Otter Tail Corporation

Good morning and welcome to Otter Tail Corporation's Q2 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 second quarter 2021 earnings results. Our complete earnings release and slides accompanying this call are available on our website at ottertail.com. A recording of the call will be available on our website later today. With me on the call today are Chuck McFarland, Otter Tail Corporation's President and CEO, and Kevin Moog, Otter Tail 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 Securities and Exchange Commission, which we encourage you to review. Otter Hill 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 Hill Corporation's President and CEO, Mr. Chuck McFarland.

Thank you, Lauren. Good morning, everyone. Welcome to our second quarter 2021 earnings call. Auditor Corporation continues to support all the locations we serve with collective efforts to mitigate the spread of COVID. As most of our employees return to the office from working remotely, we continue to monitor case activity with vaccination rates in the communities we operate. We also continue to monitor and follow guidance and recommendations from the CDC our states, local public health officials, and OSHA. As of today, 5% of our employees continue to work remotely. Throughout the course of the past year and a half, our companies and employees have done an excellent job managing the highs and lows from COVID-related impacts, including adjustments to staffing levels, navigating supply chain constraints, managing commodity pricing, and supporting increased customer demand. Please refer to slide four as I begin my comments on Q2 results. We earned $1.01 per share for the quarter, which is a 141% increase over the $0.42 per share earned in Q2 of 2020. All of our businesses had improved results, led by our plastic segment, which had another outstanding quarter. Kevin will provide more detailed discussion of our financial performance in his comments, but here are a few brief overview of the Q2 results. The electric segment had a record second quarter with earnings per share increasing four cents. This was primarily driven by recovery of investments in Astoria Station and Maricourt Wind Energy Center, approved interim rates going into effect January 1st in conjunction with Otter Tail Power's Minnesota General Rate case filing, and increased revenues from C&I customers as sales volumes recover from the negative impacts of COVID. Our manufacturing segment earnings per share increased 13 cents due to increased sales volumes at BTD and TO Plastics. BTD experienced increased demand across all its end markets as major OEMs continue to rebuild depleted inventories created by strong end market sales and production and supply chain issues. Our plastic segment had another record-breaking quarter with earnings per share increasing 42 cents. This was driven by higher pipe sales and higher pipe prices and improved operating margins resulting from positive unique market conditions driven by PVC resin supply constraints. We do anticipate operating margins to return to more historic levels in 2022. Based on our strong year-to-date performance, especially in the plastic segment, and our updated view for the remainder of the year, we are raising our 2021 diluted earnings per share guidance to be in the range of $3.50 to $3.65 from our previously announced guidance of $2.47 to $2.62. This is a 50% to 56% increase over last year's $2.34 a share. Turning to some highlights for the quarter, we retired Hoot Lake Plant on May 27th this year, marking the end of 100 years of coal-fired energy generation at the site. On July 21st, we joined current and former plant employees and others involved in plant operations to commemorate the plant's legacy and its dependable, innovative employees. Hoot Lake Plant, a 140-megawatt coal-fired generating facility in Fergus Falls, Minnesota, played a vital role in our company's history of generating reliable and affordable energy. We continue to grow Ottertail Power through capital investments in generation, transmission, and technology projects. 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. This allows MISO to economically dispatch the unit. This $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 245 megawatts of dispatchable capacity compared to Hoot Lake Plant's 140 megawatts, with projected 85% less carbon emissions than historic Hoot Lake plant levels. We announced in September 2020 the $60 million Hoot Lake solar project as shown on slide 13. This is a 49 megawatt project to be built on previously owned and newly purchased land around Hoot Lake plant. 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 recently retiring the Hoot Lake coal plant. This spring, the Minnesota PUC 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 to be eligible for future cost recovery for Minnesota customers through our renewable resource rider. In early July, the Fergus Falls City Council approved our conditional use permit, which outlines our plans for the site, including screening, vegetative management, stormwater management, and decommissioning. To qualify for the 26% investment tax credit, we have secured safe harbor equipment and currently anticipate the project to be completed in 2023. As noted on slide 14, we began a purchase power agreement in 2013 with Nextera Energy for energy delivered to the Otter Tail Power System from the Ashtabula III wind farm located near La Verne, North Dakota. This agreement includes the option to buy the assets of Ashtabula III, converting from a purchase power agreement to a rate-based facility in 2023. This wind farm is a 62.4 megawatt facility with a 40% net capacity factor. We expect to purchase the facility in early 2023. Regulatory approvals will be obtained over the next several months. We will be filing our next Minnesota Integrated Resource Plan in September of 2021, as noted on slide 15. This plan will identify the most cost-effective combination of resources to reliably meet customers' needs during the next 15 years. We will file the plan in all three state jurisdictions. As required by the Minnesota PUC, the plan will address compliance with the EPA's Regional Hays Rule. Our last integrated resource plan was filed in June of 2016 and approved in April of 2017. We filed our Minnesota general rate case on November 2nd, 2020 as shown on slide 16. Our last Minnesota rate review was filed in 2016. The primary driver for this request is to place Astoria Station into our 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, 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 approval of our annual depreciation filing, which extended our wind asset lives from 25 to 35 years. This change in depreciation expense and a reduction in pension expense drove the decrease to the interim rate request. In December, the Commission approved our interim rate request beginning in January 2021. In late April, we filed a substantial reduction to our original request, incorporating the 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 or a 3.8% increase versus the original request of $14.5 million or a 6.8% increase. Evidentiary hearings were held in early June and the administrative law judge is scheduled to issue his recommendation to the PUC by September 2nd. We anticipate a decision in late 2021. Even with this increase, Ottertail Power residential customers will continue to have some of the lowest rates in the country. As shown on slide 18, the utility's 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 anticipate updating our CAPEX and rate-based forecast in future earnings calls after filing our Minnesota IRP in September and as more information on the MISO Regional Transmission Plan is known. Additionally, the utility has entered into electric service agreements with industrial customers in the water pumping and soybean crushing areas. These new loads and other loads under development are expected to be commercially operational between 2022 and 2024. Turning to our manufacturing segment, BTD, our contract metal fabricator, continues to experience increased customer demand and improved sales across all of our end markets as major OEMs rebuild depleted inventories. They continue to be 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 continue to impact 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 to their customer, steel availability could impact production for some OEMs. Our plastic segment continues to deliver extraordinary results in a tight pipe market due to PVC resin supply constraints that have significantly driven up PVC pipe prices. PVC resin constraints resulted from abnormally cold weather in February that impacted the Gulf Coast region. Resin constraints remain due to high demand as PVC resin plants continue to recover from shutdowns. While we expect PVC resin supply constraints to remain for the rest of the year, both of our PVC companies remain agile and reliable with on-time deliveries. Looking ahead, Otter Tail Power continues 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 sources. Based on current dispatch levels of both Big Stone and Coyote Station, our target is to reduce carbon emissions from generation sources we own 50% from 2005 levels by 2025 and 97% by 2050. We will achieve these targets while keeping residential rates among the lowest in the nation. Growing concern about companies generating more than 25% of revenues from thermal coal, please note Otter Tail 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 21. Now I'll turn it over to Kevin for the financial perspective.