Otter Tail Corporation

Good morning and welcome to Otter Tail Corporation's 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 for their opening comments.

Good morning everyone and welcome to our 2022 Earnings Conference Call. My name is Tyler Nelson. Last night we announced our 2022 fourth quarter and annual 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 made available on our website later today. With me on the call today are Chuck McFarland, Otter Tail Corporation's President and CEO, and Kevin Mohm, 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 the course of 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 differ from those presented here. 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 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 2022 year-end earnings call. Please refer to slide 4 as I begin my comments on our annual results. Otter Tail Corporation achieved record financial results in 2022. We generated diluted earnings per share of $6.78, a 60% increase from 2021. All segments produced double digit earnings growth led by our plastic segment, which capitalized on extraordinary industry conditions to achieve another record level of earnings. Looking forward, we expect plastic segment earnings to recede in 2023 from our record level this past year, but remain elevated relative to our expected normalized earnings beginning in 2024. In a moment, Kevin will provide a more detailed discussion of our financial performance. Slide 5 illustrates our five-year compounded annual growth rate and earnings per share with and without the impact of our plastic segment. Through dependable earnings and steady growth at Otter Tail Power, BTD, TO Plastics, and changes in corporate costs, we have produced a historic 10.8% earnings per share CAGR, excluding our plastic segment businesses. The additional earnings and cash flow generated by our plastic segments in 2021 and 2022 provide additional strength to our already strong credit metrics, liquidity, and capital structure, and allow for capital investments in our operating companies. Turning to slide seven, we illustrate Otter Tail Power's efforts in working toward a cleaner energy future. We are targeting to reduce carbon emissions from our owned generation resources approximately 50% from 2005 levels by 2025, and 97% by 2050. assuming targeted dispatch occurs. Additionally, our owned and contracted energy generation is forecast to be more than 50% renewable by 2025. Last week, Governor Walz signed the Clean Energy Bill into law in Minnesota. The bill requires Minnesota utilities to provide carbon-free electricity to Minnesota retail customers by 2040. It also requires utilities to provide 80% carbon-free energy by 2030, and 90% by 2035. The legislation allows utilities to use renewable energy credits to offset carbon emissions to achieve these requirements. We expect to meet these requirements with our existing renewable fleet and available renewable energy credits. The bill also updates the state's existing renewable energy standard, now requiring utilities to provide energy from renewable resources equal to at least 55% of the total energy by 2035. Based on our current projected energy resource mix, we anticipate we will meet the renewable requirement in 2035. This will require some additional renewable additions between 2024 and 2035. Slide 11 includes an overview of Otter Tail Power's 49-megawatt Hoot Lake solar project. Project construction began in May of 2022 and is expected to be completed in mid-2023. All the costs and benefits of the project are assigned to Minnesota customers. Recovery of the $60 million investment has been approved through the Renewable Rider. Passage of the Inflation Reduction Act has increased the investment tax credit on this from 26% to 40%. Turning to slide 12, Artel Power completed the purchase of the Ashtabula III wind farm on January 3, 2023. Since 2013, we have had a purchase power agreement in place to purchase the offtake of this facility. Acquiring the facility provides a lower cost alternative than maintaining the purchase power agreement. All regulatory approvals have been received to provide recovery of this rate-based investment. Slide 13 provides additional information on Tranche 1 of MISO's long-range transmission plan. Otter Tail will be a co-owner in two Tranche 1 projects, the Jamestown to Ellendale and Big Stone South to Alexandria 345 KV transmission projects. Otter Tail's total and capital investment in these projects is estimated to be approximately 390 million. 40% of the capital investment is expected to occur in the next five years. Slide 14 provides an update on Otter Tail Power's integrated resource plan. In November, the Minnesota PUC supported our request to amend the resource plan procedural schedule. The amended schedule allows us to incorporate the effects of changes to MISO seasonal capacity construct, increased MISO reserve margin requirements, recent load additions, and the passage of the Inflation Reduction Act. These items could have an impact on the 2021 initial preferred five-year plan, which requested authority to add dual fuel capability to Astoria Station, to 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 the coal-fired coyote generating station. We plan to file an updated resource plan in March of this year. The amended schedule does not modify the timeline for reviewing our proposal to add dual fuel capability at Astoria Station. Slide 15 provides an overview of Otter Tail Power's capital spending plan. The plan includes $1.1 billion of capital investment over the next five-year period, producing a 6.4% annual compounded growth rate in rate base over this time frame. Approximately 80% of this capital plan will be recovered through existing rates or riders. This rate-based growth plan is a key driver in our ability to produce earnings per share growth at our targeted level of 5% to 7%. Turning to our manufacturing segment, slide 21 highlights the financial performance for the year. Strong customer demand across most end markets drove our earnings growth in 2022. BTD, our metal fabrication business, produce double-digit volume growth, and experience volatile steel prices during the year, with steel prices declining sharply in the second half of the year. Lower steel prices have negatively impacted our scrap metal revenues. We continue to monitor the impact of supply chains, which are improving, and economic conditions that may impact customer demand and our shipping volumes. Teoplastics benefited from robust customer demand in 2022, along with product price increases offsetting inflationary cost pressures. Looking forward, slide 23 highlights our 23 market outlook for end markets served by our manufacturing segment. We expect recreational vehicle and the lawn and garden end markets to soften in 2023, especially in the back half of the year as inflation and the interest rate environment impact customers' discretionary spending. In contrast, we expect the ag, power generation, and horticulture markets to remain strong throughout 2023. Slide 24 highlights our financial results from our plastic segment in 2022. Our team effectively capitalized on extraordinary industry conditions to produce record financial results. Demand for PVC pipe declined sharply in the fourth quarter of the year as market conditions, including a softening housing market and lower resin prices, led to distributors and contractors to reduce purchase volumes to manage their inventory levels. To this point, we have seen only modest pressure on our sales prices. We expect margins will compress in 2023 after distributor and contractor inventories are right-sized. At our vinyl tech location, our rail expansion project is underway, and we are in the permitting and design phase of our plant expansion. Finally, I would like to thank all employees for their execution and persistence in 2022. Our team effectively managed a number of challenges during the year while maintaining our focus on achieving operational and commercial excellence. Now I'll turn it over to Kevin to provide additional commentary on our financial performance in 2022 and our expectations for 2023.