Otter Tail Corporation

Good morning and welcome to Otter Tail Corporation's Q3 2021 earnings conference call. Today's call is being recorded and we will hold the 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 Tyler Ackerman and I manage Otter Tail's investor relations area. Last night we announced our third 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 I 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. 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 turn the call over to Otter Tail Corporation's President and CEO, Mr. Chuck McFarland.

Thank you, Tyler. Good morning, everyone. Welcome to our third 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. Most of our employees have returned to the office from working remotely. As of today, 5% of our employees continue to work remotely. We continue to monitor case activity along 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. Additionally, we are making plans to meet the executive order guidance for federal contractors or OSHA ETS requirements for all of our operating companies related to COVID vaccination or testing requirements. Throughout the course of the past year and a half, Our companies have done an excellent job managing COVID-related impacts, including creating safe work environments, 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 Q3 results. Autotel Corporation achieved outstanding financial results during the third quarter of 2021. We earned $1.26 per share for the quarter, which was a 145% increase over the 87 cents per share earned in Q3 of 2020. The increase was led by our plastic segment, which had another record quarter driven by continued strong PVC pipe demand and PVC resin supply constraints, which were exacerbated in the third quarter due to impacts from Hurricane Ida. Kevin will provide more detailed discussion of our financial performance in his comments, but a brief overview of Q3 is as follows. Electric segment quarter-over-quarter earnings were down with earnings per share decreasing six cents. This was primarily driven by increased costs arising from this year's planned major maintenance at Big Stone Plant and a Q3 2020 positive earnings impact from a MISO MVP order. Our manufacturing segment earnings per share increased two cents due to increased sales volumes at BTD and TO Plastics and scrap metal revenues at BTD. Our plastic segment had a record-breaking quarter with earnings per share increasing 43 cents. This was driven by higher PVC pipe prices and improved operating margins resulting from positive unique market conditions. These increased results started with the unusual and infrequent impact resulting from the extreme cold weather in February that caused resin suppliers to temporarily close petrochemical plants in the Gulf Coast region. We expect these supply and demand conditions to persist for the remainder of 2021 and continuing in the first half of 2022. Based on our strong year-to-date performance, especially in our plastic segment, In our updated view for the remainder of the year, we are increasing our 2021 diluted earnings per share guidance to be in the range of $4.05 to $4.20 from our previously announced guidance of $3.50 to $3.65. This is a 73% to 79% increase over last year's $2.34 per share. Turning to some highlights for the quarter, Otter Tail Power filed its integrated resource plan in September. The requests in the five-year action plan include the addition of dual fuel capability to our storage station natural gas plant, the addition of 150 megawatts of solar generation in the 2025 timeframe, and the commencement of the process to withdraw from our 35% ownership in Coyote Station by year-end 2028. After incorporating the requests from the integrated resource plan, we now anticipate capital expenditures in our electric segment of nearly $1 billion over the next five years, which will result in a compound annual growth rate and rate base of 7.2% from the end of 2020 to the end of 2026. We continue to make progress on the development of Otter Tail Power's 49-megawatt Boot Lake solar project which will be constructed on and near the retired Hoot Lake plant property. The project is expected to be completed in 2023 and has received renewable rider eligibility approval in Minnesota, allocating 100% of the costs and benefits of the project to Minnesota customers. The location of Hoot Lake Solar offers us a unique opportunity to utilize our existing Hoot Lake transmission rights, substation, and land. We continue to work through supply chain challenges, including inflationary costs and potential increased solar tariff issues associated with the project. Our investments in Hoot Lake Solar, those identified in our integrated resource plan, and other capital expenditures will allow us to improve our customers' experience, reduce operating and maintenance expenses, reduce emissions, and improve reliability and safety. As shown on slide 8, we are targeting to reduce carbon emissions from our own generation resources approximately 50% from 2005 levels by 2025 and 97% by 2050. Otter Tail Power announced in the third quarter the addition of a new load with a business focused on the delivery of high-performance crypto mining and infrastructure solutions to customers which engage in direct mining of Ethereum, Bitcoin, and other crypto assets. Demand from the customer's facilities could approach 100 megawatts with a high load factor and the ability to be curtailed. The North Dakota PSC has approved our electric service agreement with this customer, and we expect this load to be fully online by the end of the first quarter of 2022. Given the increases we've seen in natural gas prices, we are planning to update our 2022 Minnesota fuel clause adjustment forecast. We submitted our original forecast for 2022 in April of this year. The Minnesota PUC has yet to approve the forecast that will go into effect on January 1st, 2022. As a result, we have an opportunity to provide an updated forecast and will seek to have the revised forecast approved. Fuel cost recovery in North Dakota and South Dakota are based on actual costs incurred. The favorable regulatory environments we operate in provide opportunities to mitigate risks in fuel price changes. We filed our Minnesota general rate case on November 2, 2020, As shown on slide 14. Our last Minnesota rate review was filed in 2026. Excuse me 2016. The primary driver for this request is to place Astoria Station. Into our base rates in Minnesota. In September of 2021, the administrative law judge provided recommendations on our Minnesota rate case. The recommendations include a revenue decoupling mechanism for residential, and commercial customers, a return on equity of 9.48% on a 52.5% equity layer, and full recovery of the recently completed Maricourt Wind and Astoria natural gas generation projects in base rates. Based on the ALJ recommendations, we are anticipating final rates will reflect only a moderate increase over our current rates. This is due to operating expense reductions achieved during the rate case period and other regulatory proceedings approved following our original filing in November of 2020. 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 reduction in pension expense drove the decrease in the interim rate request. In December, the Commission approved our interim rate request beginning in January of 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 was for $8.2 million, or a 3.8% increase, versus the original request of $14.5 million, or 6.8%. As reflected on slide 15, the ALJ is recommending an approximate $0.5 million overall increase. The Minnesota Public Utilities Commission will have deliberations in early November with a written order projected to be issued by the end of January 2022. We expect final rates to be implemented by mid-2022. At the conclusion of this case, Otter Tail Power residential customers will continue to have some of the lowest rates in the country. Turning to our manufacturing segment, BTD, our contract metal fabricator, continues to be challenged by labor and recruitment costs as we focus on hiring to meet customer demand. We have made progress on hiring new employees during the quarter after increasing starting wages, off-ship premiums, and offering sign-on incentives. BTD is at its highest employee count level of all time. We are focusing on getting these new employees to full productivity. Steel prices remain at historically high levels, but lead times have started to improve. We remain focused on managing our steel supplies to ensure we continue to receive material on time. Also, BTD continues to experience increased customer demand driven by OEMs' improved sales and the desire to rebuild depleted inventories. Teoplastics had a solid performance driven by strong horticulture and market sales. Our plastic segment continues to deliver extraordinary results in a tight pipe market, which experienced further resin supply constraints in the third quarter due to disruptions caused by Hurricane Ida. Resin shortages and low PVC pipe inventories negatively impacted our volume of pipe sold in the quarter. However, demand for PVC pipe remains strong and sales prices continue to increase because of these conditions, resulting in record third quarter earnings. Again, I would like to thank employees within Otter Tail for their commitment and dedication and for navigating the economic swings and safety concerns presented with COVID. Now I'll turn it over to Kevin for the financial perspective.