Otter Tail Corporation

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

Good morning, everyone, and welcome to our 2023 Earnings Conference Call. My name is Beth Eichen, and I'm Otter Tail Corporation's Manager of Investor Relations. Last night, we announced our 2023 fourth quarter and annual 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, and Todd Walland, Otter Tail Corporation's Vice President 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 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 2023 year-end earnings call. Please refer to slide four as I begin my comments on our annual results. Otter Tail Corporation delivered record-setting earnings in 2023, driven by strong financial performance across all of our segments, as well as significant corporate cost savings. We generated diluted earnings per share of $7, beating the record of $6.78 set last year and significantly exceeding our original expectations for the year. The electric segment earnings increased 6% from 2022, primarily driven by higher commercial and industrial sales, lower pension costs, and the recovery of rate-based investments. Manufacturing segment earnings increased modestly from 2022. Plastic segment earnings decreased 4%, primarily due to decrease in sales volume. Our corporate cost center generated earnings in 2023 due to the returns earned on our short-term investments funded by the significant cash flows generated over the last few years. In a moment, Todd will provide a more detailed discussion of our 2023 financial results as well as our expectations for 2024 earnings. Slide 5 shows our five-year compounded annual growth rate in earnings per share with and without the impact of our plastic segment. Even without the impact of the extraordinary results generated by our plastic segment over the last few years, We produce a compounded annual growth rate in earnings per share of nearly 12%. With the impact of plastic segment included, this jumps to approximately 28%. Turning to slide six, Otter Tail Power is committed to transitioning to a lower carbon and increasingly clean energy future while maintaining affordable and reliable electric service to our customers. We have undertaken numerous initiatives in recent years to reduce our carbon footprint, including retiring our Hoot Lake coal plant and constructing and placing into service our Maricourt Wind Energy Center and our Hoot Lake solar facility. Despite taking these initiatives, we modified our near-term carbon reduction targets in response to changing market conditions, including higher natural gas prices, and higher than originally forecast dispatch levels of our co-owned coal facilities. Our updated carbon reduction targets are to own and contract energy generation that is 55 percent renewable by 2030, to reduce our carbon emissions from owned generation resources by 50 percent from 2005 levels by 2030, and to reduce our carbon emissions from own generation resources by 97% from 2005 levels by 2050. Slide five provides a few examples of the way in which we act upon our values focusing on safety, people, and community. We are proud to share that in 2023, our two foundations gave nearly 1.2 million to strengthen the communities in which our team members work and live. Slide 10 provides an overview of Ottertail Power's updated five-year capital spending plan. The updated plan includes $1.3 billion of capital investment over the next five-year period and is expected to produce annual rate-based growth of 7.7%. Ottertail Power has a strong record for translating rate-based growth into earnings. In the previous five-year period, we converted average rate-based growth into earnings growth, at a one-to-one ratio. I'll now provide a few details on several projects within the existing five-year planning period and beyond. Slide 11 summarizes Otter Tail Power's advanced metering infrastructure project with a total investment of approximately $60 million. Advanced metering infrastructure, or AMI, lays the groundwork necessary for improved outage response and communication which improves our customers' experience. Additionally, the infrastructure is able to integrate data and systems, allowing us to better understand peak energy use and offer energy and cost-saving options to customers. We are targeting to upgrade more than 174,000 meters across our service territory and anticipate completing the project in 2025. We believe this project will reduce operating expenses through technology-enabled savings. Turning to slide 12, we have commenced repowering our four legacy wind farms with an investment of approximately $230 million, which includes replacing hubs, rotors, and blades on the existing wind towers. Once complete, this project is expected to be equivalent to adding 40 megawatts of new wind generation with a 50% capacity factor. This project qualifies for renewed production tax credits with the passage of the Inflation Reduction Act and is anticipated to lower customer bills, demonstrating our continued focus and commitment to customer affordability. Slide 13 summarizes Otter Tail Power's investment under tranche one of MISO's long-range transmission plant. Otter Tail Power will co-own two tranche one projects, the Jamestown-Ellendale and the Big Stone South Alexandria 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 our capital investment in these projects to be approximately $420 million, with 70% of the capital investment to occur before 2029. These investments are expected to have a very limited impact on our retail customer rates as they are allocated across the entire MISO Midwest footprint. Our team continues to monitor developments at MISO regarding potential tranche two transmission projects. MISO continues to indicate Tranche 2 projects will be approved sometime in mid-2024. While we expect some investment opportunities arising from Tranche 2 projects, our updated five-year capital plan does not include any estimates of future investments for these potential projects. In addition to transmission investment opportunities available through MISO's long-range transmission plan, MISO and the Southwest Power Pool, or SPP, partnered to develop the Joint Targeted Interconnection Queue portfolio of projects focused on improving the interconnection queue backlog along the MISO-SPP scene. 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 U.S. Department of Energy awarded $464 million, or 25% of the estimated cost, to five of these projects, one of which we are expecting to co-develop with Xcel Energy. While the recovery of these projects still needs approval from FERC, we are optimistic about the eventual outcome of the potential investment opportunity, which currently falls outside of our five-year planning period. Turning to slide 14, while we continue to focus on identifying opportunities for capital investments to support safe, reliable, and increasingly clean electric service to our customers, affordability remains one of our top priorities. From 2018 to 2023, Otter Tail Power's electric rates have consistently remained well below the national and regional averages even during a time in which Otter Tail Power placed significant capital investment into service. In 2023, specifically, Otter Tail's residential rates were 30% below the national average and 15% below the regional average. Slide five summarizes Otter Tail Power's key regulatory matters in 2024. Next, I will give a more detailed update on our integrated resource plan and North Dakota rate case. Turning to slide 16, Otter Tail Power submitted an additional supplemental resource plan filing to the Minnesota Public Utilities Commission in December of 2023. In the supplemental filing, we outlined our updated plan to meet the needs of our Minnesota customers and included a proposal to modify our resource modeling methodology. This new method may lead to directly assigning certain new generation resources to a single jurisdiction as needed. This is expected to provide additional flexibility in adding new generation resources that meet the needs of our customers in each jurisdiction we serve. Our preferred plan for Minnesota customers, as outlined in our December filing, includes the addition of solar and wind investments and requests to designate the Minnesota portion of Coyote Station as an available maximum energy resource starting in 2029. The Minnesota portion of Coyote Station would only operate in limited emergency situations if our request is approved by the Minnesota Commission, which will reduce the output of the facility and its greenhouse gas emissions while preserving reliability for our customers. We expect increased clarity on our five-year resource additions following IRP and related regulatory actions in 2024. Turning to slide 17, for the first time since 2017, we filed a general rate case with the North Dakota Public Service Commission in November of 2023. In our rate case filing, we're opposed proposed to increase net revenues by approximately $17 million, or 8.4%, based on a requested ROE of 10.6% on an equity layer of 53.5%. In December, the Public Service Commission approved our interim rate request, with interim rates taking effect on January 1, 2024. Customers will see an average net increase of approximately 6%. Turning to our manufacturing segment on slide 20, our BTD Georgia expansion project is progressing well, and we expect to complete the project in early 2025. Looking to our end market outlook on slide 22, we expect many of the end markets our manufacturing segment serves to soften in 2024. Despite this softness, we continue to win additional work with existing customers as they look to us to add value. Over the past two years, we have been awarded major programs with existing customers which are scheduled to come to market in 2024 and should allow BTD to maintain or grow revenue even with softer OEM outlooks. With the recreational vehicle, lawn and garden, construction and agricultural end markets, dealer inventory has largely normalized to pre-pandemic levels. The recreational vehicle and lawn and garden end markets continue to be impacted by lower consumer discretionary spending in response to inflation and higher interest rates. The construction and agriculture end markets are forecasting to be down 5% to 10% this year, Power generation, however, continues to be a healthy end market for us as demand remains strong. The outlook for the horticulture end market continues to be relatively stable as the channel works through the inventory purchased in 2022 and early 2023 in response to scarcity concerns. Teoplastic sales volumes decreased in 2023 as compared to 2022, as customers reduce their inventory levels and are returning to normal seasonal buying patterns. Slide 23 provides an overview of our plastic segment. While plastic earnings declined slightly from our extraordinary results in 2022, our plastic business continues to capitalize on favorable industry conditions and produce strong financial results compared to pre-pandemic levels. Slide 24 highlights historical resin costs and PVC sales pipe pricing. Profit margins were higher in 2023 as compared to 2022 as the cost of PVC resin and other input costs fell more rapidly than the sales price of PVC pipe. The sales price of PVC pipe continues to decline steadily from historic highs reached in 2022. The Vinyl Tech site improvement and expansion project is underway, and we project to increase capacity by approximately 8% or 26 million pounds. We expect to bring this new capacity online in the second half of 2024 at a total cost of approximately 50 million. Additionally, we are planning to add another line to Vinyl Tech, which is expected to add 26 million pounds as well, and should become fully operational in early 2026. I'll now turn it over to Todd to provide additional commentary on our 23 financial results and our expectations for 2024.