Q4 2024 Otter Tail Corp Earnings Call
Speaker Change: Good morning, and welcome to Otter Tail Corporation's fourth quarter 2024 earnings conference call.
Today's call is being recorded.
Speaker Change: We will hold a question and answer session after the prepared remarks.
Speaker Change: I will now turn the call over to the company for their opening comments.
Speaker Change: Good morning everyone and welcome to our fourth quarter 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 fourth quarter and annual financial results.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Before we begin, I want to remind you that we will be making forward-looking statements during the course of this call.
Speaker Change: 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.
Speaker Change: Our forward-looking statements are described in more detail in our filings at the Securities and Exchange Commission, which we encourage you to review. Otter Tail Corporation disclaims any duty to update or revive our forward-looking statements due to new information, future events, developments, or otherwise.
Speaker Change: I will now turn the call over to Otter Tail Corporation's President and CEO, Mr. Chuck MacFarlane.
Chuck MacFarlane: Thank you, Beth. Good morning and welcome to our fourth quarter 2024 earnings call.
Chuck MacFarlane: Please refer to slide 4 as I begin my remarks with an overview of recent highlights.
Chuck MacFarlane: 2024 was a successful year for Otter Tail Corporation. We produced record earnings, generated diluted earnings per share of $7.17, and we continue to produce one of the highest returns on equity in the utility industry.
Chuck MacFarlane: We updated our five-year capital spending plan with Otter Tail Power's portion totaling $1.4 billion, which is a 9% increase over our previous plan.
Chuck MacFarlane: The revised plan is expected to produce a rate-based compounded annual growth rate of 9%, and we continue to expect Otter Tail Power's earnings to increase at a similar rate.
Chuck MacFarlane: With our recent and projected strong financial performance, we are excited to announce increases to our long-term financial targets.
Chuck MacFarlane: Our updated long-term earnings per share growth rate is now 6 to 8 percent, an increase from our previous 5 to 7 percent.
Chuck MacFarlane: Slide 5 provides a summary of our quarter and year-to-date financial results.
Chuck MacFarlane: We are pleased with the record earnings generated during the year on the back of solid performance from our electric and plastic segments.
Chuck MacFarlane: Following my operational update, Todd will provide a more detailed discussion of our 2024 financial results, as well as our outlook for 2025.
Todd Wahlund: Turning to our electric platform, Otter Tail Power continues to perform well, converting our 2024 rate-based growth into earnings growth at approximately a one-to-one ratio.
Todd Wahlund: We executed on our key regulatory priorities and delivered on our significant rate-based growth plan, all while maintaining some of the lowest electric rates in the nation.
Todd Wahlund: Turning to slide 7, we obtained approval for our fully settled North Dakota general rate case in the fourth quarter.
Todd Wahlund: The outcome of the case provided for net annual revenue requirement increase of $13.1 million premised on a return of equity of 10.1% and an equity layer of 53.5%.
Todd Wahlund: The final outcome of the rate case achieved 57% of our amended request. However, if income neutral adjustments are included, this percentage increases to 70%.
Todd Wahlund: We appreciate the effort from all parties in our rate case for reaching a constructive outcome that balances various stakeholder interests.
Todd Wahlund: Slide 8 and 9 provide an overview of ongoing and future projects.
Todd Wahlund: Touching on a few key updates, our wind repowering project continues to progress well. We completed the equipment upgrades at the first of four owned wind energy centers in the fourth quarter, and expect to complete the other three by the end of 2025.
Todd Wahlund: This project continues to be an excellent example of investing capital that serves both our customers and investors.
Todd Wahlund: As we continue to anticipate, this project will lower customer bills through available tax credits and increased energy output.
Todd Wahlund: We now have plans in December to add up to 345 megawatts of solar generation, subject to certain regulatory approvals.
Todd Wahlund: Our estimated capital investment opportunity for Solway Solar and Abercrombie Solar is $100 million and $400 million, respectively.
Todd Wahlund: We believe these solar facilities will fit the requirements of our approved Minnesota Integrated Resource Plan and represent an opportunity to provide increasingly clean electric service that is also cost effective to our customers.
Todd Wahlund: Turning to slide 9, in December, MISO approved several projects within the TRONCH 2.1 of its Long-Range Transmission Plan.
Todd Wahlund: We anticipate that Otter Tail Power will co-own three projects included in this portfolio.
Todd Wahlund: These projects will be developed and constructed over several years, and we estimate our capital investment opportunity to be $700 million.
Todd Wahlund: MISO and SPP's boards also approved the Joint Targeted Interconnection, or JTIQ, portfolio projects in December.
Todd Wahlund: These projects are intended to improve reliability and reduce constraints along the MISO SPPC.
We estimate our capital investment opportunity to be $450 million.
Todd Wahlund: The majority of the capital investment associated with MISO Tranche 2.1 and JTIQ projects fall outside the current 2025-2029 planning period, but demonstrate the health of our rate-based growth pipeline.
Todd Wahlund: Looking forward, Otter Tail Power updated its five-year rate base kegger to 9% from 7.7% as summarized on slide 10.
Todd Wahlund: Autotail Power is expected to convert its rate-based growth into earnings growth at a one-to-one ratio over the long term, which is made possible by identifying high-quality projects, effective project execution, and minimizing the impact of regulatory lag.
Todd Wahlund: As noted on the slide, we expect over 95% of our updated five-year capital spending plan to be recovered through existing rates or riders, allowing for timely recovery of our capital investments.
Todd Wahlund: Additionally, Otter Tail Power remains well positioned to attract and support large loads.
Todd Wahlund: As summarized on slide 11, Otter Tail Power has approximately 970 megawatts of potential new large loads in our pipeline.
Todd Wahlund: Well, we have a significant amount of opportunity relative to our existing 1,000 megawatt system size.
Todd Wahlund: It is unlikely that we will add this much new load. Instead, we aim to bring on one to two large customers in the next one to three years and hope to grow with them to support their electric service needs.
Todd Wahlund: Adding a new large load would not only benefit us, but also our current customers, as it would enable us to spread out our existing fixed costs.
Todd Wahlund: We have and will continue to be thoughtful in our negotiations to ensure that we are appropriately mitigating any potential adverse implications of adding new large loads to our existing customers.
Todd Wahlund: Additionally, no adjustments have been made to our load growth forecast or five-year capital spending plan at this time for these potential new large loads.
Todd Wahlund: Even with the significant capital investment opportunity ahead, we are well positioned to execute our capital spending plan while maintaining affordable electric rates for our customers.
Todd Wahlund: We anticipate being able to maintain affordable rates by continuing to leverage our existing low-cost asset base.
Todd Wahlund: Available tax credits, technology-driven gains, and efficient financing as we have no near-term equity needs.
Todd Wahlund: Additionally, transmission investment comprises a significant portion of our updated five-year capital spending plan.
Todd Wahlund: These investments have limited impact on our retail customer rates, as the costs are allocated across the entire MISO system.
Todd Wahlund: Our customer base is comprised of a small percentage of MISO and only pays their pro rata share of the MISO portfolio projects.
Todd Wahlund: Turning to slide 12, Otter Tail Power has some of the lowest electric rates in the nation.
Todd Wahlund: with our 2024 rates 30% below the national average and 16% below our regional peers.
Todd Wahlund: We remain committed to maintaining affordable electric service rates for all of our customers and have demonstrated the ability to do so for many years.
Todd Wahlund: Transitioning to our manufacturing platform, our manufacturing and plastic segment faced dynamic market conditions in 2024, and I am proud of how our team members responded.
Todd Wahlund: Starting with our manufacturing segment, BTD and TO Plastics experienced end market demand related headwinds in 2024, especially in the second half of the year.
Todd Wahlund: As summarized on slide 14, nearly all of the end markets we serve are being negatively impacted by higher dealer and used inventory levels, inflationary pressures, and increased interest rates.
Todd Wahlund: and we expect end market conditions to remain challenged in 2025.
Todd Wahlund: In response to the challenging market conditions, we took actions in 2024 to tightly manage costs to mitigate the impact of lower sales volumes on earnings.
Todd Wahlund: and we will continue to evaluate if any further action is needed in 2025.
Todd Wahlund: Despite this downturn, we remain confident in the segment's long-term fundamentals.
Todd Wahlund: We expect to focus on reshoring manufacturing operations to the U.S.
Todd Wahlund: Additionally, we expect large equipment manufacturers to continue to look to outsource a portion of their work once end market conditions improve.
Todd Wahlund: Slide 15 provides an overview of our plastic segment pricing and volume trends.
Todd Wahlund: Our sales prices of PVC pipe have steadily declined since peaking in mid-2022, decreasing 12% in 2024 compared to 2023 levels.
Todd Wahlund: Sales volumes increased significantly in 2024 due to our customer sales volume growth and end market demand following a period of distributor destocking in 2023.
Todd Wahlund: Slide 16 summarizes our long-term earnings expectations of the plastic segment.
Todd Wahlund: Our updated projection is that our plastics earnings will decrease through 2027. We continue to project a range of $45-50 million in annual earnings as our current best estimate and now anticipate reaching this level in 2028.
Todd Wahlund: This estimate of earnings is predicated on the assumption that our sales prices continue to decline at a pace similar to what we've experienced since the latter part of 2022, reverting to a pre-2021 gross margin percentage.
Todd Wahlund: However, there are many market dynamics that could materially impact our results and cause them to vary from our projections.
Todd Wahlund: Our long-term view of plastic segment earnings also incorporates the impact of incremental sales volume growth from our recent capacity addition in Phoenix.
Todd Wahlund: and the expectation that raw material costs will generally increase with the rate of inflation contributing to the contraction of gross margin during this time.
Turning to slide 17.
Our manufacturing platform remains well-positioned to support future growth opportunities.
Todd Wahlund: We completed, on time and on budget, the first phase of our Vinyl Tech Expansion Project in the fourth quarter, enhancing our facility and increasing our resin and pipe storage.
increasing our plastic segment production capacity by approximately 7%.
Todd Wahlund: We look forward to leveraging this new capability at Vinyl Tech to better serve our customers in the Southwest market while simultaneously freeing up large diameter production capacity at our Northern Pipe products in Fargo.
Todd Wahlund: Our BTV Georgia expansion project continues to progress well. Many of our customers are expanding into the southeast market.
Todd Wahlund: and this project positions us well to support this growth over the long term.
Todd Wahlund: We are currently occupying the new space and plan to bring the additional manufacturing capacity online in the first quarter of 2025.
Todd Wahlund: This project is expected to increase production capacity for up to $35 million in incremental annual sales.
Todd Wahlund: Separately, I want to take a moment to address the recent change in presidential administration and its potential impact on Otter Tail.
Todd Wahlund: to items such as any IRA-related changes, including tax credits and transferability.
DOE grant funding for the JTIQ portfolio projects.
Todd Wahlund: and the impact of potential tariffs on all of our businesses.
Todd Wahlund: While we will watch for any developments impacting tax credit transferability, the impact of this change to Otter Tail would be limited in our five-year planning period.
Todd Wahlund: as we are able to monetize the tax credits we generate due to earnings produced by our electric and manufacturing platforms.
Todd Wahlund: I will now turn it over to Todd to provide his financial update.
Todd Wahlund: We ended the year in a position of financial strength with a solid balance sheet and ample liquidity to support our growth initiatives.
Todd Wahlund: 2024 also marked the 86th consecutive year in which we've paid dividends.
Todd Wahlund: Earlier this month, we announced a 12% increase to our dividend, producing an annual indicated dividend for 2025 of $2.10 per share.
Todd Wahlund: This double-digit increase reflects our commitment to delivering shareholder value while maintaining our balanced capital allocation strategy.
Todd Wahlund: We remain focused on investing in our electric segment rate-based growth while returning capital to our shareholders.
Thank you.
Todd Wahlund: Please follow along on slides 19, 20, and 21 as I provide an overview of our 2024 financial results at the consolidated and segment level.
Todd Wahlund: Year-to-date diluted earnings per share increased 17 cents compared to 2023.
Todd Wahlund: Primarily driven by our plastics and electric segments. Partially offset by our manufacturing segment and corporate cost center.
Todd Wahlund: Electric segment earnings grew nearly 8% year over year with an increase of 15 cents per share, driven by the impact of the interim rate increase as part of our North Dakota rate case.
Todd Wahlund: Higher rider revenues from the recovery of our rate-based investments and increased commercial and industrial sales volumes.
Todd Wahlund: These items were partially offset by the impact of unfavorable weather and the cost of our rate-based investments in higher depreciation and interest expense.
Todd Wahlund: Our utility team with efficient operating and financing costs was able to offset the significant weather-related headwind during the year.
Todd Wahlund: Manufacturing segment earnings decreased 18 cents per share, primarily due to lower sales volumes, higher production costs, and less scrap revenue.
Todd Wahlund: This is partially offset by lower general and administrative expenses and the favorable impact of product pricing and mix.
Manufacturing segment sales volumes decreased 15% from 2023 levels.
Todd Wahlund: The higher production cost was a result of reduced leverage on our fixed manufacturing costs due to decreased production and sales volumes.
Todd Wahlund: Despite the down cycle, the fundamentals of the segment remain strong, and we continue to benefit from the incremental earnings and cash flow generated by these businesses.
Segment earnings increased 30 cents per share from 2023 levels.
Todd Wahlund: This increase is primarily due to the impact of higher sales volumes.
partially offset by the impact of lower sales prices.
Todd Wahlund: Sales volumes increased 27% in 2024. This sales growth was a function of low sales volumes in 2023, driven by customer destocking and competitive conditions for PVC pipe.
Todd Wahlund: Sales volumes in 2024 benefited from customer sales volume growth, especially with our large distribution customers and improved end market demand.
Todd Wahlund: Our corporate costs were higher in 2024, primarily due to an increase in employee medical claim levels, following a lower-than-expected amount in 2023 and higher variable compensation.
Todd Wahlund: These items were partially offset by higher investment income from an increase in the amount of invested funds arising from the significant amount of cash generated during the year.
Turning to slide 22, our balance sheet remains strong.
Todd Wahlund: Our total available liquidity as of December 31st, 2024 was $606 million.
Todd Wahlund: We achieved a return on equity of 19% on an equity layer of 62%
outpacing many of our utility peers.
Todd Wahlund: We are positioned well to deliver on our growth strategy and consistently deliver shareholder value over the long term.
Todd Wahlund: given the strength of our balance sheet, cash position, and no equity needs for at least the next five years.
Todd Wahlund: Turning to slide 23, we are initiating our 2025 diluted earnings per share guidance range of $5.68 to $6.08.
Todd Wahlund: which is expected to result in an estimated return on equity near 14 percent.
Todd Wahlund: Our guidance reflects electric segment earnings growth of approximately 7 percent.
And, as expected, a decline in plastic segment earnings.
Todd Wahlund: In addition, manufacturing segment earnings are anticipated to decline as end market conditions remain challenging.
driven by a projected decline in our PVC pipe pricing.
Todd Wahlund: Partially offsetting the projected decline in product pricing is a modest increase in anticipated sales volumes in 2025 from our new capacity at our Phoenix location.
Todd Wahlund: As Chuck discussed earlier in the call, we continue to believe plastic segment earnings will normalize at a range of $45 to $50 million.
Todd Wahlund: However, we no longer expect our first full year of normal earnings to be in 2026, but rather 2028.
Todd Wahlund: 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 percent.
as shown on slide 24.
Todd Wahlund: Even without the impact of plastic segment earnings, we expect this rate to be 8%.
Todd Wahlund: Our updated five-year capital spending plan, which is a key driver of earnings growth for our electric segment, is included in more detail on slide 25.
Todd Wahlund: Compared to our latest plan, our updated capital spending plan includes additional investments in solar generation and transmission.
Todd Wahlund: Beyond our updated base five-year capital spending plan, we project up to six hundred and fifty million dollars of an incremental capital investment opportunity at Otter Tail Power.
Todd Wahlund: Our base capital plan for 2025 through 2029 does not currently include any additional capital investment for wind generation as approved in our Minnesota Integrated Resource Plan.
Todd Wahlund: as we continue to evaluate which is more economic for our customers.
Todd Wahlund: building and owning a new facility or contracting the energy through a purchase power agreement.
Todd Wahlund: Further, it 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.
Todd Wahlund: Additionally, it does not include any delivery investment relating to potential new large loads.
Todd Wahlund: We estimate that for every $100 million of incremental capital investment, our rate-based compound annual growth rate would increase by approximately 75 basis points.
Slide 26 summarizes our updated five-year financing plan.
Todd Wahlund: Even with our upsized capital spending plan, we expect to finance our growth without any equity issuances.
Todd Wahlund: We plan to issue debt at Otter Tail Power on an annual basis to help fund its rate-based growth plan and maintain its authorized capital structure.
Todd Wahlund: We have $80 million in parent-level debt that matures in late 2026 that we plan to retire with existing cash and not replace.
Todd Wahlund: The value of our portfolio of companies is evident in our financing plan.
Todd Wahlund: We are able to invest the cash flow generated by our manufacturing platform into our utilities rate-based growth plan Eliminating the need for equity issuance for at least the next five years
Todd Wahlund: With the strength of our balance sheet, growth opportunities, and the talent excellence we have cultivated, we have increased our long-term financial targets, as summarized on slide 28.
Todd Wahlund: We increased our long-term earnings-per-share growth rate to 6 to 8 percent.
Todd Wahlund: increasing our targeted total shareholder return to 9 to 11 percent.
Todd Wahlund: We anticipate delivering on these targets once plastic segment earnings have normalized, which is expected to occur in 2028.
Todd Wahlund: We continue to target a long-term earnings mix of 65% electric and 35% manufacturing.
Todd Wahlund: We anticipate reaching this earnings mix in 2028 as electric segment earnings continue to grow in line with its rate-based growth rate.
of 9%, and plastic segment earnings have normalized.
Todd Wahlund: We are pleased with our results in 2024 and are well positioned going into 2025 to continue to deliver value for our shareholders, customers, and employees.
We are now ready to take your questions.
Speaker Change: Thank you. 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.
Please stand by while we compile the Q&A roster.
Speaker Change: Our first question comes from the line of Kate Sullivan with Maxim Group. Your line is open.
I thank you. I'm just looking at slide 11.
Speaker Change: in terms of your phases to secure larger loads. And Chuck, did you say earlier that you have agreed to large load agreements with one or two customers or potentially will, and then is that reflected, if so, in the current TAPx guidance for the next five years to start, please?
Thank you.
Speaker Change: Thanks for the question. Yeah, if you're looking at that slide, we have
Speaker Change: What we consider an electric service agreement would be the point at which we have a signed agreement with the...
Speaker Change: The new large loads and we do not have any of those we have
Speaker Change: term sheets out to a group that have 150 megawatts worth and then we are working with others but just in an entry level of letter of intent.
Speaker Change: So we have no signed items, but we would hope to do that in the next one to three years.
Speaker Change: Those are not in our capital spending plan. If you look on slide 25, where we've got the incremental capital investment opportunity, that's where we would include some of that capital spending.
Speaker Change: Yeah, that's an impressive number. And then does this, and if you can comment, I mean, does the 970 megawatt letter of intent
Speaker Change: exclude customers that you haven't entered agreements with? In other words, are you turning away customers expressing interest to have new loads in your service territory?
Okay.
under
Speaker Change: Thank you. And then turning to manufacturing, I mean, it's broad based, the current weakness in the manufacturing and demand, I guess it's mostly on the steel working, outsourced manufacturing side.
Speaker Change: Is it, if you would, categorize it across the different end markets. Is it the higher interest rates? Is it just cyclical related to the higher demand you had during COVID? Can you comment on that?
Just a few things, Tate.
Speaker Change: Some of it is in the recreational vehicle. We think there's a large used inventory and dealer inventory channel.
Speaker Change: Inventory Corrections. On agriculture, we do think that's also reflective of commodity prices that have come down and farmer income.
Construction, you know, is...
Speaker Change: down, but not as much as the others, and Lonnon Garden has been
That was the first sector to go lower after COVID.
Speaker Change: And then is the expansion of BTT Georgia related to one of those specific end markets or all of them?
for all of them.
Speaker Change: We would say that the current area of BT, Georgia, you know, we have
Speaker Change: More construction in that segment than others, but they are all represented.
at BTD Aden, Georgia.
Speaker Change: And the last for me is, is most of wood in the manufacturing, not the plastics part of manufacturing, but the manufacturing light on a metal fabrication work versus plastic thermal forming still, or has the next changed much in the last couple of years?
Thank you.
No, the mix is still heavily toward a...
towards metal fabrication.
Okay, thank you very much.
Thank you.
Chuck MacFarlane: As there are no remaining questions in the queue, I will turn the call back over to Chuck for his closing remarks.
Chuck MacFarlane: Thank you for joining our call and your interest in Otter Tail Corporation.
Speaker Change: If you have any questions, please reach out to our investor relations team, and we look forward to speaking with you next quarter.
Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.