Q1 2024 Otter Tail Corporation Earnings Call
Operator: Good morning, and welcome to Otter Tail Corporation's 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 its opening comments.
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.
Beth Eiken: Good morning, everyone, and welcome to our first quarter 2024 earnings conference call. My name is Beth Eiken, and I'm Otter Tail Corporation's Manager of Investor Relations.
Beth Osman: Good morning, everyone and welcome to our first quarter 2024 earnings Conference call. My name is Beth icon and I'm Otter tail Corporation's manager of Investor Relations.
Beth Eiken: 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 today are Chuck MacFarlane, Otter Tail Corporation's President and CEO, and Todd Wahlund, Otter Tail Corporation's Vice President and CSO.
Beth Eiken: Last night, we announced our first quarter financial results, our complete earnings release and slides accompanying this call are available on our website at otter tail Dot com a recording of this call will be available on our website later today.
Beth Eiken: With me on the call today are Chuck Macfarlane Otter tail corporations, President and CEO and Todd wallet to Otter tail Corporation's Vice President and CFO before we begin I want to remind you that we'll be making forward looking statements. During the course of this call.
Beth Eiken: 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.
Beth Eiken: Noted on slide two these statements represent our current views and expectations of future events.
Beth Eiken: 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 are 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.
Beth Eiken: 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.
Charles S. MacFarlane: 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.
Charles S. MacFarlane: 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 plastics business. Plastic segment earnings increased 39% from the first quarter of 2023 due to higher sales volumes driven by customer sales volume growth. Strong Distributor and In-Market Demand. Electric segment earnings decreased modestly, primarily driven by weather-related headwinds. The manufacturing segment earnings decreased 23% due to lower sales volume.
Charles S. MacFarlane: Thank you Beth good morning, and welcome to our first quarter 2024 earnings call.
Charles S. MacFarlane: Please refer to slide four as I begin my comments on our quarterly performance.
Charles S. MacFarlane: 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.
Charles S. MacFarlane: Driven by strong financial performance within our plastic segment.
Charles S. MacFarlane: Plastic segment earnings increased 39% from the first quarter of 2023 due to higher sales volumes driven by customer sales volume growth and strong distributor and end market demand.
Charles S. MacFarlane: Electric segment earnings decreased modestly primarily driven by weather related headwinds.
Charles S. MacFarlane: Manufacturing segment earnings decreased 23% due to lower <unk>.
Charles S. MacFarlane: Sales volumes are.
Charles S. MacFarlane: 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 2020.
Charles S. MacFarlane: Our corporate costs decreased due to returns earned on our short term investments driven by a larger cash balance and higher interest rates.
Charles S. MacFarlane: Yeah.
Charles S. MacFarlane: We are increasing our 2020 core earnings guidance for $1 10 per share.
Charles S. MacFarlane: Through a range of $6 23 to $6.53.
Charles S. MacFarlane: Due to the stronger than expected plastics segment performance in Q1, and our revised expectations for the remainder of the year.
Charles S. MacFarlane: In a moment Todd will provide a more detailed discussion of our first quarter financial results and our updated earnings expectations for 2024.
Charles S. MacFarlane: Slide 5 shows our expected 5-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. Even without the impact of the extraordinary results generated by our plastic segment over the last few years.
Todd: Slide five shows our expected five year compounded annual growth rate in earnings per share with and without the impact of our plastic segment.
Charles S. MacFarlane: Through the end of 2024 based on the midpoint of our updated earnings guidance.
Charles S. MacFarlane: 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 eight 5%.
Charles S. MacFarlane: We expect to produce a compounded annual growth rate in earnings per share of 8.5% from 2019 through 2024. Turning to our electric segment, slide 7 provides an overview of our electric operation. 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.
Charles S. MacFarlane: 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. Slide 8 summarizes Otter Tail Power's 5-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 percent. Otter Tail Power has a strong track record of translating rate-based growth into earnings growth.
Charles S. MacFarlane: Turning to our electric segment Slide seven 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.
Charles S. MacFarlane: In addition to Otter tail Power's rate base growth. We also have the opportunity for new large loads.
Charles S. MacFarlane: 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 loan growth forecast for these opportunities, but continue to engage with companies showing an interest in entering our service territory.
Charles S. MacFarlane: Slide eight summarizes otter tail powers five year capital spending plan.
Charles S. MacFarlane: Plan includes $1 3 billion of capital investment over the next five year period and is expected to produce a rate base growth of seven 7%.
Charles S. MacFarlane: Otter tail power has a strong track record of translating rate base growth into earnings growth.
Charles S. MacFarlane: 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.
Charles S. MacFarlane: In the previous five year period, we converted an average rate base growth and the earnings growth at a one to one ratio a sign of a high performing regulated utility.
Charles S. MacFarlane: Over the long term we.
Charles S. MacFarlane: We expect to continue to convert our rate base growth and earnings growth near one to one ratio.
Charles S. MacFarlane: 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.
Charles S. MacFarlane: I will now provide a few details on several projects within the existing five year planning period MBR.
Charles S. MacFarlane: Slide nine summarizes otter tail powers advanced metering infrastructure project with a total investment of approximately $60 million.
Charles S. MacFarlane: Advanced metering infrastructure or am I should allow us to better understand peak energy use.
Charles S. MacFarlane: We can offer energy and cost saving options to customers and improve our customers' experience.
Charles S. MacFarlane: 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.
Charles S. MacFarlane: We're targeting to upgrade more than a 174000 meters across our service territory and anticipate completing the project in 2025.
Charles S. MacFarlane: We expect this project will reduce our operating expenses through lower meter reading costs and technology enabled savings.
Charles S. MacFarlane: Turning to slide 10, we have commenced repowering are for legacy wind farms with an investment of approximately 130 or $230 million.
Charles S. MacFarlane: Once complete this project is expected to be equivalent to adding 40 megawatts of new wind generation with a 50% capacity factor.
Charles S. MacFarlane: In March, we received approval for rider recovery of 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. 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 Tronch 1 of MISO's long-range transmission; Otter Tail Power will co-own two Tronch One projects, the Jamestown-Ellendale, Big Stone South, Alexandria, Big Oaks, and 345. KV Transmission.
Charles S. MacFarlane: In March we received approval for rider recovery of the project cost from the North Dakota Commission.
Charles S. MacFarlane: And to anticipate a decision from the Minnesota Commission in mid 2024.
Charles S. MacFarlane: We anticipate requesting phase in rider recovery in South Dakota. This summer.
Charles S. MacFarlane: This wind Repowering project qualifies for renewed production tax credits under the inflation reduction Act.
Charles S. MacFarlane: These tax credits along with the incremental energy produced Ips of Repowering wind farms are anticipated to lower customer bills, demonstrating our continued focus and commitment to <unk>.
Charles S. MacFarlane: Customer affordability.
Charles S. MacFarlane: Slide 11 summarizes otter tail powers investments under tranche one of MISO is long range transmission plan.
Charles S. MacFarlane: Otter tail power, we'll call them two tranche one projects the Jamestown Allendale.
Charles S. MacFarlane: And Big Stone, South Alexandria, Big August $3 45 gave.
Charles S. MacFarlane: Kv transmission projects.
Charles S. MacFarlane: 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 rate, 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 Project. 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.
Charles S. MacFarlane: Both projects have FERC approval for construction work in progress recovery, ensuring a timely recovery of our capital investment.
Charles S. MacFarlane: In total we estimate our capital investment in these projects to be approximately $420 million.
Charles S. MacFarlane: 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.
Charles S. MacFarlane: In March of 2020 for MISO released their initial draft proposal for the tranche two portfolio of projects.
Charles S. MacFarlane: 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.
Charles S. MacFarlane: 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 TRANCH2 was intended to resolve. Tranche 2 related investment is not currently included in our capital spending.
Charles S. MacFarlane: Our current investment opportunity based on the initial draft proposal is limited, but it's still subject to change.
Charles S. MacFarlane: 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 two.
Charles S. MacFarlane: MISO has recognized that additional regional transmission investment is required to meet the needs tranche due was intended to resolve.
Charles S. MacFarlane: Two related investment is not currently included in our capital spending plan.
Charles S. MacFarlane: In addition to the transmission investment opportunities available through MISO's long-range transmission, 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. Twenty-five percent 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.
Charles S. MacFarlane: In addition to the transmission investment opportunities available through MISO is long range transmission plan.
Charles S. MacFarlane: MISO in the southwest power pool or SPP.
Charles S. MacFarlane: Partner to develop the joint targeted interconnection queue or J T. IQ portfolio projects focused on improving the interconnection queue backlog along the MISO SPP scene.
Charles S. MacFarlane: We expect to co develop one of the five projects with XL energy.
Charles S. MacFarlane: 25% of project cost will be funded by a grant.
Charles S. MacFarlane: While the recovery of these projects still needs approval from FERC, we are.
Charles S. MacFarlane: We're optimistic about the potential investment opportunity, which we estimate to range from approximately $350 million to $400 million.
Charles S. MacFarlane: 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.
Charles S. MacFarlane: This investment is also not included in our current five year capital spending plan and represent some incremental opportunity.
Charles S. MacFarlane: 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.
Charles S. MacFarlane: Affordability remains one of our top priorities.
Charles S. MacFarlane: From 2018 through 2023, Otter Tail Power's electric rates have consistently remained well below the national and regional average. Slide 13 summarizes Otter Tail Power's key regulatory matters for 2024. I will give a more detailed update on our Integrated Resource Plan and North Dakota rates. 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.
Charles S. MacFarlane: From 2018 through 2023 Otter tail powers electric rates have consistently remained well below the national and regional averages.
Charles S. MacFarlane: Slide 13 summarizes otter tail powers key regulatory matters in 'twenty 'twenty four.
Charles S. MacFarlane: I will give a more detailed update on our integrated resource plan.
Charles S. MacFarlane: And North Dakota rate case.
Charles S. MacFarlane: Turning to slide 14, and April Otter tail power, the Minnesota Department of Commerce, and three labor organizations entered into a settlement agreement on our integrated resource plan or <unk>.
Charles S. MacFarlane: The settlement parties recommend the Minnesota Public Utilities Commission approve the following: adding and directly assigning 2 to 300 megawatts of solar generation and 150 to 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 signatories to the settlement, transferred These parties are supportive of the Renewable Energy Bill.
Charles S. MacFarlane: The settlement parties recommended the Minnesota Public Utilities Commission approved the following.
Charles S. MacFarlane: Adding and directly assigning two to 300 megawatts of solar generation and 150 to 200 megawatts of wind generation to Minnesota customers.
Charles S. MacFarlane: Adding onsite liquefied natural gas storage is a story of station.
Charles S. MacFarlane: Limiting the dispatch of Minnesota portion of Coyote station to emergency events.
Charles S. MacFarlane: And beginning to withdraw from the Minnesota portion of Coyote station should a major non routine capital investment would be required.
Charles S. MacFarlane: We are pleased with the terms of the settlement agreement as it largely aligns with our preferred plan.
Charles S. MacFarlane: All parties that were not signatory to the settlement.
Charles S. MacFarlane: For the post 2028 exit of Coyote with batteries as a replacement resource and did not support our story on site fuel.
Charles S. MacFarlane: These parties are supportive of the renewable build out.
Charles S. MacFarlane: A hearing before the Minnesota Commission is scheduled on May 28th, 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.
Charles S. MacFarlane: A hearing before the Minnesota Commission is set as scheduled on May 28, and we anticipate a decision soon thereafter.
Charles S. MacFarlane: 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 ERP filings are steps to be taken in North Dakota.
Charles S. MacFarlane: Turning to slide 15, we filed a general rate case with the North Dakota Public Service Commission in November of 2003.
Charles S. MacFarlane: We filed a general rate case with the North Dakota Public Service Commission in November of 2013. In our rate case filing, we propose 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 2020. Separately, in April, the EPA finalized new regulations under Section 111D of the Clean Air Act in an effort to reduce greenhouse gas emissions from electric generating facilities.
Charles S. MacFarlane: In our rate case filing we proposed to increase net revenues by approximately $17 million or eight 4%.
Charles S. MacFarlane: <unk> on a requested ROE of 10, 6% on an equity layer of 53, 5%.
Charles S. MacFarlane: An evidentiary hearing has been scheduled in late July and we anticipate the final outcome of the case will occur in Q3 of 2024.
Charles S. MacFarlane: Separately in April the EPA finalized new regulations under section 170.
Charles S. MacFarlane: Of the clean Air Act in an effort to reduce greenhouse gas emissions from electric generating units.
Charles S. MacFarlane: Two co-owned coal facilities are within the scope of these regulations, and we are evaluating the impact compliance will have on our operation. It is anticipated that the regulations will be legally challenged or could be modified if there is a change in administration.
Charles S. MacFarlane: Our two coal on coal facilities are within the scope of these regulations.
Charles S. MacFarlane: We are evaluating the impact compliance will have on our operations.
Charles S. MacFarlane: It is anticipated that the regulation will be legally challenged or could be modified if there is a change in administration.
Charles S. MacFarlane: The EPA also finalized new regulations in April for mercury and air toxics and the Management of Discharge Water and Coal Ash at our Coal Fire Power Plant. Well, we continue to review and evaluate the regulations. We do not anticipate compliance will have a material impact on our operation.
Charles S. MacFarlane: The EPA also finalized in April new regulations for Mercury and air toxins in the management of discharge water and coal ash at our coal fired power plants.
Charles S. MacFarlane: While we continue to review and evaluate the regulations, we do not anticipate compliance will have a material impact on our operations.
Charles S. MacFarlane: Looking now to our manufacturing segment on slide 18. BTD and Teoplastics are navigating changing market conditions, negatively impacting sales volume. In response, they are taking actions to manage costs and drive operational efficiency. Turning to our end market outlook on slide 20, many of the end markets BTD serves are soft.
Charles S. MacFarlane: Looking now to our manufacturing segment on slide 18.
Charles S. MacFarlane: <unk> plastics are navigating changing market conditions negatively impacting sales volumes in.
Charles S. MacFarlane: In response, they are taking actions to manage cost and drive operational efficiencies fees.
Charles S. MacFarlane: Turning to our end market outlook on slide 20, many of the end markets BTB serves are softening and.
Charles S. MacFarlane: During the first quarter of 2024, we started to see some customers looking to in-source work to put excess capacity. Despite this softness, we expect programs we were previously awarded for new products to partially offset lower sales volumes in existing products. We continue to expect productivity-related gains throughout the year. The outlook for geoplastics primary and market horticulture remains relatively stable for the ultimate end users.
Charles S. MacFarlane: And during the first quarter of 2024, we started to see some customers looking to in source work to put excess capacity to use.
Charles S. MacFarlane: Despite this softness we expect programs. We were previously awarded for new products to partially offset lower sales volumes and existing products and continue to expect productivity related gains throughout the year.
Charles S. MacFarlane: While the outlook for T O plastics primary end market horticulture.
Charles S. MacFarlane: It remains relatively stable for the ultimate end users distributors continue to work through inventory previously purchased in response to slot supply chain related concerns thus negatively impacting our sales volumes.
Charles S. MacFarlane: Distributors continue to work through inventory previously purchased in response to supply chain related concerns, thus negatively impacting our sales. Currently, we expect sales volumes to return to a more normal level in the second half of 2024. Slide 21 provides an overview of our plastics.
Charles S. MacFarlane: We currently expect sales volumes to return to more normal levels in the second half of 2024.
Charles S. MacFarlane: 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.
Charles S. MacFarlane: 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. However, 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 de-stocking. Furthermore, sales volumes in Q1 of this year were still below the 2018-2022 historic low. Slide 22 highlights historical sales prices of PVC pipe and the cost of resin.
Charles S. MacFarlane: It is 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.
Charles S. MacFarlane: Further sales volumes in Q1 of this year, we're still below the 2000 2018 to 2020 to historic levels.
Charles S. MacFarlane: Slide 22 highlights historical sales prices of PVC pipe and the cost of resin.
Charles S. MacFarlane: 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 spread. 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. Capacity will be for large-diameter pipe, which Vinyl Tech has historically had to source from northern pipeworks.
Charles S. MacFarlane: During the first quarter of 2020 for the sales price of PVC pipe decreased more rapidly than the cost of resin and other input materials, resulting in lower spreads.
Charles S. MacFarlane: 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.
Charles S. MacFarlane: The capacity will be for large diameter pipe, which vinyl tech has historically had to source from northern pipe products. We're 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.
Charles S. MacFarlane: 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 plant. 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.
Charles S. MacFarlane: 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.
Todd R. Wahlund: Thank you, Chuck. And good morning, everyone.
Todd: Thank you Chuck and good morning, everyone.
Todd R. Wahlund: We delivered diluted earnings per share of $1.77 in the first quarter of 2024, nearly a 20% increase over the same time last year. Despite Hedwin's experience within our electric and manufacturing segment, our plastics segment produced stronger than anticipated financial results in the first quarter 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%.
Todd: We delivered diluted earnings per share of $1 77.
Todd R. Wahlund: In the first quarter of 2024.
Todd R. Wahlund: Nearly a 20% increase over the same time last year.
Todd R. Wahlund: Despite headwinds experienced within our electric and manufacturing segments.
Todd R. Wahlund: Our plastics segment produced stronger than anticipated financial results in the first quarter 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%.
Todd R. Wahlund: Please follow along on slide 26 as I begin with an overview of our first quarter financial results by segment. Electric segment earnings decreased $751,000, or 3% from the first quarter of 2023, driven by the impact of unfavorable weather, higher operating and maintenance expenses, primarily relating to higher labor costs and increased depreciation expenses. These items are 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.
Todd R. Wahlund: Please follow along on slide 26, as I begin with an overview of our first quarter financial results by segment.
Todd R. Wahlund: Electric segment earnings decreased $751000 or 3% from the first quarter of 2023.
Todd R. Wahlund: Driven by the impact of unfavorable weather higher operating and maintenance expenses, primarily relating to higher labor costs and increased depreciation expense.
Todd R. Wahlund: These items were partially offset by increased rider revenue.
Todd R. Wahlund: The interim rate increase in North Dakota stemming from our general rate case filing and higher commercial and industrial sales.
Todd R. Wahlund: Quarter over quarter, the impact of unfavorable weather was nine cents 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.
Todd R. Wahlund: Quarter over quarter, the impact of unfavorable weather was <unk> <unk> per share as our service territory experienced a much warmer start to the year.
Todd R. Wahlund: For example temperatures in March were about 12 degrees warmer than in 2023.
Todd R. Wahlund: Manufacturing segment earnings decreased $1.6 million, or 23%, compared to the first quarter of 2023, primarily due to lower sales volumes at both of our manufacturing businesses. The decrease in sales volumes and earnings quarter over quarter was largely driven by Teal 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.
Todd R. Wahlund: Manufacturing segment earnings decreased $1 $6 million or 23% compared to the first quarter of 2023, primarily due to the lower sales volumes at both of our manufacturing businesses.
Todd R. Wahlund: The decrease in sales volumes in 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.
Todd R. Wahlund: We are forecasting a rebound in sales volumes later this year as we anticipate customers being through their destocking efforts and in advance of the next seasonal purchasing period.
Todd R. Wahlund: VTD experienced a slight decrease in sales volumes quarter over quarter due to softening and 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 on overall 2024 earnings. Plastic segment earnings increased $13 million, or approximately 39%, from the first quarter of 2023.
Todd R. Wahlund: <unk> 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.
Todd R. Wahlund: In response to the headwinds experienced at both manufacturing businesses, we're taking actions to tightly manage costs in an effort to mitigate the impact to overall 2020 for earnings.
Todd R. Wahlund: Plastic segment earnings increased $13 million or approximately 39% from the first quarter of 2023.
Todd R. Wahlund: 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 usual. However, sales volumes in the first quarter of 2023 were much lower than usual, as distributors, our primary customers, were focused on de-stocking efforts after purchasing higher levels of inventory in 2022, in response to supply chain-related disruption and challenges.
Todd R. Wahlund: 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.
Todd R. Wahlund: Sales volumes increased 56% compared to the same period last year due to customer sales volume growth and strong distributor and end market demand.
Todd R. Wahlund: Milder weather seems to have contributed to higher sales volumes as it allowed for construction work to begin earlier than normal.
Todd R. Wahlund: Additionally, sales volumes in the first quarter of 2023 were much lower than usual as distributors are primary customers were focused on destocking efforts after purchasing higher levels of inventory in 2022.
Todd R. Wahlund: In response to supply chain related disruption and challenges.
Todd R. Wahlund: Gross profit margins declined in the first quarter of 2024 as PVC pipe sales prices declined more than the change in the cost of resin and other input material costs. Sales prices of PVC pipe declined 15% from the same time last year.
Todd R. Wahlund: Gross profit margins declined in the first quarter of 2024 as PVC pipe sales prices declined more than the change in the cost of resin and other input material to us.
Todd R. Wahlund: Sales prices of PVC pipe declined 15% from the same time last year.
Todd R. Wahlund: Corporate costs declined nearly $1.2 million from the first quarter 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.
Todd R. Wahlund: Corporate costs declined nearly $1 $2 million from the first quarter of 2023.
Todd R. Wahlund: Primarily driven by returns earned on our short term investments as our cash balances higher and interest rates have increased.
Todd R. Wahlund: 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.
Todd R. Wahlund: Turning to slide 27.
Todd R. Wahlund: Our consolidated equity layer as of March 31st, 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. Turning to slide 28, we are increasing our 2024 diluted earnings per share guidance to a range of $6.23 to $6.53 from our initial range of $5.13 to $5.43.
Todd R. Wahlund: 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%.
Todd R. Wahlund: 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 R. Wahlund: Turning to slide 28, we are increasing our 2024 diluted earnings per share guidance to a range of $6 23 to $6 53.
Todd R. Wahlund: From our initial range of $5 13 to $5 43.
Todd R. Wahlund: Due to stronger than expected plastic 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 first quarter, 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 R. Wahlund: Due to stronger than expected plastics segment performance in Q1.
Todd R. Wahlund: And our revised expectations for this segment throughout the remainder of the year.
Todd R. Wahlund: This increases the midpoint of our guidance to $6 38.
Todd R. Wahlund: Or a $1 <unk> increase per share.
Todd R. Wahlund: We are maintaining our electric segment and corporate cost center earnings guidance for 2024.
Todd R. Wahlund: Despite the impact of unfavorable weather in the first quarter, our electric segment is positioned well to overcome these headwinds.
Todd R. Wahlund: An updated estimates for sales volumes and the impact of our sales decoupling mechanism in Minnesota.
Todd R. Wahlund: We are increasing our plastic 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, and relatively small changes in pipe prices significantly impact plastic segment earnings. Additionally, with strong end market demand, we expect sales volumes to be higher than assumed in our initial 2024 guidance.
Todd R. Wahlund: We are increasing our plastics segment earnings guidance as a sales price of PVC pipe has been more stable than we originally anticipated for 2024.
Todd R. Wahlund: Sales prices continued to recede, but at a much more gradual rate than was assumed in our initial 2024 guidance Andrew.
Todd R. Wahlund: And relatively small changes in pipe prices significantly impact plastic segment earnings.
Todd R. Wahlund: Additionally, with strong end market demand, we expect sales volumes to be higher than assumed in our initial 2020 for guidance.
Todd R. Wahlund: 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 markets. This reduction in sales volumes, combined with fixed manufacturing costs, negatively impacts operating margins.
Todd R. Wahlund: We are decreasing our 2020 for earnings guidance for our manufacturing segment due to lower expected sales volumes compressed operating margins and reduced research and development tax credits for BTG.
Todd R. Wahlund: Compared to 2023, we anticipate lower sales volumes in the horticulture lawn and garden recreational vehicle and agriculture end markets.
Todd R. Wahlund: This reduction in sales volumes combined with fixed manufacturing costs negatively impacts operating margins.
Todd R. Wahlund: With the changes made to our earnings guidance for the year, we anticipate our earnings mix for 2024 to be 34% electric and 66% non-electric. Net of Corporate Costs, While this anticipated mix deviates from our long-term expected earnings mix of approximately 65% electric and 35% non-electric, the incremental cash flow will further position us to execute well on our growth strategies without the need for additional equity. Our five-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 R. Wahlund: With the changes made to our earnings guidance for the year, we anticipate our earnings mix for 2024 to be 34% electric and 66% non electric net of corporate costs.
Todd R. Wahlund: While this anticipated mix deviates from our long term expected earnings mix of approximately 65% electric and 35% non electric.
Todd R. Wahlund: The incremental cash flow will further position us to execute well on our growth strategies without the need for additional equity.
Todd R. Wahlund: Our five year capital spending plan, which is a key driver of earnings growth for our electric segment is included in more detail on slide 29.
Todd R. Wahlund: No changes have been made to this plan since it was first announced earlier this year during our year end earnings call.
Todd R. Wahlund: As we continue to work towards 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 utilities' five-year capital spending plan. In order to finance our rate-based growth at Otter Tail Power, we project issuing debt on an annual basis for the next four 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 first quarter of 2024.
Todd R. Wahlund: As we continue to work towards the decision on our integrated resource plan in Minnesota, and additional transmission grid enhancements. Our advance we will determine what updates if any are needed to our electric utility's five year capital spending plan.
Todd R. Wahlund: In order to finance our rate base growth at Otter tail power, we project issuing debt on an annual basis for the next four years.
Todd R. Wahlund: Slide 30 provides a summary of our financing plan for 2025 through 2028, following our $120 million private placement debt issuance completed in the first quarter of 2024.
Todd R. Wahlund: We continue to expect to retire and not replace our only outstanding parent level debt when the $80 million note matures in 2026. 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, hence avoiding any resulting dilution in earnings per share.
Todd R. Wahlund: We continue to expect retiring and not replacing our only outstanding parent level debt when the $80 million note matures in 2026.
Todd R. Wahlund: 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.
Todd R. Wahlund: Avoiding any resulting dilution in earnings per share.
Todd R. Wahlund: 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-based growth. We are positioned well to deliver upon our revised 2024 earnings guidance, as well as meet our long-term investment targets. See slides 33 and 34.
Todd R. Wahlund: 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.
Todd R. Wahlund: 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.
Todd R. Wahlund: 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 an excellent position to support this growth with our strong balance sheet, ample access to liquidity, and investment grade credit rating. We are now ready to take your questions.
Todd R. Wahlund: Our diversified business model continues to produce above average returns serving us and our stakeholders well.
Todd R. Wahlund: We have many organic growth opportunities across our segments and are positioned to grow with our customers.
Todd R. Wahlund: We are in excellent position to support this growth with our strong balance sheet.
Todd R. Wahlund: Ample access to liquidity and investment grade credit ratings.
Speaker Change: We are now ready to take your questions.
Operator: As a reminder, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again.
Todd R. Wahlund: Yes.
Speaker Change: As a reminder, please press star one one on your telephone and wait for your name to be announced.
Operator: To withdraw your question. Please press star one again.
Operator: 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 Cabeli Farms. Your line is now open.
Operator: After the Q&A.
Operator: With a few closing remarks, please standby, while we compile the Q&A roster.
Operator: Yes.
Operator: Okay.
Operator: Our first question comes from the line of Tim Winter Gabelli funds. Your line is now open.
Timothy Michael Winter: Good morning, gentlemen, and congratulations on another really, really good quarter. Looks like PNVC continues to be strong. I'm just inquiring. Some of your neighboring utilities have recently spun off or partially IPO'd. They're non-regulated businesses that have done very well. Any consideration of such a dynamic for the plastics division given the strength?
Timothy Michael Winter: Good morning, gentlemen, and congratulations on another really really good quarter.
Timothy Michael Winter: PVC flooring tends to be strong.
Timothy Michael Winter: I'm just.
Timothy Michael Winter: And acquiring some of your neighboring utilities or <unk>.
Timothy Michael Winter: <unk> spun off our partial IPO theyre nonregulated businesses that have done done very well.
Timothy Michael Winter: Any consideration.
Timothy Michael Winter: Of such a dynamic for for the plastics division given given the strength.
Charles S. MacFarlane: 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 currently, we view our portfolio of businesses as very solid, and our growth strategy is very solid. But we do consider alternatives every year. OK.
Charles S. MacFarlane: Yeah, Tim, we're on the train.
Speaker Change: Yes, Tim were in the middle of our strategic plan and annual strategic planning process and so as part of that we do.
Charles S. MacFarlane: Evaluate our portfolio and strategic options.
Charles S. MacFarlane: And.
Charles S. MacFarlane: Currently we view our portfolio of businesses is very solid and our growth strategy is very solid, but we do consider.
Charles S. MacFarlane: Alternatives every year.
Speaker Change: 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.
Speaker Change: Thank you I'm showing no further questions at this time I would now like to turn it over to John for closing comments.
Chuck: I will give it a second.
Charles S. MacFarlane: Any other questions? Well, thank you for joining our call and for 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.
Chuck: If there's any other questions.
Chuck: 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.
Chuck: Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Operator: Okay.
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Operator: Thanks.
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