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 period ended September 30, 2021March 31, 2022 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)
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Minnesota (State or other jurisdiction of incorporation or organization) | 27-0383995 (I.R.S. Employer Identification No.) |
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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:
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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):
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| 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:
41,539,98441,630,655 Common Shares ($5 par value) as of October 29, 2021.April 27, 2022.
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ITEM 1. | | |
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ITEM 2. | | |
ITEM 3. | | |
ITEM 4. | | |
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ITEM 1. | | |
ITEM 1A. | | |
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ITEM 6. | | |
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The following abbreviations or acronyms are used in the text. | | | | | | | | | | | | | | |
AFUDC | Allowance for Funds Used During Construction | | MPUCMISO | Minnesota Public Utilities CommissionMidcontinent Independent System Operator, Inc. |
ARP | Alternative Revenue Program | | NDPSCMPUC | North DakotaMinnesota Public ServiceUtilities Commission |
BTD | BTD Manufacturing, Inc. | | Northern PipeOTC | Northern Pipe Products, Inc.Otter Tail Corporation |
CIP | Conservation Improvement Program | | OTC | Otter Tail Corporation |
ECR | Environmental Cost Recovery Rider | | OTP | Otter Tail Power Company |
EEP | Energy Efficiency Plan | | PACE | Partnership in Assisting Community Expansion |
EPA | Environmental Protection Agency | | PIRPTCs | Phase-In RiderProduction tax credits |
ESSRP | Executive Survivor and Supplemental Retirement Plan | | PTCs | Production tax credits |
EUIC | Electric Utility Infrastructure Cost Recovery Rider | | PVC | Polyvinyl chloride |
FCA | Fuel Clause Adjustment | | RHR | Regional Haze Rule |
FERC | Federal Energy Regulatory Commission | | ROERHR | Return on equityRegional Haze Rule |
GCR | Generation Cost Recovery Rider | | RRRROE | Renewable Resource RiderReturn on equity |
ISO | Independent System Operator | | SDPUCRRR | South Dakota Public Utilities CommissionRenewable Resource Rider |
IRP | Integrated Resource Plan | | SEC | Securities and Exchange Commission |
kWkwh | kiloWattkilowatt-hour | | T.O. Plastics | T.O. Plastics, Inc. |
kwhMerricourt | kilowatt-hourMerricourt Wind Energy Center | | TCR | Transmission Cost Recovery Rider |
Merricourt | Merricourt Wind Energy Center | | Vinyltech | Vinyltech Corporation |
MISO | Midcontinent Independent System Operator, Inc. | | | |
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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 Act). When used in this Form 10-Q and in future filings by the Company with the SEC,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 Act. 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 the impact and duration of the COVID-19 pandemic, 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 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, 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 Securities and Exchange Commission,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.PART I. FINANCIAL INFORMATION
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ITEM 1. | FINANCIAL STATEMENTS |
OTTER TAIL CORPORATION
CONSOLIDATED BALANCE SHEETS (unaudited) | (in thousands, except share data) | (in thousands, except share data) | September 30, 2021 | | December 31, 2020 | (in thousands, except share data) | March 31, 2022 | | December 31, 2021 |
| Assets | Assets | | | | Assets | | | |
Current Assets | Current Assets | | | | Current Assets | | | |
Cash and Cash Equivalents | Cash and Cash Equivalents | $ | 1,272 | | | $ | 1,163 | | Cash and Cash Equivalents | $ | 1,371 | | | $ | 1,537 | |
Receivables, net of allowance for credit losses | Receivables, net of allowance for credit losses | 178,759 | | | 113,959 | | Receivables, net of allowance for credit losses | 218,896 | | | 174,953 | |
Inventories | Inventories | 114,615 | | | 92,165 | | Inventories | 145,857 | | | 148,490 | |
Regulatory Assets | Regulatory Assets | 22,517 | | | 21,900 | | Regulatory Assets | 21,770 | | | 27,342 | |
Other Current Assets | Other Current Assets | 17,804 | | | 5,645 | | Other Current Assets | 14,497 | | | 17,032 | |
Total Current Assets | Total Current Assets | 334,967 | | | 234,832 | | Total Current Assets | 402,391 | | | 369,354 | |
Noncurrent Assets | Noncurrent Assets | | Noncurrent Assets | |
Investments | Investments | 55,456 | | | 51,856 | | Investments | 57,893 | | | 56,690 | |
Property, Plant and Equipment, net of accumulated depreciation | Property, Plant and Equipment, net of accumulated depreciation | 2,083,223 | | | 2,049,273 | | Property, Plant and Equipment, net of accumulated depreciation | 2,128,344 | | | 2,124,605 | |
Regulatory Assets | Regulatory Assets | 158,515 | | | 168,395 | | Regulatory Assets | 124,413 | | | 125,508 | |
Intangible Assets, net of accumulated amortization | Intangible Assets, net of accumulated amortization | 9,319 | | | 10,144 | | Intangible Assets, net of accumulated amortization | 8,768 | | | 9,044 | |
Goodwill | Goodwill | 37,572 | | | 37,572 | | Goodwill | 37,572 | | | 37,572 | |
Other Noncurrent Assets | Other Noncurrent Assets | 34,096 | | | 26,282 | | Other Noncurrent Assets | 32,360 | | | 32,057 | |
Total Noncurrent Assets | Total Noncurrent Assets | 2,378,181 | | | 2,343,522 | | Total Noncurrent Assets | 2,389,350 | | | 2,385,476 | |
Total Assets | Total Assets | $ | 2,713,148 | | | $ | 2,578,354 | | Total Assets | $ | 2,791,741 | | | $ | 2,754,830 | |
| Liabilities and Shareholders' Equity | Liabilities and Shareholders' Equity | | Liabilities and Shareholders' Equity | |
Current Liabilities | Current Liabilities | | Current Liabilities | |
Short-Term Debt | Short-Term Debt | $ | 97,857 | | | $ | 80,997 | | Short-Term Debt | $ | 97,770 | | | $ | 91,163 | |
Current Maturities of Long-Term Debt | Current Maturities of Long-Term Debt | 169,962 | | | 140,087 | | Current Maturities of Long-Term Debt | 29,990 | | | 29,983 | |
Accounts Payable | Accounts Payable | 135,437 | | | 130,805 | | Accounts Payable | 119,022 | | | 135,089 | |
Accrued Salaries and Wages | Accrued Salaries and Wages | 28,455 | | | 26,908 | | Accrued Salaries and Wages | 19,846 | | | 31,704 | |
Accrued Taxes | Accrued Taxes | 17,972 | | | 18,831 | | Accrued Taxes | 21,879 | | | 19,245 | |
Regulatory Liabilities | Regulatory Liabilities | 25,323 | | | 16,663 | | Regulatory Liabilities | 27,211 | | | 24,844 | |
Other Current Liabilities | Other Current Liabilities | 35,081 | | | 22,495 | | Other Current Liabilities | 57,437 | | | 55,671 | |
Total Current Liabilities | Total Current Liabilities | 510,087 | | | 436,786 | | Total Current Liabilities | 373,155 | | | 387,699 | |
Noncurrent Liabilities and Deferred Credits | | |
Pensions Benefit Liability | 101,446 | | | 114,055 | | |
Noncurrent Liabilities | | Noncurrent Liabilities | |
Pension Benefit Liability | | Pension Benefit Liability | 53,153 | | | 73,973 | |
Other Postretirement Benefits Liability | Other Postretirement Benefits Liability | 68,090 | | | 67,359 | | Other Postretirement Benefits Liability | 66,383 | | | 66,481 | |
Regulatory Liabilities | Regulatory Liabilities | 230,733 | | | 233,973 | | Regulatory Liabilities | 233,989 | | | 234,430 | |
Deferred Income Taxes | Deferred Income Taxes | 176,502 | | | 153,376 | | Deferred Income Taxes | 203,877 | | | 188,268 | |
Deferred Tax Credits | Deferred Tax Credits | 16,847 | | | 17,405 | | Deferred Tax Credits | 16,475 | | | 16,661 | |
Other Noncurrent Liabilities | Other Noncurrent Liabilities | 62,342 | | | 60,002 | | Other Noncurrent Liabilities | 63,497 | | | 62,527 | |
Total Noncurrent Liabilities and Deferred Credits | 655,960 | | | 646,170 | | |
Total Noncurrent Liabilities | | Total Noncurrent Liabilities | 637,374 | | | 642,340 | |
Commitments and Contingencies (Note 9) | Commitments and Contingencies (Note 9) | 0 | | 0 | Commitments and Contingencies (Note 9) | 0 | | 0 |
Capitalization | Capitalization | | Capitalization | |
Long-Term Debt, net of current maturities | Long-Term Debt, net of current maturities | 594,619 | | | 624,432 | | Long-Term Debt, net of current maturities | 734,074 | | | 734,014 | |
Shareholders' Equity | Shareholders' Equity | | Shareholders' Equity | |
Common Shares: 50,000,000 shares authorized of $5 par value; 41,539,984 and 41,469,879 outstanding at September 30, 2021 and December 31, 2020 | 207,700 | | | 207,349 | | |
Common Shares: 50,000,000 shares authorized, $5 par value; 41,605,884 and 41,551,524 outstanding at March 31, 2022 and December 31, 2021 | | Common Shares: 50,000,000 shares authorized, $5 par value; 41,605,884 and 41,551,524 outstanding at March 31, 2022 and December 31, 2021 | 208,029 | | | 207,758 | |
Additional Paid-In Capital | Additional Paid-In Capital | 418,568 | | | 414,246 | | Additional Paid-In Capital | 421,449 | | | 419,760 | |
Retained Earnings | Retained Earnings | 334,385 | | | 257,878 | | Retained Earnings | 424,605 | | | 369,783 | |
Accumulated Other Comprehensive Loss | Accumulated Other Comprehensive Loss | (8,171) | | | (8,507) | | Accumulated Other Comprehensive Loss | (6,945) | | | (6,524) | |
Total Shareholders' Equity | Total Shareholders' Equity | 952,482 | | | 870,966 | | Total Shareholders' Equity | 1,047,138 | | | 990,777 | |
Total Capitalization | Total Capitalization | 1,547,101 | | | 1,495,398 | | Total Capitalization | 1,781,212 | | | 1,724,791 | |
Total Liabilities and Shareholders' Equity | Total Liabilities and Shareholders' Equity | $ | 2,713,148 | | | $ | 2,578,354 | | Total Liabilities and Shareholders' Equity | $ | 2,791,741 | | | $ | 2,754,830 | |
See accompanying notes to consolidated financial statements.
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (unaudited) | | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
(in thousands, except per-share amounts) | (in thousands, except per-share amounts) | 2021 | | 2020 | | 2021 | | 2020 | (in thousands, except per-share amounts) | 2022 | | 2021 | |
| Operating Revenues | Operating Revenues | | | | | Operating Revenues | | | | |
Electric | Electric | $ | 118,775 | | | $ | 115,213 | | | $ | 348,629 | | | $ | 333,213 | | Electric | $ | 130,416 | | | $ | 123,699 | | |
Product Sales | Product Sales | 197,519 | | | 120,542 | | | 514,983 | | | 330,045 | | Product Sales | 244,488 | | | 138,011 | | |
Total Operating Revenues | Total Operating Revenues | 316,294 | | | 235,755 | | | 863,612 | | | 663,258 | | Total Operating Revenues | 374,904 | | | 261,710 | | |
Operating Expenses | Operating Expenses | | Operating Expenses | | |
Electric Production Fuel | Electric Production Fuel | 17,698 | | | 11,554 | | | 44,576 | | | 34,077 | | Electric Production Fuel | 14,853 | | | 14,714 | | |
Electric Purchased Power | Electric Purchased Power | 9,878 | | | 13,428 | | | 40,273 | | | 45,940 | | Electric Purchased Power | 20,529 | | | 19,260 | | |
Electric Operating and Maintenance Expenses | Electric Operating and Maintenance Expenses | 36,465 | | | 32,845 | | | 114,615 | | | 106,639 | | Electric Operating and Maintenance Expenses | 44,278 | | | 41,421 | | |
Cost of Products Sold (excluding depreciation) | Cost of Products Sold (excluding depreciation) | 134,212 | | | 86,856 | | | 358,767 | | | 246,567 | | Cost of Products Sold (excluding depreciation) | 151,759 | | | 101,977 | | |
Other Nonelectric Expenses | Other Nonelectric Expenses | 16,224 | | | 13,615 | | | 45,587 | | | 36,277 | | Other Nonelectric Expenses | 17,206 | | | 13,693 | | |
Depreciation and Amortization | Depreciation and Amortization | 22,815 | | | 20,395 | | | 68,109 | | | 61,230 | | Depreciation and Amortization | 23,548 | | | 22,126 | | |
Electric Property Taxes | Electric Property Taxes | 4,474 | | | 4,333 | | | 13,136 | | | 12,601 | | Electric Property Taxes | 4,432 | | | 4,320 | | |
Total Operating Expenses | Total Operating Expenses | 241,766 | | | 183,026 | | | 685,063 | | | 543,331 | | Total Operating Expenses | 276,605 | | | 217,511 | | |
Operating Income | Operating Income | 74,528 | | | 52,729 | | | 178,549 | | | 119,927 | | Operating Income | 98,299 | | | 44,199 | | |
Other Income and Expense | Other Income and Expense | | Other Income and Expense | | |
Interest Charges | Interest Charges | 9,648 | | | 8,568 | | | 28,601 | | | 25,353 | | Interest Charges | 8,948 | | | 9,398 | | |
Nonservice Cost Components of Postretirement Benefits | Nonservice Cost Components of Postretirement Benefits | 505 | | | 842 | | | 1,511 | | | 2,581 | | Nonservice Cost Components of Postretirement Benefits | (22) | | | 383 | | |
Other Income (Expense), net | Other Income (Expense), net | 203 | | | 1,712 | | | 2,095 | | | 3,733 | | Other Income (Expense), net | 260 | | | 1,160 | | |
Income Before Income Taxes | Income Before Income Taxes | 64,578 | | | 45,031 | | | 150,532 | | | 95,726 | | Income Before Income Taxes | 89,633 | | | 35,578 | | |
Income Tax Expense | Income Tax Expense | 11,824 | | | 9,097 | | | 25,380 | | | 18,543 | | Income Tax Expense | 17,630 | | | 5,249 | | |
Net Income | Net Income | $ | 52,754 | | | $ | 35,934 | | | $ | 125,152 | | | $ | 77,183 | | Net Income | $ | 72,003 | | | $ | 30,329 | | |
| Weighted-Average Common Shares Outstanding: | Weighted-Average Common Shares Outstanding: | | Weighted-Average Common Shares Outstanding: | | |
Basic | Basic | 41,504 | | | 40,914 | | | 41,487 | | | 40,548 | | Basic | 41,548 | | | 41,455 | | |
Diluted | Diluted | 41,869 | | | 41,078 | | | 41,795 | | | 40,733 | | Diluted | 41,871 | | | 41,700 | | |
Earnings Per Share: | Earnings Per Share: | | Earnings Per Share: | | |
Basic | Basic | $ | 1.27 | | | $ | 0.88 | | | $ | 3.02 | | | $ | 1.90 | | Basic | $ | 1.73 | | | $ | 0.73 | | |
Diluted | Diluted | $ | 1.26 | | | $ | 0.87 | | | $ | 2.99 | | | $ | 1.89 | | Diluted | $ | 1.72 | | | $ | 0.73 | | |
See accompanying notes to consolidated financial statements.
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
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Net Income | $ | 52,754 | | | $ | 35,934 | | | $ | 125,152 | | | $ | 77,183 | |
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) | — | | | (21) | | | (43) | | | 13 | |
Unrealized Gains (Losses) | (33) | | | (13) | | | (85) | | | 205 | |
Income Tax (Expense) Benefit | 7 | | | 7 | | | 27 | | | (46) | |
Available-for-Sale Securities, net of tax | (26) | | | (27) | | | (101) | | | 172 | |
Pension and Postretirement Benefit Plans: | | | | | | | |
Amortization of Unrecognized Postretirement Benefit Losses and Costs | 197 | | | 138 | | | 591 | | | 413 | |
Income Tax Expense | (51) | | | (36) | | | (154) | | | (108) | |
Pension and Postretirement Benefit Plan, net of tax | 146 | | | 102 | | | 437 | | | 305 | |
Total Other Comprehensive Income | 120 | | | 75 | | | 336 | | | 477 | |
Total Comprehensive Income | $ | 52,874 | | | $ | 36,009 | | | $ | 125,488 | | | $ | 77,660 | |
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| Three Months Ended March 31, | | |
(in thousands) | 2022 | | 2021 | | | | |
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Net Income | $ | 72,003 | | | $ | 30,329 | | | | | |
Other Comprehensive (Loss) Income: | | | | | | | |
Unrealized (Loss) on Available-for-Sale Securities, net of tax benefit of $61 and $10 | (231) | | | (35) | | | | | |
Pension and Other Postretirement Benefits, net of tax benefit (expense) of $67 and $(53) | (190) | | | 150 | | | | | |
Total Other Comprehensive (Loss) Income | $ | (421) | | | $ | 115 | | | | | |
Total Comprehensive Income | $ | 71,582 | | | $ | 30,444 | | | | | |
See accompanying notes to consolidated financial statements.
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except common shares outstanding) | Common Shares Outstanding | | Par Value, Common Shares | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss)1 | | Total Shareholders' Equity |
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Balance, June 30, 2021 | 41,538,709 | | | $ | 207,694 | | | $ | 417,870 | | | $ | 297,850 | | | $ | (8,291) | | | $ | 915,123 | |
Common Stock Issuances, Net of Expenses | 1,275 | | | 6 | | | (6) | | | — | | | — | | | — | |
Common Stock Retirements and Forfeitures | — | | | — | | | (126) | | | — | | | — | | | (126) | |
Net Income | — | | | — | | | — | | | 52,754 | | | — | | | 52,754 | |
Other Comprehensive Income | — | | | — | | | — | | | — | | | 120 | | | 120 | |
Stock Compensation Expense | — | | | — | | | 830 | | | — | | | — | | | 830 | |
Common Dividends ($0.39 per share) | — | | | — | | | — | | | (16,219) | | | — | | | (16,219) | |
Balance, September 30, 2021 | 41,539,984 | | | $ | 207,700 | | | $ | 418,568 | | | $ | 334,385 | | | $ | (8,171) | | | $ | 952,482 | |
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Balance, June 30, 2020 | 40,848,828 | | | $ | 204,244 | | | $ | 390,141 | | | $ | 233,705 | | | $ | (6,035) | | | $ | 822,055 | |
Common Stock Issuances, Net of Expenses | 203,337 | | | 1,017 | | | 6,885 | | | — | | | — | | | 7,902 | |
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Net Income | — | | | — | | | — | | | 35,934 | | | — | | | 35,934 | |
Other Comprehensive Income | — | | | — | | | — | | | — | | | 75 | | | 75 | |
Stock Compensation Expense | — | | | — | | | 1,275 | | | — | | | — | | | 1,275 | |
Common Dividends ($0.37 per share) | — | | | — | | | — | | | (15,171) | | | — | | | (15,171) | |
Balance, September 30, 2020 | 41,052,165 | | | $ | 205,261 | | | $ | 398,301 | | | $ | 254,468 | | | $ | (5,960) | | | $ | 852,070 | |
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Balance, December 31, 2020 | 41,469,879 | | | $ | 207,349 | | | $ | 414,246 | | | $ | 257,878 | | | $ | (8,507) | | | $ | 870,966 | |
Common Stock Issuances, Net of Expenses | 105,806 | | | 530 | | | (578) | | | — | | | — | | | (48) | |
Common Stock Retirements and Forfeitures | (35,701) | | | (179) | | | (1,454) | | | — | | | — | | | (1,633) | |
Net Income | — | | | — | | | — | | | 125,152 | | | — | | | 125,152 | |
Other Comprehensive Income | — | | | — | | | — | | | — | | | 336 | | | 336 | |
Stock Compensation Expense | — | | | — | | | 6,354 | | | — | | | — | | | 6,354 | |
Common Dividends ($1.17 per share) | — | | | — | | | — | | | (48,645) | | | — | | | (48,645) | |
Balance, September 30, 2021 | 41,539,984 | | | $ | 207,700 | | | $ | 418,568 | | | $ | 334,385 | | | $ | (8,171) | | | $ | 952,482 | |
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Balance, December 31, 2019 | 40,157,591 | | | $ | 200,788 | | | $ | 364,790 | | | $ | 222,341 | | | $ | (6,437) | | | $ | 781,482 | |
Common Stock Issuances, Net of Expenses | 932,791 | | | 4,664 | | | 30,107 | | | — | | | — | | | 34,771 | |
Common Stock Retirements and Forfeitures | (38,217) | | | (191) | | | (1,878) | | | — | | | — | | | (2,069) | |
Net Income | — | | | — | | | — | | | 77,183 | | | — | | | 77,183 | |
Other Comprehensive Income | — | | | — | | | — | | | — | | | 477 | | | 477 | |
Stock Compensation Expense | — | | | — | | | 5,282 | | | — | | | — | | | 5,282 | |
Common Dividends ($1.11 per share) | — | | | — | | | — | | | (45,056) | | | — | | | (45,056) | |
Balance, September 30, 2020 | 41,052,165 | | | $ | 205,261 | | | $ | 398,301 | | | $ | 254,468 | | | $ | (5,960) | | | $ | 852,070 | |
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1Accumulated Other Comprehensive Income (Loss) as of September 30, 2021 and December 31, 2020 is comprised of the following: |
(in thousands) | September 30, 2021 | | December 31, 2020 |
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Unrealized Gain on Available-for-Sale Debt Securities: | | | |
Before Tax | $ | 137 | | | $ | 265 | |
Tax Effect | (29) | | | (56) | |
Unrealized Gain on Available-for-Sale Debt, net of tax | 108 | | | 209 | |
Unamortized Actuarial Losses and Prior Service Costs Related to Pension and Postretirement Benefits: | | | |
Before Tax | (11,202) | | | (11,793) | |
Tax Effect | 2,923 | | | 3,077 | |
Unamortized Actuarial Losses and Prior Service Costs Related to Pension and Postretirement Benefits, net of tax | (8,279) | | | (8,716) | |
Accumulated Other Comprehensive Loss: | | | |
Before Tax | (11,065) | | | (11,528) | |
Tax Effect | 2,894 | | | 3,021 | |
Net Accumulated Other Comprehensive Loss | $ | (8,171) | | | $ | (8,507) | |
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(in thousands, except common shares outstanding) | Common Shares Outstanding | | Par Value, Common Shares | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders' Equity |
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Balance, December 31, 2021 | 41,551,524 | | | $ | 207,758 | | | $ | 419,760 | | | $ | 369,783 | | | $ | (6,524) | | | $ | 990,777 | |
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Stock Issued Under Share-Based Compensation Plans, net of shares withheld for employee taxes | 54,360 | | | 271 | | | (3,215) | | | — | | | — | | | (2,944) | |
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Net Income | — | | | — | | | — | | | 72,003 | | | — | | | 72,003 | |
Other Comprehensive Loss | — | | | — | | | — | | | — | | | (421) | | | (421) | |
Stock Compensation Expense | — | | | — | | | 4,904 | | | — | | | — | | | 4,904 | |
Common Dividends ($0.4125 per share) | — | | | — | | | — | | | (17,181) | | | — | | | (17,181) | |
Balance, March 31, 2022 | 41,605,884 | | | $ | 208,029 | | | $ | 421,449 | | | $ | 424,605 | | | $ | (6,945) | | | $ | 1,047,138 | |
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Balance, December 31, 2020 | 41,469,879 | | | $ | 207,349 | | | $ | 414,246 | | | $ | 257,878 | | | $ | (8,507) | | | $ | 870,966 | |
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Stock Issued Under Share-Based Compensation Plans, net of shares withheld for employee taxes | 40,576 | | | 203 | | | (1,710) | | | — | | | — | | | (1,507) | |
Stock Issued Under Dividend Reinvestment and Stock Purchase Plans, net of expenses and repurchased shares | — | | | — | | | (25) | | | — | | | — | | | (25) | |
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 | |
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See accompanying notes to consolidated financial statements.
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) | | | Nine Months Ended September 30, | | Three Months Ended March 31, |
(in thousands) | (in thousands) | 2021 | | 2020 | (in thousands) | 2022 | | 2021 |
| Operating Activities | Operating Activities | | | | Operating Activities | | | |
Net Income | Net Income | $ | 125,152 | | | $ | 77,183 | | Net Income | $ | 72,003 | | | $ | 30,329 | |
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | | Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | |
Depreciation and Amortization | Depreciation and Amortization | 68,109 | | | 61,230 | | Depreciation and Amortization | 23,548 | | | 22,126 | |
Deferred Tax Credits | Deferred Tax Credits | (558) | | | (986) | | Deferred Tax Credits | (186) | | | (186) | |
Deferred Income Taxes | Deferred Income Taxes | 18,835 | | | 20,353 | | Deferred Income Taxes | 14,342 | | | 5,697 | |
Change in Deferred Debits and Other Assets | 6,166 | | | 3,439 | | |
Discretionary Contribution to Pension Plan | Discretionary Contribution to Pension Plan | (10,000) | | | (11,200) | | Discretionary Contribution to Pension Plan | (20,000) | | | (10,000) | |
Change in Noncurrent Liabilities and Deferred Credits | 2,662 | | | 3,237 | | |
Allowance for Equity Funds Used During Construction | Allowance for Equity Funds Used During Construction | (427) | | | (3,104) | | Allowance for Equity Funds Used During Construction | (260) | | | (45) | |
Stock Compensation Expense | Stock Compensation Expense | 6,354 | | | 5,282 | | Stock Compensation Expense | 4,904 | | | 4,197 | |
Other, Net | Other, Net | (3,480) | | | (176) | | Other, Net | 866 | | | (1,407) | |
Cash (Used for) Provided by Current Assets and Current Liabilities: | | |
Change in Receivables | (64,800) | | | (20,025) | | |
Change in Inventories | (22,450) | | | 15,980 | | |
Change in Other Current Assets | (12,159) | | | 2,023 | | |
Change in Payables and Other Current Liabilities | 40,574 | | | (12,063) | | |
Change in Interest Payable and Income Taxes Receivable/Payable | 774 | | | 103 | | |
Changes in Operating Assets and Liabilities: | | Changes in Operating Assets and Liabilities: | |
Receivables | | Receivables | (43,943) | | | (20,431) | |
Inventories | | Inventories | 3,403 | | | (261) | |
Regulatory Assets | | Regulatory Assets | 4,468 | | | 703 | |
Other Assets | | Other Assets | 3,729 | | | (6,421) | |
Accounts Payable | | Accounts Payable | (12,533) | | | 2,245 | |
Accrued and Other Liabilities | | Accrued and Other Liabilities | (7,859) | | | (8,890) | |
Regulatory Liabilities | | Regulatory Liabilities | 2,812 | | | (3,850) | |
Pension and Other Postretirement Benefits | | Pension and Other Postretirement Benefits | 122 | | | 1,464 | |
Net Cash Provided by Operating Activities | Net Cash Provided by Operating Activities | 154,752 | | | 141,276 | | Net Cash Provided by Operating Activities | 45,416 | | | 15,270 | |
Investing Activities | Investing Activities | | Investing Activities | |
Capital Expenditures | Capital Expenditures | (117,312) | | | (220,630) | | Capital Expenditures | (28,710) | | | (50,076) | |
Proceeds from Disposal of Noncurrent Assets | Proceeds from Disposal of Noncurrent Assets | 5,819 | | | 4,617 | | Proceeds from Disposal of Noncurrent Assets | 878 | | | 3,244 | |
Cash Used for Investments and Other Assets | Cash Used for Investments and Other Assets | (5,591) | | | (6,372) | | Cash Used for Investments and Other Assets | (3,617) | | | (2,188) | |
Net Cash Used in Investing Activities | Net Cash Used in Investing Activities | (117,084) | | | (222,385) | | Net Cash Used in Investing Activities | (31,449) | | | (49,020) | |
Financing Activities | Financing Activities | | Financing Activities | |
Change in Checks Written in Excess of Cash | (3,133) | | | 90 | | |
Net Short-Term Borrowings | 16,860 | | | 42,600 | | |
Proceeds from Issuance of Common Stock | — | | | 35,219 | | |
Common Stock Issuance Expenses | (67) | | | (465) | | |
Payments for Shares Withheld for Employee Tax Obligations | (1,633) | | | (2,069) | | |
Proceeds from Issuance of Long-Term Debt | — | | | 75,000 | | |
Debt Issuance Expenses | (772) | | | (369) | | |
Net Borrowings on Short-Term Debt | | Net Borrowings on Short-Term Debt | 6,608 | | | 53,854 | |
| Payments for Retirement of Long-Term Debt | Payments for Retirement of Long-Term Debt | (169) | | | (136) | | Payments for Retirement of Long-Term Debt | — | | | (169) | |
Dividends Paid | Dividends Paid | (48,645) | | | (45,056) | | Dividends Paid | (17,181) | | | (16,208) | |
Payments for Shares Withheld for Employee Tax Obligations | | Payments for Shares Withheld for Employee Tax Obligations | (2,942) | | | (1,507) | |
Other, net | | Other, net | (618) | | | (2,171) | |
Net Cash (Used in) Provided by Financing Activities | Net Cash (Used in) Provided by Financing Activities | (37,559) | | | 104,814 | | Net Cash (Used in) Provided by Financing Activities | (14,133) | | | 33,799 | |
Net Change in Cash and Cash Equivalents | Net Change in Cash and Cash Equivalents | 109 | | | 23,705 | | Net Change in Cash and Cash Equivalents | (166) | | | 49 | |
Cash and Cash Equivalents at Beginning of Period | Cash and Cash Equivalents at Beginning of Period | 1,163 | | | 21,199 | | Cash and Cash Equivalents at Beginning of Period | 1,537 | | | 1,163 | |
Cash and Cash Equivalents at End of Period | Cash and Cash Equivalents at End of Period | $ | 1,272 | | | $ | 44,904 | | Cash and Cash Equivalents at End of Period | $ | 1,371 | | | $ | 1,212 | |
| | Supplemental Disclosure of Noncash Investing Activities | Supplemental Disclosure of Noncash Investing Activities | | Supplemental Disclosure of Noncash Investing Activities | |
Accrued Property, Plant, and Equipment Additions | $ | 14,358 | | | $ | 112,314 | | |
Accrued Property, Plant and Equipment Additions | | Accrued Property, Plant and Equipment Additions | $ | 9,165 | | | $ | 18,962 | |
See accompanying notes to consolidated financial statements
OTTER TAIL CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Summary of Significant Accounting Policies
Overview
Otter Tail Corporation (OTC) and its subsidiaries (collectively, the "Company", "us", "our" or "we") form a diverse, multi-platform business consisting of a vertically integrated, regulated utility with generation, transmission and distribution facilities complemented by manufacturing businesses providing metal fabrication for custom machine parts and metal components, manufacturing of extruded and thermoformed plastic products, and manufacturing of PVCpolyvinyl chloride (PVC) pipe products. We classify our business into 3 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-Kfor the fiscal year ended December 31, 2020.2021. Because of the coronavirus (COVID-19) pandemic, the seasonality of our businesses and other factors, the earnings for the three and nine months ended September 30, 2021March 31, 2022 should not be taken as an indication of earnings for all or any part of the balance of the current year or as an indication of earnings for future years.
Use of Estimates
We use estimates based on the best information available in recording transactions and balances resulting from business operations. As better information becomes available or actual amounts are known, the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates.
Reclassifications
Certain reclassifications of amounts previously reported have been made to the accompanying consolidated statements of shareholders' equity and consolidated statements of cash flows to maintain consistency and comparability between periods presented. The reclassifications had no impact on previously reported shareholders' equity, 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.
2. Segment Information
We classify our business into 3 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 and nine months ended September 30,March 31, 2022 and 2021 and 2020 are as follows:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
(in thousands) | (in thousands) | | 2021 | | 2020 | | 2021 | | 2020 | (in thousands) | | 2022 | | 2021 | |
| Operating Revenue1 | | |
Operating Revenue | | Operating Revenue | | |
Electric | Electric | | $ | 118,775 | | | $ | 115,213 | | | $ | 348,629 | | | $ | 333,213 | | Electric | | $ | 130,416 | | | $ | 123,699 | | |
Manufacturing | Manufacturing | | 89,977 | | | 59,849 | | | 250,085 | | | 174,276 | | Manufacturing | | 104,957 | | | 75,825 | | |
Plastics | Plastics | | 107,542 | | | 60,693 | | | 264,898 | | | 155,769 | | Plastics | | 139,531 | | | 62,186 | | |
Total | Total | | $ | 316,294 | | | $ | 235,755 | | | $ | 863,612 | | | $ | 663,258 | | Total | | $ | 374,904 | | | $ | 261,710 | | |
Net Income (Loss) | Net Income (Loss) | | Net Income (Loss) | | |
Electric | Electric | | $ | 22,528 | | | $ | 24,737 | | | $ | 55,547 | | | $ | 54,225 | | Electric | | $ | 19,233 | | | $ | 17,587 | | |
Manufacturing | Manufacturing | | 4,200 | | | 3,311 | | | 15,290 | | | 8,476 | | Manufacturing | | 4,084 | | | 5,385 | | |
Plastics | Plastics | | 28,410 | | | 10,343 | | | 60,102 | | | 20,922 | | Plastics | | 50,846 | | | 9,147 | | |
Corporate | Corporate | | (2,384) | | | (2,457) | | | (5,787) | | | (6,440) | | Corporate | | (2,160) | | | (1,790) | | |
Total | Total | | $ | 52,754 | | | $ | 35,934 | | | $ | 125,152 | | | $ | 77,183 | | Total | | $ | 72,003 | | | $ | 30,329 | | |
| 1Amounts reflect operating revenues to external customers. Intersegment operating revenues are not material for any period presented. | |
The following provides the identifiable assets by segment and corporate assets as of September 30, 2021March 31, 2022 and December 31, 2020:2021:
| (in thousands) | (in thousands) | September 30, 2021 | | December 31, 2020 | (in thousands) | March 31, 2022 | | December 31, 2021 |
| Identifiable Assets | Identifiable Assets | | Identifiable Assets | |
Electric | Electric | $ | 2,271,636 | | | $ | 2,233,399 | | Electric | $ | 2,278,337 | | | $ | 2,283,776 | |
Manufacturing | Manufacturing | 242,414 | | | 191,005 | | Manufacturing | 269,833 | | | 251,044 | |
Plastics | Plastics | 143,615 | | | 99,767 | | Plastics | 184,865 | | | 162,565 | |
Corporate | Corporate | 55,483 | | | 54,183 | | Corporate | 58,706 | | | 57,445 | |
Total | Total | $ | 2,713,148 | | | $ | 2,578,354 | | Total | $ | 2,791,741 | | | $ | 2,754,830 | |
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 and nine months ended September 30, 2021March 31, 2022 and 2020:2021:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
(in thousands) | (in thousands) | 2021 | | 2020 | | 2021 | | 2020 | (in thousands) | 2022 | | 2021 | |
| Operating Revenues | Operating Revenues | | Operating Revenues | | |
Electric Segment | Electric Segment | | Electric Segment | | |
Retail: Residential | Retail: Residential | $ | 33,902 | | | $ | 32,734 | | | $ | 100,067 | | | $ | 96,440 | | Retail: Residential | $ | 40,561 | | | $ | 37,485 | | |
Retail: Commercial and Industrial | Retail: Commercial and Industrial | 60,557 | | | 64,918 | | | 185,376 | | | 189,771 | | Retail: Commercial and Industrial | 71,171 | | | 66,403 | | |
Retail: Other | Retail: Other | 1,979 | | | 1,953 | | | 5,687 | | | 5,550 | | Retail: Other | 1,907 | | | 1,818 | | |
Total Retail | Total Retail | 96,438 | | | 99,605 | | | 291,130 | | | 291,761 | | Total Retail | 113,639 | | | 105,706 | | |
Transmission | Transmission | 13,300 | | | 12,288 | | | 37,085 | | | 32,802 | | Transmission | 12,556 | | | 11,944 | | |
Wholesale | Wholesale | 6,944 | | | 1,500 | | | 14,711 | | | 3,141 | | Wholesale | 2,463 | | | 4,507 | | |
Other | Other | 2,093 | | | 1,820 | | | 5,703 | | | 5,509 | | Other | 1,758 | | | 1,542 | | |
Total Electric Segment | Total Electric Segment | 118,775 | | | 115,213 | | | 348,629 | | | 333,213 | | Total Electric Segment | 130,416 | | | 123,699 | | |
Manufacturing Segment | Manufacturing Segment | | Manufacturing Segment | | |
Metal Parts and Tooling | Metal Parts and Tooling | 76,455 | | | 50,957 | | | 210,141 | | | 145,435 | | Metal Parts and Tooling | 89,573 | | | 62,673 | | |
Plastic Products and Tooling | Plastic Products and Tooling | 10,198 | | | 7,600 | | | 30,624 | | | 25,323 | | Plastic Products and Tooling | 12,445 | | | 10,295 | | |
Scrap Metal Sales | Scrap Metal Sales | 3,324 | | | 1,292 | | | 9,320 | | | 3,518 | | Scrap Metal Sales | 2,939 | | | 2,857 | | |
Total Manufacturing Segment | Total Manufacturing Segment | 89,977 | | | 59,849 | | | 250,085 | | | 174,276 | | Total Manufacturing Segment | 104,957 | | | 75,825 | | |
Plastics Segment | Plastics Segment | | Plastics Segment | | |
PVC Pipe | PVC Pipe | 107,542 | | | 60,693 | | | 264,898 | | | 155,769 | | PVC Pipe | 139,531 | | | 62,186 | | |
Total Operating Revenue | Total Operating Revenue | 316,294 | | | 235,755 | | | 863,612 | | | 663,258 | | Total Operating Revenue | 374,904 | | | 261,710 | | |
Less: Non-contract Revenues Included Above | Less: Non-contract Revenues Included Above | | Less: Non-contract Revenues Included Above | | |
Electric Segment - ARP Revenues | Electric Segment - ARP Revenues | (33) | | | 2,778 | | | (2,790) | | | 2,900 | | Electric Segment - ARP Revenues | (2,460) | | | (975) | | |
Total Operating Revenues from Contracts with Customers | Total Operating Revenues from Contracts with Customers | $ | 316,327 | | | $ | 232,977 | | | $ | 866,402 | | | $ | 660,358 | | Total Operating Revenues from Contracts with Customers | $ | 377,364 | | | $ | 262,685 | | |
4. Select Balance Sheet Information
Receivables and Allowance for Credit Losses
Receivables as of September 30, 2021March 31, 2022 and December 31, 20202021 are as follows:
| (in thousands) | (in thousands) | September 30, 2021 | | December 31, 2020 | (in thousands) | March 31, 2022 | | December 31, 2021 |
| Receivables | Receivables | | Receivables | |
Trade | Trade | $ | 152,906 | | | $ | 87,048 | | Trade | $ | 192,315 | | | $ | 142,297 | |
Other | Other | 11,182 | | | 8,939 | | Other | 8,139 | | | 10,591 | |
Unbilled Receivables | Unbilled Receivables | 17,003 | | | 21,187 | | Unbilled Receivables | 20,229 | | | 23,901 | |
Total Receivables | Total Receivables | 181,091 | | | 117,174 | | Total Receivables | 220,683 | | | 176,789 | |
Less: Allowance for Credit Losses | Less: Allowance for Credit Losses | 2,332 | | | 3,215 | | Less: Allowance for Credit Losses | (1,787) | | | (1,836) | |
Receivables, net of allowance for credit losses | Receivables, net of allowance for credit losses | $ | 178,759 | | | $ | 113,959 | | Receivables, net of allowance for credit losses | $ | 218,896 | | | $ | 174,953 | |
The following is a summary of activity in the allowance for credit losses for the ninethree months ended September 30, 2021March 31, 2022 and 2020:2021:
| | | | | | | | | | | | | March 31, | | March 31, |
(in thousands) | (in thousands) | 2021 | | 2020 | (in thousands) | 2022 | | 2021 |
| Beginning Balance, January 1 | Beginning Balance, January 1 | $ | 3,215 | | | $ | 1,339 | | Beginning Balance, January 1 | $ | 1,836 | | | $ | 3,215 | |
Additions Charged to Expense | Additions Charged to Expense | 177 | | | 1,845 | | Additions Charged to Expense | 210 | | | 211 | |
Reductions for Amounts Written Off, Net of Recoveries | Reductions for Amounts Written Off, Net of Recoveries | (1,060) | | | (923) | | Reductions for Amounts Written Off, Net of Recoveries | (259) | | | (443) | |
Ending Balance, September 30 | $ | 2,332 | | | $ | 2,261 | | |
Ending Balance, March 31 | | Ending Balance, March 31 | $ | 1,787 | | | $ | 2,983 | |
Inventories
Inventories consist of the following as of September 30, 2021March 31, 2022 and December 31, 2020:2021:
| (in thousands) | (in thousands) | September 30, 2021 | | December 31, 2020 | (in thousands) | March 31, 2022 | | December 31, 2021 |
| Finished Goods | Finished Goods | $ | 25,727 | | | $ | 22,046 | | Finished Goods | $ | 37,195 | | | $ | 39,903 | |
Work in Process | Work in Process | 29,932 | | | 16,210 | | Work in Process | 33,962 | | | 35,705 | |
Raw Material, Fuel and Supplies | Raw Material, Fuel and Supplies | 58,956 | | | 53,909 | | Raw Material, Fuel and Supplies | 74,700 | | | 72,882 | |
Total Inventories | Total Inventories | $ | 114,615 | | | $ | 92,165 | | Total Inventories | $ | 145,857 | | | $ | 148,490 | |
Investments
The following is a summary of our investments as of September 30, 2021March 31, 2022 and December 31, 2020:2021:
| (in thousands) | (in thousands) | September 30, 2021 | | December 31, 2020 | (in thousands) | March 31, 2022 | | December 31, 2021 |
| Corporate-Owned Life Insurance Policies | Corporate-Owned Life Insurance Policies | $ | 40,096 | | | $ | 36,825 | | Corporate-Owned Life Insurance Policies | $ | 40,722 | | | $ | 41,078 | |
Debt Securities | Debt Securities | 9,208 | | | 9,260 | | Debt Securities | 8,959 | | | 9,202 | |
Money Market Funds | Money Market Funds | 953 | | | 4,075 | | Money Market Funds | 1,893 | | | 949 | |
Mutual Funds | Mutual Funds | 5,170 | | | 1,662 | | Mutual Funds | 6,285 | | | 5,432 | |
Other Investments | Other Investments | 29 | | | 34 | | Other Investments | 34 | | | 29 | |
Total Investments | Total Investments | $ | 55,456 | | | $ | 51,856 | | Total Investments | $ | 57,893 | | | $ | 56,690 | |
The amount of unrealized gains and losses on debt securities as of September 30, 2021March 31, 2022 and December 31, 2020 are2021 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 September 30, 2021March 31, 2022 and December 31, 2020 are2021 was not material.
Property, Plant and Equipment
Major classes of property, plant and equipment as of September 30, 2021March 31, 2022 and December 31, 20202021 include:
| (in thousands) | (in thousands) | September 30, 2021 | | December 31, 2020 | (in thousands) | March 31, 2022 | | December 31, 2021 |
| Electric Plant in Service | | | | |
Electric Plant | | Electric Plant | | | |
Electric Plant in Service | Electric Plant in Service | $ | 2,705,778 | | | $ | 2,531,352 | | Electric Plant in Service | $ | 2,776,778 | | | $ | 2,758,445 | |
Construction Work in Progress | Construction Work in Progress | 100,495 | | | 203,078 | | Construction Work in Progress | 72,347 | | | 74,926 | |
Total Gross Electric Plant | Total Gross Electric Plant | 2,806,273 | | | 2,734,430 | | Total Gross Electric Plant | 2,849,125 | | | 2,833,371 | |
Less Accumulated Depreciation and Amortization | Less Accumulated Depreciation and Amortization | 822,441 | | | 778,988 | | Less Accumulated Depreciation and Amortization | 829,499 | | | 817,302 | |
Net Electric Plant | Net Electric Plant | 1,983,832 | | | 1,955,442 | | Net Electric Plant | 2,019,626 | | | 2,016,069 | |
Nonelectric Property, Plant and Equipment | Nonelectric Property, Plant and Equipment | | Nonelectric Property, Plant and Equipment | |
Nonelectric Property, Plant and Equipment in Service | Nonelectric Property, Plant and Equipment in Service | 263,880 | | | 258,730 | | Nonelectric Property, Plant and Equipment in Service | 278,729 | | | 273,950 | |
Construction Work in Progress | Construction Work in Progress | 15,564 | | | 9,290 | | Construction Work in Progress | 14,365 | | | 16,611 | |
Total Gross Nonelectric Property, Plant and Equipment | Total Gross Nonelectric Property, Plant and Equipment | 279,444 | | | 268,020 | | Total Gross Nonelectric Property, Plant and Equipment | 293,094 | | | 290,561 | |
Less Accumulated Depreciation and Amortization | Less Accumulated Depreciation and Amortization | 180,053 | | | 174,189 | | Less Accumulated Depreciation and Amortization | 184,376 | | | 182,025 | |
Net Nonelectric Property, Plant and Equipment | Net Nonelectric Property, Plant and Equipment | 99,391 | | | 93,831 | | Net Nonelectric Property, Plant and Equipment | 108,718 | | | 108,536 | |
Net Property, Plant and Equipment | Net Property, Plant and Equipment | $ | 2,083,223 | | | $ | 2,049,273 | | Net Property, Plant and Equipment | $ | 2,128,344 | | | $ | 2,124,605 | |
5. Regulatory Matters
Regulatory Assets and Liabilities
The following presents our current and long-term regulatory assets and liabilities as of September 30, 2021March 31, 2022 and December 31, 20202021 and the period we expect to recover or refund such amounts:
| | | Period of | | September 30, 2021 | | December 31, 2020 | | Period of | | March 31, 2022 | | December 31, 2021 |
(in thousands) | (in thousands) | Recovery/Refund | | Current | | Long-Term | | Current | | Long Term | (in thousands) | Recovery/Refund | | Current | | Long-Term | | Current | | Long Term |
| Regulatory Assets | Regulatory Assets | | Regulatory Assets | |
Pension and Other Postretirement Benefit Plans1 | Pension and Other Postretirement Benefit Plans1 | Various | | $ | 11,037 | | | $ | 139,467 | | | $ | 11,037 | | | $ | 146,071 | | Pension and Other Postretirement Benefit Plans1 | Various | | $ | 7,791 | | | $ | 113,663 | | | $ | 7,791 | | | $ | 114,961 | |
Alternative Revenue Program Riders2 | Alternative Revenue Program Riders2 | Up to 3 years | | 7,229 | | | 8,225 | | | 8,871 | | | 9,373 | | Alternative Revenue Program Riders2 | Up to 2 years | | 9,280 | | | 5,713 | | | 11,889 | | | 5,564 | |
Asset Retirement Obligations1 | Asset Retirement Obligations1 | Asset lives | | — | | | 7,065 | | | — | | | 8,462 | | Asset Retirement Obligations1 | Asset lives | | — | | | 1,098 | | | — | | | 742 | |
| ISO Cost Recovery Trackers1 | ISO Cost Recovery Trackers1 | Up to 2 years | | 270 | | | 1,027 | | | 1,079 | | | 867 | | ISO Cost Recovery Trackers1 | Up to 2 years | | 220 | | | 950 | | | — | | | 1,342 | |
Unrecovered Project Costs1 | Unrecovered Project Costs1 | Up to 3 years | | 3,227 | | | 1,456 | | | 361 | | | 2,989 | | Unrecovered Project Costs1 | Up to 5 years | | 1,086 | | | 1,456 | | | 2,136 | | | 1,455 | |
Deferred Rate Case Expenses1 | Deferred Rate Case Expenses1 | Various | | 637 | | | 936 | | | 360 | | | 230 | | Deferred Rate Case Expenses1 | Various | | 542 | | | 1,037 | | | 607 | | | 1,131 | |
Debt Reacquisition Premiums1 | Debt Reacquisition Premiums1 | Up to 12 years | | 117 | | | 262 | | | 192 | | | 341 | | Debt Reacquisition Premiums1 | Up to 11 years | | 68 | | | 234 | | | 100 | | | 240 | |
Fuel Clause Adjustments1 | | Fuel Clause Adjustments1 | Up to 1 year | | 2,767 | | | — | | | 4,819 | | | — | |
Other1 | Other1 | Various | | — | | | 77 | | | — | | | 62 | | Other1 | Various | | 16 | | | 262 | | | — | | | 73 | |
Total Regulatory Assets | Total Regulatory Assets | | $ | 22,517 | | | $ | 158,515 | | | $ | 21,900 | | | $ | 168,395 | | Total Regulatory Assets | | $ | 21,770 | | | $ | 124,413 | | | $ | 27,342 | | | $ | 125,508 | |
Regulatory Liabilities | Regulatory Liabilities | | Regulatory Liabilities | |
Deferred Income Taxes | Deferred Income Taxes | Asset lives | | $ | — | | | $ | 130,555 | | | $ | — | | | $ | 134,719 | | Deferred Income Taxes | Asset lives | | $ | — | | | $ | 128,042 | | | $ | — | | | $ | 129,437 | |
Plant Removal Obligations | Plant Removal Obligations | Asset lives | | 5,893 | | | 96,734 | | | — | | | 98,707 | | Plant Removal Obligations | Asset lives | | 8,561 | | | 101,850 | | | 8,306 | | | 101,595 | |
Fuel Clause Adjustments | Fuel Clause Adjustments | Up to 1 year | | 5,692 | | | — | | | 10,947 | | | — | | Fuel Clause Adjustments | Up to 1 year | | 5,386 | | | — | | | 1,554 | | | — | |
Alternative Revenue Program Riders | Alternative Revenue Program Riders | Various | | 5,265 | | | 2,507 | | | 3,581 | | | 470 | | Alternative Revenue Program Riders | Various | | 6,215 | | | 3,986 | | | 5,772 | | | 3,336 | |
Pension and Other Postretirement Benefit Plans | Pension and Other Postretirement Benefit Plans | Up to 1 year | | 1,959 | | | — | | | 1,959 | | | — | | Pension and Other Postretirement Benefit Plans | Up to 1 year | | 2,603 | | | — | | | 2,603 | | | — | |
| Derivative Instruments | Derivative Instruments | Various | | 6,136 | | | 787 | | | — | | | — | | Derivative Instruments | Various | | 4,179 | | | — | | | 6,214 | | | — | |
Other | Other | Various | | 378 | | | 150 | | | 176 | | | 77 | | Other | Various | | 267 | | | 111 | | | 395 | | | 62 | |
Total Regulatory Liabilities | Total Regulatory Liabilities | | $ | 25,323 | | | $ | 230,733 | | | $ | 16,663 | | | $ | 233,973 | | Total Regulatory Liabilities | | $ | 27,211 | | | $ | 233,989 | | | $ | 24,844 | | | $ | 234,430 | |
| 1Costs subject to recovery without a rate of return. | 1Costs subject to recovery without a rate of return. | | 1Costs subject to recovery without a rate of return. | |
2Amount eligible for recovery includes an incentive or rate of return. | 2Amount eligible for recovery includes an incentive or rate of return. | | 2Amount eligible for recovery includes an incentive or rate of return. | |
6. Short-Term and Long-Term Borrowings
The following is a summary of our outstanding shortshort- and long-term borrowings by borrower, Otter Tail Corporation (OTC)OTC or Otter Tail Power Company (OTP), as of September 30, 2021March 31, 2022 and December 31, 2020:2021:
Short-Term Debt
The following is a summary of our lines of credit as of September 30, 2021March 31, 2022 and December 31, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | September 30, 2021 | | December 31, 2020 |
(in thousands) | Line Limit | | Amount Outstanding | | Letters of Credit | | Amount Available | | Amount Available |
| | | | | | | | | |
OTC Credit Agreement | $ | 170,000 | | | $ | 36,624 | | | $ | — | | | $ | 133,376 | | | $ | 104,834 | |
OTP Credit Agreement | 170,000 | | | 61,233 | | | 13,159 | | | 95,608 | | | 140,068 | |
Total | $ | 340,000 | | | $ | 97,857 | | | $ | 13,159 | | | $ | 228,984 | | | $ | 244,902 | |
On September 30, 2021, OTC entered into a Fourth Amended and Restated Credit Agreement (the OTC Credit Agreement) and OTP entered into a Third Amended and Restated Credit Agreement (the OTP Credit Agreement) amending and restating the previously existing credit agreements to extend the maturity date of each agreement to September 30, 2026. The agreements both provide for $170 million revolving lines of credit to support operations, and borrowings which may be used for working capital needs and other capital requirements, to refinance certain indebtedness and for the issuance of letters of credit in an aggregate not to exceed $40 million for the OTC Credit Agreement and $50 million for the OTP Credit Agreement. Each credit facility includes an accordion provision allowing the borrower to increase the available borrowing capacity, subject to certain terms and conditions. The borrowing capacity of the OTC Credit Agreement can be increased to $290 million and the OTP Credit Agreement can be increased to $250 million. Borrowings under each credit facility are subject to a variable rate of interest on outstanding balances and a commitment fee is applied based on the average unused amount available to be drawn under the respective facility. The variable rate of interest to be charged is based on either LIBOR or a Base Rate, as defined in the agreement, selected by the borrower at the time of an advance, subject to the conditions of each agreement, plus an applicable credit spread. The credit spread ranges from 0.125% to 2.00% for the OTC Credit Agreement and from zero to 1.75% for the OTP Credit Agreement, depending on the benchmark interest rate selected and is subject to adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2022 | | December 31, 2021 |
(in thousands) | Line Limit | | Amount Outstanding | | Letters of Credit | | Amount Available | | Amount Available |
| | | | | | | | | |
OTC Credit Agreement | $ | 170,000 | | | $ | 43,281 | | | $ | — | | | $ | 126,719 | | | $ | 147,363 | |
OTP Credit Agreement | 170,000 | | | 54,489 | | | 7,844 | | | 107,667 | | | 88,315 | |
Total | $ | 340,000 | | | $ | 97,770 | | | $ | 7,844 | | | $ | 234,386 | | | $ | 235,678 | |
based on the credit ratings of the borrower. As of September 30, 2021, the weighted-average LIBOR Rate based interest rate was 1.59% and 1.33% under the OTC Credit Agreement and OTP Credit Agreement, respectively.
Each credit facility contains a number of restrictions on the borrower, including restrictions on their ability to merge, sell assets, make investments, create or incur liens on assets, guarantee the obligations of any other party and engage in transactions with related parties. The agreements also contain certain financial and non-financial covenants and defined events of default, and include provisions for the replacement of the LIBOR benchmark rate in the event that LIBOR is no longer available.
Long-Term Debt
The following is a summary of outstanding long-term debt by borrower as of September 30, 2021March 31, 2022 and December 31, 2020:2021:
| | | (in thousands) | | (in thousands) |
Entity | Entity | | Debt Instrument | | Rate | | Maturity | | September 30, 2021 | | December 31, 2020 | Entity | | Debt Instrument | | Rate | | Maturity | | March 31, 2022 | | December 31, 2021 |
| OTC | OTC | | Guaranteed Senior Notes | | 3.55% | | 12/15/26 | | $ | 80,000 | | | $ | 80,000 | | OTC | | Guaranteed Senior Notes | | 3.55% | | 12/15/26 | | $ | 80,000 | | | $ | 80,000 | |
OTP | 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 | 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 | 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 | 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 | 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 | 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 | OTP | | Series 2020B Senior Unsecured Notes | | 3.22% | | 08/20/30 | | 40,000 | | | 40,000 | | OTP | | Series 2021A Senior Unsecured Notes | | 2.74% | | 11/29/31 | | 40,000 | | | 40,000 | |
OTP | OTP | | Series 2007D Senior Unsecured Notes | | 6.47% | | 08/20/37 | | 50,000 | | | 50,000 | | OTP | | Series 2007D Senior Unsecured Notes | | 6.47% | | 08/20/37 | | 50,000 | | | 50,000 | |
OTP | OTP | | Series 2019B Senior Unsecured Notes | | 3.52% | | 10/10/39 | | 26,000 | | | 26,000 | | OTP | | Series 2019B Senior Unsecured Notes | | 3.52% | | 10/10/39 | | 26,000 | | | 26,000 | |
OTP | OTP | | Series 2020C Senior Unsecured Notes | | 3.62% | | 02/25/40 | | 10,000 | | | 10,000 | | OTP | | Series 2020C Senior Unsecured Notes | | 3.62% | | 02/25/40 | | 10,000 | | | 10,000 | |
OTP | OTP | | Series 2013B Senior Unsecured Notes | | 5.47% | | 02/27/44 | | 90,000 | | | 90,000 | | OTP | | Series 2013B Senior Unsecured Notes | | 5.47% | | 02/27/44 | | 90,000 | | | 90,000 | |
OTP | OTP | | Series 2018A Senior Unsecured Notes | | 4.07% | | 02/07/48 | | 100,000 | | | 100,000 | | OTP | | Series 2018A Senior Unsecured Notes | | 4.07% | | 02/07/48 | | 100,000 | | | 100,000 | |
OTP | OTP | | Series 2019C Senior Unsecured Notes | | 3.82% | | 10/10/49 | | 64,000 | | | 64,000 | | OTP | | Series 2019C Senior Unsecured Notes | | 3.82% | | 10/10/49 | | 64,000 | | | 64,000 | |
OTP | OTP | | Series 2020D Senior Unsecured Notes | | 3.92% | | 02/25/50 | | 15,000 | | | 15,000 | | OTP | | Series 2020D Senior Unsecured Notes | | 3.92% | | 02/25/50 | | 15,000 | | | 15,000 | |
OTC | | PACE Note | | 2.54% | | 03/18/21 | | — | | | 169 | | |
OTP | | OTP | | Series 2021B Senior Unsecured Notes | | 3.69% | | 11/29/51 | | 100,000 | | | 100,000 | |
Total | Total | | $ | 767,000 | | | $ | 767,169 | | Total | | $ | 767,000 | | | $ | 767,000 | |
Less: | Less: | Current Maturities Net of Unamortized Debt Issuance Costs | | 169,962 | | | 140,087 | | Less: | Current Maturities, Net of Unamortized Debt Issuance Costs | | 29,990 | | | 29,983 | |
| | Unamortized Long-Term Debt Issuance Costs | | | 2,419 | | | 2,650 | | | Unamortized Long-Term Debt Issuance Costs | | | 2,936 | | | 3,003 | |
Total Long-Term Debt Net of Unamortized Debt Issuance Costs | | $ | 594,619 | | | $ | 624,432 | | |
Total Long-Term Debt, Net of Unamortized Debt Issuance Costs | | Total Long-Term Debt, Net of Unamortized Debt Issuance Costs | | $ | 734,074 | | | $ | 734,014 | |
On June 10, 2021, OTP entered into a Note Purchase Agreement pursuant to which OTP agreed to issue, in a private placement transaction, $230$230.0 million aggregate principal amount of senior unsecured notes consisting of (a) $40$40.0 million of 2.74% Series 2021A Senior Unsecured Notes due November 29, 2031, (b) $100$100.0 million of 3.69% Series 2021B Senior Unsecured Notes due November 29, 2051 and (c) $90$90.0 million of 3.77% Series 2022A Senior Unsecured Notes due May 20, 2052. AsDuring the year ended December 31, 2021, OTP issued its Series 2021A and Series 2021B notes for aggregate proceeds of September 30, 2021, there$140.0 million, which were no amounts outstanding. The funding ofused to repay the notes will occur in 2 issuances, $140 million in November 2021 and $90 million in May 2022.Series 2011A notes. The issuance of the Series 2022A notes is scheduled to close, subject to the satisfaction of certain customary conditions to closing.closing, in May 2022.
Financial Covenants
Certain of OTC's and OTP's short-termshort- 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 September 30, 2021,March 31, 2022, OTC and OTP were in compliance with these financial covenants.
7. Employee Postretirement Benefits
Pension Plan and Other Postretirement Benefits
PensionThe Company sponsors a noncontributory funded pension plan (the "Pension Plan"), an unfunded, nonqualified Executive Survivor and Supplemental Retirement Plan, both accounted for as defined benefit pension plans, and a postretirement healthcare plan accounted for as an other postretirement benefit plan.
ComponentsThe following table includes the components of net periodic pension benefit cost of our defined benefit pension plans and other postretirement benefits for the three and nine months ended September 30, 2021March 31, 2022 and 2020 are as follows:2021:
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| | | | | | | |
Service Cost–Benefit Earned During the Period | $ | 1,866 | | | $ | 1,655 | | | $ | 5,597 | | | $ | 4,966 | |
Interest Cost on Projected Benefit Obligation | 2,915 | | | 3,264 | | | 8,745 | | | 9,790 | |
Expected Return on Assets | (5,590) | | | (5,506) | | | (16,769) | | | (16,516) | |
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Amortization of Net Actuarial Loss: | | | | | | | |
From Regulatory Asset | 2,660 | | | 2,231 | | | 7,981 | | | 6,693 | |
From Other Comprehensive Income | 68 | | | 55 | | | 204 | | | 165 | |
Net Periodic Pension Cost | $ | 1,919 | | | $ | 1,699 | | | $ | 5,758 | | | $ | 5,098 | |
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| Pension Benefits (Pension Plan) | | Pension Benefits (ESSRP) | | Postretirement Benefits |
(in thousands) | 2022 | | 2021 | | 2022 | | 2021 | | 2022 | | 2021 |
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Service Cost | $ | 1,644 | | | $ | 1,866 | | | $ | 49 | | | $ | 47 | | | $ | 335 | | | $ | 430 | |
Interest Cost | 3,086 | | | 2,915 | | | 335 | | | 307 | | | 510 | | | 473 | |
Expected Return on Assets | (5,921) | | | (5,590) | | | — | | | — | | | — | | | — | |
Amortization of Prior Service Cost | — | | | — | | | — | | | — | | | (1,433) | | | (1,433) | |
Amortization of Net Actuarial Loss | 1,966 | | | 2,728 | | | 142 | | | 155 | | | 766 | | | 943 | |
Net Periodic Benefit Cost | $ | 775 | | | $ | 1,919 | | | $ | 526 | | | $ | 509 | | | $ | 178 | | | $ | 413 | |
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The following table includes the impact of regulation on the recognition of periodic benefit cost arising from pension and other postretirement benefits for the three months ended March 31, 2022 and 2021:
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(in thousands) | 2022 | | 2021 |
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Net Periodic Benefit Cost | $ | 1,479 | | | $ | 2,841 | |
Net Amount Amortized (Deferred) Due to the Effect of Regulation | 527 | | | (115) | |
Net Periodic Benefit Cost Recognized | $ | 2,006 | | | $ | 2,726 | |
We had no minimum funding requirementrequirements for our pension plan or any other postretirement benefit plans as of December 31, 20202021, but made a discretionary plan contribution of $10.0$20.0 million to our pension plan in January 2021.February 2022.
Executive Survivor and Supplemental Retirement Plan (ESSRP)
Components of net periodic pension benefit cost for the three and nine months ended September 30, 2021 and 2020 are as follows:
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
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Service Cost–Benefit Earned During the Period | $ | 47 | | | $ | 45 | | | $ | 140 | | | $ | 134 | |
Interest Cost on Projected Benefit Obligation | 307 | | | 362 | | | 921 | | | 1,086 | |
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Amortization of Net Actuarial Loss: | | | | | | | |
From Regulatory Asset | 30 | | | 24 | | | 92 | | | 71 | |
From Other Comprehensive Income | 124 | | | 85 | | | 373 | | | 256 | |
Net Periodic Pension Cost | $ | 508 | | | $ | 516 | | | $ | 1,526 | | | $ | 1,547 | |
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Other Postretirement Benefits
Components of net periodic postretirement benefit cost for the three and nine months ended September 30, 2021 and 2020 are as follows:
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
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Service Cost–Benefit Earned During the Period | $ | 430 | | | $ | 461 | | | $ | 1,291 | | | $ | 1,385 | |
Interest Cost on Projected Benefit Obligation | 472 | | | 598 | | | 1,418 | | | 1,795 | |
Amortization of Prior Service Cost | | | | | | | |
From Regulatory Asset | (1,397) | | | (1,169) | | | (4,192) | | | (3,508) | |
From Other Comprehensive Income | (35) | | | (28) | | | (107) | | | (86) | |
Amortization of Net Actuarial Loss | | | | | | | |
From Regulatory Asset | 919 | | | 1,051 | | | 2,759 | | | 3,154 | |
From Other Comprehensive Income | 24 | | | 26 | | | 71 | | | 78 | |
Net Periodic Postretirement Benefit Cost | $ | 413 | | | $ | 939 | | | $ | 1,240 | | | $ | 2,818 | |
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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 and nine months ended September 30,March 31, 2022 and 2021 and 2020 is as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
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Federal Statutory Rate | 21.0 | % | | 21.0 | % | | 21.0 | % | | 21.0 | % |
Increases (Decreases) in Tax from: | | | | | | | |
State Taxes on Income, Net of Federal Tax | 5.0 | | | 5.0 | | | 5.0 | | | 5.0 | |
Production Tax Credits (PTCs) | (5.0) | | | — | | | (6.0) | | | — | |
Amortization of Excess Deferred Income Taxes | (1.6) | | | (2.9) | | | (2.0) | | | (3.4) | |
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North Dakota Wind Tax Credit Amortization, Net of Federal Tax | (0.2) | | | (0.6) | | | (0.3) | | | (0.8) | |
Excess Tax Deduction on Stock Awards | — | | | 0.3 | | | — | | | (0.4) | |
Allowance for Equity Funds Used During Construction | (0.1) | | | (0.7) | | | (0.1) | | | (0.8) | |
Other, Net | (0.8) | | | (1.9) | | | (0.7) | | | (1.2) | |
Effective Tax Rate | 18.3 | % | | 20.2 | % | | 16.9 | % | | 19.4 | % |
We began generating PTCs from our Merricourt wind farm placed in service in the fourth quarter of 2020. No PTCs were generated during the nine months ended September 30, 2020. Income tax benefits arising from PTCs are offset by corresponding operating revenue reductions. | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | | | |
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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) | (4.4) | | | (7.6) | | | | | |
Amortization of Excess Deferred Income Taxes | (1.3) | | | (2.9) | | | | | |
Excess Tax Deduction on Stock Awards | (0.5) | | | (0.1) | | | | | |
North Dakota Wind Tax Credit Amortization, Net of Federal Tax | (0.2) | | | (0.4) | | | | | |
Corporate-Owned Life Insurance | 0.2 | | | (0.5) | | | | | |
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Other, Net | (0.1) | | | 0.3 | | | | | |
Effective Tax Rate | 19.7 | % | | 14.8 | % | | | | |
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.
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. Certain 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 FERCFederal Energy Regulatory Commission (FERC) seeking to reduce the ROEreturn on equity (ROE) component of the transmission rates that MISOMidcontinent 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. The November 2020 opinion is subject to judicial review. We have deferred recognition and recorded a refund liability of $3.0$2.4 million as of September 30, 2021.March 31, 2022. This refund liability reflects our best estimate of required refunds to customers once all regulatory and judicial proceedings are completed.
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 EPAEnvironmental 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. In September 2021, the North Dakota Department of Environmental Quality (NDDEQ) made public a draft of its state implementation plan. The plan concluded it is not reasonable to require additional emission controls during this planning period. In January 2022, prior to the submission to the EPA by the NDDEQ, the EPA provided preliminary comments on the draft North Dakota state
implementation plan in which it expressed disagreement with the NDDEQ's recommendation to forgo additional emission controls. Following a consultation and public comment period, and any subsequent modifications to the plan, the NDDEQ will submit its state implementation plan to the EPA for approval.
We cannot predict with certainty the impact the state implementation plan may have on our business until the state implementation 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 anthe 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 from customersin rates would be subject to regulatory approval.
Westmoreland Coal Company (Westmoreland) Arbitration. In December 2018, insurers for Westmoreland, Westmoreland and its affiliated companies filed an arbitration demand against the co-owners of Coyote Station, including OTP, a 35% co-owner. The claimant insurers are pursuing recovery in the amount of $5.5 million, plus prejudgment interest to recover business interruption insurance proceeds paid to Westmoreland or its affiliates arising from a boiler feed pump explosion in December 2014 at the facility. The explosion and ensuing repairs reduced the amount of coal purchased from a Westmoreland affiliate under an existing coal purchase agreement. The Westmoreland insurers claim the co-owners breached the minimum purchase obligations in the coal purchase agreement. As of September 30, 2021, we have recorded an estimated liability for losses to be incurred related to this matter based upon the most recent information available, however, ultimate losses could be in excess of the amount recorded. Any losses incurred from this matter could be eligible for recovery through typical cost recovery processes of our electric utility business. The potential cost recovery would be subject to regulatory approval.
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 September 30, 2021,March 31, 2022, other than those discussed above, will not be material.
10. Stockholders' Equity
Registration Statements
On May 3, 2021, we filed a shelf registration statement with the Securities and Exchange Commission (SEC)SEC under which we may offer for sale, from time to time, either separately or together in any combination, equity, debt or other securities described in the shelf registration statement. No new debt or equity has been issued pursuant to the registration statement. The registration statement expires in May 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 a Share Purchase Plan, which provides shareholders, retail customers of OTP and other interested investors a methodmethods of purchasing our common shares, by reinvesting their dividends and/or making optional cash investments. Shares purchased under the plan may be new issuenewly issued common shares or common shares purchased on the open market. During the three months ended March 31, 2022, we issued 36,104 shares under this program. 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 March 31, 2022, there was 1,348,716 shares available for purchase or issuance under the plan. The registration statement expires in May 2024.
Dividend Restrictions
Otter Tail CorporationOTC 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 September 30, 2021,March 31, 2022, 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 MPUCMinnesota Public Utilities Commission (MPUC) indirectly limits the amount of dividends OTP can pay to the Company by requiring an equity-to-total-capitalization ratio between 47.5%48.0% and 58.1%58.7% based on OTP’s 2020most recent capital structure petition effective by order of the MPUC on July 15, 2020.January 26, 2022. As of September 30, 2021,March 31, 2022, OTP’s equity-to-total-capitalization ratio including short-term debt was 52.6%53.2% and its net assets restricted from distribution totaled approximately $674.9$682.0 million. Under the 2020MPUC order relating to the Company's 2021 capital structure petition, total capitalization for OTP cannot exceed $1.7 billion.
11. Accumulated Other Comprehensive Income (Loss)
The following shows the changes in accumulated other comprehensive loss for the three months ended March 31, 2022 and 2021: | | | | | | | | | | | | | | | | | |
(in thousands) | Pension and Other Postretirement Benefits | | Net Unrealized Gain (Losses) on Available-for-Sale Securities | | Total |
Balance, December 31, 2021 | $ | (6,537) | | | $ | 13 | | | $ | (6,524) | |
Other Comprehensive Loss Before Reclassifications, net of tax | — | | | (231) | | | (231) | |
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | (190) | | (1) | — | | (2) | (190) | |
Total Other Comprehensive Income (Loss) | (190) | | | (231) | | | (421) | |
Balance, March 31, 2022 | $ | (6,727) | | | $ | (218) | | | $ | (6,945) | |
| | | | | |
Balance, December 31, 2020 | $ | (8,716) | | | $ | 209 | | | $ | (8,507) | |
Other Comprehensive Loss Before Reclassifications, net of tax | — | | | (32) | | | (32) | |
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | 150 | | (1) | (3) | | (2) | 147 | |
Total Other Comprehensive Income (Loss) | 150 | | | (35) | | | 115 | |
Balance, March 31, 2021 | $ | (8,566) | | | $ | 174 | | | $ | (8,392) | |
(1) Included in the computation of net periodic pension and other postretirement benefit costs. See Note 7. | | | | | |
(2) Included in other income (expense), net on the accompanying consolidated statements of income. | | | | | |
12. Share-Based Payments
Stock Compensation Expense
Stock-based compensation expense arising from our employee stock purchase plan and share-based compensation plans, recognized within operating expenses in the consolidated statements of income, amounted to $0.8$4.9 million and $1.3$4.2 million for the three months ended September 30,March 31, 2022 and 2021, and 2020, respectively, and $6.4 million and $5.3 million for the nine months ended September 30, 2021 and 2020, respectively.
Restricted Stock Awards. We grant restricted stock awards to members of our Board of Directors and restricted stock units to ourcertain key employees. The awards vest, depending on award type and recipient, either ratably over periods of three andor four years or cliff vest after four years. Vesting is accelerated in certain circumstances, including on retirement. Restricted stock awards granted to members of the Board of Directors are issued and outstanding on grant and carry the same voting and dividend rights of unrestricted outstanding common stock. Restricted stock units are not issued or outstanding on 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 ninethree months ended September 30, 2021:March 31, 2022: | | | Shares | | Weighted Average Grant-Date Fair Value | | Shares | | Weighted Average Grant-Date Fair Value |
| Nonvested, January 1, 2021 | 128,664 | | | $ | 44.30 | | |
Nonvested, January 1, 2022 | | Nonvested, January 1, 2022 | 138,093 | | | $ | 44.48 | |
Granted | Granted | 57,650 | | | 43.10 | | Granted | 15,842 | | | 61.39 | |
Vested | Vested | (47,646) | | | 42.98 | | Vested | (18,969) | | | 46.49 | |
Forfeited | Forfeited | (2,075) | | | 40.95 | | Forfeited | — | | | — | |
Nonvested, September 30, 2021 | 136,593 | | | $ | 44.30 | | |
Nonvested, March 31, 2022 | | Nonvested, March 31, 2022 | 134,966 | | | $ | 46.18 | |
The fair value of vested awards was $2.1$1.2 million and $2.8$0.7 million during the ninethree months ended September 30,March 31, 2022 and 2021, and 2020.respectively.
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-yearthree 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.
The grant date fair value of stock performance awards granted during the ninethree months ended September 30,March 31, 2022 and 2021 and 2020 was determined using a Monte Carlo fair value simulation model incorporating the following assumptions:
| | | 2021 | | 2020 | | 2022 | | 2021 |
| Risk-free interest rate | Risk-free interest rate | 0.18 | % | | 1.42 | % | Risk-free interest rate | 1.52 | % | | 0.18 | % |
Expected term (in years) | Expected term (in years) | 3.00 | | 3.00 | Expected term (in years) | 3.00 | | 3.00 |
Expected volatility | Expected volatility | 32.00 | % | | 19.00 | % | Expected volatility | 32.00 | % | | 32.00 | % |
Dividend yield | Dividend yield | 3.60 | % | | 2.80 | % | Dividend yield | 2.90 | % | | 3.60 | % |
|
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 ninethree months ended September 30, 2021March 31, 2022 (share amounts reflect awards at target): | | | Shares | | Weighted Average Grant-Date Fair Value | | Shares | | Weighted Average Grant-Date Fair Value |
| Nonvested, January 1, 2021 | 164,600 | | | $ | 42.32 | | |
Nonvested, January 1, 2022 | | Nonvested, January 1, 2022 | 189,600 | | | $ | 42.54 | |
Granted | Granted | 79,000 | | | 38.34 | | Granted | 55,800 | | | 54.91 | |
Vested | Vested | (54,000) | | | 35.73 | | Vested | (55,600) | | | 43.30 | |
Forfeited | Forfeited | — | | | — | | Forfeited | — | | | — | |
Nonvested, September 30, 2021 | 189,600 | | | $ | 42.54 | | |
Nonvested, March 31, 2022 | | Nonvested, March 31, 2022 | 189,800 | | | $ | 45.95 | |
The fair value of vested awards was $2.5$5.1 million and $3.4$2.5 million during the ninethree months ended September 30,March 31, 2022 and 2021, and 2020.respectively.
12.13. 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 and nine months ended September 30, 2021March 31, 2022 and 2020:2021:
| | | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended March 31, | |
(in thousands) | (in thousands) | 2021 | | 2020 | | 2021 | | 2020 | (in thousands) | 2022 | | 2021 | |
| Weighted Average Common Shares Outstanding – Basic | Weighted Average Common Shares Outstanding – Basic | 41,504 | | | 40,914 | | | 41,487 | | | 40,548 | | Weighted Average Common Shares Outstanding – Basic | 41,548 | | | 41,455 | | |
Effect of Dilutive Securities: | Effect of Dilutive Securities: | | Effect of Dilutive Securities: | | |
Stock Performance Awards | Stock Performance Awards | 262 | | | 98 | | | 209 | | | 107 | | Stock Performance Awards | 219 | | | 143 | | |
Stock Awards | 88 | | | 49 | | | 82 | | | 53 | | |
Restricted Stock Awards | | Restricted Stock Awards | 102 | | | 85 | | |
Employee Stock Purchase Plan Shares and Other | Employee Stock Purchase Plan Shares and Other | 15 | | | 17 | | | 17 | | | 25 | | Employee Stock Purchase Plan Shares and Other | 2 | | | 17 | | |
Dilutive Effect of Potential Common Shares | Dilutive Effect of Potential Common Shares | 365 | | | 164 | | | 308 | | | 185 | | Dilutive Effect of Potential Common Shares | 323 | | | 245 | | |
Weighted Average Common Shares Outstanding – Diluted | Weighted Average Common Shares Outstanding – Diluted | 41,869 | | | 41,078 | | | 41,795 | | | 40,733 | | Weighted Average Common Shares Outstanding – Diluted | 41,871 | | | 41,700 | | |
The amount of shares excluded from diluted weighted-average common shares outstanding because such shares were anti-dilutive was not material for the three and nine months ended September 30, 2021March 31, 2022 and 2020.2021.
13.14. Derivative Instruments
OTP enters into derivative instruments to manage its exposure to future price variability and reduce volatility in prices for our retail customers. These derivative instruments are not designated as qualifying hedging transactions but provide for an economic hedge against future price variability. The instruments are recorded at fair value on the consolidated balance sheets, with changes in fair value recorded in the consolidated statements of income. However, insheets. In accordance with rate-making and cost recovery processes, we recognize a regulatory asset or liability to defer losses or gains from derivative activity until settlement of the associated derivative instrument.
As of September 30, 2021,March 31, 2022, OTP had outstanding pay-fixed, receive-variable swap agreements with an aggregate notional amount of 356,200156,800 megawatt-hours of electricity, which will be settled periodically through 2022.throughout 2022 and 2023. As of September 30, 2021,March 31, 2022, the aggregate fair value of these contractsderivative instruments was $6.9$4.2 million, of which $6.1 million is included in other current assets, and $0.8$0.2 million, which is included in other noncurrent assetsliabilities, on the consolidated balance sheets. As of December 31, 2021, the fair value of these types of derivative contracts was $6.2 million, which is included in other current assets. During the three months ended March 31, 2022, contracts matured and were settled in an aggregate amount of $2.8 million.
15. Fair Value Measurements
The following tables present our assets and liabilities measured at fair value on a recurring basis as of September 30, 2021March 31, 2022 and December 31, 20202021 classified by the input method used to measure fair value: | | | Level 1 | | Level 2 | | Level 3 | | Level 1 | | Level 2 | | Level 3 |
| September 30, 2021 | | |
March 31, 2022 | | March 31, 2022 | |
Assets: | | Assets: | |
Investments: | Investments: | | Investments: | |
Money Market Funds | Money Market Funds | $ | 953 | | | $ | — | | | $ | — | | Money Market Funds | $ | 1,893 | | | $ | — | | | $ | — | |
Mutual Funds | Mutual Funds | 5,170 | | | — | | | — | | Mutual Funds | 6,285 | | | — | | | — | |
Corporate Debt Securities | Corporate Debt Securities | — | | | 2,377 | | | — | | Corporate Debt Securities | — | | | 1,367 | | | — | |
Government-Backed and Government-Sponsored Enterprises’ Debt Securities | Government-Backed and Government-Sponsored Enterprises’ Debt Securities | — | | | 6,831 | | | — | | Government-Backed and Government-Sponsored Enterprises’ Debt Securities | — | | | 7,592 | | | — | |
Derivative Instruments | Derivative Instruments | — | | | 6,923 | | | — | | Derivative Instruments | — | | | 4,179 | | | — | |
Total Assets | Total Assets | $ | 6,123 | | | $ | 16,131 | | | $ | — | | Total Assets | $ | 8,178 | | | $ | 13,138 | | | $ | — | |
December 31, 2020 | | |
Liabilities: | | Liabilities: | |
Derivative Instruments | | Derivative Instruments | $ | — | | | $ | 198 | | | $ | — | |
Total Liabilities | | Total Liabilities | $ | — | | | $ | 198 | | | $ | — | |
| December 31, 2021 | | December 31, 2021 | |
Assets: | | Assets: | |
Investments: | Investments: | | Investments: | |
Money Market Funds | Money Market Funds | $ | 4,075 | | | $ | — | | | $ | — | | Money Market Funds | $ | 949 | | | $ | — | | | $ | — | |
Mutual Funds | Mutual Funds | 1,662 | | | — | | | — | | Mutual Funds | 5,432 | | | — | | | — | |
Corporate Debt Securities | Corporate Debt Securities | — | | | 2,627 | | | — | | Corporate Debt Securities | — | | | 1,333 | | | — | |
Government-Backed and Government-Sponsored Enterprises’ Debt Securities | Government-Backed and Government-Sponsored Enterprises’ Debt Securities | — | | | 6,633 | | | — | | Government-Backed and Government-Sponsored Enterprises’ Debt Securities | — | | | 7,869 | | | — | |
Derivative Instruments | | Derivative Instruments | — | | | 6,214 | | | — | |
Total Assets | Total Assets | $ | 5,737 | | | $ | 9,260 | | | $ | — | | Total Assets | $ | 6,381 | | | $ | 15,416 | | | $ | — | |
Level 1 fair value measurements are based on quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
The level 2 fair value measurements for government-backed and government-sponsored enterprises and corporate debt securities are determined 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.
The level 2 fair value measurements for derivative instruments are determined by using inputs such as forward electric commodity prices, adjusted for location differences. These inputs are observable in the marketplace throughout the full term of the instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace.
In addition to assets recorded at fair value on a recurring basis, we also hold financial instruments that are not recorded at fair value in the consolidated balance sheets but for which disclosure of the fair value of these financial instruments is provided. The following reflects the carrying value and estimated fair value of these assets and liabilities as of September 30, 2021March 31, 2022 and December 31, 2020:2021:
| | | September 30, 2021 | | December 31, 2020 | | March 31, 2022 | | December 31, 2021 |
(in thousands) | (in thousands) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | (in thousands) | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| Assets: | Assets: | | Assets: | |
Cash and Cash Equivalents | Cash and Cash Equivalents | $ | 1,272 | | | $ | 1,272 | | | $ | 1,163 | | | $ | 1,163 | | Cash and Cash Equivalents | $ | 1,371 | | | $ | 1,371 | | | $ | 1,537 | | | $ | 1,537 | |
Total | Total | 1,272 | | | 1,272 | | | 1,163 | | | 1,163 | | Total | 1,371 | | | 1,371 | | | 1,537 | | | 1,537 | |
Liabilities: | Liabilities: | | Liabilities: | |
Short-Term Debt | Short-Term Debt | 97,857 | | | 97,857 | | | 80,997 | | | 80,997 | | Short-Term Debt | 97,770 | | | 97,770 | | | 91,163 | | | 91,163 | |
Long-Term Debt | Long-Term Debt | 764,581 | | | 873,632 | | | 764,519 | | | 858,455 | | Long-Term Debt | 764,064 | | | 781,531 | | | 763,997 | | | 878,272 | |
Total | Total | $ | 862,438 | | | $ | 971,489 | | | $ | 845,516 | | | $ | 939,452 | | Total | $ | 861,834 | | | $ | 879,301 | | | $ | 855,160 | | | $ | 969,435 | |
|
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 Quarterly Report on Form 10-Q, and our annual financial statements and the related notes along with the discussion and analysis of our financial condition and results of operations contained in our Annual Report on Form 10-K for the year ended December 31, 2020.2021. 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)COVID-19 and its impact on our businesses, employees, customers, construction contractors and vendors.business. 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 employees, customers, vendors and other business partners, and communities employees, construction contractors, customersin which we live and business operations.work.
Beginning in March 2020, COVID-19 andWhile 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, and have continued to increase in 2021, due to increased demand and supply disruptions.
The impact of COVID-19 and the resulting macroeconomic conditions ondid not materially impact our business and financialoperating results began to ease in 2021 or the first quarter of 2021 and continued to do so through the third quarter of 2021. However,2022, uncertainty remains regarding the magnitude and duration of the pandemic and the resulting potential future financial effects. Increased infection rates and any future responses to mitigate the spread of the virus, including any potential vaccination mandates that would apply to our employees, could impact our business and our financial results in future periods.
Recently, the Department of Labor’s Occupational Safety and Health Administration (“OSHA”) drafted an emergency temporary standard requiring all employers with at least 100 employees to ensure their employees are fully vaccinated or require weekly testing for unvaccinated employees. On October 12, 2021, OSHA sent a draft of the standard to the White House regulatory office for approval and it is anticipated to be acted upon soon. Additionally, President Biden issued an executive order on September 9, 2021, which requires employees of certain federal contractors and covered subcontractors to be vaccinated, with no weekly testing option, unless they have an approved disability or religious exemption. We expect one, or both, of these new regulations will apply to at least some, and possibly all, of our businesses. The exact impact the new regulations could have on our companies is uncertain at this time. However, it could result in employee attrition, difficulty fulfilling future labor needs, additional costs related to compliance and may have an adverse effect on our future operating results.
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.
RESOURCE MATERIAL AVAILABILITY AND PRICING
Supply shortagesThe cost of steel and PVC resin, two key material inputs to our Manufacturing and Plastics segments, respectively, havesignificantly impacted our operating results in 2021.the first quarter of 2022.
Steel supply shortages arose primarily due to steel mill capacity reductionsprices increased rapidly throughout 2021 and remained elevated in 2020 in response to lower steel demand due to COVID-19. Production and availabilitythe first quarter of steel have begun to improve as steel mill facilities have increased production capacities in response to strong market demand for steel products. The combination of steel supply shortages and strong demand has led to significantly increased steel prices.2022. The increase in steel prices has led to increased sale prices for our products at BTD Manufacturing, Inc. (BTD), our metal fabrication business within our Manufacturing segment, as we passpassed along material cost increases to our customers. In addition, limited steel availability has led to increased complexity in managing our business, including our production schedules, and other increased costs. We anticipate increasedConsistent with steel prices, will continuescrap metal prices also increased throughout the remainder of 2021 and into 2022.
Resin shortages initially arose as a result of production plant shutdowns due to abnormally low temperatures and ice storms in the Gulf Coast region of the United Statesremained elevated in the first quarter of 20212022. Steel costs remain elevated as mill prices and have been exacerbated by hurricane activity insupply chain costs remain significantly higher than historical levels. While steel costs are expected to moderate through 2022, they are expected to remain historically high through the third quarteryear. Scrap metal prices are also expected to moderate throughout the year.
PVC resin is the primary material input of the year. ThesePVC pipe manufactured by our Plastics segment businesses. Resin supply constraints,disruptions throughout 2021, along with robust domestic and global demand for PVC resin, have led to significantly increased resin prices. The increaseResin supply disruptions also resulted in the pricereduced manufacturing of resin, the primary material input into the PVC pipe manufactured by our Plastics segment businesses, along with strong customer demand for PVC pipe and low pipe inventories due toacross the industry. The combination of disrupted PVC resin supply constraints, haveand the resulting low PVC pipe inventories along with robust demand for PVC pipe led to rapidly increased salesincreasing sale prices for PVC pipe.pipe throughout 2021, which continued in the first quarter of 2022. The increase in sale prices has outpaced the increase in PVC resin costs, leading to expanding gross profit margins and a significant increase in net earnings in our Plastics segment. We anticipate these market dynamics will persist throughWhile PVC resin supplies have improved, the remainderprice of 2021PVC resin is now increasing again, driven by rising feedstock prices from energy supply disruptions resulting from the conflict in Ukraine. This has created an environment for U.S. resin producers to raise domestic prices and continue duringa strengthening of the first half of 2022. We currently expect these conditions to subsideexport markets for PVC resin. In addition, beginning in the second half of 2022.2021 and continuing in the first quarter of 2022, supply constraints for additives and other ingredients aside from PVC resin used to manufacture PVC pipe prevented PVC pipe manufacturers from being able to build inventory levels.
We currently expect the unique market dynamics we experienced in 2021 and the first quarter of 2022 to continue through the second quarter of 2022, but begin to subside in the second half of 2022 due to anticipated resin price declines and slowing demand, thus impacting our gross profit margins. Should current market conditions continue through the second half of 2022, our Plastics segment financial results could exceed current expectations.
The marketplace dynamics impacting both our Manufacturing and Plastics segments are fluid and subject to change which may impact our operating results prospectively.
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RESULTS OF OPERATIONS – QUARTER TO DATE | |
Provided below is a summary and discussion of our operating results on a consolidated basis followed by a discussion of the operating results of each of our segments: Electric, Manufacturing and Plastics. In addition to the segment results, we provide an overview of our Corporate costs. Our Corporate costs do not constitute a reportable segment but rather consist of unallocated general corporate expenses, such as corporate staff and overhead costs, the results of our captive insurance company and other items excluded from the measurement of segment performance. Corporate costs are added to operating segment totals to reconcile to totals on our consolidated statements of income.
Intersegment transactions were not material in 2021 or 2020 and amounted to less than $0.1 million
CONSOLIDATED RESULTS
The following table summarizes consolidated operating results for the three months ended September 30, 2021March 31, 2022 and 2020:2021:
| (in thousands) | (in thousands) | 2021 | | 2020 | | $ change | | % change | (in thousands) | 2022 | | 2021 | | $ change | | % change |
| Operating Revenues | Operating Revenues | $ | 316,294 | | | $ | 235,755 | | | $ | 80,539 | | | 34.2 | % | Operating Revenues | $ | 374,904 | | | $ | 261,710 | | | $ | 113,194 | | | 43.3 | % |
Operating Expenses | Operating Expenses | 241,766 | | | 183,026 | | | 58,740 | | | 32.1 | | Operating Expenses | 276,605 | | | 217,511 | | | 59,094 | | | 27.2 | |
Operating Income | Operating Income | 74,528 | | | 52,729 | | | 21,799 | | | 41.3 | | Operating Income | 98,299 | | | 44,199 | | | 54,100 | | | 122.4 | |
Interest Charges | Interest Charges | 9,648 | | | 8,568 | | | 1,080 | | | 12.6 | | Interest Charges | 8,948 | | | 9,398 | | | (450) | | | (4.8) | |
Nonservice Cost Components of Postretirement Benefits | Nonservice Cost Components of Postretirement Benefits | 505 | | | 842 | | | (337) | | | (40.0) | | Nonservice Cost Components of Postretirement Benefits | (22) | | | 383 | | | (405) | | | (105.7) | |
Other Income | Other Income | 203 | | | 1,712 | | | (1,509) | | | (88.1) | | Other Income | 260 | | | 1,160 | | | (900) | | | (77.6) | |
Income Before Income Taxes | Income Before Income Taxes | 64,578 | | | 45,031 | | | 19,547 | | | 43.4 | | Income Before Income Taxes | 89,633 | | | 35,578 | | | 54,055 | | | 151.9 | |
Income Tax Expense | Income Tax Expense | 11,824 | | | 9,097 | | | 2,727 | | | 30.0 | | Income Tax Expense | 17,630 | | | 5,249 | | | 12,381 | | | 235.9 | |
Net Income | Net Income | $ | 52,754 | | | $ | 35,934 | | | $ | 16,820 | | | 46.8 | % | Net Income | $ | 72,003 | | | $ | 30,329 | | | $ | 41,674 | | | 137.4 | % |
Operating Revenues increased $80.5$113.2 million primarily due to rising PVC pipe prices and increased sales volumes within our Plastics segment and increased volumes and material cost,costs leading to increased sales prices in our Manufacturing segment. Increased transmission services and wholesaleretail revenues partially offset by decreased retailwholesales revenues within our Electric segment also contributed to higher operating revenues in the thirdfirst quarter of 2021 compared to the same period last year. See our segment disclosures below for additional discussion of items impacting operating revenues.
Operating Expenses increased $58.7$59.1 million primarily due to increased costs of products sold in our ManufacturingPlastics and PlasticsManufacturing segments due to increased raw material costs and higher sales volumes, as well as increased labor costs. Operating expenses in our Electric segment increased primarily due to higher depreciation and amortization expense arising from our recent rate base investments and higher operating and maintenance expenses.expenses and increased purchased power costs. See our segment disclosures below for additional discussion of items impacting operating expenses.
Interest Charges increased $1.1decreased $0.5 million due to a decrease in the interest expense fromrate on our $40.0$140.0 million of fixed-rate long-term debt issuancethat was refinanced in August 2020,December 2021, and a higherlower level of average short-term borrowings outstanding in 20212022 compared to 2020 and a decrease in capitalized interest in 2021 following2021.
Nonservice Cost Components of Postretirement Benefits decreased $0.4 million primarily due to the completion and placement in serviceamortization of Astoria Stationactuarial gains resulting from the increase in the first quarterdiscount rates used to measure our pension benefit and postretirement benefit liabilities as of December 31, 2021.
Other Income decreased $1.5$0.9 million primarily due to lower earned equity AFUDC due to the completion and placement in-service of Astoria Station ininvestment losses on our corporate-owned life insurance policies during the first quarter of 2021. During2022 compared to investment gains in the constructionsame period of Astoria Station we earned AFUDC in our Minnesota jurisdiction.the previous year.
Income Tax Expense increased $2.7$12.4 million primarily due to increased income before income taxes. Our effective tax rate was 18.3%19.7% in the thirdfirst quarter of 20212022 and 20.2%14.8% in the thirdfirst quarter of 2020.2021. The decreaseincrease in our effective tax rate was driven by PTCs earnedan increase in the third quarter of 2021 from our Merricourt wind farm, which was placedincome before income taxes without a corresponding increase in service in the fourth quarter of 2020, partially offset bytax credits and other permanent differences.differences that impact our effective tax rate. See Note 8 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information regarding factors impacting our effective tax rate in 20212022 and 2020.2021.
ELECTRIC SEGMENT RESULTS
The following table summarizes Electric segment operating results for the three months ended September 30, 2021March 31, 2022 and 2020:2021:
| (in thousands) | (in thousands) | 2021 | | 2020 | | $ change | | % change | (in thousands) | 2022 | | 2021 | | $ change | | % change |
| Retail Revenues | Retail Revenues | $ | 96,438 | | | $ | 99,605 | | | $ | (3,167) | | | (3.2) | % | Retail Revenues | $ | 113,639 | | | $ | 105,706 | | | $ | 7,933 | | | 7.5 | % |
Transmission Services Revenues | Transmission Services Revenues | 13,300 | | | 12,288 | | | 1,012 | | | 8.2 | | Transmission Services Revenues | 12,556 | | | 11,944 | | | 612 | | | 5.1 | |
Wholesale Revenues | Wholesale Revenues | 6,944 | | | 1,500 | | | 5,444 | | | 362.9 | | Wholesale Revenues | 2,463 | | | 4,507 | | | (2,044) | | | (45.4) | |
Other Electric Revenues | Other Electric Revenues | 2,093 | | | 1,830 | | | 263 | | | 14.4 | | Other Electric Revenues | 1,758 | | | 1,542 | | | 216 | | | 14.0 | |
Total Operating Revenues | Total Operating Revenues | 118,775 | | | 115,223 | | | 3,552 | | | 3.1 | | Total Operating Revenues | 130,416 | | | 123,699 | | | 6,717 | | | 5.4 | |
Production Fuel | Production Fuel | 17,698 | | | 11,554 | | | 6,144 | | | 53.2 | | Production Fuel | 14,853 | | | 14,714 | | | 139 | | | 0.9 | |
Purchased Power | Purchased Power | 9,878 | | | 13,428 | | | (3,550) | | | (26.4) | | Purchased Power | 20,529 | | | 19,260 | | | 1,269 | | | 6.6 | |
Operating and Maintenance Expenses | Operating and Maintenance Expenses | 36,465 | | | 32,845 | | | 3,620 | | | 11.0 | | Operating and Maintenance Expenses | 44,278 | | | 41,421 | | | 2,857 | | | 6.9 | |
Depreciation and Amortization | Depreciation and Amortization | 17,874 | | | 15,647 | | | 2,227 | | | 14.2 | | Depreciation and Amortization | 18,382 | | | 17,308 | | | 1,074 | | | 6.2 | |
Property Taxes | Property Taxes | 4,474 | | | 4,333 | | | 141 | | | 3.3 | | Property Taxes | 4,432 | | | 4,320 | | | 112 | | | 2.6 | |
Operating Income | Operating Income | $ | 32,386 | | | $ | 37,416 | | | $ | (5,030) | | | (13.4) | % | Operating Income | $ | 27,942 | | | $ | 26,676 | | | $ | 1,266 | | | 4.7 | % |
| | | 2021 | | 2020 | | change | | % change | | 2022 | | 2021 | | change | | % change |
| Electric kilowatt-hour (kwh) Sales (in thousands) | Electric kilowatt-hour (kwh) Sales (in thousands) | | | | | Electric kilowatt-hour (kwh) Sales (in thousands) | | | | |
Retail kwh Sales | Retail kwh Sales | 1,076,580 | | | 1,075,336 | | | 1,244 | | | 0.1 | % | Retail kwh Sales | 1,515,297 | | | 1,348,519 | | | 166,778 | | | 12.4 | % |
Wholesale kwh Sales – Company Generation | Wholesale kwh Sales – Company Generation | 174,187 | | | 75,884 | | | 98,303 | | | 129.5 | | Wholesale kwh Sales – Company Generation | 66,187 | | | 80,423 | | | (14,236) | | | (17.7) | |
Heating Degree Days | Heating Degree Days | 3 | | | 61 | | | (58) | | | (95.1) | | Heating Degree Days | 3,821 | | | 3,078 | | | 743 | | | 24.1 | |
Cooling Degree Days | 463 | | | 363 | | | 100 | | | 27.5 | | |
| |
The operating results of our Electric segment are impacted by fluctuations in weather conditions and the resulting demand for electricity for heating and cooling. The following table shows heating and cooling degree days as a percent of normal for the three months ended September 30, 2021March 31, 2022 and 2020.2021.
| | | | | | | | | | | |
| 2021 | | 2020 |
| | | |
Heating Degree Days | 5.8 | % | | 115.1 | % |
Cooling Degree Days | 132.7 | % | | 104.6 | % |
| | | |
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
Heating Degree Days | 111.8 | % | | 89.5 | % |
| | | |
| | | |
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 20212022 and 2020,2021, and between years.
| | | | | | | | | | | | | | | | | |
| 2021 vs Normal | | 2021 vs 2020 | | 2020 vs Normal |
| | | | | |
Effect on Diluted Earnings Per Share | $ | 0.03 | | | $ | 0.02 | | | $ | 0.01 | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| 2022 vs Normal | | 2022 vs 2021 | | 2021 vs Normal |
| | | | | |
Effect on Diluted Earnings Per Share | $ | 0.04 | | | $ | 0.08 | | | $ | (0.04) | |
| | | | | |
Retail Revenues decreased $3.2increased $7.9 million primarily due to the following:
•The recognition of $2.6 million of Minnesota transmission rider revenue in the third quarter of 2020 resulting from a favorable judicial decision regarding the state jurisdictional treatment of federally approved transmission projects.
•A $1.2 million decrease in fuel recovery revenues largely due to lower purchased power costs and credits provided to retail customers from increased margins on wholesale sales, but partially offset by increased recovery of higher production fuel costs.
•A decrease in revenue from the combination of reduced demand from residential and commercial and industrial customers, exclusive of the impact of weather, net of the effect of a change in customer usage mix.
These decreases in revenue were partially offset by a $1.2$4.4 million increase in consumptionrevenues from the favorable impact of weather in the thirdfirst quarter of 20212022 compared to the same period last year.
Transmission Services Revenues• increased $1.0A $3.6 million increase in fuel recovery revenues primarily due to increased generator interconnection revenues.production fuel and purchase power costs and a decrease in credits provided to retail customers from decreased margins recognized on wholesale sales.
•A $2.3 million increase in retail sales volumes from commercial and industrial customers.
•A $2.4 million decrease in interim rate revenue in Minnesota as a result of our April 2021 filing with the MPUC in which we lowered our requested net annual revenue increase, primarily due to a reduction in operating costs from amounts included in our original filing.
Wholesale Revenues increased $5.4decreased $2.0 million as a result of a 129.5% increase18% decrease in wholesale sales volumes and a 101.7% increase34% decrease in wholesale prices. Wholesale energy sales in the first quarter of 2021 were comparatively higher due to high prices driven by increased fuel costs andhigh market demand and availability constraints caused by winter storm activity, which drove up spot market prices for wholesale energy.electricity.
Production Fuel costs increased $6.1$0.1 million mainly as a result of increased fuel cost per kwh, which was largely offset by a 41.4% increase15% decrease in kwhs generated from our fuel-burning plants due to higher demand and favorable prices for energythe retirement of our coal-burning Hoot Lake Plant in wholesale markets. In addition, increased fuel cost per kwh also contributed to higher production fuel costs in the third quarter ofMay 2021.
Purchased Power costs to serve retail customers decreased $3.6increased $1.3 million primarily due to a 48.9% decrease59% increase in the volume of purchased power as our recent capacity additions provide additional generation resourcesresulting from the retirement of Hoot Lake Plant and increased demand due to serve customer demand and market conditions led to operating our
existing facilities at higher capacity factors in lieu of purchasing power at higher market prices, butcold weather, partially offset by an increasea decrease in the costprice of purchased power per kwh in the third quarter of 2021.power.
Operating and Maintenance Expense increased $3.6$2.9 million mainly due to:
•$1.4 millionto increased operating and maintenance costs as a result of Merricourt and Astoria Station operating and maintenance expenses incurredbecause the facilities were fully operational in the thirdfirst quarter of 2021 as these facilities are now commercially operational.
•$2.1 million of maintenance costs arising from our planned outage at Big Stone plant, which began2022 and were ramping up in the third quarter of 2021previous year because they had recently been placed into service; increased incentive compensation costs related to current year financial and we expect will be completed in the fourth quarter of the year.
•Other additional expenses include an increase in transmission tariff expense from higher transmission volumes andoperational performance; increased travel costs as business travel recoversresulting from the impact of COVID-19.
eased COVID restrictions; and increased insurance costs. These expense increasesincreased costs were partially offset by among other items, lower operating costs followinga decrease in CIP expenses as CIP spending decreased compared to the closure of Hoot Lake Plant in May 2021 and lower bad debt expense due to improving customer collections as the economic impact of COVID-19 has eased.previous year.
Depreciation and Amortization expense increased $2.2$1.1 million primarily due to Merricourt and Astoria Station being placed in service in the fourth quarterFebruary of 2020 and the first quarter of 2021, respectively.2021.
MANUFACTURING SEGMENT RESULTS
The following table summarizes Manufacturing segment operating results for the three months ended September 30, 2021March 31, 2022 and 2020:2021:
| (in thousands) | (in thousands) | 2021 | | 2020 | | $ change | | % change | (in thousands) | 2022 | | 2021 | | $ change | | % change |
| Operating Revenues | Operating Revenues | $ | 89,977 | | | $ | 59,849 | | | $ | 30,128 | | | 50.3 | % | Operating Revenues | $ | 104,957 | | | $ | 75,825 | | | $ | 29,132 | | | 38.4 | % |
Cost of Products Sold (excluding depreciation) | Cost of Products Sold (excluding depreciation) | 70,148 | | | 44,444 | | | 25,704 | | | 57.8 | | Cost of Products Sold (excluding depreciation) | 86,161 | | | 56,311 | | | 29,850 | | | 53.0 | |
Other Operating Expenses | Other Operating Expenses | 10,161 | | | 6,901 | | | 3,260 | | | 47.2 | | Other Operating Expenses | 8,847 | | | 8,212 | | | 635 | | | 7.7 | |
Depreciation and Amortization | Depreciation and Amortization | 3,794 | | | 3,759 | | | 35 | | | 0.9 | | Depreciation and Amortization | 4,014 | | | 3,757 | | | 257 | | | 6.8 | |
Operating Income | Operating Income | $ | 5,874 | | | $ | 4,745 | | | $ | 1,129 | | | 23.8 | % | Operating Income | $ | 5,935 | | | $ | 7,545 | | | $ | (1,610) | | | (21.3) | % |
Operating Revenues increased $30.1$29.1 million primarily due to a 41.3%$29.3 million increase in material costs at BTD, which isare passed through to customers, as a result of higher steel prices. Steel prices increased significantly fromrapidly throughout 2021 and remained elevated in the previous year. Steelfirst quarter of 2022, which resulted in increased revenues as we sell through high-priced inventory. Operating revenues also increased slightly due to price increases related to inflationary costs being experienced across the business. The increase in operating revenues was partially offset by a 5% decrease in sales volumes. End market demand has remained strong, however, supply chain disruptions experienced by our OEM customers have led to unpredictable shipments of products as customers have delayed or adjusted their shipment timing in response to other supply chain challenges they are experiencing, which has negatively impacted our sales volumes. Increases in sales prices have increased as steel mill production has not matchedand volumes at T.O. Plastics, due to strong customer demand as mill capacity recovers from shutdowns in 2020 resulting from the COVID-19 pandemic. A 4.0% increase in sales volumes and an increase in scrap revenues, primarily due to higher scrap metal prices,horticulture sector, also contributed to the segment increase in operating revenues. We anticipate steel prices will remain elevated for the remainder of 2021 and into 2022. Increased horticultural product sales volumes at T.O. Plastics in 2021, driven by increasing customer demand, as well as increased sales prices also contributed to increased operating revenues in 2021 as compared to 2020.
Cost of Products Sold increased $25.7$29.9 million primarily due to increased volumes and higher material, labor and freight costs at BTD. The increase in material cost iswas largely driven by increased steel prices as mentioned above. The increases in labor and freight costs, and lower productivity resulted in lower gross profit margins compared to the same period in 2020. Lower productivity during the period was primarily the result2021. Aligning labor with unpredictable demand led to lower production efficiency which had a
negative impact on gross profit margins. Increases in headcount and the time required for new employee to achieve peak productivity. Increased sales volumes and production activity at T.O. Plastics also contributed to the increase in costimpacted costs of products sold, in 2021.and gross profit margins were negatively impacted by product mix and increased maintenance and freight costs.
Other Operating Expenses increased $3.3$0.6 million due to increases in the third quarter of 2021various cost categories including salaries and wages, due to increases in headcount compared to 2020. In the third quarter of 2021 other operating expenses were impactedprevious year, and software and service provider costs, partially offset by increasedlower incentive based compensation and other costs necessary to support higher business volumes.compensation.
PLASTICS SEGMENT RESULTS
The following table summarizes Plastics segment operating results for the three months ended September 30, 2021March 31, 2022 and 2020:2021:
| (in thousands) | (in thousands) | 2021 | | 2020 | | $ change | | % change | (in thousands) | 2022 | | 2021 | | $ change | | % change |
| Operating Revenues | Operating Revenues | $ | 107,542 | | | $ | 60,693 | | | $ | 46,849 | | | 77.2 | % | Operating Revenues | $ | 139,531 | | | $ | 62,186 | | | $ | 77,345 | | | 124.4 | % |
Cost of Products Sold (excluding depreciation) | Cost of Products Sold (excluding depreciation) | 64,064 | | | 42,415 | | | 21,649 | | | 51.0 | | Cost of Products Sold (excluding depreciation) | 65,598 | | | 45,666 | | | 19,932 | | | 43.6 | |
Other Operating Expenses | Other Operating Expenses | 3,832 | | | 3,250 | | | 582 | | | 17.9 | | Other Operating Expenses | 3,964 | | | 2,944 | | | 1,020 | | | 34.6 | |
Depreciation and Amortization | Depreciation and Amortization | 1,099 | | | 905 | | | 194 | | | 21.4 | | Depreciation and Amortization | 1,107 | | | 990 | | | 117 | | | 11.8 | |
Operating Income | Operating Income | $ | 38,547 | | | $ | 14,123 | | | $ | 24,424 | | | 172.9 | % | Operating Income | $ | 68,862 | | | $ | 12,586 | | | $ | 56,276 | | | 447.1 | % |
Operating Revenues increased $46.8$77.3 million primarily due to a 103.6%125% increase in the price per pound of PVC pipe sold. The increase in sale prices was largelyprimarily due to the combination of PVC resin supply constraints, which has led to limited PVC pipe inventory, andcontinued strong demand for PVC pipe products. Resinproducts and limited PVC pipe inventories. The unique supply in the third quarter of 2021 was negatively impacted by disruptions caused by Hurricane Ida in the Gulf Coast region, which compounded supply constraints that beganand demand market conditions in the first quarter of 2021 as2022 were a resultcontinuation of plant shutdowns caused by extreme winter weather. Poundsthe market dynamics experienced throughout 2021. In the first quarter of 2022, we, along with other PVC pipe soldmanufacturers, experienced supply constraints of additives and other ingredients used to make PVC pipe, which prevented us and others from being able to build inventory levels. PVC resin supply disruptions improved during the quarter. Expected declines in the thirdprice of PVC resin did not materialize and resin prices continued to increase in March due to increasing feedstock prices and stronger than expected export markets. Sales volumes in the first quarter of 2021 decreased 13.0% from2022 were consistent with sales volumes in the same period last year. We anticipate sales prices will remain elevated throughout the remainderfirst quarter of 2021 and into 2022, as resin suppliers work to fulfill purchase allotments and pipe manufacturers continue to replenish depleted inventories while customer demand remains strong.2021.
Cost of Products Sold increased $21.6$19.9 million primarily due to increased PVC resin and other input material costs, per pound, which increased 91.7% compared52% due to the same period inmarket conditions described above. Labor, freight and various non-resin material costs also increased from the previous year. Increases in labor and freight costs in 2021 also contributed to the increase in cost of products sold.
Other Operating Expenses increased $0.6$1.0 million as a result of an increasedue to increases in variablevarious cost categories including compensation costs associated with the increased financial results in 2021.and sales commissions.
CORPORATE COSTS
The following table summarizes Corporate operating results for the three months ended September 30, 2021March 31, 2022 and 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | 2021 | | 2020 | | $ change | | % change |
| | | | | | | |
Other Operating Expenses | $ | 2,231 | | | $ | 3,471 | | | $ | (1,240) | | | (35.7) | % |
Depreciation and Amortization | 48 | | | 84 | | | (36) | | | (42.9) | |
Operating Loss | $ | 2,279 | | | $ | 3,555 | | | $ | (1,276) | | | (35.9) | % |
Other Operating Expenses decreased $1.2 million primarily due to decreased stock and incentive based compensation cost as a result of the timing of expense recognition, which can fluctuate due to changes in estimates of annual financial performance relative to targeted amounts.
| | | | | |
RESULTS OF OPERATIONS – YEAR TO DATE | |
Intersegment transactions were not material in 2021 or 2020 and amounted to less than $0.1 million of operating revenues and operating expenses for each period.
CONSOLIDATED RESULTS
The following table summarizes consolidated operating results for the nine months ended September 30, 2021 and 2020: | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | 2021 | | 2020 | | $ change | | % change |
| | | | | | | |
Operating Revenues | $ | 863,612 | | | $ | 663,258 | | | $ | 200,354 | | | 30.2 | % |
Operating Expenses | 685,063 | | | 543,331 | | | 141,732 | | | 26.1 | |
Operating Income | 178,549 | | | 119,927 | | | 58,622 | | | 48.9 | |
Interest Charges | 28,601 | | | 25,353 | | | 3,248 | | | 12.8 | |
Nonservice Cost Components of Postretirement Benefits | 1,511 | | | 2,581 | | | (1,070) | | | (41.5) | |
Other Income | 2,095 | | | 3,733 | | | (1,638) | | | (43.9) | |
Income Before Income Taxes | 150,532 | | | 95,726 | | | 54,806 | | | 57.3 | |
Income Tax Expense | 25,380 | | | 18,543 | | | 6,837 | | | 36.9 | |
Net Income | $ | 125,152 | | | $ | 77,183 | | | $ | 47,969 | | | 62.1 | % |
Operating Revenues increased $200.4 million primarily due to higher PVC pipe prices within our Plastics segment and increased volumes and material costs, leading to higher sales prices, in our Manufacturing segment. Increased transmission services and wholesale revenues within our Electric segment also contributed to the higher operating revenues in 2021. See our segment disclosures below for additional discussion of items impacting operating revenues.
Operating Expenses increased $141.7 million in 2021 primarily due to increased costs of products sold in our Plastics and Manufacturing segments due to higher raw material costs and sales volumes. Operating expenses in our Electric segment increased primarily from higher operating and maintenance and depreciation and amortization expenses, in each case largely the result of our recent rate base investments and the associated operating costs of such investments. See our segment disclosures below for additional discussion of items impacting operating expenses.
Interest Charges increased $3.2 million in 2021 due to a debt issuance in our Electric segment in the third quarter of 2020, increased outstanding borrowings under our short-term debt arrangements, both of which were largely used to finance rate base investments in our Electric segment, and a decrease in capitalized interest in 2021 due to the completion and placement in service of Astoria Station in the first quarter of 2021.
Nonservice Cost Components of Postretirement Benefits decreased $1.1 million in 2021 due to a change in how prescription drug coverage is provided to retirees and the impact of nonservice costs from a decrease in the discount rate from 2020 to 2021.
Other Income decreased $1.6 million in 2021 due to a $2.7 million decrease in earned equity AFUDC due primarily to the completion and placement in service of Astoria Station in the first quarter of 2021, but partially offset by increases in the values of corporate-owned life insurance policies and other investments in 2021 compared to 2020.
Income Tax Expense increased $6.8 million in 2021 primarily due to increased income before income taxes. Our effective tax rate was 16.9% in 2021 and 19.4% in 2020 with the decrease primarily driven by PTCs earned in 2021 from our Merricourt wind farm, which was placed in service in the fourth quarter of 2020. See Note 8 to our consolidated financial statements included in the report on Form 10-Q for additional information regarding factors impacting our effective tax rate.
ELECTRIC SEGMENT RESULTS
The following table summarizes Electric segment operating results for the nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | 2021 | | 2020 | | $ change | | % change |
| | | | | | | |
Retail Revenues | $ | 291,130 | | | $ | 291,761 | | | $ | (631) | | | (0.2) | % |
Transmission Services Revenues | 37,085 | | | 32,802 | | | 4,283 | | | 13.1 | |
Wholesale Revenues | 14,711 | | | 3,141 | | | 11,570 | | | 368.4 | |
Other Electric Revenues | 5,703 | | | 5,548 | | | 155 | | | 2.8 | |
Total Operating Revenues | 348,629 | | | 333,252 | | | 15,377 | | | 4.6 | |
Production Fuel | 44,576 | | | 34,077 | | | 10,499 | | | 30.8 | |
Purchased Power | 40,273 | | | 45,940 | | | (5,667) | | | (12.3) | |
Operating and Maintenance Expenses | 114,615 | | | 106,639 | | | 7,976 | | | 7.5 | |
Depreciation and Amortization | 53,335 | | | 47,063 | | | 6,272 | | | 13.3 | |
Property Taxes | 13,136 | | | 12,601 | | | 535 | | | 4.2 | |
Operating Income | $ | 82,694 | | | $ | 86,932 | | | $ | (4,238) | | | (4.9) | % |
| | | | | | | |
Electric kilowatt-hour (kwh) Sales (in thousands) | | | | | | | |
Retail kwh Sales | 3,511,730 | | | 3,538,299 | | | (26,569) | | | (0.8) | % |
Wholesale kwh Sales – Company Generation | 358,761 | | | 156,948 | | | 201,813 | | | 128.6 | |
Heating Degree Days | 3,614 | | | 3,968 | | | (354) | | | (8.9) | |
Cooling Degree Days | 700 | | | 533 | | | 167 | | | 31.3 | |
| | | | | | | |
The operating results of our Electric segment are impacted by fluctuations in weather conditions and the resulting demand for electricity for heating and cooling. The following table shows heating and cooling degree days as a percent of normal for the nine months ended September 30, 2021 and 2020.
| | | | | | | | | | | |
| 2021 | | 2020 |
| | | |
Heating Degree Days | 89.9 | % | | 99.3 | % |
Cooling Degree Days | 150.9 | % | | 116.9 | % |
| | | |
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 | $ | 0.02 | | | $ | 0.01 | | | $ | 0.01 | |
| | | | | |
Retail Revenues decreased $0.6 million primarily due to the following:
•A $4.7 million decrease in fuel recovery revenues largely due to lower purchased power costs and credits provided to retail customers from increased margins on wholesale sales, but partially offset by increased recovery of higher production fuel costs.
•The recognition of $2.6 million of Minnesota transmission rider revenue in the third quarter of 2020 resulting from a favorable judicial decision regarding the state jurisdictional treatment of federally approved transmission projects.
•A $1.6 million decrease in revenue from the combination of reduced demand from residential and commercial and industrial customers, exclusive of the impact of weather, net of the effect of a change in customer usage mix.
These decreases in revenue were partially offset by the following:
•A $3.6 million increase in rider revenues primarily related to the recovery of Merricourt and Astoria Station project costs and operating expenses.
•A $3.0 million increase in new revenue from an interim rate increase in Minnesota, net of estimated refunds, effective January 1, 2021 in connection with our rate case filed in November 2020.
•A $2.1 million increase in revenue from transmission rider recovery, due to increased transmission investments, and increased conservation improvement program spending.
Transmission Services Revenues increased $4.3 million primarily due to increased recovery of higher transmission costs and increased transmission investment as well as increased generator interconnection revenues.
Wholesale Revenues increased $11.6 million as a result of a 128.6% increase in wholesale sales volumes and a 104.9% increase in wholesale electric prices, primarily driven by increased fuel costs and high market demand for wholesale energy, which serves to drive up spot market prices for electricity.
Production Fuel costsincreased $10.5 million primarily as a result of a 30.8% increase in kwhs generated from our fuel-burning plants due to higher demand and favorable prices for energy in wholesale markets.
Purchased Power costs to serve retail customers decreased $5.7 million mainly due to a 26.7% decrease in the volume of purchased power as our recent capacity additions provide additional generation resources to serve customer demand and market conditions led to operating our existing facilities at higher capacity factors in lieu of purchasing power at higher market prices.
Operating and Maintenance Expense increased $8.0 million, which was primarily the result of:
•$4.0 million of Merricourt and Astoria Station operating and maintenance expenses incurred in 2021 as these facilities are now commercially operational.
•$2.1 million of maintenance costs arising from our planned outage at Big Stone plant, which began in the third quarter of 2021 and we expect will be completed in the fourth quarter of the year.
•Other additional costs including a $1.6 million increase in transmission tariff expenses, a $1.0 million increase in vegetative maintenance cost, and an increase in conservation program expenditures.
These expense increases were partially offset by, among other items, $1.7 million of lower bad debt expense due to improving customer collections as the economic impact of COVID-19 has eased and lower operating costs following the closure of Hoot Lake Plant in May 2021.
Depreciation and Amortization expense increased $6.3 million primarily due to Merricourt and Astoria Station being placed in service in the fourth quarter of 2020 and in February 2021, respectively.
MANUFACTURING SEGMENT RESULTS
The following table summarizes Manufacturing segment operating results for the nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | 2021 | | 2020 | | $ change | | % change |
| | | | | | | |
Operating Revenues | $ | 250,085 | | | $ | 174,276 | | | $ | 75,809 | | | 43.5 | % |
Cost of Products Sold (excluding depreciation) | 189,183 | | | 131,145 | | | 58,038 | | | 44.3 | |
Other Operating Expenses | 28,109 | | | 19,678 | | | 8,431 | | | 42.8 | |
Depreciation and Amortization | 11,395 | | | 11,244 | | | 151 | | | 1.3 | |
Operating Income | $ | 21,398 | | | $ | 12,209 | | | $ | 9,189 | | | 75.3 | % |
Operating Revenues increased $75.8 million primarily due to higher revenues at BTD, which was largely driven by a 15.6% increase in sales volumes and a 25.5% increase in material costs, which are passed through to customers through increased sales prices. The increase in material costs is largely the result of historically high steel prices due to supply shortages as steel mill capacity rebounds from capacity reductions in 2020. Sales volumes in 2020 were negatively impacted by COVID-19 as customers implemented temporary plant shutdowns due to the pandemic. Sales volumes in 2021 have rebounded as customer demand across most end markets has been robust. An increase in horticultural product sales volumes at T.O. Plastics in 2021, driven by increasing customer demand, as well as increased sales prices, also contributed to increased operating revenues in 2021.
Cost of Products Sold increased $58.0 million primarily due to increased volumes and higher material, labor and freight costs at BTD. The increase in material cost is largely the result of high steel prices as mentioned above. Year to date gross profit margins are consistent with the prior year as increases in labor and freight costs and lower productivity in the third quarter of 2021 have been offset by higher sales volumes, as higher volumes have resulted in greater leveraging of fixed production costs. Increased sales volumes and production activity at T.O. Plastics has also contributed to the increase in cost of products sold in 2021. Year to date gross profit margins at T.O. Plastics increased compared to the same period in 2020, as higher production activities have resulted in greater leveraging of fixed production costs and sales prices have increased, resulting from input material cost inflation. | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | $ change | | % change |
| | | | | | | |
Other Operating Expenses | $ | 4,395 | | | $ | 2,537 | | | $ | 1,858 | | | 73.2 | % |
Depreciation and Amortization | 45 | | | 71 | | | (26) | | | (36.6) | |
Operating Loss | $ | 4,440 | | | $ | 2,608 | | | $ | 1,832 | | | 70.2 | % |
Other Operating Expenses increased $8.4 million in 2021 compared to 2020. Other operating expenses in 2020 were reduced by initiatives taken to reduce costs in an effort to mitigate the impact of declining sales volumes from the effects of COVID-19. Other operating expenses in 2021 were impacted by an increase in incentive based compensation arising from the improvement in financial results, and an increase in costs necessary to support the increase in business volumes.
PLASTICS SEGMENT RESULTS
The following table summarizes Plastics segment operating results for the nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | 2021 | | 2020 | | $ change | | % change |
| | | | | | | |
Operating Revenues | $ | 264,898 | | | $ | 155,769 | | | $ | 109,129 | | | 70.1 | % |
Cost of Products Sold (excluding depreciation) | 169,584 | | | 115,432 | | | 54,152 | | | 46.9 | |
Other Operating Expenses | 10,450 | | | 8,990 | | | 1,460 | | | 16.2 | |
Depreciation and Amortization | 3,200 | | | 2,667 | | | 533 | | | 20.0 | |
Operating Income | $ | 81,664 | | | $ | 28,680 | | | $ | 52,984 | | | 184.7 | % |
Operating Revenues increased $109.1 million, primarily due to a 71.1% increase in the price per pound of PVC pipe sold. As discussed above, sale prices have rapidly increased in 2021 due to the combination of PVC resin supply constraints, which has led to limited PVC pipe inventory, and strong demand for PVC pipe products. Resin supply constraints has impacted our production and sales volumes were down slightly compared to the previous year.
Cost of Products Sold increased $54.2$1.9 million primarily due to increased PVC resincompensation expenses, including stock and other input costs,incentive compensation, in the first quarter of 2022 which increased 60.3% compared towere higher than the amount recognized in the same period in the previous year. Increases in labor and freight costs in 2021 also contributed to the increase in cost of products sold.
Other Operating Expenses increased $1.5 million as a result of an increase in variable costs associated with increased financial results in 2021.
CORPORATE COSTS
The following table summarizes Corporate operating results for the nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | 2021 | | 2020 | | $ change | | % change |
| | | | | | | |
Other Operating Expenses | $ | 7,028 | | | $ | 7,638 | | | $ | (610) | | | (8.0) | % |
Depreciation and Amortization | 179 | | | 256 | | | (77) | | | (30.1) | |
Operating Loss | $ | 7,207 | | | $ | 7,894 | | | $ | (687) | | | (8.7) | % |
Other Operating Expenses decreased $0.6 millionyear due to net decreases in corporate overhead and operating costs.our current year financial performance.
The following provides a summary of general rate case filings, rate rider filings and other regulatory filings that have or are expected to have a material impact on our operating results, financial position or cash flows.
GENERAL RATES
Minnesota Rate Case: On November 2, 2020, OTP filed a request with the MPUC for an increase in revenue recoverable through base 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 hashad 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 through 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 deferredproposed deferral of 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 initially 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. TheAmong other items, the cost reductions include, among other items,included 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.
On September 20, 2021, the Administrative Law Judge assigned to our rate case issued his recommendations to the MPUC, and the MPUC is expected to hold deliberations in early November with a written order expected to be issued by the end of January 2022. We anticipate final rates will be implemented by mid-2022.
On February 1, 2022, the MPUC issued its written order. The key provisions of the order include a revenue requirement of $209.0 million, based on a return on rate base of 7.18% and an allowed return on equity of 9.48% on an equity ratio of 52.5%. The order also authorizes recovery of our remaining Hoot Lake Plant net asset over a five-year period, and approves the requested decoupling mechanism for most residential and commercial customer rate groups with a cap of 4% of annual base revenues.
On March 8, 2022, OTP filed its final rate case compliance filing, which included final revenue calculations, rate design and resulting tariff revisions, along with a proposal for interim rate refunds. The final calculations included a revision to the calculation of interim rates. If approved by the MPUC, this revision could increase interim revenues in the period the filing is approved by an amount of approximately $4.0 million. We expect the MPUC will issue its order and implement final rates in mid-2022.
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. |
EUIC | 2021 | | MN | | Requested | | 06/07/21 | | 1.3 | | | 01/01/22 | | Includes recovery of new infrastructure costs, including advanced metering, outage management and demand response systems. |
RRR | 2021 | | ND | | Approved | | 03/07/21 | | 11.8 | | 04/01/21 | | 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 | 2022 | | ND | | Requested | | 09/15/21 | | 6.1 | | | 01/01/22 | | Includes recovery of three new transmission projects/programs. |
RRR | 2020 | | ND | | Approved | | 03/18/20 | | 5.8 | | | 04/01/20 | | Includes return on Merricourt construction costs. |
TCR | 2020 | | ND | | Approved | | 08/31/20 | | 5.6 | | | 01/21/20 | | Includes recovery of new transmission assets. |
TCR | 2021 | | ND | | Approved | | 11/18/20 | | 5.6 | | 01/01/21 | | Includes recovery of eight new transmission projects. |
GCR | 2021 | | ND | | Approved | | 03/01/21 | | 5.2 | | 07/01/21 | | Includes recovery of Astoria Station, net of anticipated savings associated with the retirement of Hoot Lake Plant. |
TCR | 2020 | | SD | | Approved | | 01/29/20 | | 2.3 | | 03/02/20 | | Annual update to transmission cost recovery rider. |
TCR | 2021 | | SD | | Approved | | 02/19/21 | | 2.2 | | 03/01/21 | | Includes recovery of two new transmission projects. |
PIR | 2020 | | SD | | Approved | | 05/31/20 | | 1.6 | | 09/01/20 | | Includes return on Merricourt and Astoria Station construction costs. |
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. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Recovery | | | | | | Filing | | Amount | | Effective | | |
Mechanism | | Jurisdiction | | Status | | Date | | (in millions) | | Date | | Notes |
| | | | | | | | | | | | |
CIP - 2022 | | MN | | Requested | | 04/01/22 | | $ | 10.8 | | | 10/01/22 | | Includes recovery of energy conservation improvement costs as well as a demand side management financial incentive. |
CIP - 2021 | | MN | | Approved | | 04/01/21 | | 9.4 | | | 12/01/21 | | Includes recovery of energy conservation improvement costs as well as a demand side management financial incentive. |
TCR - 2021 | | MN | | Requested | | 11/23/21 | | 7.2 | | | 07/01/22 | | Includes recovery of two new transmission projects. |
RRR - 2021 | | MN | | Requested | | 12/06/21 | | 7.0 | | | 07/01/22 | | Includes return on Hoot Lake Solar construction costs and costs associated with the acquisition of the Ashtabula III wind farm. |
RRR - 2021 | | ND | | Approved | | 03/07/21 | | 11.8 | | | 04/01/21 | | Includes recovery of Merricourt investment and operating costs. |
RRR - 2022 | | ND | | Approved | | 01/05/22 | | 7.8 | | | 04/01/22 | | Includes Merricourt recovery, the proposed purchase of Ashtabula III and credits related to deferred taxes and production tax credits. |
TCR - 2021 | | ND | | Approved | | 09/15/21 | | 6.1 | | | 01/01/22 | | Includes recovery of three new transmission projects/programs. |
TCR - 2020 | | ND | | Approved | | 11/18/20 | | 5.6 | | | 01/01/21 | | Includes recovery of eight new transmission projects. |
GCR - 2021 | | ND | | Approved | | 03/01/21 | | 5.2 | | | 07/01/21 | | Includes recovery of Astoria Station, net of anticipated savings associated with the retirement of Hoot Lake Plant. |
GCR - 2022 | | ND | | Requested | | 03/01/22 | | 3.3 | | | 07/01/22 | | Annual update to generation cost recovery rider. |
TCR - 2020 | | SD | | Approved | | 01/29/20 | | 2.3 | | | 03/02/20 | | Annual update to transmission cost recovery rider. |
TCR - 2021 | | SD | | Approved | | 10/29/21 | | 2.2 | | | 03/01/22 | | Annual update to transmission cost recovery rider. |
TCR - 2021 | | SD | | Approved | | 02/19/21 | | 2.2 | | | 03/01/21 | | Includes recovery of two new transmission projects. |
| | | | | | | | | | | | |
INTEGRATED RESOURCE PLAN
Minnesota law requires utilities to submit to the MPUC for approval a 15-year advance IRP. A resource plan is a set of resource options a utility could use to meet the service needs of its customers over a forecast period, including an explanation of the utility’s supply and demand circumstances, and the extent to which each resource option would be used to meet those service needs. Typically, the filings are submitted every two years.
On September 1, 2021, OTP filed its 2022 IRPIntegrated Resource Plan (IRP) concurrently with regulators in the three states where OTP operates, Minnesota, North Dakota and South Dakota. The 2022 IRP includes OTP’s preferred plan for meeting customers’ anticipated capacity and energy needs while maintaining system reliability and low electric service rates.
The components of OTP's preferred plan include:
–the addition of dual fuel capability at our Astoria Station natural gas plant, allowing for the plant to burn fuel oil in addition to natural gas;plant;
–the addition of 150 megawatts of solar generation in 2025;
–the addition of 100 megawatts of wind generation in 2027;
–the commencement of the process of withdrawing from our 35 percent ownership interest in Coyote Station, a jointly owned, coal-fired generation plant, by December 31, 2028; and
–the addition of 50 megawatts of solar generation in 2033.
TheAlthough the 2022 IRP requestsincludes planned actions beyond 2026, regulators will not act upon or approve planned actions in periods beyond 2026 as part of our 2022 IRP filing.
Subject to regulatory approval, for certain activities planned to commence within the next five years, which include the addition of dual fuel capacity at our Astoria Station natural gas plant, the addition of 150 megawatts of solar generation, and the withdrawal from our ownership interest in Coyote Station.
The preferred plan proposes to subject to regulatory approval, create a regulatory asset as a vehicle to recover costs related to thea future withdrawal from Coyote Station, including the net book value of the plant on the withdrawal date, anticipated decommissioning costs and any required costs incurred ifas a result of an early termination of the existing lignite sales agreement, under which Coyote Station acquires all of its lignite coal fuel from a nearby mine is necessary. For its economic analysis,mine. As part of the filing, OTP developed an estimate of the reasonably foreseeable costs of withdrawing from Coyote Station at the end of 2028 of $68.5 million. These costs may differ from actual results due to the uncertainty and timing of future events associated with the terms and conditions of a withdrawal.
We currently anticipate the MPUC, barring any delays in the procedural schedule, will hold deliberations and render a decision on the IRP by the end of 2022. There currently is no procedural schedule established for this IRP by the North Dakota Public Service Commission.
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 our business operations, and fund our short-term and long-term capital expenditure plans.plans and satisfy our obligations as they become due. 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.control. In addition, our liquidity could be impacted by non-compliance with covenants under our various debt instruments. As of September 30, 2021,March 31, 2022, we were in compliance with all debtfinancial covenants (see the Financial Covenants section under Capital Resources below).
The following table presents the status of our lines of credit as of September 30, 2021March 31, 2022 and December 31, 2020:2021:
| | | 2021 | | 2020 | | 2022 | | 2021 |
(in thousands) | (in thousands) | Line Limit | | Amount Outstanding | | Letters of Credit | | Amount Available | | Amount Available | (in thousands) | Line Limit | | Amount Outstanding | | Letters of Credit | | Amount Available | | Amount Available |
| OTC Credit Agreement | OTC Credit Agreement | $ | 170,000 | | | $ | 36,624 | | | $ | — | | | $ | 133,376 | | | $ | 104,834 | | OTC Credit Agreement | $ | 170,000 | | | $ | 43,281 | | | $ | — | | | $ | 126,719 | | | $ | 147,363 | |
OTP Credit Agreement | OTP Credit Agreement | 170,000 | | | 61,233 | | | 13,159 | | | 95,608 | | | 140,068 | | OTP Credit Agreement | 170,000 | | | 54,489 | | | 7,844 | | | 107,667 | | | 88,315 | |
Total | Total | $ | 340,000 | | | $ | 97,857 | | | $ | 13,159 | | | $ | 228,984 | | | $ | 244,902 | | Total | $ | 340,000 | | | $ | 97,770 | | | $ | 7,844 | | | $ | 234,386 | | | $ | 235,678 | |
We have an internal risk tolerance metric to maintain a minimum of $50 million of liquidity under the OTC 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 ninethree months ended September 30, 2021March 31, 2022 and 2020:2021:
| (in thousands) | (in thousands) | 2021 | | 2020 | (in thousands) | 2022 | | 2021 |
| Net Cash Provided by Operating Activities | Net Cash Provided by Operating Activities | $ | 154,752 | | | $ | 141,276 | | Net Cash Provided by Operating Activities | $ | 45,416 | | | $ | 15,270 | |
|
Net Cash Provided by Operating Activities increased $13.5$30.1 million for the ninethree months ended September 30, 2021March 31, 2022 compared to the ninethree months ended September 30, 2020.March 31, 2021. The increase in cash provided by operating activities was primarily the result of increased earnings during the year, which was partially offset by increased working capital needs. Our level of working capital increased year over year and was impacted by increased accounts receivables within our Manufacturing and Plastics segments, due to strong sales volumes and significantly increased sales prices in 2021, and higher inventory levels within our Manufacturing segment due to higher production volumes and increased material costs in 2021, but2022, partially offset by increased accounts payable due to higher production volumes and increased material costs in our Manufacturing and Plastics segments in 2021. We made2022. Operating cash flows were also reduced by a discretionary contribution to our pension plan of $10.0$20.0 million induring the ninethree months ended September 30, 2021March 31, 2022, compared to a contribution of $11.2$10.0 million in 2020.2021. | (in thousands) | (in thousands) | 2021 | | 2020 | (in thousands) | 2022 | | 2021 |
| Net Cash Used in Investing Activities | Net Cash Used in Investing Activities | $ | 117,084 | | | $ | 222,385 | | Net Cash Used in Investing Activities | $ | 31,449 | | | $ | 49,020 | |
|
Net Cash Used in Investing Activities decreased $105.3$17.6 million for the ninethree months ended September 30, 2021March 31, 2022 compared to the ninethree months ended September 30, 2020.March 31, 2021. The decrease isin capital expenditures was primarily the result of lower capital investment withinrelated to costs incurred in 2021 by OTP to complete our Electric segment as capital spending on our large generation assets, Merricourt and Astoria Station occurred throughout 2020project, and was largely completed byother one-time projects. Capital investment spending in our Manufacturing and Plastics segments also decreased from the fourth quarter of 2020.previous year.
| (in thousands) | (in thousands) | 2021 | | 2020 | (in thousands) | 2022 | | 2021 |
| Net Cash (Used in) Provided by Financing Activities | Net Cash (Used in) Provided by Financing Activities | $ | (37,559) | | | $ | 104,814 | | Net Cash (Used in) Provided by Financing Activities | $ | (14,133) | | | $ | 33,799 | |
|
Net Cash (Used in) Provided by Financing Activities decreased $142.4$47.9 million for the ninethree months ended September 30, 2021March 31, 2022 compared to the ninethree months ended September 30, 2020,March 31, 2021, primarily as a result of a decrease in financing needs given the lower level of capital spending in our Electric segment and the increase in 2021 compared to 2020.cash provided by operating activities. Financing activities infor the ninethree months ended September 30, 2021March 31, 2022 included a net borrowing increaseproceeds from short-term borrowings of $16.9$6.6 million under our line of credit facilities and dividend payments of $48.6 million ($1.17 per share).
$17.2 million. Financing activities infor the ninethree months ended September 30, 2020March 31, 2021 included net proceeds from short-term borrowings of $75.0$53.9 million, from the issuanceprimarily incurred to fund major construction projects, and dividend payments of long-term debt, a net borrowing increase of $42.6 million under our line of credit facilities and $34.8 million in proceeds raised from the issuance of common stock, net of issuance costs. We paid dividends of $45.1 million ($1.11 per share) in the nine months ended September 30, 2020.$16.2 million.
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 in our electric segment are investments in electric generation facilities, including wind and solar investments, environmental upgrades, transmission lines and distribution lines, manufacturing facilities and upgrades, equipment used in the manufacturing process,systems, and computer hardware and information systems. Our electric segment capital expenditure program is subject to review and regulatory approval 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.
Our
2022 IRP, filed with the MPUC on September 1, 2021, outlined our preferred plan for meeting our electric customers’ anticipated energy needs while maintaining system reliability, which included significant plannedfuture capital expenditure plans also include investments in manufacturing facilities and facility upgrades, manufacturing equipment additions and
enhancementsupgrades and additional technology assets to
be used in our
electric fleetmanufacturing operations. Refer to Item 7, Management's Discussion and Analysis of assets. The following provides a summaryFinancial Condition and Results of the actual capital expendituresOperations, of our Form 10-K for the year ended December 31, 2020, and the anticipated2021 for our capital expendituresexpenditure plan for the five year period 2021from 2022 through 2026, for our Electric segment, inclusive of the additions outlined in our 2022 IRP, and our non-electric businesses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | | 2020 | | | 2021(1) | | | 2022 | | 2023 | | 2024 | | 2025 | | 2026 | | Total 2022 - 2026 |
| | | | | | | | | | | | | | | | | | | |
Electric Segment: | | | | | | | | | | | | | | | | | | | |
Renewables and Natural Gas Generation | | | | | | 23 | | | | 30 | | | 80 | | | 92 | | | 92 | | | 160 | | | 454 | |
Technology and Infrastructure | | | | | | 2 | | | | 26 | | | 30 | | | 18 | | | — | | | — | | | 74 | |
Distribution Plant Replacements | | | | | | 31 | | | | 37 | | | 35 | | | 35 | | | 35 | | | 33 | | | 175 | |
Transmission (includes replacements) | | | | | | 27 | | | | 26 | | | 28 | | | 24 | | | 20 | | | 27 | | | 125 | |
Other | | | | | | 34 | | | | 30 | | | 29 | | | 32 | | | 36 | | | 23 | | | 150 | |
Total Electric Segment | | | $ | 357 | | | | $ | 117 | | | | $ | 149 | | | $ | 202 | | | $ | 201 | | | $ | 183 | | | $ | 243 | | | $ | 978 | |
Manufacturing and Plastics Segments | | | 15 | | | | 36 | | | | 33 | | | 46 | | | 31 | | | 21 | | | 22 | | | 153 | |
Total Capital Expenditures | | | $ | 372 | | | | $ | 153 | | | | $ | 182 | | | $ | 248 | | | $ | 232 | | | $ | 204 | | | $ | 265 | | | $ | 1,131 | |
| | | | | | | | | | | | | | | | | | | |
Total Electric Utility Average Rate Base | | | $ | 1,385 | | | | $ | 1,570 | | | | $ | 1,630 | | | $ | 1,750 | | | $ | 1,860 | | | $ | 1,980 | | | $ | 2,100 | | | |
Annual Rate Base Growth | | | | | | 13.4 | % | | | 3.8 | % | | 7.4 | % | | 6.3 | % | | 6.5 | % | | 6.1 | % | | |
(1) Includes actual results for the nine months ended September 30, 2021, and anticipated capital expenditures for the fourth quarter of 2021. |
2026.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, 20202021 are included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended December 31, 2020.2021. There were no material changes in our contractual obligations outside of the ordinary course of our business during the ninethree months ended September 30, 2021.March 31, 2022. Off-Balance Sheet Arrangements
As of March 31, 2022, we have outstanding letters of credit totaling $11.0 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 that have, or are reasonably likely to have, a material current or future effect on our financial condition. 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.
COMMON STOCK DIVIDENDS
We paid dividends to our common stockholders totaling $48.6$17.2 million, or $1.17$0.4125 per share, in the first ninethree months of 2021.2022. 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 Quarterly Report on Form 10-Q for additional information. The decision to declare a dividend is reviewed quarterly by our Board of Directors.
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 debtDebt financing will be required in the five-year period 2021from 2022 through 20252026 to supportrefinance maturing debt and to finance our capital investments. Our financing plans are subject to change and are impacted by our planned level of capital investments, primarily within our Electric segmentdecisions 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 satisfyrefund or retire early retireany of our presently outstanding long-term debt, to complete acquisitions, or to finance potential acquisition opportunities oruse capital 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 tostatement with the SEC under which we may offer for sale, from time to time, either separately or together in any combination, equity, debt or other securities described in the shelf registration statement. No new debt or equity has been issued pursuant to the registration statement. The registration statement expires in May 2024.
On May 3, 2021, we filed a second registration statement allowswith the SEC for the issuance of up to 1,500,000 common shares under ouran Automatic Dividend Reinvestment and a Share Purchase Plan, which provides our common shareholders, retail customers of OTP and other interested investors a methodmethods of purchasing our common shares, by reinvesting their dividends and/or making optional cash investments. Shares purchased under the plan may be new issuenewly issued common shares or common shares purchased on the open market. BothAs of March 31, 2022, there was 1,348,716 shares available for purchase or issuance under the plan. The registration statements expirestatement expires in May 2024.
SHORT-TERM DEBT
Otter Tail CorporationOTC and Otter Tail Power CompanyOTP are each party to a credit agreement (the OTC Credit Agreement and OTP Credit Agreement, respectively) which each provide for unsecured revolving lines of credit. On September 30, 2021, Otter Tail Corporation entered into a Fourth Amended and Restated Credit Agreement and Otter Tail Power Company entered into a Third Amended and Restated Credit Agreement, amending and restating the previously existing credit agreements to extend the maturity date of each agreement to September 30, 2026. The borrowing capacity and other significant terms of the agreements remained unchanged from the previous credit agreements. The following is a summary of key provisions and borrowing information as of, and for the ninethree months ended, September 30, 2021:March 31, 2022:
| | | | | | | | | | | |
(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 September 30, 2021 | — | | | 13,159 | |
Amount Outstanding as of September 30, 2021 | 36,624 | | | 61,233 | |
Average Amount Outstanding During the Nine Months Ended September 30, 2021 | 58,703 | | | 51,911 | |
Maximum Amount Outstanding During the Nine Months Ended September 30, 2021 | 79,718 | | | 72,471 | |
Interest Rate as of September 30, 2021 | 1.59 | % | | 1.33 | % |
Maturity Date | September 30, 2026 | | September 30, 2026 |
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| | | |
1Each facility includes an accordion featuring allowing the borrower to increase the borrowing limit if certain terms and conditions are met. |
| | | | | | | | | | | |
(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, 2022 | — | | | 7,844 | |
Amount Outstanding as of March 31, 2022 | 43,281 | | | 54,489 | |
Average Amount Outstanding During the Three Months Ended March 31, 2022 | 35,493 | | | 66,098 | |
Maximum Amount Outstanding During the Three Months Ended March 31, 2022 | 58,715 | | | 74,519 | |
Interest Rate as of March 31, 2022 | 1.92 | % | | 1.64 | % |
Maturity Date | September 30, 2026 | | September 30, 2026 |
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1Each facility includes an accordion featuring allowing the borrower to increase the borrowing limit if certain terms and conditions are met. |
LONG-TERM DEBT
At September 30, 2021,March 31, 2022, 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 20212022 to 2050.
On June 10, 2021, OTP entered into2051. Pursuant to a Note Purchase Agreement pursuant to whichexecuted in June 2021, OTP agreedintends to issue in a private placement transaction, $230 million aggregate principal amount of senior unsecured notes. The funding of theits Series 2022A notes will occur in two issuances, $140 million in November 2021 and $90 milliondue May 20, 2052, in May 2022. The issuance2022 for aggregate proceeds of the notes is$90.0 million, subject to the satisfaction of certain customary conditions to closing. We intend toclosing, and use a portion of the proceeds ofto repay the notes to refinance existing long-term indebtedness, including long-term debt instruments with outstanding principal balances of $140$30.0 million and $30 million,Series 2007B Notes which matureare maturing in December 2021 and August 2022, respectively, and for general corporate purposes.2022.
Note 6 to our consolidated financial statements included in this Quarterly Report on Form 10-Q includes additional information regarding these short-term and long-term debt instruments. Financial Covenants
Certain of our short- and long-debtlong-term debt agreements require Otter Tail CorporationOTC and OTP to maintain certain financial covenants. As of September 30, 2021,March 31, 2022, we were in compliance with these financial covenants as further described below:
Otter Tail CorporationOTC, 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 September 30, 2021,March 31, 2022, our interest-bearing debt to total capitalization was 0.470.45 to 1.00, our interest and dividend coverage ratio was 5.738.35 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 September 30, 2021,March 31, 2022, OTP's interest-bearing debt to total capitalization was 0.47 to 1.00, its interest and dividend coverage ratio was 3.163.33 to 1.00, and OTP had no priority indebtedness outstanding.
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OFF-BALANCE-SHEET ARRANGEMENTS | |
As of September 30, 2021 we have outstanding letters of credit totaling $16.9 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.
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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, 20202021 the critical accounting policies that affect our most significant estimates and assumptions used in preparing our consolidated financial statements. There have been no material changes to our critical accounting policies and estimates from those disclosed in the most recent Annual Report on Form 10-K. | | | | | |
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
There have been no material changes in our market risk from those disclosed in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for the year ended December 31, 2020.2021. | | | | | |
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of DisclosuresDisclosure 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 September 30, 2021,March 31, 2022, 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 September 30, 2021.March 31, 2022.
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 September 30, 2021March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
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, 2020.2021.
The following Exhibits are filed as part of, or incorporated by reference into, this report. | | | | | | | |
| | |
No. | | | Description |
10.1 | | | |
10.2 | | | |
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.
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| 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) |
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| | Dated: November 3, 2021May 4, 2022 |