Otter Tail Corporation

Good morning, and welcome to the Otter Tail Corporation's second quarter 2024 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 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 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 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, and good morning, and welcome to our second quarter 2024 earnings call. Please refer to slide four as I begin my comments on our quarterly performance. We are pleased with our second quarter financial results. Diluted earnings per share increased 6% to $2.07 per share compared to the same time last year, driven by strong financial performance within our plastics and manufacturing segments. Plastic segment earnings increased 9% from the second quarter of 2023 due to higher sales volumes driven by customer sales volume growth and distributor and end market demand. This was partially offset by lower pipe prices. Manufacturing segment earnings increased 15%, primarily driven by higher margins at BTD. Electric segment earnings increased 6% from the same time last year, or decreased 6% from the same time last year, primarily due to the impact of unfavorable weather. We are increasing our 2024 earnings guidance to the range of $6.77 to $7.07, from our previous range of $6.23 to $6.53, primarily due to the strength of our plastic segment. In a moment, Todd will provide more detailed 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 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 8.3%. Turning to our electric segment, slide seven provides an overview of our electric operations. A 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 Autotail Power's rate-based growth, we continue to explore opportunities for new large loads. This potential load growth is primarily driven by data centers, crypto mining, and clean fuel-related opportunities. We have not made any adjustments to our load forecast for these opportunities currently, but continue to engage with companies showing an interest in entering our service territory. When engaging with these various companies, we typically take a prudent approach, ensuring adequate financial security and protection from the loss of the large load or a slowdown in demand or energy cost changes that could impact our other customers. We are certainly interested in bringing large loads online in our service territory and feel well-positioned to do so, as we have several sites available that could support these large loads minimal delivery infrastructure investment needed, but we'll continue to balance this with the needs of our other customers. 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 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 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, given our constructive regulatory environments and available riders. 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, will allow us to better understand peak energy use so that we can offer energy and cost-saving options to our customers and improve our customers' experience. We are targeting to upgrade more than 174,000 meters across our service territory and are about halfway through at this point. We anticipate completing the project in 2025 and expect this project will reduce operating expense 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 recently received approval from the Minnesota Commission as well. We requested rider recovery in South Dakota and anticipate a decision in Q3. This wind repowering project qualifies for 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 the Big Stone South Alexandria Big Oaks 345 KV transmission projects. Both projects have FERC approval for construction work in progress, ensuring the 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 very little 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 tranche two portfolio projects and recognized additional transmission investment would be required to meet the needs Tranche 2 was intended to resolve. In June, MISO revised their proposal for Tranche 2 and released their near-final Tranche 2 portfolio projects, which included additional transmission investment for Otter Tail Power. We expect the MISO Board of Directors to approve the portfolio later this year. In addition to transmission investment opportunities available through MISO's long-range 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. MISO and SPP are currently planning to file their cost allocation tariff with FERC in Q3. While the recovery method of these projects is still in process, we are optimistic about the potential investment opportunity, which we estimate to range from approximately $350 to $400 million. Both Tranche 2 and JTIQ represent incremental transmission investment opportunities for us, but most of the spend is likely to fall outside of our current five-year planning period. Turning to slide 12, while we continue to focus on identifying opportunities for capital investment to support safe, reliable, and increasingly clean electric service to our customers, affordability remains one of our top priorities. 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. As we complete our internal cost of service studies this year, we will determine whether a Minnesota general rate case will be filed in late 2024. In addition to Otter Tail Power's specific key regulatory matters, we continue to monitor developments at FERC relating to ROE and self-fund dockets. I will now give a more detailed update on our integrated resource plan and North Dakota rate case. Turning to slide 14, in May, Otter Tail Power received approval from the Minnesota Public Utilities Commission on its integrated resource plan. The decision authorizes adding 200 to 300 megawatts of solar generation by 2027. 150 to 200 megawatts of wind generation and 20 to 75 megawatts of battery storage by 2029. Designating the Minnesota portion of Coyote Station as an emergency only resource starting as early as 2026. Commencing activities to no longer serve Minnesota customers with capacity or energy from Coyote Station as soon as feasible, but no later than December of 2031. and adding onsite fuel storage at Astoria Station by 2027. We view the outcome of our integrated resource plan docket in Minnesota as favorable overall and one that helps to preserve reliability as we continue to transition to cleaner energy. Despite the approval of adding onsite fuel storage at Astoria Station from the Minnesota Commission, The North Dakota Public Service Commission denied our advanced determination of prudence request relating to this project. As such, there's uncertainty about the future prospects of this project. Turning to slide 15, we filed a general rate case with the North Dakota Public Service Commission in November of 2023. In July, Otter Tail Power amended its rate case filing for certain items identified through the regulatory review process to a modified request to increase net revenues by approximately $23 million, or 10.9%, based on a requested ROE of 10.6% and an equity layer of 53.5%. We anticipate the final outcome of the case will occur in late 2024. Separately, in July, the EPA published its proposed rule for North Dakota's regional haze state implementation plan, in which the EPA proposed to disapprove of the state's conclusion that no emissions control additions are necessary at Coyote Station to achieve the objectives of the regional haze rule. We cannot predict with certainty the final resolution and timing of the regional Hays compliance in North Dakota and specifically the impact of Coyote Station and its operations, if any. However, significant emission control investments could be required and recovery of such costs from customers would require regulatory approval. Alternatively, investments in emission control equipment may prove to be uneconomic and could result in the early retirement or sale of our interest in Cayo Station, which would also be subject to regulatory approval. Turning to our manufacturing segment on slide 18, despite strong quarterly financial results, BTD and Teal Plastics continue to face end-market demand-related headwinds. We anticipate conditions to soften further in the second half of 2024, In response, we have and will continue to take actions to manage costs and mitigate the impact of lower sales volumes. Turning to our end market outlook on slide 20, many of the end markets that BTD serves are softening. We continue to see customers insourcing work to put their excess capacity to use. While the outlook for teal plastics primary end market horticulture remains relatively stable. Distributors continue to reduce and more tightly manage their inventory levels as lead times have shortened and interest rates have increased. We remain optimistic about demand improving in the second half of 2024, but expect sales volumes to be down significantly from 2023 levels. Slide 21 provides an overview of our plastic segment. Sales volumes increased in the second quarter of 2024 compared to the same time last year due to sales volume growth with existing customers and improved distributor and end market demand. It's important to note that while sales volumes were higher quarter over quarter, sales volumes during Q2 of 2023 were below normal levels as distributors were largely focused on destocking efforts. Slide 22 highlights historical sales prices of PVC pipe and the cost of resin. Sales prices continue to decline, but at a slower rate than we anticipated. Improved demand has provided support for product pricing and moderated the rate of pricing declines. We continue to see variability in the rate of price decline across product categories and geographies. Our vinyl tech site improvement and expansion project continues to progress well. We look forward to bringing large diameter pipe production capabilities to vinyl tech later this year so that we can better serve our customers located in the south and southwest. I will now turn it over to Todd to provide additional commentary on our second quarter financial results and our expectations for the remainder of the year.