Otter Tail Corporation

Good morning and welcome to Otter Tail Corporation first quarter 2024 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 first quarter 2024 earnings conference call. My name is Beth Eichen and I'm Otter Tail Corporation's Manager of Investor Relations. 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. 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 against 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 first quarter 2024 earnings call. Please refer to slide four as I begin my comments on our quarterly performance. We are pleased with our overall first quarter financial results. Diluted earnings per share increased nearly 20% to $1.77 per share compared to the same time last year. driven by strong financial performance within our plastic segment. Plastic segment earnings increased 39 percent from the first quarter of 2023 due to higher sales volumes driven by customer sales volume growth and strong distributor and end market demand. Electric segment earnings decreased modestly, primarily driven by weather-related headwinds. Manufacturing segment earnings decreased 23 percent due to lower sales volumes. Our corporate costs decreased due to returns earned on our short-term investments driven by a larger cash balance and higher interest rates. We are increasing our 2024 earnings guidance by $1.10 per share to a range of $6.23 to $6.53 due to the stronger than expected plastic segment performance in Q1 and our revised expectations for the remainder of the year. In a moment, Todd will provide a more detailed discussion of our first quarter financial results and our updated earnings expectations for 2024. 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 2024 based on the midpoint of our updated earnings guidance. Even without the impact of the extraordinary results generated by our plastic segment over the last few years. We expect to produce a compounded annual growth rate in earnings per share from 2019 through 2024 of 8.5%. Turning to our electric segment, slide 7 provides an overview of our electric operations. Our regulated electric utility announced a sizable five-year capital spending plan earlier this year. with significant amounts being allocated to renewable resources, transmission investment, and technology. In addition to Otter Tail Power's rate-based growth, we also have the opportunity for new large loads. This potential load growth is primarily driven by crypto mining, high performance computing, and clean fuel related opportunities. At this time, we have not made any adjustments to our load growth forecast for these opportunities but continue to engage with companies showing an interest in entering our service territory. Slide 8 summarizes Otter Tail Power's five-year capital spending plan. The plan includes $1.3 billion of capital investment over the next five-year period and is expected to produce a rate-based growth of 7.7%. Otter Tail Power has a strong track record of translating rate-based growth into earnings growth. In the previous five-year period, we converted an average rate-based growth into earnings growth at a one-to-one ratio, a sign of a high-performing regulated utility. Over the long term, we expect to continue to convert our rate-based growth into earnings growth near a one-to-one ratio. I will now provide a few details on several projects within the existing five-year planning period and beyond. Slide 9 summarizes Otter Tail Power's advanced metering infrastructure project with a total investment of approximately $60 million. Advanced metering infrastructure, or AMI, should allow us to better understand peak energy use so that we can offer energy and cost-saving options to customers and improve our customers' experience. We are targeting to upgrade more than 174,000 meters across our service territory and anticipate completing the project in 2025. We expect this project will reduce operating expenses through lower meter reading costs and technology-enabled savings. Turning to slide 10, we have commenced repowering our four legacy wind farms with an investment of approximately $230 million. Once complete, this project is expected to be equivalent to adding 40 megawatts of new wind generation with a 50% capacity factor. In March, we received approval for rider recovery of the project cost from the North Dakota Commission and anticipate a decision from the Minnesota Commission in mid 2024. We anticipate requesting phase-in rider recovery in South Dakota this summer. This wind repowering project qualifies for renewed production tax credits under the Inflation Reduction Act. These tax credits, along with the incremental energy produced at these repowered wind farms, are anticipated to lower customer bills, demonstrating our continued focus and commitment to customer affordability. Slide 11 summarizes Otter Tail Power's investments under tranche one of MISO's long-range transmission plan. Otter Tail Power will co-own two tranche one projects, the Jamestown Ellendale and Big Stone South Alexandria Big Oaks 345 KV transmission projects. Both projects have FERC approval for construction work in progress recovery, ensuring a timely recovery of our capital investment. In total, we estimate our capital investment in these projects to be approximately $420 million. These investments are expected to have a very limited impact on our retail customer rates as they are allocated across the entire MISO North footprint. In March of 2024, MISO released their initial draft proposal for the Tranche 2 portfolio projects. We continue to engage with and provide feedback to MISO as they work to refine the portfolio before putting it in front of the MISO Board of Directors later this year. Our current investment opportunity based on the initial draft proposal is limited, but is still subject to change. We and others continue to advocate to MISO for additional transmission investment in the Dakotas and western Minnesota to meet the original objectives of Tranche 2. MISO has recognized that additional regional transmission investment is required to meet the needs Tranche 2 was intended to resolve. Tranche 2-related investment is not currently included in our capital spending plan. In addition to the 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, or JTIQ, portfolio projects focused on improving the interconnection queue backlog along the MISO SPP scene. We expect to co-develop one of the five projects with Xcel Energy. 25% of project costs will be funded by a DOE grant. While the recovery of these projects still needs approval from FERC, we are optimistic about the potential investment opportunity, which we estimate to range from approximately $350 to $400 million. This investment is also not included in our current five-year capital spending plan, and represents an incremental opportunity. Turning to slide 12, we will 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 through 2023, Otter Tail Power's electric rates have consistently remained well below the national and regional averages. Slide 13 summarizes Otter Tail Power's key regulatory matters in 2024. I will give a more detailed update on our integrated resource plan and North Dakota rate case. Turning to slide 14, in April, Otter Tail Power, the Minnesota Department of Commerce, and three labor organizations entered into a settlement agreement on our integrated resource plan, or IRP. the settlement parties recommend the Minnesota Public Utilities Commission approve the following. Adding and directly assigning two to 300 megawatts of solar generation and 150 to 200 megawatts of wind generation to Minnesota customers. Adding onsite liquefied natural gas storage at Astoria Station. Limiting the dispatch of Minnesota's portion of Coyote Station to emergency events and beginning to withdraw from the Minnesota portion of Coyote Station should a major non-routine capital investment be required. We are pleased with the terms of the settlement agreement as it largely aligns with our preferred plan. Involved parties that were not signatory to the settlement preferred a post-2028 exit of Coyote with batteries as a replacement resource and did not support Astoria on-site fuel. These parties are supportive of the renewable build-off. A hearing before the Minnesota Commission is scheduled on May 28, and we anticipate a decision soon thereafter. The North Dakota Public Service Commission supports the continued use of existing resources and does not anticipate needing any additional resources in the next five years. As such, we do not anticipate any additional IRP filings or steps to be taken in North Dakota. Turning to slide 15, we filed a general rate case with the North Dakota Public Service Commission in November of 23. In our rate case filing, we 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%. An evidentiary hearing has been scheduled in late July, and we anticipate the final outcome of the case will occur in Q3 of 2024. Separately in April, the EPA finalized new regulations under Section 111 of the Clean Air Act in an effort to reduce greenhouse gas emissions from electric generating units. Our two co-owned coal facilities are within the scope of these regulations. We are evaluating the impact compliance will have on our operations. It is anticipated that the regulation will be legally challenged or could be modified if there is a change in administration. The EPA also finalized in April new regulations for mercury and air toxins and the management of discharge water and coal ash at our coal-fired power plants. While we continue to review and evaluate the regulations, We do not anticipate compliance will have a material impact on our operations. Looking now to our manufacturing segment on slide 18, BTD and Teoplastics are navigating changing market conditions negatively impacting sales volumes. In response, they are taking actions to manage cost and drive operational efficiency. Turning to our end market outlook on slide 20, Many of the end markets BTD serves are softening. And during the first quarter of 2024, we started to see some customers looking to in-source work to put excess capacity to use. Despite this softness, we expect programs we were previously awarded for new products to partially offset lower sales volumes in existing products and continue to expect productivity-related gains throughout the year. While the outlook for QO Plastics primary end market horticulture remains relatively stable for the ultimate end users, distributors continue to work through inventory previously purchased in response to supply chain related concerns, thus negatively impacting our sales volumes. We currently expect sales volumes to return to more normal levels in the second half of 2024. Slide 21 provides an overview of our plastic segment. Sales volumes increased significantly in the first quarter of 2024 compared to the same time last year due to customer sales volume growth and distributor and end market demand. It's important to note that while sales volumes were much higher quarter over quarter, sales volumes during Q1 2023 were well below normal levels as distributors were largely focused on destocking efforts. Further, sales volumes in Q1 of this year were still below the 2020-18 to 2022 historic levels. Slide 22 highlights historical sales prices of PVC pipe and the cost of resin. During the first quarter of 2024, the sales price of PVC pipe decreased more rapidly than the cost of resin and other input materials, resulting in lower spreads. Additionally, our vinyl tech site improvement and expansion project continues to progress well and we look forward to bringing on our first installment of additional capacity online later this year. The capacity will be for large diameter pipe which vinyl tech has historically had to source from northern pipe products. We are excited to bring these capabilities to vinyl tech to better serve our southern customers while simultaneously freeing up large diameter pipe capacity at our northern pipe products facility. I will now turn it over to Todd to provide additional commentary on our first quarter financial results and our expectations for the remainder of the year.