OTTR

Good morning, and welcome to Otter Tail Corporation's First Quarter 2026 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 remarks.

Good morning, and welcome to our first quarter 2026 earnings conference call. My name is Beth Eiken, and I'm Otter Tail Corporation's Manager of Investor Relations. Last night, we announced our Q1 financial results. Our complete earnings release and slides accompanying this call are available on our website at ottertail.com. A recording of this call will be available on our website later today. With me on the call today are Chuck MacFarlane, Otter Tail Corporation's CEO, Tim Rogelstad, Otter Tail Corporation's President, and Tyler Nelson, Otter Tail Corporation's Vice President and CFO. Before we begin, I want to remind you that we will be making forward-looking statements during the course of this call. As noted on slide two, these statements represent our current views and expectations of future events.

They are subject to risks and uncertainties, which may cause actual results to differ from those presented here. Please be advised against placing undue reliance on any of these statements. Our forward-looking statements are described in more detail in our filings with the Securities and Exchange Commission, which we encourage you to review. Otter Tail Corporation disclaims any duty to update or revise our forward-looking statements due to new information, future events, developments, or otherwise. I will now turn the call over to Otter Tail Corporation's CEO, Mr. Chuck MacFarlane.

Thanks, Beth. Good morning, welcome to our first quarter earnings call. Before I turn to my prepared remarks on the quarter, I want to briefly touch on our leadership transition we announced last month. These changes are a result of long-standing, thoughtful succession planning by the board and management team. Effective April 13th, Tim Rogelstad was elected President of Otter Tail Corporation. Tim will oversee our electric and manufacturing platforms and report directly to me. With over 35 years of experience at Otter Tail, he brings a deep understanding of the organization, our culture and strategy, and has a proven track record of strong leadership and execution. At the same time, Todd Wahlund was elected Senior Vice President of the corporation and President of Otter Tail Power Company, providing continuity and seasoned operational and financial leadership to the utility as it continues to deliver on its rate-based growth plan.

Todd Wahlund brings years of operational utility experience to the role, having previously served in resource planning and renewable energy development prior to becoming Otter Tail Power CFO and later Otter Tail Corporation CFO. We also announced that Tyler Nelson has been elected Vice President and Chief Financial Officer of the Corporation. Tyler has played a key role in our financial leadership for the last 6 years and brings a deep understanding of our financial operations and strategy to the role. These changes do not alter our strategy or priorities. They serve to strengthen our leadership bench as we remain committed to delivering long-term shareholder value. Now let's turn to slide four as I provide an overview of recent operational and financial highlights. We are pleased with our first quarter financial results and are well-positioned to achieve our financial objectives for the year.

Across our businesses, our team members executed on our near-term priorities for the benefit of our customers and shareholders. Otter Tail Power delivered on our regulatory priorities while making significant progress on our customer-focused rate-based growth plan. We achieved a constructive outcome in our South Dakota rate case and implemented new base rates on April 1st. We also implemented interim rates for our Minnesota rate case at the start of the year. We completed our $230 million wind repowering project earlier this year, upgrading the wind towers at four of our owned wind energy centers. These upgrades are expected to result in a 20% increase in output and are economical for our customers due to the renewed renewable energy tax credits. Phase 2 of our Vinyltech expansion is complete.

This marks the end of a multi-year expansion project that added 15% of additional production capacity for our Plastic segment, increased our manufacturing footprint, and expanded our raw material storage capabilities. This multi-year expansion project was completed on budget, and we look forward to leveraging this investment to better serve our customers, pursue growth opportunities, and enhance our employee experience. Slide five provides a summary of our first quarter financial results, as well as our expectations for the remainder of the year. We produced diluted earnings per share of $1.73 in the first quarter, compared to $1.62 last year. The increase in earnings was driven by strong performance in our Electric and Manufacturing segments. Plastic segment earnings continued to recede within our expectations. We are maintaining our 2026 diluted earnings per share guidance range of $5.22-$5.62.

Following my operational update, Tyler will provide a detailed discussion of our quarterly financial results and our 2026 outlook. Transitioning now to my operational update for Otter Tail Power, beginning on slide seven. We obtained approval from the South Dakota Commission on the settlement agreement reached between Otter Tail Power and Commission staff during the first quarter, resulting in a constructive outcome and concluding the rate proceeding. The final outcome of the rate case achieved approximately 75% of our request when considering adjustments for rider treatment. Turning to slide eight, our Minnesota rate case continues to progress. Interim rate revenues of $28.6 million went into effect on January 1st, subject to refund. Separately, Otter Tail Power is in the process of finalizing its next integrated resource plan.

We have held stakeholder meetings to discuss our plan at a high level. We are on track to file the IRP in Minnesota later this month. Turning to slide nine, we are reaffirming our five-year rate base compounded annual growth rate of 10%. Otter Tail Power is expected to continue to convert this rate base growth into earnings per share growth near a one-to-one ratio over the five-year planning period. Slides 10 and 11 provide an overview of ongoing and future capital projects. Our two solar development projects are in the early stages of construction. During the first quarter, our team members secured the solar panels needed for these projects. This strategy eliminates tariff-related risk and helps to avoid any potential cost increases for the benefit of our customers. Our battery storage project remains under development.

We are targeting to bring this 75 MW storage facility online in 2028. Development work also continues on our large regional transmission projects. We continue to work through areas of landowner and local government opposition associated with siting and certain permits for the Jamestown to Ellendale Tranche 1 project. We received a Minnesota route permit last week for the Big Stone to Alexandria Tranche 1 project, a nearly 100-mile transmission line. We're also monitoring the complaint filed by several states at FERC against MISO's Tranche 2.1 projects. We continue to expect these projects to move forward due to their reliability-related benefits but believe there could be delays. Turning to slide 12, which provides an update on our large load pipeline, we removed the 430 MW load previously under a term sheet from our pipeline.

We no longer expect this project to move forward due to permitting-related challenges as well as failed tax incentive legislation in the South Dakota Legislature. Phase 1 of our pipeline increased by approximately 500 MW. We continue to engage with companies interested in adding a new large load to our system. We have and will continue to be prudent in our approach to ensure appropriate guardrails are in place to protect our customers and our shareholders. As a reminder, these changes to our pipeline have no impact on our current load growth forecast or capital spending, as we will only adjust our internal forecast for loads that have a signed electric service agreement. We remain committed to providing low-cost electric service to our customers and have demonstrated our ability to do so.

As slide 13 illustrates, Otter Tail Power's electric rates have remained well below the national and regional averages for many years. Looking ahead, we are deeply focused on managing customer bills. We currently project bills to increase between 3% and 4% on a compounded annual growth rate over the current 5-year planning period. This is made possible by MISO system-wide recovery for our transmission investments, the availability of renewable energy tax credits, reduced energy costs, and other factors. Transitioning to our manufacturing platform, slide 15 provides an overview of the industry conditions impacting our manufacturing segment. We are optimistic that conditions are improving in several of our end markets. Manufacturing dealer inventory levels have largely normalized. We experienced increased sales volumes in the construction and recreational vehicle markets. The industrial end market remains strong as our products are used to support the growing energy demand.

However, agriculture industry conditions remain challenging due to the weak farm economy, with elevated costs, lower relative commodity prices, and ongoing trade disruption. T.O. Plastics horticultural end market remains stable, with sales volumes improving during the first quarter compared to the same time last year. We continue to face formidable competition from low-cost importers. We are emphasizing our high-quality products and quick delivery capabilities to our customers and appear to be making headway. Slide 16 provides an overview of our Plastics segment pricing and volume trends. Average sales prices of our PVC pipe continued to decline, decreasing 19% from the Q1 2025 average. Sales volumes increased 7% from the same time last year. We benefited from an opportunistic sale of a specialty pipe during this quarter, as well as increased distributor and contractor demand late in the quarter.

Distributors and contractors sought to secure additional pipe in advance of potential PVC resin cost increases that have been announced by U.S. PVC resin manufacturers. Material input costs, including PVC resin, decreased 12% from the same time last year as the domestic supply of resin was elevated. We are now seeing an increase in PVC resin costs stemming from the conflict in the Middle East. Global PVC resin manufacturers are more heavily impacted by the rising cost of oil, leading to an increase in exports from U.S. resin manufacturers who utilize natural gas as a feedstock. I will now turn it over to Tyler to provide his financial update.

Thanks, Chuck. Good morning, everyone. Turning to slide 18. We are pleased with our first quarter financial results. We generated diluted earnings per share of $1.73, a 7% increase compared to the same time last year. Please follow along on slides 19 and 20 as I provide an overview of our first quarter results by segment. Electric segment earnings increased $0.25 per share or 43% in the first quarter, driven by increased electric rates and the recovery of our rate-based investments. Interim rates in Minnesota and South Dakota went into effect in January 2026 and December 2025. In addition, new base rates in North Dakota were effective for all of Q1 2026, but only a small portion of the same period last year. Our quarterly results also benefited from higher commercial sales volumes across our service territory.

These items were partially offset by the impact of unfavorable weather, higher operating and maintenance costs, and increased depreciation expense stemming from our rate-based investments. Manufacturing Segment earnings increased $0.06 per share, driven by higher margins, primarily from a favorable product mix. Increased sales volumes and improved production efficiency also contributed to our quarterly results. Partially offsetting these items were higher general and administrative costs. Turning to slide 20, Plastic Segment earnings decreased $0.24 per share or 24%, primarily due to lower sales prices of our PVC pipe. As Chuck shared earlier, our average sales price decreased 19% from the same time last year. This pricing decline was generally in line with our expectation and continues the trend of receding pricing dating back to the middle of 2022. Partially offsetting the reduction in sales prices are higher sales volumes and lower input material costs.

Our volumes benefited from an opportunistic sale of a specialty pipe product, and near the end of the quarter, a broader increase in demand spurred by an announced increase in PVC resin costs. Corporate costs decreased $0.04 per share, primarily driven by a timing-based tax benefit compared to the same period last year. Turning to slide 21. We continue to be in a position of financial strength with a balance sheet capable of funding our rate-based growth plan without any external equity needs through at least 2030. Our available liquidity at the end of March was over $650 million, including almost $350 million of cash and equivalents. Our capital allocation strategy remains unchanged. We are focused on using our available cash to fund our utility rate-based investments and return capital to our shareholders through our dividend.

On slide 22, we are affirming our annual diluted earnings per share guidance range of $5.22-$5.62, which is expected to produce a return on equity of approximately 12%. We started the year with momentum and are well-positioned to achieve our financial targets. I would like to highlight a few key items we are focused on for the remainder of the year. In our electric segment, we have a planned major outage at a coal facility beginning in the second quarter and expect higher O&M spend mid-year related to asset health and resiliency initiatives. In our Manufacturing segment, we are optimistic about increased sales volumes in the 1st quarter, but demand visibility becomes less certain in the second half of the year.

In our plastic segment, we expect second quarter sales volumes to be strong and our product pricing to temporarily stabilize as distributors and contractors accelerate pipe purchasing before potential PVC cost increases take effect. However, our annual sales volume forecast remains largely unchanged as we expect the second half of the year to be negatively impacted by the accelerated buying we are seeing now, as well as broader macroeconomic conditions. Overall, we are pleased with the start to the year and our team is focused on delivering upon our strategic priorities over the remainder of 2026. On slide 23, we summarize and affirm our 5-year capital spending plan. Our planned investment in our electric segment totals $1.9 billion and is expected to produce a rate-based compounded annual growth rate of 10%.

Our customer-focused investment plan will be a key driver of earnings growth for this segment over the five-year period. We continue to project up to $750 million in incremental capital investment opportunity within our Electric segment over the planning period. This incremental opportunity stems from a potential wind generation resource, the acceleration of regional transmission investment, and the potential delivery investment to serve a new large load in our service territory. Slide 24 summarizes our financing plan. We continue to expect to fund our five-year growth plan without any equity issuances. Our robust utility capital program will be primarily financed through existing cash and cash generated from operations over the planning period. At Otter Tail Power, we expect to issue debt periodically to support our rate base growth plan and maintain our authorized capital structure.

During the first quarter, we completed a $170 million private placement, with $100 million funded in March, with the remaining $70 million scheduled to fund in June. We do not anticipate any further debt issuances in 2026. At the parent level, we have $80 million of debt maturing in the fourth quarter, which we plan to retire using available cash and do not expect to refinance. The value of our diversified portfolio is reflected in our financing strategy. By reinvesting incremental cash flow from our manufacturing platform into utility rate base growth, we expect to eliminate the need for external equity for at least the next five years. On slide 25, we are reaffirming our expected long-term Plastics earnings profile.

We believe Plastics Segment earnings will continue to decline through the end of 2027 and expect earnings in 2028 to be within a range of $45 million-$50 million. This assumption is based on a continuing decline in the average sales price of our PVC pipe products, higher sales volumes from our recently expanded production capacity, and input cost increases generally in line with the rate of inflation. Due to seasonality and other factors, the rate of pricing decline can vary from period to period. Additionally, it continues to be difficult to predict with certainty long-term Plastics Segment earnings. The timing or level of earnings could vary materially from our projection. Our Plastics Segment continues to be an important component to our overall strategy with the enhanced returns, cash flow, and earnings it generates.

Even as earnings continue to recede, we expect the segment to produce an accretive return and incremental cash to help fund our Electric Utilities rate base growth plan. Slide 26 summarizes our investment targets. Underpinned by the significant growth in our Electric segment, we continue to target a long-term earnings per share growth rate of 7%-9%, resulting in a total targeted shareholder return of 10%-12%. We anticipate delivering on these targets once Plastics segment earnings normalize in 2028. As we continue to execute on our customer-focused growth plan, we are well-positioned to deliver on our investment targets over the long term. Otter Tail Power continues to be a high-performing electric utility, converting its rate base growth into earnings per share growth near a 1-to-1 ratio.

Our manufacturing and plastic pipe businesses consistently produce accretive returns and incremental cash, enabling us to fund our rate base growth plan without any external equity needs through at least 2030. It is this intentional strategic diversification that has and will continue to provide benefits to our customers and investors over the long term. We look forward to what the future holds and are grateful for your interest and investment in Otter Tail Corporation. We are now ready to take your questions.

Thank you. At this time, we will conduct a question and answer session. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Chris Ellinghaus of Siebert Williams Shank. Your line is now open.

Hey, good morning, everybody. How are you?

Good. How are you?

Chuck, you know, given the Iranian situation, does that alter your expectations for what sort of the global resin dynamics will be? Or are you sort of thinking that that gets resolved before the second half of the year?

Thanks for the question, Chris. Yeah, I think we believe that it, you know, long term will be resolved. Whether it's completely resolved by the second half of this year, you know, we don't know on that. We just know that, you know, it is impacting the U.S. domestic export price of resin, which drives up the domestic price at this time.

Sure, that makes sense. What is driving in manufacturing sort of the recovery in recreational vehicle market dynamics, given, you know, sort of the negative consumer sentiment this year?

Hi, Chris. This is Tyler. I think a couple things. First, inventory levels in the channel, both at the dealer and the manufacturer, have normalized. I think they're at a good level where we will see more throughput on any demand at the end customer level. We will feel that now that inventories have normalized. In addition to that, at some of the higher-end models, we continue to see strength in product demand, whereas the lower-end models, more subject to macroeconomic conditions. That's where we have seen some ongoing softness. At the mid and higher levels, we have seen a bit of a pickup in demand.

Okay. In the pipeline slide, did that letter of intent customer slide back into, you know, the broader pipeline, or did they just give up altogether?

Hi, Chris. This is Tim Rogelstad. No, we continue to work with that customer. I would say they're not currently in the pipeline of projects, but I think, you know, we'll continue to explore options, and it's possible we could see them come back in.

Okay. Was it more the permitting site issue or the tax issue that was particularly important to them?

You know, from our understanding, you know, I think both of them were definitely barriers for them to wanna move forward in South Dakota. I'm not sure if one was more important over the other, but that's where the situation sits.

Okay. Can you give us any update on the Minnesota rate case process? You know, what's the next, you know, big hurdle for you?

Okay. Well, we're in the middle of discovery right now. Probably one of the unique things that's happened in this particular case is, you know, the pace of discovery started a little bit later than what we were used to. The last 2 months, we've seen what I'd characterize as heavy discovery. The next step will be the expectation of getting the intervener testimony, which we expect sometime here in the second quarter.

Okay. you know, there's been a decent run-up in interest rates lately. Do you expect to make any adjustments to the case for, you know, what we're seeing today?

Chris, this is Tyler. No, we don't expect any adjustments for the interest rate environment that we're experiencing today. They do take into account the data issuance, the data offering that we completed. That gets factored into the case. Outside of that, no other adjustments planned.

Okay. All right, thanks for the details. Appreciate it.

Thank you.

Thank you.

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

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. We look forward to speaking with you next quarter.

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