Otter Tail Corporation

Good morning, and welcome to the Otter Tail Corporation's Q1 2021 earnings conference call. Today's call is being recorded, and we will hold a question and answer session after the prepared remarks. I will now turn the call over to the company for their opening comments.

Good morning, everyone, and welcome to our call. My name is Loren Hanson, and I manage Otter Tail's investor relations area. Last night, we announced our first quarter 2021 earnings results. Our complete earnings release and slides accompanying this call are available on our website at autotail.com. A recording of the call will be available on our website later today. With me on the call today are Chuck McFarlane, Autotail Corporation's President and CEO, and Kevin Moog, Autotail Corporation's Senior Vice President and Chief Financial Officer. Before we begin, I want to remind you that we will be making forward-looking statements during this call. As noted on slide two, these statements represent our current judgment or opinion of what the future holds. They are subject to risks and uncertainties that may cause actual results to differ materially. So please be advised about placing undue reliance on any of these statements. Our forward-looking statements are described in more detail in our filings with the the Securities and Exchange Commission, which we encourage you to review. Otter Tail Corporation disclaims any duty to update or revise our forward-looking statements due to new information, future events, developments, or otherwise. For opening remarks, I will now turn the call over to Otter Tail Corporation's President and CEO, Mr. Chuck McFarland.

Thank you, Loren. Good morning, everyone. Welcome to our first quarter 2021 earnings call. Otter Tail Corporation continues to support all the locations we serve with collective efforts to mitigate the spread of COVID-19. Our business continuity plans put the health and safety of our employees and our communities at the forefront and are designed to help ensure continued electric reliability and operational excellence across our companies. We remain diligent in our precautionary health and safety efforts based on the recommendations from the CDC, regional health organizations, and state and local government orders. Currently, 10% of our employees continue to work remotely. We continue to monitor this dynamic event and how it is impacting the economy and our electric and manufacturing platforms. Please refer to slide four as I begin my comments on Q1 results. We earned 73 cents per share for the quarter, a 22% increase over the 60 cents per share earned in Q1 of 2020. This increase was largely driven by outstanding results at our plastic segment. Kevin will provide a more detailed discussion of our financial performance in his comments, but a brief overview of Q1 results are the electric segment earnings per share increased two cents, which is primarily driven by recovery of now the now operational Maricourt Wind Farm, and approved interim rates going into effect January 1st in conjunction with Otter Tail Power's Minnesota general rate case filing. This was offset in part by negative weather and a decrease in C&I sales due to COVID. Our manufacturing segment earnings per share increased one cent. BTD continues to see a rebound in sales of most of their end markets, as major OEMs rebuild depleted inventories created by the pandemic. Our plastic segment had a record-breaking quarter with earnings per share increasing eight cents. This was driven by slightly higher pipe sales volumes and higher PVC pipe prices and improved operating margins. As shown on slide five, we are now on track to meet or exceed our original annual EPS guidance every year since 2016. with a projected 9.8 EPS compound annual growth rate over the 2016 to 2021 timeframe. We continue to grow Otter Tail Power through capital investments in generation, transmission, and technology projects. On slide 11, Maricourt Wind Energy Center concluded construction and began commercial operation at the end of 2020. The facility generates enough energy to power more than 65,000 homes. At a cost of $260 million, it's the largest capital project in company history. On slide 12, after years of planning and two years of construction and testing, Astoria Station is now part of the Mid-Continent Independent System Operator, or MISO, energy market, allowing MISO to economically dispatch the units. The $152 million investment complements our wind generation by providing a reliable backstop when the wind is not blowing, and it has flexible operating options and low emissions. Astoria Station provides 240 megawatts of dispatchable capacity compared to Hoot Lake Plant's 140 megawatts, with projected 85% less carbon emissions from historic Hoot Lake Plant levels. We announced in September of 2020 the $60 million Hoot Lake Solar project as shown on slide 13. This is a 49 megawatt project we plan to build on previously owned and newly purchased land around Hoot Lake plant in Fergus Falls, Minnesota. Hoot Lake Solar will generate enough energy to power approximately 10,000 homes each year. This project offers us a unique opportunity to reuse our existing Hoot Lake transmission interconnection, along with substation and plant land after retiring the Hoot Lake coal plant in 2021. In March, the City of Fergus Falls accepted the Environmental Assessment Worksheet. The City also approved our annexation request for the project property we own in adjoining townships. We expect to submit our conditional use permit request during the second quarter We have secured safe harbor equipment and currently anticipate the project to be completed in 2023. Additionally, the Minnesota Public Utilities Commission approved our request to authorize 100% of Hoot Lake Solar's output to be allocated for use by Minnesota customers, and 100% of our investment in the Hoot Lake Solar be eligible for future cost recovery for Minnesota customers through our renewable resource cost recovery rider. We filed our Minnesota general rate case on November 2, 2020, as shown on slide 15. Our last Minnesota rate review was filed in 2016. Investment in cleaner energy generation is the primary driver for this request as we seek to get Astoria Station placed in base rates in Minnesota. This project was approved in our most recent IRP and has been earning AFUDC during the construction period. Additionally, our new customer information system, which focuses on enhancing the customer experience by allowing customers more access and options related to their energy use and services, was also a driver for this request. Recognizing the economic impact to customers of the ongoing pandemic and with input from Commission staff, we agreed to reduce our interim rate request by approximately half to $6.9 million, or 3.2%. This was done in conjunction with anticipated lower depreciation expense associated with extending our wind assets from 25 to 35-year lives. In December, the Commission approved our interim request, beginning in January 2021. On Friday, April 30th, we filed a substantial reduction in our original request, incorporating these lower depreciation rates approved by the Commission, lower borrowing rates, lower pension and benefit costs, and other refinements identified during the discovery phase of the case. The new request is for $8.2 million, a 3.8% increase, versus the original request of $14.5 million, or a 6.8% request. We anticipate a decision in late 2021 or early 2022. Even with this increase, Ottertail Power residential customers will continue to have some of the lowest rates in the country. As shown on slide 16, the utilities rate base is expected to grow by an annual rate of 5% between 2020 and 2025 in a constructive regulatory environment and will be a key driver for future earnings growth. We will be filing our next Minnesota Integrated Resource Plan in September of 2021, as noted on slide 19. This plan will identify the most cost-effective combination of resources to reliably meet customers' needs during the next 15 years. While the filing is required in Minnesota, we develop a strategy for our integrated system and also file the plan with the North Dakota and South Dakota regulatory commissions. As required by the Minnesota PUC, the plan will speak to the North Dakota regional Hays compliance. Our last integrated resource plan was filed in June of 2016 and approved in April of 2017. We expect the updated IRP and MISO regional transmission plans underdeveloped to favorably impact our long-term rate-based growth forecast. In April, FERC issued a Supplemental Notice of Proposed Rulemaking, or NOPR, for transmission incentives. In its Supplemental NOPR, FERC focuses on the ROE adder for electric utilities that join transmission organizations. FERC's notice proposes to sunset the ROE adder after three years from when the utility transfers control of its transmission assets to the regional transmission organizations. Right now, this incentive increases our base FERC ROE by half a percent. We estimate a negative impact to ongoing EPS starting in 2022 of up to two cents if the RTO incentive is eliminated in FERC's final rule. The Biden administration's infrastructure plan proposes approximately $2 trillion in investment this decade. highlights infrastructure improvements, including electric grid resilience, the electric vehicle market, and energy efficiency, and reiterates the administration's call for net zero carbon emissions from the electric sector by 2035. It also calls for a 10-year extension and phase down of clean energy generation and storage, production tax credits, and investment tax credits, as well as the possibility of direct pay in lieu of the tax credit utilization. We continue to monitor both the FERC and infrastructure plan proposals. Turning to our manufacturing segment, BTD, our contract metal fabricator, continues to experience increased demand and improved sales for most of their end markets as major OEMs rebuild depleted inventories. They are currently being challenged with securing staffing levels to keep up with the increased demand, Industry-wide demand for manufacturing talent has increased, and lingering COVID-19 impacts have reduced the number of available applicants. Also, steel prices are exceeding historic levels driven by strong demand and limited product availability as mills are slow to recover from capacity reductions in 2020 related to COVID. Even though BTD is able to pass the increased material costs on the customer, Product availability could impact production for some OEM manufacturers. Our plastic segment continues to deliver strong results as they benefit from a tight PVC pipe market due to PVC resin supply constraints that have significantly driven up PVC pipe prices. PVC resin constraints resulting from abnormally cold weather in February that impacted the Gulf Coast region resulting in several resin suppliers invoking force majeure. Resin constraints remain due to high demand as PVC resin plants still do not have full operational capability. While we expect PVC resin supply constraints to extend into the second quarter, both of our PVC companies remain agile and reliable with on-time deliveries. Looking ahead, we continue to be innovative as we modernize our energy grid, enhance customer experiences, and work toward a cleaner energy future. We project that by 2023, our customers will receive approximately 35% of their energy from renewable resources, and by 2025, we project that our carbon emissions will be 50% below 2005 levels, all while keeping residential rates among the lowest in the nation. With growing investor concern about companies generating more than 25% of revenues from thermal coal, it's reassuring to note that Ottertail Corporation's percentage of revenue from coal assets is significantly below that threshold. The percentage of consolidated revenues from our coal assets was 12% in 2020. Now, I'll turn it over to Kevin for the financial perspective.