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(Mark One)

☒    Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2023 or

☐    Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 0-53713 

(Exact name of registrant as specified in its charter) 

Registrant's telephone number, including area code: 866-410-8780

Securities registered pursuant to Section 12(b) of the Act: 

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:

41,710,521 Common Shares ($5 par value) as of July 28, 2023. 

DEFINITIONS

The following abbreviations or acronyms are used in the text.

FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). When used in this Form 10-Q and in future filings by Otter Tail Corporation (the "Company") with the Securities and Exchange Commission (SEC), in the Company’s press releases and in oral statements, words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” "future," "goal," “intend,” "likely," “may,” “outlook,” “plan,” “possible,” “potential,” "probable," "projected," “should,” "target," “will,” “would” or similar expressions are intended to identify forward-looking statements within the meaning of the PSLRA. Such statements are based on current expectations and assumptions and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. The Company’s risks and uncertainties include, among other things, uncertainty of future investments and capital expenditures, rate base levels and rate base growth, long-term investment risk, seasonal weather patterns and extreme weather events, counterparty credit risk, future business volumes with key customers, reductions in our credit ratings, our ability to access capital markets on favorable terms, assumptions and costs relating to funding our employee benefit plans, our subsidiaries’ ability to make dividend payments, cyber security threats or data breaches, the impact of government legislation and regulation including foreign trade policy and environmental, health and safety laws and regulations, the impact of climate change including compliance with legislative and regulatory changes to address climate change, operational and economic risks associated with our electric generating and manufacturing facilities, risks associated with energy markets, the availability and pricing of resource materials, inflation cost pressures, attracting and maintaining a qualified and stable workforce, expectations regarding regulatory proceedings, and changing macroeconomic and industry conditions. These and other risks and uncertainties are more fully described in our filings with the SEC, including our most recently filed Annual Report on Form 10-K. Forward-looking statements speak only as of the date they are made, and we expressly disclaim any obligation to update any forward-looking information.

Otter Tail Corporation (OTC) and its subsidiaries (collectively, the "Company", "us", "our" or "we") form a diverse, multi-platform business consisting of a vertically integrated, regulated utility with generation, transmission and distribution facilities complemented by manufacturing businesses providing metal fabrication for custom machine parts and metal components, manufacturing of extruded and thermoformed plastic products, and manufacturing of polyvinyl chloride (PVC) pipe products. We classify our business into three segments: Electric, Manufacturing and Plastics.

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, 2022.

Because of the seasonality of our businesses and other factors, the earnings for the three and six months ended June 30, 2023 should not be taken as an indication of earnings for all or any part of the balance of the current year or as an indication of earnings for future years.

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.

Certain reclassifications of amounts previously reported have been made to the accompanying consolidated statements of cash flows to maintain consistency and comparability between periods presented. Other, net operating cash flows previously reported for the six months ended June 30, 2022, included $4.4 million of investment losses, which are presented separately in the current period, and excluded $0.6 million of allowance for equity funds used during construction, which were previously presented separately. The reclassifications had no impact on previously reported net cash provided by operating activities, net cash used in investing activities, net cash (used in) provided by financing activities, or cash and cash equivalents.

The Company has financial instruments that potentially subject us to a concentration risk, including cash and cash equivalents held in deposit and money market accounts with various financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Corporation up to an insurance limit of $250,000. Currently, our cash and cash equivalents significantly exceed federally insured levels.

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 and cash equivalents, prepaid expenses, investments and fixed assets. Corporate is not an operating segment, rather it is added to operating segment totals to reconcile to consolidated amounts.

Information for each segment and our unallocated corporate costs for the three and six months ended June 30, 2023 and 2022 are as follows:

The following provides the identifiable assets by segment and corporate assets as of June 30, 2023 and December 31, 2022:

Presented below are 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 and six months ended June 30, 2023 and 2022:

Receivables as of June 30, 2023 and December 31, 2022 are as follows:

The following is a summary of activity in the allowance for credit losses for the six months ended June 30, 2023 and 2022:

Inventories consist of the following as of June 30, 2023 and December 31, 2022:

The following is a summary of our investments as of June 30, 2023 and December 31, 2022:

The amount of unrealized gains and losses on debt securities as of June 30, 2023 and December 31, 2022 was not material and no unrealized losses were deemed to be other-than-temporary. In addition, the amount of unrealized gains and losses on marketable equity securities still held as of June 30, 2023 and December 31, 2022 was not material.

Major classes of property, plant and equipment as of June 30, 2023 and December 31, 2022 include:

On January 3, 2023, we purchased the Ashtabula III wind farm, located in eastern North Dakota, which consists of 39 wind turbines and the related infrastructure, adding 62.4 megawatts of nameplate capacity to our owned generation assets. The total purchase price of the acquisition was $50.6 million. In addition to the acquired assets, we also recognized a $3.3 million asset retirement obligation liability associated with the wind farm and became party to the land easement agreements with the landowners of the wind farm.

The following presents our current and long-term regulatory assets and liabilities as of June 30, 2023 and December 31, 2022 and the period we expect to recover or refund such amounts:

The following is a summary of our outstanding short- and long-term borrowings by borrower, OTC or Otter Tail Power Company (OTP), as of June 30, 2023 and December 31, 2022:

The following is a summary of our lines of credit as of June 30, 2023 and December 31, 2022:

The following is a summary of outstanding long-term debt by borrower as of June 30, 2023 and December 31, 2022: 

Certain of OTC's and OTP's short- and long-term debt agreements require the borrower, whether OTC or OTP, to maintain certain financial covenants, including a maximum debt to total capitalization ratio of 0.60 to 1.00, a minimum interest and dividend coverage ratio of 1.50 to 1.00, and a maximum level of priority indebtedness. As of June 30, 2023, OTC and OTP were in compliance with these financial covenants.

The Company sponsors a noncontributory funded pension plan (the "Pension Plan"), an unfunded, nonqualified Executive Survivor and Supplemental Retirement Plan (the "ESSRP"), both accounted for as defined benefit pension plans, and a postretirement healthcare plan accounted for as an other postretirement benefit plan.

The following table includes the components of net periodic benefit cost (income) related to our defined benefit pension plans and other postretirement benefits for the three and six months ended June 30, 2023 and 2022:

The following table includes the impact of regulation on the recognition of periodic benefit cost (income) arising from pension and other postretirement benefits for the three and six months ended June 30, 2023 and 2022:

We had no minimum funding requirements for our Pension Plan or any other postretirement benefit plans as of December 31, 2022. We did not make any contributions to our Pension Plan during the six months ended June 30, 2023. We made a discretionary contribution to our Pension Plan of $20.0 million during the six months ended June 30, 2022.

The reconciliation of the statutory federal income tax rate to our effective tax rate for each of the three and six months ended June 30, 2023 and 2022 is as follows:

			Three Months Ended June 30,																		Six Months Ended June 30,
			2023									2022									2023									2022
Income Taxes at Federal Statutory Rate			$	21,426		21.0		%				$	23,507		21.0		%				$	37,341		21.0		%				$	42,330		21.0		%
Increases (Decreases) in Tax from:
State Taxes on Income, Net of Federal Tax			5,104			5.0						5,596			5.0						8,893			5.0						10,078			5.0
Production Tax Credits (PTCs)			(4,574)			(4.5)						(4,719)			(4.2)						(9,229)			(5.2)						(8,686)			(4.3)
Amortization of Excess Deferred Income Taxes			(622)			(0.6)						99			—						(1,420)			(0.8)						(1,078)			(0.5)
North Dakota Wind Tax Credit Amortization, Net of Federal Tax			(146)			(0.1)						(155)			(0.1)						(310)			(0.2)						(355)			(0.2)
Corporate-Owned Life Insurance			(460)			(0.5)						965			0.8						(878)			(0.5)						1,142			0.6
Other, Net			(666)			(0.6)						707			0.7						(1,032)			(0.5)						199			—
Income Tax Expense / Effective Tax Rate			$	20,062		19.7		%				$	26,000		23.2		%				$	33,365		18.8		%				$	43,630		21.6		%

Land Easements. Since 2013, OTP had purchased the wind-generated electricity from the Ashtabula III wind farm pursuant to a power purchase agreement. That agreement granted us the option to purchase the wind farm and on January 3, 2023, we completed the purchase for $50.6 million. In connection with the purchase, we assumed 51 land easements, not classified as leases, which require annual payments. As of June 30, 2023, the remaining payments to be made under the easements total $4.1 million and the remaining terms of the agreements extend into 2034.

FERC Return on Equity (ROE). In November 2013 and February 2015, customers filed complaints with the Federal Energy Regulatory Commission (FERC) seeking to reduce the return on equity component of the transmission rates that Midcontinent Independent System Operator, Inc. (MISO) transmission owners, including OTP, may collect under the MISO tariff rate. FERC's most recent order, issued on November 19, 2020, adopted a revised ROE methodology and set the base ROE at 10.02% (10.52% with an adder) effective for the fifteen-month period from November 2013 to February 2015 and on a prospective basis beginning in September 2016. The order also dismissed any complaints covering the period from February 2015 to May 2016. On August 9, 2022, the U.S. Court of Appeals for the District of Columbia Circuit vacated the FERC order citing a lack of reasoned explanation by FERC in its adoption of its revised ROE methodology as outlined in its November 2020 order. The U.S. Court of Appeals remanded the matter to FERC to reopen the proceedings.

Significant uncertainty exists as to how FERC will proceed upon remand and there is no prescribed timeline under which FERC must act. We have deferred recognition and recorded a refund liability of $2.7 million as of June 30, 2023. This refund liability reflects our best estimate of amounts previously collected from customers under the MISO tariff rate that may be required to be refunded to customers once all regulatory and judicial proceedings are complete and a final ROE is established for the periods outlined above.

Regional Haze Rule (RHR). The RHR was adopted in an effort to improve visibility in national parks and wilderness areas. The RHR requires states, in coordination with the Environmental Protection Agency (EPA) and other governmental agencies, to develop and implement plans to achieve natural visibility conditions. The second RHR implementation period covers the years 2018-2028. States are required to submit a state implementation plan to assess reasonable progress with the RHR and determine what additional emission reductions are appropriate, if any.

Coyote Station, OTP's jointly owned coal-fired power plant in North Dakota, is subject to assessment in the second implementation period under the North Dakota state implementation plan. The North Dakota Department of Environmental Quality (NDDEQ) submitted its state implementation plan to the EPA for approval in August, 2022. In its plan, the NDDEQ concluded it is not reasonable to require additional emission controls during this planning period. The EPA has previously expressed disagreement with the NDDEQ's recommendation to forgo additional emission controls and has indicated that such a plan is not likely to be accepted.

We cannot predict with certainty the impact the state implementation plan may have on our business until the plan has been approved or otherwise acted on by the EPA. However, significant emission control investments could be required and the recovery of such costs from customers would require regulatory approval. Alternatively, investments in emission control equipment may prove to be uneconomic and result in the early retirement of or the sale of our interest in Coyote Station, subject to regulatory approval. We cannot estimate the ultimate financial effects such a retirement or sale may have on our consolidated operating results, financial position or cash flows, but such amounts could be material and the recovery of such costs in rates would be subject to regulatory approval.

Self-Funding of Transmission Upgrades. The FERC has granted transmission owners within MISO the unilateral authority to determine the funding mechanism for interconnection transmission upgrades that are necessary to accommodate new generation facilities connecting to the electrical grid. Under existing FERC orders, transmission owners can unilaterally determine whether the generator pays the transmission owner in advance for the transmission upgrade or, alternatively, the transmission owner can elect to fund the upgrade and recover over time from the generator the cost of and a return on the upgrade investment (a self-funding). FERC’s orders granting transmission owners this unilateral funding authority has been judicially contested on the basis that transmission owners may be motivated to discriminate among generators in making funding determinations. In the most recent judicial proceedings, the petitioners argued to the U.S. Court of Appeals for the District of Columbia that FERC did not comply with a previous judicial order to fully develop a record regarding the risk of discrimination and the financial risk absorbed by transmission owners for generator-funded upgrades. On December 2, 2022, the Court of Appeals ruled in favor of the petitioners remanding the matter to FERC, instructing the agency to adequately explain the basis of its orders. The Court of Appeals decision did not vacate transmission owners’ unilateral funding authority.

OTP, as a transmission owner in MISO, has exercised its authority and elected to self-fund previous transmission upgrades necessary to accommodate new system generation. Under such an election, OTP is recovering the cost of the transmission upgrade and a return on that investment from the generator over a contractual period of time. Should FERC, on remand from the Court of Appeals, eliminate transmission owners’ unilateral funding authority, on either a prospective or retrospective basis, our financial results would be impacted. We cannot at this time reasonably predict the outcome of this matter given the uncertainty as to how and when FERC may respond to the judicial remand.

Other Contingencies. We are party to litigation and regulatory matters arising in the normal course of business. We regularly analyze relevant information and, as necessary, estimate and record accrued liabilities for legal, regulatory enforcement and other matters in which a loss is probable of occurring and can be reasonably estimated. We believe the effect on our consolidated operating results, financial position and cash flows, if any, for the disposition of all matters pending as of June 30, 2023, other than those discussed above, will not be material.

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 methods of purchasing our common shares, by reinvesting their dividends or making optional cash investments. Shares purchased under the plan may be newly issued common shares or common shares purchased on the open market. During the six months ended June 30, 2023, we issued 56,311 shares under this plan. We repurchased a sufficient number of shares on the open market to satisfy issuance under the plan; accordingly, no proceeds from the issuance were received. As of June 30, 2023, there were 1,194,682 shares available for purchase or issuance under the plan. The registration statement expires in May 2024.

OTC is a holding company with no significant operations of its own. The primary source of funds for payments of dividends to OTC's shareholders is from dividends paid or distributions made by OTC's subsidiaries. As a result of certain statutory limitations or regulatory or financing agreements, the amount of distributions allowed to be made by OTC's subsidiaries or the amount of dividends paid by OTC could be restricted. Both the OTC Credit Agreement and 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 June 30, 2023, 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 Minnesota Public Utilities Commission (MPUC) indirectly limits the amount of dividends OTP can pay to OTC by requiring an equity-to-total-capitalization ratio between 47.5% and 58.0% based on OTP’s capital structure petition effective by order of the MPUC on November 8, 2022. As of June 30, 2023, OTP’s equity-to-total-capitalization ratio, including short-term debt, was 53.8% and its net assets restricted from distribution totaled approximately $778.6 million. Under the MPUC order, total capitalization for OTP cannot exceed $1.8 billion.

The following presents the changes in accumulated other comprehensive loss for the three and six months ended June 30, 2023 and 2022:

			Three Months Ended June 30,
			2023																		2022
(in thousands)			Pension and Other Postretirement Benefits						Net Unrealized Gains (Losses) on Available-for-Sale Securities						Total						Pension and Other Postretirement Benefits						Net Unrealized Gains (Losses) on Available-for-Sale Securities						Total
Balance, Beginning of Period			$	1,308					$	(339)					$	969					$	(6,727)					$	(218)					$	(6,945)
Other Comprehensive Loss Before Reclassifications, net of tax			—						(62)						(62)						—						(75)						(75)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)			(27)			(1)			1			(2)			(26)						106			(1)			1			(2)			107
Total Other Comprehensive Income (Loss)			(27)						(61)						(88)						106						(74)						32
Balance, End of Period			$	1,281					$	(400)					$	881					$	(6,621)					$	(292)					$	(6,913)
			Six Months Ended June 30,
			2023																		2022
(in thousands)			Pension and Other Postretirement Benefits						Net Unrealized Gains (Losses) on Available-for-Sale Securities						Total						Pension and Other Postretirement Benefits						Net Unrealized Gains (Losses) on Available-for-Sale Securities						Total
Balance, Beginning of Period			$	1,334					$	(419)					$	915					$	(6,537)					$	13					$	(6,524)
Other Comprehensive Income (Loss) Before Reclassifications, net of tax			—						18						18						—						(306)						(306)
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss)			(53)			(1)			1			(2)			(52)						(84)			(1)			1			(2)			(83)
Total Other Comprehensive Income (Loss)			(53)						19						(34)						(84)						(305)						(389)
Balance, End of Period			$	1,281					$	(400)					$	881					$	(6,621)					$	(292)					$	(6,913)
(1) Included in the computation of net periodic pension and other postretirement benefit costs. See Note 7.
(2) Included in other income (expense), net on the accompanying consolidated statements of income.