Otter Tail Corporation

Good morning and welcome to Otter Tail Corporation's first quarter 2023 earnings conference call. Today's call is being recorded. 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 and welcome to our first quarter 2023 earnings conference call. My name is Tyler Nelson. Last night, we announced our first quarter financial results. Our complete earnings release and slides accompanying this call are available on our website at ottertail.com. A recording of this 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 Moe, 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 to 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. 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 first quarter 2023 earnings call. Please refer to slide four as I begin my comments on our first quarter results. We are pleased with our first quarter financial results. We generated earnings per share of $1.49. As expected, our earnings declined compared to first quarter of last year as earnings from our plastic segment receded from historic highs. In contrast, our electric and manufacturing segments each produced double digit earnings growth in the first quarter of 2023. Based on our first quarter results and expectations for the remainder of the year, we are increasing our 23 earnings guidance range from $4.55 to $4.85 per share, an increase of approximately 20% from our previous guidance, driven by increased earnings from our plastics and manufacturing segments. In a moment, Kevin will provide a more detailed discussion of our first quarter financial results and our expectations for the remainder of the year. Slide five illustrates our expected five-year compounded annual growth rate in earnings per share through the end of 2023, 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 expect to produce a compounded annual growth in earnings per share from 2018 through the five years ending 2023 of 9.5%. This excludes the results of our plastic segment. The additional earnings and cash flow generated by our plastic segment over this time period provide additional strength to our already strong credit metrics, liquidity, and capital structure, and allow for capital investment in our operating companies. Turning to slide 7, we illustrate Otter Tail Power's efforts in working toward a cleaner energy future. We are targeting to reduce carbon emissions from owned generation resources, approximately 50% from 2005 levels by 2025, and 97% by 2050, assuming historic misodispatch occurs. Additionally, our owned and contracted energy generation is forecast to be more than 50% by 2025. In turning to slide 11, in March, Otter Tail filed its Supplemental Integrated Resource Plan. The filing incorporated the effects of the passage of the Inflation Reduction Act, changes in our forecasted customer load, the adoption of MISO seasonal capacity construct, and increased MISO reserve margin requirements, all of which occurred after the initial IRP filing in 2021. One specific item to mention is the increase in MISO's winter reserve margin, which increased from 8% to 25%. This significantly impacts Otter Tail Power, a winter peaking utility. Our preferred plan, as outlined in our filings last month, requests authority to add onsite liquefied natural gas storage at Astoria Station in 2026, add 200 megawatts of solar generation in the 2027 to 2028 timeframe, and commence activities to prepare for the addition of 200 megawatts of additional wind generation in the 2029 timeframe. Our preferred plan also requests authority to withdraw from our 35% ownership interest in Coyote Station should major non-routine capital investment be required at the facility. In addition to those actions, we outlined in our IRP our intention to repower our four legacy wind farms in 2024 through 2026 at an estimated cost of approximately $200 million. It is anticipated that this investment will reduce customer rates. The levelized cost of energy per megawatt hour in the revised IRP is lower than the plan submitted in 2021, reflecting our focus on customer affordability. Slide 12 provides an overview and status update on our significant capital investment projects. Our team continues to effectively execute on project plans, working to secure projects that are completed on time and on budget. I will now provide a few details on several projects. On slide 13, we provide an overview of the Ashtabula III wind farm acquisition, which Otter Tail Power completed on January 3rd. Since 2013, we have had a purchase power agreement to purchase the offtake of this facility. Acquiring the facility provides a lower cost alternative than maintaining the power purchase agreement. Regulatory recovery of our $51 million investment began in the first quarter of 2023. Turning to slide 14, construction continues on Otter Tail Power's 49 megawatt Hoot Lake solar project. Construction began in May of 2022 and is expected to be completed in the second half of 2023. All 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 project from 26% to 40%. Slide 15 provides a summary of Otter Tail Power's investments under Tranche 1 of MISO's Long Range Transmission Plan. Otter Tail will be co-owner in two Tranche 1 projects. the Jamestown to Ellendale, and Big Stone South to Alexandria 345 KV transmission projects. Our team is focused on project development and planning and coordinating these complex projects with our co-owners. We have filed for construction work in progress with FERC for each project to ensure timely recovery of our capital investment. In total, we estimate Otter Tail's capital investment in these projects to be approximately $390 million. Forty percent of the capital investment is expected to occur in the next five years. These investments have a very minimal impact on OTP's retail customers as the costs are allocated across the MISO Midwest footprint. Our team continues to monitor developments at MISO regarding Tranche 2 transmission projects. MISO is currently indicating Tranche 2 projects will be approved in mid-2024. While we expect some investment opportunity for Otter Tail Power arising from the Tranche 2 projects, our five-year capital plan does not include any estimates for future projects at this time. Slide 16 provides an overview of Otter Tail Power's capital spending plan. We have updated our capital plan to incorporate the capital investments included in our supplemental IRP filing. The plan includes $1.1 billion of capital investment over the next five-year period, is an increase of approximately $50 million over our prior capital plan, and produces a 6.5% annual compound growth rate in rate base over this time frame. It is important to highlight that most of the capital investment from our solar and wind investments outlined in our IRP occur after 2027 and therefore are not reflected in this five-year horizon. We anticipate approximately 80% of our capital investments will be recovered through existing rates or riders. This rate-based growth is a key driver in our ability to produce earnings per share growth at our target level of 5% to 7%. Slide 17 provides an overview of key regulatory matters on our agenda for 2023. Our utility team is off to a good start and on track to accomplish our most important regulatory filings in 2023. Additionally, as we complete our internal cost of service studies this year, we will determine whether a North Dakota general rate case will be filed in late 2023. Turning to our manufacturing segment on slide 21, end market demand in agriculture, construction, and energy markets is driving volume growth and profitability at BTD. Steel prices in the first quarter of 2023 are substantially lower than the first quarter last year, but we did see a sharp increase in steel prices near the end of March. BTD continues to manage inflationary cost pressures in the business, partially through increased product pricing. Geoplastics earnings were driven by product pricing and the sourcing of low-cost material inputs, which led to increased gross profit margins in the quarter. Sales volume in the horticulture end market did soften in the first quarter, as lead time improvements across the industry resulted in decreased order backlogs. Slide 24 provides an overview of our plastic segment. Continuing the trend from the last half of 2022, sales volume continued to be soft in the first quarter of 2023 as distributors and contractors manage their inventory levels. Slide 25 highlights our recent resin and PVC pricing. We continue to benefit from elevated PVC pipe pricing despite resin costs receding from historic highs. PVC pipe prices remained higher than estimated for the first quarter of the year and early into the second quarter. Our updated pricing expectations for the remainder of the year are the primary driver for our increased 2023 earnings guidance that Kevin will expand on. I'll turn it over to Kevin to provide additional commentary on our first quarter results and our updated outlook for 2023.