Otter Tail Corporation

Good morning, and welcome to Otter Tail Corporation's Q2 2022 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 of their opening comments.

Good morning, everyone, and welcome to our call. My name is Tyler Ackerman. I'm the manager of investor relations at Otter Tail. Last night, we announced our second quarter 2022 financial 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 today on the call 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 views and expectations of future events. They are subject to risks and uncertainties, which may cause actual results to differ from those presented here. So please be advised while placing undue reliance on any of these statements. Our forward-looking statements are described in more detail in our filings with the Security 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, Tyler. Good morning and welcome to our second quarter 2022 earnings call. Otter Tail Corporation achieved record financial results in the second quarter led primarily by another outstanding quarter in our plastic segment. Please refer to slide four as I begin my comments on our second quarter results. We achieved diluted earnings per share of $2.05, which is an increase of 103% over the second quarter of 2021. A more detailed discussion of our Q2 financial performance will be provided by Kevin, but here's an overview. Our electric segment increased earnings by 3.4 million, or 22%, over Q2 2021, driven by increased commercial and industrial sales and the finalization of the Minnesota rate case interim rate refunds. Our manufacturing segment earnings increased by 1.85 million, or 32%, over Q2 2021. The increase in earnings was due to increases in sales prices and volumes, as well as favorable cost absorption. Our plastic segment quarterly earnings increased $41.4 million over Q2 2021, which was primarily due to an 86% increase in the price per pound of PVC pipe sold. Slide 5 reflects the earnings profiles of our business with and without the impact of the plastic segment. Our electric segment is a well-run, fully integrated electric utility, which has delivered continued steady earnings growth and has a solid capital plan that is forecast to deliver 6% rate-based growth. This has been accomplished with supportive regulatory environments and a demonstrated ability to successfully execute on large-scale capital projects. Our consolidated earnings per share without the plastic segment reflects both the dependable growing earnings of the electric segment, as well as the steady growth we've experienced from BTD and Teo Plastics, resulting in a historic 8.8% compound annual growth rate, excluding the plastics companies, Northern Pipe and Vinyl Tech. The additional earnings and cash flows generated by the plastic segments in 2021 and 2022 provide additional support to our already strong credit metrics, liquidity, and capital structure. Otter Tail Power continues to work toward a cleaner energy future. As shown on slide seven, assuming forecast dispatch occurs, we are targeting to reduce carbon emissions from our owned generation resources approximately 50% from 2005 levels by 2025 and 97% by 2050. Additionally, our owned and contracted energy generation will be more than 50% renewable by 2025. We continue to execute on our plan to grow Otter Tail Power through capital investments in generation, transmission, distribution, and technology projects. As shown on slide 11, Progress continues on Otter Tail Power's 49 megawatt Hoot Lake solar project. The project is expected to be completed in 2023. We have contracts in place for thin film panels which reduce supply chain risks associated with the United States restriction on goods from the Xi'an region of China and the US Department of Commerce circumvent investigation. All costs and benefits of the project are assigned to Minnesota customers. Recovery for the $60 million investment has been approved through the Renewable Rider. Last month, Autotel Power exercised its option to purchase the Ashtabula III wind farm, which is located in eastern North Dakota. We had a purchase power agreement in place to purchase the wind generated electricity from Ashtabula III since 2013. That agreement granted us the option to purchase the wind farm after 10 years. We anticipate closing on the transaction in January of 2023. The purchase is subject to customary regulatory approvals. Slide 13 provides the map of Tranche 1 portfolio projects the MISO Board of Directors approved on July 25th. The Tranche 1 portfolio includes 18 projects and represents approximately $10.3 billion of new transmission development in the MISO Midwest subregion. It is important to note that the estimated costs for the projects are provided by MISO. Otter Tail Power's internal planning level estimates are still being completed, and we plan to provide more insight on the estimates on our next quarterly call. The Jamestown to Ellendale and the Big Stone South to Alexandria transmission projects are located in Otter Tail Power's service territory and Otter Tail owns two of the endpoint substations. The majority of the investment in these projects will be outside of our current five-year capital investment plan. Otter Tail Power's integrated resource plan filed in September of 2021 continues to move forward. Minnesota Public Utilities Commission hearing on the IRP is expected to occur during Q1 of 2023. As shown on the slide 14, the preferred plan requests authority to add dual fuel capability to Astoria Station, add 150 megawatts of solar at a yet to be determined site, and to commence the process of withdrawing from our 35% ownership interest in coal-fired coyote generating plant. We anticipate the North Dakota Department of Environmental Quality will file a state implementation plan for the 2028 regional haze compliance with the EPA in August. That does not require additional emissions controls. In the preliminary comments provided by EPA to the DEQ, additional significant controls at Coyote Station are viewed as being cost effective. As reflected on slide 17, we are projecting an approximate 6% annual rate-based growth over the 2021 to 2026 timeframe. From 2022 to 2026, Otter Tail Power is forecasting capital expenditures of nearly $1 billion. Rider Recovery is expected for nearly half of the forecasted capital spend. Slide 20 shows that even with significant capital investment in recent years, Otter Tail Power has maintained rates lower than the national average. Otter Tail Power continues to monitor fuel costs and works to provide low-cost generation of electricity for its customers through its own generation fleet, as well as market purchases. Our manufacturing segment continues to experience a volatile steel market. Steel prices are declining from the peak in the fourth quarter of 2021. We have managed the high priced finished goods inventory as well as steel supply during the first six months of 2022. Fuel plastics has increased sales prices, favorable cost absorption and decreased freight costs, which led to increased gross profit margins despite higher material costs in the second quarter. Our plastic segment again delivered record quarterly results as demand for PVC pipe continues to outpace supply. Sales prices continue to increase at a rate higher than raw material price increases. The continued high demand and favorable sales prices for PVC pipe are the main factors for the revised 2022 earnings guidance Kevin will expand on. I'll now turn it over to Kevin to provide an overview of our second quarter results and our updated business outlook for 2022.