OTTER TAIL CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- May 7, 2021 3:16 pm GMTMay 7, 2021 8:55 pm GMT
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You should read the following discussion and analysis of our financial condition and results of operations together with our interim financial statements and the related notes appearing under Item 1 of this Form 10-Q, and our annual financial statements and the related notes along with the discussion and analysis of our financial condition and results of operations contained in our Annual Report on Form 10-K for the year ended December 31, 2020. Otter Tail Corporation and its subsidiaries form a diverse group of businesses with operations classified into three segments: Electric, Manufacturing and Plastics. Our Electric business is a vertically integrated, regulated utility with generation, transmission and distribution facilities to serve our customers in western Minnesota, eastern North Dakota and northeastern South Dakota. Our Manufacturing segment provides metal fabrication for custom machine parts and metal components and manufactures extruded and thermoformed plastic products. Our Plastics segment manufactures PVC pipe for use in, among other applications, municipal and rural water, wastewater, and water reclamation projects. COVID-19 We continue to monitor the progression of the novel coronavirus (COVID-19) and its impact on our businesses, employees, customers, construction contractors and vendors. As this pandemic continues, we are following the directives and advice of government leaders and medical professionals and have adopted practices to help curtail the spread of the virus and mitigate its impact on our communities, employees, construction contractors, customers and business operations. Our Electric segment business provides a critical service to our customers and our manufacturing businesses provide products and support to critical infrastructure industries. We continue to operate our businesses in a manner that is safe for our employees and our customers. Beginning in March 2020, COVID-19 and the resulting economic conditions negatively impacted operating results of our Manufacturing segment as customer demand declined significantly in the second quarter of 2020. Sales volumes strengthened in the third and fourth quarters of 2020 due to strong recreational vehicle and lawn and garden end-market demand. Our Electric and Plastics segments operating results were also impacted in 2020. Within our Electric segment, we experienced reduced demand from commercial and industrial customers and increased costs for bad debts. In our Plastics segment, we experienced lower sales volumes in the second quarter of 2020 as distributors of our products reduced inventory levels given the uncertainty of the potential impact of COVID-19. Sales volumes recovered and gross profit margins increased in the third and fourth quarters of 2020 due to increase demand and concerns of supply disruptions. The impact of COVID-19 and the resulting macroeconomic conditions on our business and financial results have begun to ease. However, uncertainty remains regarding the magnitude and duration of the pandemic and resulting financial effects. We expect demand from commercial and industrial customers and bad debt expense levels within our Electric segment to be impacted during 2021, and customer demand within our Manufacturing and Plastics segments could be disrupted as the pandemic evolves. We continue to monitor developments involving our workforce, customers, construction contractors, suppliers and vendors and the financial effects on our business. However, due to the unprecedented and evolving nature of this pandemic, we cannot predict the full extent of the impact COVID-19 will have on our operating results, financial condition and liquidity. RESULTS OF OPERATIONS Provided below is a summary and discussion of our operating results on a consolidated basis followed by a discussion of the operating results of each of our segments, Electric, Manufacturing and Plastics. Intersegment transactions were not material in 2021 or 2020. In addition to the segment results, we provide an overview of our Corporate costs. Our Corporate costs do not constitute a reportable segment but rather consist of unallocated general corporate expenses, such as corporate staff and overhead costs, the results of our captive insurance company and other items excluded from the measurement of segment performance. Corporate costs are added to operating segment totals to reconcile to totals on our consolidated statements of income. CONSOLIDATED RESULTS The following table summarizes our consolidated results of operations for the three months ended March 31, 2021 and 2020: (in thousands) 2021 2020 $ change % change Operating Revenues $ 261,710 $ 234,747 $ 26,963 11.5 % Operating Expenses 217,511 195,458 22,053 11.3 Operating Income 44,199 39,289 4,910 12.5 Interest Charges 9,398 8,123 1,275 15.7 Nonservice Cost Components of Postretirement Benefits 383 871 (488) (56.0) Other Income 1,160 (389) 1,549 (398.2) Income Before Income Taxes 35,578 29,906 5,672 19.0 Income Tax Expense 5,249 5,638 (389) (6.9) Net Income $ 30,329 $ 24,268 $ 6,061 25.0 % Operating Revenues increased $27.0 million primarily due to rising pipe prices within our Plastics segment and increased material cost leading to increased sales prices in our Manufacturing segment. Operating revenues within our Electric segment also increased, primarily as a result of increased transmission and wholesale electric revenues. See our segment disclosures below for additional discussion of items impacting operating revenues.
Table of Contents Operating Expenses increased $22.1 million primarily due to increased costs of products sold in our Plastics and Manufacturing segments due to increased raw material costs in each segment. Operating expenses in our Electric segment increased primarily due to higher depreciation and amortization expense arising from our recent rate base investments. See our segment disclosures below for additional discussion of items impacting operating expenses. Interest Charges increased $1.3 million mostly due to: •A $0.5 million increase in interest expense related to OTP long-term debt issuances of $35 million in February 2020 and $40 million in August 2020. •A $0.3 million reduction in capitalized interest at OTP related to the completion and start up of Astoria Station in the first quarter of 2021. •A $0.4 million increase in corporate interest expense due to a higher level of short-term borrowings between the quarters as well as an increase in the cost of borrowing. Nonservice Cost Components of Postretirement Benefits decreased $0.5 million due to a change in how prescription drug coverage is provided to retirees and due to the impact on nonservice costs of a 70 basis point drop in the discount rate from 2020 to 2021. Other Income increased $1.5 million primarily due to increases in the cash values of corporate-owned life insurance policies and captive insurance company investments in the first quarter of 2021 compared to losses in value in the first quarter of 2020. Income Tax Expense decreased $0.4 million despite a $5.7 million increase in income before income taxes primarily due to PTCs earned in the first quarter of 2021 from our Merricourt wind farm, which was placed in service in the fourth quarter of 2020. Our effective tax rate was 14.8% in the first quarter of 2021 and 18.9% in the first quarter of 2020. See Note 8 to our consolidated financial statements included in this report on Form 10-Q for additional information regarding factors impacting our effective tax rate in 2021 and 2020. ELECTRIC SEGMENT RESULTS The following table summarizes the results of operations for our Electric segment for the three months ended March 31, 2021 and 2020: (in thousands) 2021 2020 $ change % change Retail Sales Revenue $ 105,706 $ 106,603 $ (897) (0.8) % Transmission Services Revenues 11,944 10,841 1,103 10.2 Wholesale Revenues 4,507 876 3,631 414.5 Other Electric Revenues 1,542 1,556 (14) (0.9) Total Operating Revenue 123,699 119,876 3,823 3.2 Production Fuel 14,714 13,735 979 7.1 Purchased Power 19,260 18,830 430 2.3 Operation and Maintenance Expenses 41,421 40,615 806 2.0 Depreciation and Amortization 17,308 15,676 1,632 10.4 Property Taxes 4,320 4,100 220 5.4 Operating Income $ 26,676 $ 26,920 $ (244) (0.9) % Electric kilowatt-hour (kwh) Sales (in thousands) Retail kwh Sales 1,348,519 1,429,910 (81,391) (5.7) % Wholesale kwh Sales - Company Generation 80,423 38,924 41,499 106.6 Heating Degree Days 3,078 3,272 (194) (5.9) Cooling Degree Days - - - -
Results of operations for the Electric segment are impacted by fluctuations in weather conditions and the resulting demand for electricity for heating and cooling. The following table shows heating degree days as a percent of normal.
2021 2020 Heating Degree Days 89.5 % 95.6 % The following table summarizes the estimated effect on diluted earnings per share of the difference in retail kwh sales under actual weather conditions and expected retail kwh sales under normal weather conditions in 2021 and 2020, and between years. 2021 vs 2021 vs 2020 vs Normal 2020 Normal
Effect on Diluted Earnings Per Share $ (0.04) $ (0.02) $ (0.02)
Retail Sales Revenue decreased $0.9 million driven by:
Table of Contents •A $2.8 million decrease in retail revenue mainly due to decreased kwh sales to commercial and industrial customers, exclusive of the impact of milder weather on sales, due to ongoing impacts of COVID-19 on first quarter 2021 kwh sales. COVID-19 did not impact electric revenues in the first quarter of 2020. •A $1.5 million decrease in fuel recovery revenue mainly due to credits provided to customers from increased margins on wholesale kwh sales and a 5.7% reduction in retail kwh sales between the quarters. •A $0.9 million decrease in retail revenues related to decreased consumption due to milder weather in the first quarter of 2021 compared with the first quarter of 2020, evidenced by a 5.9% decrease in heating-degree days between the quarters. These decreases in revenue were partially offset by: •A $2.3 million increase in new retail revenues, net of an estimated refund, related to an interim rate increase in Minnesota effective January 1, 2021 in connection with OTP's current Minnesota rate case filed in November 2020. •A $0.7 million increase in conservation rider revenues related to the recovery of increased conservation improvement program spending in Minnesota and South Dakota. •A $0.5 million increase in renewable rider revenues in North Dakota related to recovery of Merricourt operating expenses and returns on increased investment in the project, which was placed in service in the fourth quarter of 2020. •A $0.5 million increase in retail revenue due to a positive price variance resulting from varying kwh sales to customers under different tariffs. •A $0.3 million net increase in North Dakota and South Dakota generation, transmission and phase-in rider revenues related to the recovery of Astoria Station and transmission project costs. Transmission Services Revenues increased $1.1 million due to increases of $0.7 million in generator interconnection revenues under two new agreements which began billing after the first quarter of 2020 and $0.4 million in Midcontinent Independent System Operator. Inc. (MISO) transmission services tariff revenues. Wholesale Electric Revenue increased $3.6 million as a result of a 106.6% increase in wholesale kwh sales and a 149% increase in wholesale electric prices driven by high market demand and availability constraints during the February 2021 cold weather, which drove up spot market prices for electricity. Production Fuel costs increased $1.0 million mainly as a result of a 16.2% increase in kwhs generated from our fuel-burning plants due to higher demand and favorable prices for energy in wholesale markets. Fuel costs per kwh of generation decreased 7.8% at our fuel-burning plants as a result of increased efficiencies at higher and longer-sustained levels of generation. Fuel costs per kwh of generation including renewable generation decreased 15.4% as a result of Merricourt being added to our generation mix in December 2020. Purchased Power costs to serve retail customers increased $0.4 million as a result of a 26.6% increase in purchased power prices, partially offset by a 19.2% decrease in kwhs purchased. The increase in kwh prices mainly was driven by high market demand for electricity and availability constraints caused by the February 2021 cold weather. Operating and Maintenance Expense increased $0.8 million mainly due to: •$1.2 million in Merricourt operating and maintenance expenses incurred in the first quarter of 2021 as the wind farm is now commercially operational. •A $0.7 million increase in conservation improvement program expenditures, which are being recovered through retail rate riders in Minnesota and South Dakota. These increases in expense were partially offset by: •A $0.6 million decrease in steam generation plant maintenance and operating expenses. •A $0.5 million decrease in bad debt expense due to improved customer collections in the first quarter of 2021. Depreciation and Amortization expense increased $1.6 million primarily due to Merricourt going into service in December of 2020. Property Taxes increased $0.2 million due to property additions and increased valuations on existing property.
Table of Contents MANUFACTURING SEGMENT RESULTS The following table summarizes the results of operations for our Manufacturing segment for the three months ended March 31, 2021 and 2020: (in thousands) 2021 2020 $ change % change Operating Revenues $ 75,825 $ 68,479 $ 7,346 10.7 % Cost of Products Sold 56,311 50,614 5,697 11.3 Other Operating Expenses 8,212 7,278 934 12.8 Depreciation and Amortization 3,757 3,746 11 0.3 Operating Income $ 7,545 $ 6,841 $ 704 10.3 % Operating Revenues increased $7.3 million primarily due to the following: •At BTD, revenues increased $6.2 million, consisting of $4.4 million in material cost increases passed through to customers and $1.8 million in volume and price increases. The volume increase was driven by stronger sales in the recreational vehicle, agricultural, lawn and garden and construction end markets offset, in part, by a decline in sales primarily in the energy end market. Scrap revenues increased $1.5 million mostly due to increases in scrap metal prices, but also due to increases in scrap volumes from increased sales and production activity. These increases in revenue were, partially offset by lower tooling and other revenues. •At T.O. Plastics, revenues increased $0.4 million. A $1.0 million increase in horticultural product sales was partially offset by decreases in industrial, life sciences and other product sales totaling $0.6 million. Cost of Products Sold increased $5.7 million due to the following: •Cost of products sold at BTD increased $5.9 million as a result of higher material prices and sales-volume-driven increases in material and labor costs. •Cost of products sold at T.O. Plastics decreased $0.2 million due to lower material costs resulting from a higher mix of product sales utilizing reclaimed material and the reduction in industrial and life sciences product sales, which more than offset increases in material costs on increased horticultural product sales. Other Operating Expenses increased $0.9 million. Operating expenses at BTD increased $0.5 million mainly due to increases in operating expenses. Operating expenses at T.O. Plastics increased $0.4 million, mainly due to recognition of an expense reduction of $0.6 million related to insurance settlement proceeds received in the first quarter of 2020. PLASTICS SEGMENT RESULTS The following table summarizes the results of operations for our Plastics segment for the three months ended March 31, 2021 and 2020: (in thousands) 2021 2020 $ change % change Operating Revenues $ 62,186 $ 46,397 $ 15,789 34.0 % Cost of Products Sold 45,666 35,270 10,396 29.5 Other Operating Expenses 2,944 2,770 174 6.3 Depreciation and Amortization 990 890 100 11.2 Operating Income $ 12,586 $ 7,467 $ 5,119 68.6 % Operating Revenues increased $15.8 million due to a 34% increase in the price per pound of PVC pipe sold and a 1.1% increase in pounds of PVC pipe sold. The price increase was driven, in part, by PVC resin supply constraints due to resin production plant shutdowns and feedstock shortages related to abnormally low temperatures and snowstorms in the Gulf Coast region of the United States in February 2021 and significant global demand for PVC resin and limited pipe inventory across the country. Cost of products sold increased $10.4 million primarily due to increased PVC resin and other material cost increases. Cost of Products Sold increased $10.4 million primarily due to increased PVC resin and other material cost increases. Other Operating Expenses increased $0.2 million as a result of increased incentive benefits directly related to increased profitability. CORPORATE COSTS The following table summarizes Corporate results of operations for the three months ended March 31, 2021 and 2020: (in thousands) 2021 2020 $ change % change Other Operating Expenses $ 2,537 $ 1,852 $ 685 37.0 % Depreciation and Amortization 71 87 (16) (18.4) Operating Loss $ 2,608 $ 1,939 $ 669 34.5 % Other Operating Expenses increased $0.7 million mainly as a result of increased stock incentive compensation expenses related to improved performance of the Company's stock quarter over quarter and in its projected returns on equity.
Table of Contents REGULATORY RATE MATTERS The following provides a summary of general rate case filings and rate rider filings that have or are expected to have a material impact on our operating results, financial position or cash flows. GENERAL RATES Minnesota Rate Case: On November 2, 2020, OTP filed a request with the MPUC for an increase in revenue recoverable under general rates in Minnesota. In its filing, OTP requested a net increase in annual revenue of approximately $14.5 million, or 6.77%, based on an allowed rate of return on rate base of 7.59% and an allowed rate of return on equity of 10.20% on an equity ratio of 52.5% of total capital. Through this proceeding, OTP has proposed changes to the mechanism of cost recovery, with some costs moving from riders into base rates and fuel, purchased power, and conservation program costs moving out of base rates and into riders. The filing also included a revenue decoupling mechanism proposal. Such mechanisms are designed to separate a utility's revenue from changes in energy sales. The decoupling mechanism uses a tracker balance in which authorized customer margins are subject to a true-up mechanism to maintain or cap a given level of revenues. On December 3, 2020, the MPUC approved an interim annual rate increase of $6.9 million, or 3.2%, effective January 1, 2021. This approval was provided after an alternative recovery proposal was submitted by OTP, which, among other changes, requested the extension of depreciable lives of certain wind-related assets and deferred certain cost recovery decisions to the final rate determination. In the aggregate, this alternative recovery proposal reduced operating costs and delayed recovery of certain other costs by approximately $7.0 million to lessen the interim rate impact on customers. In a filing submitted to the MPUC on April 30, 2021, OTP lowered its requested net annual revenue increase from its initial request of $14.5 million to $8.2 million, primarily due to a reduction in operating costs from amounts included in its November 2020 filing. The cost reductions include, among other items, lower depreciation expense on our wind generation assets due to the extension of depreciable lives from 25 to 35 years and a reduction in postretirement benefit costs. RATE RIDERS The following table includes a summary of pending and recently concluded rate rider proceedings: Recovery Filing Amount Effective Mechanism Jurisdiction Status Date (in millions) Date Notes RRR - 2019 MN Approved 06/21/19 $ 12.5 01/01/20 Includes return on Merricourt construction costs. TCR - 2018 MN Approved 05/07/20 10.3 01/21/20 See below for additional details. TCR - 2020 ND Approved 08/31/20 5.6 01/21/20 Includes recovery of new transmission assets. RRR - 2020 ND Approved 03/18/20 5.8 04/01/20 Includes return on Merricourt construction costs. GCR - 2020 ND Approved 06/10/20 6.2 07/01/20 Includes return on Astoria Station construction costs. TCR - 2021 ND Approved 11/18/20 5.6 01/01/21 Includes recovery of eight new transmission projects. TCR - 2020 SD Approved 01/29/20 2.3 03/02/20 Annual update to transmission cost recovery rider. PIR - 2020 SD Approved 05/31/20 1.6 09/01/20 Includes return on Merricourt and Astoria Station construction costs. TCR - 2021 SD Approved 02/19/21 2.2 03/01/21 Includes recovery of two new transmission projects. RRR - 2021 ND Approved 03/07/21 11.8 04/01/21 Includes return on Merricourt construction costs. Includes recovery of Astoria Station, GCG - 2021 ND Requested 03/01/21 5.2 - net of anticipated savings associated with the retirement of Hoot Lake Plant. Minnesota TCR. On May 1, 2017, the MPUC ordered OTP to include in the TCR rider retail rate base the Minnesota jurisdictional share of OTP's investments in certain transmission assets and all revenues received from other utilities under MISO's tariffed rates as a credit in its TCR revenue requirement calculations. The order had the effect of diverting interstate wholesale revenues that have been approved by the FERC to offset the FERC-approved expenses, effectively reducing OTP's recovery of FERC-approved expense levels. On August 18, 2017, OTP filed an appeal of the MPUC order with the Minnesota Court of Appeals to contest the portion of the order requiring OTP to jurisdictionally allocate costs of the FERC transmission projects in the TCR rider. On June 11, 2018, the Minnesota Court of Appeals reversed the MPUC's order. On July 11, 2018 the MPUC filed a petition for review of the decision to the Minnesota Supreme Court, which granted review of the appellate court decision. The Minnesota Supreme Court issued its opinion on April 22, 2020, concluding the MPUC lacked authority to amend an existing TCR rider approved under Minnesota state law to include the costs and revenues associated with these transmission projects and affirming the decision of the Minnesota Court of Appeals. On October 22, 2020, the MPUC approved OTP's request for a Minnesota TCR rider update with the exclusion of these transmission projects. In addition, the MPUC approved the inclusion of three new projects previously requested in the Minnesota TCR rider eligibility petition. Updated rates went into effect in January 2021. With this decision, one-half of the projected TCR rider tracker balance at December 2020 of $13.4 million will be included in the 2021 TCR rider annual revenue requirement, with the remainder included in the next annual update. The annual updates provide for recovery of approximately $2.6 million in MISO revenues credits to Minnesota customers through the TCR rider prior to September 30, 2020. As a result, OTP recognized additional rider revenue of $2.6 million during the third quarter of 2020.
Table of Contents LIQUIDITY LIQUIDITY OVERVIEW We believe our financial condition is strong and our cash, other liquid assets, operating cash flows, existing lines of credit, access to capital markets, and borrowing ability because of investment-grade credit ratings, when taken together, provide us ample liquidity to conduct business operations and fund our capital expenditure plans. Our liquidity, including our operating cash flows and access to capital markets, can be impacted by macroeconomic factors outside of our control, such as those which may be caused by COVID-19. In addition, our liquidity could be impacted by non-compliance with covenants under our various debt instruments. As of March 31, 2021, we were in compliance with all debt covenants (see the Financial Covenants section under Capital Resources below). We continue to have sufficient liquidity under our credit facilities to support our business based on the current economic environment. We are closely monitoring our liquidity and capital market conditions given the uncertainty surrounding the impact of COVID-19, which could have an adverse effect on the availability and terms of future debt and equity financing. The following table presents the status of our lines of credit as of March 31, 2021 and December 31, 2020: 2021 2020 Amount Letters Amount Amount (in thousands) Line Limit Outstanding of Credit Available Available Otter Tail Corporation Credit Agreement $ 170,000 $ 78,206
$ - $ 91,794 $ 104,834 OTP Credit Agreement
170,000 56,645 12,671 100,684 140,068 Total $ 340,000 $ 134,851 $ 12,671 $ 192,478 $ 244,902 We have an internal risk tolerance metric to maintain a minimum of $50 million of liquidity under the Otter Tail Corporation Credit Agreement. Should additional liquidity be needed, this agreement includes an accordion feature allowing us to increase the amount available to $290 million, subject to certain terms and conditions. The OTP Credit Agreement also includes an accordion feature allowing OTP to increase that facility to $250 million, subject to certain terms and conditions. CASH FLOWS The following is a discussion of our cash flows for the three months ended March 31, 2021 and 2020: (in thousands) 2021 2020
Net Cash Provided by Operating Activities $ 15,270 $ 21,777
Net Cash Provided by Operating Activities decreased $6.5 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. An increase in net income in 2021 was more than offset by an increase in working capital requirements, which was primarily the result of increased accounts receivables within our Manufacturing and Plastics segments due to strong sales volumes and increased sales prices during the three months ended March 31, 2021. We made a discretionary contribution to our pension plan of $10.0 million during the three months ended March 31, 2021 compared to a contribution of $11.2 million in 2020. We do not anticipate making any further discretionary contributions to the pension plan in 2021. (in thousands) 2021 2020
Net Cash Used in Investing Activities $ 49,020 $ 75,059
Net Cash Used in Investing Activities decreased $26.0 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. The decrease is primarily the result of lower capital investment within our Electric segment as capital spending on our large generation assets, Merricourt and Astoria Station, were largely completed in the fourth quarter of 2020. (in thousands) 2021 2020
Net Cash Provided by Financing Activities $ 33,799 $ 39,967
Net Cash Provided by Financing Activities decreased $6.2 million for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, primarily as a result of a decrease in financing needs given the lower level of capital spending in our Electric segment in 2021. Financing activities in the three months ended March 31, 2021 included a net borrowing increase of $53.9 million under our line of credit facilities and a dividend payment of $16.2 million ($0.39 per share). Financing activities in the three months ended March 31, 2020 included proceeds of $35.0 million from the issuance of long-term debt, a net borrowing increase of $13.9 million under our line of credit facilities and $6.2 million in proceeds raised from the issuance of common stock, net of issuance costs. We paid a dividend of $14.9 million ($0.37 per share) in the three months ended March 31, 2020. 23
Table of Contents CAPITAL REQUIREMENTS CAPITAL EXPENDITURES We have a capital expenditure program for expanding, upgrading and improving our plants and operating equipment. Typical uses of cash for capital expenditures are investments in electric generation facilities and environmental upgrades, transmission and distribution lines, manufacturing facilities and upgrades, equipment used in the manufacturing process, and computer hardware and information systems. Our capital expenditure program is subject to review and is revised in light of changes in demands for energy, technology, environmental laws, regulatory changes, business expansion opportunities, the costs of labor, materials and equipment and our financial condition. Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Form 10-K for the year ended December 31, 2020 for our capital expenditure plan for the five year period from 2021 through 2025. CONTRACTUAL OBLIGATIONS Our contractual obligations primarily include principal and interest payments due under our outstanding debt obligations, commitments to acquire coal, energy and capacity commitments, payments to meet our postretirement benefit obligations, and payment obligations under land easement and leasing arrangements. Our contractual obligations as of December 31, 2020 are included in Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of our Form 10-K for the year ended December 31, 2020. There were no material in our contractual obligations outside of the ordinary course of our business during the three months ended March 31, 2021. COMMON STOCK DIVIDENDS We paid dividends to our common stockholders totaling $16.2 million, or $0.39 per share, in the first three months of 2021. The determination of the amount of future cash dividends to be paid will depend on, among other things, our financial condition, improvement in earnings per share, cash flows from operations, the level of our capital expenditures and our future business prospects. As a result of certain statutory limitations or regulatory or financing agreements, restrictions could occur on the amount of distributions allowed to be made by our subsidiaries. See Note 10 to our consolidated financial statements included in this report on Form 10-Q for additional information. The decision to declare a dividend is reviewed quarterly by our Board of Directors. CAPITAL RESOURCES Financial flexibility is provided by operating cash flows, unused lines of credit, and access to capital markets, which is aided by strong financial coverages and investment grade credit ratings. Equity or debt financing will be required in the period 2021 through 2025 to support our capital investments, primarily within our Electric segment to fund construction of new rate base and transmission investments. In addition, we may issue equity or debt financing to opportunistically reduce borrowings under our lines of credit, to satisfy or early retire our outstanding long-term debt, or to finance potential acquisition opportunities or for other corporate purposes. REGISTRATION STATEMENTS On May 3, 2021 we filed two registration statements with the SEC. The first statement, a shelf registration, allows us to offer for sale, from time to time, either separately or together in any combination, equity, debt or other securities described in the registration statement. The second registration statement allows for the issuance of up to 1,500,000 common shares under our Automatic Dividend Reinvestment and Share Purchase Plan, which provides our common shareholders, retail customers of OTP and other interested investors a method of purchasing our common shares by reinvesting their dividends and/or making optional cash investments. Share purchased under the plan may be new issue common shares or common shares purchased on the open market. Both registration statements expire in May 2024. SHORT-TERM DEBT Otter Tail Corporation and Otter Tail Power Company are each party to a credit agreement (the OTC Credit Agreement and OTP Credit Agreement, respectively) which provide for unsecured revolving lines of credit. The following is a summary of key provisions and borrowing information as of and for the three months ended March 31, 2021: OTC Credit OTP Credit (in thousands, except interest rates) Agreement Agreement Borrowing Limit $ 170,000 $ 170,000 Borrowing Limit if Accordion Exercised1 290,000 250,000
Amount Restricted Due to Outstanding Letters of Credit as of March 31, 2021
- 12,671 Amount Outstanding as of March 31, 2021 78,206 56,645
Average Amount Outstanding During the Three Months Ended March 31, 2021
Maximum Amount Outstanding During the Three Months Ended March 31, 2021
79,718 69,674 Interest Rate as of March 31, 2021 1.6 % 1.4 % October 31, October 31, Maturity Date 2024 2024
1Each facility includes an accordion featuring allowing the borrower to increase the borrowing limit if certain terms and conditions are met.
Table of Contents LONG-TERM DEBT At March 31, 2021, we had $767.0 million of principal outstanding under long-term debt arrangements. These instruments generally provide for unsecured borrowings at fixed rates of interest with maturities ranging from 2021 to 2050. Note 6 to our consolidated financial statements included in this report on Form 10-Q includes additional information regarding these instruments. One OTP debt instrument with a principal balance of $140.0 million matures in December 2021. We anticipate issuing long-term debt in 2021 with the proceeds used to satisfy this maturing instrument. Financial Covenants Certain of our short- and long-debt agreements require Otter Tail Corporation and OTP to maintain certain financial covenants. As of March 31, 2021, we were in compliance with these financial covenants as further described below: Otter Tail Corporation under its financial covenants, may not permit its ratio of Interest-Bearing Debt to Total Capitalization to exceed 0.60 to 1.00, may not permit its Interest and Dividend Coverage Ratio to be less than 1.50 to 1.00, and may not permit its Priority Indebtedness to exceed 10% of our Total Capitalization. As of March 31, 2021, our Interest-Bearing Debt to Total Capitalization was 0.50 to 1.00, our Interest and Dividend Coverage Ratio was 4.62 to 1.00 and we had no Priority Indebtedness outstanding. OTP under its financial covenants, may not permit its ratio of Debt to Total Capitalization to exceed 0.60 to 1.00, may not permit its Interest and Dividend Coverage Ratio to be less than 1.50 to 1.00, and may not permit its Priority Debt to exceed 20% of its Total Capitalization. As of March 31, 2021, OTP's Interest-Bearing Debt to Total Capitalization was 0.47 to 1.00, its Interest and Dividend Coverage Ratio was 3.55 to 1.00 and it had no Priority Indebtedness outstanding. None of our debt agreements include any provisions that would trigger an acceleration of the related debt as a result of changes in the credit rating levels assigned to the related obligor by rating agencies. OFF-BALANCE-SHEET ARRANGEMENTS As of March 31, 2021 we have outstanding letters of credit totaling $16.4 million, a portion of which reduces our borrowing capacity under our lines of credit. No outstanding letters of credit are reflected in outstanding short-term debt on our consolidated balance sheets. We do not have any other off-balance-sheet arrangements or any relationships with unconsolidated entities or financial partnerships. These entities are often referred to as structured finance special purpose entities or variable interest entities, which are established for the purpose of facilitating off-balance-sheet arrangements or for other contractually narrow or limited purposes. We are not exposed to any financing, liquidity, market or credit risk that could arise if we had such relationships. CRITICAL ACCOUNTING POLICIES INVOLVING SIGNIFICANT ESTIMATES The discussion and analysis of our results of operations are based on financial statements prepared in accordance with accounting principles generally accepted in the United States of America. Certain of our accounting policies require management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities in the preparation of our consolidated financial statements. We have disclosed in our Annual Report on Form 10 -K for the year ended December 31, 2020 the critical accounting policies that affect our most significant estimates and assumptions used in preparing our consolidated financial statements. There have been no material changes to our critical accounting policies and estimates from those disclosed in this Form 10-K.