# Otter Tail Corp: Form 10-Q for the period ended Jun 30, 2024

- Company: [Otter Tail Corp](/companies/ottr.md) (CIK 1466593)
- Form: 10-Q
- Filed: 2024-08-07
- Accepted by EDGAR: Aug 7, 2024, 12:48 ET
- Period: 2024-06-30
- Accession: 0001466593-24-000129
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1466593/000146659324000129/ottr-20240630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1466593/000146659324000129/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Selling, general and administrative | 3 months, 2024-04-01 to 2024-06-30 | $18.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2024-01-01 to 2024-06-30 | $37.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2024-04-01 to 2024-06-30 | $110.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2024-01-01 to 2024-06-30 | $205.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-04-01 to 2024-06-30 | $10.2m | us-gaap:InterestExpenseNonoperating |
| Interest expense | 6 months, 2024-01-01 to 2024-06-30 | $20.1m | us-gaap:InterestExpenseNonoperating |
| Income tax | 3 months, 2024-04-01 to 2024-06-30 | $20.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2024-01-01 to 2024-06-30 | $38.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-04-01 to 2024-06-30 | $87.0m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2024-01-01 to 2024-06-30 | $161.3m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-04-01 to 2024-06-30 | $2.07 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2024-01-01 to 2024-06-30 | $3.84 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-04-01 to 2024-06-30 | $2.08 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2024-01-01 to 2024-06-30 | $3.86 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-04-01 to 2024-06-30 | 42,068,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2024-01-01 to 2024-06-30 | 42,051,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2024-01-01 to 2024-06-30 | $223.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2024-01-01 to 2024-06-30 | $175.5m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2024-01-01 to 2024-06-30 | $39.1m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2024-06-30 | $230.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-06-30 | $614.1m | us-gaap:AssetsCurrent |
| Total assets | at 2024-06-30 | $3.46bn | us-gaap:Assets |
| Current liabilities | at 2024-06-30 | $271.0m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2024-06-30 | $943.6m | us-gaap:LongTermDebtNoncurrent |
| Short-term borrowings | at 2024-06-30 | $12.8m | us-gaap:ShortTermBorrowings |
| Shareholders' equity | at 2024-06-30 | $1.57bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 44,732 characters.

*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, 2023.*

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.

### 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 June 30, 2024 and 2023:

*(in thousands)*

|  | 2024 | 2023 | $ change | % change |
| --- | ---: | ---: | ---: | ---: |
| Operating Revenues | **$342,336** | $337,716 | $4,620 | 1.4% |
| Operating Expenses | **231,425** | 231,663 | (238) | (0.1) |
| **Operating Income** | **110,911** | 106,053 | 4,858 | 4.6 |
| Interest Expense | **(10,202)** | (9,696) | (506) | 5.2 |
| Nonservice Components of Postretirement Benefits | **2,388** | 2,421 | (33) | (1.4) |
| Other Income (Expense), net | **4,490** | 3,253 | 1,237 | 38.0 |
| **Income Before Income Taxes** | **107,587** | 102,031 | 5,556 | 5.4 |
| Income Tax Expense | **20,592** | 20,062 | 530 | 2.6 |
| **Net Income** | **$86,995** | $81,969 | $5,026 | 6.1% |

**Operating Revenues** increased $4.6 million primarily due to increased sales volumes in our Plastics segment driven by strong distributor and end market demand, partially offset by decreased sales volumes in our Manufacturing segment, and decreased revenues in our Electric segment due to the impact of unfavorable weather. See our segment disclosures below for additional discussion of items impacting operating revenues.

**Operating Expenses** decreased $0.2 million primarily due to decreased sales volumes in our Manufacturing segment, lower fuel costs in our Electric segment and lower material costs in our Plastics segment. See our segment disclosures below for additional discussion of items impacting operating expenses.

**Interest Expense** increased $0.5 million due to increased interest rates on our short-term variable rate debt outstanding at OTP and the issuance of an additional $120.0 million of long-term debt at OTP in March 2024.

**Other Income (Expense)** increased $1.2 million, having a positive impact on net income, primarily due to increased investment income earned on our short-term cash equivalent investments and long-term marketable securities, as well as increased allowance for funds used during construction in our Electric segment related to an increase in capital expenditures compared to the same period last year. Increases to other income were partially offset by a lower amount of gains on our corporate-owned life insurance policies compared to the same period last year.

**Income Tax Expense** increased $0.5 million primarily due to increased income before income taxes. Our effective tax rate was 19.2% for the three months ended June 30, 2024 and 19.7% for the same period last year.

### ELECTRIC SEGMENT RESULTS

The following table summarizes Electric segment operating results for the three months ended June 30, 2024 and 2023:

*(in thousands)*

|  | 2024 | 2023 | $ change | % change |
| --- | ---: | ---: | ---: | ---: |
| Retail Revenues | **$96,382** | $93,715 | $2,667 | 2.8% |
| Transmission Services Revenues | **12,440** | 14,829 | (2,389) | (16.1) |
| Wholesale Revenues | **1,669** | 2,670 | (1,001) | (37.5) |
| Other Electric Revenues | **2,337** | 2,549 | (212) | (8.3) |
| Total Operating Revenues | **112,828** | 113,763 | (935) | (0.8) |
| Production Fuel | **12,324** | 14,833 | (2,509) | (16.9) |
| Purchased Power | **9,249** | 5,212 | 4,037 | 77.5 |
| Operating and Maintenance Expenses | **44,652** | 45,522 | (870) | (1.9) |
| Depreciation and Amortization | **20,387** | 18,672 | 1,715 | 9.2 |
| Property Taxes | **3,619** | 4,336 | (717) | (16.5) |
| Operating Income | **$22,597** | $25,188 | $(2,591) | (10.3)% |
|  | **2024** | **2023** | **change** | **% change** |
| Electric kilowatt-hour (kwh) Sales (in thousands) |  |  |  |  |
| Retail kwh Sales | **1,315,504** | 1,345,830 | (30,326) | (2.3)% |
| Wholesale kwh Sales – Company Generation | **57,985** | 87,032 | (29,047) | (33.4) |
| **Heating Degree Days** | **372** | 639 | (267) | (41.8) |
| **Cooling Degree Days** | **61** | 254 | (193) | (76.0) |

The operating results of our Electric segment are impacted by fluctuations in weather conditions and the resulting demand for electricity for heating and cooling. The following table shows heating and cooling degree days as a percent of normal for the three months ended June 30, 2024 and 2023.

|  | 2024 | 2023 |
| --- | ---: | ---: |
| Heating Degree Days | **68.8%** | 120.6% |
| Cooling Degree Days | **48.8%** | 215.3% |

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 for the three months ended June 30, 2024 and 2023, and between those periods.

|  | 2024 vs Normal | 2024 vs 2023 | 2023 vs Normal |
| --- | ---: | ---: | ---: |
| Effect on Diluted Earnings Per Share | $(0.03) | $(0.07) | $0.04 |

**Retail Revenues** increased $2.7 million primarily due to the following:

- A $2.5 million increase in new retail revenues, net of an estimated refund, from an interim rate increase in North Dakota effective January 1, 2024 in connection with OTP's North Dakota rate case filed in November 2023.
- A $2.5 million increase in fuel recovery revenues, primarily due to increased purchase power and fuel costs, partially offset by lower fuel volumes, primarily due to unfavorable weather during the period.
- A $1.3 million increase in retail revenues due to increased sales volumes from commercial and industrial customers.

The increases in retail revenues described above were partially offset by a $4.3 million decrease in retail revenues due to the impact of unfavorable weather.

**Transmission Services Revenues** decreased $2.4 million as a result of certain project cost and operating and maintenance expense updates during the second quarter last year which resulted in additional nonrecurring revenues during the period.

**Production Fuel** costs decreased $2.5 million due to a decrease in the generation from our coal-fired and natural gas facilities compared to the same period last year, primarily due to decreased demand resulting from unfavorable weather.

**Purchased Power** costs to serve retail customers increased $4.0 million primarily due to a 50% increase in price of purchased power, as well as an 18% increase in the amount of kwh purchased.

**Operating and Maintenance Expenses** decreased $0.9 million primarily due to lower vegetative management expenses and decreased maintenance costs.

**Depreciation and Amortization** increased $1.7 million due to additional capital investments.

### MANUFACTURING SEGMENT RESULTS

The following table summarizes Manufacturing segment operating results for the three months ended June 30, 2024 and 2023:

*(in thousands)*

|  | 2024 | 2023 | $ change | % change |
| --- | ---: | ---: | ---: | ---: |
| Operating Revenues | **$96,684** | $102,475 | $(5,791) | (5.7)% |
| Cost of Products Sold (excluding depreciation) | **71,797** | 79,154 | (7,357) | (9.3) |
| Nonelectric Selling, General, and Administrative Expenses | **10,200** | 10,470 | (270) | (2.6) |
| Depreciation and Amortization | **5,087** | 4,531 | 556 | 12.3 |
| Operating Income | **$9,600** | $8,320 | $1,280 | 15.4% |

**Operating Revenues** decreased $5.8 million primarily due to decreased sales volumes at both of our manufacturing businesses, with an overall sales volume decrease of 13% compared to the same period last year. At BTD Manufacturing, our contract metal fabricator, sales volumes declined primarily in the lawn and garden and agriculture end markets. A 31% decline in scrap metal revenues also contributed to the overall decrease in operating revenues. Decreased sales volumes and scrap revenues were partially offset by increased steel prices, resulting in a 5% increase in material costs, which are passed through to customers. At T.O. Plastics, our plastics thermoforming manufacturer, sales volume declines were primarily attributable to decreased sales of horticulture products as customers and distributors continued to reduce inventory levels from the high levels previously established due to supply chain challenges.

**Cost of Products Sold** decreased $7.4 million primarily due to decreased sales volumes, partially offset by higher steel costs, as described above.

### PLASTICS SEGMENT RESULTS

The following table summarizes Plastics segment operating results for the three months ended June 30, 2024 and 2023:

*(in thousands)*

|  | 2024 | 2023 | $ change | % change |
| --- | ---: | ---: | ---: | ---: |
| Operating Revenues | **$132,824** | $121,478 | $11,346 | 9.3% |
| Cost of Products Sold (excluding depreciation) | **44,998** | 41,504 | 3,494 | 8.4 |
| Nonelectric Selling, General, and Administrative Expenses | **4,604** | 3,936 | 668 | 17.0 |
| Depreciation and Amortization | **1,133** | 1,003 | 130 | 13.0 |
| Operating Income | **$82,089** | $75,035 | $7,054 | 9.4% |

**Operating Revenues** increased $11.3 million primarily due to a 26% increase in sales volumes driven by customer sales volume growth and distributor and end market demand. Sales volumes in the second quarter of last year were negatively impacted by distributors’ inventory management strategies amid uncertain market conditions. Although demand has recovered from last year, sales prices have continued to decline. Sales prices decreased 13% compared to the same period last year, partially offsetting the impact of increased sales volumes.

**Cost of Products Sold** increased $3.5 million primarily due to increased sales volumes, as described above. The impact of increased sales volumes was partially offset by decreased PVC resin costs. PVC resin and other input material costs decreased 14% compared to the same period in the previous year as the unique supply and demand conditions experienced in recent years, which caused significant volatility and increases in resin costs, have subsided and resin costs have remained stable during the first half of the year.

### CORPORATE COSTS

The following table summarizes Corporate operating results for the three months ended June 30, 2024 and 2023:

*(in thousands)*

|  | 2024 | 2023 | $ change | % change |
| --- | ---: | ---: | ---: | ---: |
| Nonelectric Selling, General, and Administrative Expenses | **$3,350** | $2,464 | $886 | 36.0% |
| Depreciation and Amortization | **25** | 26 | (1) | (3.8) |
| Operating Loss | **$3,375** | $2,490 | $885 | 35.5% |

25

### RESULTS OF OPERATIONS – YEAR TO DATE

### CONSOLIDATED RESULTS

The following table summarizes consolidated operating results for the six months ended June 30, 2024 and 2023:

*(in thousands)*

|  | 2024 | 2023 | $ change | % change |
| --- | ---: | ---: | ---: | ---: |
| Operating Revenues | **$689,404** | $676,797 | $12,607 | 1.9% |
| Operating Expenses | **483,518** | 490,074 | (6,556) | (1.3) |
| **Operating Income** | **205,886** | 186,723 | 19,163 | 10.3 |
| Interest Expense | **(20,052)** | (19,111) | (941) | 4.9 |
| Nonservice Components of Postretirement Benefits | **4,830** | 4,833 | (3) | (0.1) |
| Other Income (Expense), net | **9,069** | 5,370 | 3,699 | 68.9 |
| **Income Before Income Taxes** | **199,733** | 177,815 | 21,918 | 12.3 |
| Income Tax Expense | **38,400** | 33,365 | 5,035 | 15.1 |
| **Net Income** | **$161,333** | $144,450 | $16,883 | 11.7% |

**Operating Revenues** increased $12.6 million primarily due to increased sales volumes within our Plastics segment, partially offset by decreased sales volumes in our Manufacturing segment, and decreased revenues and unfavorable weather in our Electric segment. See our segment disclosures below for additional discussion of items impacting operating revenues.

**Operating Expenses** decreased $6.6 million primarily due to lower purchased power costs in our Electric segment, lower sales volumes within our Manufacturing segment, and lower material costs in our Plastics segment, partially offset by costs associated with increased sales volumes within our Plastics segment. See our segment disclosures below for additional discussion of items impacting operating expenses.

**Interest Expense** increased $0.9 million due to increased interest rates on our short-term variable rate debt outstanding at OTP and the issuance of an additional $120.0 million of long-term debt at OTP in March 2024.

**Other Income** increased $3.7 million, having a positive impact on net income, primarily due to increased investment income earned on our short-term cash equivalent investments and long-term marketable securities, as well as increased allowance for funds used during construction in our Electric segment related to an increase in capital expenditures compared to the same period last year. Increases to other income were partially offset by a lower amount of gains on our corporate-owned life insurance policies compared to the same period last year.

**Income Tax Expense** increased $5.0 million primarily due to increased income before income taxes. Our effective tax rate was 19.2% for the six months ended June 30, 2024, and 18.8% for the same period last year. The increase in our effective tax rate was primarily driven by a decrease in PTCs from our wind generation assets compared to the same period last year.

### ELECTRIC SEGMENT RESULTS

The following table summarizes Electric segment operating results for the six months ended June 30, 2024 and 2023:

*(in thousands)*

|  | 2024 | 2023 | $ change | % change |
| --- | ---: | ---: | ---: | ---: |
| Retail Revenues | **$220,871** | $230,168 | $(9,297) | (4.0)% |
| Transmission Services Revenues | **24,654** | 26,936 | (2,282) | (8.5) |
| Wholesale Revenues | **5,134** | 4,508 | 626 | 13.9 |
| Other Electric Revenues | **3,658** | 4,059 | (401) | (9.9) |
| Total Operating Revenues | **254,317** | 265,671 | (11,354) | (4.3) |
| Production Fuel | **30,018** | 26,326 | 3,692 | 14.0 |
| Purchased Power | **31,771** | 47,037 | (15,266) | (32.5) |
| Operating and Maintenance Expenses | **92,630** | 91,070 | 1,560 | 1.7 |
| Depreciation and Amortization | **40,273** | 36,997 | 3,276 | 8.9 |
| Property Taxes | **7,986** | 8,957 | (971) | (10.8) |
| Operating Income | **$51,639** | $55,284 | $(3,645) | (6.6)% |
|  | **2024** | **2023** | **change** | **% change** |
| Electric kilowatt-hour (kwh) Sales (in thousands) |  |  |  |  |
| Retail kwh Sales | **2,896,355** | 2,981,076 | (84,721) | (2.8)% |
| Wholesale kwh Sales – Company Generation | **139,070** | 148,886 | (9,816) | (6.6) |
| **Heating Degree Days** | **3,284** | 4,371 | (1,087) | (24.9) |
| **Cooling Degree Days** | **61** | 254 | (193) | (76.0) |

The operating results of our Electric segment are impacted by fluctuations in weather conditions and the resulting demand for electricity for heating and cooling. The following table shows heating and cooling degree days as a percent of normal for the six months ended June 30, 2024 and 2023.

|  | 2024 | 2023 |
| --- | ---: | ---: |
| Heating Degree Days | **82.3%** | 109.9% |
| Cooling Degree Days | **48.8%** | 215.3% |

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 for the six months ended June 30, 2024 and 2023, and between those periods.

|  | 2024 vs Normal | 2024 vs 2023 | 2023 vs Normal |
| --- | ---: | ---: | ---: |
| Effect on Diluted Earnings Per Share | $(0.10) | $(0.17) | $0.07 |

27

**Retail Revenues** decreased $9.3 million primarily due to the following:

- A $11.8 million decrease in fuel recovery revenues due to lower amounts of purchased power driven by unfavorable weather and decreased market energy costs.
- A $9.7 million decrease due to the impact of unfavorable weather.

The decreases in retail revenues described above were partially offset by the following:

- A $5.2 million increase in new retail revenues, net of an estimated refund, from an interim rate increase in North Dakota effective January 1, 2024 in connection with OTP's North Dakota rate case filed in November 2023.
- A $2.7 million increase in retail revenues due to increased sales volumes from commercial and industrial customers.
- A $1.0 million net increase in rider revenues, excluding the impact of interim revenues in North Dakota, primarily related to additional recovery of costs associated with our meter infrastructure project.

**Transmission Services Revenues** decreased $2.3 million as a result of certain project cost and operating and maintenance expense updates during the second quarter last year which resulted in additional nonrecurring revenues during the period.

**Production Fuel** costs increased $3.7 million primarily due to increased fuel usage at Big Stone Plant, as there was an outage at the plant during this same period last year, as well as a 4% increase in fuel cost per kwh.

**Purchased Power** costs to serve retail customers decreased $15.3 million due to a 23% decrease in the volume of purchased power due to decreased demand resulting from unfavorable weather, as well as a 12% decrease in the price of purchased power per kwh, primarily due to decreased market energy costs.

**Depreciation and Amortization** increased $3.3 million due to additional capital investments.

### MANUFACTURING SEGMENT RESULTS

The following table summarizes Manufacturing segment operating results for the six months ended June 30, 2024 and 2023:

*(in thousands)*

|  | 2024 | 2023 | $ change | % change |
| --- | ---: | ---: | ---: | ---: |
| Operating Revenues | **$196,065** | $209,257 | $(13,192) | (6.3)% |
| Cost of Products Sold (excluding depreciation) | **148,709** | 161,381 | (12,672) | (7.9) |
| Nonelectric Selling, General, and Administrative Expenses | **20,343** | 21,047 | (704) | (3.3) |
| Depreciation and Amortization | **9,999** | 9,000 | 999 | 11.1 |
| Operating Income | **$17,014** | $17,829 | $(815) | (4.6)% |

**Operating Revenues** decreased $13.2 million primarily due to decreased sales volumes at both of our manufacturing businesses, with an overall sales volume decrease of 11% compared to the same period last year. At BTD, sales volumes declined primarily in the lawn and garden and agriculture end markets. Decreased scrap metal sales also contributed to the overall decrease in operating revenues. Decreased sales volumes and scrap revenues were partially offset by increased steel prices, resulting in a 3% increase in material costs, which are passed through to customers. At T.O. Plastics sales volume declines were primarily attributable to decreased sales of horticulture products as customers and distributors continued to reduce inventory levels from the high levels previously established due to supply chain challenges.

**Cost of Products Sold** decreased $12.7 million primarily due to decreased sales volumes, partially offset by higher steel costs, as described above.

**Nonelectric Selling, General, and Administrative Expenses** decreased $0.7 million due to variable costs associated with decreased business activity and financial performance during the period.

**Depreciation and Amortization** increased $1.0 million due to an increase in our investment in manufacturing equipment and our facilities.

### PLASTICS SEGMENT RESULTS

The following table summarizes Plastics segment operating results for the six months ended June 30, 2024 and 2023:

*(in thousands)*

|  | 2024 | 2023 | $ change | % change |
| --- | ---: | ---: | ---: | ---: |
| Operating Revenues | **$239,022** | $201,869 | $37,153 | 18.4% |
| Cost of Products Sold (excluding depreciation) | **82,809** | 71,646 | 11,163 | 15.6 |
| Nonelectric Selling, General, and Administrative Expenses | **8,613** | 7,465 | 1,148 | 15.4 |
| Depreciation and Amortization | **2,208** | 2,040 | 168 | 8.2 |
| Operating Income | **$145,392** | $120,718 | $24,674 | 20.4% |

**Operating Revenues** increased $37.2 million primarily due to a 38% increase in sales volumes driven by customer sales volume growth and distributor and end market demand. Sales volumes in the first half 2023 were impacted by distributors' inventory management strategies amid uncertain market conditions and end market softness. Increased sales volumes were partially offset by a 14% decrease in sales prices compared to the same period last year.

**Cost of Products Sold** increased $11.2 million due to increased sales volumes, as discussed above, partially offset by a 24% decrease in the cost of PVC resin and other input materials. The unique supply and demand conditions experienced in recent years, which caused significant volatility and increases in resin costs, have subsided and resin costs have remained stable during the first half of the year.

**Nonelectric Selling, General, and Administrative Expenses** increased $1.1 million due to variable costs associated with increased business activity and financial performance during the period.

### CORPORATE COSTS

The following table summarizes Corporate operating results for the six months ended June 30, 2024 and 2023:

*(in thousands)*

|  | 2024 | 2023 | $ change | % change |
| --- | ---: | ---: | ---: | ---: |
| Other Operating Expenses | **$8,111** | $7,056 | $1,055 | 15.0% |
| Depreciation and Amortization | **48** | 52 | (4) | (7.7) |
| Operating Loss | **$8,159** | $7,108 | $1,051 | 14.8% |

**Other Operating Expenses** increased $1.1 million primarily due to increased external service provider costs and increased employee benefit expenses, including increases in our employee health insurance claim costs.

### REGULATORY MATTERS

The following provides a summary of 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

### North Dakota Rate Case

On November 2, 2023, OTP filed a request with the North Dakota Public Service Commission (NDPSC) for an increase in revenue recoverable under general rates in North Dakota. In its filing, OTP requested a net increase in annual revenue of $17.4 million, or 8.4%, based on an allowed rate of return on rate base of 7.85% and an allowed rate of return on equity of 10.6% on an equity ratio of 53.5% of total capital. Through this proceeding, OTP has proposed changes to the mechanism of cost and investment recovery, with recovery moving from riders into base rates. The filing also includes a proposal to implement a sales adjustment mechanism to address potential significant load additions or losses.

The filing included an interim rate request of a net increase in annual revenue of $12.4 million, or 6.0%, which was approved by the NDPSC on December 13, 2023. Interim rates went into effect on January 1, 2024, and are subject to potential refund until the finalization of the rate case.

On July 3, 2024, OTP filed an update to the original request increasing the amount of the net annual revenue increase from $17.4 million to $22.5 million to account for certain items identified throughout the regulatory process to date. An evidentiary hearing before the NDPSC had been scheduled for July 29, 2024, but due to the updated request, the evidentiary hearing is now expected to take place in fourth quarter of 2024, with a final decision anticipated by the end of the year.

### RATE RIDERS

The following table includes a summary of pending and recently concluded rate rider proceedings with a significant revenue impact:

*(in millions)*

| Recovery Mechanism | Jurisdiction | Status | Filing Date | Amount | Effective Date | Notes |
| --- | --- | --- | --- | ---: | --- | --- |
| RRR - 2023 | MN | Approved | 11/01/22 | $17.5 | 07/01/23 | Recovery of Hoot Lake Solar costs, Ashtabula III costs, and true up for PTCs from Merricourt. |
| ECO - 2023 | MN | Approved | 04/03/23 | 9.7 | 10/01/23 | Recovery of energy conservation improvement costs as well as a demand side management financial incentive. |
| ECO - 2024 | MN | Requested | 04/01/24 | 8.8 | 10/01/24 | Recovery of energy conservation improvement costs as well as a demand side management financial incentive. |
| RRR - 2024 | MN | Requested | 12/04/23 | 8.0 | 07/01/24 | Recovery of Hoot Lake Solar costs, Ashtabula III costs, wind upgrade project costs at our four owned wind facilities, and true up of PTCs for Merricourt. |
| EUIC - 2025 | MN | Requested | 05/03/24 | 4.6 | 01/01/25 | Recovery of advanced metering infrastructure, outage management system, geographic information system, and demand response projects. |
| TCR - 2025 | MN | Requested | 05/24/24 | 3.1 | 01/01/25 | Recovery of transmission project costs. |
| RRR - 2023 | ND | Approved | 12/30/22 | 12.2 | 05/01/23 | Recovery of Merricourt, Ashtabula III and other costs. |
| RRR - 2022 | ND | Approved | 01/05/22 | 7.8 | 04/01/22 | Recovery of Merricourt costs, Ashtabula III costs, and deferred taxes and PTCs. |
| TCR - 2023 | ND | Approved | 09/15/22 | 7.5 | 01/01/23 | Recovery of transmission project costs. |
| TCR - 2024 | ND | Approved | 11/02/23 | 4.5 | 01/01/24 | Recovery of transmission project costs. |
| MDT - 2023 | ND | Approved | 07/08/22 | 3.1 | 01/01/23 | Recovery of advanced metering infrastructure, outage management system and demand response projects. |
| PIR - 2024 | SD | Requested | 06/03/24 | 4.5 | 09/01/24 | Recovery of Ashtabula III, Merricourt, Astoria Station, wind upgrade projects, Advanced Grid Infrastructure project costs, and impact of load growth credits. |
| PIR - 2022 | SD | Approved | 06/01/22 | 3.0 | 09/01/22 | Recovery of Ashtabula III, Merricourt, Astoria Station, Advanced Grid Infrastructure project costs, and impact of load growth credits. |
| TCR - 2023 | SD | Approved | 11/01/22 | 3.0 | 03/01/23 | Recovery of transmission project costs. |

### RESOURCE PLANNING

### Minnesota

In May 2024, the MPUC approved OTP’s 2023 to 2037 Integrated Resource Plan (IRP). Consistent with MPUC practice, the decision was made during deliberations by oral vote and was finalized in a written order issued in July 2024.

The MPUC:

- Directed OTP to procure the following generation resources, subject to additional regulatory review and approval:
- 200 to 300 megawatts of solar generation by November 1, 2027, or as soon as practicable thereafter,
- 150 to 200 megawatts of wind generation by December 31, 2029, or as soon as practicable thereafter,
- 20 to 75 megawatts of battery storage by December 31, 2029, or as soon as practicable thereafter;
- Approved the project to add on-site liquified natural gas storage at Astoria Station natural gas plant by 2027;
- Directed OTP to designate the Minnesota share of the jointly owned Coyote Station coal-fired plant as an Available Maximum Energy (AME) resource beginning in 2026 and ending no later than December 2031. If the designation as an AME resource is found to not be feasible, then Minnesota customers shall not continue to pay for or depend on capacity or energy from Coyote Station past 2028; and
- Directed OTP to commence activities to no longer serve Minnesota customers with capacity or energy from Coyote Station as soon as feasible and no later than December 31, 2031.

Under the MPUC’s order, OTP will file its next IRP in May 2026. In this filing, the company will include, among other options, an analysis considering the continued operation of Big Stone Plant with AME.

### North Dakota

In February 2023, we filed a request for an Advanced Determination of Prudence (ADP) with the NDPSC for the on-site liquified natural gas storage at Astoria Station. Our latest supplemental IRP in North Dakota was filed in March 2023, which included the on-site storage request as well as other investments to meet our customers’ anticipated capacity and energy needs while maintaining system reliability and low electric service rates. At an informal hearing in July 2024, the NDPSC denied the on-site fuel storage ADP. It remains unclear what action the NDPSC will take on our IRP.

### ENVIRONMENTAL REGULATION

In April 2024, the EPA finalized new regulations under Section 111 of the Clean Air Act to regulate greenhouse gas (GHG) emissions from existing and new fossil fuel-based power plants. The final rule establishes subcategories for new combustion turbines and existing coal-fired power plants to achieve certain carbon dioxide (CO2) emission reduction levels based on the respective subcategory. For existing coal-fired power plants, the applicable subcategory is based upon the date at which the plant will cease operations.

We continue to review and evaluate the final regulations and their impact on our power plants and the potential impact to our operating results, financial condition and liquidity. Coyote Station and Big Stone Plant, our two co-owned coal-fired power plants, are within the scope of the regulations but we do not believe our combustion turbines would be within the scope of the final regulation.

In April 2024, the EPA also finalized regulations to strengthen and update Mercury and Air Toxics Standards for coal-fired power plants, tightening the emission standard for toxic metals and finalizing a reduction standard for mercury from existing lignite-fired sources. The EPA also published a final rule under the Clean Water Act to reduce pollutants discharged through wastewater from coal-fired power plants and a final rule requiring the safe management of coal ash at inactive facilities, including requirements for ongoing monitoring and closure and post-closure care.

We continue to review and evaluate these final regulations, and their impact our operations, which could have a material impact on our operating results, financial condition and liquidity.

### LIQUIDITY

### 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, could be impacted by macroeconomic factors outside of our 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 June 30, 2024, 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 June 30, 2024 and December 31, 2023:

*(in thousands)*

|  | Borrowing Limit | 2024 Amount Outstanding | Letters of Credit | Amount Available | 2023 Amount Available |
| --- | ---: | ---: | ---: | ---: | ---: |
| OTC Credit Agreement | **$170,000** | **$—** | **$—** | **$170,000** | $170,000 |
| OTP Credit Agreement | **170,000** | **12,809** | **9,132** | **148,059** | 79,446 |
| Total | **$340,000** | **$12,809** | **$9,132** | **$318,059** | $249,446 |

OTC and OTP are each party to separate credit agreements (the OTC Credit Agreement and OTP Credit Agreement, respectively) which provide for unsecured revolving lines of credit. Should additional liquidity be needed, the OTC Credit 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.

As of June 30, 2024, we had $318.1 million of available liquidity under our credit facilities and $230.7 million of available cash and cash equivalents, resulting in total available liquidity of $548.7 million, compared to total available liquidity of $430.8 million as of June 30, 2023.

### CASH FLOWS

The following is a discussion of our cash flows for the six months ended June 30, 2024 and 2023:

*(in thousands)*

|  | 2024 | 2023 |
| --- | ---: | ---: |
| Net Cash Provided by Operating Activities | **$223,461** | $184,497 |

**Net Cash Provided by Operating Activities** increased $39.0 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023, primarily due to an increase in net income driven by increased earnings from our Plastics segment and a lower level of working capital compared to the previous year. Our working capital decrease was largely due to the timing and volume of resin and other input material purchases in our Plastics segment and capital expenditures in our Electric segment.

*(in thousands)*

|  | 2024 | 2023 |
| --- | ---: | ---: |
| Net Cash Used in Investing Activities | **$228,065** | $153,625 |

**Net Cash Used in Investing Activities** increased $74.4 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. The increase in cash used in investing activities was primarily due to a $50.1 million investment in U.S. treasuries made to secure a fixed rate of return until their maturity in September 2026, and a higher amount of Electric segment capital expenditures, including additional investments in our wind repowering and advanced meter infrastructure projects.

*(in thousands)*

|  | 2024 | 2023 |
| --- | ---: | ---: |
| Net Cash Provided by Financing Activities | **$4,903** | $710 |

**Net Cash Provided by Financing Activities** increased $4.2 million for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. Financing activities for the six months ended June 30, 2024 included the issuance of $120.0 million of long-term debt at OTP, the proceeds of which were used to repay short-term borrowings of $68.6 million under the OTP credit agreement, fund Electric segment construction expenditures, and support operating activities. We manage the capital structure of OTP independent from our consolidated financial position and to ensure compliance with the capital structure approved through regulation; therefore, our decision to issue long-term debt at OTP is not impacted by our consolidated cash and cash equivalent position.

Financing activities for the six months ended June 30, 2024 also included dividend payments of $39.1 million. Financing activities for the six months ended June 30, 2023 included net short-term borrowings of $42.0 million and dividend payments of $36.5 million.

### CAPITAL REQUIREMENTS

### CAPITAL EXPENDITURES

Our capital expenditure plan includes investments in electric generation facilities, transmission and distribution lines, manufacturing facilities and upgrades, equipment used in the manufacturing process, and computer hardware and information systems. Our capital expenditure plan 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, 2023 for our capital expenditure plans for the five year period from 2024 through 2028.

### 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 easements and leasing arrangements.

Our contractual obligations as of December 31, 2023 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, 2023. There were no material changes in our contractual obligations outside of the ordinary course of business during the six months ended June 30, 2024.

### COMMON STOCK DIVIDENDS

We paid dividends to our common stockholders totaling $39.1 million, or $0.9350 per share, in the first six months of 2024. The determination of the amount of future cash dividends to be paid will depend on, among other things, our financial condition, our actual or expected level of earnings 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, the amount of dividends we are allowed to pay could be restricted. See Note 11 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for additional information. The decision to declare dividends 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, and is aided by strong financial coverages and investment grade credit ratings. Debt financing will be required in the next five-years 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 outstanding debt, to complete acquisitions, or to use capital for other corporate purposes.

### REGISTRATION STATEMENTS

On May 3, 2024, we filed two registration statements with the SEC, replacing two previously filed registration statements upon their expiration. 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. No new debt or equity has been issued pursuant to 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. Shares purchased under the plan may be newly issued common shares or common shares purchased on the open market. As of June 30, 2024, there were 1,099,327 shares available for purchase or issuance under the plan. Both registration statements expire in May 2027.

### 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 provides for unsecured revolving lines of credit. The following is a summary of key provisions and borrowing information as of, and for the six months ended, June 30, 2024:

*(in thousands, except interest rates)*

|  | OTC Credit Agreement | OTP Credit Agreement |
| --- | ---: | ---: |
| Borrowing Limit | $170,000 | $170,000 |
| Borrowing Limit if Accordion Exercised1 | 290,000 | 250,000 |
| Amount Restricted Due to Outstanding Letters of Credit as of June 30, 2024 | — | 9,132 |
| Amount Outstanding as of June 30, 2024 | — | 12,809 |
| Average Amount Outstanding During the Six Months Ended June 30, 2024 | — | 40,570 |
| Maximum Amount Outstanding During the Six Months Ended June 30, 2024 | — | 102,024 |
| Interest Rate as of June 30, 2024 | 6.84% | 6.67% |
| 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. |  |  |

### LONG-TERM DEBT

In March 2024, OTP entered into a Note Purchase Agreement pursuant to which OTP issued, in a private placement transaction, $120.0 million of senior unsecured notes consisting of (a) $60.0 million of 5.48% Series 2024A Senior Unsecured Notes due April 1, 2034, and (b) $60.0 million of 5.77% Series 2024B Senior Unsecured Notes due April 1, 2054. The proceeds of the notes were used to repay existing short-term borrowings, fund capital expenditures, and for general corporate purposes.

As of June 30, 2024, we had $947.0 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 2026 to 2054. Note 7 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 June 30, 2024, 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 percent of its total capitalization. As of June 30, 2024, OTC's interest-bearing debt to total capitalization was 0.38 to 1.00, OTC's interest and dividend coverage ratio was 11.23 to 1.00, and OTC 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 indebtedness to exceed 20 percent of its total capitalization. As of June 30, 2024, OTP's interest-bearing debt to total capitalization was 0.47 to 1.00, OTP's interest and dividend coverage ratio was 3.4 to 1.00, and OTP had no priority indebtedness outstanding.

### 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 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 disclosures 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, 2023 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.

## Market risk

As filed, 221 characters.

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, 2023.

## Controls and procedures

As filed, 987 characters.

***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 June 30, 2024, 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 June 30, 2024.

***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 June 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 1,969 characters.

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, 2023, except for the risk factor below.

**Legislation, regulation, litigation or other actions related to climate change and greenhouse gas emissions could materially impact us.**

Current and future federal, state, regional and international regulations to address global climate change and reduce GHG emissions, including measures such as mandated levels of renewable generation, mandatory reductions in CO2 emission levels, taxes on CO2 emissions, or cap-and-trade regimes, could require us to incur significant costs which could negatively impact our financial condition, operating results and liquidity if such costs cannot be recovered through rates granted by rate-making authorities or through increased market prices for electricity.

In April 2024, the EPA finalized new regulations under Section 111 of the Clean Air Act to regulate GHG emissions from existing and new fossil fuel-based power plants. The new regulations require existing coal-fired power plants to achieve certain CO2 emissions reduction levels, with the amount of reduction dependent upon the remaining operating life of the facility. The new regulation has the potential to materially impact the operations of our coal-fired power plants, which could have a material impact on our operating results, financial condition and liquidity.

In addition to complying with legislation and regulation, we could be subject to litigation related to climate change. If we were subjected to such litigation, the costs of such litigation could be significant and an adverse outcome could require substantial capital expenditures, changes in operations and possible payment of penalties or damages which could affect our financial condition, operating results and liquidity if the costs are not recoverable in rates or covered by insurance.

Filed Aug 7, 2024.
Source: SEC EDGAR, the filing index for accession 0001466593-24-000129. Last ingested by Listed: Nov 4, 2026, 12:58 ET. No prices; not investment advice.