Otter Tail Corporation

Good morning and welcome to Otter Tail Corporation's fourth 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 fourth 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 fourth quarter and annual 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 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 fourth quarter 2024 earnings call. Please refer to slide four as I begin my remarks with an overview of recent highlights. 2024 was a successful year for Otter Tail Corporation. We produced record earnings, generated diluted earnings per share of $7.17, and we continue to produce one of the highest returns on equity in the utility industry. We updated our five-year capital spending plan with Otter Tail Power's portion totaling $1.4 billion, which is a 9% increase over our previous plan. The revised plan is expected to produce rate-based compounded annual growth rate of 9%, and we continue to expect Otter Tail Power's earnings to increase at a similar rate. With our recent and projected strong financial performance, we are excited to announce increases to our long-term financial targets. Our updated long-term earnings per share growth rate is now 6% to 8%, an increase from our previous 5% to 7%. Slide five provides a summary of our quarter and year-to-date financial results. We are pleased with the record earnings generated during the year on the back of solid performance from our electric and plastic segments. Following my operational update, Todd will provide a more detailed discussion of our 2024 financial results, as well as our outlook for 2025. Turning to our electric platform, Otter Tail Power continues to perform well, converting our 2024 rate-based growth into earnings growth at approximately a one-to-one ratio. We executed on our key regulatory priorities and delivered on our significant rate-based growth plan, all while maintaining some of the lowest electric rates in the nation. Turning to slide seven, we obtained approval for our fully settled North Dakota general rate case in the fourth quarter. The outcome of the case provided for net annual revenue requirement increase of $13.1 million premised on a return of equity of 10.1% and an equity layer of 53.5%. The final outcome of the rate case achieved 57% of our amended request, however, if neutral income neutral adjustments are included, this percentage increases to 70%. We appreciate the effort from all parties in our rate case for reaching a constructive outcome that balances various stakeholder interests. Slide eight and nine provide an overview of ongoing and future projects. Touching on a few key updates, our wind repowering project continues to progress well. We completed the equipment upgrades at the first of four owned wind energy centers in the fourth quarter and expect to complete the other three by the end of 2025. This project continues to be an excellent example of investing capital that serves both our customers and investors as we continue to anticipate this project will lower customer bills through available tax credits and increased energy output. We announced plans in December to add up to 345 megawatts of solar generation, subject to certain regulatory approvals. Our estimated capital investment opportunity for Solway Solar and Abercrombie Solar is $100 million and $400 million, respectively. We believe these solar facilities will fit the requirements of our approved Minnesota Integrated Resource Plan and represent an opportunity to provide increasingly clean electric service that is also cost-effective to our customers. Turning to slide nine, in December, MISO approved several projects within Tranche 2.1 of its long-range transmission plan. We anticipate that Otter Tail Power will co-own three projects included in this portfolio. These projects will be developed and constructed over several years And we estimate our capital investment opportunity to be $700 million. MISO and SPP's boards also approved the Joint Targeted Interconnection Queue, or JTIQ, portfolio projects in December. These projects are intended to improve reliability and reduce constraints along the MISO-SPP scene. We estimate our capital investment opportunity to be $450 million. The majority of the capital investment associated with MISO Tranche 2.1 and JTIQ projects fall outside the current 2025 to 2029 planning period, but demonstrate the health of our rate-based growth pipeline. Looking forward, Otter Tail Power updated its five-year rate-based CAGR to 9% from 7.7%, as summarized on slide 10. Otter Tail Power is expected to convert its rate-based growth into earnings growth at a one-to-one ratio over the long term, which is made possible by identifying high-quality projects, effective project execution, and minimizing the impact of regulatory lag. As noted on the slide, we expect over 95% of our updated five-year capital spending plan to be recovered through existing rates or riders allowing for timely recovery of our capital investments. Additionally, Otter Tail Power remains well positioned to attract and support large loads. As summarized on slide 11, Otter Tail Power has approximately 970 megawatts of potential new large loads in our pipeline. While we have a significant amount of opportunity relative to our existing 1,000 megawatt system size, it is unlikely that we will add this much new load. Instead, we aim to bring on one to two large customers in the next one to three years and hope to grow with them to support their electric service needs. Adding a new large load would not only benefit us, but also our current customers as it would enable us to spread out our existing fixed costs. We have and will continue to be thoughtful in our negotiations to ensure that we are appropriately mitigating any potential adverse implications of adding new large loads to our existing customers. Additionally, no adjustments have been made to our load growth forecast or five-year capital spending plan at this time for these potential new large loads. Even with the significant capital investment opportunity ahead, we are well positioned to execute our capital spending plan while maintaining affordable electric rates for our customers. We anticipate being able to maintain affordable rates by continuing to leverage our existing low-cost asset base, available tax credits, technology-driven gains, and efficient financing as we have no near-term equity needs. Additionally, transmission investment comprises a significant portion of our updated five-year capital spending plan. These investments have limited impact on our retail customer rates as the costs are allocated across the entire MISO system. Our customer base is comprised of a small percentage of MISO and only pays their pro-rata share of the MISO portfolio projects. Turning to slide 12, Otter Tail Power has some of the lowest electric rates in the nation, with our 2024 rates 30% below the national average and 16% below our regional peers. We remain committed to maintaining affordable electric service rates for all of our customers and have demonstrated the ability to do so for many years. Transitioning to our manufacturing platform, our manufacturing and plastic segment faced dynamic market conditions in 2024, and I am proud of how our team members responded. Starting with our manufacturing segment, BTD and TO Plastics experienced end market demand related headwinds in 2024, especially in the second half of the year. As summarized on slide 14, nearly all of the end markets we serve are being negatively impacted by higher dealer and used inventory levels, inflationary pressures, and increased interest rates. And we expect end market conditions to remain challenged in 2025. In response to the challenging market conditions, we took actions in 2024 to tightly manage costs to mitigate the impact of lower sales volumes on earnings. and we will continue to evaluate if any further action is needed in 2025. Despite this downturn, we remain confident in the segment's long-term fundamentals. We expect to focus on reshoring manufacturing operations to the U.S., as well as the existing housing shortage and power demand growth to support volumes over the long term. Additionally, we expect large equipment manufacturers to continue to look to outsource a portion of their work once end market conditions improve. Slide 15 provides an overview of our plastic segment pricing and volume trends. Our sales prices of PVC pipe have steadily declined since peaking in mid-2022, decreasing 12% in 2024 compared to 2023 levels. Sales volumes increased significantly in 2024 due to our customer sales volume growth and end market demand following a period of distributor destocking in 2023. Slide 16 summarizes our long-term earnings expectations of the plastic segment. Our updated projection is that our plastics earnings will decrease through 2027 We continue to project a range of 45 to 50 million in annual earnings as our current best estimate and now anticipate reaching this level in 2028. This estimate of earnings is predicated on the assumption that our sales prices continue to decline at a pace similar to what we've experienced since the latter part of 2022, reverting to a pre-2021 gross margin percentage. However, there are many market dynamics that could materially impact our results and cause them to vary from our projections. Our long-term view of plastic segment earnings also incorporates the impact of incremental sales volume growth from our recent capacity addition in Phoenix and the expectation that raw material costs will generally increase with the rate of inflation contributing to the contraction of gross margin during this time. Turning to slide 17, our manufacturing platform remains well positioned to support future growth opportunities. We completed, on time and on budget, the first phase of our vinyl tech expansion project in the fourth quarter, enhancing our facility and increasing our resin and pipe storage. The first phase also added a line capable of producing large diameter PVC pipe increasing our plastic segment production capacity by approximately 7%. We look forward to leveraging this new capability at Vinyl Tech to better serve our customers in the Southwest market, while simultaneously freeing up large diameter production capacity at our northern pipe products in Fargo. Our BTD Georgia expansion project continues to progress well. Many of our customers are expanding into the southeast market, and this project positions us well to support this growth over the long term. We are currently occupying the new space and plan to bring the additional manufacturing capacity online in the first quarter of 2025. This project is expected to increase production capacity for up to 35 million in incremental annual sales. Separately, I want to take a moment to address the recent change in presidential administration and its potential impact on Otter Tail. While we remain confident in our ability to effectively navigate changing political environments, we will continue to monitor developments that could pose risks to items such as any IRA-related changes, including tax credits and transferability, DOE grant funding for the JTIQ portfolio projects, and the impact of potential tariffs on all of our businesses. While we will watch for any developments impacting tax credit transferability, the impact of this change to Otter Tail would be limited in our five-year planning period as we are able to monetize the tax credits we generate due to earnings produced by our electric and manufacturing platforms. I will now turn it over to Todd to provide his financial update.