UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended March 31, 2024 or
Commission File Number 0-53713
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(Address of principal executive offices) | (Zip Code) | ||||
Registrant's telephone number, including area code: 866 -410-8780
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Accelerated Filer ☐ | |||||||||||||||||
Non-Accelerated Filer ☐ | Smaller Reporting Company | Emerging Growth Company | |||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:
| TABLE OF CONTENTS | |||||||||||
| Description | Page | |||||||
| ITEM 1. | ||||||||
| ITEM 2. | ||||||||
| ITEM 3. | ||||||||
| ITEM 4. | ||||||||
| ITEM 1. | ||||||||
| ITEM 1A. | ||||||||
| ITEM 5. | ||||||||
| ITEM 6. | ||||||||
1
| DEFINITIONS | |||||||||||
AME | Available Maximum Emergency | MISO | Midcontinent Independent System Operator, Inc. | |||||||||||
| ARP | Alternative Revenue Program | MPUC | Minnesota Public Utilities Commission | |||||||||||
| BTD | BTD Manufacturing, Inc. | NDDEQ | North Dakota Department of Environmental Quality | |||||||||||
| CCS | Carbon Capture and Sequestration | NDPSC | North Dakota Public Service Commission | |||||||||||
ECO | Energy Conservation and Optimization Rider | OTC | Otter Tail Corporation | |||||||||||
| EGU | Electric Generating Units | OTP | Otter Tail Power Company | |||||||||||
| EPA | Environmental Protection Agency | PIR | Phase-In Rider | |||||||||||
| ESSRP | Executive Survivor and Supplemental Retirement Plan | PSLRA | Private Securities Litigation Reform Act of 1995 | |||||||||||
EUIC | Electric Utility Infrastructure Costs Rider | PTC | Production Tax Credits | |||||||||||
| FERC | Federal Energy Regulatory Commission | PVC | Polyvinyl chloride | |||||||||||
| GCR | Generation Cost Recovery Rider | RHR | Regional Haze Rule | |||||||||||
| GHG | Greenhouse Gas | ROE | Return on equity | |||||||||||
IRP | Integrated Resource Plan | RRR | Renewable Resource Rider | |||||||||||
| ISO | Independent System Operator | SEC | Securities and Exchange Commission | |||||||||||
| kwh | kilowatt-hour | T.O. Plastics | T.O. Plastics, Inc. | |||||||||||
| MDT | Meter and Distribution Technology | TCR | Transmission Cost Recovery Rider | |||||||||||
| Merricourt | Merricourt Wind Energy Center | |||||||||||||
| FORWARD-LOOKING INFORMATION | ||
PART I. FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS | ||||
2
OTTER TAIL CORPORATION
CONSOLIDATED BALANCE SHEETS (unaudited)
| (in thousands, except share data) | March 31, 2024 | December 31, 2023 | |||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and Cash Equivalents | $ | $ | |||||||||
| Receivables, net of allowance for credit losses | |||||||||||
| Inventories | |||||||||||
| Regulatory Assets | |||||||||||
| Other Current Assets | |||||||||||
| Total Current Assets | |||||||||||
| Noncurrent Assets | |||||||||||
| Investments | |||||||||||
| Property, Plant and Equipment, net of accumulated depreciation | |||||||||||
| Regulatory Assets | |||||||||||
| Intangible Assets, net of accumulated amortization | |||||||||||
| Goodwill | |||||||||||
| Other Noncurrent Assets | |||||||||||
| Total Noncurrent Assets | |||||||||||
| Total Assets | $ | $ | |||||||||
| Liabilities and Shareholders' Equity | |||||||||||
| Current Liabilities | |||||||||||
| Short-Term Debt | $ | $ | |||||||||
| Accounts Payable | |||||||||||
| Accrued Salaries and Wages | |||||||||||
| Accrued Taxes | |||||||||||
| Regulatory Liabilities | |||||||||||
| Other Current Liabilities | |||||||||||
| Total Current Liabilities | |||||||||||
| Noncurrent Liabilities | |||||||||||
| Pension Benefit Liability | |||||||||||
| Other Postretirement Benefits Liability | |||||||||||
| Regulatory Liabilities | |||||||||||
| Deferred Income Taxes | |||||||||||
| Deferred Tax Credits | |||||||||||
| Other Noncurrent Liabilities | |||||||||||
| Total Noncurrent Liabilities | |||||||||||
| Capitalization | |||||||||||
| Long-Term Debt | |||||||||||
| Shareholders' Equity | |||||||||||
Common Shares: outstanding at March 31, 2024 and December 31, 2023 | |||||||||||
| Additional Paid-In Capital | |||||||||||
| Retained Earnings | |||||||||||
| Accumulated Other Comprehensive Income | |||||||||||
| Total Shareholders' Equity | |||||||||||
| Total Capitalization | |||||||||||
| Total Liabilities and Shareholders' Equity | $ | $ | |||||||||
See accompanying condensed notes to consolidated financial statements.
3
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
| Three Months Ended March 31, | |||||||||||
| (in thousands, except per-share amounts) | 2024 | 2023 | |||||||||
| Operating Revenues | |||||||||||
| Electric | $ | $ | |||||||||
| Product Sales | |||||||||||
| Total Operating Revenues | |||||||||||
| Operating Expenses | |||||||||||
| Electric Production Fuel | |||||||||||
| Electric Purchased Power | |||||||||||
| Electric Operating and Maintenance Expenses | |||||||||||
| Cost of Products Sold (excluding depreciation) | |||||||||||
Nonelectric Selling, General, and Administrative Expenses | |||||||||||
| Depreciation and Amortization | |||||||||||
| Electric Property Taxes | |||||||||||
| Total Operating Expenses | |||||||||||
| Operating Income | |||||||||||
| Other Income and (Expense) | |||||||||||
| Interest Expense | ( | ( | |||||||||
| Nonservice Components of Postretirement Benefits | |||||||||||
| Other Income (Expense), net | |||||||||||
| Income Before Income Taxes | |||||||||||
| Income Tax Expense | |||||||||||
| Net Income | $ | $ | |||||||||
| Weighted-Average Common Shares Outstanding: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
| Earnings Per Share: | |||||||||||
| Basic | $ | $ | |||||||||
| Diluted | $ | $ | |||||||||
See accompanying condensed notes to consolidated financial statements.
4
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Net Income | $ | $ | |||||||||
| Other Comprehensive Income (Loss): | |||||||||||
Unrealized Gain (Loss) on Available-for-Sale Securities, net of tax benefit (expense) of $ | ( | ||||||||||
Pension and Other Postretirement Benefits, net of tax benefit of $ | ( | ( | |||||||||
Total Other Comprehensive Income (Loss) | ( | ||||||||||
| Total Comprehensive Income | $ | $ | |||||||||
See accompanying condensed notes to consolidated financial statements.
5
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited)
| (in thousands, except common shares outstanding) | Common Shares Outstanding | Par Value, Common Shares | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Shareholders' Equity | |||||||||||||||||||||||||||||
| Balance, December 31, 2023 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Stock Issued Under Share-Based Compensation Plans, net of shares withheld for employee taxes | ( | — | — | ( | |||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | |||||||||||||||||||||||||||||||
Other Comprehensive Loss | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Stock Compensation Expense | — | — | — | — | |||||||||||||||||||||||||||||||
Common Dividends ($ | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance, March 31, 2024 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Balance, December 31, 2022 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Stock Issued Under Share-Based Compensation Plans, net of shares withheld for employee taxes | ( | — | — | ( | |||||||||||||||||||||||||||||||
| Net Income | — | — | — | — | |||||||||||||||||||||||||||||||
Other Comprehensive Income | — | — | — | — | |||||||||||||||||||||||||||||||
| Stock Compensation Expense | — | — | — | — | |||||||||||||||||||||||||||||||
Common Dividends ($ | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||
| Balance, March 31, 2023 | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
See accompanying condensed notes to consolidated financial statements.
6
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Operating Activities | |||||||||||
| Net Income | $ | $ | |||||||||
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | |||||||||||
| Depreciation and Amortization | |||||||||||
| Deferred Tax Credits | ( | ( | |||||||||
| Deferred Income Taxes | |||||||||||
Investment Gains | ( | ( | |||||||||
| Stock Compensation Expense | |||||||||||
| Other, Net | ( | ||||||||||
| Changes in Operating Assets and Liabilities: | |||||||||||
| Receivables | ( | ( | |||||||||
| Inventories | |||||||||||
| Regulatory Assets | |||||||||||
| Other Assets | |||||||||||
| Accounts Payable | ( | ||||||||||
| Accrued and Other Liabilities | ( | ( | |||||||||
| Regulatory Liabilities | |||||||||||
| Pension and Other Postretirement Benefits | ( | ( | |||||||||
| Net Cash Provided by Operating Activities | |||||||||||
| Investing Activities | |||||||||||
| Capital Expenditures | ( | ( | |||||||||
| Proceeds from Disposal of Noncurrent Assets | |||||||||||
| Cash Used for Investments and Other Assets | ( | ( | |||||||||
| Net Cash Used in Investing Activities | ( | ( | |||||||||
| Financing Activities | |||||||||||
| Net Borrowings (Repayments) of Short-Term Debt | ( | ||||||||||
| Proceeds from Issuance of Long-Term Debt | |||||||||||
| Dividends Paid | ( | ( | |||||||||
| Payments for Shares Withheld for Employee Tax Obligations | ( | ( | |||||||||
| Other, net | ( | ( | |||||||||
Net Cash Provided by Financing Activities | |||||||||||
| Net Change in Cash and Cash Equivalents | ( | ||||||||||
| Cash and Cash Equivalents at Beginning of Period | |||||||||||
| Cash and Cash Equivalents at End of Period | $ | $ | |||||||||
| Supplemental Disclosure of Noncash Investing Activities | |||||||||||
| Accrued Property, Plant and Equipment Additions | $ | $ | |||||||||
See accompanying condensed notes to consolidated financial statements
7
OTTER TAIL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Summary of Significant Accounting Policies
Overview
Otter Tail Corporation (OTC) and its subsidiaries (collectively, the "Company", "us", "our" or "we") form a diverse, multi-platform business consisting of a vertically integrated, regulated utility with generation, transmission and distribution facilities complemented by manufacturing businesses providing metal fabrication for custom machine parts and metal components, manufacturing of extruded and thermoformed plastic products, and manufacturing of polyvinyl chloride (PVC) pipe products. We classify our business into three
Basis of Presentation
The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the SEC for interim reporting. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles. In the opinion of management, we have included all adjustments, including normal recurring accruals, necessary for a fair presentation of the consolidated financial statements for the periods presented. The consolidated financial statements and condensed notes thereto should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023.
Because of the seasonality of our businesses and other factors, the earnings for the three months ended March 31, 2024 should not be taken as an indication of earnings for all or any part of the balance of the current year or as an indication of earnings for future years.
Use of Estimates
We use estimates based on the best information available in recording transactions and balances resulting from business operations. As better information becomes available or actual amounts are known, the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates.
Reclassifications
Certain reclassifications of amounts previously reported have been made to the accompanying consolidated statements of cash flows to maintain consistency and comparability between periods presented. Other, net operating cash flows previously reported for the three months ended March 31, 2023, included $1.8 million of investment gains, which are presented separately in the current period, and excluded $0.2 million of allowance for equity funds used during construction, which were previously presented separately. The reclassifications had no impact on previously reported net cash provided by operating activities, net cash used in investing activities, net cash used in financing activities, or cash and cash equivalents.
Recent Accounting Pronouncements
Segment Reporting. In November 2023, the Financial Accounting Standards Board (FASB) issued amended authoritative guidance codified in Accounting Standards Codification (ASC) 280, Segment Reporting. The amended guidance expands annual and interim disclosure requirements for reportable segments, primarily through expanded disclosures about significant segment expenses. The updated standard is effective for our annual periods beginning in 2024 and interim periods beginning in the first quarter of fiscal 2025. Adoption of the amended guidance must be applied retrospectively to all prior periods presented in the financial statements. We are currently evaluating the impact that the updated standard will have on our financial statement disclosures.
Income Taxes. In December 2023, the FASB issued amended authoritative guidance codified in ASC 740, Income Taxes. The amended guidance requires additional disaggregated information in effective tax rate reconciliation disclosures and additional disaggregated information about income taxes paid. The updated standard is effective for our annual periods beginning in 2025. The amended guidance is to be applied on a prospective basis with the option to apply the standard retrospectively. We are currently evaluating the impact that the updated standard will have on our financial statement disclosures.
2. Segment Information
The classification of our business into three
Certain assets and costs are not allocated to our operating segments. Corporate operating costs include items such as corporate staff and overhead costs, the results of our captive insurance company and other items excluded from the measurement of operating
8
segment performance. Corporate assets consist primarily of cash and cash equivalents, prepaid expenses, investments and fixed assets. Corporate is not an operating segment, rather it is added to operating segment totals to reconcile to consolidated amounts.
Information for each segment and our unallocated corporate costs for the three months ended March 31, 2024 and 2023 are as follows:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Operating Revenue | |||||||||||
| Electric | $ | $ | |||||||||
| Manufacturing | |||||||||||
| Plastics | |||||||||||
| Total | $ | $ | |||||||||
| Net Income (Loss) | |||||||||||
| Electric | $ | $ | |||||||||
| Manufacturing | |||||||||||
| Plastics | |||||||||||
| Corporate | ( | ( | |||||||||
| Total | $ | $ | |||||||||
The following provides the identifiable assets by segment and corporate assets as of March 31, 2024 and December 31, 2023:
| (in thousands) | March 31, 2024 | December 31, 2023 | |||||||||
| Identifiable Assets | |||||||||||
| Electric | $ | $ | |||||||||
| Manufacturing | |||||||||||
| Plastics | |||||||||||
| Corporate | |||||||||||
| Total | $ | $ | |||||||||
9
3. Revenue
Presented below are our operating revenues from external customers, in total and by amounts arising from contracts with customers and alternative revenue program (ARP) arrangements, disaggregated by revenue source and segment for the three months ended March 31, 2024 and 2023:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Operating Revenues | |||||||||||
| Electric Segment | |||||||||||
| Retail: Residential | $ | $ | |||||||||
| Retail: Commercial and Industrial | |||||||||||
| Retail: Other | |||||||||||
| Total Retail | |||||||||||
| Transmission | |||||||||||
| Wholesale | |||||||||||
| Other | |||||||||||
| Total Electric Segment | |||||||||||
| Manufacturing Segment | |||||||||||
| Metal Parts and Tooling | |||||||||||
| Plastic Products and Tooling | |||||||||||
| Scrap Metal | |||||||||||
| Total Manufacturing Segment | |||||||||||
| Plastics Segment | |||||||||||
| PVC Pipe | |||||||||||
| Total Operating Revenue | |||||||||||
| Less: Non-contract Revenues Included Above | |||||||||||
| Electric Segment - ARP Revenues | ( | ( | |||||||||
| Total Operating Revenues from Contracts with Customers | $ | $ | |||||||||
4. Select Balance Sheet Information
Receivables and Allowance for Credit Losses
Receivables as of March 31, 2024 and December 31, 2023 are as follows:
| (in thousands) | March 31, 2024 | December 31, 2023 | |||||||||
| Receivables | |||||||||||
| Trade | $ | $ | |||||||||
| Other | |||||||||||
| Unbilled Receivables | |||||||||||
| Total Receivables | |||||||||||
| Less: Allowance for Credit Losses | |||||||||||
| Receivables, net of allowance for credit losses | $ | $ | |||||||||
The following is a summary of activity in the allowance for credit losses for the three months ended March 31, 2024 and 2023:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Beginning Balance, January 1 | $ | $ | |||||||||
| Additions Charged to Expense | |||||||||||
| Reductions for Amounts Written Off, Net of Recoveries | ( | ( | |||||||||
Ending Balance, March 31 | $ | $ | |||||||||
10
Inventories
Inventories consist of the following as of March 31, 2024 and December 31, 2023:
| (in thousands) | March 31, 2024 | December 31, 2023 | |||||||||
| Raw Material, Fuel and Supplies | $ | $ | |||||||||
| Work in Process | |||||||||||
| Finished Goods | |||||||||||
| Total Inventories | $ | $ | |||||||||
Investments
The following is a summary of our investments as of March 31, 2024 and December 31, 2023:
| (in thousands) | March 31, 2024 | December 31, 2023 | |||||||||
Short-term Investments | |||||||||||
| Corporate and Government Debt Securities | $ | $ | |||||||||
Long-term Investments | |||||||||||
| Corporate-Owned Life Insurance Policies | |||||||||||
| Corporate and Government Debt Securities | |||||||||||
| Money Market Funds | |||||||||||
| Mutual Funds | |||||||||||
| Other Investments | |||||||||||
Total Long-term Investments | |||||||||||
| Total Investments | $ | $ | |||||||||
The amount of unrealized gains and losses on debt securities as of March 31, 2024 and December 31, 2023 was not material and no unrealized losses were deemed to be other-than-temporary. In addition, the amount of unrealized gains and losses on marketable equity securities still held as of March 31, 2024 and December 31, 2023 was not material.
Property, Plant and Equipment
Major classes of property, plant and equipment as of March 31, 2024 and December 31, 2023 include:
| (in thousands) | March 31, 2024 | December 31, 2023 | |||||||||
| Electric Plant | |||||||||||
| Electric Plant in Service | $ | $ | |||||||||
| Construction Work in Progress | |||||||||||
| Total Gross Electric Plant | |||||||||||
| Less Accumulated Depreciation and Amortization | |||||||||||
| Net Electric Plant | |||||||||||
| Nonelectric Property, Plant and Equipment | |||||||||||
| Nonelectric Property, Plant and Equipment in Service | |||||||||||
| Construction Work in Progress | |||||||||||
| Total Gross Nonelectric Property, Plant and Equipment | |||||||||||
| Less Accumulated Depreciation and Amortization | |||||||||||
| Net Nonelectric Property, Plant and Equipment | |||||||||||
| Net Property, Plant and Equipment | $ | $ | |||||||||
11
5. Regulatory Matters
Regulatory Assets and Liabilities
The following presents our current and long-term regulatory assets and liabilities as of March 31, 2024 and December 31, 2023 and the period we expect to recover or refund such amounts:
| Period of | March 31, 2024 | December 31, 2023 | |||||||||||||||||||||||||||
| (in thousands) | Recovery/Refund | Current | Long-Term | Current | Long-Term | ||||||||||||||||||||||||
| Regulatory Assets | |||||||||||||||||||||||||||||
Pension and Other Postretirement Benefit Plans1 | Various | $ | $ | $ | $ | ||||||||||||||||||||||||
Alternative Revenue Program Riders2 | Up to | ||||||||||||||||||||||||||||
Asset Retirement Obligations1 | Asset lives | ||||||||||||||||||||||||||||
| Deferred Income Taxes | Asset lives | ||||||||||||||||||||||||||||
Fuel Clause Adjustments1 | Up to | ||||||||||||||||||||||||||||
Derivative Instruments1 | Up to | ||||||||||||||||||||||||||||
Other1 | Various | ||||||||||||||||||||||||||||
| Total Regulatory Assets | $ | $ | $ | $ | |||||||||||||||||||||||||
| Regulatory Liabilities | |||||||||||||||||||||||||||||
| Deferred Income Taxes | Asset lives | $ | $ | $ | $ | ||||||||||||||||||||||||
| Plant Removal Obligations | Asset lives | ||||||||||||||||||||||||||||
| Fuel Clause Adjustments | Up to | ||||||||||||||||||||||||||||
| Alternative Revenue Program Riders | Up to | ||||||||||||||||||||||||||||
| North Dakota PTC Refunds | Asset lives | ||||||||||||||||||||||||||||
| Pension and Other Postretirement Benefit Plans | Various | ||||||||||||||||||||||||||||
| Other | Various | ||||||||||||||||||||||||||||
| Total Regulatory Liabilities | $ | $ | $ | $ | |||||||||||||||||||||||||
1Costs subject to recovery without a rate of return. | |||||||||||||||||||||||||||||
2Amounts eligible for recovery includes an incentive or rate of return. | |||||||||||||||||||||||||||||
6. Short-Term and Long-Term Borrowings
The following is a summary of our outstanding short- and long-term borrowings by borrower, OTC or OTP, as of March 31, 2024 and December 31, 2023:
Short-Term Debt
The following is a summary of our lines of credit as of March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||||||||
| (in thousands) | Borrowing Limit | Amount Outstanding | Letters of Credit | Amount Available | Amount Available | ||||||||||||||||||||||||
| OTC Credit Agreement | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| OTP Credit Agreement | |||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
12
Long-Term Debt
The following is a summary of outstanding long-term debt by borrower as of March 31, 2024 and December 31, 2023:
| (in thousands) | ||||||||||||||||||||||||||||||||
| Borrower | Debt Instrument | Rate | Maturity | March 31, 2024 | December 31, 2023 | |||||||||||||||||||||||||||
| OTC | Guaranteed Senior Notes | % | 12/15/26 | $ | $ | |||||||||||||||||||||||||||
| OTP | Series 2007C Senior Unsecured Notes | % | 08/02/27 | |||||||||||||||||||||||||||||
| OTP | Series 2013A Senior Unsecured Notes | % | 02/27/29 | |||||||||||||||||||||||||||||
| OTP | Series 2019A Senior Unsecured Notes | % | 10/10/29 | |||||||||||||||||||||||||||||
| OTP | Series 2020A Senior Unsecured Notes | % | 02/25/30 | |||||||||||||||||||||||||||||
| OTP | Series 2020B Senior Unsecured Notes | % | 08/20/30 | |||||||||||||||||||||||||||||
| OTP | Series 2021A Senior Unsecured Notes | % | 11/29/31 | |||||||||||||||||||||||||||||
| OTP | Series 2024A Senior Unsecured Notes | % | 04/01/34 | |||||||||||||||||||||||||||||
| OTP | Series 2007D Senior Unsecured Notes | % | 08/20/37 | |||||||||||||||||||||||||||||
| OTP | Series 2019B Senior Unsecured Notes | % | 10/10/39 | |||||||||||||||||||||||||||||
| OTP | Series 2020C Senior Unsecured Notes | % | 02/25/40 | |||||||||||||||||||||||||||||
| OTP | Series 2013B Senior Unsecured Notes | % | 02/27/44 | |||||||||||||||||||||||||||||
| OTP | Series 2018A Senior Unsecured Notes | % | 02/07/48 | |||||||||||||||||||||||||||||
| OTP | Series 2019C Senior Unsecured Notes | % | 10/10/49 | |||||||||||||||||||||||||||||
| OTP | Series 2020D Senior Unsecured Notes | % | 02/25/50 | |||||||||||||||||||||||||||||
| OTP | Series 2021B Senior Unsecured Notes | % | 11/29/51 | |||||||||||||||||||||||||||||
| OTP | Series 2022A Senior Unsecured Notes | % | 05/20/52 | |||||||||||||||||||||||||||||
| OTP | Series 2024B Senior Unsecured Notes | % | 04/01/54 | |||||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||||||||
| Less: | Unamortized Long-Term Debt Issuance Costs | |||||||||||||||||||||||||||||||
| Total Long-Term Debt, Net of Unamortized Debt Issuance Costs | $ | $ | ||||||||||||||||||||||||||||||
On March 28, 2024, OTP entered into a Note Purchase Agreement pursuant to which OTP issued, in a private placement transaction, $120.0 million of senior unsecured notes consisting of (a) $60.0 million of 5.48 % Series 2024A Senior Unsecured Notes due April 1, 2034, and (b) $60.0 million of 5.77 % Series 2024B Senior Unsecured Notes due April 1, 2054.
Per the terms of the agreement, OTP may prepay all or any part of the notes (in an amount not less than 10 % of the aggregate principal amount of the notes then outstanding in the case of a partial prepayment) at 100 % of the principal amount so prepaid, together with unpaid accrued interest and a make-whole amount, as defined in the agreement; provided that no default or event of default exists under the agreement. Any prepayment made by the Company of all of the Series 2024A Notes then outstanding on or after January 1, 2034, or the Series 2024B Notes then outstanding on or after October 1, 2053, will be made without any make-whole amount. Consistent with other borrowings, the agreement contains a number of restrictions on the business of OTP, including restrictions on OTP’s ability to merge, sell substantially all assets, create or incur liens on assets, guarantee the obligations of any other party, and engage in certain transactions with affiliates.
Financial Covenants
Certain of OTC's and OTP's short- and long-term debt agreements require the borrower, whether OTC or OTP, to maintain certain financial covenants, including a maximum debt to total capitalization ratio of 0.60 to 1.00, a minimum interest and dividend coverage ratio of 1.50 to 1.00, and a maximum level of priority indebtedness. As of March 31, 2024, OTC and OTP were in compliance with these financial covenants.
7. Employee Postretirement Benefits
Pension Plan and Other Postretirement Benefits
The Company sponsors a noncontributory funded pension plan (the "Pension Plan"), an unfunded, nonqualified Executive Survivor and Supplemental Retirement Plan (the "ESSRP"), both accounted for as defined benefit pension plans, and a postretirement healthcare plan accounted for as an other postretirement benefit plan.
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The following table includes the components of net periodic benefit cost (income) related to our defined benefit pension plans and other postretirement benefits for the three months ended March 31, 2024 and 2023:
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| Pension Benefits (Pension Plan) | Pension Benefits (ESSRP) | Postretirement Benefits | |||||||||||||||||||||||||||||||||
| (in thousands) | 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||||||
| Service Cost | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Interest Cost | |||||||||||||||||||||||||||||||||||
| Expected Return on Assets | ( | ( | |||||||||||||||||||||||||||||||||
| Amortization of Prior Service Cost | ( | ( | |||||||||||||||||||||||||||||||||
| Amortization of Net Actuarial Loss | |||||||||||||||||||||||||||||||||||
| Net Periodic Benefit Cost (Income) | $ | ( | $ | ( | $ | $ | $ | ( | $ | ( | |||||||||||||||||||||||||
The following table includes the impact of regulation on the recognition of periodic benefit cost (income) arising from pension and other postretirement benefits for the three months ended March 31, 2024 and 2023:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Net Periodic Benefit Cost (Income) | $ | ( | $ | ( | |||||||
| Net Amount Amortized Due to the Effect of Regulation | |||||||||||
| Net Periodic Benefit Cost (Income) Recognized | $ | ( | $ | ( | |||||||
We had no minimum funding requirements for our Pension Plan or any other postretirement benefit plans as of December 31, 2023. We did not
8. Income Taxes
The Company's effective tax rate was 19.3 % and 17.6 % for each of the three months ended March 31, 2024 and 2023. These rates differed from the federal statutory rate of 21% primarily due to the impact of production tax credits associated with the energy generation of our wind and solar assets, partially offset by state taxes.
9. Commitments and Contingencies
Contingencies
FERC Return on Equity (ROE). In November 2013 and February 2015, customers filed complaints with the Federal Energy Regulatory Commission (FERC) seeking to reduce the ROE component of the transmission rates that MISO transmission owners, including OTP, may collect under the MISO tariff rate. FERC's most recent order, issued on November 19, 2020, adopted a revised ROE methodology and set the base ROE at 10.02% (10.52% with an adder) effective for the fifteen-month period from November 2013 to February 2015 and on a prospective basis beginning in September 2016. The order also dismissed any complaints covering the period from February 2015 to May 2016. On August 9, 2022, the U.S. Court of Appeals for the District of Columbia Circuit vacated the FERC order citing a lack of reasoned explanation by FERC in its adoption of its revised ROE methodology as outlined in its November 2020 order. The U.S. Court of Appeals remanded the matter to FERC to reopen the proceedings.
Significant uncertainty exists as to how FERC will proceed upon remand and there is no prescribed timeline under which FERC must act. As a result, we have deferred recognition of certain revenues and had a refund liability of $2.8 million as of March 31, 2024, which is included in other current liabilities on the consolidated balance sheet. This refund liability reflects our best estimate of amounts previously collected from customers under the MISO tariff rate that may be required to be refunded to customers once all regulatory and judicial proceedings are complete and a final ROE is established for the periods outlined above.
Regional Haze Rule (RHR). The RHR was adopted in an effort to improve visibility in national parks and wilderness areas. The RHR requires states, in coordination with the Environmental Protection Agency (EPA) and other governmental agencies, to develop and implement plans to achieve natural visibility conditions. The second RHR implementation period covers the years 2018-2028. States are required to submit a state implementation plan to assess reasonable progress with the RHR and determine what additional emission reductions are appropriate, if any.
Coyote Station, OTP's jointly owned coal-fired power plant in North Dakota, is subject to assessment in the second implementation period under the North Dakota state implementation plan. The North Dakota Department of Environmental Quality (NDDEQ)
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submitted its state implementation plan to the EPA for approval in August, 2022. In its plan, the NDDEQ concluded it is not reasonable to require additional emission controls during this planning period. The EPA has previously expressed disagreement with the NDDEQ's recommendation to forgo additional emission controls and has indicated that such a plan is not likely to be accepted.
In June 2023, a coalition of environmental organizations filed a lawsuit against the EPA for failing to enforce the RHR. In response, the EPA proposed, through a consent decree filed in the U.S. District Court for the District of Columbia in March 2024, a timeline for it to act on 34 outstanding state implementation plans. Under the proposed consent decree the EPA would approve, deny, partially approve or issue a federal implementation plan at assigned dates between 2024 and 2026, including a final decision on the North Dakota state implementation plan by November 2024.
We cannot predict with certainty the impact the state implementation plan may have on our business until the plan has been approved or otherwise acted on by the EPA. However, significant emission control investments could be required and the recovery of such costs from customers would require regulatory approval. Alternatively, investments in emission control equipment may prove to be uneconomic and result in the early retirement of or the sale of our interest in Coyote Station, subject to regulatory approval. We cannot estimate the ultimate financial effects such a retirement or sale may have on our consolidated operating results, financial position or cash flows, but such amounts could be material and the recovery of such costs in rates would be subject to regulatory approval.
Self-Funding of Transmission Upgrades. The FERC has granted transmission owners within MISO the unilateral authority to determine the funding mechanism for interconnection transmission upgrades that are necessary to accommodate new generation facilities connecting to the electrical grid. Under existing FERC orders, transmission owners can unilaterally determine whether the generator pays the transmission owner in advance for the transmission upgrade or, alternatively, the transmission owner can elect to fund the upgrade and recover over time from the generator the cost of and a return on the upgrade investment (a self-funding). FERC’s orders granting transmission owners this unilateral funding authority have been judicially contested on the basis that transmission owners may be motivated to discriminate among generators in making funding determinations. In the most recent judicial proceedings, the petitioners argued to the U.S. Court of Appeals for the District of Columbia that FERC did not comply with a previous judicial order to fully develop a record regarding the risk of discrimination and the financial risk absorbed by transmission owners for generator-funded upgrades. On December 2, 2022, the Court of Appeals ruled in favor of the petitioners remanding the matter to FERC, instructing the agency to adequately explain the basis of its orders. The Court of Appeals decision did not vacate transmission owners’ unilateral funding authority.
OTP, as a transmission owner in MISO, has exercised its authority and elected to self-fund previous transmission upgrades necessary to accommodate new system generation. Under such an election, OTP is recovering the cost of the transmission upgrade and a return on that investment from the generator over a contractual period of time. Should FERC, on remand from the Court of Appeals, eliminate transmission owners’ unilateral funding authority on either a prospective or retrospective basis, our financial results would be impacted. We cannot at this time reasonably predict the outcome of this matter given the uncertainty as to how and when FERC may respond to the judicial remand.
Other Contingencies. We are party to litigation and regulatory matters arising in the normal course of business. We regularly analyze relevant information and, as necessary, estimate and record accrued liabilities for legal, regulatory enforcement and other matters in which a loss is probable of occurring and can be reasonably estimated. We believe the effect on our consolidated operating results, financial position and cash flows, if any, for the disposition of all matters pending as of March 31, 2024, other than those discussed above, will not be material.
10. Stockholders' Equity
Registration Statements
On May 3, 2024, we filed a shelf registration statement with the SEC under which we may offer for sale, from time to time, either separately or together in any combination, equity, debt or other securities described in the shelf registration statement. No new debt or equity has been issued pursuant to the registration statement. The registration statement expires in May 2027.
On May 3, 2024, we filed a second registration statement with the SEC for the issuance of up to 1,500,000 common shares under an Automatic Dividend Reinvestment and Share Purchase Plan, which provides shareholders, retail customers of OTP and other interested investors methods of purchasing our common shares by reinvesting their dividends or making optional cash investments. Shares purchased under the plan may be newly issued common shares or common shares purchased on the open market. The registration statement expires in May 2027.
Dividend Restrictions
OTC is a holding company with no significant operations of its own. The primary source of funds for payments of dividends to OTC's shareholders is from dividends paid or distributions made by OTC's subsidiaries. As a result of certain statutory limitations or
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regulatory or financing agreements, the amount of distributions allowed to be made by OTC's subsidiaries or the amount of dividends paid by OTC could be restricted. Both the OTC Credit Agreement and the OTP Credit Agreement contain restrictions on the payment of cash dividends upon a default or event of default, including failure to maintain certain financial covenants. As of March 31, 2024, we were in compliance with these financial covenants.
Under the Federal Power Act, a public utility may not pay dividends from any funds properly included in a capital account. What constitutes “funds properly included in a capital account” is undefined in the Federal Power Act or the related regulations; however, the FERC has consistently interpreted the provision to allow dividends to be paid as long as i) the source of the dividends is clearly disclosed, ii) the dividend is not excessive and iii) there is no self-dealing on the part of corporate officials.
11. Accumulated Other Comprehensive Income (Loss)
The following presents the changes in accumulated other comprehensive income (loss) for the three months ended March 31, 2024 and 2023:
| Three Months Ended March 31, | |||||||||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Pension and Other Postretirement Benefits | Net Unrealized Gains (Losses) on Available-for-Sale Securities | Total | Pension and Other Postretirement Benefits | Net Unrealized Gains (Losses) on Available-for-Sale Securities | Total | |||||||||||||||||||||||||||||
| Balance, Beginning of Period | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
Other Comprehensive (Loss) Income Before Reclassifications, net of tax | ( | ( | |||||||||||||||||||||||||||||||||
| Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | ( | (1) | (2) | ( | ( | (1) | ( | ||||||||||||||||||||||||||||
| Total Other Comprehensive Income (Loss) | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
| Balance, End of Period | $ | $ | ( | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
(1) Included in the computation of net periodic pension and other postretirement benefit costs. See Note 7. | |||||||||||||||||||||||||||||||||||
(2) Included in other income (expense), net on the accompanying consolidated statements of income. | |||||||||||||||||||||||||||||||||||
12. Share-Based Payments
Stock Compensation Expense
Stock-based compensation expense arising from our employee stock purchase plan and share-based compensation plans recognized within operating expenses in the consolidated statements of income amounted to $5.5 million and $5.3 million for the three months ended March 31, 2024 and 2023.
Restricted Stock Awards. Restricted stock awards are granted to executive officers and other key employees and members of the Company's Board of Directors. The awards vest, depending on award recipient, either ratably over a period of or four years or cliff vest after four years . Vesting is accelerated in certain circumstances, including upon retirement.
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The following is a summary of stock award activity for the three months ended March 31, 2024:
| Shares | Weighted-Average Grant-Date Fair Value | ||||||||||
Nonvested, January 1, 2024 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | |||||||||||
Nonvested, March 31, 2024 | $ | ||||||||||
The fair value of vested awards was $1.5 million and $1.2 million during the three months ended March 31, 2024 and 2023.
Stock Performance Awards. Stock performance awards are granted to executive officers and certain other key employees. The awards vest at the end of a three-year performance period. The number of common shares awarded, if any, at the end of the performance period ranges from zero to 150 % of the target amount based on two performance measures: i) total shareholder return relative to a peer group and ii) ROE. Vesting of the awards is accelerated in certain circumstances, including on retirement. The number of common shares awarded on an accelerated vesting is based on actual performance at the end of the performance period.
The grant date fair value of stock performance awards granted during the three months ended March 31, 2024 and 2023 was determined using a Monte Carlo fair value simulation model incorporating the following assumptions:
| 2024 | 2023 | ||||||||||
| Risk-free interest rate | % | % | |||||||||
| Expected term (in years) | |||||||||||
| Expected volatility | % | % | |||||||||
| Dividend yield | % | % | |||||||||
The risk-free interest rate was derived from yields on U.S. government bonds of a similar term. The expected term of the award is equal to the three-year performance period. Expected volatility was estimated based on actual historical volatility of our common stock. Dividend yield was estimated based on historical and future yield estimates.
The following is a summary of stock performance award activity for the three months ended March 31, 2024 (share amounts reflect awards at target):
| Shares | Weighted-Average Grant-Date Fair Value | ||||||||||
Nonvested, January 1, 2024 | $ | ||||||||||
| Granted | |||||||||||
| Vested | ( | ||||||||||
| Forfeited | |||||||||||
Nonvested, March 31, 2024 | $ | ||||||||||
13. Earnings Per Share
The numerator used in the calculation of both basic and diluted earnings per share is net income. The denominator used in the calculation of basic earnings per share is the weighted-average number of shares outstanding during the period. The denominator used in the calculation of diluted earnings per share is derived by adjusting basic shares outstanding for the dilutive effect of potential shares outstanding, which consist of time- and performance-based stock awards and employee stock purchase plan shares.
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The following includes the computation of the denominator for basic and diluted weighted-average shares outstanding for the three months ended March 31, 2024 and 2023:
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2024 | 2023 | |||||||||
| Weighted-Average Common Shares Outstanding – Basic | |||||||||||
| Effect of Dilutive Securities: | |||||||||||
| Stock Performance Awards | |||||||||||
| Restricted Stock Awards | |||||||||||
Employee Stock Purchase Plan | |||||||||||
| Dilutive Effect of Potential Common Shares | |||||||||||
| Weighted-Average Common Shares Outstanding – Diluted | |||||||||||
14. Derivative Instruments
OTP enters into derivative instruments to manage its exposure to future market energy price variability and reduce volatility in prices for our retail customers. These derivative instruments are not designated as qualifying hedging transactions but provide for an economic hedge against future market energy price variability. The instruments are recorded at fair value on the consolidated balance sheets. In accordance with rate-making and cost recovery processes, we recognize a regulatory asset or liability to defer losses or gains from derivative activity until settlement of the associated derivative instrument.
As of March 31, 2024, OTP had multiple outstanding pay-fixed, receive-variable swap agreements with an aggregate notional amount of 54,000 megawatt-hours of electricity, with settlement dates extending to December 31, 2024. As of March 31, 2024, the fair value of these derivative instruments was $0.2 million, which is included in other current liabilities on the consolidated balance sheets. As of December 31, 2023, the fair value of these derivative instruments was $4.2 million, which is included in other current liabilities. During the three months ended March 31, 2024 and 2023, contracts matured and were settled in an aggregate amount of a $2.7 million loss and a $16.0 million loss, respectively. Gains and losses recognized on the settlement of derivative instruments are returned to, or recovered from, our electric customers through fuel recovery mechanisms in each state. When recognized in the consolidated statements of income, these gains or losses are included in electric purchased power.
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15. Fair Value Measurements
The following tables present our assets and liabilities measured at fair value on a recurring basis as of March 31, 2024 and December 31, 2023 classified by the input method used to measure fair value:
| (in thousands) | Level 1 | Level 2 | Level 3 | ||||||||||||||
| March 31, 2024 | |||||||||||||||||
| Assets: | |||||||||||||||||
| Investments: | |||||||||||||||||
| Money Market Funds | $ | $ | $ | ||||||||||||||
| Mutual Funds | |||||||||||||||||
| Corporate Debt Securities | |||||||||||||||||
| Government-Backed and Government-Sponsored Enterprises’ Debt Securities | |||||||||||||||||
| Total Assets | $ | $ | $ | ||||||||||||||
| Liabilities: | |||||||||||||||||
| Derivative Instruments | $ | $ | $ | ||||||||||||||
| Total Liabilities | $ | $ | $ | ||||||||||||||
| December 31, 2023 | |||||||||||||||||
| Assets: | |||||||||||||||||
| Investments: | |||||||||||||||||
| Money Market Funds | $ | $ | $ | ||||||||||||||
| Mutual Funds | |||||||||||||||||
| Corporate Debt Securities | |||||||||||||||||
| Government-Backed and Government-Sponsored Enterprises’ Debt Securities | |||||||||||||||||
| Total Assets | $ | $ | $ | ||||||||||||||
| Liabilities: | |||||||||||||||||
| Derivative Instruments | |||||||||||||||||
| Total Liabilities | $ | $ | $ | ||||||||||||||
Level 1 fair value measurements are based on quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
The level 2 fair value measurements for government-backed and government-sponsored enterprises and corporate debt securities are determined based on valuations provided by a third-party pricing service which utilizes industry accepted valuation models and observable market inputs to determine valuation. Some valuations or model inputs used by the pricing service may be based on broker quotes.
The level 2 fair value measurements for derivative instruments are determined by using inputs such as forward electric commodity prices, adjusted for location differences. These inputs are observable in the marketplace throughout the full term of the instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.
In addition to assets recorded at fair value on a recurring basis, we also hold financial instruments that are not recorded at fair value in the consolidated balance sheets but for which disclosure of the fair value of these financial instruments is provided.
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The following reflects the carrying value and estimated fair value of these assets and liabilities as of March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | ||||||||||||||||||||||
| (in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Cash and Cash Equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Total | |||||||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Short-Term Debt | |||||||||||||||||||||||
| Long-Term Debt | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:
Cash Equivalents: The carrying amount approximates fair value because of the short-term maturity of those instruments.
Short-Term Debt: The carrying amount approximates fair value because the debt obligations are short-term and the balances outstanding are subject to variable rates of interest which reset frequently, a Level 2 fair value input.
Long-Term Debt: The fair value of long-term debt is estimated based on current market indications for borrowings of similar maturities with similar terms, a Level 2 fair value input.
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| ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | ||||
You should read the following discussion and analysis of our financial condition and results of operations together with our interim financial statements and the related notes appearing under Item 1 of this Quarterly Report on Form 10-Q, and our annual financial statements and the related notes along with the discussion and analysis of our financial condition and results of operations contained in our Annual Report on Form 10-K for the year ended December 31, 2023.
Otter Tail Corporation and its subsidiaries form a diverse group of businesses with operations classified into three segments: Electric, Manufacturing and Plastics. Our Electric segment business is a vertically integrated, regulated utility with generation, transmission and distribution facilities to serve our customers in western Minnesota, eastern North Dakota and northeastern South Dakota. Our Manufacturing segment provides metal fabrication for custom machine parts and metal components and manufactures extruded and thermoformed plastic products. Our Plastics segment manufactures PVC pipe for use in, among other applications, municipal and rural water, wastewater and water reclamation projects.
| RESULTS OF OPERATIONS – QUARTER TO DATE | |||||
Provided below is a summary and discussion of our operating results on a consolidated basis followed by a discussion of the operating results of each of our segments: Electric, Manufacturing and Plastics. In addition to the segment results, we provide an overview of our Corporate costs. Our Corporate costs do not constitute a reportable segment, but rather consist of unallocated general corporate expenses, such as corporate staff and overhead costs, the results of our captive insurance company and other items excluded from the measurement of segment performance. Corporate costs are added to operating segment totals to reconcile to totals on our consolidated statements of income.
CONSOLIDATED RESULTS
The following table summarizes consolidated operating results for the three months ended March 31, 2024 and 2023:
| (in thousands) | 2024 | 2023 | $ change | % change | |||||||||||||||||||
| Operating Revenues | $ | 347,068 | $ | 339,081 | $ | 7,987 | 2.4 | % | |||||||||||||||
| Operating Expenses | 252,093 | 258,411 | (6,318) | (2.4) | |||||||||||||||||||
| Operating Income | 94,975 | 80,670 | 14,305 | 17.7 | |||||||||||||||||||
| Interest Expense | (9,850) | (9,415) | (435) | 4.6 | |||||||||||||||||||
| Nonservice Components of Postretirement Benefits | 2,442 | 2,412 | 30 | 1.2 | |||||||||||||||||||
| Other Income (Expense), net | 4,579 | 2,118 | 2,461 | 116.2 | |||||||||||||||||||
| Income Before Income Taxes | 92,146 | 75,785 | 16,361 | 21.6 | |||||||||||||||||||
| Income Tax Expense | 17,808 | 13,304 | 4,504 | 33.9 | |||||||||||||||||||
| Net Income | $ | 74,338 | $ | 62,481 | $ | 11,857 | 19.0 | % | |||||||||||||||
Operating Revenues increased $8.0 million primarily due to increased sales volumes in our Plastics segment driven by strong distributor and end market demand, partially offset by decreased sales volumes in our Manufacturing segment, and decreased retail revenues in our Electric segment driven by decreased fuel recovery revenues and the impact of unfavorable weather. See our segment disclosures below for additional discussion of items impacting operating revenues.
Operating Expenses decreased $6.3 million primarily due to decreased sales volumes in our Manufacturing segment, lower purchased power costs in our Electric segment and lower material costs in our Plastics segment. See our segment disclosures below for additional discussion of items impacting operating expenses.
Other Income (Expense) increased $2.5 million, primarily due to increased investment income earned on our short-term cash equivalent investments due to an increase in the cash available for investment and an increase in interest rates.
Income Tax Expense increased $4.5 million compared to the same period last year. Our effective tax rate was 19.3% in the first quarter of 2024 and 17.6% in the first quarter of 2023. The increase in our effective tax rate was primarily due to an increase in our income before taxes.
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ELECTRIC SEGMENT RESULTS
The following table summarizes Electric segment operating results for the three months ended March 31, 2024 and 2023:
| (in thousands) | 2024 | 2023 | $ change | % change | |||||||||||||||||||
| Retail Revenues | $ | 124,489 | $ | 136,453 | $ | (11,964) | (8.8) | % | |||||||||||||||
| Transmission Services Revenues | 12,214 | 12,107 | 107 | 0.9 | |||||||||||||||||||
| Wholesale Revenues | 3,465 | 1,838 | 1,627 | 88.5 | |||||||||||||||||||
| Other Electric Revenues | 1,320 | 1,511 | (191) | (12.6) | |||||||||||||||||||
| Total Operating Revenues | 141,488 | 151,909 | (10,421) | (6.9) | |||||||||||||||||||
| Production Fuel | 17,694 | 11,492 | 6,202 | 54.0 | |||||||||||||||||||
| Purchased Power | 22,521 | 41,825 | (19,304) | (46.2) | |||||||||||||||||||
| Operating and Maintenance Expenses | 47,977 | 45,549 | 2,428 | 5.3 | |||||||||||||||||||
| Depreciation and Amortization | 19,887 | 18,326 | 1,561 | 8.5 | |||||||||||||||||||
| Property Taxes | 4,367 | 4,621 | (254) | (5.5) | |||||||||||||||||||
| Operating Income | $ | 29,042 | $ | 30,096 | $ | (1,054) | (3.5) | % | |||||||||||||||
| 2024 | 2023 | change | % change | ||||||||||||||||||||
Electric kilowatt-hour (kwh) Sales (in thousands) | |||||||||||||||||||||||
| Retail kwh Sales | 1,580,851 | 1,635,246 | (54,395) | (3.3) | % | ||||||||||||||||||
| Wholesale kwh Sales – Company Generation | 81,085 | 61,854 | 19,231 | 31.1 | |||||||||||||||||||
| Heating Degree Days | 2,913 | 3,732 | (819) | (21.9) | |||||||||||||||||||
The operating results of our Electric segment are impacted by fluctuations in weather conditions and the resulting demand for electricity for heating and cooling. The following table shows heating degree days as a percent of normal for the three months ended March 31, 2024 and 2023. There were no cooling degree days in our service territory during the three months ended March 31, 2024 and 2023.
| 2024 | 2023 | ||||||||||
| Heating Degree Days | 84.4 | % | 108.2 | % | |||||||
The following table summarizes the estimated effect on diluted earnings per share of the difference in retail kwh sales under actual weather conditions and expected retail kwh sales under normal weather conditions in 2024 and 2023, and between years.
2024 vs Normal | 2024 vs 2023 | 2023 vs Normal | |||||||||||||||
| Effect on Diluted Earnings Per Share | $ | (0.06) | $ | (0.09) | $ | 0.03 | |||||||||||
Retail Revenues decreased $12.0 million primarily due to the following:
•A $14.3 million decrease in fuel recovery revenues, primarily due to lower purchased power volumes driven by increased company generation and the unseasonably warm weather in much of our service territory.
•A $5.5 million decrease in revenues from the unfavorable impact of weather compared to last year.
The decreases in retail revenues described above were partially offset by the following:
•A $3.3 million increase in rider revenue, which included the recovery of costs of our wind repowering projects and other rate base investments.
•A $2.2 million increase in new retail revenues, net of an estimated refund, from an interim rate increase in North Dakota effective January 1, 2024, in connection with OTP's North Dakota rate case filed in November 2023.
•A $1.4 million increase in retail revenues due to increased sales volumes from commercial and industrial customers driven by additional demand.
Wholesale Revenues increased $1.6 million primarily due to a 44% increase in wholesale electric prices and a 31% increase in wholesale kwh sales.
Production Fuel costs increased $6.2 million primarily due to an increase in the generation from our coal-fired and natural gas facilities compared to the same period last year, partially due to an outage at Big Stone Plant in the first quarter of 2023.
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Purchased Power costs to serve retail customers decreased $19.3 million primarily due to a 42% decrease in the amount of kwh purchased driven by lower customer demand resulting from unfavorable weather as well as an increase in purchased power in the first quarter of 2023 due to the outage at Big Stone Plant.
Operating and Maintenance Expenses increased $2.4 million primarily due to higher labor costs, driven by the hiring of additional employees, wage inflation, and increased employee retirement benefits, as well as an increase in health insurance-related costs.
MANUFACTURING SEGMENT RESULTS
The following table summarizes Manufacturing segment operating results for the three months ended March 31, 2024 and 2023:
| (in thousands) | 2024 | 2023 | $ change | % change | |||||||||||||||||||
| Operating Revenues | $ | 99,380 | $ | 106,782 | $ | (7,402) | (6.9) | % | |||||||||||||||
| Cost of Products Sold (excluding depreciation) | 76,913 | 82,227 | (5,314) | (6.5) | |||||||||||||||||||
Nonelectric Selling, General, and Administrative Expenses | 10,142 | 10,578 | (436) | (4.1) | |||||||||||||||||||
| Depreciation and Amortization | 4,912 | 4,468 | 444 | 9.9 | |||||||||||||||||||
| Operating Income | $ | 7,413 | $ | 9,509 | $ | (2,096) | (22.0) | % | |||||||||||||||
Operating Revenues decreased $7.4 million primarily due to decreased sales volumes at both of our manufacturing businesses. T.O. Plastics, our plastics thermoforming manufacturer, experienced a 35% decrease in sales volumes compared to the same period last year, primarily attributable to decreased sales of horticulture products as customers continue to reduce inventory levels and aim to return to more normal seasonal inventory stocking levels. BTD Manufacturing, our contract metal fabricator, experienced a 5% decrease in sales volumes compared to the same period last year. Sales volumes declined primarily in the lawn and garden and energy end markets, while demand remained relatively strong in other segments, including the recreational vehicle, agriculture, and industrial end markets.
Cost of Products Sold decreased $5.3 million primarily due to decreased sales volumes, as described above. The impacts of lower sales volumes were partially offset by reduced leverage of fixed manufacturing costs resulting from decreased production and sales volumes at T.O. Plastics.
PLASTICS SEGMENT RESULTS
The following table summarizes Plastics segment operating results for the three months ended March 31, 2024 and 2023:
| (in thousands) | 2024 | 2023 | $ change | % change | |||||||||||||||||||
| Operating Revenues | $ | 106,200 | $ | 80,390 | $ | 25,810 | 32.1 | % | |||||||||||||||
| Cost of Products Sold (excluding depreciation) | 37,810 | 30,142 | 7,668 | 25.4 | |||||||||||||||||||
Nonelectric Selling, General, and Administrative Expenses | 4,010 | 3,529 | 481 | 13.6 | |||||||||||||||||||
| Depreciation and Amortization | 1,075 | 1,036 | 39 | 3.8 | |||||||||||||||||||
| Operating Income | $ | 63,305 | $ | 45,683 | $ | 17,622 | 38.6 | % | |||||||||||||||
Operating Revenues increased $25.8 million primarily due to a 56% increase in sales volumes driven by customer sales volume growth and strong distributor and end market demand. Sales volumes in the first quarter of 2023 were significantly impacted by distributor destocking efforts as distributors managed inventory levels amid uncertain market conditions. Increased sales volumes in the first quarter of 2024 were partially offset by a 15% decrease in sales prices compared to the same period last year. As market dynamics have begun to normalize, sales prices have declined at a modest pace after peaking in mid-2022.
Cost of Products Sold increased $7.7 million primarily due to increased sales volumes, as discussed above. The impact of increased sales volumes was partially offset by decreased PVC resin costs. PVC resin and other input material costs decreased 27% compared to the same period in the previous year as the unique supply and demand conditions, which caused significant volatility and increases in resin costs, have subsided and resin costs have stabilized.
CORPORATE COSTS
The following table summarizes Corporate operating results for the three months ended March 31, 2024 and 2023:
| (in thousands) | 2024 | 2023 | $ change | % change | |||||||||||||||||||
Nonelectric Selling, General, and Administrative Expenses | $ | 4,762 | $ | 4,592 | $ | 170 | 3.7 | % | |||||||||||||||
| Depreciation and Amortization | 23 | 26 | (3) | (11.5) | |||||||||||||||||||
| Operating Loss | $ | 4,785 | $ | 4,618 | $ | 167 | 3.6 | % | |||||||||||||||
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| REGULATORY MATTERS | |||||
The following provides a summary of rate rider filings and other regulatory filings that have or are expected to have a material impact on our operating results, financial position or cash flows.
GENERAL RATES
North Dakota Rate Case
On November 2, 2023, OTP filed a request with the North Dakota Public Service Commission (NDPSC) for an increase in revenue recoverable under general rates in North Dakota. In its filing, OTP requested a net increase in annual revenue of $17.4 million, or 8.4%, based on an allowed rate of return on rate base of 7.85% and an allowed rate of return on equity of 10.6% on an equity ratio of 53.5% of total capital. Through this proceeding, OTP has proposed changes to the mechanism of cost and investment recovery, with recovery moving from riders into base rates. The filing also includes a proposal to implement a sales adjustment mechanism to address potential significant load additions or losses. The filing included an interim rate request of a net increase in annual revenue of $12.4 million, or 6.0%, which was approved by the NDPSC on December 13, 2023. Interim rates went into effect on January 1, 2024, and are subject to potential refund until the finalization of the rate case. An evidentiary hearing before the NDPSC has been scheduled for July 29, 2024, and we anticipate the final outcome of the case will occur in the third quarter of 2024.
RATE RIDERS
The following table includes a summary of pending and recently concluded rate rider proceedings with a significant revenue impact:
| Recovery | Filing | Amount | Effective | |||||||||||||||||||||||||||||||||||
| Mechanism | Jurisdiction | Status | Date | (in millions) | Date | Notes | ||||||||||||||||||||||||||||||||
RRR - 2023 | MN | Approved | 11/01/22 | $17.5 | 07/01/23 | Recovery of Hoot Lake Solar costs, Ashtabula III costs, and true up for PTCs from Merricourt. | ||||||||||||||||||||||||||||||||
ECO - 2023 | MN | Approved | 04/03/23 | 9.7 | 10/01/23 | Recovery of energy conservation improvement costs as well as a demand side management financial incentive. | ||||||||||||||||||||||||||||||||
ECO - 2024 | MN | Requested | 04/01/24 | 8.8 | 10/01/24 | Recovery of energy conservation improvement costs as well as a demand side management financial incentive. | ||||||||||||||||||||||||||||||||
RRR - 2024 | MN | Requested | 12/04/23 | 8.0 | 07/01/24 | Recovery of Hoot Lake Solar costs, Ashtabula III costs, wind upgrade project costs at our four owned wind facilities, and true up of PTCs for Merricourt. | ||||||||||||||||||||||||||||||||
EUIC - 2025 | MN | Requested | 05/03/24 | 4.6 | 01/01/25 | Recovery of advanced metering infrastructure, outage management system, geographic information system, and demand response projects. | ||||||||||||||||||||||||||||||||
| RRR - 2023 | ND | Approved | 12/30/22 | 12.2 | 05/01/23 | Recovery of Merricourt, Ashtabula III and other costs. | ||||||||||||||||||||||||||||||||
| RRR - 2022 | ND | Approved | 01/05/22 | 7.8 | 04/01/22 | Recovery of Merricourt costs, Ashtabula III costs, and deferred taxes and PTCs. | ||||||||||||||||||||||||||||||||
TCR - 2023 | ND | Approved | 09/15/22 | 7.5 | 01/01/23 | Recovery of transmission project costs. | ||||||||||||||||||||||||||||||||
| TCR - 2024 | ND | Approved | 11/02/23 | 4.5 | 01/01/24 | Recovery of transmission project costs. | ||||||||||||||||||||||||||||||||
MDT - 2023 | ND | Approved | 07/08/22 | 3.1 | 01/01/23 | Recovery of advanced metering infrastructure, outage management system and demand response projects. | ||||||||||||||||||||||||||||||||
| PIR - 2022 | SD | Approved | 06/01/22 | 3.0 | 09/01/22 | Recovery of Ashtabula III, Merricourt, Astoria Station, Advanced Grid Infrastructure project costs, and impact of load growth credits. | ||||||||||||||||||||||||||||||||
TCR - 2023 | SD | Approved | 11/01/22 | 3.0 | 03/01/23 | Recovery of transmission project costs. | ||||||||||||||||||||||||||||||||
RESOURCE PLANNING
In 2021, OTP filed its 2022 Integrated Resource Plan (IRP) with regulators in the three states where OTP operates, Minnesota, North Dakota, and South Dakota. The IRP included OTP’s preferred plan for meeting customers’ anticipated capacity and energy needs while maintaining system reliability and low electric service rates. Through two supplemental filings in 2023, the IRP was modified and updated in response to regulatory developments, changing market conditions, and comments received from intervenors. In the latest supplemental filing, made only in Minnesota, OTP proposed to prospectively plan to serve its Minnesota customers with current legacy resources allocated to all jurisdictions consistent with past practice and certain new resources dedicated to and recovered solely from Minnesota customers and, as the need arises, to serve its other jurisdictions with new resources dedicated to and recovered from those jurisdictions. With the proposal of separated resource planning by jurisdiction, the most recent supplemental filing outlined OTP’s preferred plan for Minnesota only.
On April 2, 2024, OTP, the Minnesota Department of Commerce - Division of Energy Resources, the International Union of Operating Engineers Local 49, the North Central States Regional Council of Carpenters, and the Laborers’ International Union of North America
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entered into a settlement agreement to resolve all issues among the parties and recommend a decision to the MPUC to resolve the contested matters in the IRP. The terms of the settlement agreement outline the parties’ recommendation that the MPUC resolve the IRP and approve, among other items, the following:
–Approve the following renewable resource additions directly assigned to Minnesota customers, giving reasonable preference to projects located in Minnesota:
–200 to 300 megawatts of solar generation by November 1, 2027, or as soon as practicable thereafter;
–150 to 200 megawatts of wind generation by December 31, 2029, or as soon as practicable thereafter;
–Approve the proposal to add on-site liquefied natural gas storage at the Astoria Station natural gas plant;
–Approve the proposal to operate the Minnesota allocated share of the jointly owned Coyote Station coal-fired plant as an Available Maximum Emergency (AME) resource as soon as March 1, 2026, with the costs and benefits of designating and operating Coyote Station as an AME resource borne by customers in Minnesota;
–Authorize OTP to begin the process of withdrawing from the Minnesota allocated share of Coyote Station if a material, non-routine capital investment in the plant is required; and
–Require OTP to file its next Minnesota resource plan no later than May 15, 2026, in which OTP must develop a plan assuming the withdrawal from the Minnesota allocated share of Coyote Station as of December 31, 2031; provided that additional plans for consideration may be presented as well.
Other parties to the Minnesota IRP proceeding have not joined the settlement. The regulatory process is ongoing and the MPUC is not bound by this settlement and may accept, modify or deny the recommendations included in the settlement. Neither the settlement agreement nor OTP’s Minnesota preferred plan had been approved by the MPUC as of the date of this filing. A hearing before the MPUC has been scheduled for May 28, 2024.
ENVIRONMENTAL REGULATION
In April 2024, the EPA finalized new regulations under Section 111 of the Clean Air Act to regulate GHG emissions from existing and new fossil fuel-based power plants. The final rule establishes subcategories for new combustion turbines and existing coal-fired power plants to achieve certain CO2 emission reduction levels based on the respective subcategory. For existing coal-fired power plants the applicable subcategory is based upon the date at which the plant will cease operations.
We continue to review and evaluate the final regulations and their impact on our power plants and the potential impact to our operating results, financial condition and liquidity. Coyote Station and Big Stone Plant, our two co-owned coal-fired power plants, are within the scope of the regulations but we do not believe our combustion turbines would be within the scope of the final regulation.
In April 2024, the EPA also finalized regulations to strengthen and update Mercury and Air Toxics Standards (MATS) for coal-fired power plants, tightening the emission standard for toxic metals and finalizing a reduction standard for mercury from existing lignite-fired sources. The EPA also published a final rule under the Clean Water Act to reduce pollutants discharged through wastewater from coal-fired power plants and a final rule requiring the safe management of coal ash at inactive facilities, including requirements for ongoing monitoring and closure and post-closure care.
We continue to review and evaluate these final regulations, and their impact our operations, which could have a material impact on our operating results, financial condition and liquidity.
| LIQUIDITY | |||||
LIQUIDITY OVERVIEW
We believe our financial condition is strong and our cash and cash equivalents, other liquid assets, operating cash flows, existing lines of credit, access to capital markets and borrowing ability, because of investment-grade credit ratings, when taken together, provide us ample liquidity to conduct our business operations, fund our short-term and long-term capital expenditure plans and satisfy our obligations as they become due. Our liquidity, including our operating cash flows and access to capital markets, could be impacted by macroeconomic factors outside of our control, including higher interest rates and debt capital costs and diminished credit availability. In addition, our liquidity could be impacted by non-compliance with certain financial covenants under our various
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debt instruments. As of March 31, 2024, we were in compliance with all financial covenants (see the Financial Covenants section under Capital Resources below).
The following table presents the status of our lines of credit as of March 31, 2024 and December 31, 2023:
| 2024 | 2023 | ||||||||||||||||||||||||||||
| (in thousands) | Borrowing Limit | Amount Outstanding | Letters of Credit | Amount Available | Amount Available | ||||||||||||||||||||||||
| OTC Credit Agreement | $ | 170,000 | $ | — | $ | — | $ | 170,000 | $ | 170,000 | |||||||||||||||||||
| OTP Credit Agreement | 170,000 | — | 9,132 | 160,868 | 79,446 | ||||||||||||||||||||||||
| Total | $ | 340,000 | $ | — | $ | 9,132 | $ | 330,868 | $ | 249,446 | |||||||||||||||||||
OTC and OTP are each party to separate credit agreements (the OTC Credit Agreement and OTP Credit Agreement, respectively) which provide for unsecured revolving lines of credit. Should additional liquidity be needed, the OTC Credit Agreement includes an accordion feature allowing us to increase the amount available to $290 million, subject to certain terms and conditions. The OTP Credit Agreement also includes an accordion feature allowing OTP to increase that facility to $250 million, subject to certain terms and conditions.
As of March 31, 2024, we had $330.9 million of available liquidity under our credit facilities and $238.2 million of available cash and cash equivalents, resulting in total available liquidity of $569.1 million, compared to total available liquidity of $373.7 million as of March 31, 2023.
CASH FLOWS
The following is a discussion of our cash flows for the three months ended March 31, 2024 and 2023:
| (in thousands) | 2024 | 2023 | |||||||||
| Net Cash Provided by Operating Activities | $ | 71,913 | $ | 55,553 | |||||||
Net Cash Provided by Operating Activities increased $16.4 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023, primarily due to an increase in net income driven by increased earnings from our Plastics segment.
| (in thousands) | 2024 | 2023 | |||||||||
| Net Cash Used in Investing Activities | $ | 75,876 | $ | 100,379 | |||||||
Net Cash Used in Investing Activities decreased $24.5 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The decrease in cash used in investing activities was primarily due to a lower amount of Electric segment capital investment compared to last year, due to the purchase of the Ashtabula III wind farm for $50.6 million in January 2023.
| (in thousands) | 2024 | 2023 | |||||||||
Net Cash Provided by Financing Activities | $ | 11,748 | $ | 29,910 | |||||||
Net Cash Provided by Financing Activities decreased $18.2 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Financing activities for the three months ended March 31, 2024 included the issuance of $120.0 million of long-term debt at OTP, the proceeds of which were used to repay short-term borrowings of $81.4 million under the OTP credit agreement, fund Electric segment construction expenditures, and support operating activities. Financing activities for the three months ended March 31, 2024 also included dividend payments of $19.6 million. Financing activities for the three months ended March 31, 2023 included net short-term borrowings of $52.7 million and dividend payments of $18.3 million.
| CAPITAL REQUIREMENTS | |||||
CAPITAL EXPENDITURES
Our capital expenditure plan includes investments in electric generation facilities, transmission and distribution lines, manufacturing facilities and upgrades, equipment used in the manufacturing process, and computer hardware and information systems. Our capital expenditure plan is subject to review and is revised in light of changes in demands for energy, technology, environmental laws, regulatory changes, business expansion opportunities, the costs of labor, materials and equipment and our financial condition. Refer
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to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Form 10-K for the year ended December 31, 2023 for our capital expenditure plans for the five year period from 2024 through 2028.
CONTRACTUAL OBLIGATIONS
Our contractual obligations primarily include principal and interest payments due under our outstanding debt obligations, commitments to acquire coal, energy and capacity commitments, payments to meet our postretirement benefit obligations, and payment obligations under land easements and leasing arrangements.
Our contractual obligations as of December 31, 2023 are included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2023. There were no material changes in our contractual obligations outside of the ordinary course of business during the three months ended March 31, 2024.
COMMON STOCK DIVIDENDS
We paid dividends to our common stockholders totaling $19.6 million, or $0.4675 per share, in the first three months of 2024. The determination of the amount of future cash dividends to be paid will depend on, among other things, our financial condition, our actual or expected level of earnings and cash flows from operations, the level of our capital expenditures and our future business prospects. As a result of certain statutory limitations or regulatory or financing agreements, the amount of dividends we are allowed to pay could be restricted. See Note 10 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information. The decision to declare dividends is reviewed quarterly by our Board of Directors.
| CAPITAL RESOURCES | |||||
Financial flexibility is provided by operating cash flows, unused lines of credit and access to capital markets, and is aided by strong financial coverages and investment grade credit ratings. Debt financing will be required in the next five-years to refinance maturing debt and to finance our capital investments. Our financing plans are subject to change and are impacted by our planned level of capital investments, and decisions to reduce borrowings under our lines of credit, to refund or retire early any of our outstanding debt, to complete acquisitions, or to use capital for other corporate purposes.
REGISTRATION STATEMENTS
On May 3, 2024 we filed two registration statements with the SEC, replacing two previously filed registration statements upon their expiration. The first statement, a shelf registration, allows us to offer for sale, from time to time, either separately or together in any combination, equity, debt or other securities described in the registration statement. No new debt or equity has been issued pursuant to the registration statement. The second registration statement allows for the issuance of up to 1,500,000 common shares under our Automatic Dividend Reinvestment and Share Purchase Plan, which provides our common shareholders, retail customers of OTP and other interested investors a method of purchasing our common shares by reinvesting their dividends and/or making optional cash investments. Shares purchased under the plan may be newly issued common shares or common shares purchased on the open market. Both registration statements expire in May 2027.
SHORT-TERM DEBT
OTC and OTP are each party to a credit agreement (the OTC Credit Agreement and the OTP Credit Agreement, respectively) which each provides for unsecured revolving lines of credit. The following is a summary of key provisions and borrowing information as of, and for the three months ended, March 31, 2024:
| (in thousands, except interest rates) | OTC Credit Agreement | OTP Credit Agreement | |||||||||
| Borrowing Limit | $ | 170,000 | $ | 170,000 | |||||||
Borrowing Limit if Accordion Exercised1 | 290,000 | 250,000 | |||||||||
Amount Restricted Due to Outstanding Letters of Credit as of March 31, 2024 | — | 9,132 | |||||||||
Amount Outstanding as of March 31, 2024 | — | — | |||||||||
Average Amount Outstanding During the Three Months Ended March 31, 2024 | — | 78,678 | |||||||||
Maximum Amount Outstanding During the Three Months Ended March 31, 2024 | — | 102,024 | |||||||||
Interest Rate as of March 31, 2024 | 6.83 | % | 6.58 | % | |||||||
| Maturity Date | October 29, 2027 | October 29, 2027 | |||||||||
1Each facility includes an accordion featuring allowing the borrower to increase the borrowing limit if certain terms and conditions are met. | |||||||||||
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LONG-TERM DEBT
In March 2024, OTP entered into a Note Purchase Agreement pursuant to which OTP issued, in a private placement transaction, $120.0 million of senior unsecured notes consisting of (a) $60.0 million of 5.48% Series 2024A Senior Unsecured Notes due April 1, 2034, and (b) $60.0 million of 5.77% Series 2024B Senior Unsecured Notes due April 1, 2054. The proceeds of the notes were used to repay existing short-term borrowings, fund capital expenditures, and for general corporate purposes.
As of March 31, 2024, we had $947.0 million of principal outstanding under long-term debt arrangements. These instruments generally provide for unsecured borrowings at fixed rates of interest with maturities ranging from 2026 to 2054. Note 6 to our consolidated financial statements included in this Quarterly Report on Form 10-Q includes additional information regarding these short-term and long-term debt instruments.
Financial Covenants
Certain of our short- and long-term debt agreements require OTC and OTP to maintain certain financial covenants. As of March 31, 2024, we were in compliance with these financial covenants as further described below:
OTC, under its financial covenants, may not permit its ratio of interest-bearing debt to total capitalization to exceed 0.60 to 1.00, may not permit its interest and dividend coverage ratio to be less than 1.50 to 1.00, and may not permit its priority indebtedness to exceed 10 percent of its total capitalization. As of March 31, 2024, OTC's interest-bearing debt to total capitalization was 0.39 to 1.00, OTC's interest and dividend coverage ratio was 11.18 to 1.00, and OTC had no priority indebtedness outstanding.
OTP, under its financial covenants, may not permit its ratio of interest-bearing debt to total capitalization to exceed 0.60 to 1.00, may not permit its interest and dividend coverage ratio to be less than 1.50 to 1.00, and may not permit its priority indebtedness to exceed 20 percent of its total capitalization. As of March 31, 2024, OTP's interest-bearing debt to total capitalization was 0.47 to 1.00, OTP's interest and dividend coverage ratio was 3.48 to 1.00, and OTP had no priority indebtedness outstanding.
| CRITICAL ACCOUNTING POLICIES INVOLVING SIGNIFICANT ESTIMATES | |||||
The discussion and analysis of our results of operations are based on financial statements prepared in accordance with generally accepted accounting principles in the United States of America. Certain of our accounting policies require management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the preparation of our consolidated financial statements. We have disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023 the critical accounting policies that affect our most significant estimates and assumptions used in preparing our consolidated financial statements. There have been no material changes to our critical accounting policies and estimates from those disclosed in the most recent Annual Report on Form 10-K.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | ||||
There have been no material changes in our market risk from those disclosed in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended December 31, 2023.
| ITEM 4. | CONTROLS AND PROCEDURES | ||||
Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of March 31, 2024, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2024.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS | ||||||||||
We are the subject of various legal and regulatory proceedings in the ordinary course of our business. Such matters are subject to many uncertainties and to outcomes that are not predictable with assurance. We record a liability in our consolidated financial statements for costs related to claims, including future legal costs, settlements and judgments, where we have assessed that a loss is
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probable, and an amount can be reasonably estimated. Material proceedings are described under Note 9, Commitments and Contingencies, to the consolidated financial statements, and in Management's Discussion and Analysis of Financial Condition and Results of Operations, Regulatory Matters.
| ITEM 1A. | RISK FACTORS | |||||||||||||
There have been no material changes from the risk factors disclosed in Item 1A, Risk Factors, of our Annual Report on Form 10-K for the year ended December 31, 2023, except for the risk factor below.
Legislation, regulation, litigation or other actions related to climate change and greenhouse gas emissions could materially impact us.
Current and future federal, state, regional and international regulations to address global climate change and reduce GHG emissions, including measures such as mandated levels of renewable generation, mandatory reductions in CO2 emission levels, taxes on CO2 emissions, or cap-and-trade regimes, could require us to incur significant costs which could negatively impact our financial condition, operating results and liquidity if such costs cannot be recovered through rates granted by rate-making authorities or through increased market prices for electricity.
In April 2024, the EPA finalized new regulations under Section 111 of the Clean Air Act to regulate GHG emissions from existing and new fossil fuel-based power plants. The new regulations require existing coal-fired power plants to achieve certain CO2 emissions reduction levels, with the amount of reduction dependent upon the remaining operating life of the facility. The new regulation has the potential to materially impact the operations of our coal-fired power plants, which could have a material impact on our operating results, financial condition and liquidity.
In addition to complying with legislation and regulation, we could be subject to litigation related to climate change. If we were subjected to such litigation, the costs of such litigation could be significant and an adverse outcome could require substantial capital expenditures, changes in operations and possible payment of penalties or damages which could affect our financial condition, operating results and liquidity if the costs are not recoverable in rates or covered by insurance.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |||||||||||||
Purchases of Otter Tail Corporation common shares were made on the open market during the three months ended March 31, 2024, as follows:
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(3) | Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(3) | |||||||||||||||||||
January 2024(1) | 13,133 | $ | 85.61 | $ | — | $ | — | ||||||||||||||||
February 2024(2) | 3,010 | 94.87 | — | — | |||||||||||||||||||
| March 2024 | — | — | — | — | |||||||||||||||||||
| Total | 16,143 | $ | 87.34 | $ | — | $ | — | ||||||||||||||||
(1) These purchases were made to satisfy obligations under our Employee Stock Purchase Plan as we elected to acquire shares in the open market to fulfill share issuances to plan participants. | |||||||||||||||||||||||
(2) These purchases were made in connection with our Employee Stock Ownership Plan as we elected to acquire shares in the open market to fulfill share contributions to the plan. | |||||||||||||||||||||||
(3) We do not have any publicly announced share repurchase plans or programs. | |||||||||||||||||||||||
| ITEM 5. | OTHER INFORMATION | |||||||||||||
Securities Trading Plans On February 22, 2024 , Paul Knutson , the Company’s Vice President, Human Resources , entered into a written plan in accordance with Rule 10b5-1 under the Exchange Act, for the sale of shares of the Company’s common stock. The plan was entered into during an open trading window in accordance with the Company’s policies regarding transactions in the Company’s securities and is intended to satisfy the affirmative defense of Rule 10b5-1(c) under the Exchange Act. The plan provides for the potential sale of up to 4,000 shares of the Company’s common stock between May 24, 2024 and December 31, 2024.
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| ITEM 6. | EXHIBITS | |||||||||||||
The following Exhibits are filed as part of, or incorporated by reference into, this report.
| No. | Description | ||||
| 10.1 | |||||
| 31.1 | |||||
| 31.2 | |||||
| 32.1 | |||||
| 32.2 | |||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| OTTER TAIL CORPORATION | ||||||||
| By: | /s/ Todd R. Wahlund | |||||||
| Todd R. Wahlund Vice President and Chief Financial Officer (duly authorized officer and principal financial officer) | ||||||||
| Dated: May 8, 2024 | ||||||||
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