Otter Tail Corporation (NASDAQ:OTTR) is a diversified utility and manufacturing company that has consistently delivered strong financial performance and shareholder returns. With a vertically integrated electric utility segment, a robust manufacturing division, and a thriving plastics business, Otter Tail has established itself as a well-rounded conglomerate poised for continued growth.

In the fiscal year 2023, Otter Tail reported impressive financial results, with annual net income of $294,191,000, annual revenue of $1,349,166,000, annual operating cash flow of $404,499,000, and annual free cash flow of $117,365,000. These figures demonstrate the company's ability to generate substantial profits and cash flow, which it can reinvest into its operations and return to shareholders.

The company's first quarter of 2024 was also a strong performance, with diluted earnings per share increasing nearly 20% to $1.77 compared to the same period in 2023. This growth was primarily driven by the exceptional performance of the Plastics segment, which saw a 39% increase in earnings due to higher sales volumes and strong demand.

Business Overview

Otter Tail Corporation operates through three main segments: Electric, Manufacturing, and Plastics. The Electric segment is a vertically integrated, regulated utility that provides electricity to customers in western Minnesota, eastern North Dakota, and northeastern South Dakota. The Manufacturing segment includes BTD Manufacturing, a contract metal fabricator, and T.O. Plastics, a plastics thermoforming manufacturer. The Plastics segment, which includes the company's PVC pipe manufacturing operations, has been a standout performer in recent years.

Electric Segment

Otter Tail's Electric segment is the backbone of the company, accounting for approximately 65% of its total earnings. The segment has a strong track record of translating rate base growth into earnings growth, with a 1:1 ratio in the previous five-year period. The company's five-year capital spending plan for the Electric segment includes $1.3 billion in investments, primarily focused on renewable energy, transmission infrastructure, and technology upgrades.

Key projects within the Electric segment include the $60 million Advanced Metering Infrastructure (AMI) project, which is expected to improve customer experience and reduce operating expenses, and the $230 million wind farm repowering initiative, which will add the equivalent of 40 megawatts of new wind generation. These investments, along with the company's participation in MISO's transmission projects, position Otter Tail's Electric segment for continued growth and improved operational efficiency.

Manufacturing Segment

Otter Tail's Manufacturing segment, which includes BTD Manufacturing and T.O. Plastics, has faced some headwinds in recent quarters. BTD, the contract metal fabricator, experienced a 5% decrease in sales volumes due to softening demand in several end markets, including lawn and garden and energy. T.O. Plastics, the plastics thermoforming manufacturer, saw a 35% decrease in sales volumes as customers continued to work through inventory levels.

To mitigate the impact of these challenges, the company is taking actions to tightly manage costs and drive operational efficiencies within the Manufacturing segment. While the near-term outlook remains cautious, Otter Tail is confident in the long-term prospects of this division, which benefits from diversified end markets and customers.

Plastics Segment

The Plastics segment has been a standout performer for Otter Tail, contributing significantly to the company's overall growth. In the first quarter of 2024, the Plastics segment's earnings increased by 39% compared to the same period in 2023, driven by a 56% increase in sales volumes due to strong customer demand and distributor restocking.

While PVC pipe sales prices have declined more rapidly than the cost of resin and other input materials, resulting in margin compression, Otter Tail remains optimistic about the Plastics segment's long-term prospects. The company's Vinyltech site improvement and expansion project, which will bring additional large-diameter pipe capacity online later this year, is expected to further strengthen the Plastics segment's competitive position.

Regulatory Matters and Outlook

Otter Tail has been actively engaged in several regulatory proceedings that will shape the future of its Electric segment. In April 2024, the company, along with the Minnesota Department of Commerce and three labor organizations, entered into a settlement agreement on its Integrated Resource Plan (IRP) for Minnesota. The agreement outlines plans to add 200-300 megawatts of solar generation and 150-200 megawatts of wind generation directly assigned to Minnesota customers, as well as the potential withdrawal from the Minnesota portion of the Coyote Station coal-fired plant.

Additionally, Otter Tail filed a general rate case with the North Dakota Public Service Commission in November 2023, seeking a net revenue increase of approximately $17 million or 8.4%. The company anticipates a decision on this rate case in the third quarter of 2024.

Otter Tail's management has also been closely monitoring the EPA's new regulations under Section 111B of the Clean Air Act, which aim to reduce greenhouse gas emissions from electric generating units. While the company is evaluating the impact of these regulations on its coal-fired power plants, it does not anticipate a material impact on its operations.

Liquidity

Otter Tail maintains a strong balance sheet and ample liquidity to fund its growth initiatives. As of March 31, 2024, the company's consolidated equity layer stood at 61.3%, and its return on equity over the last 12 months was 22.1%. The company has no external equity needs over the next five years, as it plans to finance its rate base growth at the Electric segment through debt issuances.

In the first quarter of 2024, Otter Tail issued $120 million in senior unsecured notes, the proceeds of which were used to repay short-term borrowings, fund capital expenditures, and support operating activities. This debt issuance, along with the company's strong cash flow generation, provides Otter Tail with the financial flexibility to execute on its growth strategies without the need for additional equity.

Financials

Otter Tail's diversified business model has enabled the company to deliver consistent financial performance. In the fiscal year 2023, the company reported annual net income of $294,191,000, annual revenue of $1,349,166,000, annual operating cash flow of $404,499,000, and annual free cash flow of $117,365,000.

For the first quarter of 2024, Otter Tail reported diluted earnings per share of $1.77, a nearly 20% increase compared to the same period in 2023. This strong performance was primarily driven by the exceptional results in the Plastics segment, which offset headwinds in the Electric and Manufacturing segments.

Based on the company's first-quarter performance and revised expectations for the remainder of the year, Otter Tail has increased its 2024 diluted earnings per share guidance to a range of $6.23 to $6.53, up from the initial range of $5.13 to $5.43. This increase in the midpoint of the guidance by $1.10 per share reflects the company's confidence in its ability to deliver strong financial results across its diversified business segments.

Conclusion

Otter Tail Corporation is a well-diversified utility and manufacturing company that has consistently delivered impressive financial performance and shareholder returns. With a robust Electric segment, a resilient Manufacturing division, and a thriving Plastics business, the company is poised for continued growth and success.

Otter Tail's strategic investments in renewable energy, transmission infrastructure, and technology upgrades, coupled with its strong balance sheet and ample liquidity, position the company to capitalize on the evolving energy landscape and meet the needs of its customers. As the company navigates regulatory changes and manages the near-term challenges in its Manufacturing segment, investors can take comfort in Otter Tail's proven ability to adapt and deliver consistent results.

Overall, Otter Tail Corporation's diversified business model, disciplined capital allocation, and commitment to operational excellence make it a compelling investment opportunity in the utility and manufacturing sectors.