Q1 2025 Otter Tail Corp Earnings Call

Thomson Reuters StreetEvents

Wed, May 7, 2025, 1:29 AM 23 min read

Participants

Tyler Nelson; Vice President of Finance & Treasurer; Otter Tail Corp

Charles Macfarlane; President, Chief Executive Officer, Director; Otter Tail Corp

Todd Wahlund; Chief Financial Officer, Vice President; Otter Tail Corp

Sophie Karp; Analyst; KeyBanc

Presentation

Operator

Good morning, and welcome to Otter Tail Corporation's first-quarter 2025 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.

Tyler Nelson

Good morning, and welcome to our first-quarter earnings conference call. My name is Tyler Nelson. I'm Otter Tail Corporation's Vice President of Finance. 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. A recording of this call will be available on our website later today.
With me on the call 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. 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 (technical difficulty)
I will now turn the call over to Otter Tail Corporation's President and CEO, Mr. Chuck MacFarlane.

Charles Macfarlane

Well, thank you, Tyler, and good morning, and welcome to our first-quarter earnings call. Please refer to slide 4 as I begin my remarks with an overview of our first quarter highlights. I am proud of our team's effort and execution during the first quarter of the year. Our financial results in Q1 met our expectations, and we are on target to achieve our annual earnings guidance. Otter Tail Power officially completed its North Dakota rate case, implementing base rates in March.
In addition, the team achieved an important milestone in working towards bringing a new large load onto our electric system. And during the quarter, we also completed the expansion of our BTD Georgia facility, an important project to enable future growth in our Southeast market.
Slide 5 provides a summary of our first-quarter financial results and the expectations for the remainder of the year. We produced diluted earnings per share of $1.62 in the first quarter, a decline from the first quarter of last year, but in line with our expectations and on target to achieve our 2025 annual earnings guidance.
Our Electric segment produced earnings growth in Q1, but as expected, earnings from our Manufacturing and Plastics segments declined based on industry conditions impacting these businesses.
Our businesses are faced with a heightened level of uncertainty as we monitor developments in the US trade policy and macroeconomic conditions. Overall, we are well positioned to weather this period of uncertainty given the strength of our balance sheet, including ample liquidity and an experienced management team.
Despite this uncertainty, we are affirming our 2025 earnings guidance with a midpoint of $5.88 per share. In a moment, Todd will provide a more detailed discussion of our first-quarter financial results as well as our outlook for the remainder of the year.
Slide 6 outlines the uncertainty present in the current operating environment and the potential impacts to our business. We are actively monitoring the landscape of trade and tax policy and will respond to changes as necessary with the goal of minimizing the disruption to our businesses but also taking advantage of potential opportunities.
The tariff exposure to Otter Tail Power is primarily on the materials and components used in our capital investments. Increased costs could impact the timing or the requested amount of recovery on our investments. Any customer impact would be spread over the life of the asset.
Many major components are sourced domestically or from suppliers with some degree of supply chain flexibility. Certain components are sourced from Mexico or Canada and are currently exempted from additional tariffs as they are covered under the USMCA. We are working with our supplier partners to minimize tariff impacts.
Substantially, all of the raw material inputs used in our Manufacturing and Plastics segment businesses are domestically sourced, thus limiting our tariff exposure. Domestic steel prices have increased following the implementation of tariffs on imported steel.
We expect higher steel prices will impact our raw material costs in the second half of 2025, but the earnings impact should be minimal as we are able to pass this cost increase on to our customers. We are monitoring for end market demand changes if tariffs produce elevated inflation or broad economic disruption.
Turning to tax policy changes. We are closely monitoring for changes in the tax credit legislation expanded by the Inflation Reduction Act or IRA. Thus far, there has been a certain level of bipartisan support in Congress for maintaining renewable energy credits under the IRA. Our current expectation is that a partial repeal of the IRA is possible.
At this point, we are uncertain as to how the tax policy may change, but we are not expecting potential changes to impact our near-term renewable investments including our wind repowering projects and our Solway solar project as we expect these investments to qualify under existing technology-specific rules.
Tax credit transferability may be a component of the IRA that is at risk to be modified. As a reminder, all benefits of tax credits, including when transferred, are fully returned to our retail customers. To this point, we have not needed to transfer any tax credits and don't expect to in the near term.
We are able to monetize tax credits generated by Otter Tail Power to offset the tax obligations of other businesses, flowing these tax credits back to Otter Tail Power's customers. We anticipate transferability will continue to be available for existing and in-process projects.
Over the long term, I am confident our team will effectively respond to any changes in tax policy, ensuring we continue to select the appropriate capital investments to provide reliable and affordable energy to our customers.
Now turning to an update on our electric platform on slide 8. As I mentioned, Otter Tail Power concluded its North Dakota general rate case with a final compliance filing and implementation of final rates in March. As we have previously discussed, this was a fully settled case that was approved by the North Dakota Commission late last year. Overall, we view the outcome of the case to be constructive, balancing the interests of all stakeholders.
As we look forward, we anticipate a rate case filing in South Dakota in the middle of 2025. In addition, our team is currently evaluating the potential filing in Minnesota, which if filed, would most likely happen late this year. We last filed a rate case in South Dakota in 2018 and in Minnesota in 2020.
Turning to slide 9. We are affirming our electric segment capital investment and rate base growth projections through 2029. We expect this customer-focused investment plan to produce a compounded annual growth rate and rate base of 9%, and we expect to convert that rate base growth into earnings per share growth and an approximate 1:1 ratio.
Slides 10 and 11 provide an overview of ongoing and future capital projects. I will now touch on a few key updates. Our advanced metering infrastructure project is substantially complete as we have updated over 170,000 meters, allowing us to offer energy and cost saving options to our customers and improving their overall service experience.
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 last year and construction continues with expected completion of the other three by the end of this year. We continue to anticipate the project will lower customer bills through available tax credits and increased energy output. An excellent example of investing capital that serves both our customers and investors.
Project development and work on regulatory planning continues on our two solar projects, which collectively will add up to 345 megawatts of solar generation to our portfolio. We believe these solar facilities 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 11. Development work continues on three MISO Tranche 1 projects Otter Tail Power will co-own. We've encountered some landowner and local government resistance to siting and certain permitting for one of the projects, which has delayed our development progress. Our team continues to engage with landowners, seeking their feedback and input while working towards a solution. Our team is scrutinizing the project time line to maintain our planned completion date.
Development work has begun on our MISO Tranche 2.1 projects. We are working closely with our co-owners on project planning and regulatory matters including filing the first -- right of first refusal notices with our state commissions in the first quarter. These projects continue to be important developments to enhance the reliability and efficiency of the electric grid. These investments are expected to have very limited impact on our retail customer rates as these costs are allocated across the entire MISO footprint.
Turning to slide 12. Otter Tail Power remains well positioned to attract and support large loads. We have over 1,000 megawatts of potential new large loads in our pipeline. This is a significant opportunity relative to our existing 1,000-megawatt system.
We aim to bring one to two large customers online in the next one to three years with the goal to grow with them in support of their electric service needs. As I previously mentioned, we did receive an important milestone in the first quarter, executing a service agreement with a new customer. We are now working to receive regulatory approval for this new load along with other steps necessary to commence service. We are excited about the opportunity to support this unique customer locating next to our Big Stone Plant.
Customer load is expected to be approximately 155 megawatts comprised of 3 megawatts of firm load and approximately 152 megawatts of nonfirm load. The firm load will be supplied by Otter Tail Power generation through the electric grid. The nonfirm load will be served by market energy and operate during certain periods. We are targeting an in-service date later this year subject to obtaining required regulatory approvals and construction of the distribution assets necessary to serve the load.
We have and we will continue to be thoughtful in our negotiations to ensure that we are appropriately mitigating any potential adverse implications of adding new large load to our existing customer base. Adding new loads, if appropriately managed, will not only benefit us, but also our current customers as it enables us to spread out our existing fixed costs and thereby benefiting our existing customers.
We remain committed to maintaining affordable electric service rates for our customers and have demonstrated the ability to do so for many years. As slide 13 illustrates, 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.
I will now transition to our manufacturing platform, starting on slide 15, with an overview of industry conditions served by our manufacturing segment. Both BTD and T.O. Plastics continue to confront end market demand headwinds in most of the markets we serve. We are seeing some stabilization in the construction and lawn and garden end markets as dealer inventories are normalizing.
The recreational vehicle and agriculture markets continue to be challenged with a high level of new and used inventories in the channel and softening commodity prices weighing on farm income specifically impacting the ag economy. The horticulture market served by T.O. Plastics has also stabilized. However, the extent and timing of sales volume recovery remains unclear.
Distributor and customer inventories are at low levels and our business is well positioned to respond as demand returns. Low-priced import competition continues to be a challenge, tariffs on these products may create an opportunity for increased sales volumes. We continue to monitor end market conditions along with the general economic environment.
While there is a heightened level of uncertainty, our management teams are experienced in operating through periods of dynamic microeconomic and industry conditions. We continue to tightly manage costs and be prudent in our capital spending while we're also being ready to respond when market conditions improve.
Despite this downturn cycle, we remain confident in the segment's long-term fundamentals. We expect to focus on reshoring manufacturing operations to the US, which could be aided by changes in tariff policy 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 an increasing portion of their work once end market conditions improve.
Slide 16 provides an overview of our Plastics segment's pricing and volume trends. Our sales prices of PVC pipe have steadily declined since peaking in mid-2022, decreasing 11% in the first quarter of 2025 compared to the same period last year.
Sales volumes increased 13% in the quarter from the combination of strong distributor and end market demand and the incremental volume from our capacity expansion completed in late 2024. Our new large diameter line at our Phoenix location is operating as we expected and we are pleased with the output in the first full quarter of operations.
Our first quarter results also benefited from lower resin costs, which was driven by increased domestic supply of PVC resin. We are monitoring end market conditions that could negatively impact our sales volumes, specifically those that impact residential or commercial development.
Turning to slide 17. Our manufacturing platform remains well positioned to support future growth opportunities. Work continues on the second phase of our expansion at our Phoenix facility. We are on track to bring the second extrusion line and related infrastructure online early next year. This will add an additional 26 million pounds of capacity, which, along with the Phase 1 line will increase our total capacity by approximately 15%.
We are pleased to have completed our BTD Georgia facility expansion project in the first quarter of the year. The project was completed on time and on budget. We expect all manufacturing equipment to be installed and ramping up to full production capacity over the remainder of the year. This project positions us well to grow with our customers that are expanding in the Southeast market. We anticipate the project will increase production capacity up to $35 million in incremental annual sales.
I'll now turn it over to Todd to provide his financial update.

Todd Wahlund

Thank you, Chuck, and good morning, everyone. As illustrated on slide 19, we produced diluted earnings per share of $1.62 in the first quarter of the year, an 8% decline from the same period last year. Please follow along on slides 20 and 21 as I provide an overview of our first quarter results by segment.
Electric segment earnings increased 10% in the first quarter, driven by favorable weather conditions compared to the same period last year, an increase in sales volumes and increased rider revenues from the recovery of our ongoing capital investments.
Heating degree days in the first quarter of 2025 approximated normal levels, but were elevated compared to the first quarter of last year, which was unseasonably warm in our service territory. These increases in revenues were partially offset by increased depreciation and interest expense from our capital investments and associated financing costs.
Manufacturing segment earnings decreased $0.09 per share, primarily due to lower sales volumes, along with increased production costs and unfavorable product mix and the impact of product pricing pressures. As Chuck mentioned, we continue to see soft end market demand, especially for recreational vehicles and agricultural equipment.
Our team is focused on managing costs in the business, aligning our cost structure with the current demand environment. Despite the down cycle, the fundamentals of this segment remain strong, and we continue to benefit from the incremental earnings and cash flow generated by these businesses.
Turning to slide 21. Our Plastics segment produced diluted earnings per share of $1.03 in the first quarter of 2025, a decrease of 7% compared to the first-quarter last year. This expected decline was driven by the continued reduction in product prices. The average sales price of PVC pipe declined 11% compared to the first quarter of 2024. This continues the downward trend we have experienced since the middle of 2022 after PVC pipe pricing reached its high point.
Partially offsetting the decline in pricing was a 13% increase in sales volumes. The large diameter pipe capacity we added late last year contributed to this increased sales volume and we continue to see strong distributor and end market demand across our territory.
First-quarter earnings also benefited from lower material costs as resin prices have declined due to increased domestic supply levels stemming from new resin production capacity and a soft export market for PVC resin. Finally, our corporate costs were higher in the first quarter of 2025 primarily due to an increase in employee medical claim levels under our self-insured plan.
Turning to slide 22. Our balance sheet remains very strong. Our consolidated equity layer as of March 31 was 62%. We have available borrowing capacity on both the parent and Otter Tail Power credit facilities, which, along with our $280 million of cash and equivalents, provides for a total available liquidity of over $600 million.
Our position of financial strength ensures we are well positioned to weather a period of economic uncertainty to deliver on our growth strategy and consistently deliver long-term shareholder value.
On slide 23, we are affirming our 2025 diluted earnings per share guidance range of $5.68 to $6.08, which is expected to produce a return on equity near 14%. Our guidance reflects Electric segment earnings growth of approximately 7% and a continued decline in Plastics segment earnings as PVC pipe prices continue to decline. In addition, manufacturing segment earnings are anticipated to decline as end market conditions remain challenging.
I will now advance to slide 24. With a combination of a high-growth electric utility and a manufacturing platform that provides enhanced returns and incremental cash flows, we have a proven track record of delivering outstanding growth levels for our investors. Based on the midpoint of our 2025 guidance range, we are forecasting our consolidated five-year compounded annual growth rate in earnings per share to be over 20%. Even without the impact of plastic segment earnings, we expect this growth rate to exceed 8%.
Slide 25 presents our customer-focused capital investment plan for years 2025 through 2029. The $1.4 billion of capital investments in our Electric segment will benefit our customers and investors and will be a key driver of earnings growth for this business over the five-year period. Beyond our base five-year capital spending plan, we project up to $650 million of incremental capital investment opportunity at Otter Tail Power.
Our base capital plan for 2025 through 2029 does not currently include any capital investment for wind generation approved in our Minnesota Integrated Resource Plan as we continue to evaluate whether building and owning a new facility or contracting the energy through a purchase power agreement is most beneficial to our customers.
Further, the plan does not include any capital investment relating to battery storage approved in our IRP or any dual field related projects to address potential changes to MISO capacity requirements. This plan also does not include any delivery investment relating to potential new large loads. For every $100 million of incremental capital investment, we estimate our rate base compounded annual growth rate would increase by approximately 75 basis points.
Slide 26 summarizes our five-year financing plan. Even with our robust capital spending plan, we expect to finance the entire five-year growth plan without any equity issuances, given our current cash balance and cash flow projections over the next five years. Annual debt issuances at Otter Tail Power are planned to help fund our rate base growth plan and maintain our authorized capital structure.
In the first quarter, we completed a $100 million private placement debt issuance with the first $50 million funded in March and the second $50 million to be funded in June of this year. We do not anticipate any further debt issuances in 2025. We have $80 million of total parent-level debt that all matures in late 2026 and we plan to retire this with existing cash and not replace it with new issuances. The value of our portfolio of companies is evident in our financing plan.
We project being able to eliminate the need for external equity for at least the next five years by investing the incremental cash flow generated by our manufacturing platform into our utilities rate base growth plan.
On slide 27, we reaffirm our long-term earnings expectations of our Plastics segment to be in a range of $45 million to $50 million beginning in 2028. We continue to expect earnings to decline through 2027 based on the assumption that our sales prices continue to trend downward at a pace similar to what we have experienced since the latter part of 2022.
Our long-term view of segment earnings also incorporates the impact of incremental sales volume growth and the expectation that raw material costs will generally increase with the rate of inflation. Considering these factors, we expect our gross profit margin percentage in 2028 to approximate the margin percentages we realized from this segment prior to 2021.
Slide 28 summarizes our investment targets. While we are currently navigating a period of heightened economic disruption and uncertainty, we remain confident in our ability to deliver on our investment targets over the long term. We continue to target a long-term earnings mix of 65% electric and 35% manufacturing.
We anticipate achieving this in 2028 as Electric segment earnings per share grows in line with rate base growth of 9%. The Manufacturing segment recovers from the current down cycle and Plastics segment earnings normalize.
Following this, we project a long-term EPS growth rate of 6% to 8% that will be driven by our capital investment plan for our electric segment and the recent and planned capacity additions within our manufacturing platform. Our diversified business model continues to produce above average returns and generate sufficient cash to enable us to finance our growth initiatives without any external needs for at least the next five years.
Finally, we are committed to a balanced capital allocation strategy, reinvesting in our businesses to support future growth while returning capital to our shareholders through our dividend, which we have paid for 86 consecutive years. The indicated annual dividend increase of 12% announced earlier this year reflects our position of financial strength and our commitment to delivering shareholder value.
We are now ready to take your questions.

Question and Answer Session

Operator

(Operator Instructions) Sophie Karp (technical difficulty)

Sophie Karp

So just wanted to maybe start with the Plastics. I'm just curious what volumes you have assumed in the guidance for this year. Maybe you can help us think about this directionally. And I guess, looking at slide 27 here, right, if you have -- if you expect to have an inflationary increase in input costs, why would you simultaneously expect the continued product price declines, right? So wouldn't those factors be offsetting each other? The inflationary pressures in the industry would -- could they be supportive of pricing?

Todd Wahlund

Thank you, Sophie, for the question. I'll take the first one, and if I miss any of the questions you asked, just ask again here. So in terms of the volume for this year, it's lower single digits increase in our volume. We had very strong volumes in Q1 increase over 2024. We expect to have strong increases in the second quarter as well, but our guidance reflects a potential downturn in the second half of the year just as we're looking at housing starts and builder sentiment, we see that there is some risk in the second half of the year.
So we factored that into our guidance, but we still expect to be within the guidance range based on that potential downturn in the second half of the year. In terms of the inflationary increases, so basically, our core assumption here on our normal Plastics earnings is that we revert back to the same gross margin percentages that we had pre-2021. So at some point, those converge, and we expect to see that in that end of 2027 time frame. So as costs are increasing, prices are decreasing.
Once we get to that gross margin percentage level, we expect that's when we'll see the new normal play out. So we are factoring in basically the continued about 12% decrease in prices per year that we've been seeing since September of 2022. Did I catch all your questions, Sophie or did I miss anything?

Sophie Karp

Yeah. No, I think this is great. And then if I can squeeze one more in. Is it -- are you seeing yet any impact from some of your pipe competitors expanding capacity in your core regions? Or is it too early to see that?

Charles Macfarlane

Sophie, we don't have complete visibility into that, but we anticipate that competitors are doing similar to us in adding incremental line capacity at various sites or debottlenecking the sites that they have. To our knowledge, we're not seeing new plants or that type of thing. But we anticipate that there are others replacing equipment, upgrading equipment, adding capacity, very similar to what we would be doing.

Operator

As there are no remaining questions in the queue, I will turn the call back over to Chuck for his closing remarks.

Charles Macfarlane

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

This concludes today's conference call. Thank you for participating. You may now disconnect.

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