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Operator
Good morning and welcome to Otter Tail Corporation's 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 the opening comments.
spk01
Good morning everyone and welcome to our call. My name is Tyler Aikerman and I manage Otter Tail's investor relations area. Last night we announced our Q4 and full year 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 McFarlane, 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 views and expectations of future events. They are subject to risks and uncertainties which may cause actual results to differ from those presented today. 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 now turn the call over to Otter Tail Corporation's President and CEO, Mr. Chuck McFarland.
Tyler Aikerman
Thank you, Tyler. Good morning, everyone, and welcome to our 2021 year-end earnings call. Thanks to the efforts of our employees, Otter Tail Corporation achieved record financial results in 2021. Please refer to slide four as I begin my comments on our results. We achieved earnings per share of $4.23, which is an increase of 80% over 2020. The increase was led by our plastic segment, which had an outstanding year, driven by continued strong PVC pipe demand and PVC resin supply constraints. Kevin will provide more detailed discussion of our financial performance in his comments, but a brief overview of 2021 is as follows. Our electric segment increased earnings by $5.7 million or 8.5% over 2020. This was primarily driven by a rate-based growth from our Maricourt Wind and Astoria Station projects. Our manufacturing segment increased earnings by $6.1 million or 56% over 2020, with BTD's earnings up 4.4 million and Teo Plastics up 1.7. This was mostly due to strong end markets for both BTD and Teo Plastics, as well as favorable scrap metal pricing at BTD. Our plastic segment had a record-breaking year with earnings of 97.8 million, which is approximately 250% higher than 2020. This was driven by higher pipe prices and improved operating results resulting from unique market conditions. These increased margins 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. And it was exacerbated in the third quarter from disruptions caused by Hurricane Ida. The first quarter of 2022 is expected to be strong, as market conditions from the fourth quarter of 2021 continue into 2022. Now I'll share some of the highlights from last year. Otter Tail Power filed its integrated resource plan in September. The plan identifies key projects in the energy transition, which is underway at Otter Tail Power. The main request in the five-year action plan include the addition of fuel-oil backup capability at our Astoria 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 request 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 compounded annual growth rate in rate base of 5.9% from the end of 2020 to the end of 2026, as shown on slide 17. Ottertail Power's Hoot Lake Solar project continues to move forward and is on schedule to be completed in 2023. The 49-megawatt solar project will be constructed on and near the retired Hoot Lake coal plant property. The location of Hoot Lake Solar offers us a unique opportunity to utilize our existing Hoot Lake transmission rights, substation, and land. Minnesota customers will be allocated 100% of the costs and benefits of the project, The project has received renewable rider eligibility approval in Minnesota. We continue to experience supply chain challenges and some inflationary costs associated with the project. We have contracts in place for thin film panels, which will avoid the heightened supply chain risk related to alleged human rights abuses in China and the U.S. ban on goods from that region. Our investment in Hoot Lake Solar and 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. As shown on slide 7, we are targeting a carbon reduction emissions from our own generation resources approximately 50% lower than 2005 levels by 2025 and 97% by 2050. Otter Tail Power announced in the third quarter of 2021 the addition of a new load with a business focused on the delivery of high performance crypto mining and related infrastructure solutions. This load started coming online during the first quarter of 2022 and plans to be fully operational in the second quarter of 2022. Demand for from the customer's facility could approach 100 megawatts with a high load factor and the ability to be curtailed. Otter Tail Power received a written order on its rate case in February. Important takeaways from the written order are the approved return on equity of 9.48% on a 52.5% equity layer and a revenue decoupling mechanism as shown on slide 14. Recognizing the economic impact to customers of the ongoing pandemic and with input from the 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. We expect final rates to be implemented by mid-year 2022, with interim rates remaining in effect until then. Now turning to our manufacturing segment, BTD, our contract metal fabricator, was challenged by labor and recruitment costs as we focused on hiring to meet customer demand. During the year, we have made progress on hiring new employees after increasing starting wages, off-shift premiums, and hiring incentives. BTD's year-end employee count was at its highest level of all time. We are focusing on training and increasing productivity of these new employees. Steel prices peaked in the fourth quarter at historically high levels, and prices have begun to moderate and lead times have improved. Although steel prices have been high, BTD experienced increased customer demand driven by OEMs, improved sales, and the desire to rebuild depleted inventories. Teoplastics had solid performance driven by strong horticulture and market sales, offset by lower sales to contract market customers. Horticulture sales backlog is at an all-time high. Our plastic segment continues to deliver extraordinary results while managing through raw material supply challenges. Demand for PVC pipe remains strong, causing sales prices to continue to rise above raw material price increases. led to the record fourth quarter earnings. I would like to thank all of the Otter Tail team members for their resiliency and continued commitment while navigating the economic swings and safety concerns presented with COVID. Now I'll turn it over to Kevin to provide additional detail on our financial performance in 2021.
Tyler
Thanks, Chuck, and good morning, everyone. Our 2021 operating revenues were $1.196 billion compared with $890 million in 2020. This revenue growth occurred across all of our reporting segments. Our 2021 earnings per share of $4.23 increased from our 2020 earnings per share of $2.34. These results were primarily driven by the unique market conditions we experienced in our plastic segment during 2021. However, it is important to note all of our operating segments contributed to our year-over-year earnings increase. And our 2021 return on equity was 19.2% on an equity ratio of 53.7%. Slide 27 provides an overview of our three-year financial performance. These results are reflective of our strategy of having the electric, manufacturing, and plastic segments. Our electric segment is a well-run, fully integrated electric utility with a growing rate base that is expected to provide continued earnings growth with support of regulatory environments and a demonstrated ability to successfully execute on large-scale capital projects. Our manufacturing and plastic segments provide additional earnings growth and are well positioned for the future. The additional earnings and cash flows generated by the plastic segment in 2021 provide additional strength to our already strong credit metrics, liquidity, and capital structure. 2021 resulted in a record year of cash flows generated from operating activities. The $231 million of operating cash flows was generated in large part by increases in year-over-year net income and depreciation expense. As a part of this, our accounts receivable increased $61 million, and our inventories increased $54 million. And we fully expect these working capital items will be converted to cash in 2022, contributing to another strong year of operating cash flows. These operating cash flows and the liquidity available under our credit facilities allow us to look at additional organic investment opportunities. Specifically, we will be making a discretionary contribution of $20 million to our pension plan in February of 2022. And as previously mentioned, we have acquired land in Phoenix adjacent to our vinyl tech property that will allow us to execute on a potential facility expansion to improve plant operations, logistics, and increase plant capacity. The capital for this project is included in our five-year capital expenditure plans. Our five-year financing plans call for issuance of long-term debt to primarily support the electric segment's rate-based growth, and there is no need for any external equity in the financing plan. The Board of Directors increased our 2022 indicated annual dividend rate 5.8% to $1.65 a share. This increase reflects our strong 2021 financial performance and our 2022 outlook, the company's strong balance sheet, liquidity, cash generation profile, and our commitment to enhancing shareholder returns. We expect future dividend increases to be in line with our long-term earnings growth goal of 5% to 7% off our 2020 earnings per share of $2.34. 2022 will be the 84th year we have paid dividends on our common stock. Please refer to slides 28 and 29 as I provide an overview of 2021 earnings by segment. The electric segment net earnings increased $5.7 million or 8.5% over 2020. The increase in earnings was primarily driven by rate-based growth resulting from the completion of the Maricourt Wind Farm and Astoria Station increased retail revenues from the interim rates related to our Minnesota rate case, net of production tax credits, and increases in transmission service revenues. These items were offset by higher O&M costs related to increase in operating costs from placing Maricourt and Astoria Station in service in 2021, increase in Big Stone plant maintenance costs as a result of our plant facility outage, Increases in other O&M costs, such as transmission tariff costs, insurance costs, and higher vegetative maintenance costs. Depreciation and amortization expense also increased due to recent capital additions. Interest costs were higher due to higher levels of long-term debt compared with the previous year. And income taxes were favorably impacted, mainly due to the production tax credits earned on AmeriCorp in 2021. Net earnings for the manufacturing segment increased $6.1 million over 2020. This growth in earnings resulted from increased sales volumes of 6.8% at BTD from improved end market demand across most markets served. We also experienced an increase in operating revenues related to the increase in material costs during 2021. These costs are passed through to our customers. There were higher scrap metal prices than they continued throughout 2021, which contributed to a growth in operating revenues of $7.3 million. This increase in operating revenues at BTD were largely offset by lower gross profit margins. This was a result of more labor related to time required for new employees to be trained. This in turn caused lower productivity levels during the year. Operating expenses expanded in 2021 to support our higher business volumes. TO Plastics also contributed to the growth in segment operating revenues and net income. This was primarily due to improved product pricing and sales volumes. These items also contributed to an increase in gross profit margins at TO Plastics. Plastic revenues and net earnings increased driven by higher sales prices due to the combination of PVC resin supply constraints, which led to limited PVC pipe inventory and strong demand for PVC pipe products. Resin supply in 2021 was negatively impacted during the year by production disruptions caused by the extreme weather events in the first and third quarters in the Gulf Coast region. Pounds of pipes sold in 2021 increased 1.7% from 2020, as resin supply constraints limited our production. Our corporate costs grew 1.1 million, primarily due to increased labor and benefits costs, including higher health insurance costs related to our self-funded health insurance plan, as well as a half a million dollar year-over-year increase in a contribution commitment to Otter Tail Corporation's charitable foundation. Moving on to our business outlook on slide 31, this reflects an earnings per share range of $3.78 to $4.08 for 2022. This guidance equates to a return on equity range of 15.3% to 16.3%. The guidance is reflective of an electric utility with a 5.9% compounded annual growth rate and rate base off of 2021 over the next five years in support of regulatory jurisdictions, and strong levels of earnings in 2022 from our manufacturing and plastics segments. The earnings contribution expected in 2022 is different from our anticipated 70% electric, 30% manufacturing plastics long-term earnings mix. We are expecting another strong financial performance year in our plastics segment, This performance is expected to result in our manufacturing and plastic segment contributing 53% of 2022 earnings and a 47% contribution from the electric segment. We were planning on capital expenditures of $182 million in 2022 compared to $172 million in 2021. and our electric segment accounts for 82% of our planned 2022 expenditures. Our strategic objectives to grow our business and achieve operational excellence continues to position us to achieve a 5% to 7% compounded annual growth rate in earnings per share using 2020's $2.34 a share. We expect our electric segment net income to increase 7% over 2021 based on the following items. Year over year increase in rate base along with increased load growth from new and existing commercial and industrial customers. Our ending rate base in 2021 grew by 13.7% to $1.6 billion. Lower expected plant outage costs in 2022 as the Big Stone plant outage in 2021 had higher costs than what is expected related to the planned Coyote plant outage in 2022. The discount rate for our pension plan for 2022 is 3.03% compared with the 2.78% in 2021. For each 25 basis point increase in the discount rate, pension expense decreases approximately $1.3 million. The assumed long-term rate of return for 2022 is 6.3% compared with the 6.51% in 2021. Each 25 basis point decrease in this rate equates to approximately $900,000 in increased pension expense. There are lower expected contributions to the Otter Tail Power Company Foundation in 2022. Lower interest expense, as the $140 million notes issued in November of 2021, have a lower interest rate compared to the $140 million that was refinanced. These items are partially offset by higher depreciation and property tax expense driven by the increased rate base. Labor costs are expected to be higher in 2022 as open positions were filled in the first half of 2021 and are expected to be employed for all of 2022. And continued increasing insurance costs related to the increase in insurable values and increase in insurance rates due to competitive market conditions. We expect net income from our manufacturing segment to increase 7.6% compared with 2021. This is based on an increase in sales at BTD driven by in-market demand as our customers continue to build inventory to fill shortages created by supply chain challenges. And while we have been generally able to meet our customers' on-time delivery requirements, our customers have other supply chain challenges which impact their ability to consistently take our product in line with their production timelines. Steel lead times have improved back to pre-pandemic timeframes, and steel costs remain elevated as mill prices and supply chain costs are expected to remain historically high during 2022. These costs could put additional pressure on our profitability if we are unable to pass cost increases on to our customers on a timely basis. Scrap metal revenues are expected to be lower in 2022, given currently declining market prices for scrap metal, and we continue to work on improving labor efficiencies in order to enhance our gross margins. An increase in earnings from teal plastics is driven in large part by a full year of increases in product prices that occurred throughout 2021 and improved manufacturing productivity. Our backlog for the manufacturing segment is approximately $391 million for 2022 compared with $204 million one year ago. We expect 2022 net income from our plastic segments to decline from the record earnings year in 2021. Even with the expected decline in earnings, 2022 is expected to generate significant earnings and cash flows in this segment. quarter of 2022 is expected to be strong as market conditions from the fourth quarter of 2021 continue into 2022. We then expect to see a return to more normal business conditions as raw material supply improves, causing sales prices, resin prices, and related spreads to decline. Specific reasons for the expected year-over-year decline in net income are Lower volume of pounds of pipes sold in 2022, driven by extremely low levels of finished good inventories to start the year. PVC resin production is forecasted to be strong beginning in the first quarter, which is expected to put downward pressure on prices. PVC demand has decreased globally, causing PVC supply to increase, which is also expected to result in declining PVC resin prices. and increases in freight costs due to the inflationary nature of the logistics environment across the country. We expect our corporate costs will be in line with 2021. We are not planning for a contribution to our foundation in 2022. This savings is largely offset by lower budgeted gains on our investments in 2022 than what was recognized in 2021. and anticipated costs related to further expected safety measures related to COVID-19 to be incurred in 2022. We expect a delivered total shareholder return of 8% to 10% over the long term, consisting of our expected 5% to 7% compounded annual growth rate in earnings per share using 2020 as the base year along with our current dividend yield. Looking forward, we would expect to grow the dividend consistent with our long-term earnings per share growth rate of 5% to 7%. Our business model continues to serve us well, and we remain positioned to fund our rate-based growth opportunities at the utility with our strong balance sheet, ample liquidity to support our businesses, and strong investment-grade corporate credit ratings. We're now ready to take your questions.
Operator
Ladies and gentlemen, if you have a question, please press star then 1 on your touchstone telephone. If your question hasn't been answered or you wish to remove yourself from the queue, please press the pound key. After the Q&A, Chuck will return with a few closing remarks. Again, to ask a question, that's star then 1. Our first question comes from Brian Russo with Sedoti. Your line is open.
Chuck
Yeah, hi, good morning. Hi, Brian. Hey, just to start with the utility, the 100 megawatt cryptocurrency customer, I believe it's under a specific tariff or rate. Any detail you can provide for us on that? How does that compare versus some of your other, maybe your average CNI type rate?
Tyler Aikerman
Sure, Brian. This is Chuck. We filed a rate Approximately five years ago in North Dakota, we have a large general service rate, and we came up with a new rate for customers that are over 25 megawatts called super large general service rate. I don't know. We spent a lot of time on the naming, but that rate is each individual customer has to have the rate approved by the commission, which we have done in this case. And it tends to be because this customer is interruptible or curtailable and is really only an energy-using customer, its rates are fairly attractive from that standpoint. So it's a filed rate with our commission, but they need to approve each customer that goes on it.
Chuck
Okay, so the rate is fairly attractive to the customer.
Tyler Aikerman
Yeah, it's not a large margin rate for us because there's very little demand component on it.
Chuck
Understood, but I guess you have quite a bit of capex, so you're just able to spread costs over a larger megawatt customer base.
Tyler Aikerman
It does. It reduces our fixed costs across all customers because its load is covering the fixed costs on those energy, the energy component.
Chuck
Okay. And then just on the plastics, it looks like your operating margins in the fourth quarter of 21 were approximately 44%. That compares to 35% for the full year of 21. I'm wondering, just based on your comments earlier, are the margins that you captured in the fourth quarter, can we extrapolate that further? into the first quarter of 2022 to kind of figure out you know what a kind of quarterly uh dispersion and then do you think by the fourth quarter of 2022 you'll be back to historical margins hey brian this is kevin thanks for the question i mean that's your comment is what we're seeing happen is that the the results in the fourth quarter were stronger
Tyler
than what we expected when we were with you at the third quarter earnings call. And so what happened is as demand continued to outpace supply, we continued to see upward movement in sales prices that then caused higher operating margins in the fourth quarter than what occurred throughout the year, as you noted. And what we're seeing is those conditions have continued into the first quarter. And so to say, can we extrapolate that? I think that's a fair assumption based on what we're currently seeing as these conditions, like you said, transitioned into the first quarter of 2022. And then as we go throughout the year, of course, things can change. But as we sit here today, based on the reasons I talked about in my comments and are further included in the press release, we are expecting... through the rest of the year then, a return back to these more normal-like conditions. And what are those more normal-like conditions? If we look on slide 25 of the earnings call presentation, we have that graphic that shows what's happened to the relationship of spreads and pricing. And so we expect here over time that we're going to return back to those, call it those conditions in the 18 to 20, early 21 timeframe.
Chuck
Okay. So have you seen, um, PVC prices, um, already moderating for, you know, the back half of the year or, um, you know, companies like yourself still raising prices in the first quarter.
Tyler
We're still seeing our first quarter in the first month and a half of the first quarter. We have seen, uh, rise in sales prices. We've seen competitors take sales prices up. And we're seeing expected, there's a little bit of conflicting information. We've seen some announcements that says resin prices are going to come down. And we've also seen some announcements where resin prices could stay where they're at or potentially increase. So we continue to monitor that. I think the general view based on as PVC resin supply has improved, that prices will certainly remain flat to start to decline through the rest of the year, which would then, we expect to see sales prices decline and ultimately those return to more normal-like margins. One of the things that happened in the late fourth quarter was there was a supply constraint with tin stabilizer that's used in the making of PVC pipe that caused a number of competitors or pipe converters I should say to not take as much PVC resin because they were constrained with tin stabilizer issues. So that helped increase PVC resin supply towards the end of the year. Now a lot of the tin stabilizer issues looks to have corrected themselves here as there was an alternate product that converters were able to go back to to help with kind of ramping back up their production. But we start the year with low inventory levels and expect PVC resin production to improve as we go through the year, and that will be a key driver on where spreads will shake out as we go through the rest of the year.
Chuck
Okay, thank you. That's helpful. And then just real quickly on BTD, It looked like you saw some margin compression to the low single digits versus a full year of mid to high single digits on an operating margin perspective. Is the driver of that the reasons you cited, supply chain issues from the OEMs? And where do we see normalized operating margins as we move through 2022 as these OEMs, you know, look to replenish their dealer inventories?
Tyler
Yeah, as we, you know, as we move forward into 2022, Brian, I mean, the answer to the margin compression is certainly the supply chain challenges. They were talking about, you know, the fact that our productivity was wasn't where we wanted to be because of the ramp up in new employees that we brought on and needed to continue to get them trained. We've continued to see some of those, through the fourth quarter, those productivity challenges. We continue to work to improve those into Q4, or I'm sorry, into 2022. And as we look forward, we certainly are expecting to see some strengthening in margins that will be somewhat offset by the fact that we'll see lower scrap metal revenues in 2022. You know, 2021 had high scrap metal prices. We're assuming a pullback in scrap metal revenues, which based on current scrap metal prices as they're currently declining. We're looking to offset some of that with improved productivity, but I think the other challenge that's there is while we are certainly able to meet our delivery requirements to our customers, we're being pushed off by them because of their other supply chain challenges. And so we're building to their forecasts in terms of what they're telling us, but then they aren't taking the product as quickly as We were as planned, and so that has potential pressure on us in 22 as well.
Chuck
Okay, got it. And then just real quickly, the backlog that you cited in manufacturing, I understand sometimes it's not an apples-to-apples comparison because you've got a lot of, you know, steel prices that might be higher versus a year ago that is basically margin neutral for you, right, because you pass it through. So I was just curious, you know, what would you, What's embedded in that, like, 300-plus million of backlog, you know, that's really not incremental, you know, order-related margins, but it's just inflationary pressure on the steel side.
Tyler
Yeah, I mean, I think our backlog at BTD is mostly around that – has steel prices around that $1,800 a ton in it. Okay, got it. Thank you. Okay.
spk07
Okay.
Operator
As a reminder, to ask a question, please press star then 1. I'm not showing any additional questions at this time. I'd like to turn the call back over to Chuck for any closing remarks.
Tyler Aikerman
Thank you for your questions and your interest in Otter Tail Corporation. Our outstanding 2020 results reflect the resiliency and hard work from the employees of Otter Tail Corporation and unique market conditions. With our utility growth strategy and predictable earnings stream complemented by our strategic manufacturing platform companies, we are well positioned to deliver 2022 earnings per share in the range of $3.78 to $4.08. Thank you for joining our call. We appreciate your interest in RRTIP Corporation, and we look forward to speaking with you next quarter.
Operator
This concludes the program. You may now disconnect. Everyone, have a great day. Thank you for watching! you Music. Thank you. Thank you. Good morning, and welcome to Otter Tail Corporation's 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 the opening comments.
spk01
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 Q4 and full year 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 McFarlane, 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 views and expectations of future events. They are subject to risks and uncertainties which may cause actual results to differ from those presented today. 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 now turn the call over to Otter Tail Corporation's President and CEO, Mr. Chuck McFarland.
Tyler Aikerman
Thank you, Tyler. Good morning, everyone, and welcome to our 2021 year-end earnings call. Thanks to the efforts of our employees, Otter Tail Corporation achieved record financial results in 2021. Please refer to slide four as I begin my comments on our results. We achieved earnings per share of $4.23, which is an increase of 80% over 2020. The increase was led by our plastic segment, which had an outstanding year, driven by continued strong PVC pipe demand and PVC resin supply constraints. Kevin will provide more detailed discussion of our financial performance in his comments, but a brief overview of 2021 is as follows. Our electric segment increased earnings by $5.7 million or 8.5% over 2020. This was primarily driven by a rate-based growth from our Maricourt Wind and Astoria Station projects. Our manufacturing segment increased earnings by $6.1 million or 56% over 2020, with BTD's earnings up 4.4 million and Teo Plastics up 1.7. This was mostly due to strong end markets for both BTD and Teo Plastics, as well as favorable scrap metal pricing at BTD. Our plastic segment had a record-breaking year with earnings of 97.8 million, which is approximately 250% higher than 2020. This was driven by higher pipe prices and improved operating results resulting from unique market conditions. These increased margins 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. And it was exacerbated in the third quarter from disruptions caused by Hurricane Ida. The first quarter of 2022 is expected to be strong as market conditions from the fourth quarter of 2021 continue into 2022. Now I'll share some of the highlights from last year. Otter Tail Power filed its integrated resource plan in September. The plan identifies key projects in the energy transition which is underway at Otter Tail Power. The main request in the five-year action plan include the addition of fuel-oil backup capability at our Astoria 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 percent ownership in Coyote Station by year-end 2028. After incorporating the request 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 compounded annual growth rate in rate base of 5.9% from the end of 2020 to the end of 2026, as shown on slide 17. Otter Tail Power's Hoot Lake Solar project continues to move forward and is on schedule to be completed in 2023. The 49-megawatt solar project will be constructed on and near the retired Hoot Lake coal plant property. The location of Hoot Lake Solar offers us a unique opportunity to utilize our existing Hoot Lake transmission rights, substation, and land. Minnesota customers will be allocated 100% of the costs and benefits of the project, The project has received renewable rider eligibility approval in Minnesota. We continue to experience supply chain challenges and some inflationary costs associated with the project. We have contracts in place for thin film panels, which will avoid the heightened supply chain risk related to alleged human rights abuses in China and the U.S. ban on goods from that region. Our investment in Hoot Lake Solar and 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. As shown on slide 7, we are targeting carbon reduction emissions from our own generation resources approximately 50 percent lower than 2005 levels by 2025 and 97 percent by 2050. Otter Tail Power announced in the third quarter of 2021 the addition of a new load with a business focused on the delivery of high-performance crypto mining and related infrastructure solutions. This load started coming online during the first quarter of 2022 and plans to be fully operational in the second quarter of 2022. Demand for from the customer's facility could approach 100 megawatts with a high load factor and the ability to be curtailed. Otter Tail Power received a written order on its rate case in February. Important takeaways from the written order are the approved return on equity of 9.48% on a 52.5% equity layer and a revenue decoupling mechanism as shown on slide 14. Recognizing the economic impact to customers of the ongoing pandemic and with input from the 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. We expect final rates to be implemented by mid-year 2022, with interim rates remaining in effect until then. Now turning to our manufacturing segment, BTD, our contract metal fabricator, was challenged by labor and recruitment costs as we focused on hiring to meet customer demand. During the year, we have made progress on hiring new employees after increasing starting wages, off-shift premiums, and hiring incentives. BTD's year-end employee count was at its highest level of all time. We are focusing on training and increasing productivity of these new employees. Steel prices peaked in the fourth quarter at historically high levels, and prices have begun to moderate and lead times have improved. Although steel prices have been high, BTD experienced increased customer demand driven by OEMs, improved sales, and the desire to rebuild depleted inventories. Teoplastics had solid performance driven by strong horticulture and market sales, offset by lower sales to contract market customers. Horticulture sales backlog is at an all-time high. Our plastic segment continues to deliver extraordinary results while managing through raw material supply challenges. Demand for PVC pipe remains strong, causing sales prices to continue to rise above raw material price increases. led to the record fourth quarter earnings. I would like to thank all of the Otter Tail team members for their resiliency and continued commitment while navigating the economic swings and safety concerns presented with COVID. Now I'll turn it over to Kevin to provide additional detail on our financial performance in 2021.
Tyler
Thanks, Chuck, and good morning, everyone. Our 2021 operating revenues were $1.196 billion compared with $890 million in 2020. This revenue growth occurred across all of our reporting segments. Our 2021 earnings per share of $4.23 increased from our 2020 earnings per share of $2.34. These results were primarily driven by the unique market conditions we experienced in our plastic segment during 2021. However, it is important to note all of our operating segments contributed to our year-over-year earnings increase. And our 2021 return on equity was 19.2% on an equity ratio of 53.7%. Slide 27 provides an overview of our three-year financial performance. These results are reflective of our strategy of having the electric, manufacturing, and plastic segments. Our electric segment is a well-run, fully integrated electric utility with a growing rate base that is expected to provide continued earnings growth with supportive regulatory environments and a demonstrated ability to successfully execute on large-scale capital projects. Our manufacturing and plastic segments provide additional earnings growth and are well positioned for the future. The additional earnings and cash flows generated by the plastic segment in 2021 provide additional strength to our already strong credit metrics, liquidity, and capital structure. 2021 resulted in a record year of cash flows generated from operating activities. The $231 million of operating cash flows was generated in large part by increases in year-over-year net income and depreciation expense. As a part of this, our accounts receivable increased $61 million, and our inventories increased $54 million. And we fully expect these working capital items will be converted to cash in 2022, contributing to another strong year of operating cash flows. These operating cash flows and the liquidity available under our credit facilities allow us to look at additional organic investment opportunities. Specifically, we will be making a discretionary contribution of $20 million to our pension plan in February of 2022. And as previously mentioned, we have acquired land in Phoenix adjacent to our vinyl tech property that will allow us to execute on a potential facility expansion to improve plant operations, logistics, and increase plant capacity. The capital for this project is included in our five-year capital expenditure plans. Our five-year financing plans call for issuance of long-term debt to primarily support the electric segment's rate-based growth, and there is no need for any external equity in the financing plan. The Board of Directors increased our 2022 indicated annual dividend rate 5.8% to $1.65 a share. This increase reflects our strong 2021 financial performance and our 2022 outlook, the company's strong balance sheet, liquidity, cash generation profile, and our commitment to enhancing shareholder returns. We expect future dividend increases to be in line with our long-term earnings growth goal of 5% to 7% off our 2020 earnings per share of $2.34. 2022 will be the 84th year we have paid dividends on our common stock. Please refer to slides 28 and 29 as I provide an overview of 2021 earnings by segment. The electric segment net earnings increased $5.7 million or 8.5% over 2020. The increase in earnings was primarily driven by rate-based growth resulting from the completion of the Maricourt Wind Farm and Astoria Station increased retail revenues from the interim rates related to our Minnesota rate case, net of production tax credits, and increases in transmission service revenues. These items were offset by higher O&M costs related to increase in operating costs from placing Maricourt and Astoria Station in service in 2021, increase in Big Stone plant maintenance costs as a result of our plant facility outage, Increases in other O&M costs, such as transmission tariff costs, insurance costs, and higher vegetative maintenance costs. Depreciation and amortization expense also increased due to recent capital additions. Interest costs were higher due to higher levels of long-term debt compared with the previous year. And income taxes were favorably impacted, mainly due to the production tax credits earned on Maricourt in 2021. Net earnings for the manufacturing segment increased $6.1 million over 2020. This growth in earnings resulted from increased sales volumes of 6.8% at BTD from improved end market demand across most markets served. We also experienced an increase in operating revenues related to the increase in material costs during 2021. These costs are passed through to our customers. There were higher scrap metal prices than they continued throughout 2021, which contributed to a growth in operating revenues of $7.3 million. This increase in operating revenues at BTD were largely offset by lower gross profit margins. This was a result of more labor related to time required for new employees to be trained. This in turn caused lower productivity levels during the year. Operating expenses expanded in 2021 to support our higher business volumes. TO Plastics also contributed to the growth in segment operating revenues and net income. This was primarily due to improved product pricing and sales volumes. These items also contributed to an increase in gross profit margins at TO Plastics. Plastic revenues and net earnings increased driven by higher sales prices due to the combination of PVC resin supply constraints, which led to limited PVC pipe inventory and strong demand for PVC pipe products. Resin supply in 2021 was negatively impacted during the year by production disruptions caused by the extreme weather events in the first and third quarters in the Gulf Coast region. Pounds of pipes sold in 2021 increased 1.7% from 2020, as resin supply constraints limited our production. Our corporate costs grew 1.1 million, primarily due to increased labor and benefits costs, including higher health insurance costs related to our self-funded health insurance plan, as well as a half a million dollar year-over-year increase in a contribution commitment to Otter Tail Corporation's charitable foundation. Moving on to our business outlook on slide 31, this reflects an earnings per share range of $3.78 to $4.08 for 2022. This guidance equates to a return on equity range of 15.3% to 16.3%. The guidance is reflective of an electric utility with a 5.9% compounded annual growth rate and rate base off of 2021 over the next five years in support of regulatory jurisdictions, and strong levels of earnings in 2022 from our manufacturing and plastic segments. The earnings contribution expected in 2022 is different from our anticipated 70% electric, 30% manufacturing plastics long-term earnings mix. We are expecting another strong financial performance year in our plastic segment, This performance is expected to result in our manufacturing and plastic segment contributing 53% of 2022 earnings and a 47% contribution from the electric segment. We were planning on capital expenditures of $182 million in 2022 compared to $172 million in 2021. and our electric segment accounts for 82% of our planned 2022 expenditures. Our strategic objectives to grow our business and achieve operational excellence continues to position us to achieve a 5% to 7% compounded annual growth rate in earnings per share using 2020's $2.34 a share. We expect our electric segment net income to increase 7% over 2021 based on the following items. Year over year increase in rate base along with increased load growth from new and existing commercial and industrial customers. Our ending rate base in 2021 grew by 13.7% to $1.6 billion. Lower expected plant outage costs in 2022 as the Big Stone plant outage in 2021 had higher costs than what is expected related to the planned Coyote plant outage in 2022. The discount rate for our pension plan for 2022 is 3.03% compared with the 2.78% in 2021. For each 25 basis point increase in the discount rate, pension expense decreases approximately $1.3 million. The assumed long-term rate of return for 2022 is 6.3% compared with the 6.51% in 2021. Each 25 basis point decrease in this rate equates to approximately $900,000 in increased pension expense. There are lower expected contributions to the Otter Tail Power Company Foundation in 2022. Lower interest expense, as the $140 million notes issued in November of 2021, have a lower interest rate compared to the $140 million that was refinanced. These items are partially offset by higher depreciation and property tax expense driven by the increased rate base. Labor costs are expected to be higher in 2022 as open positions were filled in the first half of 2021 and are expected to be employed for all of 2022. And continued increasing insurance costs related to the increase in insurable values and increase in insurance rates due to competitive market conditions. We expect net income from our manufacturing segment to increase 7.6% compared with 2021. This is based on an increase in sales at BTD driven by in-market demand as our customers continue to build inventory to fill shortages created by supply chain challenges. And while we have been generally able to meet our customers' on-time delivery requirements, our customers have other supply chain challenges which impact their ability to consistently take our product in line with their production timelines. Steel lead times have improved back to pre-pandemic timeframes, and steel costs remain elevated as mill prices and supply chain costs are expected to remain historically high during 2022. These costs could put additional pressure on our profitability if we are unable to pass cost increases on to our customers on a timely basis. Scrap metal revenues are expected to be lower in 2022, given currently declining market prices for scrap metal, and we continue to work on improving labor efficiencies in order to enhance our gross margins. An increase in earnings from TO Plastics is driven in large part by a full year of increases in product prices that occurred throughout 2021 and improved manufacturing productivity. Our backlog for the manufacturing segment is approximately $391 million for 2022, compared with $204 million one year ago. We expect 2022 net income from our plastic segments to decline from the record earnings year in 2021. Even with the expected decline in earnings, 2022 is expected to generate significant earnings and cash flows in this segment. quarter of 2022 is expected to be strong as market conditions from the fourth quarter of 2021 continue into 2022. We then expect to see a return to more normal business conditions as raw material supply improves, causing sales prices, resin prices, and related spreads to decline. Specific reasons for the expected year-over-year decline in net income are Lower volume of pounds of pipes sold in 2022, driven by extremely low levels of finished good inventories to start the year. PVC resin production is forecasted to be strong beginning in the first quarter, which is expected to put downward pressure on prices. PVC demand has decreased globally, causing PVC supply to increase, which is also expected to result in declining PVC resin prices. and increases in freight costs due to the inflationary nature of the logistics environment across the country. We expect our corporate costs will be in line with 2021. We are not planning for a contribution to our foundation in 2022. This savings is largely offset by lower budgeted gains on our investments in 2022 than what was recognized in 2021. and anticipated costs related to further expected safety measures related to COVID-19 to be incurred in 2022. We expect a delivered total shareholder return of 8% to 10% over the long term, consisting of our expected 5% to 7% compounded annual growth rate in earnings per share using 2020 as the base year along with our current dividend yield. Looking forward, we would expect to grow the dividend consistent with our long-term earnings per share growth rate of 5% to 7%. Our business model continues to serve us well, and we remain positioned to fund our rate-based growth opportunities at the utility with our strong balance sheet, ample liquidity to support our businesses, and strong investment-grade corporate credit ratings. We're now ready to take your questions.
Operator
Ladies and gentlemen, if you have a question, please press star then one on your touchstone telephone. If your question hasn't been answered or you wish to remove yourself from the queue, please press the pound key. After the Q&A, Chuck will return with a few closing remarks. Again, to ask a question, that's star then one. Our first question comes from Brian Russo with Sedoti. Your line is open.
Chuck
Yeah, hi, good morning. Hi, Brian. Hey, just to start with the utility, the 100 megawatt cryptocurrency customer, I believe it's under a specific tariff or rate. Any detail you can provide for us on that? How does that compare versus some of your other, maybe your average CNI type rate?
Tyler Aikerman
Sure, Brian. This is Chuck. We filed a rate Approximately five years ago in North Dakota, we have a large general service rate, and we came up with a new rate for customers that are over 25 megawatts called super large general service rate. I don't know. We spent a lot of time on the naming, but that rate is each individual customer has to have the rate approved by the commission, which we have done in this case. And it tends to be because this customer is interruptible or curtailable and is really only an energy-using customer, its rates are fairly attractive from that standpoint. So it's a filed rate with our commission, but they need to approve each customer that goes on it.
Chuck
Okay, so the rate is fairly attractive to the customer.
Tyler Aikerman
Yeah, it's not a large margin rate for us because there's very little demand component on it.
Chuck
Understood, but I guess you have quite a bit of CapEx, so you're just able to spread costs over a larger megawatt customer base.
Tyler Aikerman
It does. It reduces our fixed costs across all customers because its load is covering the fixed costs on those energy, the energy component.
Chuck
Okay. And then just on the plastics, it looks like your operating margins in the fourth quarter of 21 were approximately 44%. That compares to 35% for the full year of 21. I'm wondering, just based on your comments earlier, are the margins that you captured in the fourth quarter, can we extrapolate that further? into the first quarter of 2022 to kind of figure out you know what a kind of quarterly uh dispersion and then do you think by the fourth quarter of 2022 you'll be back to historical margins hey brian this is kevin thanks for the question i mean that's your comment is what we're seeing happen is that the the results in the fourth quarter were stronger
Tyler
than what we expected when we were with you at the third quarter earnings call. And so what happened is as demand continued to outpace supply, we continued to see upward movement in sales prices that then caused higher operating margins in the fourth quarter than what occurred throughout the year, as you noted. And what we're seeing is those conditions have continued into the first quarter And so to say, can we extrapolate that? I think that's a fair assumption based on what we're currently seeing as these conditions, like you said, transitioned into the first quarter of 2022. And then as we go throughout the year, of course, things can change. But as we sit here today, based on the reasons I talked about in my comments and are further included in the press release, we are expecting... through the rest of the year then are returned back to these more normal like conditions. And what are those more normal like conditions? If we look on slide 25 of the earnings call presentation, we have that graphic that shows what's happened to the relationship of spreads and pricing. And so we expect here over time that we're going to return back to those, call it those conditions in the 18 to 20, early 21 timeframe.
Chuck
Okay. So have you seen, um, PVC prices, um, already moderating for, you know, the back half of the year or, um, you know, companies like yourself still raising prices.
Tyler
In the first quarter, we're still seeing our first quarter in the first month and a half of the first quarter, we have seen, uh, a rise in sales prices. We've seen competitors take sales prices up. And we're seeing expected, there's a little bit of conflicting information. We've seen some announcements that says resin prices are going to come down. And we've also seen some announcements where resin prices could stay where they're at or potentially increase. So we continue to monitor that. I think the general view based on as PVC resin supply has improved, that prices will certainly remain flat to start to decline through the rest of the year, which would then, we expect to see sales prices decline and ultimately those return to more normal-like margins. One of the things that happened in the late fourth quarter was there was a supply constraint with tin stabilizer that's used in the making of PVC pipe, that caused a number of competitors or pipe converters, I should say, to not take as much PVC resin because they were constrained with tin stabilizer issues. So that helped increase PVC resin supply towards the end of the year. Now a lot of the tin stabilizer issues looks to have corrected themselves here as there was an alternate product that converters were able to go back to to help with kind of ramping back up their production. But we start the year with low inventory levels and expect PVC resin production to improve as we go through the year, and that will be a key driver on where spreads will shake out as we go through the rest of the year.
Chuck
Okay, thank you. That's helpful. And then just real quickly on BTD. It looked like you saw some margin compression to the low single digits versus a full year of mid to high single digits on an operating margin perspective. Is the driver of that the reasons you cited, supply chain issues from the OEMs? And where do we see normalized operating margins as we move through
Tyler
2022 as these oems you know look to replenish their dealer inventories yeah as we you know as we move forward into 2022 brian i mean the answer to the margin compression is certainly the supply chain challenges they were talking about you know the fact that our productivity was wasn't where we wanted to be because of the ramp up in new employees that we brought on and needed to continue to get them trained. We've continued to see some of those, through the fourth quarter, those productivity challenges. We continue to work to improve those into Q4, or I'm sorry, into 2022. And as we look forward, we certainly are expecting to see some strengthening in margins that will be somewhat offset by the fact that we'll see lower scrap metal revenues in 2022. You know, 2021 had high scrap metal prices. We're assuming a pullback in scrap metal revenues, which based on current scrap metal prices as they're currently declining. We're looking to offset some of that with improved productivity, but I think the other challenge that's there is while we are certainly able to meet our delivery requirements to our customers, we're being pushed off by them because of their other supply chain challenges. And so we're building to their forecasts in terms of what they're telling us, but then they aren't taking the product as quickly as We were as planned, and so that has potential pressure on us in 22 as well.
Chuck
Okay, got it. And then just real quickly, the backlog that you cited in manufacturing, I understand sometimes it's not an apples-to-apples comparison because you've got a lot of, you know, steel prices that might be higher versus a year ago that is basically margin neutral for you, right, because you pass it through. So I was just curious, you know, what would you – What's embedded in that, like, 300-plus million of backlog, you know, that's really not incremental, you know, order-related margins, but it's just inflationary pressure on the steel side.
Tyler
Yeah, I mean, I think our backlog at BTD is mostly around that – has steel prices around that $1,800 a ton in it. Okay, got it. Thank you.
spk07
Okay. Okay.
Operator
As a reminder, to ask a question, please press star then 1. I'm not showing any additional questions at this time. I'd like to turn the call back over to Chuck for any closing remarks.
Tyler Aikerman
Thank you for your questions and your interest in Otter Tail Corporation. Our outstanding 2020 results reflect the resiliency and hard work from the employees of Otter Tail Corporation and unique market conditions. With our utility growth strategy and predictable earnings stream complemented by our strategic manufacturing platform companies, we are well positioned to deliver 2022 earnings per share in the range of $3.78 to $4.08. Thank you for joining our call. We appreciate your interest in RTIP Corporation, and we look forward to speaking with you next quarter.
Operator
This concludes the program. You may now disconnect. Everyone, have a great day.
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