Otter Tail Corp - Quarter Report: 2021 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly ended March 31, 2021 or
☐ Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number 0-53713
OTTER TAIL CORPORATION
(Exact name of registrant as specified in its charter)
Minnesota (State or other jurisdiction of incorporation or organization) | 27-0383995 (I.R.S. Employer Identification No.) | ||||
215 South Cascade Street, Box 496, Fergus Falls, Minnesota (Address of principal executive offices) | 56538-0496 (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 | ||||||
| Common Shares, par value $5.00 per share | OTTR | The Nasdaq Stock Market LLC | ||||||
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):
Large Accelerated Filer ☑ | 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:
41,538,084 Common Shares ($5 par value) as of April 30, 2021.
| TABLE OF CONTENTS | |||||||||||
| Description | Page | |||||||
| ITEM 1. | ||||||||
| ITEM 2. | ||||||||
| ITEM 3. | ||||||||
| ITEM 4. | ||||||||
| ITEM 1. | ||||||||
| ITEM 1A. | ||||||||
| ITEM 2. | ||||||||
| ITEM 6. | ||||||||
1
| DEFINITIONS | |||||||||||
| AFUDC | Allowance for Funds Used During Construction | MPUC | Minnesota Public Utilities Commission | |||||||||||
| ARP | Alternative Revenue Program | NDPSC | North Dakota Public Service Commission | |||||||||||
| BTD | BTD Manufacturing, Inc. | Northern Pipe | Northern Pipe Products, Inc. | |||||||||||
| CIP | Conservation Improvement Program | OTC | Otter Tail Corporation | |||||||||||
| ECR | Environmental Cost Recovery | OTP | Otter Tail Power Company | |||||||||||
| ECR | Environmental Cost Recovery Rider | PACE | Partnership in Assisting Community Expansion | |||||||||||
| EEP | Energy Efficiency Plan | PIR | Phase-In Rider | |||||||||||
| EPA | Environmental Protection Agency | PTCs | Production tax credits | |||||||||||
| ESSRP | Executive Survivor and Supplemental Retirement Plan | PVC | Polyvinyl chloride | |||||||||||
| FCA | Fuel Clause Adjustment | RHR | Regional Haze Rule | |||||||||||
| FERC | Federal Energy Regulatory Commission | ROE | Return on equity | |||||||||||
| GCR | Generation Cost Recovery | RRR | Renewable Resource Rider | |||||||||||
| ISO | Independent System Operator | SDPUC | South Dakota Public Utilities Commission | |||||||||||
| kW | kiloWatt | SEC | Securities and Exchange Commission | |||||||||||
| kwh | kilowatt-hour | T.O. Plastics | T.O. Plastics, Inc. | |||||||||||
| Merricourt | Merricourt Wind Energy Center | TCR | Transmission Cost Recovery | |||||||||||
| MISO | Midcontinent Independent System Operator, Inc. | Vinyltech | Vinyltech Corporation | |||||||||||
| FORWARD-LOOKING INFORMATION | ||
PART I. FINANCIAL INFORMATION
| ITEM 1. | FINANCIAL STATEMENTS | ||||
2
OTTER TAIL CORPORATION
CONSOLIDATED BALANCE SHEETS
| (in thousands, except share data) | March 31, 2021 | December 31, 2020 | |||||||||
| Assets | |||||||||||
| Current Assets | |||||||||||
| Cash and Cash Equivalents | $ | 1,212 | $ | 1,163 | |||||||
| Receivables, net of allowance for credit losses | 134,390 | 113,959 | |||||||||
| Inventories | 92,426 | 92,165 | |||||||||
| Regulatory Assets | 21,419 | 21,900 | |||||||||
| Other Current Assets | 9,516 | 5,645 | |||||||||
| Total Current Assets | 258,963 | 234,832 | |||||||||
| Noncurrent Assets | |||||||||||
| Investments | 54,446 | 51,856 | |||||||||
| Property, Plant and Equipment, net of accumulated depreciation | 2,060,792 | 2,049,273 | |||||||||
| Regulatory Assets | 167,556 | 168,395 | |||||||||
| Intangible Assets, net of accumulated amortization | 9,869 | 10,144 | |||||||||
| Goodwill | 37,572 | 37,572 | |||||||||
| Other Noncurrent Assets | 29,342 | 26,282 | |||||||||
| Total Noncurrent Assets | 2,359,577 | 2,343,522 | |||||||||
| Total Assets | $ | 2,618,540 | $ | 2,578,354 | |||||||
| Liabilities and Shareholders' Equity | |||||||||||
| Current Liabilities | |||||||||||
| Short-Term Debt | $ | 134,851 | $ | 80,997 | |||||||
| Current Maturities of Long-Term Debt | 139,941 | 140,087 | |||||||||
| Accounts Payable | 113,073 | 130,805 | |||||||||
| Accrued Salaries and Wages | 17,635 | 26,908 | |||||||||
| Accrued Taxes | 19,437 | 18,831 | |||||||||
| Regulatory Liabilities | 12,517 | 16,663 | |||||||||
| Other Current Liabilities | 21,975 | 22,495 | |||||||||
| Total Current Liabilities | 459,429 | 436,786 | |||||||||
| Noncurrent Liabilities and Deferred Credits | |||||||||||
| Pensions Benefit Liability | 103,193 | 114,055 | |||||||||
| Other Postretirement Benefits Liability | 67,255 | 67,359 | |||||||||
| Regulatory Liabilities | 234,986 | 233,973 | |||||||||
| Deferred Income Taxes | 160,529 | 153,376 | |||||||||
| Deferred Tax Credits | 17,219 | 17,405 | |||||||||
| Other Noncurrent Liabilities | 63,577 | 60,002 | |||||||||
| Total Noncurrent Liabilities and Deferred Credits | 646,759 | 646,170 | |||||||||
| Commitments and Contingencies (Note 9) | |||||||||||
| Capitalization | |||||||||||
| Long-Term Debt, net of current maturities | 624,485 | 624,432 | |||||||||
| Shareholders' Equity | |||||||||||
Common Shares: 50,000,000 share authorized of $5 par value; 41,510,455 and 41,469,879 outstanding at March 31, 2021 and December 31, 2020 | 207,552 | 207,349 | |||||||||
| Additional Paid-In Capital | 416,708 | 414,246 | |||||||||
| Retained Earnings | 271,999 | 257,878 | |||||||||
| Accumulated Other Comprehensive Loss | (8,392) | (8,507) | |||||||||
| Total Shareholders' Equity | 887,867 | 870,966 | |||||||||
| Total Capitalization | 1,512,352 | 1,495,398 | |||||||||
| Total Liabilities and Shareholders' Equity | $ | 2,618,540 | $ | 2,578,354 | |||||||
See accompanying notes to consolidated financial statements.
3
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
| Three Months Ended March 31, | |||||||||||
| (in thousands, except per-share amounts) | 2021 | 2020 | |||||||||
| Operating Revenues | |||||||||||
| Electric | $ | 123,699 | $ | 119,870 | |||||||
| Product Sales | 138,011 | 114,877 | |||||||||
| Total Operating Revenues | 261,710 | 234,747 | |||||||||
| Operating Expenses | |||||||||||
| Electric Production Fuel | 14,714 | 13,735 | |||||||||
| Electric Purchased Power | 19,260 | 18,830 | |||||||||
| Electric Operating and Maintenance Expenses | 41,421 | 40,615 | |||||||||
| Cost of Products Sold (excluding depreciation) | 101,977 | 85,879 | |||||||||
| Other Nonelectric Expenses | 13,693 | 11,900 | |||||||||
| Depreciation and Amortization | 22,126 | 20,399 | |||||||||
| Electric Property Taxes | 4,320 | 4,100 | |||||||||
| Total Operating Expenses | 217,511 | 195,458 | |||||||||
| Operating Income | 44,199 | 39,289 | |||||||||
| Other Income and Expense | |||||||||||
| Interest Charges | 9,398 | 8,123 | |||||||||
| Nonservice Cost Components of Postretirement Benefits | 383 | 871 | |||||||||
| Other Income (Expense) | 1,160 | (389) | |||||||||
| Income Before Income Taxes | 35,578 | 29,906 | |||||||||
| Income Tax Expense | 5,249 | 5,638 | |||||||||
| Net Income | $ | 30,329 | $ | 24,268 | |||||||
| Weighted-Average Common Shares Outstanding: | |||||||||||
| Basic | 41,455 | 40,217 | |||||||||
| Diluted | 41,700 | 40,444 | |||||||||
| Earnings Per Share: | |||||||||||
| Basic | $ | 0.73 | $ | 0.60 | |||||||
| Diluted | $ | 0.73 | $ | 0.60 | |||||||
See accompanying notes to consolidated financial statements.
4
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Net Income | $ | 30,329 | $ | 24,268 | |||||||
| Other Comprehensive Income (Loss): | |||||||||||
| Unrealized Gain (Loss) on Available-for-Sale Securities: | |||||||||||
| Reversal of Previously Recognized Losses (Gains) Realized on Sale of Investments and Included in Other Income (Expense) During Period | (5) | 2 | |||||||||
| Unrealized Gains (Losses) Arising During Period | (40) | 126 | |||||||||
| Income Tax (Expense) Benefit | 10 | (27) | |||||||||
| Available-for-Sale Securities, net of tax | (35) | 101 | |||||||||
| Pension and Postretirement Benefit Plans: | |||||||||||
| Amortization of Unrecognized Postretirement Benefit Losses and Costs | 203 | 138 | |||||||||
| Income Tax Expense | (53) | (36) | |||||||||
| Pension and Postretirement Benefit Plan, net of tax | 150 | 102 | |||||||||
Total Other Comprehensive Income | 115 | 203 | |||||||||
| Total Comprehensive Income | $ | 30,444 | $ | 24,471 | |||||||
See accompanying notes to consolidated financial statements.
5
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
| (in thousands, except common shares outstanding) | Common Shares Outstanding | Par Value, Common Shares | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss)1 | Total Shareholders' Equity | |||||||||||||||||||||||||||||
| Balance, December 31, 2020 | 41,469,879 | $ | 207,349 | $ | 414,246 | $ | 257,878 | $ | (8,507) | $ | 870,966 | ||||||||||||||||||||||||
| Common Stock Issuances, Net of Expenses | 76,277 | 382 | (407) | (25) | |||||||||||||||||||||||||||||||
| Common Stock Retirements and Forfeitures | (35,701) | (179) | (1,328) | (1,507) | |||||||||||||||||||||||||||||||
| Net Income | 30,329 | 30,329 | |||||||||||||||||||||||||||||||||
| Other Comprehensive Income | 115 | 115 | |||||||||||||||||||||||||||||||||
| Stock Compensation Expense | 4,197 | 4,197 | |||||||||||||||||||||||||||||||||
Common Dividends ($0.39 per share) | (16,208) | (16,208) | |||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | 41,510,455 | $ | 207,552 | $ | 416,708 | $ | 271,999 | $ | (8,392) | $ | 887,867 | ||||||||||||||||||||||||
| Balance, December 31, 2019 | 40,157,591 | $ | 200,788 | $ | 364,790 | $ | 222,341 | $ | (6,437) | $ | 781,482 | ||||||||||||||||||||||||
| Common Stock Issuances, Net of Expenses | 257,074 | 1,285 | 6,990 | 8,275 | |||||||||||||||||||||||||||||||
| Common Stock Retirements and Forfeitures | (38,217) | (191) | (1,881) | (2,072) | |||||||||||||||||||||||||||||||
| Net Income | 24,268 | 24,268 | |||||||||||||||||||||||||||||||||
| Other Comprehensive Income | 203 | 203 | |||||||||||||||||||||||||||||||||
| Stock Compensation Expense | 2,770 | 2,770 | |||||||||||||||||||||||||||||||||
Common Dividends ($0.37 per share) | (14,907) | (14,907) | |||||||||||||||||||||||||||||||||
| Balance, March 31, 2020 | 40,376,448 | $ | 201,882 | $ | 372,669 | $ | 231,702 | $ | (6,234) | $ | 800,019 | ||||||||||||||||||||||||
1Accumulated Other Comprehensive Income (Loss) as of March 31, 2021 and December 31, 2020 is comprised of the following: | |||||||||||
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Unrealized Gain (Loss) on Available-for-Sale Debt Securities: | |||||||||||
| Before Tax | $ | 220 | $ | 265 | |||||||
| Tax Effect | (46) | (56) | |||||||||
| Unrealized Gain (Loss) on Available-for-Sale Debt, net of tax | 174 | 209 | |||||||||
| Unamortized Actuarial Losses and Prior Service Costs Related to Pension and Postretirement Benefits: | |||||||||||
| Before Tax | (11,590) | (11,793) | |||||||||
| Tax Effect | 3,024 | 3,077 | |||||||||
| Unamortized Actuarial Losses and Prior Service Costs Related to Pension and Postretirement Benefits, net of tax | (8,566) | (8,716) | |||||||||
| Accumulated Other Comprehensive Loss: | |||||||||||
| Before Tax | (11,370) | (11,528) | |||||||||
| Tax Effect | 2,978 | 3,021 | |||||||||
| Net Accumulated Other Comprehensive Loss | $ | (8,392) | $ | (8,507) | |||||||
See accompanying notes to consolidated financial statements.
6
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Three Months Ended March 31, | |||||||||||
| (in thousands) | 2021 | 2020 | |||||||||
| Operating Activities | |||||||||||
| Net Income | $ | 30,329 | $ | 24,268 | |||||||
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | |||||||||||
| Depreciation and Amortization | 22,126 | 20,399 | |||||||||
| Deferred Tax Credits | (186) | (329) | |||||||||
| Deferred Income Taxes | 5,697 | 5,812 | |||||||||
| Change in Deferred Debits and Other Assets | 543 | 5,087 | |||||||||
| Discretionary Contribution to Pension Plan | (10,000) | (11,200) | |||||||||
| Change in Noncurrent Liabilities and Deferred Credits | (1,804) | 860 | |||||||||
| Allowance for Equity/Other Funds Used During Construction | (45) | (791) | |||||||||
| Stock Compensation Expense | 4,197 | 2,770 | |||||||||
| Other—Net | (1,569) | 46 | |||||||||
| Cash (Used for) Provided by Current Assets and Current Liabilities: | |||||||||||
| Change in Receivables | (20,431) | (16,666) | |||||||||
| Change in Inventories | (261) | (301) | |||||||||
| Change in Other Current Assets | (3,871) | (447) | |||||||||
| Change in Payables and Other Current Liabilities | (6,930) | (7,690) | |||||||||
| Change in Interest Payable and Income Taxes Receivable/Payable | (2,525) | (41) | |||||||||
| Net Cash Provided by Operating Activities | 15,270 | 21,777 | |||||||||
| Investing Activities | |||||||||||
| Capital Expenditures | (50,076) | (75,059) | |||||||||
| Proceeds from Disposal of Noncurrent Assets | 3,244 | 2,487 | |||||||||
| Cash Used for Investments and Other Assets | (2,188) | (2,487) | |||||||||
| Net Cash Used in Investing Activities | (49,020) | (75,059) | |||||||||
| Financing Activities | |||||||||||
| Change in Checks Written in Excess of Cash | (2,144) | — | |||||||||
| Net Short-Term Borrowings | 53,854 | 13,893 | |||||||||
| Proceeds from Issuance of Common Stock | — | 8,399 | |||||||||
| Common Stock Issuance Expenses | (25) | (124) | |||||||||
| Payments for Shares Withheld for Employee Tax Obligations | (1,507) | (2,072) | |||||||||
| Proceeds from Issuance of Long-Term Debt | — | 35,000 | |||||||||
| Short-Term and Long-Term Debt Issuance Expenses | (2) | (177) | |||||||||
| Payments for Retirement of Long-Term Debt | (169) | (45) | |||||||||
| Dividends Paid | (16,208) | (14,907) | |||||||||
Net Cash Provided by Financing Activities | 33,799 | 39,967 | |||||||||
| Net Change in Cash and Cash Equivalents | 49 | (13,315) | |||||||||
| Cash and Cash Equivalents at Beginning of Period | 1,163 | 21,199 | |||||||||
| Cash and Cash Equivalents at End of Period | $ | 1,212 | $ | 7,884 | |||||||
| Supplemental Disclosure of Noncash Investing Activities | |||||||||||
| Transactions Related to Capital Additions Not Settled in Cash | $ | 18,962 | $ | 16,193 | |||||||
See accompanying notes to consolidated financial statements
7
OTTER TAIL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Overview
Otter Tail Corporation 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 PVC pipe products. We classify our business into three segments: Electric, Manufacturing and Plastics.
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, 2020.
Because of the coronavirus (COVID-19) pandemic, the seasonality of our businesses and other factors, the earnings for the three months ended March 31, 2021 should not be taken as an indication of earnings for all or any part of the balance of the year.
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.
2. Segment Information
We classify our business into three segments, Electric, Manufacturing and Plastics, consistent with our business strategy, organizational structure and our internal reporting and review processes used by our chief operating decision maker to make decisions regarding allocation of resources, to assess operating performance and to make strategic decisions.
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 segment performance. Corporate assets consist primarily of cash, 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, 2021 and 2020 are as follows:
| (in thousands) | 2021 | 2020 | ||||||||||||
Operating Revenue1 | ||||||||||||||
| Electric | $ | 123,699 | $ | 119,870 | ||||||||||
| Manufacturing | 75,825 | 68,479 | ||||||||||||
| Plastics | 62,186 | 46,398 | ||||||||||||
| Total | $ | 261,710 | $ | 234,747 | ||||||||||
| Net Income (Loss) | ||||||||||||||
| Electric | $ | 17,587 | $ | 16,182 | ||||||||||
| Manufacturing | 5,385 | 4,927 | ||||||||||||
| Plastics | 9,147 | 5,449 | ||||||||||||
| Corporate | (1,790) | (2,290) | ||||||||||||
| Total | $ | 30,329 | $ | 24,268 | ||||||||||
1Amounts reflect operating revenues to external customers. Intersegment operating revenues are not material for any period presented. | ||||||||||||||
8
The following provides the identifiable assets by segment and corporate assets as of March 31, 2021 and December 31, 2020:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Identifiable Assets | |||||||||||
| Electric | $ | 2,242,026 | $ | 2,233,399 | |||||||
| Manufacturing | 209,477 | 191,005 | |||||||||
| Plastics | 111,148 | 99,767 | |||||||||
| Corporate | 55,889 | 54,183 | |||||||||
| Total | $ | 2,618,540 | $ | 2,578,354 | |||||||
3. Revenue
We present our operating revenues to 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, 2021 and 2020:
| (in thousands) | 2021 | 2020 | |||||||||
| Operating Revenues | |||||||||||
| Electric Segment | |||||||||||
| Retail: Residential | $ | 37,485 | $ | 35,839 | |||||||
| Retail: Commercial and Industrial | 66,403 | 68,942 | |||||||||
| Retail: Other | 1,818 | 1,822 | |||||||||
| Total Retail | 105,706 | 106,603 | |||||||||
| Transmission | 11,944 | 10,841 | |||||||||
| Wholesale | 4,507 | 876 | |||||||||
| Other | 1,542 | 1,550 | |||||||||
| Total Electric Segment | 123,699 | 119,870 | |||||||||
| Manufacturing Segment | |||||||||||
| Metal Parts and Tooling | 62,673 | 57,211 | |||||||||
| Plastic Products and Tooling | 10,295 | 9,883 | |||||||||
| Scrap Metal Sales | 2,857 | 1,385 | |||||||||
| Total Manufacturing Segment | 75,825 | 68,479 | |||||||||
| Plastics Segment | |||||||||||
| PVC Pipe | 62,186 | 46,398 | |||||||||
| Total Operating Revenue | 261,710 | 234,747 | |||||||||
| Less: Noncontract Revenues Included Above | |||||||||||
| Electric Segment - Alternative Revenue Program Revenues | (975) | (87) | |||||||||
| Total Operating Revenues from Contracts with Customers | $ | 262,685 | $ | 234,834 | |||||||
4. Select Balance Sheet Information
Receivables and Allowance for Credit Losses
Receivables as of March 31, 2021 and December 31, 2020 are as follows:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Receivables | |||||||||||
| Trade | $ | 112,060 | $ | 87,048 | |||||||
| Other | 6,982 | 8,939 | |||||||||
| Unbilled Receivables | 18,331 | 21,187 | |||||||||
| Total Receivables | 137,373 | 117,174 | |||||||||
| Less Allowance for Credit Losses | 2,983 | 3,215 | |||||||||
| Receivables, net of allowance for credit losses | $ | 134,390 | $ | 113,959 | |||||||
9
The following is a summary of activity in the allowance for credit losses for the three months ended March 31, 2021 and 2020:
| (in thousands) | 2021 | 2020 | |||||||||
| Beginning Balance, January 1 | $ | 3,215 | $ | 1,339 | |||||||
| Additions Charged to Expense | 211 | 635 | |||||||||
| Reductions for Amounts Written-Off, Net of Recoveries | (443) | (293) | |||||||||
| Ending Balance, March 31 | $ | 2,983 | $ | 1,681 | |||||||
Inventories
Inventories consist of the following as of March 31, 2021 and December 31, 2020:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Finished Goods | $ | 20,567 | $ | 22,046 | |||||||
| Work in Process | 19,324 | 16,210 | |||||||||
| Raw Material, Fuel and Supplies | 52,535 | 53,909 | |||||||||
| Total Inventories | $ | 92,426 | $ | 92,165 | |||||||
Investments
The following is a summary of our investments at March 31, 2021 and December 31, 2020:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Corporate-Owned Life Insurance Policies | $ | 38,205 | $ | 36,825 | |||||||
| Debt Securities | 9,209 | 9,260 | |||||||||
| Money Market Funds | 1,862 | 4,075 | |||||||||
| Mutual Funds | 5,141 | 1,662 | |||||||||
| Other Investments | 29 | 34 | |||||||||
| Total Investments | $ | 54,446 | $ | 51,856 | |||||||
The amount of unrealized gains and losses on debt securities as of March 31, 2021 and December 31, 2020 are 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, 2021 and December 31, 2020 are not material.
Property, Plant and Equipment
Major classes of property, plant and equipment as of March 31, 2021 and December 31, 2020 include:
| (in thousands) | March 31, 2021 | December 31, 2020 | |||||||||
| Electric Plant in Service | |||||||||||
| Electric Plant in Service | 2,682,884 | 2,531,352 | |||||||||
| Construction Work in Progress | 77,676 | 203,078 | |||||||||
| Total Gross Electric Plant | 2,760,560 | 2,734,430 | |||||||||
| Less Accumulated Depreciation and Amortization | 796,161 | 778,988 | |||||||||
| Net Electric Plant | $ | 1,964,399 | $ | 1,955,442 | |||||||
| Nonelectric Property, Plant and Equipment | |||||||||||
| Nonelectric Property, Plant and Equipment in Service | 259,975 | 258,730 | |||||||||
| Construction Work in Progress | 12,086 | 9,290 | |||||||||
| Total Gross Nonelectric Property, Plant and Equipment | 272,061 | 268,020 | |||||||||
| Less Accumulated Depreciation and Amortization | 175,668 | 174,189 | |||||||||
| Net Nonelectric Property, Plant and Equipment | 96,393 | 93,831 | |||||||||
| Net Property, Plant and Equipment | $ | 2,060,792 | $ | 2,049,273 | |||||||
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5. Regulatory Matters
Regulatory Assets and Liabilities
The following presents our current and long-term regulatory assets and liabilities as of March 31, 2021 and December 31, 2020 and the period we expect to recover or refund such amounts:
| Period of | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||
| (in thousands) | Recovery/Refund | Current | Long-Term | Current | Long Term | ||||||||||||||||||||||||
| Regulatory Assets | |||||||||||||||||||||||||||||
Pension and Other Postretirement Benefit Plans1 | Various | $ | 11,037 | $ | 143,996 | $ | 11,037 | $ | 146,071 | ||||||||||||||||||||
Alternative Revenue Program Riders2 | Up to 3 years | 6,891 | 10,418 | 8,871 | 9,373 | ||||||||||||||||||||||||
Asset Retirement Obligations1 | Asset lives | — | 8,539 | — | 8,462 | ||||||||||||||||||||||||
ISO Cost Recovery Trackers1 | Up to 2 years | 809 | 703 | 1,079 | 867 | ||||||||||||||||||||||||
Unrecovered Project Costs1 | Up to 3 years | 1,556 | 2,937 | 361 | 2,989 | ||||||||||||||||||||||||
Deferred Rate Case Expenses1 | Various | 493 | 165 | 360 | 230 | ||||||||||||||||||||||||
Debt Reacquisition Premiums1 | Up to 12 years | 180 | 302 | 192 | 341 | ||||||||||||||||||||||||
Other1 | Various | 453 | 496 | — | 62 | ||||||||||||||||||||||||
| Total Regulatory Assets | $ | 21,419 | $ | 167,556 | $ | 21,900 | $ | 168,395 | |||||||||||||||||||||
| Regulatory Liabilities | |||||||||||||||||||||||||||||
| Deferred Income Taxes | Asset lives | $ | — | $ | 133,306 | $ | — | $ | 134,719 | ||||||||||||||||||||
| Plant Removal Obligations | Asset lives | — | 100,616 | — | 98,707 | ||||||||||||||||||||||||
| Fuel Clause Adjustments | Up to 1 year | 7,072 | — | 10,947 | — | ||||||||||||||||||||||||
| Alternative Revenue Program Riders | Various | 3,306 | 837 | 3,581 | 470 | ||||||||||||||||||||||||
| Pension and Other Postretirement Benefit Plans | Up to 1 year | 1,959 | — | 1,959 | — | ||||||||||||||||||||||||
| Other | Various | 180 | 227 | 176 | 77 | ||||||||||||||||||||||||
| Total Regulatory Liabilities | $ | 12,517 | $ | 234,986 | $ | 16,663 | $ | 233,973 | |||||||||||||||||||||
1Costs subject to recovery without a rate of return. | |||||||||||||||||||||||||||||
2Amount eligible for recovery includes an incentive or rate of return. | |||||||||||||||||||||||||||||
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6. Short-Term and Long-Term Borrowings
The following is a summary of our outstanding short and long-term borrowings by borrower, Otter Tail Corporation (OTC) or Otter Tail Power Company (OTP), as of March 31, 2021 and December 31, 2020:
Short-Term Debt
The following is a summary of our lines of credit as of March 31, 2021 and December 31, 2020:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||||||||
| (in thousands) | Line Limit | Amount Outstanding | Letters of Credit | Amount Available | Amount Available | ||||||||||||||||||||||||
| OTC Credit Agreement | $ | 170,000 | $ | 78,206 | $ | — | $ | 91,794 | $ | 104,834 | |||||||||||||||||||
| OTP Credit Agreement | 170,000 | 56,645 | 12,671 | 100,684 | 140,068 | ||||||||||||||||||||||||
| Total | $ | 340,000 | $ | 134,851 | $ | 12,671 | $ | 192,478 | $ | 244,902 | |||||||||||||||||||
Long-Term Debt
The following is a summary of outstanding long-term debt by borrower as of March 31, 2021 and December 31, 2020:
| (in thousands) | ||||||||||||||||||||||||||||||||
| Entity | Debt Instrument | Rate | Maturity | March 31, 2021 | December 31, 2020 | |||||||||||||||||||||||||||
| OTC | Guaranteed Senior Notes | 3.55% | 12/15/26 | $ | 80,000 | $ | 80,000 | |||||||||||||||||||||||||
| OTP | Series 2011A Senior Unsecured Notes | 4.63% | 12/01/21 | 140,000 | 140,000 | |||||||||||||||||||||||||||
| OTP | Series 2007B Senior Unsecured Notes | 6.15% | 08/20/22 | 30,000 | 30,000 | |||||||||||||||||||||||||||
| OTP | Series 2007C Senior Unsecured Notes | 6.37% | 08/02/27 | 42,000 | 42,000 | |||||||||||||||||||||||||||
| OTP | Series 2013A Senior Unsecured Notes | 4.68% | 02/27/29 | 60,000 | 60,000 | |||||||||||||||||||||||||||
| OTP | Series 2019A Senior Unsecured Notes | 3.07% | 10/10/29 | 10,000 | 10,000 | |||||||||||||||||||||||||||
| OTP | Series 2020A Senior Unsecured Notes | 3.22% | 02/25/30 | 10,000 | 10,000 | |||||||||||||||||||||||||||
| OTP | Series 2020B Senior Unsecured Notes | 3.22% | 08/20/30 | 40,000 | 40,000 | |||||||||||||||||||||||||||
| OTP | Series 2007D Senior Unsecured Notes | 6.47% | 08/20/37 | 50,000 | 50,000 | |||||||||||||||||||||||||||
| OTP | Series 2019B Senior Unsecured Notes | 3.52% | 10/10/39 | 26,000 | 26,000 | |||||||||||||||||||||||||||
| OTP | Series 2020C Senior Unsecured Notes | 3.62% | 02/25/40 | 10,000 | 10,000 | |||||||||||||||||||||||||||
| OTP | Series 2013B Senior Unsecured Notes | 5.47% | 02/27/44 | 90,000 | 90,000 | |||||||||||||||||||||||||||
| OTP | Series 2018A Senior Unsecured Notes | 4.07% | 02/07/48 | 100,000 | 100,000 | |||||||||||||||||||||||||||
| OTP | Series 2019C Senior Unsecured Notes | 3.82% | 10/10/49 | 64,000 | 64,000 | |||||||||||||||||||||||||||
| OTP | Series 2020D Senior Unsecured Notes | 3.92% | 02/25/50 | 15,000 | 15,000 | |||||||||||||||||||||||||||
| OTC | PACE Note | 2.54% | 03/18/21 | — | 169 | |||||||||||||||||||||||||||
| Total | $ | 767,000 | $ | 767,169 | ||||||||||||||||||||||||||||
| Less: | Current Maturities Net of Unamortized Debt Issuance Costs | 139,941 | 140,087 | |||||||||||||||||||||||||||||
| Unamortized Long-Term Debt Issuance Costs | 2,574 | 2,650 | ||||||||||||||||||||||||||||||
| Total Long-Term Debt Net of Unamortized Debt Issuance Costs | $ | 624,485 | $ | 624,432 | ||||||||||||||||||||||||||||
Financial Covenants
Certain of OTC's and OTP's short-term and long-term debt agreements require the borrower, whether OTC or OTP, to maintain certain financial covenants, including a maximum debt to total capitalization 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, 2021, OTC and OTP were in compliance with these financial covenants.
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7. Pension Plan and Other Postretirement Benefits
Pension Plan
Components of net periodic pension benefit cost for the three months ended March 31, 2021 and 2020 are as follows:
| (in thousands) | 2021 | 2020 | |||||||||
| Service Cost–Benefit Earned During the Period | $ | 1,866 | $ | 1,655 | |||||||
| Interest Cost on Projected Benefit Obligation | 2,915 | 3,263 | |||||||||
| Expected Return on Assets | (5,590) | (5,505) | |||||||||
| Amortization of Net Actuarial Loss: | |||||||||||
| From Regulatory Asset | 2,660 | 2,231 | |||||||||
| From Other Comprehensive Income | 68 | 55 | |||||||||
| Net Periodic Pension Cost | $ | 1,919 | $ | 1,699 | |||||||
We had no minimum funding requirement as of December 31, 2020 but made a discretionary plan contribution of $10.0 million in January 2021.
Executive Survivor and Supplemental Retirement Plan (ESSRP)
Components of net periodic pension benefit cost for the three months ended March 31, 2021 and 2020 are as follows:
| (in thousands) | 2021 | 2020 | |||||||||
| Service Cost–Benefit Earned During the Period | $ | 47 | $ | 45 | |||||||
| Interest Cost on Projected Benefit Obligation | 307 | 362 | |||||||||
| Amortization of Net Actuarial Loss: | |||||||||||
| From Regulatory Asset | 31 | 23 | |||||||||
| From Other Comprehensive Income | 124 | 86 | |||||||||
| Net Periodic Pension Cost | $ | 509 | $ | 516 | |||||||
Other Postretirement Benefits
Components of net periodic postretirement benefit cost for the three months ended March 31, 2021 and 2020 are as follows:
| (in thousands) | 2021 | 2020 | |||||||||
| Service Cost–Benefit Earned During the Period | $ | 430 | $ | 462 | |||||||
| Interest Cost on Projected Benefit Obligation | 473 | 598 | |||||||||
| Amortization of Prior Service Cost | |||||||||||
| From Regulatory Asset | (1,397) | (1,169) | |||||||||
| From Other Comprehensive Income | (36) | (29) | |||||||||
| Amortization of Net Actuarial Loss | |||||||||||
| From Regulatory Asset | 920 | 1,051 | |||||||||
| From Other Comprehensive Income | 23 | 26 | |||||||||
| Net Periodic Postretirement Benefit Cost | $ | 413 | $ | 939 | |||||||
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8. Income Taxes
The reconciliation of the statutory federal income tax rate to our effective tax rate for each of the three months ended March 31, 2021 and 2020 is as follows:
| 2021 | 2020 | ||||||||||
| Federal Statutory Rate | 21.0 | % | 21.0 | % | |||||||
| Increases (Decreases) in Tax from: | |||||||||||
| State Taxes on Income, Net of Federal Tax | 5.0 | 5.0 | |||||||||
| Production Tax Credits (PTCs) | (7.6) | — | |||||||||
| Amortization of Excess Deferred Income Taxes | (2.9) | (4.1) | |||||||||
| Corporate-Owned Life Insurance | (0.5) | 0.7 | |||||||||
| North Dakota Wind Tax Credit Amortization, Net of Federal Tax | (0.4) | (0.9) | |||||||||
| Excess Tax Deduction on Stock Awards | (0.1) | (1.3) | |||||||||
| Allowance for Equity Funds Used During Construction | — | (1.0) | |||||||||
| Other, Net | 0.3 | (0.5) | |||||||||
| Effective Tax Rate | 14.8 | % | 18.9 | % | |||||||
We began generating PTCs from our Merricourt wind farm placed in service in the fourth quarter of 2020. No PTCs were generated during the three months ended March 31, 2020. Income tax benefits arising from PTCs are offset by corresponding operating revenue reductions as PTC amounts generated reduce Electric segment customer billings.
9. Commitments and Contingencies
Commitments
Construction and Other Purchase Commitments. OTP has commitments under contracts, including its share of construction program and other commitments associated with its jointly-owned facilities, extending into 2046. T.O. Plastics is party to a resin supply agreement under which it must purchase all of a specified class of regrind resin delivered by the supplier at a periodically negotiated price per pound. The agreement expires in 2026.
Electric Utility Capacity and Energy Requirements and Coal Purchase and Delivery Contracts. OTP has commitments for the purchase of capacity and energy requirements under agreements extending into 2044. OTP also has contracts providing for the purchase and delivery of a significant portion of its current coal requirements, with expiration dates ranging from 2022 through 2040. These contracts do not include minimum purchase requirements but do require all coal necessary for the operation of the respective plant to be purchased from the counterparty.
Land Easements. OTP has commitments to make future payments under land easements extending into 2050.
Contingencies
FERC ROE. In November 2013 and February 2015, customers filed complaints with 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. The November 2020 opinion is subject to judicial review. We have deferred recognition and recorded a refund liability of $3.7 million as of March 31, 2021. This refund liability reflects our best estimate of required refunds to customers once all regulatory and judicial proceedings are finalized.
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 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, with state implementation plans targeted for submission to the EPA by July 31, 2021. States are required 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. We cannot predict with certainty the impact the state implementation plan may have on our business until the plan is finalized and adopted. 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 a required early retirement of, or the sale of our interest in, Coyote Station. We cannot estimate the 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 from customers would be subject to regulatory approval.
Other Contingencies. We are party to litigation and regulatory enforcement 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, 2021, other than those relating to the RHR, will not be material.
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10. Stockholders' Equity
Registration Statements
On May 3, 2021 we filed a shelf registration statement with the Securities and Exchange Commission (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. The registration statement expires in May 2024.
On May 3, 2021, 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 a method of purchasing our common shares by reinvesting their dividends and/or making optional cash investments. Shares purchased under the plan may be new issue common shares or common shares purchased on the open market. The registration statement expires in May 2024.
Dividend Restrictions
Otter Tail Corporation is a holding company with no significant operations of its own. The primary source of funds for payments of dividends to our shareholders is from dividends paid or distributions made by our subsidiaries. As a result of certain statutory limitations or regulatory or financing agreements, restrictions could occur on the amount of distributions allowed to be made by our subsidiaries. Both the OTC Credit Agreement and 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, 2021, 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.
The MPUC indirectly limits the amount of dividends OTP can pay to the Company by requiring an equity-to-total-capitalization ratio between 47.5% and 58.1% based on OTP’s 2020 capital structure petition effective by order of the MPUC on July 15, 2020. As of March 31, 2021, OTP’s equity-to-total-capitalization ratio including short-term debt was 52.4% and its net assets restricted from distribution totaled approximately $671.0 million. Under the 2020 capital structure petition, total capitalization for OTP cannot exceed $1.7 billion.
11. 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 $4.2 million and $2.8 million for the three months ended March 31, 2021 and 2020.
Stock Awards. We grant restricted stock awards to members of our Board of Directors and restricted stock units to our employees. The awards vest, depending on award type and recipient, either ratably over periods of and four years or cliff vest after four years. Vesting is accelerated in certain circumstances, including upon retirement. Restricted stock awards granted to members of the Board of Directors are issued and outstanding upon grant and carry the same voting and dividend rights of unrestricted outstanding common stock. Restricted stock units are not issued or outstanding upon grant and do not provide for voting or dividend rights. Certain restricted stock unit award recipients are eligible to receive dividend equivalent payments during the vesting period, subject to forfeiture under the terms of the agreement.
The grant date fair value of each stock award is determined based on the market price of our common stock on the date of grant adjusted to exclude the value of dividends for those awards that do not receive dividend or dividend equivalent payments during the vesting period.
The following is a summary of stock award activity for the three months ended March 31, 2021:
| Shares | Weighted Average Grant-Date Fair Value | ||||||||||
Nonvested, January 1, 2021 | 128,664 | $ | 44.30 | ||||||||
| Granted | 21,600 | 42.35 | |||||||||
| Vested | (16,800) | 45.93 | |||||||||
| Forfeited | — | — | |||||||||
Nonvested, March 31, 2021 | 133,464 | $ | 43.78 | ||||||||
The fair value of vested awards was $0.7 million and $1.3 million during the three months ended March 31, 2021 and 2020.
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) return on equity. The awards have no voting or dividend rights during the vesting period. Vesting of the awards is accelerated in certain circumstances, including on retirement. The amount of common shares awarded on an accelerated vesting is based either on actual performance at the end of the performance period or the amount of common shares earned at target.
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The grant date fair value of stock performance awards granted during the three months ended March 31, 2021 and 2020 was determined using a Monte Carlo fair value simulation model incorporating the following assumptions:
| 2021 | 2020 | ||||||||||
| Risk-free interest rate | 0.18 | % | 1.42 | % | |||||||
| Expected term (in years) | 3.00 | 3.00 | |||||||||
| Expected volatility | 32.00 | % | 19.00 | % | |||||||
| Dividend yield | 3.60 | % | 2.80 | % | |||||||
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 historic and future yield estimates.
The following is a summary of stock performance award activity for the three months ended March 31, 2021 (share amounts reflect awards at target):
| Shares | Weighted Average Grant-Date Fair Value | ||||||||||
Nonvested, January 1, 2021 | 164,600 | $ | 42.32 | ||||||||
| Granted | 79,000 | 38.34 | |||||||||
| Vested | (54,000) | 35.73 | |||||||||
| Forfeited | — | — | |||||||||
Nonvested, March 31, 2021 | 189,600 | $ | 42.54 | ||||||||
The fair value of vested awards was $2.5 million and $3.4 million during the three months ended March 31, 2021 and 2020.
12. Earnings Per Share
The numerator used in the calculation of both basic and diluted earnings per common share is net income. The denominator used in the calculation of basic earnings per common share is the weighted average number of common shares outstanding during the period. The denominator used in the calculation of diluted earnings per common share is derived by adjusting basic shares outstanding for the dilutive effect of potential common shares outstanding, which consist of time and performance based stock awards and employee stock purchase plan shares.
The following includes the computation of the denominator for basic and diluted weighted-average shares outstanding for the three months ended March 31, 2021 and 2020:
| (in thousands) | 2021 | 2020 | |||||||||
| Weighted Average Common Shares Outstanding – Basic | 41,455 | 40,217 | |||||||||
| Effect of Dilutive Securities: | |||||||||||
| Stock Performance Awards | 143 | 126 | |||||||||
| Stock Awards | 85 | 83 | |||||||||
| Employee Stock Purchase Plan Shares and Other | 17 | 18 | |||||||||
| Dilutive Effect of Potential Common Shares | 245 | 227 | |||||||||
| Weighted Average Common Shares Outstanding – Diluted | 41,700 | 40,444 | |||||||||
The amount of shares excluded from diluted weighted-average common shares outstanding because such shares were anti-dilutive was not material for the three months ended March 31, 2021 and 2020.
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13. Fair Value Measurements
The following tables present our assets measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020 classified by the input method used to measure fair value:
| Level 1 | Level 2 | Level 3 | |||||||||||||||
| March 31, 2021 | |||||||||||||||||
| Investments: | |||||||||||||||||
| Money Market Funds | $ | 1,862 | $ | — | $ | — | |||||||||||
| Mutual Funds | 5,141 | — | — | ||||||||||||||
| Corporate Debt Securities | — | 2,401 | — | ||||||||||||||
| Government-Backed and Government-Sponsored Enterprises’ Debt Securities | — | 6,808 | — | ||||||||||||||
| Total Assets | $ | 7,003 | $ | 9,209 | $ | — | |||||||||||
| December 31, 2020 | |||||||||||||||||
| Investments: | |||||||||||||||||
| Money Market Funds | $ | 4,075 | $ | — | $ | — | |||||||||||
| Mutual Funds | 1,662 | — | — | ||||||||||||||
| Corporate Debt Securities | — | 2,627 | — | ||||||||||||||
| Government-Backed and Government-Sponsored Enterprises’ Debt Securities | — | 6,633 | — | ||||||||||||||
| Total Assets | $ | 5,737 | $ | 9,260 | $ | — | |||||||||||
The level 2 fair value measurements for Government-Backed and Government-Sponsored Enterprises’ and Corporate Debt Securities are determined on the basis of 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.
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. The following reflects the carrying value and estimated fair value of these assets and (liabilities) as of March 31, 2021 and December 31, 2020:
| March 31, 2021 | December 31, 2020 | ||||||||||||||||||||||
| (in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
| Cash and Cash Equivalents | $ | 1,212 | $ | 1,212 | $ | 1,163 | $ | 1,163 | |||||||||||||||
| Short-Term Debt | (134,851) | (134,851) | (80,997) | (80,997) | |||||||||||||||||||
| Long-Term Debt | (764,426) | (839,942) | (764,519) | (858,455) | |||||||||||||||||||
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, 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 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, 2020.
Otter Tail Corporation and its subsidiaries form a diverse group of businesses with operations classified into three segments: Electric, Manufacturing and Plastics. Our Electric 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.
COVID-19
We continue to monitor the progression of the novel coronavirus (COVID-19) and its impact on our businesses, employees, customers, construction contractors and vendors. As this pandemic continues, we are following the directives and advice of government leaders and medical professionals and have adopted practices to help curtail the spread of the virus and mitigate its impact on our communities, employees, construction contractors, customers and business operations. Our Electric segment business provides a critical service to our customers and our manufacturing businesses provide products and support to critical infrastructure industries. We continue to operate our businesses in a manner that is safe for our employees and our customers.
Beginning in March 2020, COVID-19 and the resulting economic conditions negatively impacted operating results of our Manufacturing segment as customer demand declined significantly in the second quarter of 2020. Sales volumes strengthened in the third and fourth quarters of 2020 due to strong recreational vehicle and lawn and garden end-market demand. Our Electric and Plastics segments operating results were also impacted in 2020. Within our Electric segment, we experienced reduced demand from commercial and industrial customers and increased costs for bad debts. In our Plastics segment, we experienced lower sales volumes in the second quarter of 2020 as distributors of our products reduced inventory levels given the uncertainty of the potential impact of COVID-19. Sales volumes recovered and gross profit margins increased in the third and fourth quarters of 2020 due to increase demand and concerns of supply disruptions.
The impact of COVID-19 and the resulting macroeconomic conditions on our business and financial results have begun to ease. However, uncertainty remains regarding the magnitude and duration of the pandemic and resulting financial effects. We expect demand from commercial and industrial customers and bad debt expense levels within our Electric segment to be impacted during 2021, and customer demand within our Manufacturing and Plastics segments could be disrupted as the pandemic evolves.
We continue to monitor developments involving our workforce, customers, construction contractors, suppliers and vendors and the financial effects on our business. However, due to the unprecedented and evolving nature of this pandemic, we cannot predict the full extent of the impact COVID-19 will have on our operating results, financial condition and liquidity.
| RESULTS OF OPERATIONS | |||||
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. Intersegment transactions were not material in 2021 or 2020. 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 our consolidated results of operations for the three months ended March 31, 2021 and 2020:
| (in thousands) | 2021 | 2020 | $ change | % change | |||||||||||||||||||
| Operating Revenues | $ | 261,710 | $ | 234,747 | $ | 26,963 | 11.5 | % | |||||||||||||||
| Operating Expenses | 217,511 | 195,458 | 22,053 | 11.3 | |||||||||||||||||||
| Operating Income | 44,199 | 39,289 | 4,910 | 12.5 | |||||||||||||||||||
| Interest Charges | 9,398 | 8,123 | 1,275 | 15.7 | |||||||||||||||||||
| Nonservice Cost Components of Postretirement Benefits | 383 | 871 | (488) | (56.0) | |||||||||||||||||||
| Other Income | 1,160 | (389) | 1,549 | (398.2) | |||||||||||||||||||
| Income Before Income Taxes | 35,578 | 29,906 | 5,672 | 19.0 | |||||||||||||||||||
| Income Tax Expense | 5,249 | 5,638 | (389) | (6.9) | |||||||||||||||||||
| Net Income | $ | 30,329 | $ | 24,268 | $ | 6,061 | 25.0 | % | |||||||||||||||
Operating Revenues increased $27.0 million primarily due to rising pipe prices within our Plastics segment and increased material cost leading to increased sales prices in our Manufacturing segment. Operating revenues within our Electric segment also increased, primarily as a result of increased transmission and wholesale electric revenues. See our segment disclosures below for additional discussion of items impacting operating revenues.
18
Operating Expenses increased $22.1 million primarily due to increased costs of products sold in our Plastics and Manufacturing segments due to increased raw material costs in each segment. Operating expenses in our Electric segment increased primarily due to higher depreciation and amortization expense arising from our recent rate base investments. See our segment disclosures below for additional discussion of items impacting operating expenses.
Interest Charges increased $1.3 million mostly due to:
•A $0.5 million increase in interest expense related to OTP long-term debt issuances of $35 million in February 2020 and $40 million in August 2020.
•A $0.3 million reduction in capitalized interest at OTP related to the completion and start up of Astoria Station in the first quarter of 2021.
•A $0.4 million increase in corporate interest expense due to a higher level of short-term borrowings between the quarters as well as an increase in the cost of borrowing.
Nonservice Cost Components of Postretirement Benefits decreased $0.5 million due to a change in how prescription drug coverage is provided to retirees and due to the impact on nonservice costs of a 70 basis point drop in the discount rate from 2020 to 2021.
Other Income increased $1.5 million primarily due to increases in the cash values of corporate-owned life insurance policies and captive insurance company investments in the first quarter of 2021 compared to losses in value in the first quarter of 2020.
Income Tax Expense decreased $0.4 million despite a $5.7 million increase in income before income taxes primarily due to PTCs earned in the first quarter of 2021 from our Merricourt wind farm, which was placed in service in the fourth quarter of 2020. Our effective tax rate was 14.8% in the first quarter of 2021 and 18.9% in the first quarter of 2020. See Note 8 to our consolidated financial statements included in this report on Form 10-Q for additional information regarding factors impacting our effective tax rate in 2021 and 2020.
ELECTRIC SEGMENT RESULTS
The following table summarizes the results of operations for our Electric segment for the three months ended March 31, 2021 and 2020:
| (in thousands) | 2021 | 2020 | $ change | % change | |||||||||||||||||||
| Retail Sales Revenue | $ | 105,706 | $ | 106,603 | $ | (897) | (0.8) | % | |||||||||||||||
| Transmission Services Revenues | 11,944 | 10,841 | 1,103 | 10.2 | |||||||||||||||||||
| Wholesale Revenues | 4,507 | 876 | 3,631 | 414.5 | |||||||||||||||||||
| Other Electric Revenues | 1,542 | 1,556 | (14) | (0.9) | |||||||||||||||||||
| Total Operating Revenue | 123,699 | 119,876 | 3,823 | 3.2 | |||||||||||||||||||
| Production Fuel | 14,714 | 13,735 | 979 | 7.1 | |||||||||||||||||||
| Purchased Power | 19,260 | 18,830 | 430 | 2.3 | |||||||||||||||||||
| Operation and Maintenance Expenses | 41,421 | 40,615 | 806 | 2.0 | |||||||||||||||||||
| Depreciation and Amortization | 17,308 | 15,676 | 1,632 | 10.4 | |||||||||||||||||||
| Property Taxes | 4,320 | 4,100 | 220 | 5.4 | |||||||||||||||||||
| Operating Income | $ | 26,676 | $ | 26,920 | $ | (244) | (0.9) | % | |||||||||||||||
Electric kilowatt-hour (kwh) Sales (in thousands) | |||||||||||||||||||||||
| Retail kwh Sales | 1,348,519 | 1,429,910 | (81,391) | (5.7) | % | ||||||||||||||||||
| Wholesale kwh Sales – Company Generation | 80,423 | 38,924 | 41,499 | 106.6 | |||||||||||||||||||
| Heating Degree Days | 3,078 | 3,272 | (194) | (5.9) | |||||||||||||||||||
| Cooling Degree Days | — | — | — | — | |||||||||||||||||||
Results of operations for the 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.
| 2021 | 2020 | ||||||||||
| Heating Degree Days | 89.5 | % | 95.6 | % | |||||||
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 2021 and 2020, and between years.
2021 vs Normal | 2021 vs 2020 | 2020 vs Normal | |||||||||||||||
| Effect on Diluted Earnings Per Share | $ | (0.04) | $ | (0.02) | $ | (0.02) | |||||||||||
Retail Sales Revenue decreased $0.9 million driven by:
19
•A $2.8 million decrease in retail revenue mainly due to decreased kwh sales to commercial and industrial customers, exclusive of the impact of milder weather on sales, due to ongoing impacts of COVID-19 on first quarter 2021 kwh sales. COVID-19 did not impact electric revenues in the first quarter of 2020.
•A $1.5 million decrease in fuel recovery revenue mainly due to credits provided to customers from increased margins on wholesale kwh sales and a 5.7% reduction in retail kwh sales between the quarters.
•A $0.9 million decrease in retail revenues related to decreased consumption due to milder weather in the first quarter of 2021 compared with the first quarter of 2020, evidenced by a 5.9% decrease in heating-degree days between the quarters.
These decreases in revenue were partially offset by:
•A $2.3 million increase in new retail revenues, net of an estimated refund, related to an interim rate increase in Minnesota effective January 1, 2021 in connection with OTP's current Minnesota rate case filed in November 2020.
•A $0.7 million increase in conservation rider revenues related to the recovery of increased conservation improvement program spending in Minnesota and South Dakota.
•A $0.5 million increase in renewable rider revenues in North Dakota related to recovery of Merricourt operating expenses and returns on increased investment in the project, which was placed in service in the fourth quarter of 2020.
•A $0.5 million increase in retail revenue due to a positive price variance resulting from varying kwh sales to customers under different tariffs.
•A $0.3 million net increase in North Dakota and South Dakota generation, transmission and phase-in rider revenues related to the recovery of Astoria Station and transmission project costs.
Transmission Services Revenues increased $1.1 million due to increases of $0.7 million in generator interconnection revenues under two new agreements which began billing after the first quarter of 2020 and $0.4 million in Midcontinent Independent System Operator. Inc. (MISO) transmission services tariff revenues.
Wholesale Electric Revenue increased $3.6 million as a result of a 106.6% increase in wholesale kwh sales and a 149% increase in wholesale electric prices driven by high market demand and availability constraints during the February 2021 cold weather, which drove up spot market prices for electricity.
Production Fuel costs increased $1.0 million mainly as a result of a 16.2% increase in kwhs generated from our fuel-burning plants due to higher demand and favorable prices for energy in wholesale markets. Fuel costs per kwh of generation decreased 7.8% at our fuel-burning plants as a result of increased efficiencies at higher and longer-sustained levels of generation. Fuel costs per kwh of generation including renewable generation decreased 15.4% as a result of Merricourt being added to our generation mix in December 2020.
Purchased Power costs to serve retail customers increased $0.4 million as a result of a 26.6% increase in purchased power prices, partially offset by a 19.2% decrease in kwhs purchased. The increase in kwh prices mainly was driven by high market demand for electricity and availability constraints caused by the February 2021 cold weather.
Operating and Maintenance Expense increased $0.8 million mainly due to:
•$1.2 million in Merricourt operating and maintenance expenses incurred in the first quarter of 2021 as the wind farm is now commercially operational.
•A $0.7 million increase in conservation improvement program expenditures, which are being recovered through retail rate riders in Minnesota and South Dakota.
These increases in expense were partially offset by:
•A $0.6 million decrease in steam generation plant maintenance and operating expenses.
•A $0.5 million decrease in bad debt expense due to improved customer collections in the first quarter of 2021.
Depreciation and Amortization expense increased $1.6 million primarily due to Merricourt going into service in December of 2020.
Property Taxes increased $0.2 million due to property additions and increased valuations on existing property.
20
MANUFACTURING SEGMENT RESULTS
The following table summarizes the results of operations for our Manufacturing segment for the three months ended March 31, 2021 and 2020:
| (in thousands) | 2021 | 2020 | $ change | % change | |||||||||||||||||||
| Operating Revenues | $ | 75,825 | $ | 68,479 | $ | 7,346 | 10.7 | % | |||||||||||||||
| Cost of Products Sold | 56,311 | 50,614 | 5,697 | 11.3 | |||||||||||||||||||
| Other Operating Expenses | 8,212 | 7,278 | 934 | 12.8 | |||||||||||||||||||
| Depreciation and Amortization | 3,757 | 3,746 | 11 | 0.3 | |||||||||||||||||||
| Operating Income | $ | 7,545 | $ | 6,841 | $ | 704 | 10.3 | % | |||||||||||||||
Operating Revenues increased $7.3 million primarily due to the following:
•At BTD, revenues increased $6.2 million, consisting of $4.4 million in material cost increases passed through to customers and $1.8 million in volume and price increases. The volume increase was driven by stronger sales in the recreational vehicle, agricultural, lawn and garden and construction end markets offset, in part, by a decline in sales primarily in the energy end market. Scrap revenues increased $1.5 million mostly due to increases in scrap metal prices, but also due to increases in scrap volumes from increased sales and production activity. These increases in revenue were, partially offset by lower tooling and other revenues.
•At T.O. Plastics, revenues increased $0.4 million. A $1.0 million increase in horticultural product sales was partially offset by decreases in industrial, life sciences and other product sales totaling $0.6 million.
Cost of Products Sold increased $5.7 million due to the following:
•Cost of products sold at BTD increased $5.9 million as a result of higher material prices and sales-volume-driven increases in material and labor costs.
•Cost of products sold at T.O. Plastics decreased $0.2 million due to lower material costs resulting from a higher mix of product sales utilizing reclaimed material and the reduction in industrial and life sciences product sales, which more than offset increases in material costs on increased horticultural product sales.
Other Operating Expenses increased $0.9 million. Operating expenses at BTD increased $0.5 million mainly due to increases in operating expenses. Operating expenses at T.O. Plastics increased $0.4 million, mainly due to recognition of an expense reduction of $0.6 million related to insurance settlement proceeds received in the first quarter of 2020.
PLASTICS SEGMENT RESULTS
The following table summarizes the results of operations for our Plastics segment for the three months ended March 31, 2021 and 2020:
| (in thousands) | 2021 | 2020 | $ change | % change | |||||||||||||||||||
| Operating Revenues | $ | 62,186 | $ | 46,397 | $ | 15,789 | 34.0 | % | |||||||||||||||
| Cost of Products Sold | 45,666 | 35,270 | 10,396 | 29.5 | |||||||||||||||||||
| Other Operating Expenses | 2,944 | 2,770 | 174 | 6.3 | |||||||||||||||||||
| Depreciation and Amortization | 990 | 890 | 100 | 11.2 | |||||||||||||||||||
| Operating Income | $ | 12,586 | $ | 7,467 | $ | 5,119 | 68.6 | % | |||||||||||||||
Operating Revenues increased $15.8 million due to a 34% increase in the price per pound of PVC pipe sold and a 1.1% increase in pounds of PVC pipe sold. The price increase was driven, in part, by PVC resin supply constraints due to resin production plant shutdowns and feedstock shortages related to abnormally low temperatures and snowstorms in the Gulf Coast region of the United States in February 2021 and significant global demand for PVC resin and limited pipe inventory across the country. Cost of products sold increased $10.4 million primarily due to increased PVC resin and other material cost increases.
Cost of Products Sold increased $10.4 million primarily due to increased PVC resin and other material cost increases.
Other Operating Expenses increased $0.2 million as a result of increased incentive benefits directly related to increased profitability.
CORPORATE COSTS
The following table summarizes Corporate results of operations for the three months ended March 31, 2021 and 2020:
| (in thousands) | 2021 | 2020 | $ change | % change | |||||||||||||||||||
| Other Operating Expenses | $ | 2,537 | $ | 1,852 | $ | 685 | 37.0 | % | |||||||||||||||
| Depreciation and Amortization | 71 | 87 | (16) | (18.4) | |||||||||||||||||||
| Operating Loss | $ | 2,608 | $ | 1,939 | $ | 669 | 34.5 | % | |||||||||||||||
Other Operating Expenses increased $0.7 million mainly as a result of increased stock incentive compensation expenses related to improved performance of the Company's stock quarter over quarter and in its projected returns on equity.
21
| REGULATORY RATE MATTERS | |||||
The following provides a summary of general rate case filings and rate rider filings that have or are expected to have a material impact on our operating results, financial position or cash flows.
GENERAL RATES
Minnesota Rate Case: On November 2, 2020, OTP filed a request with the MPUC for an increase in revenue recoverable under general rates in Minnesota. In its filing, OTP requested a net increase in annual revenue of approximately $14.5 million, or 6.77%, based on an allowed rate of return on rate base of 7.59% and an allowed rate of return on equity of 10.20% on an equity ratio of 52.5% of total capital. Through this proceeding, OTP has proposed changes to the mechanism of cost recovery, with some costs moving from riders into base rates and fuel, purchased power, and conservation program costs moving out of base rates and into riders. The filing also included a revenue decoupling mechanism proposal. Such mechanisms are designed to separate a utility's revenue from changes in energy sales. The decoupling mechanism uses a tracker balance in which authorized customer margins are subject to a true-up mechanism to maintain or cap a given level of revenues.
On December 3, 2020, the MPUC approved an interim annual rate increase of $6.9 million, or 3.2%, effective January 1, 2021. This approval was provided after an alternative recovery proposal was submitted by OTP, which, among other changes, requested the extension of depreciable lives of certain wind-related assets and deferred certain cost recovery decisions to the final rate determination. In the aggregate, this alternative recovery proposal reduced operating costs and delayed recovery of certain other costs by approximately $7.0 million to lessen the interim rate impact on customers.
In a filing submitted to the MPUC on April 30, 2021, OTP lowered its requested net annual revenue increase from its initial request of $14.5 million to $8.2 million, primarily due to a reduction in operating costs from amounts included in its November 2020 filing. The cost reductions include, among other items, lower depreciation expense on our wind generation assets due to the extension of depreciable lives from 25 to 35 years and a reduction in postretirement benefit costs.
RATE RIDERS
The following table includes a summary of pending and recently concluded rate rider proceedings:
| Recovery | Filing | Amount | Effective | |||||||||||||||||||||||||||||||||||
| Mechanism | Jurisdiction | Status | Date | (in millions) | Date | Notes | ||||||||||||||||||||||||||||||||
| RRR - 2019 | MN | Approved | 06/21/19 | $ | 12.5 | 01/01/20 | Includes return on Merricourt construction costs. | |||||||||||||||||||||||||||||||
| TCR - 2018 | MN | Approved | 05/07/20 | 10.3 | 01/21/20 | See below for additional details. | ||||||||||||||||||||||||||||||||
| TCR - 2020 | ND | Approved | 08/31/20 | 5.6 | 01/21/20 | Includes recovery of new transmission assets. | ||||||||||||||||||||||||||||||||
| RRR - 2020 | ND | Approved | 03/18/20 | 5.8 | 04/01/20 | Includes return on Merricourt construction costs. | ||||||||||||||||||||||||||||||||
| GCR - 2020 | ND | Approved | 06/10/20 | 6.2 | 07/01/20 | Includes return on Astoria Station construction costs. | ||||||||||||||||||||||||||||||||
| TCR - 2021 | ND | Approved | 11/18/20 | 5.6 | 01/01/21 | Includes recovery of eight new transmission projects. | ||||||||||||||||||||||||||||||||
| TCR - 2020 | SD | Approved | 01/29/20 | 2.3 | 03/02/20 | Annual update to transmission cost recovery rider. | ||||||||||||||||||||||||||||||||
| PIR - 2020 | SD | Approved | 05/31/20 | 1.6 | 09/01/20 | Includes return on Merricourt and Astoria Station construction costs. | ||||||||||||||||||||||||||||||||
| TCR - 2021 | SD | Approved | 02/19/21 | 2.2 | 03/01/21 | Includes recovery of two new transmission projects. | ||||||||||||||||||||||||||||||||
| RRR - 2021 | ND | Approved | 03/07/21 | 11.8 | 04/01/21 | Includes return on Merricourt construction costs. | ||||||||||||||||||||||||||||||||
| GCG - 2021 | ND | Requested | 03/01/21 | 5.2 | — | Includes recovery of Astoria Station, net of anticipated savings associated with the retirement of Hoot Lake Plant. | ||||||||||||||||||||||||||||||||
Minnesota TCR. On May 1, 2017, the MPUC ordered OTP to include in the TCR rider retail rate base the Minnesota jurisdictional share of OTP's investments in certain transmission assets and all revenues received from other utilities under MISO's tariffed rates as a credit in its TCR revenue requirement calculations. The order had the effect of diverting interstate wholesale revenues that have been approved by the FERC to offset the FERC-approved expenses, effectively reducing OTP's recovery of FERC-approved expense levels.
On August 18, 2017, OTP filed an appeal of the MPUC order with the Minnesota Court of Appeals to contest the portion of the order requiring OTP to jurisdictionally allocate costs of the FERC transmission projects in the TCR rider. On June 11, 2018, the Minnesota Court of Appeals reversed the MPUC's order. On July 11, 2018 the MPUC filed a petition for review of the decision to the Minnesota Supreme Court, which granted review of the appellate court decision. The Minnesota Supreme Court issued its opinion on April 22, 2020, concluding the MPUC lacked authority to amend an existing TCR rider approved under Minnesota state law to include the costs and revenues associated with these transmission projects and affirming the decision of the Minnesota Court of Appeals.
On October 22, 2020, the MPUC approved OTP's request for a Minnesota TCR rider update with the exclusion of these transmission projects. In addition, the MPUC approved the inclusion of three new projects previously requested in the Minnesota TCR rider eligibility petition. Updated rates went into effect in January 2021. With this decision, one-half of the projected TCR rider tracker balance at December 2020 of $13.4 million will be included in the 2021 TCR rider annual revenue requirement, with the remainder included in the next annual update. The annual updates provide for recovery of approximately $2.6 million in MISO revenues credits to Minnesota customers through the TCR rider prior to September 30, 2020. As a result, OTP recognized additional rider revenue of $2.6 million during the third quarter of 2020.
22
| LIQUIDITY | |||||
LIQUIDITY OVERVIEW
We believe our financial condition is strong and our cash, 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 business operations and fund our capital expenditure plans. Our liquidity, including our operating cash flows and access to capital markets, can be impacted by macroeconomic factors outside of our control, such as those which may be caused by COVID-19. In addition, our liquidity could be impacted by non-compliance with covenants under our various debt instruments. As of March 31, 2021, we were in compliance with all debt covenants (see the Financial Covenants section under Capital Resources below).
We continue to have sufficient liquidity under our credit facilities to support our business based on the current economic environment. We are closely monitoring our liquidity and capital market conditions given the uncertainty surrounding the impact of COVID-19, which could have an adverse effect on the availability and terms of future debt and equity financing.
The following table presents the status of our lines of credit as of March 31, 2021 and December 31, 2020:
| 2021 | 2020 | ||||||||||||||||||||||||||||
| (in thousands) | Line Limit | Amount Outstanding | Letters of Credit | Amount Available | Amount Available | ||||||||||||||||||||||||
| Otter Tail Corporation Credit Agreement | $ | 170,000 | $ | 78,206 | $ | — | $ | 91,794 | $ | 104,834 | |||||||||||||||||||
| OTP Credit Agreement | 170,000 | 56,645 | 12,671 | 100,684 | 140,068 | ||||||||||||||||||||||||
| Total | $ | 340,000 | $ | 134,851 | $ | 12,671 | $ | 192,478 | $ | 244,902 | |||||||||||||||||||
We have an internal risk tolerance metric to maintain a minimum of $50 million of liquidity under the Otter Tail Corporation Credit Agreement. Should additional liquidity be needed, this 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.
CASH FLOWS
The following is a discussion of our cash flows for the three months ended March 31, 2021 and 2020:
| (in thousands) | 2021 | 2020 | |||||||||
| Net Cash Provided by Operating Activities | $ | 15,270 | $ | 21,777 | |||||||
Net Cash Provided by Operating Activities decreased $6.5 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. An increase in net income in 2021 was more than offset by an increase in working capital requirements, which was primarily the result of increased accounts receivables within our Manufacturing and Plastics segments due to strong sales volumes and increased sales prices during the three months ended March 31, 2021. We made a discretionary contribution to our pension plan of $10.0 million during the three months ended March 31, 2021 compared to a contribution of $11.2 million in 2020. We do not anticipate making any further discretionary contributions to the pension plan in 2021.
| (in thousands) | 2021 | 2020 | |||||||||
| Net Cash Used in Investing Activities | $ | 49,020 | $ | 75,059 | |||||||
Net Cash Used in Investing Activities decreased $26.0 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease is primarily the result of lower capital investment within our Electric segment as capital spending on our large generation assets, Merricourt and Astoria Station, were largely completed in the fourth quarter of 2020.
| (in thousands) | 2021 | 2020 | |||||||||
| Net Cash Provided by Financing Activities | $ | 33,799 | $ | 39,967 | |||||||
Net Cash Provided by Financing Activities decreased $6.2 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily as a result of a decrease in financing needs given the lower level of capital spending in our Electric segment in 2021. Financing activities in the three months ended March 31, 2021 included a net borrowing increase of $53.9 million under our line of credit facilities and a dividend payment of $16.2 million ($0.39 per share).
Financing activities in the three months ended March 31, 2020 included proceeds of $35.0 million from the issuance of long-term debt, a net borrowing increase of $13.9 million under our line of credit facilities and $6.2 million in proceeds raised from the issuance of common stock, net of issuance costs. We paid a dividend of $14.9 million ($0.37 per share) in the three months ended March 31, 2020.
23
| CAPITAL REQUIREMENTS | |||||
CAPITAL EXPENDITURES
We have a capital expenditure program for expanding, upgrading and improving our plants and operating equipment. Typical uses of cash for capital expenditures are investments in electric generation facilities and environmental upgrades, transmission and distribution lines, manufacturing facilities and upgrades, equipment used in the manufacturing process, and computer hardware and information systems. Our capital expenditure program 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 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, 2020 for our capital expenditure plan for the five year period from 2021 through 2025.
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 easement and leasing arrangements. Our contractual obligations as of December 31, 2020 are included in 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, 2020. There were no material in our contractual obligations outside of the ordinary course of our business during the three months ended March 31, 2021.
COMMON STOCK DIVIDENDS
We paid dividends to our common stockholders totaling $16.2 million, or $0.39 per share, in the first three months of 2021. The determination of the amount of future cash dividends to be paid will depend on, among other things, our financial condition, improvement in earnings per share, 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, restrictions could occur on the amount of distributions allowed to be made by our subsidiaries. See Note 10 to our consolidated financial statements included in this report on Form 10-Q for additional information. The decision to declare a dividend 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, which is aided by strong financial coverages and investment grade credit ratings. Equity or debt financing will be required in the period 2021 through 2025 to support our capital investments, primarily within our Electric segment to fund construction of new rate base and transmission investments. In addition, we may issue equity or debt financing to opportunistically reduce borrowings under our lines of credit, to satisfy or early retire our outstanding long-term debt, or to finance potential acquisition opportunities or for other corporate purposes.
REGISTRATION STATEMENTS
On May 3, 2021 we filed two registration statements with the SEC. 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. 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. Share purchased under the plan may be new issue common shares or common shares purchased on the open market. Both registration statements expire in May 2024.
SHORT-TERM DEBT
Otter Tail Corporation and Otter Tail Power Company are each party to a credit agreement (the OTC Credit Agreement and OTP Credit Agreement, respectively) which provide 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, 2021:
| (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, 2021 | — | 12,671 | |||||||||
Amount Outstanding as of March 31, 2021 | 78,206 | 56,645 | |||||||||
Average Amount Outstanding During the Three Months Ended March 31, 2021 | 68,737 | 38,007 | |||||||||
Maximum Amount Outstanding During the Three Months Ended March 31, 2021 | 79,718 | 69,674 | |||||||||
Interest Rate as of March 31, 2021 | 1.6 | % | 1.4 | % | |||||||
| Maturity Date | October 31, 2024 | October 31, 2024 | |||||||||
1Each facility includes an accordion featuring allowing the borrower to increase the borrowing limit if certain terms and conditions are met. | |||||||||||
24
LONG-TERM DEBT
At March 31, 2021, we had $767.0 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 2021 to 2050. Note 6 to our consolidated financial statements included in this report on Form 10-Q includes additional information regarding these instruments. One OTP debt instrument with a principal balance of $140.0 million matures in December 2021. We anticipate issuing long-term debt in 2021 with the proceeds used to satisfy this maturing instrument.
Financial Covenants
Certain of our short- and long-debt agreements require Otter Tail Corporation and OTP to maintain certain financial covenants. As of March 31, 2021, we were in compliance with these financial covenants as further described below:
Otter Tail Corporation 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% of our Total Capitalization. As of March 31, 2021, our Interest-Bearing Debt to Total Capitalization was 0.50 to 1.00, our Interest and Dividend Coverage Ratio was 4.62 to 1.00 and we had no Priority Indebtedness outstanding.
OTP under its financial covenants, may not permit its ratio of 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 Debt to exceed 20% of its Total Capitalization. As of March 31, 2021, OTP's Interest-Bearing Debt to Total Capitalization was 0.47 to 1.00, its Interest and Dividend Coverage Ratio was 3.55 to 1.00 and it had no Priority Indebtedness outstanding.
None of our debt agreements include any provisions that would trigger an acceleration of the related debt as a result of changes in the credit rating levels assigned to the related obligor by rating agencies.
| OFF-BALANCE-SHEET ARRANGEMENTS | |||||
As of March 31, 2021 we have outstanding letters of credit totaling $16.4 million, a portion of which reduces our borrowing capacity under our lines of credit. No outstanding letters of credit are reflected in outstanding short-term debt on our consolidated balance sheets. We do not have any other off-balance-sheet arrangements or any relationships with unconsolidated entities or financial partnerships. These entities are often referred to as structured finance special purpose entities or variable interest entities, which are established for the purpose of facilitating off-balance-sheet arrangements or for other contractually narrow or limited purposes. We are not exposed to any financing, liquidity, market or credit risk that could arise if we had such relationships.
| CRITICAL ACCOUNTING POLICIES INVOLVING SIGNIFICANT ESTIMATES | |||||
The discussion and analysis of our results of operations are based on financial statements prepared in accordance with accounting principles generally accepted 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 disclosure 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, 2020 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 this 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, 2020.
| ITEM 4. | CONTROLS AND PROCEDURES | ||||
Evaluation of Disclosures 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, 2021, 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, 2021.
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, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 probable, and an amount can be reasonably estimated. Material proceedings are described under Note 9, Commitments and Contingencies, to the consolidated financial statements.
| 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, 2020.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | |||||||||||||
We do not have a publicly announced stock repurchase program. The following tables presents common shares of the Company that were surrendered to us by employees to pay taxes in connection with shares issued for incentive awards in February 2021 under our 2014 Stock Incentive Plan:
| Calendar Month | Total Number of Shares Purchased | Average Price Paid per Share | |||||||||
| January 2021 | — | $ | — | ||||||||
| February 2021 | 35,701 | 42.21 | |||||||||
| March 2021 | — | — | |||||||||
| Total | 35,701 | $ | 42.21 | ||||||||
| ITEM 6. | EXHIBITS | |||||||||||||
The following Exhibits are filed as part of, or incorporated by reference into, this report.
| No. | Description | ||||
| 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/ Kevin G. Moug | |||||||
| Kevin G. Moug Chief Financial Officer and Senior Vice President (duly authorized officer and principal financial officer) | ||||||||
| Dated: May 7, 2021 | ||||||||
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