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 March 31, 20222023 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:
41,630,65541,710,621 Common Shares ($5 par value) as of April 27, 2022.28, 2023.
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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. | | | | | | | | | | | | | | |
AFUDCAMDT | Allowance for Funds Used During Construction | | MISO | Midcontinent Independent System Operator, Inc. |
ARP | Alternative Revenue ProgramAdvanced Meter and Distribution Technology | | MPUC | Minnesota Public Utilities Commission |
ARP | Alternative Revenue Program | | NDDEQ | North Dakota Department of Environmental Quality |
BTD | BTD Manufacturing, Inc. | | NDPSC | North Dakota Public Service Commission |
CIP | Conservation Improvement Program | | OTC | Otter Tail Corporation |
CIPEAR | Conservation Improvement ProgramEnergy Adjustment Rider | | OTP | Otter Tail Power Company |
EITE | Energy Intensive, Trade Exposed Rider | | PIR | Phase-In Rider |
EPA | Environmental Protection Agency | | PTCsPSLRA | Production tax creditsPrivate Securities Litigation Reform Act of 1995 |
ESSRP | Executive Survivor and Supplemental Retirement Plan | | PVCPTC | Polyvinyl chlorideProduction Tax Credits |
FERC | Federal Energy Regulatory Commission | | RHRPVC | Regional Haze RulePolyvinyl chloride |
GCR | Generation Cost Recovery Rider | | ROERHR | Return on equityRegional Haze Rule |
ISO | Independent System Operator | | ROE | Return on equity |
IRP | Integrated Resource Plan | | RRR | Renewable Resource Rider |
IRPkwh | Integrated Resource Plankilowatt-hour | | SEC | Securities and Exchange Commission |
kwhMerricourt | kilowatt-hourMerricourt Wind Energy Center | | T.O. Plastics | T.O. Plastics, Inc. |
MerricourtMISO | Merricourt Wind Energy CenterMidcontinent Independent System Operator, Inc. | | TCR | Transmission Cost Recovery Rider |
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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)"PSLRA"). When used in this Form 10-Q and in future filings by the CompanyOtter Tail Corporation (the "Company") with the Securities and Exchange Commission (SEC), in the Company’s press releases and in oral statements, words such as “anticipate,” “believe,” “could,” “estimate,” “expect,” "future," "goal," “intend,” "likely," “may,” “outlook,” “plan,” “possible,” “potential,” "probable," "projected," “should,” "target," “will,” “would” or similar expressions are intended to identify forward-looking statements within the meaning of the Act.PSLRA. Such statements are based on current expectations and assumptions and entail various risks and uncertainties that could cause actual results to differ materially from those expressed in such forward-looking statements. The Company’s risks and uncertainties include, among other things, uncertainty of 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, health and safety laws and regulations, the impact of climate change including compliance with legislative and regulatory changes to address climate change, operational and economic risks associated with our electric generating and manufacturing facilities, risks associated with energy markets, the availability and pricing of resource materials, inflation cost pressures, attracting and maintaining a qualified and stable workforce, expectations regarding regulatory proceedings, and changing macroeconomic and industry conditions. These and other risks and uncertainties are more fully described in our filings with the SEC, including our most recently filed Annual Report on Form 10-K. Forward-looking statements speak only as of the date they are made, and we expressly disclaim any obligation to update any forward-looking information.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) | March 31, 2022 | | December 31, 2021 | (in thousands, except share data) | March 31, 2023 | | December 31, 2022 |
| Assets | Assets | | | | Assets | | | |
Current Assets | Current Assets | | | | Current Assets | | | |
Cash and Cash Equivalents | Cash and Cash Equivalents | $ | 1,371 | | | $ | 1,537 | | Cash and Cash Equivalents | $ | 104,080 | | | $ | 118,996 | |
Receivables, net of allowance for credit losses | Receivables, net of allowance for credit losses | 218,896 | | | 174,953 | | Receivables, net of allowance for credit losses | 175,442 | | | 144,393 | |
Inventories | Inventories | 145,857 | | | 148,490 | | Inventories | 144,767 | | | 145,952 | |
Regulatory Assets | Regulatory Assets | 21,770 | | | 27,342 | | Regulatory Assets | 16,566 | | | 24,999 | |
Other Current Assets | Other Current Assets | 14,497 | | | 17,032 | | Other Current Assets | 13,510 | | | 18,412 | |
Total Current Assets | Total Current Assets | 402,391 | | | 369,354 | | Total Current Assets | 454,365 | | | 452,752 | |
Noncurrent Assets | Noncurrent Assets | | Noncurrent Assets | |
Investments | Investments | 57,893 | | | 56,690 | | Investments | 58,058 | | | 54,845 | |
Property, Plant and Equipment, net of accumulated depreciation | Property, Plant and Equipment, net of accumulated depreciation | 2,128,344 | | | 2,124,605 | | Property, Plant and Equipment, net of accumulated depreciation | 2,289,491 | | | 2,212,717 | |
Regulatory Assets | Regulatory Assets | 124,413 | | | 125,508 | | Regulatory Assets | 97,179 | | | 94,655 | |
Intangible Assets, net of accumulated amortization | Intangible Assets, net of accumulated amortization | 8,768 | | | 9,044 | | Intangible Assets, net of accumulated amortization | 7,668 | | | 7,943 | |
Goodwill | Goodwill | 37,572 | | | 37,572 | | Goodwill | 37,572 | | | 37,572 | |
Other Noncurrent Assets | Other Noncurrent Assets | 32,360 | | | 32,057 | | Other Noncurrent Assets | 43,077 | | | 41,177 | |
Total Noncurrent Assets | Total Noncurrent Assets | 2,389,350 | | | 2,385,476 | | Total Noncurrent Assets | 2,533,045 | | | 2,448,909 | |
Total Assets | Total Assets | $ | 2,791,741 | | | $ | 2,754,830 | | Total Assets | $ | 2,987,410 | | | $ | 2,901,661 | |
| Liabilities and Shareholders' Equity | Liabilities and Shareholders' Equity | | Liabilities and Shareholders' Equity | |
Current Liabilities | Current Liabilities | | Current Liabilities | |
Short-Term Debt | Short-Term Debt | $ | 97,770 | | | $ | 91,163 | | Short-Term Debt | $ | 60,854 | | | $ | 8,204 | |
Current Maturities of Long-Term Debt | 29,990 | | | 29,983 | | |
| Accounts Payable | Accounts Payable | 119,022 | | | 135,089 | | Accounts Payable | 93,543 | | | 104,400 | |
Accrued Salaries and Wages | Accrued Salaries and Wages | 19,846 | | | 31,704 | | Accrued Salaries and Wages | 20,149 | | | 32,327 | |
Accrued Taxes | Accrued Taxes | 21,879 | | | 19,245 | | Accrued Taxes | 23,415 | | | 19,340 | |
Regulatory Liabilities | Regulatory Liabilities | 27,211 | | | 24,844 | | Regulatory Liabilities | 20,526 | | | 17,300 | |
Other Current Liabilities | Other Current Liabilities | 57,437 | | | 55,671 | | Other Current Liabilities | 43,977 | | | 56,065 | |
Total Current Liabilities | Total Current Liabilities | 373,155 | | | 387,699 | | Total Current Liabilities | 262,464 | | | 237,636 | |
Noncurrent Liabilities | Noncurrent Liabilities | | Noncurrent Liabilities | |
Pension Benefit Liability | Pension Benefit Liability | 53,153 | | | 73,973 | | Pension Benefit Liability | 33,185 | | | 33,210 | |
Other Postretirement Benefits Liability | Other Postretirement Benefits Liability | 66,383 | | | 66,481 | | Other Postretirement Benefits Liability | 47,469 | | | 46,977 | |
Regulatory Liabilities | Regulatory Liabilities | 233,989 | | | 234,430 | | Regulatory Liabilities | 245,071 | | | 244,497 | |
Deferred Income Taxes | Deferred Income Taxes | 203,877 | | | 188,268 | | Deferred Income Taxes | 230,393 | | | 221,302 | |
Deferred Tax Credits | Deferred Tax Credits | 16,475 | | | 16,661 | | Deferred Tax Credits | 15,730 | | | 15,916 | |
Other Noncurrent Liabilities | Other Noncurrent Liabilities | 63,497 | | | 62,527 | | Other Noncurrent Liabilities | 65,439 | | | 60,985 | |
Total Noncurrent Liabilities | Total Noncurrent Liabilities | 637,374 | | | 642,340 | | Total Noncurrent Liabilities | 637,287 | | | 622,887 | |
Commitments and Contingencies (Note 9) | Commitments and Contingencies (Note 9) | 0 | | 0 | Commitments and Contingencies (Note 9) | |
Capitalization | Capitalization | | Capitalization | |
Long-Term Debt, net of current maturities | 734,074 | | | 734,014 | | |
Long-Term Debt | | Long-Term Debt | 823,882 | | | 823,821 | |
Shareholders' Equity | Shareholders' Equity | | Shareholders' Equity | |
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 | | |
Common Shares: 50,000,000 shares authorized, $5 par value; 41,684,526 and 41,631,113 outstanding at March 31, 2023 and December 31, 2022 | | Common Shares: 50,000,000 shares authorized, $5 par value; 41,684,526 and 41,631,113 outstanding at March 31, 2023 and December 31, 2022 | 208,423 | | | 208,156 | |
Additional Paid-In Capital | Additional Paid-In Capital | 421,449 | | | 419,760 | | Additional Paid-In Capital | 424,948 | | | 423,034 | |
Retained Earnings | Retained Earnings | 424,605 | | | 369,783 | | Retained Earnings | 629,437 | | | 585,212 | |
Accumulated Other Comprehensive Loss | (6,945) | | | (6,524) | | |
Accumulated Other Comprehensive Income | | Accumulated Other Comprehensive Income | 969 | | | 915 | |
Total Shareholders' Equity | Total Shareholders' Equity | 1,047,138 | | | 990,777 | | Total Shareholders' Equity | 1,263,777 | | | 1,217,317 | |
Total Capitalization | Total Capitalization | 1,781,212 | | | 1,724,791 | | Total Capitalization | 2,087,659 | | | 2,041,138 | |
Total Liabilities and Shareholders' Equity | Total Liabilities and Shareholders' Equity | $ | 2,791,741 | | | $ | 2,754,830 | | Total Liabilities and Shareholders' Equity | $ | 2,987,410 | | | $ | 2,901,661 | |
See accompanying notes to consolidated financial statements.
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (unaudited) | | | Three Months Ended March 31, | | | Three Months Ended March 31, | |
(in thousands, except per-share amounts) | (in thousands, except per-share amounts) | 2022 | | 2021 | | (in thousands, except per-share amounts) | 2023 | | 2022 | |
| Operating Revenues | Operating Revenues | | | | | Operating Revenues | | | | |
Electric | Electric | $ | 130,416 | | | $ | 123,699 | | | Electric | $ | 151,909 | | | $ | 130,416 | | |
Product Sales | Product Sales | 244,488 | | | 138,011 | | | Product Sales | 187,172 | | | 244,488 | | |
Total Operating Revenues | Total Operating Revenues | 374,904 | | | 261,710 | | | Total Operating Revenues | 339,081 | | | 374,904 | | |
Operating Expenses | Operating Expenses | | | Operating Expenses | | |
Electric Production Fuel | Electric Production Fuel | 14,853 | | | 14,714 | | | Electric Production Fuel | 11,492 | | | 14,853 | | |
Electric Purchased Power | Electric Purchased Power | 20,529 | | | 19,260 | | | Electric Purchased Power | 41,825 | | | 20,529 | | |
Electric Operating and Maintenance Expenses | Electric Operating and Maintenance Expenses | 44,278 | | | 41,421 | | | Electric Operating and Maintenance Expenses | 45,549 | | | 44,278 | | |
Cost of Products Sold (excluding depreciation) | Cost of Products Sold (excluding depreciation) | 151,759 | | | 101,977 | | | Cost of Products Sold (excluding depreciation) | 112,369 | | | 151,759 | | |
Other Nonelectric Expenses | Other Nonelectric Expenses | 17,206 | | | 13,693 | | | Other Nonelectric Expenses | 18,699 | | | 17,206 | | |
Depreciation and Amortization | Depreciation and Amortization | 23,548 | | | 22,126 | | | Depreciation and Amortization | 23,856 | | | 23,548 | | |
Electric Property Taxes | Electric Property Taxes | 4,432 | | | 4,320 | | | Electric Property Taxes | 4,621 | | | 4,432 | | |
Total Operating Expenses | Total Operating Expenses | 276,605 | | | 217,511 | | | Total Operating Expenses | 258,411 | | | 276,605 | | |
Operating Income | Operating Income | 98,299 | | | 44,199 | | | Operating Income | 80,670 | | | 98,299 | | |
Other Income and Expense | | | |
Interest Charges | 8,948 | | | 9,398 | | | |
Nonservice Cost Components of Postretirement Benefits | (22) | | | 383 | | | |
Other Income and (Expense) | | Other Income and (Expense) | | |
Interest Expense | | Interest Expense | (9,415) | | | (8,948) | | |
Nonservice Components of Postretirement Benefits | | Nonservice Components of Postretirement Benefits | 2,412 | | | 22 | | |
Other Income (Expense), net | Other Income (Expense), net | 260 | | | 1,160 | | | Other Income (Expense), net | 2,118 | | | 260 | | |
Income Before Income Taxes | Income Before Income Taxes | 89,633 | | | 35,578 | | | Income Before Income Taxes | 75,785 | | | 89,633 | | |
Income Tax Expense | Income Tax Expense | 17,630 | | | 5,249 | | | Income Tax Expense | 13,304 | | | 17,630 | | |
Net Income | Net Income | $ | 72,003 | | | $ | 30,329 | | | Net Income | $ | 62,481 | | | $ | 72,003 | | |
| Weighted-Average Common Shares Outstanding: | Weighted-Average Common Shares Outstanding: | | | Weighted-Average Common Shares Outstanding: | | |
Basic | Basic | 41,548 | | | 41,455 | | | Basic | 41,632 | | | 41,548 | | |
Diluted | Diluted | 41,871 | | | 41,700 | | | Diluted | 41,977 | | | 41,871 | | |
Earnings Per Share: | Earnings Per Share: | | | Earnings Per Share: | | |
Basic | Basic | $ | 1.73 | | | $ | 0.73 | | | Basic | $ | 1.50 | | | $ | 1.73 | | |
Diluted | Diluted | $ | 1.72 | | | $ | 0.73 | | | Diluted | $ | 1.49 | | | $ | 1.72 | | |
See accompanying notes to consolidated financial statements.
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) | | | | | | | | | | | | | | | |
| 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 | | | | | |
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| Three Months Ended March 31, | | |
(in thousands) | 2023 | | 2022 | | | | |
| | | | | | | |
Net Income | $ | 62,481 | | | $ | 72,003 | | | | | |
Other Comprehensive Income (Loss): | | | | | | | |
Unrealized Gain (Loss) on Available-for-Sale Securities, net of tax (expense) benefit of $(21) and $61 | 80 | | | (231) | | | | | |
Pension and Other Postretirement Benefits, net of tax benefit of $9 and $67 | (26) | | | (190) | | | | | |
Total Other Comprehensive Income (Loss) | 54 | | | (421) | | | | | |
Total Comprehensive Income | $ | 62,535 | | | $ | 71,582 | | | | | |
See accompanying notes to consolidated financial statements.
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited) | (in thousands, except common shares outstanding) | (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 | (in thousands, except common shares outstanding) | Common Shares Outstanding | | Par Value, Common Shares | | Additional Paid-In Capital | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total Shareholders' Equity |
| Balance, December 31, 2022 | | Balance, December 31, 2022 | 41,631,113 | | | $ | 208,156 | | | $ | 423,034 | | | $ | 585,212 | | | $ | 915 | | | $ | 1,217,317 | |
| Stock Issued Under Share-Based Compensation Plans, net of shares withheld for employee taxes | | Stock Issued Under Share-Based Compensation Plans, net of shares withheld for employee taxes | 53,413 | | | 267 | | | (3,355) | | | — | | | — | | | (3,088) | |
| Net Income | | Net Income | — | | | — | | | — | | | 62,481 | | | — | | | 62,481 | |
Other Comprehensive Income | | Other Comprehensive Income | — | | | — | | | — | | | — | | | 54 | | | 54 | |
Stock Compensation Expense | | Stock Compensation Expense | — | | | — | | | 5,269 | | | — | | | — | | | 5,269 | |
Common Dividends ($0.4375 per share) | | Common Dividends ($0.4375 per share) | — | | | — | | | — | | | (18,256) | | | — | | | (18,256) | |
Balance, March 31, 2023 | | Balance, March 31, 2023 | 41,684,526 | | | $ | 208,423 | | | $ | 424,948 | | | $ | 629,437 | | | $ | 969 | | | $ | 1,263,777 | |
| Balance, December 31, 2021 | Balance, December 31, 2021 | 41,551,524 | | | $ | 207,758 | | | $ | 419,760 | | | $ | 369,783 | | | $ | (6,524) | | | $ | 990,777 | | Balance, December 31, 2021 | 41,551,524 | | | $ | 207,758 | | | $ | 419,760 | | | $ | 369,783 | | | $ | (6,524) | | | $ | 990,777 | |
| Stock Issued Under Share-Based Compensation Plans, net of shares withheld for employee taxes | Stock Issued Under Share-Based Compensation Plans, net of shares withheld for employee taxes | 54,360 | | | 271 | | | (3,215) | | | — | | | — | | | (2,944) | | Stock Issued Under Share-Based Compensation Plans, net of shares withheld for employee taxes | 54,360 | | | 271 | | | (3,215) | | | — | | | — | | | (2,944) | |
| Net Income | Net Income | — | | | — | | | — | | | 72,003 | | | — | | | 72,003 | | Net Income | — | | | — | | | — | | | 72,003 | | | — | | | 72,003 | |
Other Comprehensive Loss | Other Comprehensive Loss | — | | | — | | | — | | | — | | | (421) | | | (421) | | Other Comprehensive Loss | — | | | — | | | — | | | — | | | (421) | | | (421) | |
Stock Compensation Expense | Stock Compensation Expense | — | | | — | | | 4,904 | | | — | | | — | | | 4,904 | | Stock Compensation Expense | — | | | — | | | 4,904 | | | — | | | — | | | 4,904 | |
Common Dividends ($0.4125 per share) | Common Dividends ($0.4125 per share) | — | | | — | | | — | | | (17,181) | | | — | | | (17,181) | | Common Dividends ($0.4125 per share) | — | | | — | | | — | | | (17,181) | | | — | | | (17,181) | |
Balance, March 31, 2022 | Balance, March 31, 2022 | 41,605,884 | | | $ | 208,029 | | | $ | 421,449 | | | $ | 424,605 | | | $ | (6,945) | | | $ | 1,047,138 | | Balance, March 31, 2022 | 41,605,884 | | | $ | 208,029 | | | $ | 421,449 | | | $ | 424,605 | | | $ | (6,945) | | | $ | 1,047,138 | |
| Balance, December 31, 2020 | 41,469,879 | | | $ | 207,349 | | | $ | 414,246 | | | $ | 257,878 | | | $ | (8,507) | | | $ | 870,966 | | |
| 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) | | | Three Months Ended March 31, | | Three Months Ended March 31, |
(in thousands) | (in thousands) | 2022 | | 2021 | (in thousands) | 2023 | | 2022 |
| Operating Activities | Operating Activities | | | | Operating Activities | | | |
Net Income | Net Income | $ | 72,003 | | | $ | 30,329 | | Net Income | $ | 62,481 | | | $ | 72,003 | |
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 | 23,548 | | | 22,126 | | Depreciation and Amortization | 23,856 | | | 23,548 | |
Deferred Tax Credits | Deferred Tax Credits | (186) | | | (186) | | Deferred Tax Credits | (186) | | | (186) | |
Deferred Income Taxes | Deferred Income Taxes | 14,342 | | | 5,697 | | Deferred Income Taxes | 8,028 | | | 14,342 | |
Discretionary Contribution to Pension Plan | Discretionary Contribution to Pension Plan | (20,000) | | | (10,000) | | Discretionary Contribution to Pension Plan | — | | | (20,000) | |
Allowance for Equity Funds Used During Construction | Allowance for Equity Funds Used During Construction | (260) | | | (45) | | Allowance for Equity Funds Used During Construction | (174) | | | (260) | |
Stock Compensation Expense | Stock Compensation Expense | 4,904 | | | 4,197 | | Stock Compensation Expense | 5,269 | | | 4,904 | |
Other, Net | Other, Net | 866 | | | (1,407) | | Other, Net | (1,562) | | | 866 | |
Changes in Operating Assets and Liabilities: | Changes in Operating Assets and Liabilities: | | Changes in Operating Assets and Liabilities: | |
Receivables | Receivables | (43,943) | | | (20,431) | | Receivables | (31,049) | | | (43,943) | |
Inventories | Inventories | 3,403 | | | (261) | | Inventories | 1,460 | | | 3,403 | |
Regulatory Assets | Regulatory Assets | 4,468 | | | 703 | | Regulatory Assets | 7,147 | | | 4,468 | |
Other Assets | Other Assets | 3,729 | | | (6,421) | | Other Assets | 5,278 | | | 3,729 | |
Accounts Payable | Accounts Payable | (12,533) | | | 2,245 | | Accounts Payable | (7,387) | | | (12,533) | |
Accrued and Other Liabilities | Accrued and Other Liabilities | (7,859) | | | (8,890) | | Accrued and Other Liabilities | (19,617) | | | (7,859) | |
Regulatory Liabilities | Regulatory Liabilities | 2,812 | | | (3,850) | | Regulatory Liabilities | 4,420 | | | 2,812 | |
Pension and Other Postretirement Benefits | Pension and Other Postretirement Benefits | 122 | | | 1,464 | | Pension and Other Postretirement Benefits | (2,411) | | | 122 | |
Net Cash Provided by Operating Activities | Net Cash Provided by Operating Activities | 45,416 | | | 15,270 | | Net Cash Provided by Operating Activities | 55,553 | | | 45,416 | |
Investing Activities | Investing Activities | | Investing Activities | |
Capital Expenditures | Capital Expenditures | (28,710) | | | (50,076) | | Capital Expenditures | (98,101) | | | (28,710) | |
Proceeds from Disposal of Noncurrent Assets | Proceeds from Disposal of Noncurrent Assets | 878 | | | 3,244 | | Proceeds from Disposal of Noncurrent Assets | 1,030 | | | 878 | |
Cash Used for Investments and Other Assets | Cash Used for Investments and Other Assets | (3,617) | | | (2,188) | | Cash Used for Investments and Other Assets | (3,308) | | | (3,617) | |
Net Cash Used in Investing Activities | Net Cash Used in Investing Activities | (31,449) | | | (49,020) | | Net Cash Used in Investing Activities | (100,379) | | | (31,449) | |
Financing Activities | Financing Activities | | Financing Activities | |
Net Borrowings on Short-Term Debt | Net Borrowings on Short-Term Debt | 6,608 | | | 53,854 | | Net Borrowings on Short-Term Debt | 52,650 | | | 6,608 | |
| Payments for Retirement of Long-Term Debt | — | | | (169) | | |
| Dividends Paid | Dividends Paid | (17,181) | | | (16,208) | | Dividends Paid | (18,256) | | | (17,181) | |
Payments for Shares Withheld for Employee Tax Obligations | Payments for Shares Withheld for Employee Tax Obligations | (2,942) | | | (1,507) | | Payments for Shares Withheld for Employee Tax Obligations | (3,088) | | | (2,942) | |
Other, net | Other, net | (618) | | | (2,171) | | Other, net | (1,396) | | | (618) | |
Net Cash (Used in) Provided by Financing Activities | (14,133) | | | 33,799 | | |
Net Cash Provided by (Used in) Financing Activities | | Net Cash Provided by (Used in) Financing Activities | 29,910 | | | (14,133) | |
Net Change in Cash and Cash Equivalents | Net Change in Cash and Cash Equivalents | (166) | | | 49 | | Net Change in Cash and Cash Equivalents | (14,916) | | | (166) | |
Cash and Cash Equivalents at Beginning of Period | Cash and Cash Equivalents at Beginning of Period | 1,537 | | | 1,163 | | Cash and Cash Equivalents at Beginning of Period | 118,996 | | | 1,537 | |
Cash and Cash Equivalents at End of Period | Cash and Cash Equivalents at End of Period | $ | 1,371 | | | $ | 1,212 | | Cash and Cash Equivalents at End of Period | $ | 104,080 | | | $ | 1,371 | |
| | Supplemental Disclosure of Noncash Investing Activities | Supplemental Disclosure of Noncash Investing Activities | | Supplemental Disclosure of Noncash Investing Activities | |
Accrued Property, Plant and Equipment Additions | Accrued Property, Plant and Equipment Additions | $ | 9,165 | | | $ | 18,962 | | Accrued Property, Plant and Equipment Additions | $ | 10,346 | | | $ | 9,165 | |
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 polyvinyl chloride (PVC) pipe products. We classify our business into 3three segments: Electric, Manufacturing and Plastics.
Basis of Presentation
The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the SEC for interim reporting. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles. In the opinion of management, we have included all adjustments, including normal recurring accruals, necessary for a fair presentation of the consolidated financial statements for the periods presented. The consolidated financial statements and condensed notes thereto should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.2022. Because of the seasonality of our businesses and other factors, the earnings for the three months ended March 31, 20222023 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.
ReclassificationsConcentration of Deposits and Investments
Certain reclassifications of amounts previously reported have been madeThe Company has financial instruments that potentially subject us 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, ora concentration risk, including cash and cash equivalents.equivalents held in deposit and money market accounts with various financial institutions. These deposits are guaranteed by the Federal Deposit Insurance Corporation up to an insurance limit of $250,000. Currently, our cash and cash equivalents significantly exceed federally insured levels.
2. Segment Information
We classify our business into 3three segments, Electric, Manufacturing and Plastics, consistent with our business strategy, organizational structure and our internal reporting and review processes used by our chief operating decision maker to make decisions regarding allocation of resources, to assess operating performance and to make strategic decisions.
Certain assets and costs are not allocated to our operating segments. Corporate operating costs include items such as corporate staff and overhead costs, the results of our captive insurance company and other items excluded from the measurement of operating segment performance. Corporate assets consist primarily of cash and cash equivalents, prepaid expenses, investments and fixed assets. Corporate is not an operating segment, rather it is added to operating segment totals to reconcile to consolidated amounts.
Information for each segment and our unallocated corporate costs for the three months ended March 31, 20222023 and 20212022 are as follows:
| | | Three Months Ended March 31, | | | Three Months Ended March 31, | |
(in thousands) | (in thousands) | | 2022 | | 2021 | | (in thousands) | | 2023 | | 2022 | |
| Operating Revenue | Operating Revenue | | | Operating Revenue | | |
Electric | Electric | | $ | 130,416 | | | $ | 123,699 | | | Electric | | $ | 151,909 | | | $ | 130,416 | | |
Manufacturing | Manufacturing | | 104,957 | | | 75,825 | | | Manufacturing | | 106,782 | | | 104,957 | | |
Plastics | Plastics | | 139,531 | | | 62,186 | | | Plastics | | 80,390 | | | 139,531 | | |
Total | Total | | $ | 374,904 | | | $ | 261,710 | | | Total | | $ | 339,081 | | | $ | 374,904 | | |
Net Income (Loss) | Net Income (Loss) | | | Net Income (Loss) | | |
Electric | Electric | | $ | 19,233 | | | $ | 17,587 | | | Electric | | $ | 23,221 | | | $ | 19,233 | | |
Manufacturing | Manufacturing | | 4,084 | | | 5,385 | | | Manufacturing | | 6,862 | | | 4,084 | | |
Plastics | Plastics | | 50,846 | | | 9,147 | | | Plastics | | 33,686 | | | 50,846 | | |
Corporate | Corporate | | (2,160) | | | (1,790) | | | Corporate | | (1,288) | | | (2,160) | | |
Total | Total | | $ | 72,003 | | | $ | 30,329 | | | Total | | $ | 62,481 | | | $ | 72,003 | | |
The following provides the identifiable assets by segment and corporate assets as of March 31, 20222023 and December 31, 2021:2022:
| (in thousands) | (in thousands) | March 31, 2022 | | December 31, 2021 | (in thousands) | March 31, 2023 | | December 31, 2022 |
| Identifiable Assets | Identifiable Assets | | Identifiable Assets | |
Electric | Electric | $ | 2,278,337 | | | $ | 2,283,776 | | Electric | $ | 2,418,544 | | | $ | 2,351,961 | |
Manufacturing | Manufacturing | 269,833 | | | 251,044 | | Manufacturing | 256,451 | | | 245,869 | |
Plastics | Plastics | 184,865 | | | 162,565 | | Plastics | 149,256 | | | 126,318 | |
Corporate | Corporate | 58,706 | | | 57,445 | | Corporate | 163,159 | | | 177,513 | |
Total | Total | $ | 2,791,741 | | | $ | 2,754,830 | | Total | $ | 2,987,410 | | | $ | 2,901,661 | |
3. Revenue
We presentPresented below are our operating revenues to external customers, in total and by amounts arising from contracts with customers and alternative revenue program (ARP) arrangements, disaggregated by revenue source and segment for the three months ended March 31, 20222023 and 2021:2022:
| | | Three Months Ended March 31, | | | Three Months Ended March 31, | |
(in thousands) | (in thousands) | 2022 | | 2021 | | (in thousands) | 2023 | | 2022 | |
| Operating Revenues | Operating Revenues | | | Operating Revenues | | |
Electric Segment | Electric Segment | | | Electric Segment | | |
Retail: Residential | Retail: Residential | $ | 40,561 | | | $ | 37,485 | | | Retail: Residential | $ | 43,972 | | | $ | 40,561 | | |
Retail: Commercial and Industrial | Retail: Commercial and Industrial | 71,171 | | | 66,403 | | | Retail: Commercial and Industrial | 90,489 | | | 71,171 | | |
Retail: Other | Retail: Other | 1,907 | | | 1,818 | | | Retail: Other | 1,992 | | | 1,907 | | |
Total Retail | Total Retail | 113,639 | | | 105,706 | | | Total Retail | 136,453 | | | 113,639 | | |
Transmission | Transmission | 12,556 | | | 11,944 | | | Transmission | 12,107 | | | 12,556 | | |
Wholesale | Wholesale | 2,463 | | | 4,507 | | | Wholesale | 1,838 | | | 2,463 | | |
Other | Other | 1,758 | | | 1,542 | | | Other | 1,511 | | | 1,758 | | |
Total Electric Segment | Total Electric Segment | 130,416 | | | 123,699 | | | Total Electric Segment | 151,909 | | | 130,416 | | |
Manufacturing Segment | Manufacturing Segment | | | Manufacturing Segment | | |
Metal Parts and Tooling | Metal Parts and Tooling | 89,573 | | | 62,673 | | | Metal Parts and Tooling | 90,068 | | | 89,573 | | |
Plastic Products and Tooling | Plastic Products and Tooling | 12,445 | | | 10,295 | | | Plastic Products and Tooling | 14,142 | | | 12,445 | | |
Scrap Metal Sales | Scrap Metal Sales | 2,939 | | | 2,857 | | | Scrap Metal Sales | 2,572 | | | 2,939 | | |
Total Manufacturing Segment | Total Manufacturing Segment | 104,957 | | | 75,825 | | | Total Manufacturing Segment | 106,782 | | | 104,957 | | |
Plastics Segment | Plastics Segment | | | Plastics Segment | | |
PVC Pipe | PVC Pipe | 139,531 | | | 62,186 | | | PVC Pipe | 80,390 | | | 139,531 | | |
Total Operating Revenue | Total Operating Revenue | 374,904 | | | 261,710 | | | Total Operating Revenue | 339,081 | | | 374,904 | | |
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 | (2,460) | | | (975) | | | Electric Segment - ARP Revenues | (1,210) | | | (2,460) | | |
Total Operating Revenues from Contracts with Customers | Total Operating Revenues from Contracts with Customers | $ | 377,364 | | | $ | 262,685 | | | Total Operating Revenues from Contracts with Customers | $ | 340,291 | | | $ | 377,364 | | |
4. Select Balance Sheet Information
Receivables and Allowance for Credit Losses
Receivables as of March 31, 20222023 and December 31, 20212022 are as follows:
| (in thousands) | (in thousands) | March 31, 2022 | | December 31, 2021 | (in thousands) | March 31, 2023 | | December 31, 2022 |
| Receivables | Receivables | | Receivables | |
Trade | Trade | $ | 192,315 | | | $ | 142,297 | | Trade | $ | 145,337 | | | $ | 112,126 | |
Other | Other | 8,139 | | | 10,591 | | Other | 8,918 | | | 9,983 | |
Unbilled Receivables | Unbilled Receivables | 20,229 | | | 23,901 | | Unbilled Receivables | 23,378 | | | 23,932 | |
Total Receivables | Total Receivables | 220,683 | | | 176,789 | | Total Receivables | 177,633 | | | 146,041 | |
Less: Allowance for Credit Losses | Less: Allowance for Credit Losses | (1,787) | | | (1,836) | | Less: Allowance for Credit Losses | 2,191 | | | 1,648 | |
Receivables, net of allowance for credit losses | Receivables, net of allowance for credit losses | $ | 218,896 | | | $ | 174,953 | | Receivables, net of allowance for credit losses | $ | 175,442 | | | $ | 144,393 | |
The following is a summary of activity in the allowance for credit losses for the three months ended March 31, 20222023 and 2021:2022:
| | | March 31, | | March 31, | | | | | | | | | | |
(in thousands) | (in thousands) | 2022 | | 2021 | (in thousands) | 2023 | | 2022 |
| Beginning Balance, January 1 | Beginning Balance, January 1 | $ | 1,836 | | | $ | 3,215 | | Beginning Balance, January 1 | $ | 1,648 | | | $ | 1,836 | |
Additions Charged to Expense | Additions Charged to Expense | 210 | | | 211 | | Additions Charged to Expense | 737 | | | 210 | |
Reductions for Amounts Written Off, Net of Recoveries | Reductions for Amounts Written Off, Net of Recoveries | (259) | | | (443) | | Reductions for Amounts Written Off, Net of Recoveries | (194) | | | (259) | |
Ending Balance, March 31 | Ending Balance, March 31 | $ | 1,787 | | | $ | 2,983 | | Ending Balance, March 31 | $ | 2,191 | | | $ | 1,787 | |
Inventories
Inventories consist of the following as of March 31, 20222023 and December 31, 2021:2022:
| (in thousands) | (in thousands) | March 31, 2022 | | December 31, 2021 | (in thousands) | March 31, 2023 | | December 31, 2022 |
| Raw Material, Fuel and Supplies | | Raw Material, Fuel and Supplies | $ | 73,860 | | | $ | 70,374 | |
Work in Process | | Work in Process | 30,602 | | | 31,766 | |
Finished Goods | Finished Goods | $ | 37,195 | | | $ | 39,903 | | Finished Goods | 40,305 | | | 43,812 | |
Work in Process | 33,962 | | | 35,705 | | |
Raw Material, Fuel and Supplies | 74,700 | | | 72,882 | | |
Total Inventories | Total Inventories | $ | 145,857 | | | $ | 148,490 | | Total Inventories | $ | 144,767 | | | $ | 145,952 | |
Investments
The following is a summary of our investments as of March 31, 20222023 and December 31, 2021:2022:
| (in thousands) | (in thousands) | March 31, 2022 | | December 31, 2021 | (in thousands) | March 31, 2023 | | December 31, 2022 |
| Corporate-Owned Life Insurance Policies | Corporate-Owned Life Insurance Policies | $ | 40,722 | | | $ | 41,078 | | Corporate-Owned Life Insurance Policies | $ | 39,781 | | | $ | 38,991 | |
Debt Securities | 8,959 | | | 9,202 | | |
Corporate and Government Debt Securities | | Corporate and Government Debt Securities | 8,971 | | | 8,761 | |
Money Market Funds | Money Market Funds | 1,893 | | | 949 | | Money Market Funds | 2,148 | | | 1,560 | |
Mutual Funds | Mutual Funds | 6,285 | | | 5,432 | | Mutual Funds | 7,128 | | | 5,503 | |
Other Investments | Other Investments | 34 | | | 29 | | Other Investments | 30 | | | 30 | |
Total Investments | Total Investments | $ | 57,893 | | | $ | 56,690 | | Total Investments | $ | 58,058 | | | $ | 54,845 | |
The amount of unrealized gains and losses on debt securities as of March 31, 20222023 and December 31, 20212022 was not material and no unrealized losses were deemed to be other-than-temporary. In addition, the amount of unrealized gains and losses on marketable equity securities still held as of March 31, 20222023 and December 31, 20212022 was not material.
Property, Plant and Equipment
Major classes of property, plant and equipment as of March 31, 20222023 and December 31, 20212022 include:
| (in thousands) | (in thousands) | March 31, 2022 | | December 31, 2021 | (in thousands) | March 31, 2023 | | December 31, 2022 |
| Electric Plant | Electric Plant | | | | Electric Plant | | | |
Electric Plant in Service | Electric Plant in Service | $ | 2,776,778 | | | $ | 2,758,445 | | Electric Plant in Service | $ | 2,917,699 | | | $ | 2,844,379 | |
Construction Work in Progress | Construction Work in Progress | 72,347 | | | 74,926 | | Construction Work in Progress | 128,328 | | | 113,932 | |
Total Gross Electric Plant | Total Gross Electric Plant | 2,849,125 | | | 2,833,371 | | Total Gross Electric Plant | 3,046,027 | | | 2,958,311 | |
Less Accumulated Depreciation and Amortization | Less Accumulated Depreciation and Amortization | 829,499 | | | 817,302 | | Less Accumulated Depreciation and Amortization | 876,330 | | | 859,988 | |
Net Electric Plant | Net Electric Plant | 2,019,626 | | | 2,016,069 | | Net Electric Plant | 2,169,697 | | | 2,098,323 | |
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 | 278,729 | | | 273,950 | | Nonelectric Property, Plant and Equipment in Service | 295,548 | | | 293,928 | |
Construction Work in Progress | Construction Work in Progress | 14,365 | | | 16,611 | | Construction Work in Progress | 22,840 | | | 15,170 | |
Total Gross Nonelectric Property, Plant and Equipment | Total Gross Nonelectric Property, Plant and Equipment | 293,094 | | | 290,561 | | Total Gross Nonelectric Property, Plant and Equipment | 318,388 | | | 309,098 | |
Less Accumulated Depreciation and Amortization | Less Accumulated Depreciation and Amortization | 184,376 | | | 182,025 | | Less Accumulated Depreciation and Amortization | 198,594 | | | 194,704 | |
Net Nonelectric Property, Plant and Equipment | Net Nonelectric Property, Plant and Equipment | 108,718 | | | 108,536 | | Net Nonelectric Property, Plant and Equipment | 119,794 | | | 114,394 | |
Net Property, Plant and Equipment | Net Property, Plant and Equipment | $ | 2,128,344 | | | $ | 2,124,605 | | Net Property, Plant and Equipment | $ | 2,289,491 | | | $ | 2,212,717 | |
On January 3, 2023, we purchased the Ashtabula III wind farm, located in eastern North Dakota, which consists of 39 wind turbines and the related infrastructure, adding 62.4 megawatts of nameplate capacity to our owned generation assets. The total purchase price of the acquisition was $50.6 million. In addition to the acquired assets, we also recognized a $3.3 million asset retirement obligation liability associated with the wind farm and became party to the land easement agreements with the landowners of the wind farm.
5. Regulatory Matters
Regulatory Assets and Liabilities
The following presents our current and long-term regulatory assets and liabilities as of March 31, 20222023 and December 31, 20212022 and the period we expect to recover or refund such amounts:
| | | Period of | | March 31, 2022 | | December 31, 2021 | | Period of | | March 31, 2023 | | December 31, 2022 |
(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 | | $ | 7,791 | | | $ | 113,663 | | | $ | 7,791 | | | $ | 114,961 | | Pension and Other Postretirement Benefit Plans1 | See Below | | $ | — | | | $ | 89,474 | | | $ | — | | | $ | 88,354 | |
Alternative Revenue Program Riders2 | Alternative Revenue Program Riders2 | Up to 2 years | | 9,280 | | | 5,713 | | | 11,889 | | | 5,564 | | Alternative Revenue Program Riders2 | Up to 2 years | | 3,705 | | | 3,272 | | | 5,679 | | | 2,508 | |
Asset Retirement Obligations1 | Asset Retirement Obligations1 | Asset lives | | — | | | 1,098 | | | — | | | 742 | | Asset Retirement Obligations1 | Asset lives | | — | | | 1,670 | | | — | | | 1,467 | |
| Deferred Income Taxes | | Deferred Income Taxes | Asset lives | | — | | | 729 | | | — | | | — | |
ISO Cost Recovery Trackers1 | ISO Cost Recovery Trackers1 | Up to 2 years | | 220 | | | 950 | | | — | | | 1,342 | | ISO Cost Recovery Trackers1 | Up to 2 years | | 432 | | | 201 | | | 575 | | | 314 | |
Unrecovered Project Costs1 | Unrecovered Project Costs1 | Up to 5 years | | 1,086 | | | 1,456 | | | 2,136 | | | 1,455 | | Unrecovered Project Costs1 | Up to 5 years | | 319 | | | 916 | | | 320 | | | 990 | |
Deferred Rate Case Expenses1 | Deferred Rate Case Expenses1 | Various | | 542 | | | 1,037 | | | 607 | | | 1,131 | | Deferred Rate Case Expenses1 | Up to 3 years | | 377 | | | 660 | | | 377 | | | 754 | |
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 | | | — | | Fuel Clause Adjustments1 | Up to 1 year | | 11,361 | | | — | | | 10,893 | | | — | |
Derivative Instruments1 | | Derivative Instruments1 | Up to 1 year | | 347 | | | — | | | 7,130 | | | — | |
Other1 | Other1 | Various | | 16 | | | 262 | | | — | | | 73 | | Other1 | Various | | 25 | | | 257 | | | 25 | | | 268 | |
Total Regulatory Assets | Total Regulatory Assets | | $ | 21,770 | | | $ | 124,413 | | | $ | 27,342 | | | $ | 125,508 | | Total Regulatory Assets | | $ | 16,566 | | | $ | 97,179 | | | $ | 24,999 | | | $ | 94,655 | |
Regulatory Liabilities | Regulatory Liabilities | | Regulatory Liabilities | |
Deferred Income Taxes | Deferred Income Taxes | Asset lives | | $ | — | | | $ | 128,042 | | | $ | — | | | $ | 129,437 | | Deferred Income Taxes | Asset lives | | $ | — | | | $ | 130,429 | | | $ | — | | | $ | 131,480 | |
Plant Removal Obligations | Plant Removal Obligations | Asset lives | | 8,561 | | | 101,850 | | | 8,306 | | | 101,595 | | Plant Removal Obligations | Asset lives | | 8,492 | | | 106,181 | | | 8,509 | | | 105,733 | |
Fuel Clause Adjustments | Fuel Clause Adjustments | Up to 1 year | | 5,386 | | | — | | | 1,554 | | | — | | Fuel Clause Adjustments | Up to 1 year | | 3,654 | | | — | | | 365 | | | — | |
Alternative Revenue Program Riders | Alternative Revenue Program Riders | Various | | 6,215 | | | 3,986 | | | 5,772 | | | 3,336 | | Alternative Revenue Program Riders | Up to 1 year | | 2,326 | | | — | | | 2,504 | | | — | |
North Dakota PTC Refunds | | North Dakota PTC Refunds | Asset lives | | — | | | 8,254 | | | — | | | 7,136 | |
Pension and Other Postretirement Benefit Plans | Pension and Other Postretirement Benefit Plans | Up to 1 year | | 2,603 | | | — | | | 2,603 | | | — | | Pension and Other Postretirement Benefit Plans | Up to 1 year | | 5,589 | | | — | | | 5,589 | | | — | |
| Derivative Instruments | Various | | 4,179 | | | — | | | 6,214 | | | — | | |
| Other | Other | Various | | 267 | | | 111 | | | 395 | | | 62 | | Other | Various | | 465 | | | 207 | | | 333 | | | 148 | |
Total Regulatory Liabilities | Total Regulatory Liabilities | | $ | 27,211 | | | $ | 233,989 | | | $ | 24,844 | | | $ | 234,430 | | Total Regulatory Liabilities | | $ | 20,526 | | | $ | 245,071 | | | $ | 17,300 | | | $ | 244,497 | |
| 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 short- and long-term borrowings by borrower, OTC or Otter Tail Power Company (OTP), as of March 31, 20222023 and December 31, 2021:2022:
Short-Term Debt
The following is a summary of our lines of credit as of March 31, 20222023 and December 31, 2021:2022:
| | | March 31, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
(in thousands) | (in thousands) | Line Limit | | Amount Outstanding | | Letters of Credit | | Amount Available | | Amount Available | (in thousands) | Borrowing Limit | | Amount Outstanding | | Letters of Credit | | Amount Available | | Amount Available |
| OTC Credit Agreement | OTC Credit Agreement | $ | 170,000 | | | $ | 43,281 | | | $ | — | | | $ | 126,719 | | | $ | 147,363 | | OTC Credit Agreement | $ | 170,000 | | | $ | — | | | $ | — | | | $ | 170,000 | | | $ | 170,000 | |
OTP Credit Agreement | OTP Credit Agreement | 170,000 | | | 54,489 | | | 7,844 | | | 107,667 | | | 88,315 | | OTP Credit Agreement | 170,000 | | | 60,854 | | | 9,573 | | | 99,573 | | | 152,223 | |
Total | Total | $ | 340,000 | | | $ | 97,770 | | | $ | 7,844 | | | $ | 234,386 | | | $ | 235,678 | | Total | $ | 340,000 | | | $ | 60,854 | | | $ | 9,573 | | | $ | 269,573 | | | $ | 322,223 | |
Long-Term Debt
The following is a summary of outstanding long-term debt by borrower as of March 31, 20222023 and December 31, 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | (in thousands) |
Entity | | Debt Instrument | | Rate | | Maturity | | March 31, 2022 | | December 31, 2021 |
| | | | | | | | | | |
OTC | | Guaranteed Senior Notes | | 3.55% | | 12/15/26 | | $ | 80,000 | | | $ | 80,000 | |
OTP | | Series 2007B Senior Unsecured Notes | | 6.15% | | 08/20/22 | | 30,000 | | | 30,000 | |
OTP | | Series 2007C Senior Unsecured Notes | | 6.37% | | 08/02/27 | | 42,000 | | | 42,000 | |
OTP | | Series 2013A Senior Unsecured Notes | | 4.68% | | 02/27/29 | | 60,000 | | | 60,000 | |
OTP | | Series 2019A Senior Unsecured Notes | | 3.07% | | 10/10/29 | | 10,000 | | | 10,000 | |
OTP | | Series 2020A Senior Unsecured Notes | | 3.22% | | 02/25/30 | | 10,000 | | | 10,000 | |
OTP | | Series 2020B Senior Unsecured Notes | | 3.22% | | 08/20/30 | | 40,000 | | | 40,000 | |
OTP | | Series 2021A Senior Unsecured Notes | | 2.74% | | 11/29/31 | | 40,000 | | | 40,000 | |
OTP | | Series 2007D Senior Unsecured Notes | | 6.47% | | 08/20/37 | | 50,000 | | | 50,000 | |
OTP | | Series 2019B Senior Unsecured Notes | | 3.52% | | 10/10/39 | | 26,000 | | | 26,000 | |
OTP | | Series 2020C Senior Unsecured Notes | | 3.62% | | 02/25/40 | | 10,000 | | | 10,000 | |
OTP | | Series 2013B Senior Unsecured Notes | | 5.47% | | 02/27/44 | | 90,000 | | | 90,000 | |
OTP | | Series 2018A Senior Unsecured Notes | | 4.07% | | 02/07/48 | | 100,000 | | | 100,000 | |
OTP | | Series 2019C Senior Unsecured Notes | | 3.82% | | 10/10/49 | | 64,000 | | | 64,000 | |
OTP | | Series 2020D Senior Unsecured Notes | | 3.92% | | 02/25/50 | | 15,000 | | | 15,000 | |
OTP | | Series 2021B Senior Unsecured Notes | | 3.69% | | 11/29/51 | | 100,000 | | | 100,000 | |
Total | | | | | | | | $ | 767,000 | | | $ | 767,000 | |
Less: | Current Maturities, Net of Unamortized Debt Issuance Costs | | | | | | 29,990 | | | 29,983 | |
| Unamortized Long-Term Debt Issuance Costs | | | | | | 2,936 | | | 3,003 | |
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, $230.0 million of senior unsecured notes consisting of (a) $40.0 million of 2.74% Series 2021A Senior Unsecured Notes due November 29, 2031, (b) $100.0 million of 3.69% Series 2021B Senior Unsecured Notes due November 29, 2051 and (c) $90.0 million of 3.77% Series 2022A Senior Unsecured Notes due May 20, 2052. During the year ended December 31, 2021, OTP issued its Series 2021A and Series 2021B notes for aggregate proceeds of $140.0 million, which were used to repay the Series 2011A notes. The issuance of the Series 2022A notes is scheduled to close, subject to the satisfaction of certain customary conditions to closing, in May 2022. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Borrower | | Debt Instrument | | Rate | | Maturity | | March 31, 2023 | | December 31, 2022 |
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OTC | | Guaranteed Senior Notes | | 3.55% | | 12/15/26 | | $ | 80,000 | | | $ | 80,000 | |
OTP | | Series 2007C Senior Unsecured Notes | | 6.37% | | 08/02/27 | | 42,000 | | | 42,000 | |
OTP | | Series 2013A Senior Unsecured Notes | | 4.68% | | 02/27/29 | | 60,000 | | | 60,000 | |
OTP | | Series 2019A Senior Unsecured Notes | | 3.07% | | 10/10/29 | | 10,000 | | | 10,000 | |
OTP | | Series 2020A Senior Unsecured Notes | | 3.22% | | 02/25/30 | | 10,000 | | | 10,000 | |
OTP | | Series 2020B Senior Unsecured Notes | | 3.22% | | 08/20/30 | | 40,000 | | | 40,000 | |
OTP | | Series 2021A Senior Unsecured Notes | | 2.74% | | 11/29/31 | | 40,000 | | | 40,000 | |
OTP | | Series 2007D Senior Unsecured Notes | | 6.47% | | 08/20/37 | | 50,000 | | | 50,000 | |
OTP | | Series 2019B Senior Unsecured Notes | | 3.52% | | 10/10/39 | | 26,000 | | | 26,000 | |
OTP | | Series 2020C Senior Unsecured Notes | | 3.62% | | 02/25/40 | | 10,000 | | | 10,000 | |
OTP | | Series 2013B Senior Unsecured Notes | | 5.47% | | 02/27/44 | | 90,000 | | | 90,000 | |
OTP | | Series 2018A Senior Unsecured Notes | | 4.07% | | 02/07/48 | | 100,000 | | | 100,000 | |
OTP | | Series 2019C Senior Unsecured Notes | | 3.82% | | 10/10/49 | | 64,000 | | | 64,000 | |
OTP | | Series 2020D Senior Unsecured Notes | | 3.92% | | 02/25/50 | | 15,000 | | | 15,000 | |
OTP | | Series 2021B Senior Unsecured Notes | | 3.69% | | 11/29/51 | | 100,000 | | | 100,000 | |
OTP | | Series 2022A Senior Unsecured Notes | | 3.77% | | 05/20/52 | | 90,000 | | | 90,000 | |
Total | | | | | | | | $ | 827,000 | | | $ | 827,000 | |
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Less: | Unamortized Long-Term Debt Issuance Costs | | | | | | 3,118 | | | 3,179 | |
Total Long-Term Debt, Net of Unamortized Debt Issuance Costs | | | | $ | 823,882 | | | $ | 823,821 | |
Financial Covenants
Certain of OTC's and OTP's short- and long-term debt agreements require the borrower, whether OTC or OTP, to maintain certain financial covenants, including a maximum debt to total capitalization ratio of 0.60 to 1.00, a minimum interest and dividend coverage ratio of 1.50 to 1.00, and a maximum level of priority indebtedness. As of March 31, 2022,2023, OTC and OTP were in compliance with these financial covenants.
7. Employee Postretirement Benefits
Pension Plan and Other Postretirement Benefits
The Company sponsors a noncontributory funded pension plan (the "Pension Plan"), an unfunded, nonqualified Executive Survivor and Supplemental Retirement Plan (the "ESSRP"), both accounted for as defined benefit pension plans, and a postretirement healthcare plan accounted for as an other postretirement benefit plan.
The following table includes the components of net periodic benefit cost of(income) related to our defined benefit pension plans and other postretirement benefits for the three months ended March 31, 20222023 and 2021:2022:
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| Three Months Ended March 31, |
| Pension Benefits (Pension Plan) | | Pension Benefits (ESSRP) | | Postretirement Benefits |
(in thousands) | 2023 | | 2022 | | 2023 | | 2022 | | 2023 | | 2022 |
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Service Cost | $ | 925 | | | $ | 1,644 | | | $ | 18 | | | $ | 49 | | | $ | 153 | | | $ | 335 | |
Interest Cost | 4,109 | | | 3,086 | | | 314 | | | 335 | | | 669 | | | 510 | |
Expected Return on Assets | (6,479) | | | (5,921) | | | — | | | — | | | — | | | — | |
Amortization of Prior Service Cost | — | | | — | | | — | | | — | | | (1,433) | | | (1,433) | |
Amortization of Net Actuarial Loss | — | | | 1,966 | | | — | | | 142 | | | — | | | 766 | |
Net Periodic Benefit Cost (Income) | $ | (1,445) | | | $ | 775 | | | $ | 332 | | | $ | 526 | | | $ | (611) | | | $ | 178 | |
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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 (income) arising from pension and other postretirement benefits for the three months ended March 31, 20222023 and 2021:2022:
| | | | | | | | | | | | | Three Months Ended March 31, | |
(in thousands) | (in thousands) | 2022 | | 2021 | (in thousands) | 2023 | | 2022 | |
| Net Periodic Benefit Cost | $ | 1,479 | | | $ | 2,841 | | |
Net Periodic Benefit Cost (Income) | | Net Periodic Benefit Cost (Income) | $ | (1,724) | | | $ | 1,479 | | |
Net Amount Amortized (Deferred) Due to the Effect of Regulation | Net Amount Amortized (Deferred) Due to the Effect of Regulation | 527 | | | (115) | | Net Amount Amortized (Deferred) Due to the Effect of Regulation | 408 | | | 527 | | |
Net Periodic Benefit Cost Recognized | $ | 2,006 | | | $ | 2,726 | | |
Net Periodic Benefit Cost (Income) Recognized | | Net Periodic Benefit Cost (Income) Recognized | $ | (1,316) | | | $ | 2,006 | | |
We had no minimum funding requirements for our pension planPension Plan or any other postretirement benefit plans as of December 31, 2021, but2022. We did not make any contributions to our Pension Plan during the three months ended March 31, 2023. We made a discretionary contributioncontributions to our Pension Plan of $20.0 million to our pension plan in Februaryduring the three months ended March 31, 2022.
8. Income Taxes
The reconciliation of the statutory federal income tax rate to our effective tax rate for each of the three months ended March 31, 20222023 and 20212022 is as follows: | | | Three Months Ended March 31, | | | Three Months Ended | |
| | 2022 | | 2021 | | | 2023 | | 2022 | |
| Federal Statutory Rate | 21.0 | % | | 21.0 | % | | |
Income Taxes at Federal Statutory Rate | | Income Taxes at Federal Statutory Rate | $ | 15,915 | | 21.0 | % | | $ | 18,823 | | 21.0 | % | |
Increases (Decreases) in Tax from: | Increases (Decreases) in Tax from: | | | Increases (Decreases) in Tax from: | | |
State Taxes on Income, Net of Federal Tax | State Taxes on Income, Net of Federal Tax | 5.0 | | | 5.0 | | | State Taxes on Income, Net of Federal Tax | 3,789 | | 5.0 | | | 4,482 | | 5.0 | | |
Production Tax Credits (PTCs) | Production Tax Credits (PTCs) | (4.4) | | | (7.6) | | | Production Tax Credits (PTCs) | (4,655) | | (6.1) | | | (3,967) | | (4.4) | | |
Amortization of Excess Deferred Income Taxes | Amortization of Excess Deferred Income Taxes | (1.3) | | | (2.9) | | | Amortization of Excess Deferred Income Taxes | (798) | | (1.1) | | | (1,177) | | (1.3) | | |
Excess Tax Deduction on Stock Awards | (0.5) | | | (0.1) | | | |
North Dakota Wind Tax Credit Amortization, Net of Federal Tax | North Dakota Wind Tax Credit Amortization, Net of Federal Tax | (0.2) | | | (0.4) | | | North Dakota Wind Tax Credit Amortization, Net of Federal Tax | (164) | | (0.2) | | | (200) | | (0.2) | | |
Corporate-Owned Life Insurance | 0.2 | | | (0.5) | | | |
| Allowance for Equity Funds Used During Construction | | Allowance for Equity Funds Used During Construction | (51) | | (0.1) | | | (93) | | (0.1) | | |
Other, Net | Other, Net | (0.1) | | | 0.3 | | | Other, Net | (732) | | (0.9) | | | (238) | | (0.3) | | |
Effective Tax Rate | 19.7 | % | | 14.8 | % | | |
Income Tax Expense / Effective Tax Rate | | Income Tax Expense / Effective Tax Rate | $ | 13,304 | | 17.6 | % | | $ | 17,630 | | 19.7 | % | |
9. Commitments and Contingencies
Commitments
Land Easements. Since 2013, we had purchased the wind-generated electricity from the Ashtabula III wind farm pursuant to a power purchase agreement. That agreement granted us the option to purchase the wind farm and on January 3, 2023, we completed the purchase for $50.6 million. In connection with the purchase, we assumed 51 land easements, not classified as leases, which require annual payments. The remaining payments to be made under the easements total $4.2 million and the remaining terms of the agreements extend into 2034.
Contingencies
FERC ROE.Return on Equity (ROE). In November 2013 and February 2015, customers filed complaints with the Federal Energy Regulatory Commission (FERC) seeking to reduce the return on equity (ROE) component of the transmission rates that Midcontinent Independent System Operator, Inc. (MISO) transmission owners, including OTP, may collect under the MISO tariff rate. FERC's most recent order, issued on November 19, 2020, adopted a revised ROE methodology and set the base ROE at 10.02% (10.52% with an adder) effective for the fifteen-month period from November 2013 to February 2015 and on a prospective basis beginning in September 2016. The order also dismissed any complaints covering the period from February 2015 to May 2016. TheOn August 9, 2022, the U.S. Court of Appeals for the District of Columbia Circuit vacated the FERC order citing a lack of reasoned explanation by FERC in its adoption of its revised ROE methodology as outlined in its November 2020 opinionorder. The U.S. Court of Appeals remanded the matter to FERC to reopen the proceedings.
Significant uncertainty exists as to how FERC will proceed upon remand and there is subject to judicial review.no prescribed timeline under which FERC must act. We have deferred recognition and recorded a refund liability of $2.4$2.6 million as of March 31, 2022.2023. This refund liability reflects our best estimate of amounts previously collected from customers under the MISO tariff rate that may be required refundsto be refunded to customers once all regulatory and judicial proceedings are completed.complete and a final ROE is established for the periods outlined above.
Regional Haze Rule (RHR). The RHR was adopted in an effort to improve visibility in national parks and wilderness areas. The RHR requires states, in coordination with the Environmental Protection Agency (EPA) and other governmental agencies, to develop and implement plans to achieve natural visibility conditions. The second RHR implementation period covers the years 2018-2028. States are required to submit a state implementation plan to assess reasonable progress with the RHR and determine what additional emission reductions are appropriate, if any.
Coyote Station, OTP's jointly owned coal-fired power plant in North Dakota, is subject to assessment in the second implementation period under the North Dakota state implementation plan. In September 2021, theThe North Dakota Department of Environmental Quality (NDDEQ) made public a draft ofsubmitted its state implementation plan. The plan to the EPA for approval in August, 2022. In its plan, the NDDEQ concluded it is not reasonable to require additional emission controls during this planning period. 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 itthis planning period. The EPA has previously expressed disagreement with the NDDEQ's recommendation to forgo additional emission controls. Followingcontrols and has indicated that such a consultation and public comment period, and any subsequent modificationsplan is not likely to the plan, the NDDEQ will submit its state implementation plan to the EPA for approval.be accepted.
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 the early retirement of or the sale of our interest in Coyote Station, subject to regulatory approval. We cannot estimate the ultimate financial effects such a retirement or sale may have on our consolidated operating results, financial position or cash flows, but such amounts could be material and the recovery of such costs in rates would be subject to regulatory approval.
Self-Funding of Transmission Upgrades. The FERChas granted transmission owners within MISO the unilateral authority to determine the funding mechanism for interconnection transmission upgrades that are necessary to accommodate new generation facilities connecting to the electrical grid. Under existing FERC orders, transmission owners can unilaterally determine whether the generator pays the transmission owner in advance for the transmission upgrade or, alternatively, the transmission owner can elect to fund the upgrade and recover over time from the generator the cost of and a return on the upgrade investment (a self-funding). FERC’s orders granting transmission owners this unilateral funding authority has been judicially contested on the basis that transmission owners may be motivated to discriminate among generators in making funding determinations. In the most recent judicial proceedings, the petitioners argued to the U.S. Court of Appeals for the District of Columbia that FERC did not comply with a previous judicial order to fully develop a record regarding the risk of discrimination and the financial risk absorbed by transmission owners for generator-funded upgrades. On December 2, 2022, the Court of Appeals ruled in favor of the petitioners remanding the matter to FERC, instructing the agency to adequately explain the basis of its orders. The Court of Appeals decision did not vacate transmission owners’ unilateral funding authority.
OTP, as a transmission owner in MISO, has exercised its authority and elected to self-fund previous transmission upgrades necessary to accommodate new system generation. Under such an election, OTP is recovering the cost of the transmission upgrade and a return on that investment from the generator over a contractual period of time. Should FERC, on remand from the Court of Appeals, eliminate transmission owners’ unilateral funding authority, on either a prospective or retrospective basis, our financial results would be impacted. We cannot at this time reasonably predict the outcome of this matter given the uncertainty as to how and when FERC may respond to the judicial remand.
Other Contingencies. We are party to litigation and regulatory matters arising in the normal course of business. We regularly analyze relevant information and, as necessary, estimate and record accrued liabilities for legal, regulatory enforcement and other matters in which a loss is probable of occurring and can be reasonably estimated. We believe the effect on our consolidated operating results, financial position and cash flows, if any, for the disposition of all matters pending as of March 31, 2022,2023, 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 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 methods of purchasing our common shares, by reinvesting their dividends or making optional cash investments. Shares purchased under the plan may be newly issued common shares or common shares purchased on the open market. During the three months ended March 31, 2022,2023, we issued 36,10430,893 shares under this program.plan. We repurchased a sufficient number of shares on the open market to satisfy issuance under the plan; accordingly, no proceeds from the issuance were received. As of March 31, 2022,2023, there was 1,348,716were 1,220,100 shares available for purchase or issuance under the plan. The registration statement expires in May 2024.
Dividend Restrictions
OTC is a holding company with no significant operations of its own. The primary source of funds for payments of dividends to ourOTC's shareholders is from dividends paid or distributions made by ourOTC's 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.OTC's subsidiaries or the amount of dividends paid by OTC could be restricted. Both the OTC Credit Agreement and OTP Credit Agreement contain restrictions on the payment of cash dividends upon a default or event of default, including failure to maintain certain financial covenants. As of March 31, 2022,2023, we were in compliance with these financial covenants.
Under the Federal Power Act, a public utility may not pay dividends from any funds properly included in a capital account. What constitutes “funds properly included in a capital account” is undefined in the Federal Power Act or the related regulations; however, the FERC has consistently interpreted the provision to allow dividends to be paid as long as i) the source of the dividends is clearly disclosed, ii) the dividend is not excessive and iii) there is no self-dealing on the part of corporate officials.
The Minnesota Public Utilities Commission (MPUC) indirectly limits the amount of dividends OTP can pay to the CompanyOTC by requiring an equity-to-total-capitalization ratio between 48.0%47.5% and 58.7%58.0% based on OTP’s most recent capital structure petition effective by order of the MPUC on January 26,November 8, 2022. As of March 31, 2022,2023, OTP’s equity-to-total-capitalization ratio, including short-term debt, was 53.2%53.3% and its net assets restricted from distribution totaled approximately $682.0$758.1 million. Under the MPUC order, relating to the Company's 2021 capital structure petition, total capitalization for OTP cannot exceed $1.7$1.8 billion.
11. Accumulated Other Comprehensive Income (Loss)
The following showspresents the changes in accumulated other comprehensive loss for the three months ended March 31, 20222023 and 2021:2022: | | | | | | | | | | | | | | | | | |
(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) | |
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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. | | | | | |
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| Three Months Ended March 31, |
| 2023 | | 2022 |
(in thousands) | Pension and Other Postretirement Benefits | | Net Unrealized Gains (Losses) on Available-for-Sale Securities | | Total | | Pension and Other Postretirement Benefits | | Net Unrealized Gains (Losses) on Available-for-Sale Securities | | Total |
Balance, Beginning of Period | $ | 1,334 | | | $ | (419) | | | $ | 915 | | | $ | (6,537) | | | $ | 13 | | | $ | (6,524) | |
Other Comprehensive Income (Loss) Before Reclassifications, net of tax | — | | | 80 | | | 80 | | | — | | | (231) | | | (231) | |
Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) | (26) | | (1) | — | | | (26) | | | (190) | | (1) | — | | | (190) | |
Total Other Comprehensive Income (Loss) | (26) | | | 80 | | | 54 | | | (190) | | | (231) | | | (421) | |
Balance, End of Period | $ | 1,308 | | | $ | (339) | | | $ | 969 | | | $ | (6,727) | | | $ | (218) | | | $ | (6,945) | |
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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 $4.9$5.3 million and $4.2$4.9 million for the three months ended March 31, 20222023 and 2021,2022, respectively.
Restricted Stock Awards. We grant restricted stock awards to members of our Board of Directors and restricted stock units to certain key employees. The awards vest, depending on award type and recipient, either ratably over periods of three or four years or cliff vest after four years. Vesting is accelerated in certain circumstances, including on retirement.
The following is a summary of stock award activity for the three months ended March 31, 2022:2023: | | | Shares | | Weighted Average Grant-Date Fair Value | | Shares | | Weighted Average Grant-Date Fair Value |
| Nonvested, January 1, 2022 | 138,093 | | | $ | 44.48 | | |
Nonvested, January 1, 2023 | | Nonvested, January 1, 2023 | 141,551 | | | $ | 49.83 | |
Granted | Granted | 15,842 | | | 61.39 | | Granted | 17,900 | | | 64.65 | |
Vested | Vested | (18,969) | | | 46.49 | | Vested | (18,600) | | | 50.94 | |
Forfeited | Forfeited | — | | | — | | Forfeited | — | | | — | |
Nonvested, March 31, 2022 | 134,966 | | | $ | 46.18 | | |
Nonvested, March 31, 2023 | | Nonvested, March 31, 2023 | 140,851 | | | $ | 51.57 | |
The fair value of vested awards was $1.2 million and $0.7 million during the three months ended March 31, 20222023 and 2021, respectively.2022.
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. 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 three months ended March 31, 20222023 and 20212022 was determined using a Monte Carlo fair value simulation model incorporating the following assumptions:
| | | 2022 | | 2021 | | 2023 | | 2022 |
| Risk-free interest rate | Risk-free interest rate | 1.52 | % | | 0.18 | % | Risk-free interest rate | 4.15 | % | | 1.52 | % |
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 | % | | 32.00 | % | Expected volatility | 34.00 | % | | 32.00 | % |
Dividend yield | Dividend yield | 2.90 | % | | 3.60 | % | Dividend yield | 2.50 | % | | 2.90 | % |
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The risk-free interest rate was derived from yields on U.S. government bonds of a similar term. The expected term of the award is equal to the three-year performance period. Expected volatility was estimated based on actual historical volatility of our common stock. Dividend yield was estimated based on historic and future yield estimates.
The following is a summary of stock performance award activity for the three months ended March 31, 20222023 (share amounts reflect awards at target): | | | Shares | | Weighted Average Grant-Date Fair Value | | Shares | | Weighted Average Grant-Date Fair Value |
| Nonvested, January 1, 2022 | 189,600 | | | $ | 42.54 | | |
Nonvested, January 1, 2023 | | Nonvested, January 1, 2023 | 189,800 | | | $ | 45.95 | |
Granted | Granted | 55,800 | | | 54.91 | | Granted | 59,400 | | | 61.97 | |
Vested | Vested | (55,600) | | | 43.30 | | Vested | (55,000) | | | 47.79 | |
Forfeited | Forfeited | — | | | — | | Forfeited | — | | | — | |
Nonvested, March 31, 2022 | 189,800 | | | $ | 45.95 | | |
Nonvested, March 31, 2023 | | Nonvested, March 31, 2023 | 194,200 | | | $ | 50.33 | |
The fair value of vested awards was $5.1$5.3 million and $2.5$5.1 million during the three months ended March 31, 20222023 and 2021,2022, respectively.
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 months ended March 31, 20222023 and 2021:2022:
| | | Three Months Ended March 31, | | | Three Months Ended March 31, | |
(in thousands) | (in thousands) | 2022 | | 2021 | | (in thousands) | 2023 | | 2022 | |
| Weighted Average Common Shares Outstanding – Basic | Weighted Average Common Shares Outstanding – Basic | 41,548 | | | 41,455 | | | Weighted Average Common Shares Outstanding – Basic | 41,632 | | | 41,548 | | |
Effect of Dilutive Securities: | Effect of Dilutive Securities: | | | Effect of Dilutive Securities: | | |
Stock Performance Awards | Stock Performance Awards | 219 | | | 143 | | | Stock Performance Awards | 241 | | | 219 | | |
Restricted Stock Awards | Restricted Stock Awards | 102 | | | 85 | | | Restricted Stock Awards | 102 | | | 102 | | |
Employee Stock Purchase Plan Shares and Other | Employee Stock Purchase Plan Shares and Other | 2 | | | 17 | | | Employee Stock Purchase Plan Shares and Other | 2 | | | 2 | | |
Dilutive Effect of Potential Common Shares | Dilutive Effect of Potential Common Shares | 323 | | | 245 | | | Dilutive Effect of Potential Common Shares | 345 | | | 323 | | |
Weighted Average Common Shares Outstanding – Diluted | Weighted Average Common Shares Outstanding – Diluted | 41,871 | | | 41,700 | | | Weighted Average Common Shares Outstanding – Diluted | 41,977 | | | 41,871 | | |
The amountnumber of shares excluded from diluted weighted-average common shares outstanding because such shares were anti-dilutive was not material for the three months ended March 31, 20222023 and 2021.2022.
14. Derivative Instruments
OTP enters into derivative instruments to manage its exposure to future market energy price variability and reduce volatility in prices for our retail customers. These derivative instruments are not designated as qualifying hedging transactions but provide for an economic hedge against future market energy price variability. The instruments are recorded at fair value on the consolidated balance sheets. In accordance with rate-makingratemaking and cost recovery processes, we recognize a regulatory asset or liability to defer losses or gains from derivative activity until settlement of the associated derivative instrument.
As of March 31, 2022,2023, OTP had one outstanding pay-fixed, receive-variable swap agreementsagreement with an aggregate notional amount of 156,8008,000 megawatt-hours of electricity, which will be settled periodically throughout 2022 andwith a settlement date of December 31, 2023. As of March 31, 2022,2023, the fair value of thesethis derivative instrumentsinstrument was $4.2$0.3 million, which is included in other current assets, and $0.2 million, which is included in other noncurrent liabilities, on the consolidated balance sheets. As of December 31, 2021,2022, the fair value of these types of derivative contracts was $6.2$7.1 million, which is included in other current assets.liabilities. During the three months ended March 31, 2023 and 2022, contracts matured and were settled in an aggregate amount of a $16.0 million loss and a $2.8 million.million gain, respectively. Gains and losses recognized on the settlement of derivative instruments are recorded in electric purchased power in the consolidated statements of income. Such settlement gains and losses are returned to or recovered from our electric customers through fuel recovery mechanisms in each state.
15. Fair Value Measurements
The following tables present our assets and liabilities measured at fair value on a recurring basis as of March 31, 20222023 and December 31, 20212022 classified by the input method used to measure fair value: | (in thousands) | | (in thousands) | Level 1 | | Level 2 | | Level 3 |
| | Level 1 | | Level 2 | | Level 3 | |
| March 31, 2022 | | |
March 31, 2023 | | March 31, 2023 | |
Assets: | Assets: | | Assets: | |
Investments: | Investments: | | Investments: | |
Money Market Funds | Money Market Funds | $ | 1,893 | | | $ | — | | | $ | — | | Money Market Funds | $ | 2,148 | | | $ | — | | | $ | — | |
Mutual Funds | Mutual Funds | 6,285 | | | — | | | — | | Mutual Funds | 7,128 | | | — | | | — | |
Corporate Debt Securities | Corporate Debt Securities | — | | | 1,367 | | | — | | Corporate Debt Securities | — | | | 1,450 | | | — | |
Government-Backed and Government-Sponsored Enterprises’ Debt Securities | Government-Backed and Government-Sponsored Enterprises’ Debt Securities | — | | | 7,592 | | | — | | Government-Backed and Government-Sponsored Enterprises’ Debt Securities | — | | | 7,521 | | | — | |
Derivative Instruments | — | | | 4,179 | | | — | | |
| Total Assets | Total Assets | $ | 8,178 | | | $ | 13,138 | | | $ | — | | Total Assets | $ | 9,276 | | | $ | 8,971 | | | $ | — | |
Liabilities: | Liabilities: | | Liabilities: | |
Derivative Instruments | Derivative Instruments | $ | — | | | $ | 198 | | | $ | — | | Derivative Instruments | $ | — | | | $ | 347 | | | $ | — | |
Total Liabilities | Total Liabilities | $ | — | | | $ | 198 | | | $ | — | | Total Liabilities | $ | — | | | $ | 347 | | | $ | — | |
| December 31, 2021 | | |
December 31, 2022 | | December 31, 2022 | |
Assets: | Assets: | | Assets: | |
Investments: | Investments: | | Investments: | |
Money Market Funds | Money Market Funds | $ | 949 | | | $ | — | | | $ | — | | Money Market Funds | $ | 1,560 | | | $ | — | | | $ | — | |
Mutual Funds | Mutual Funds | 5,432 | | | — | | | — | | Mutual Funds | 5,503 | | | — | | | — | |
Corporate Debt Securities | Corporate Debt Securities | — | | | 1,333 | | | — | | Corporate Debt Securities | — | | | 1,434 | | | — | |
Government-Backed and Government-Sponsored Enterprises’ Debt Securities | Government-Backed and Government-Sponsored Enterprises’ Debt Securities | — | | | 7,869 | | | — | | Government-Backed and Government-Sponsored Enterprises’ Debt Securities | — | | | 7,327 | | | — | |
| Total Assets | | Total Assets | $ | 7,063 | | | $ | 8,761 | | | $ | — | |
Liabilities: | | Liabilities: | |
Derivative Instruments | Derivative Instruments | — | | | 6,214 | | | — | | Derivative Instruments | — | | | 7,130 | | | — | |
Total Assets | $ | 6,381 | | | $ | 15,416 | | | $ | — | | |
Total Liabilities | | Total Liabilities | $ | — | | | $ | 7,130 | | | $ | — | |
Level 1 fair value measurements are based on quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
The level 2 fair value measurements for government-backed and government-sponsored enterprises and corporate debt securities are determined based on 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 March 31, 20222023 and December 31, 2021:2022:
| | | March 31, 2022 | | December 31, 2021 | | March 31, 2023 | | December 31, 2022 |
(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 | $ | 1,371 | | | $ | 1,371 | | | $ | 1,537 | | | $ | 1,537 | | Cash and Cash Equivalents | $ | 104,080 | | | $ | 104,080 | | | $ | 118,996 | | | $ | 118,996 | |
Total | Total | 1,371 | | | 1,371 | | | 1,537 | | | 1,537 | | Total | 104,080 | | | 104,080 | | | 118,996 | | | 118,996 | |
Liabilities: | Liabilities: | | Liabilities: | |
Short-Term Debt | Short-Term Debt | 97,770 | | | 97,770 | | | 91,163 | | | 91,163 | | Short-Term Debt | 60,854 | | | 60,854 | | | 8,204 | | | 8,204 | |
Long-Term Debt | Long-Term Debt | 764,064 | | | 781,531 | | | 763,997 | | | 878,272 | | Long-Term Debt | 823,882 | | | 702,129 | | | 823,821 | | | 681,615 | |
Total | Total | $ | 861,834 | | | $ | 879,301 | | | $ | 855,160 | | | $ | 969,435 | | Total | $ | 884,736 | | | $ | 762,983 | | | $ | 832,025 | | | $ | 689,819 | |
|
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.
| | | | | |
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, 2021.2022. Otter Tail Corporation and its subsidiaries form a diverse group of businesses with operations classified into three segments: Electric, Manufacturing and Plastics. Our Electric segment business is a vertically integrated, regulated utility with generation, transmission and distribution facilities to serve our customers in western Minnesota, eastern North Dakota and northeastern South Dakota. Our Manufacturing segment provides metal fabrication for custom machine parts and metal components and manufactures extruded and thermoformed plastic products. Our Plastics segment manufactures PVC pipe for use in, among other applications, municipal and rural water, wastewater and water reclamation projects.
COVID-19PVC PIPE SUPPLY AND DEMAND CONDITIONS
We continue to monitorExtraordinary supply and demand conditions in the progression of COVID-19 and its impact on our 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 in which we live and work.
While the impact of COVID-19 did not materially impact our operating resultsPVC industry beginning in 2021 orhave led to a significant expansion in operating margins and elevated earnings in our Plastics segment. Periodic disruptions in the supply of resin, the primary material input used in the manufacturing of PVC pipe, coupled with robust demand for resin, led to a significant increase in the cost of resin. Low industry volumes of PVC pipe and robust end market demand for the product led to a rapid and significant increase in sales prices for PVC pipe, significantly outpacing the increase in resin input costs, leading to widening margins within our Plastics segment.
Demand for PVC pipe began to soften in the second half of 2022 and continued through the first quarter of 2023 as distributors and contractors have reduced purchase volumes and inventory levels in response to changing market conditions. Resin prices have declined and stabilized at near historical levels but sales prices for PVC pipe remain elevated, continuing to produce expanded operating margins.
These unique market dynamics impacting our Plastics segment resulted in a significant increase in earnings in 2022 uncertainty remains regarding the magnitude and duration of the pandemic and the resulting potential future financial effects. Increased infection rates and any future responsescompared 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 futureprior periods. We continuecurrently expect earnings of our Plastics segment to monitor developments involving our workforce, customers, construction contractors, suppliersremain elevated in 2023 compared to pre-2021 levels, but as the industry supply and vendors, anddemand conditions normalize, we expect segment earnings to normalize beginning in 2024.
STEEL PRICING
Volatility in 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
The costprice of steel, and PVC resin, twoa key material inputsinput to our Manufacturing and Plastics segments, respectively,segment, significantly impacted our operating results in the first quarter of 2022.
Steel prices, increased rapidly throughout 2021which were highly volatile in 2022, were elevated at the beginning of 2022 but began to steadily decline at the end of the second quarter and remained elevated inreturned to near historical levels by the first quarterend of 2022. The increase inthe year. Elevated steel prices has led to increased salesales prices in 2022 for our products at BTD Manufacturing, Inc. (BTD), our metal fabrication business within our Manufacturing segment, as we passed along material cost increases to our customers. Consistent withScrap metal prices, which typically follow steel prices, were also elevated from historical levels in the first half of 2022, positively impacting our 2022 financial results. While steel and scrap metal prices also increased throughout 2021 and remained elevatedbegan to increase late in the first quarter of 2022. Steel costs remain elevated as mill prices and supply chain costs remain significantly higher than historical levels. While steel costs are expected to moderate through 2022, they are expected to remain historically high through2023, pricing did not reach the year. Scrap metal prices are also expected to moderate throughout the year.
PVC resin is the primary material input of the PVC pipe manufactured by our Plastics segment businesses. Resin supply disruptions throughout 2021, along with robust domestic and global demand for PVC resin, led to significantly increased resin prices. Resin supply disruptions also resulted in reduced manufacturing of PVC pipe and low pipe inventories across the industry. The combination of disrupted PVC resin supply and the resulting low PVC pipe inventories along with robust demand for PVC pipe led to rapidly increasing sale prices for PVC 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 earnings in our Plastics segment. While PVC resin supplies have improved, the price of PVC 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 a strengthening of the export markets for PVC resin. In addition, beginning in the second half of 2021 and continuinglevel present 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, thusthereby 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.comparative operating results.
The marketplace dynamics impacting both our Manufacturing and Plastics segments are fluid and subject to change whichand may impact our operating results prospectively.
| | | | | |
RESULTS OF OPERATIONS – QUARTER TO DATE | |
Provided below is a summary and discussion of our operating results on a consolidated basis followed by a discussion of the operating results of each of our segments: Electric, Manufacturing and Plastics. In addition to the segment results, we provide an overview of our Corporate costs. Our Corporate costs do not constitute a reportable segment but rather consist of unallocated general corporate expenses, such as corporate staff and overhead costs, the results of our captive insurance company and other items excluded from the measurement of segment performance. Corporate costs are added to operating segment totals to reconcile to totals on our consolidated statements of income.
CONSOLIDATED RESULTS
The following table summarizes consolidated operating results for the three months ended March 31, 20222023 and 2021:2022:
| (in thousands) | (in thousands) | 2022 | | 2021 | | $ change | | % change | (in thousands) | 2023 | | 2022 | | $ change | | % change |
| Operating Revenues | Operating Revenues | $ | 374,904 | | | $ | 261,710 | | | $ | 113,194 | | | 43.3 | % | Operating Revenues | $ | 339,081 | | | $ | 374,904 | | | $ | (35,823) | | | (9.6) | % |
Operating Expenses | Operating Expenses | 276,605 | | | 217,511 | | | 59,094 | | | 27.2 | | Operating Expenses | 258,411 | | | 276,605 | | | (18,194) | | | (6.6) | |
Operating Income | Operating Income | 98,299 | | | 44,199 | | | 54,100 | | | 122.4 | | Operating Income | 80,670 | | | 98,299 | | | (17,629) | | | (17.9) | |
Interest Charges | 8,948 | | | 9,398 | | | (450) | | | (4.8) | | |
Nonservice Cost Components of Postretirement Benefits | (22) | | | 383 | | | (405) | | | (105.7) | | |
Other Income | 260 | | | 1,160 | | | (900) | | | (77.6) | | |
Interest Expense | | Interest Expense | (9,415) | | | (8,948) | | | (467) | | | 5.2 | |
Nonservice Components of Postretirement Benefits | | Nonservice Components of Postretirement Benefits | 2,412 | | | 22 | | | 2,390 | | | n/m |
Other Income (Expense) | | Other Income (Expense) | 2,118 | | | 260 | | | 1,858 | | | 714.6 | |
Income Before Income Taxes | Income Before Income Taxes | 89,633 | | | 35,578 | | | 54,055 | | | 151.9 | | Income Before Income Taxes | 75,785 | | | 89,633 | | | (13,848) | | | (15.4) | |
Income Tax Expense | Income Tax Expense | 17,630 | | | 5,249 | | | 12,381 | | | 235.9 | | Income Tax Expense | 13,304 | | | 17,630 | | | (4,326) | | | (24.5) | |
Net Income | Net Income | $ | 72,003 | | | $ | 30,329 | | | $ | 41,674 | | | 137.4 | % | Net Income | $ | 62,481 | | | $ | 72,003 | | | $ | (9,522) | | | (13.2) | % |
Operating Revenues increased $113.2decreased $35.8 million primarily due to rising PVC pipe pricesdecreased sales volumes within our Plastics segment and increased material costs leading to increaseddecreased sales prices in our Manufacturing segment. Increased retail revenuesThese decreases were partially offset by decreased wholesalesincreased sales prices in our Plastics segment, increased sales volumes in our
Manufacturing segment and increased operating revenues within our Electric segment also contributed to higher operating revenues in the first quarter of 2021 compared tosegment. PVC pipe sale volumes decreased as customer demand softened from the same period last year.a year ago amid changing market conditions. Decreased sales prices in our Manufacturing segment were primarily due to decreased steel prices, which are passed through to customers. In our Electric segment, increased fuel recovery revenues, driven by higher purchased power costs and volumes, and increased commercial and industrial sales volumes, contributed to increased operating revenues. See our segment disclosures below for additional discussion of items impacting operating revenues.
Operating Expenses increased $59.1decreased $18.2 million primarily due to increased costs of products soldlower sales volumes in our Plastics segment and lower material costs in our Manufacturing segments due to increased raw material costs. Operatingsegment. These decreases were partially offset by an increase in operating expenses in our Electric segment, increased primarily due to higher operating and maintenance expenses and increased purchased power costs.costs and volumes. See our segment disclosures below for additional discussion of items impacting operating expenses.
Interest ChargesExpense decreasedincreased $0.5 million due to a decrease in theincreased interest raterates on our $140.0 million of fixed-rate long-term debt that was refinanced in December 2021, and a lower level of average short-term borrowings outstanding in 2022 compared to 2021.variable rate debt.
Nonservice Cost Components of Postretirement Benefits decreased $0.4increased $2.4 million, having a positive impact on net income, primarily due to the amortization ofa change in actuarial gains resulting from the increase in the discount ratesassumptions used to measure our pension benefit and postretirement benefit liabilities as of December 31, 2021.obligations, including an increase in the discount rate applied and an increase in the expected return on assets assumption.
Other Income decreased $0.9increased $1.9 million primarily due to investment lossesincome earned on our short-term cash equivalent investments and gains on our corporate-owned life insurance policies during the first quarter of 20222023 compared to investment gainslosses in the same period of the previous year.
Income Tax Expense increased $12.4decreased $4.3 million primarily due to increaseddecreased income before income taxes. Our effective tax rate was 17.6% in the first quarter of 2023 and 19.7% in the first quarter of 2022 and 14.8% in the first quarter of 2021.2022. The increasedecrease in our effective tax rate was driven by an increase in our income before income taxes without a corresponding increase inproduction tax credits and other permanent differences that impactfrom our effective tax rate.wind generation assets in the current period. 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 20222023 and 2021.2022. ELECTRIC SEGMENT RESULTS
The following table summarizes Electric segment operating results for the three months ended March 31, 20222023 and 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 | | $ change | | % change |
| | | | | | | |
Retail Revenues | $ | 113,639 | | | $ | 105,706 | | | $ | 7,933 | | | 7.5 | % |
Transmission Services Revenues | 12,556 | | | 11,944 | | | 612 | | | 5.1 | |
Wholesale Revenues | 2,463 | | | 4,507 | | | (2,044) | | | (45.4) | |
Other Electric Revenues | 1,758 | | | 1,542 | | | 216 | | | 14.0 | |
Total Operating Revenues | 130,416 | | | 123,699 | | | 6,717 | | | 5.4 | |
Production Fuel | 14,853 | | | 14,714 | | | 139 | | | 0.9 | |
Purchased Power | 20,529 | | | 19,260 | | | 1,269 | | | 6.6 | |
Operating and Maintenance Expenses | 44,278 | | | 41,421 | | | 2,857 | | | 6.9 | |
Depreciation and Amortization | 18,382 | | | 17,308 | | | 1,074 | | | 6.2 | |
Property Taxes | 4,432 | | | 4,320 | | | 112 | | | 2.6 | |
Operating Income | $ | 27,942 | | | $ | 26,676 | | | $ | 1,266 | | | 4.7 | % |
| | | | | | | |
| 2022 | | 2021 | | change | | % change |
| | | | | | | |
Electric kilowatt-hour (kwh) Sales (in thousands) | | | | | | | |
Retail kwh Sales | 1,515,297 | | | 1,348,519 | | | 166,778 | | | 12.4 | % |
Wholesale kwh Sales – Company Generation | 66,187 | | | 80,423 | | | (14,236) | | | (17.7) | |
Heating Degree Days | 3,821 | | | 3,078 | | | 743 | | | 24.1 | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | 2023 | | 2022 | | $ change | | % change |
| | | | | | | |
Retail Revenues | $ | 136,453 | | | $ | 113,639 | | | $ | 22,814 | | | 20.1 | % |
Transmission Services Revenues | 12,107 | | | 12,556 | | | (449) | | | (3.6) | |
Wholesale Revenues | 1,838 | | | 2,463 | | | (625) | | | (25.4) | |
Other Electric Revenues | 1,511 | | | 1,758 | | | (247) | | | (14.1) | |
Total Operating Revenues | 151,909 | | | 130,416 | | | 21,493 | | | 16.5 | |
Production Fuel | 11,492 | | | 14,853 | | | (3,361) | | | (22.6) | |
Purchased Power | 41,825 | | | 20,529 | | | 21,296 | | | 103.7 | |
Operating and Maintenance Expenses | 45,549 | | | 44,278 | | | 1,271 | | | 2.9 | |
Depreciation and Amortization | 18,326 | | | 18,382 | | | (56) | | | (0.3) | |
Property Taxes | 4,621 | | | 4,432 | | | 189 | | | 4.3 | |
Operating Income | $ | 30,096 | | | $ | 27,942 | | | $ | 2,154 | | | 7.7 | % |
| | | | | | | |
| 2023 | | 2022 | | change | | % change |
| | | | | | | |
Electric kilowatt-hour (kwh) Sales (in thousands) | | | | | | | |
Retail kwh Sales | 1,635,246 | | | 1,515,297 | | | 119,949 | | | 7.9 | % |
Wholesale kwh Sales – Company Generation | 61,854 | | | 66,187 | | | (4,333) | | | (6.5) | |
Heating Degree Days | 3,732 | | | 3,821 | | | (89) | | | (2.3) | |
| | | | | | | |
| | | | | | | |
The operating results of our Electric segment are impacted by fluctuations in weather conditions and the resulting demand for electricity for heating and cooling.heating. The following table shows heating degree days as a percent of normal for the three months ended March 31, 20222023 and 2021.2022.
| | | | | | | | | | | |
| 2022 | | 2021 |
| | | |
Heating Degree Days | 111.8 | % | | 89.5 | % |
| | | |
| | | |
| | | | | | | | | | | |
| 2023 | | 2022 |
| | | |
Heating Degree Days | 108.2 | % | | 111.8 | % |
| | | |
| | | |
| | | |
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 20222023 and 2021,2022, and between years.
| | | | | | | | | | | | | | | | | |
| 2022 vs Normal | | 2022 vs 2021 | | 2021 vs Normal |
| | | | | |
Effect on Diluted Earnings Per Share | $ | 0.04 | | | $ | 0.08 | | | $ | (0.04) | |
| | | | | |
| | | | | | | | | | | | | | | | | |
| 2023 vs Normal | | 2023 vs 2022 | | 2022 vs Normal |
| | | | | |
Effect on Diluted Earnings Per Share | $ | 0.03 | | | $ | (0.01) | | | $ | 0.04 | |
| | | | | |
Retail Revenues increased $7.9$22.8 million primarily due to the following:
•A $4.4 million increase in revenues from the favorable impact of weather in the first quarter of 2022 compared to the same period last year.
•A $3.6$16.5 million increase in fuel recovery revenues primarily due to increased production fuel and purchasepurchased power costs and a decrease in credits providedvolumes, partially offset by lower production fuel costs due to retail customers from decreased margins recognized on wholesale sales.lower volumes, as described below.
•A $2.3$5.4 million increase in retail revenues from increased sales volumes from commercial and industrial customers.customers, including the impact of a new commercial customer load in North Dakota that came online during the first quarter of 2022.
•A $2.4$1.4 million decreaseincrease in interim raterenewable resource rider revenue, in Minnesota as a resultincluding recovery of costs related to our April 2021 filing withHoot Lake Solar project and 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.acquisition of the Ashtabula III wind farm.
Wholesale Revenues decreased $2.0 million as a result of a 18% decrease in wholesale sales volumes and a 34% decrease in wholesale prices. Wholesale energy salesRetail revenues in the first quarter of 20212023 were comparatively higher due to high prices drivennegatively impacted $0.6 million by high market demand and availability constraints caused by winter storm activity, which drove up spot market prices for electricity.unfavorable weather.
Production Fuel costsincreased $0.1 decreased $3.4 million primarily as a result of increased fuel cost per kwh, which was largely offset by a 15% decrease in kwhs generated from our fuel-burning plants due to the retirement of our coal-burning Hoot Lakean outage at Big Stone Plant in May 2021.the first quarter of 2023, which resulted in lower volumes of coal consumption.
Purchased Power costs to serve retail customers increased $1.3$21.3 million due to a 42% increase in the price of purchased power per kwh, primarily due to increased market energy costs, and a 59%43% increase in the volume of purchased power resulting fromdue to the retirement of Hoot Lakeoutage at Big Stone Plant and increased demand due to cold weather, partially offset by a decrease in the price of purchased power.customer demand.
Operating and Maintenance ExpenseExpenses increased $2.9 million due to increased operating and maintenance costs as a result of Merricourt and Astoria Station because the facilities were fully operational in the first quarter of 2022 and were ramping up in the previous year because they had recently been placed into service; increased incentive compensation costs related to current year financial and operational performance; increased travel costs resulting from eased COVID restrictions; and increased insurance costs. These increased costs were partially offset by a decrease in CIP expenses as CIP spending decreased compared to the previous year.
Depreciation and Amortization expense increased $1.1$1.3 million primarily due to Astoria Station being placedan increase in service in February of 2021.maintenance activities, including the outage at Big Stone Plant and incremental costs associated with the Ashtabula III wind farm facility.
MANUFACTURING SEGMENT RESULTS
The following table summarizes Manufacturing segment operating results for the three months ended March 31, 20222023 and 2021:2022:
| (in thousands) | (in thousands) | 2022 | | 2021 | | $ change | | % change | (in thousands) | 2023 | | 2022 | | $ change | | % change |
| Operating Revenues | Operating Revenues | $ | 104,957 | | | $ | 75,825 | | | $ | 29,132 | | | 38.4 | % | Operating Revenues | $ | 106,782 | | | $ | 104,957 | | | $ | 1,825 | | | 1.7 | % |
Cost of Products Sold (excluding depreciation) | Cost of Products Sold (excluding depreciation) | 86,161 | | | 56,311 | | | 29,850 | | | 53.0 | | Cost of Products Sold (excluding depreciation) | 82,227 | | | 86,161 | | | (3,934) | | | (4.6) | |
Other Operating Expenses | Other Operating Expenses | 8,847 | | | 8,212 | | | 635 | | | 7.7 | | Other Operating Expenses | 10,578 | | | 8,847 | | | 1,731 | | | 19.6 | |
Depreciation and Amortization | Depreciation and Amortization | 4,014 | | | 3,757 | | | 257 | | | 6.8 | | Depreciation and Amortization | 4,468 | | | 4,014 | | | 454 | | | 11.3 | |
Operating Income | Operating Income | $ | 5,935 | | | $ | 7,545 | | | $ | (1,610) | | | (21.3) | % | Operating Income | $ | 9,509 | | | $ | 5,935 | | | $ | 3,574 | | | 60.2 | % |
Operating Revenuesincreased $29.1$1.8 million primarily due to increased sales volumes at BTD Manufacturing, our contract metal fabricator, as strong customer and end market demand in the Energy, Agriculture, Power Generation, and Construction markets contributed to a $29.3 million19% increase in sales volumes. Sales price increases also contributed to the growth in operating revenues. These were implemented in response to labor and non-steel material cost inflation. Increased sales volumes and price increases were largely offset by a 21% decrease in material costs, at BTD, which are passed through to customers, as steel prices have declined from the same time a result of higher steel prices. Steel prices increased rapidly throughout 2021 and remained elevatedyear ago. Scrap revenues were lower in the first quarter of 2022, which resulted in increased revenues as we sell through high-priced inventory.due to lower scrap metal prices. 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 and volumes at T.O. Plastics, our plastics thermoforming manufacturer, also increased compared to last year, primarily due to strong customer demand in the horticulture sector, also contributed to the segment increase in operating revenues.sales price increases.
Cost of Products Sold increased $29.9decreased $3.9 million primarily due to higherdecreased material costs, as described above, largely offset by increased sales volumes, as well as increased labor and freight costs at BTD. The increase in material cost was 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 2021. Aligning labor with unpredictable demand led to lowerother production efficiency which had acosts.
negative impact on gross profit margins. Increases in sales volumes at T.O. Plastics also impacted costs of products sold, and gross profit margins were negatively impacted by product mix and increased maintenance and freight costs.
Other Operating Expenses increased $0.6$1.7 million due to increases in various cost categories including salariesvariable costs associated with increased business activity and wages, due to increases in headcount compared tofinancial performance during the previous year, and software and service provider costs, partially offset by lower incentive compensation.period.
PLASTICS SEGMENT RESULTS
The following table summarizes Plastics segment operating results for the three months ended March 31, 20222023 and 2021:2022:
| (in thousands) | (in thousands) | 2022 | | 2021 | | $ change | | % change | (in thousands) | 2023 | | 2022 | | $ change | | % change |
| Operating Revenues | Operating Revenues | $ | 139,531 | | | $ | 62,186 | | | $ | 77,345 | | | 124.4 | % | Operating Revenues | $ | 80,390 | | | $ | 139,531 | | | $ | (59,141) | | | (42.4) | % |
Cost of Products Sold (excluding depreciation) | Cost of Products Sold (excluding depreciation) | 65,598 | | | 45,666 | | | 19,932 | | | 43.6 | | Cost of Products Sold (excluding depreciation) | 30,142 | | | 65,598 | | | (35,456) | | | (54.1) | |
Other Operating Expenses | Other Operating Expenses | 3,964 | | | 2,944 | | | 1,020 | | | 34.6 | | Other Operating Expenses | 3,529 | | | 3,964 | | | (435) | | | (11.0) | |
Depreciation and Amortization | Depreciation and Amortization | 1,107 | | | 990 | | | 117 | | | 11.8 | | Depreciation and Amortization | 1,036 | | | 1,107 | | | (71) | | | (6.4) | |
Operating Income | Operating Income | $ | 68,862 | | | $ | 12,586 | | | $ | 56,276 | | | 447.1 | % | Operating Income | $ | 45,683 | | | $ | 68,862 | | | $ | (23,179) | | | (33.7) | % |
Operating Revenues increased $77.3decreased $59.1 million primarily due to a 125%46% decrease in sales volumes, partially offset by a 7% increase in the price per pound of PVC pipe sold. The increase in sale prices was primarily duesold compared to continued strong demand for PVC pipe products and limited PVC pipe inventories. The unique supply and demandthe same period last year. Sales volume decreases were attributable to distributor customer inventory management as distributors continue to closely manage their inventory levels amid changing market conditions, overall economic uncertainty, including uncertainty in the housing market, and the impact of unfavorable weather conditions during the first quarter of 2022 were a continuation of2023. Sales prices declined from the market dynamics experienced throughout 2021. In the firstfourth quarter of 2022 we, along with other PVC pipe manufacturers, experienced supply constraints of additives and other ingredients usedbut remained elevated compared to make PVC pipe, which prevented us and others from being able to build inventorypre-2021 levels. PVC resin supply disruptions improved during the quarter. Expected declines in the price 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 2022 were consistent with sales volumes in the first quarter of 2021.
Cost of Products Sold increased $19.9decreased $35.5 million primarily due to increaseddecreased sales volumes, as described above. PVC resin and other input material costs which increased 52% duedecreased 20% compared to the market conditions described above. Labor, freight and various non-resin material costs also increased fromsame period in the previous year.
Other Operating Expenses increased $1.0 million due toyear as the unique supply and demand conditions which caused significant increases in various cost categories including compensationresin costs have subsided and sales commissions.resin costs have stabilized.
CORPORATE COSTS
The following table summarizes Corporate operating results for the three months ended March 31, 20222023 and 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | |
(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 $1.9 million primarily due to increased compensation expenses, including stock and incentive compensation, in the first quarter of 2022 which were higher than the amount recognized in the same period in the previous year due to our current year financial performance. | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | 2023 | | 2022 | | $ change | | % change |
| | | | | | | |
Other Operating Expenses | $ | 4,592 | | | $ | 4,395 | | | $ | 197 | | | 4.5 | % |
Depreciation and Amortization | 26 | | | 45 | | | (19) | | | (42.2) | |
Operating Loss | $ | 4,618 | | | $ | 4,440 | | | $ | 178 | | | 4.0 | % |
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 had 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 proposed 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 $14.5 million to $8.2 million, primarily due to a reduction in operating costs from amounts included in its November 2020 filing. Among other items, the cost reductions 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 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 | | NotesDescription |
| | | | | | | | | | | | |
CIPRRR - 2022 | | MN | | Requested | | 04/11/01/22 | | $ | 17.5 | | | 07/01/23 | | Recovery of Hoot Lake Solar costs, Ashtabula III costs, and true up for PTCs from Merricourt. |
CIP - 2022 | | MN | | Approved | | 04/01/22 | | 10.8 | | | 10/01/22 | | Includes recoveryRecovery of energy conservation improvement costs as well as a demand side management financial incentive. |
CIP - 20212023 | | MN | | ApprovedRequested | | 04/01/2103/23 | | 9.49.7 | | | 12/10/01/2123 | | Includes recoveryRecovery of energy conservation improvement costs as well as a demand side management financial incentive. |
TCR - 2021 | | MN | | RequestedApproved | | 11/23/21 | | 7.2 | | | 07/08/01/22 | | Includes recoveryRecovery of two new transmission projects.project costs. |
RRR - 2021 | | MN | | RequestedApproved | | 12/06/21 | | 7.0 | | | 07/08/01/22 | | Includes return onRecovery of Hoot Lake Solar construction costs and costs associated with the acquisition of the Ashtabula III wind farm.costs. |
EITE - 2023 | | MN | | Requested | | 04/14/23 | | 2.2 | | | 01/01/24 | | Biennial update to Energy-Intensive, Trade-Exposed rider. |
TCR - 2023 | | MN | | Requested | | 04/07/23 | | 1.7 | | | 01/01/24 | | Recovery of transmission project costs. |
EUIC - 2023 | | MN | | Requested | | 03/20/23 | | 1.3 | | | 07/01/23 | | Recovery of advanced metering infrastructure, outage management and demand response system projects. |
RRR - 20212023 | | ND | | Approved | | 03/07/2104/27/23 | | 11.812.2 | | | 04/05/01/2123 | | Includes recoveryRecovery of Merricourt investmentAshtabula III and operatingother costs. |
RRR - 2022 | | ND | | Approved | | 01/05/22 | | 7.8 | | | 04/01/22 | | IncludesRecovery of Merricourt recovery, the proposed purchase ofcosts, Ashtabula III costs, and credits related to deferred taxes and production tax credits. |
TCR - 2022 | | ND | | Approved | | 09/15/22 | | 7.5 | | | 01/01/23 | | Recovery of transmission project costs. |
TCR - 2021 | | ND | | Approved | | 09/15/21 | | 6.1 | | | 01/01/22 | | Includes recoveryRecovery 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.project costs. |
GCR - 2022 | | ND | | RequestedApproved | | 03/01/22 | | 3.3 | | | 07/01/22 | | Annual update to generation cost recovery rider. |
TCRAMDT - 20202022 | | ND | | Approved | | 07/08/22 | | 3.1 | | | 01/01/23 | | Recovery of advanced metering infrastructure, outage management system and demand response projects. |
GCR - 2023 | | ND | | Requested | | 03/03/23 | | 2.2 | | | 07/01/23 | | Recovery of Astoria Station, net of anticipated savings associated with the retirement of Hoot Lake Plant. |
PIR - 2022 | | SD | | Approved | | 06/01/29/2022 | | 2.33.0 | | | 03/02/2009/01/22 | | Annual update toRecovery of Ashtabula III, Merricourt, Astoria Station, Advanced Grid Infrastructure project costs, and impact of load growth credits. |
TCR - 2022 | | SD | | Approved | | 11/01/22 | | 3.0 | | | 03/01/23 | | Recovery of transmission cost recovery rider.project costs. |
TCR - 2021 | | SD | | Approved | | 10/29/21 | | 2.2 | | | 03/01/22 | | Annual update toRecovery of transmission cost recovery rider. |
TCR - 2021 | | SD | | Approved | | 02/19/21 | | 2.2 | | | 03/01/21 | | Includes recovery of two new transmission projects.project costs. |
| | | | | | | | | | | | |
Renewable Resource Rider (RRR) and Energy Adjustment Rider (EAR): In December 2022, OTP filed an update to its North Dakota RRR. The update included, among other items, a request to modify load allocation factors in North Dakota given the large new load added in the state in 2022. In January 2023, OTP filed an update to its North Dakota EAR proposing to refund MISO planning resource auction revenues to North Dakota customers if the North Dakota Public Service Commission (NDPSC) approves the load allocation factor modification as filed in the RRR docket. In April 2023, the NDPSC denied the request to modify load allocation factors and approved the modification to the EAR allowing for planning resource auction revenues to be refunded to customers. OTP will begin incorporating the planning resource auction revenue refunds in May of 2023.
MISO PLANNING RESOURCE AUCTION
OTP offered 88-megawatts of excess capacity into the annual MISO planning resource auction for the period June, 2022 through May, 2023. As a result of a capacity shortage in the MISO region, capacity prices cleared the auction at maximum pricing. As a result, the 88-megawatts of auctioned capacity will generate approximately $9.3 million of net capacity auction revenues over the twelve-month period ending in May, 2023. The Minnesota and North Dakota allocated portion of net capacity auction revenues will be returned to customers through the FCA mechanism and EAR, respectively. The Minnesota and North Dakota commission have also each ruled that in future periods any capacity auction revenues or costs are to be passed on to customers.
INTEGRATED RESOURCE PLAN
On September 1, 2021,March 31, 2023, OTP filed itssubmitted a supplemental resource plan filing to the MPUC, the NDPSC, and the South Dakota Public Utilities Commission. The supplemental filing updates OTP’s original 2022 Integrated Resource Plan (IRP) concurrently with regulators in(2022 IRP), which was filed on September 1, 2021. In the three states wheresupplemental filing, OTP operates, Minnesota, North Dakota and South Dakota. The 2022 IRP includes OTP’s preferredoutlined its updated plan for meeting customers’ anticipated capacity and energy needs while maintaining system reliability and low electric service rates.rates, in light of several changes that have occurred since the original filing, including significant winter and spring reserve planning margins adopted by MISO, tax credits made available for renewable energy projects under the Inflation Reduction Act, the enactment of the Clean Energy Bill in Minnesota, and recent volatility in energy and capacity markets.
The components ofmajor requests in OTP's preferred plansupplemental filing include:
–•the addition of dualon-site liquefied natural gas fuel capabilitystorage at our Astoria Station natural gas plant;plant in 2026;
–•the addition of 150approximately 200 megawatts of solar generation in 2025;2027-2028;
–•undertaking the addition of 100initial steps necessary to add approximately 200 megawatts of wind generation in 2027;2029; and
–•the commencement of the process of withdrawinga withdrawal from our 35 percent ownership interest in Coyote Station, a jointly owned,jointly-owned coal-fired generation plant, by December 31, 2028; andin the event we are required to make a major, non-routine capital investment in the plant.
–Consistent with the addition of 50 megawatts of solar generation in 2033.
Although theoriginal 2022 IRP, includes planned actions beyond 2026, regulators will not act upon or approve planned actions in periods beyond 2026 as part of our 2022 IRP filing.
Subjectthe supplemental filing proposes to, subject to regulatory approval, the preferred plan proposes to create a regulatory asset as a vehicle to recover costs related to aany future withdrawal from Coyote Station, includingStation. Should such a withdrawal occur, we anticipate the regulatory asset would include the net book value of the plant on the withdrawal date, anticipated decommissioning costs, and any required costs incurred as a result of an early termination ofif the existing lignite sales agreement, under which Coyote Station acquires all of its lignite coal, from a nearby mine.must be terminated. As part of an economic analysis included in the filing, OTP developed an estimate of the reasonably foreseeable costs of withdrawing from Coyote Station, which was determined to be $68.5 million, assuming a withdrawal at the end of 2028 of $68.5 million.2028. These costs may differ from actual results due to the uncertainty and timing of future events associated with the terms and conditions ofwhich could result in 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.withdrawal from Coyote Station.
LIQUIDITY OVERVIEW
We believe our financial condition is strong and our cash and cash equivalents, other liquid assets, operating cash flows, existing lines of credit, access to capital markets and borrowing ability, because of investment-grade credit ratings, when taken together provide us ample liquidity to conduct our business operations, fund our short-term and long-term capital expenditure plans and satisfy our obligations as they become due. Our liquidity, including our operating cash flows and access to capital markets, cancould be impacted by macroeconomic factors outside of our control.control, including higher interest rates and debt capital costs and diminished credit availability. In addition, our liquidity could be impacted by non-compliance with certain financial covenants under our various debt instruments. As of March 31, 2022,2023, we were in compliance with all financial covenants (see the Financial Covenants section under Capital Resources below).
The following table presents the status of our lines of credit as of March 31, 20222023 and December 31, 2021:2022:
| | | 2022 | | 2021 | | 2023 | | 2022 |
(in thousands) | (in thousands) | Line Limit | | Amount Outstanding | | Letters of Credit | | Amount Available | | Amount Available | (in thousands) | Borrowing Limit | | Amount Outstanding | | Letters of Credit | | Amount Available | | Amount Available |
| OTC Credit Agreement | OTC Credit Agreement | $ | 170,000 | | | $ | 43,281 | | | $ | — | | | $ | 126,719 | | | $ | 147,363 | | OTC Credit Agreement | $ | 170,000 | | | $ | — | | | $ | — | | | $ | 170,000 | | | $ | 170,000 | |
OTP Credit Agreement | OTP Credit Agreement | 170,000 | | | 54,489 | | | 7,844 | | | 107,667 | | | 88,315 | | OTP Credit Agreement | 170,000 | | | 60,854 | | | 9,573 | | | 99,573 | | | 152,223 | |
Total | Total | $ | 340,000 | | | $ | 97,770 | | | $ | 7,844 | | | $ | 234,386 | | | $ | 235,678 | | Total | $ | 340,000 | | | $ | 60,854 | | | $ | 9,573 | | | $ | 269,573 | | | $ | 322,223 | |
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 three months ended March 31, 20222023 and 2021:2022:
| (in thousands) | (in thousands) | 2022 | | 2021 | (in thousands) | 2023 | | 2022 |
| Net Cash Provided by Operating Activities | Net Cash Provided by Operating Activities | $ | 45,416 | | | $ | 15,270 | | Net Cash Provided by Operating Activities | $ | 55,553 | | | $ | 45,416 | |
|
Net Cash Provided by Operating Activities increased $30.1$10.1 million for the three months ended March 31, 20222023 compared to the three months ended March 31, 2021. The increase2022, primarily due to the absence of a pension plan contribution in cash provided by operating activities2023 due to the plan's funded status, whereas a $20.0 million discretionary contribution was primarily the result of increased earnings during the year, which was partially offset by increased working capital needs. Ourmade in February 2022, as well as a lower 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 2022, partially offset by increased accounts payable due to increased material costs in our Manufacturing and Plastics segments in 2022. Operating cash flows were also reduced by a discretionary contribution to our pension plan of $20.0 million during the three months ended March 31, 2022,needs compared to a contribution of $10.0 millionthe same period in 2021.the previous year. | | | | | | | | | | | |
(in thousands) | 2022 | | 2021 |
| | | |
Net Cash Used in Investing Activities | $ | 31,449 | | | $ | 49,020 | |
| | | |
| | | | | | | | | | | |
(in thousands) | 2023 | | 2022 |
| | | |
Net Cash Used in Investing Activities | $ | 100,379 | | | $ | 31,449 | |
| | | |
Net Cash Used in Investing Activities decreased $17.6increased $68.9 million for the three months ended March 31, 20222023 compared to the three months ended March 31, 2021.2022. The decreaseincrease in capital expenditurescash used in investing activities was primarily relateddue to costs incurreda higher amount of Electric segment capital investment compared to last year, including the purchase of the Ashtabula III wind farm in 2021 by OTP to complete our Astoria Station project, and other one-time projects. Capital investment spending in our Manufacturing and Plastics segments also decreased from the previous year.January 2023 for $50.6 million.
| (in thousands) | (in thousands) | 2022 | | 2021 | (in thousands) | 2023 | | 2022 |
| Net Cash (Used in) Provided by Financing Activities | $ | (14,133) | | | $ | 33,799 | | |
Net Cash Provided by (Used in) Financing Activities | | Net Cash Provided by (Used in) Financing Activities | $ | 29,910 | | | $ | (14,133) | |
|
Net Cash Provided by (Used in) Provided by Financing Activities decreased $47.9increased $44.0 million for the three months ended March 31, 20222023 compared to the three months ended March 31, 2021,2022. Financing activities for the three months ended March 31, 2023 included net proceeds from short-term borrowings of $52.7 million which were primarily as a resultused to fund the acquisition of a decrease in financing needs given the lower levelAshtabula III, and dividend payments of capital spending in our Electric segment and the increase in cash provided by operating activities.$18.3 million. Financing activities for the three months ended March 31, 2022 included net proceeds from short-term borrowings of $6.6 million and dividend payments of $17.2 million. Financing activities for the three months ended March 31, 2021 included net proceeds from short-term borrowings of $53.9 million, primarily incurred to fund major construction projects, and dividend payments of $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 systems,lines, manufacturing facilities and upgrades, equipment used in the manufacturing process, 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, tax laws, regulatory changes, business expansion opportunities, the costs of labor, materials and equipment, and our financial condition. Our future
We have increased our Electric segment five-year capital expenditure plans also includeplan by approximately $45 million to incorporate the proposed capital investments through 2027 that are included in manufacturing facilities and facility upgrades, manufacturing equipment additions and upgrades and additional technology assets to be used in our manufacturing operations. Refer to Item 7, OTP's supplemental IRP filed on March 31, 2023.
Management's Discussion and AnalysisThe following provides a summary of Financial Condition and Results of Operations, of our Form 10-Kactual capital expenditures for the year ended December 31, 2021 for our2022, anticipated annual capital expenditure planexpenditures for the fivecurrent year period from 2022 through 2026.ending December 31, 2023, and the subsequent four years, along with electric utility average rate base and annual rate base growth: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | 2022 | | | 2023(1) | | 2024 | | 2025 | | 2026 | | 2027 | | Total 2023 - 2027 |
| | | | | | | | | | | | | | | |
Electric Segment: | | | | | | | | | | | | | | | |
Renewables and Natural Gas Generation | | | | | $ | 88 | | | $ | 119 | | | $ | 88 | | | $ | 85 | | | $ | 49 | | | $ | 429 | |
Technology and Infrastructure | | | | | 33 | | | 30 | | | 6 | | | 5 | | | 1 | | | 75 | |
Distribution Plant Replacements | | | | | 33 | | | 37 | | | 38 | | | 38 | | | 43 | | | 189 | |
Transmission (includes replacements) | | | | | 34 | | | 36 | | | 46 | | | 87 | | | 78 | | | 281 | |
Other | | | | | 26 | | | 25 | | | 30 | | | 24 | | | 23 | | | 128 | |
Total Electric Segment | | $ | 148 | | | | $ | 214 | | | $ | 247 | | | $ | 208 | | | $ | 239 | | | $ | 194 | | | $ | 1,102 | |
Manufacturing and Plastics Segments | | 23 | | | | 48 | | | 53 | | | 29 | | | 25 | | | 24 | | | 179 | |
Total Capital Expenditures | | $ | 171 | | | | $ | 262 | | | $ | 300 | | | $ | 237 | | | $ | 264 | | | $ | 218 | | | $ | 1,281 | |
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Total Electric Utility Average Rate Base | | $ | 1,624 | | | | $ | 1,748 | | | $ | 1,851 | | | $ | 1,990 | | | $ | 2,111 | | | $ | 2,230 | | | |
Annual Rate Base Growth | | 3.1 | % | | | 7.6 | % | | 5.9 | % | | 7.5 | % | | 6.1 | % | | 5.6 | % | | |
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(1) Includes actual results for the three months ended March 31, 2023, and anticipated capital expenditures for the remaining nine months of 2023. |
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 easementeasements and leasing arrangements.
Our contractual obligations as of December 31, 20212022 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, 2021. There2022. Except for the obligations arising from new land easements assumed in connection with the purchase of Ashtabula III, there were no material changes in our contractual obligations outside of the ordinary course of our business during the three months ended March 31, 2022.2023. Off-Balance Sheet Arrangements
AsIn connection with the purchase of March 31, 2022,the Ashtabula III wind farm in January 2023, we have outstanding lettersassumed 51 land easements not classified as leases, which require annual payments. The remaining payments to be made under the easements total $4.2 million and the remaining terms 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.agreements extend into 2034.
COMMON STOCK DIVIDENDS
We paid dividends to our common stockholders totaling $17.2$18.3 million, or $0.4125$0.4375 per share, in the first three months of 2022.2023. The determination of the amount of future cash dividends to be paid will depend on, among other things, our financial condition, improvement inour actual or expected level of earnings per share,and cash flows from operations, the level of our capital expenditures and our future business prospects. As a result of certain statutory limitations or regulatory or financing agreements, restrictions could occur on the amount of distributionsdividends we are allowed to pay could be made by our subsidiaries.restricted. See Note 10 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information. The decision to declare a dividenddividends 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 whichand is aided by strong financial coverages and investment grade credit ratings. Debt financing will be required in the five-year period from 20222023 through 20262028 to refinance maturing debt and to finance our capital investments. Our financing plans are subject to change and are impacted by our planned level of capital investments, and decisions to reduce borrowings under our lines of credit, to refund or retire early any of our presently outstanding debt, to complete acquisitions, or to use capital for other corporate purposes.
REGISTRATION STATEMENTS
On May 3, 2021, we filed a shelf registration statement with the SEC under which we may offer for sale, from time to time, either separately or together in any combination, equity, debt or other securities described in the shelf registration statement. No new debt or equity has been issued pursuant to the registration statement. The registration statement expires in May 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 methods of purchasing our common shares by reinvesting their dividends or making optional cash investments. Shares purchased under the plan may be newly issued common shares or common shares purchased on the open market. As of March 31, 2022,2023, there was 1,348,716were 1,220,100 shares available for purchase or issuance under the plan. The registration statement expires in May 2024.
SHORT-TERM DEBT
OTC and OTP are each party to a credit agreement (the OTC Credit Agreement and the OTP Credit Agreement, respectively) which each provide for unsecured revolving lines of credit. The following is a summary of key provisions and borrowing information as of, and for the three months ended, March 31, 2022:2023:
| (in thousands, except interest rates) | (in thousands, except interest rates) | OTC Credit Agreement | | OTP Credit Agreement | (in thousands, except interest rates) | OTC Credit Agreement | | OTP Credit Agreement |
| Borrowing Limit | Borrowing Limit | $ | 170,000 | | | $ | 170,000 | | Borrowing Limit | $ | 170,000 | | | $ | 170,000 | |
Borrowing Limit if Accordion Exercised1 | Borrowing Limit if Accordion Exercised1 | 290,000 | | | 250,000 | | 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 | % | |
Amount Restricted Due to Outstanding Letters of Credit as of March 31, 2023 | | Amount Restricted Due to Outstanding Letters of Credit as of March 31, 2023 | — | | | 9,573 | |
Amount Outstanding as of March 31, 2023 | | Amount Outstanding as of March 31, 2023 | — | | | 60,854 | |
Average Amount Outstanding During the Three Months Ended March 31, 2023 | | Average Amount Outstanding During the Three Months Ended March 31, 2023 | — | | | 51,226 | |
Maximum Amount Outstanding During the Three Months Ended March 31, 2023 | | Maximum Amount Outstanding During the Three Months Ended March 31, 2023 | — | | | 61,006 | |
Interest Rate as of March 31, 2023 | | Interest Rate as of March 31, 2023 | 6.30 | % | | 6.01 | % |
Maturity Date | Maturity Date | September 30, 2026 | | September 30, 2026 | Maturity Date | October 29, 2027 | | October 29, 2027 |
| | 1Each facility includes an accordion featuring allowing the borrower to increase the borrowing limit if certain terms and conditions are met. | 1Each facility includes an accordion featuring allowing the borrower to increase the borrowing limit if certain terms and conditions are met. | 1Each facility includes an accordion featuring allowing the borrower to increase the borrowing limit if certain terms and conditions are met. |
LONG-TERM DEBT
AtAs of March 31, 2022,2023, we had $767.0$827.0 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 20222026 to 2051. Pursuant to a Note Purchase Agreement executed in June 2021, OTP intends to issue its Series 2022A notes due May 20, 2052, in May 2022 for aggregate proceeds of $90.0 million, subject to the satisfaction of certain customary conditions to closing, and use a portion of the proceeds to repay the $30.0 million Series 2007B Notes which are maturing in August 2022.
2052. Note 6 to our consolidated financial statements included in this Quarterly Report on Form 10-Q includes additional information regarding these short-term and long-term debt instruments.
Financial Covenants
Certain of our short- and long-term debt agreements require OTC and OTP to maintain certain financial covenants. As of March 31, 2022,2023, we were in compliance with these financial covenants as further described below:
OTC, under its financial covenants, may not permit its ratio of interest-bearing debt to total capitalization to exceed 0.60 to 1.00, may not permit its interest and dividend coverage ratio to be less than 1.50 to 1.00, and may not permit its priority indebtedness to exceed 10%10 percent of ourits total capitalization. As of March 31, 2022, our2023, OTC's interest-bearing debt to total capitalization was 0.450.412 to 1.00, ourOTC's interest and dividend coverage ratio was 8.3510.62 to 1.00, and weOTC had no priority indebtedness outstanding.
OTP, under its financial covenants, may not permit its ratio of interest-bearing debt to total capitalization to exceed 0.60 to 1.00, may not permit its interest and dividend coverage ratio to be less than 1.50 to 1.00, and may not permit its priority debtindebtedness to exceed 20%20 percent of its total capitalization. As of March 31, 2022,2023, OTP's interest-bearing debt to total capitalization was 0.470.467 to 1.00, itsOTP's interest and dividend coverage ratio was 3.333.73 to 1.00, and OTP had no priority indebtedness outstanding.
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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 generally accepted 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 disclosuredisclosures 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, 20212022 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.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, 2021.2022. | | | | | |
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of March 31, 2022,2023, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2022.2023.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended March 31, 20222023 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, 2021.2022.
The following Exhibits are filed as part of, or incorporated by reference into, this report. | | | | | | | |
| | |
No. | | | Description |
31.1 | | | |
31.2 | | | |
32.1 | | | |
32.2 | | | |
101.SCH | | | —Inline XBRL Taxonomy Extension Schema Document |
101.CAL | | | —Inline XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB | | | —Inline XBRL Taxonomy Extension Label Linkbase Document |
101.PRE | | | —Inline XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF | | | —Inline XBRL Taxonomy Extension Definition Linkbase Document |
104 | | | —Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| OTTER TAIL CORPORATION |
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| 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: May 4, 20223, 2023 |