Otter Tail Corporation

Good morning and welcome to Otter Tail Corporation's second 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, everyone, and welcome to our second quarter 2023 earnings conference call. My name is Beth Osmond, and I'm Otter Tail Corporation's Manager of Investor Relations. Last night, we announced our second 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 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 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, Beth. Good morning and welcome to our second quarter 2023 earnings call. Please refer to slide four as I begin my comments on second quarter results. We are pleased with our second quarter financial results We generated earnings per share of $1.95. As expected, our earnings declined compared to second quarter of last year as earnings from our plastic segment receded from historic highs. Our electric segment produced earnings growth of 4% compared to second quarter of 2022, primarily driven by the recovery of rate-based investments. Manufacturing segment earnings decreased 21% due to lower sales volume of horticulture products and year-over-year lower manufacturing cost absorption. Our plastic segment earnings declined 13% given a general end market softness from reduced new home construction and a reduction in sales volumes as distributors continue to manage PVC pipe inventory levels. We are increasing our 2023 diluted earnings per share guidance to a range of $5.70 to $6 from our previous range of $4.55 to $4.85. This increase in our guidance is primarily due to stronger than expected plastic segment performance in the second quarter, as well as our expectations for the remainder of 2023. In a moment, Kevin will provide a more detailed discussion of our second quarter financial results and our expectations for the remainder of the year. Slide five shows our expected five-year compounded annual growth rate and earnings per share with and without the impact of our plastic segment through the end of 2023 based on the midpoint of our updated earnings guidance. We expect to produce a compounded annual growth rate and earnings per share from 2018 through 2023 of 10% exclusive of our plastic segment. The additional earnings and cash flow being generated by our plastic segment over this time period provides additional strength to our already strong credit metrics, liquidity, and capital structure, and allows for capital investment 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 reduced carbon emissions from our owned generation resources approximately 50% from 2005 levels by 2025, and 97% by 2050, assuming historic MISO dispatch occurs. Additionally, our owned and contracted energy generation is forecasted to be more than 50% renewable by 2025. Turning to slide 11, in March, Otter Tail Power filed its supplemental integrated resource plan with each of our three state utility commissions. Our preferred five-year plan requests authority to add on-site 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 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. Our levelized cost of energy in our supplemental plan is lower than our original plan submitted in 2021, reflecting our focus on customer affordability. In May, the Public Utilities Commission decided to reintegrate the Astoria Station onsite fuel decision timeline with the remainder of the IRP. We anticipate a hearing on the IRP sometime in early 2024. Slide 12 provides an overview and status update on our significant capital investment projects. Our team continues to effectively execute our project plans Working to ensure projects are completed on time and on budget, I will now provide a few details on several projects. Slide 13 provides an overview of Otter Tail Power's 49-megawatt Hoot Lake solar project. Construction began in May of 2022 and is expected to be completed in the third quarter of 2023. The project has received renewable rider approval in Minnesota, and all costs and benefits of the project are assigned to Minnesota customers. Passage of the Inflation Reduction Act has increased the investment tax credit on this project from 26% to 40%. We expect the facility to be placed in service on time and on budget in Q3. Slide 14 summarizes Otter Tail Power's investments under Tranche 1 of MISO's Long Range Transmission Plan. Otter Tail Power will be We'll co-own two Tranche 1 projects, the Jamestown Ellendale and Big Stone South Alexandria Big Oaks 345 KV transmission projects. Our team is focused on project development and planning and coordinating these complex projects with our co-owners. Both projects have FERC approval for construction work in progress recovery, ensuring the timely recovery of our capital investment. In total, we estimate Otter Tail's capital investment in these projects to be approximately $410 million. 30% of the capital investment is expected to occur in the next five years. These investments have a minimal impact on Otter Tail 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 2024. While we expect some investment opportunity for Otter Tail arising from Tranche 2 projects, our five-year capital plan does not include any estimates of future investments for these potential projects. Turning to slide 15, we intend to repower our four legacy wind farms in 2024 and 2025 with an investment of approximately $230 million. Each project qualifies for renewed production tax credits with the passage of the Inflation Reduction Act, and it is anticipated to lower customer bills, demonstrating Autotel Power's continued focus and commitment to customer affordability. Slide 16 provides an overview of Autotel Power's capital spending plan. The plan includes $1.1 billion of capital investment over the next five-year period and produces a 6.5% annual compounded growth rate and rate base over this timeframe. 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 the five-year horizon. We anticipate approximately 80% of our capital investments will be recovered through existing rates or riders. 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 2023 regulatory filings. 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 power generation markets is driving volume growth and profitability at BTD. The volume growth does present a challenge for the business as we try to align our workforce with the demand we are experiencing. We're trying to increase our headcount through hiring within a tight labor market. BTD experienced lower levels of productivity this quarter as new employees work to achieve increased efficiency. Similar to last quarter, steel prices remained lower in the second quarter of 2023 as compared to the same time last year. BTD continues to manage inflationary cost pressures in the business, partially through increased product pricing. At our BTD Georgia location, we are currently forecasting to be capacity constrained in the near term and are in the final stages of project development for an approximate $21 million expansion. Sales volumes in horticulture and markets softened in Q2, resulting in lower operating revenues for teoplastics this quarter as compared to the same time last year. Slide 24 provides an overview of our plastic segment. Volumes declined in the second quarter due to general end market softness and distributors and contractors continuing to manage inventory levels. The vinyl tech expansion and plant upgrade is underway, and we anticipate the expansion to increase capacity by approximately 8% for the segment. We currently expect to bring new capacity online in the second half of 2024, at a total cost of $50 million. Slide 25 highlights our recent resin and PVC pipe pricing. We continue to benefit from widened resin spreads similar to the first quarter of this year. PVC pipe prices remain higher than estimates for the second quarter of 2023. Our updated pricing expectations for the remainder of the year are the primary driver for the increased 2023 earnings guidance that Kevin will expand on. I'll now turn it over to Kevin to provide additional commentary on our second quarter results and our updated outlook for 2023.