Otter Tail Corporation

Good morning and welcome to Otter Tail Corporation's third 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 third 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 third quarter financial results. Our complete earnings release and slides accompanying this call are available on our website at ottertail.com. Our 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, Kevin Moog, Otter Tail Corporation's Senior Vice President and CFO, and Todd Walland, Otter Tail Power Company's Vice President of Finance and CFO. 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 2, 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 third quarter 2023 earnings call. Please refer to slide four as I begin my comments on our third quarter results. Through the combined efforts of our employees and diversified business model, we delivered record-setting quarterly earnings. We generated earnings per share of $2.19, driven by increased earnings from our manufacturing and plastic segments, along with a reduction in corporate costs. Our electric segment earnings in the quarter were largely flat to last year, but are up 7% on a year-to-date basis. Based on our strong quarterly and year-to-date results and revised expectations for the remainder of the year, we are increasing our 2023 diluted earnings per share guidance to a range of $6.76 to $6.96, from our previous range of $5.70 to $6.00. This increase is primarily driven by plastic segment performance continuing to remain stronger than previously expected. In a moment, Kevin will provide a more detailed discussion of our third 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 in earnings per share from 2018 through 2023 of 11% exclusive of our plastic segment. The additional earnings and cash flows 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. With Hoot Lake Solar becoming operational in August of this year, we expect nearly 40% of Otter Tail Power's owned and contracted energy sources will come from renewable resources. This represents an exciting milestone as we continue to transition to a cleaner energy future while still maintaining reliability and affordability for the communities we serve. Turning to slide 11, in March, Auditor Power filed its supplemental integrated resource plan with each of our three state utility commissions. In Minnesota, we received initial comments from interveners in September and filed reply comments yesterday. We anticipate a hearing with the Minnesota Public Utilities Commission in early 2024, and we expect to receive initial comments from the North Dakota Public Service Commission sometime next week and anticipate an informal hearing later this year. 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 secure projects that are completed on time and on budget. I will now provide a few details on several projects. On slide 13, An overview of Otter Tail Power's 49 megawatt Hoot Lake solar project is provided. The construction of the facility was completed on time and on budget and became fully operational in August. The facility was constructed on and near the retired Hoot Lake coal plant property in Fergus Falls, allowing us the unique opportunity to utilize existing transmission rights, land, and substation assets. Boot Lake Solar is the least cost and third largest operating solar site in the state of Minnesota, and its completion marks another step towards a cleaner energy future. Slide 14 summarizes Otter Tail Power's investments under Tranche 1 of MISO's Long Range Transmission Plan. Otter Tail Power will co-own two Tranche 1 projects, the Jamestown-Ellendale and the Big Stone South Alexandria to Big Oaks 345 KV transmission projects. Our team is focused on project development 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 will be approximately $420 million, with 30% of the capital investment to occur before 2028. These investments have very limited impact on our retail customer rates as they are allocated across the MISO Midwest footprint. Our team continues to monitor developments at MISO regarding potential 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 Power arising from Tranche 2 projects, our five-year capital plan does not include any estimates of future investments for these projects. In addition to the transmission investment opportunities available through MISO's long-range transmission planning, MISO and the Southwest Power Pool, or SPP, Recently partnered to develop the Joint Targeted Interconnection Queue, or JTIQ, portfolio project focused on improving the reliability of the grid where the two regional transmission organizations connect. The Minnesota Department of Commerce, on behalf of MISO and SPP, applied to the U.S. Department of Energy for funding to support the JTIQ projects. The DOE awarded $464 million to five of these projects, one of which we are expecting to co-develop with Xcel Energy. While these projects still need to go through the approval process with FERC, we are optimistic about the eventual outcome and the potential investment opportunity. Similar to the MISO Tranche 2 projects, we have not yet included this project in our five-year capital forecast. Turning to slide 15, we intend to repower four of our 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 Otter Tail Power's continued focus and commitment to customer affordability. Slide 16 provides an overview of Waterkill 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 compound growth rate and rate base over this timeframe. It is important to highlight that we have potential additional renewable investment opportunities after 2027, as outlined in our IRP, as well as incremental transmission investment opportunities relating to MISO Tranche 2 and JTIQ projects. 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 for 2023. Based on the results of our cost of service studies, we determined it prudent to file a general rate case in North Dakota. We will be filing our case on November 2, 2023. Slide 18 provides a summary of our planned rate case filing with the North Dakota Public Service Commission, in which we will be proposing a rate net increase in revenues of approximately $17 million, or 8.4%, based on a requested ROE of 10.6% on an equity layer of 53.5%. The rate case is driven by increases in our operating costs since our last case filing in the state of North Dakota, which was over six years ago. Even with this increase, Otter Tail Power will continue to have some of the lowest rates in the country. Turning to our manufacturing segment on slide 22, end market demand is mixed, but our existing customers continue to look to us to add value resulting in incremental volumes from winning additional work with existing customers. Within the recreational vehicle and lawn and garden end markets, discretionary spending is being impacted by inflation and rising interest rates. However, within the recreational vehicle end market specifically, we have seen a shift to higher end models as buyers of these models seem to be better insulated from economic pressures. Construction remains a strong end market for us as distributors are still experiencing low levels of inventory with a buildup of fleet replacement needs over the last few years. The agricultural end market is stabilizing as inventory has started to build. And the power generation end market continues to be healthy for us as demand remains high and inventory levels low. Our BTD George expansion, expected to cost approximately $20 million, is currently underway. We expect to bring the additional capacity online in early 2025. At Teoplastic, sales volumes in the horticulture end market decreased in Q3 as lead times have normalized and customers continue to work through inventory purchased early due to scarcity concerns, resulting in lower operating revenues this quarter as compared to the same time last year. Slide 25 provides an overview of our plastic segment. Sales volumes were relatively flat in Q3 compared to the same time last year, and we believe distributor inventory destocking is generally complete. Slide 26 highlights historic resin costs and PVC pipe pricing. The plastic segment produced stronger operating margins as our sales price to resin spreads have improved compared to the third quarter of 2022. The sales price of PVC pipe has receded from historic highs and continues to do so. This decline is at a pace slower than the reduction in cost of resin and other materials over the same timeframe. Our updated PVC pipe pricing expectations as well as related margins for the remainder of the year are the primary drivers for our increased 2023 earnings guidance that Kevin will expand on. The vinyl tech expansion and plant upgrade is underway and we anticipate the expansion will increase capacity by approximately 8% or 26 million pounds for the segment. We currently expect to bring this new capacity online in the second half of 2024 at a cost of 50 million. I'll now turn it over to Kevin to provide additional commentary on our third quarter results and our updated outlook for 2023.