Otter Tail Q1 2024 Earnings Report

Otter Tail EPS Results

• Actual EPS: $1.77
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Otter Tail Revenue Results

• Actual Revenue: $347.07 million
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Otter Tail Announcement Details

• Quarter: Q1 2024
• Date: 5/6/2024
• Time: N/A
• Conference Call Date: Tuesday, May 7, 2024
• Conference Call Time: 11:00AM ET

Otter Tail (NASDAQ:OTTR), through its primary subsidiary Otter Tail Power Company, is a regulated electric utility engaged in the generation, transmission and distribution of electricity. The company operates a diversified portfolio of owned and contracted power generation facilities, including coal, natural gas, wind and hydroelectric units, supplemented by long-term power purchase agreements. In addition to utility operations, Otter Tail provides related engineering, construction and maintenance services to support grid reliability and efficiency.

The company’s service territory covers a predominantly rural footprint in the Upper Midwest, including communities in west-central Minnesota, eastern North Dakota, northwest Wisconsin and small portions of South Dakota. Otter Tail Power Company serves both residential and commercial customers, delivering electricity to farms, municipalities, schools and businesses. Its grid infrastructure includes more than 12,000 miles of transmission and distribution lines and multiple substations strategically located to ensure uninterrupted service in areas of varied terrain and climate.

Founded in the early 20th century, Otter Tail has maintained a focus on community involvement and economic development within its service area. The company invests in technologies that support renewable energy integration and grid modernization, while maintaining a balanced energy mix to meet customer demand reliably. Otter Tail’s management emphasizes long-term planning and stakeholder engagement as pillars of its operating philosophy.

Otter Tail Q1 2024 Earnings Call Transcript

Key Takeaways

• Diluted EPS rose nearly 20% year-over-year to $1.77 in Q1, driven by strong performance in the Plastics segment.
• Plastics segment earnings increased 39% on a 56% sales volume jump, though margins compressed as PVC prices fell faster than resin costs, leading management to raise full-year EPS guidance by $1.10 to $6.23–$6.53.
• The Electric segment saw a 3% earnings decline due to warmer weather and higher O&M and depreciation costs, but the company unveiled a $1.3 billion 5-year capital plan focused on renewables, transmission upgrades, advanced metering and wind repowering with an expected 7.7% rate base growth.
• Manufacturing segment earnings fell 23% amid lower sales volumes as customers destock and in-source work; the company is implementing cost controls and efficiency measures with volumes expected to rebound in H2 2024.
• Key regulatory updates include a Minnesota IRP settlement backing 200–300 MW of solar and 150–200 MW of wind additions, an 8.4% North Dakota rate case proposal and ongoing assessment of new EPA air and water rules.

Presentation

[Operator]

Good morning, and welcome to Otter Tail Corporation Q1 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.

[Beth Eiken, Head of Investor Relations at Otter Tail Corporation]

Good morning, everyone, and welcome to our Q1 2024 earnings conference call. My name is Beth Eiken, and I'm Otter Tail Corporation's Manager of Investor Relations. Last night, we announced our Q1 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 MacFarlane, Otter Tail Corporation's President and CEO, and Todd Wahlund, 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 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.

[Beth Eiken, Head of Investor Relations at Otter Tail Corporation]

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 MacFarlane.

[Chuck MacFarlane, President and CEO at Otter Tail Corporation]

Thank you, Beth. Good morning, and welcome to our Q1 2024 earnings call. Please refer to Slide 4 as I begin my comments on our quarterly performance. We are pleased with our overall Q1 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 plastics segment. Plastics segment earnings increased 39% from the Q1 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% 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.

[Chuck MacFarlane, President and CEO at Otter Tail Corporation]

We are increasing our 2024 earnings guidance by $1.10 per share to a range of $6.23-$6.53 due to the stronger-than-expected Plastics 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 Q1 financial results and our updated earnings expectations for 2024. Slide 5 shows our expected 5-year compounded annual growth rate in earnings per share, with and without the impact of our Plastics 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 plastics 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%.

[Chuck MacFarlane, President and CEO at Otter Tail Corporation]

Turning to our electric segment, Slide 7 provides an overview of our electric operations. Our regulated electric utility announced a sizable 5-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 base 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 5-year capital spending plan. The plan includes $1.3 billion of capital investment over the next 5-year period and is expected to produce a rate base growth of 7.7%.

[Chuck MacFarlane, President and CEO at Otter Tail Corporation]

Otter Tail Power has a strong track record of translating rate base growth into earnings growth. In the previous five-year period, we converted an average rate base growth into earnings growth at a 1-to-1 ratio, a sign of a high-performing regulated utility. Over the long term, we expect to continue to convert our rate base growth into earnings growth near a 1-to-1 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.

[Chuck MacFarlane, President and CEO at Otter Tail Corporation]

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 4 legacy wind farms with an investment of approximately $230 million. Once complete, this project is expected to be equivalent to adding 40 MW of new wind generation with a 50% capacity factor. In March, we received approval for rider recovery of the project costs 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.

[Chuck MacFarlane, President and CEO at Otter Tail Corporation]

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 1 of MISO's Long Range Transmission Plan. Otter Tail Power will co-own two Tranche 1 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.

[Chuck MacFarlane, President and CEO at Otter Tail Corporation]

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.

[Chuck MacFarlane, President and CEO at Otter Tail Corporation]

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 of projects focused on improving the interconnection queue backlog along the MISO-SPP seam. 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 million-$400 million. This investment is also not included in our current 5-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.

[Chuck MacFarlane, President and CEO at Otter Tail Corporation]

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.

[Chuck MacFarlane, President and CEO at Otter Tail Corporation]

The settlement parties recommend the Minnesota Public Utilities Commission approve the following: adding and directly assigning 200-300 megawatts of solar generation and 150-200 megawatts of wind generation to Minnesota customers, adding on-site 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-out.

[Chuck MacFarlane, President and CEO at Otter Tail Corporation]

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 5 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 2023. 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%.

[Chuck MacFarlane, President and CEO at Otter Tail Corporation]

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(b) 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.

[Chuck MacFarlane, President and CEO at Otter Tail Corporation]

Looking now to our manufacturing segment on Slide 18, BTD and T.O. Plastics are navigating changing market conditions, negatively impacting sales volumes. In response, they are taking actions to manage cost and drive operational efficiencies. Turning to our end market outlook on Slide 20, many of the end markets BTD serves are softening, and during the Q1 of 2024, we started to see some customers looking to insource 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 T.O. 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.

[Chuck MacFarlane, President and CEO at Otter Tail Corporation]

We currently expect sales volumes to return to more normal levels in the second half of 2024. Slide 21 provides an overview of our plastics segment. Sales volumes increased significantly in the Q1 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 2018 to 2022 historic levels. Slide 22 highlights historical sales prices of PVC pipe and the cost of resin.

[Chuck MacFarlane, President and CEO at Otter Tail Corporation]

During the Q1 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 Vinyltech 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 Vinyltech has historically had to source from Northern Pipe Products. We are excited to bring these capabilities to Vinyltech 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 Q1 financial results and our expectations for the remainder of the year.

[Todd Wahlund, VP and CFO at Otter Tail Corporation]

Thank you, Chuck, and good morning, everyone. We delivered diluted earnings per share of $1.77 in the Q1 of 2024, nearly a 20% increase over the same time last year, despite headwinds experienced within our electric and manufacturing segments. Our Plastics segment produced stronger than anticipated financial results in the Q1 of 2024, and due to its performance and our revised expectations for the remainder of the year, we have increased the midpoint of our 2024 earnings guidance by 21%. Please follow along on Slide 26 as I begin with an overview of our Q1 financial results by segment.

[Todd Wahlund, VP and CFO at Otter Tail Corporation]

Electric segment earnings decreased $751,000 or 3% from the Q1 of 2023, driven by the impact of unfavorable weather, higher operating and maintenance expenses, primarily relating to higher labor costs and increased depreciation expense. These items were partially offset by increased rider revenue, the interim rate increase in North Dakota stemming from our general rate case filing, and higher commercial and industrial sales. Quarter-over-quarter, the impact of unfavorable weather was $0.09 per share, as our service territory experienced a much warmer start to the year. For example, temperatures in March were about 12 degrees warmer than in 2023. Manufacturing segment earnings decreased $1.6 million or 23% compared to the Q1 of 2023, primarily due to the lower sales volumes at both of our manufacturing businesses.

[Todd Wahlund, VP and CFO at Otter Tail Corporation]

The decrease in sales volumes and earnings quarter-over-quarter was largely driven by T.O. Plastics customers continuing to work through inventory previously purchased in response to supply chain-related challenges. We are forecasting a rebound in sales volumes later this year as we anticipate customers being through their destocking efforts in advance of the next seasonal purchasing period. BTD experienced a slight decrease in sales volumes quarter-over-quarter due to softening end market demand across multiple sectors, but we continue to benefit from diversity in end markets and customers. In response to the headwinds experienced at both manufacturing businesses, we are taking actions to tightly manage costs in an effort to mitigate the impact to overall 2024 earnings. Plastics segment earnings increased $13 million, or approximately 39% from the Q1 of 2023.

[Todd Wahlund, VP and CFO at Otter Tail Corporation]

Higher sales volumes led to the increase in earnings, and this was partially offset by margin compression, with PVC pipe prices continuing to gradually decline. Sales volumes increased 56% compared to the same period last year due to customer sales volume growth and strong distributor and end market demand. Milder weather seems to have contributed to higher sales volumes as it allowed for construction work to begin earlier than normal. Additionally, sales volumes in the Q1 of 2023 were much lower than usual, as distributors, our primary customers, were focused on destocking efforts after purchasing higher levels of inventory in 2022 in response to supply chain-related disruption and challenges. Gross profit margins declined in the Q1 of 2024 as PVC pipe sales prices declined more than the change in the cost of resin and other input material costs.

[Todd Wahlund, VP and CFO at Otter Tail Corporation]

Sales prices of PVC pipe declined 15% from the same time last year. Corporate costs declined nearly $1.2 million from the Q1 of 2023, primarily driven by returns earned on our short-term investments as our cash balance is higher and interest rates have increased. We continue to have a very solid balance sheet with a higher level of earnings and cash generated from the operations of our diversified portfolio of businesses. Turning to Slide 27, our consolidated equity layer as of March 31, 2024, was 61.3%, and our return on equity over the last 12 months was 22.1%. We continue to be in an enviable position with a strong balance sheet and ample liquidity to fund growth opportunities without having to issue additional equity.

[Todd Wahlund, VP and CFO at Otter Tail Corporation]

Turning to Slide 28, we are increasing our 2024 diluted earnings per share guidance to a range of $6.23-$6.53, from our initial range of $5.13-$5.43, due to stronger-than-expected Plastics segment performance in Q1 and our revised expectations for the segment throughout the remainder of the year. This increases the midpoint of our guidance to $6.38, or a $1.10 increase per share. We are maintaining our Electric segment and corporate cost center earnings guidance for 2024. Despite the impact of unfavorable weather in the Q1, our Electric segment is positioned well to overcome these headwinds based on updated estimates for sales volumes and the impact of our sales decoupling mechanism in Minnesota.

[Todd Wahlund, VP and CFO at Otter Tail Corporation]

We are increasing our Plastics segment earnings guidance as the sales price of PVC pipe has been more stable than we originally anticipated for 2024. Sales prices continue to recede, but at a much more gradual rate than was assumed in our initial 2024 guidance. Relatively small changes in pipe prices significantly impact Plastics segment earnings. Additionally, with strong end market demand, we expect sales volumes to be higher than assumed in our initial 2024 guidance. We are decreasing our 2024 earnings guidance for our Manufacturing segment due to lower expected sales volumes, compressed operating margins, and reduced research and development tax credits for BTD. Compared to 2023, we anticipate lower sales volumes in the horticulture, lawn and garden, recreational vehicle, and agriculture end markets. This reduction in sales volumes, combined with fixed manufacturing costs, negatively impacts operating margins.

[Todd Wahlund, VP and CFO at Otter Tail Corporation]

With the changes made to our earnings guidance for the year, we anticipate our earnings mix for 2024 to be 34% electric and 66% nonelectric, net of corporate costs. While this anticipated mix deviates from our long-term expected earnings mix of approximately 65% electric and 35% nonelectric, the incremental cash flow will further position us to execute well on our growth strategies without the need for additional equity. Our 5-year capital spending plan, which is a key driver of earnings growth for our Electric segment, is included in more detail on Slide 29. No changes have been made to this plan since it was first announced earlier this year during our year-end earnings call.

[Todd Wahlund, VP and CFO at Otter Tail Corporation]

As we continue to work toward a decision on our Integrated Resource Plan in Minnesota and additional transmission grid enhancements are advanced, we will determine what updates, if any, are needed to our electric utility's five-year capital spending plan. In order to finance our rate base growth at Otter Tail Power, we project issuing debt on an annual basis for the next 4 years.... Slide 30 provides a summary of our financing plan for 2025 through 2028, following our $120 million private placement debt issuance completed in the Q1 of 2024. We continue to expect retiring and not replacing our only outstanding parent-level debt when the $80 million note matures in 2026.

[Todd Wahlund, VP and CFO at Otter Tail Corporation]

Additionally, due to the significant amount of cash and earnings generated over the past few years, we have no external equity needs over the five-year period, avoiding any resulting dilution in earnings per share. We believe this differentiates us from many of our peers within the utility space, who will need to access the equity markets to fund their rate base growth. We are positioned well to deliver upon our revised 2024 earnings guidance, as well as meet our long-term investment targets, as summarized on Slide 33. Our diversified business model continues to produce above-average returns, serving us and our stakeholders well. We have many organic growth opportunities across our segments and are positioned to grow with our customers. We are in excellent position to support this growth with our strong balance sheet, ample access to liquidity, and investment-grade credit ratings. We are now ready to take your questions.

[Operator]

As a reminder, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. After the Q&A, Chuck will return with a few closing remarks. Please stand by while we compile the Q&A roster. Our first question comes from the line of Tim Winter of Gabelli Funds. Your line is now open.

[Tim Winter, Research Analysts at Gabelli Funds]

Good morning, gentlemen, and congratulations on another really, really good quarter. Looks like PVC continues to be strong. I'm just, you know, inquiring, some of your neighboring utilities have recently spun off for partial IPO, their non-regulated businesses and that have done very well. Any consideration of such a dynamic for the plastics division, given the strength?

[Todd Wahlund, VP and CFO at Otter Tail Corporation]

Yeah, Tim, we're in the middle of our strategic planning - annual strategic planning process, and so as part of that, we do evaluate our portfolio and strategic options. And, you know, currently, we view our portfolio of businesses is very solid, and our growth strategy is very solid, but we do consider alternatives every year.

[Tim Winter, Research Analysts at Gabelli Funds]

Okay. Thank you.

[Operator]

Thank you. I'm showing no further questions at this time. I would now like to turn it over to Chuck for closing comments.

[Chuck MacFarlane, President and CEO at Otter Tail Corporation]

I will give it a second to see if there's any other questions. Well, thank you for joining our call and your interest in Otter Tail Corporation. If you have any questions, please reach out to our investor relations team, and we look forward to speaking with you next quarter.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Participants

Executives

• Beth Eiken, Head of Investor Relations
• Chuck MacFarlane, President and CEO
• Todd Wahlund, VP and CFO

Analysts

• Tim Winter, Research Analysts at Gabelli Funds