Business Overview Otter Tail Corporation (OTTR) is a diversified utility and manufacturing conglomerate with a strong track record of delivering reliable and affordable electricity, as well as innovative manufacturing solutions. With its headquarters in Fergus Falls, Minnesota, the company has strategically invested in a portfolio of businesses that have contributed to its consistent financial performance and shareholder value creation.
Otter Tail Corporation was founded in 1907 as a vertically integrated, regulated electric utility serving customers in western Minnesota, eastern North Dakota, and northeastern South Dakota. For over a century, Otter Tail Power Company has been the company's primary business, generating, transmitting, and distributing electricity to its service territory. The company has since evolved into a multi-faceted organization with three primary business segments: Electric, Manufacturing, and Plastics.
In the 1970s, Otter Tail faced a significant challenge with the construction and ownership of the coal-fired Coyote Station power plant, working with co-owners on this major capital investment project. During the 1980s and 1990s, the company diversified beyond its electric utility operations, acquiring manufacturing and plastic pipe businesses to complement its core electric segment.
The 2000s brought new environmental regulations that required investments in Otter Tail's coal-fired generation fleet to comply. The company worked to balance these compliance costs with maintaining affordable electric rates for customers. During this time, Otter Tail also grew its renewable energy portfolio, adding wind and solar generation.
In recent years, Otter Tail's manufacturing and plastics segments have faced dynamic market conditions, requiring the company to carefully manage costs in those business lines. The plastics segment, in particular, has experienced significant swings in pricing and demand over the past several years. Despite these challenges, Otter Tail's electric utility has remained its foundational business, delivering reliable and cost-effective power to its customers for over a century.
Today, the company's electric utility, Otter Tail Power Company (OTP), serves approximately 134,000 customers across its original service area. The Manufacturing segment, which includes BTD Manufacturing and T.O. Plastics, engages in contract machining, metal fabrication, and the production of plastic thermoformed products. The Plastics segment, consisting of Northern Pipe Products and Vinyltech Corporation, manufactures and sells PVC pipe primarily in the western United States and Canada.
Financial Performance and Trends Otter Tail Corporation has demonstrated a consistent track record of financial performance, with the company reporting record earnings in 2024. The company generated net income of $301.7 million, or $7.17 per diluted share, in 2024, compared to $294.2 million, or $7.00 per diluted share, in 2023. This strong financial performance was driven by growth in the company's Electric and Plastics segments, partially offset by a decline in the Manufacturing segment.
The Electric segment, which accounts for approximately 39% of the company's operating revenues, reported an 8% increase in earnings in 2024, driven by higher retail revenues, increased rider revenues, and improved commercial and industrial sales volumes. The Plastics segment, contributing 35% of operating revenues, generated a 7% increase in earnings, primarily due to higher sales volumes, although this was partially offset by declining product prices.
In contrast, the Manufacturing segment, which makes up 26% of operating revenues, experienced a 36% decline in earnings in 2024, as a result of lower sales volumes and reduced gross profit margins in the plastics thermoforming business. The company has responded to these challenges by implementing cost-cutting measures and evaluating further actions if necessary.
Financials Otter Tail Corporation's balance sheet remains strong, with a return on equity of 19.3% on an equity ratio of 62.2% as of the end of 2024. The company's total available liquidity stood at $606 million as of December 31, 2024, providing ample financial flexibility to support its growth initiatives and shareholder returns.
For the fiscal year 2024, Otter Tail Corporation reported revenue of $1.33 billion, net income of $301.66 million, operating cash flow of $452.73 million, and free cash flow of $94.08 million. In the most recent quarter (Q4 2024), the company generated revenue of $303.11 million and net income of $54.85 million.
The company's financial position is further strengthened by its debt-to-equity ratio of 0.61, cash and cash equivalents of $294.65 million, and $311.61 million in available liquidity under its credit facilities. Otter Tail Corporation also maintains a current ratio of 2.03 and a quick ratio of 1.55, indicating strong short-term liquidity.
Growth Strategies and Opportunities Otter Tail Corporation's investment and growth strategy is centered on its electric utility business, Otter Tail Power Company, which is expected to drive the majority of the company's future earnings growth. The utility has updated its five-year rate base compounded annual growth rate to 9.0%, up from the previous 7.7%, reflecting significant investment opportunities in renewable generation, transmission infrastructure, and advanced grid technologies.
Some of the key initiatives within the Electric segment include: - Completion of a wind repowering project, which is expected to enhance energy output and provide customer savings through available tax credits. - Addition of up to 345 megawatts of solar generation capacity, subject to regulatory approvals, to meet the requirements of the company's approved Minnesota Integrated Resource Plan. - Participation in MISO Tranche 2.1 and the Joint Targeted Interconnection Queue (JTIQ) projects, which are expected to drive $700 million and $450 million, respectively, in capital investment opportunities over the next several years.
In addition to the Electric segment's growth, Otter Tail Corporation continues to explore opportunities to enhance its Manufacturing and Plastics businesses. The company recently completed an expansion project at its Vinyltech facility in Arizona, increasing its PVC pipe production capacity by approximately 7%. Furthermore, the ongoing BTD Manufacturing expansion in Georgia is expected to support the company's ability to serve the growing Southeastern U.S. market.
Risks and Challenges While Otter Tail Corporation has demonstrated resilience and adaptability, the company faces several risks and challenges that investors should be aware of:
1. Regulatory environment: As a regulated utility, Otter Tail Power Company's financial performance is heavily dependent on the decisions and policies of state regulatory authorities, which can impact the company's ability to recover its costs and earn a reasonable return on its investments.
2. Commodity price fluctuations: The Plastics segment's profitability is subject to volatility in the prices of PVC resin, the primary raw material used in the manufacturing of PVC pipe. Significant changes in resin prices can impact the segment's profit margins.
3. End-market conditions: The Manufacturing segment's performance is tied to the health of the industries it serves, such as recreational vehicles, agriculture, and construction. Downturns in these end markets can negatively affect the segment's sales volumes and profitability.
4. Weather-related impacts: As a utility provider, Otter Tail Power Company's operations and financial results can be impacted by extreme weather events, which can disrupt service and lead to increased repair and restoration costs.
Liquidity Otter Tail Corporation maintains a strong liquidity position, with $606 million in total available liquidity as of December 31, 2024. This robust liquidity provides the company with the financial flexibility to pursue its growth initiatives, manage potential risks, and maintain its commitment to shareholder returns.
Segment Performance and Outlook Electric Segment: The Electric segment, operated through Otter Tail Power Company, serves approximately 134,000 customers across over 400 communities in western Minnesota, eastern North Dakota, and northeastern South Dakota. In 2024, this segment accounted for 39% of the company's operating revenues. Retail revenues made up 86% of the Electric segment's total revenues, with transmission (10%) and wholesale (2%) revenues comprising the remainder. Despite weather-driven declines in retail sales volumes, the segment's operating income increased by 6.8% in 2024, primarily due to lower operating expenses and increased rider revenues.
Manufacturing Segment: The Manufacturing segment, which includes metal fabrication, stamping, painting, and plastic thermoformed products, contributed 26% of Otter Tail Corporation's total operating revenues in 2024. However, the segment experienced a 14.9% decrease in operating revenues and a 34.5% decline in operating income in 2024, primarily due to lower sales volumes across most end markets. The company has implemented cost reduction measures to mitigate the impact of these challenges.
Plastics Segment: The Plastics segment, which produces PVC pipe, contributed 35% of the company's total operating revenues in 2024. The segment saw a 10.9% increase in operating revenues, driven by a 27% increase in sales volumes, partially offset by a 12% decrease in sales prices. Despite lower sales prices, the segment's operating income increased by 6.9% in 2024 due to higher sales volumes.
Human Capital As of December 31, 2024, Otter Tail Corporation employed a total of 2,130 full-time employees across its three business segments, with the majority (1,798) working in the Electric and Manufacturing segments. The company focuses on employee safety, workforce stability, leadership development, and employee engagement to support its operational and commercial excellence.
Guidance and Future Outlook Otter Tail Corporation has initiated a 2025 diluted EPS guidance range of $5.68 to $6.08, which is expected to result in an estimated return on equity near 14%. This guidance reflects anticipated growth of approximately 7% in the Electric segment's earnings, offset by declines in the Plastics and Manufacturing segments due to challenging market conditions.
The company expects its Plastics segment earnings to be approximately $143 million in 2025, driven by a projected decline in PVC pipe pricing, partially offset by a modest increase in sales volumes from new capacity in Phoenix. Otter Tail Corporation now anticipates the Plastics segment earnings to normalize in the range of $45 million to $50 million by 2028, rather than 2026 as previously projected.
Based on the midpoint of the 2025 guidance range, Otter Tail Corporation is forecasting a consolidated five-year compounded annual growth rate in EPS of over 20%, or 8% excluding the impact of Plastics segment earnings. This outlook underscores the company's confidence in its ability to deliver long-term value to shareholders through its diversified business model and strategic growth initiatives.
Conclusion Otter Tail Corporation's focus on its electric utility business, coupled with strategic investments in its Manufacturing and Plastics segments, has positioned the company for continued growth and value creation. The company's updated five-year capital spending plan, which includes significant investments in renewable generation and transmission infrastructure, is expected to drive a rate base compounded annual growth rate of 9.0% at Otter Tail Power Company.
Furthermore, the company has increased its long-term earnings per share growth rate target to 6-8%, reflecting its confidence in its ability to execute on its strategic initiatives and deliver consistent value to shareholders. Otter Tail Corporation's strong balance sheet, ample liquidity, and diversified business model provide a solid foundation for the company to navigate the various risks and challenges it faces, while capitalizing on emerging opportunities in the utility and manufacturing sectors.
Overall, Otter Tail Corporation's proven track record, strategic priorities, and commitment to operational excellence make it a compelling investment proposition for investors seeking a well-managed, diversified utility and manufacturing company with a focus on sustainable growth and shareholder returns.