Good morning, and welcome to the Otter Tail Corporation's Q3 2021 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.

Good morning, everyone, and welcome to our call. My name is, Tyler Akerman, and I manage Otter Tail's Investor Relations area. Last night we announced our third quarter 2021 earnings results. Our complete earnings release and slides accompanying this call are available on our website at ottertail.com. A recording of the 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 Kevin Moug, Otter Tail Corporation's Senior Vice President and Chief Financial Officer. Before I begin, I want to remind you that we will be making forward-looking statements during this call. As noted on slide two, these statements represent our current judgment or opinion of what the future holds. They are subject to risks and uncertainties that may cause actual results to differ materially. So please be advised about 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, 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. For opening remarks, I will turn the call over to Otter Tail Corporation's President and CEO Mr. Chuck MacFarlane.

Thank you, Tyler. Good morning, everyone. Welcome to our third quarter 2021 earnings call. Otter Tail corporation continues to support all the locations we serve with collective efforts to mitigate the spread of COVID-19. Most of our employees have returned to the office from working remotely. As of today 5% of our employees continue to work remotely. We continue to monitor case activity along with vaccination rates in the communities we operate. We also continue to monitor and follow guidance and recommendations from the CDC, our states local public health officials and OSHA. Additionally, we are making plans to meet the executive order guidance for federal contractors or OSHA ETS requirements for all of our operating companies related to COVID vaccination, or testing requirements. Throughout the course of the past year-and-a-half, our companies have done an excellent job managing COVID related impacts, including creating safe work environments, adjustments to staffing levels, navigating supply chain constraints, managing commodity pricing and supporting increased customer demand. Please refer to slide four, as I begin my comments on Q3 results. Otter Tail Corporation achieved outstanding financial results during the third quarter of 2021. We earned $1.26 per share for the quarter, which was 145% increase over the $0.87 per share earned in Q3 of 2020. The increase was led by our Plastics segment, which had another record quarter driven by continued strong PVC pipe demand and PVC resin supply constraints, which were exacerbated in the third quarter due to impacts from Hurricane Ida. Kevin will provide more detailed discussion of our financial performance in his comments, but a brief overview of Q3 is as follows. Electric segment quarter-over-quarter earnings were down, with earnings per share decreasing $0.06. This was primarily driven by increased costs arising from this year's planned major maintenance at Big Stone…

Well, thank you, Chuck and good morning, everyone. The third quarter revenues were up 34% and net earnings increased 47%. These results continue to be driven by the unique market conditions, we've been experiencing in our Plastics segment during the second and third quarters of 2021. Let me provide a detailed review of the quarter results as shown on Slides 26 and 27. The electric segment net earnings decreased $2.2 million quarter-over-quarter, driven by a $3.2 million decrease in net retail revenues due primarily to a $2.6 million of Minnesota Transmission Rider revenue, recognized in the third quarter of 2020. This resulted from a favorable judicial decision regarding the state jurisdictional treatment of federally approved transmission projects. In addition, to the decreased retail revenues, there were increased operating expenses related to the Merricourt Windfarm and Astoria Station being commercially operational. And increased Big Stone plant planned outage maintenance expenses. Other items impacting earnings were higher depreciation and property tax expense, due to recent capital additions, higher interest expense, due to new long-term debt issuances in 2020, higher short-term borrowings in 2021 and a lower level of capitalized interest resulting from placing the Astoria Station in service in the first quarter. There was also a reduction in other income, due to lower amounts of equity funds used during construction, due to the completion of the Astoria Station. And income taxes were favorably impacted mainly, due to production tax credits earned on Merricourt in 2021. Net earnings for the manufacturing segment increased $900,000. Segment revenues increased $30.1 million, primarily due to higher material costs at BTD, as steel prices have increased significantly from the previous year. Steel prices increased as steel mill production has not matched customer demand, as mill capacity continues to recover from the shutdowns in 2020 that resulted from…

Thank you. [Operator Instructions] After the question-and-answer Chuck will return with a few closing remarks. Your first question comes from the line of Brian Russo from Sidoti. Please proceed with your question.

Hi. Good morning.

Good morning, Brian.

So first on the utility, what are the major regulatory milestones in regards to the IRP that supports your increase in updated CapEx? Will you issue RFPs, or just file for CPCNs?

Hi, Brian, this is Chuck. Well, first we'll go through a discovery process and answer questions it's generally a contested case in Minnesota. And from that point then the plan will generally indicate a resource requirement with a cost. It doesn't generally specify the requirement to use a PPA or whatnot will go out and get price estimates both, self-build and PPA. And then, we'll go from there selecting the lease cost resource.

Okay. Got it. And then, it seems like a lot of these investments are at existing sites. I suppose just like the Hoot solar project. You have some access to transmission and other related infrastructure?

We do -- we look at -- when we do our integrated resource plan, if you've looked into it we do differentiate interconnection costs and types by, a new regular MISO interconnection, a replacement which is what we're doing at Hoot Lake. And then the ability at times you can add different resources, you can pair up an existing gas resource for instance with solar or wind.

And given the strength in cash flows from the plastics outperformance, I know you had no plans to issue equity given the prior capital budget, but are you still able to finance it with debt and cash flow and no significant amount of equity through the 2026 period?

Yeah Brian, this is Kevin. We'll be updating our financing plans here as a part of our -- coming out with the 2022 guidance in February, but we certainly would continue to expect that there should be kind of minimal amounts of equity that would have to be issued.

Okay. Got it. And then just to switch topics to the Plastics segment. The supply constraints, and high prices, and attractive margins are now forecast to continue into the first half of next year. Is it all because of Hurricane Ida and the temporary shutdowns of the petrochemical plants that have pushed this out, or is there other market trends that maybe these margins maybe not as high as they currently are like you recorded in the third quarter. But there is as sustainable higher level of margins in the Plastics segment.

Brian, Kevin again, I would agree with your comment, that is certainly if you will compounded exacerbated the supply constraint issue, that certainly wasn't expected. The resin suppliers are continuing to struggle to get back to higher levels of production of the PVC resin. And that as we said in our prepared remarks is expected to continue into that first half of 2022. We currently expect that those conditions could start to change in the last half of 2022, certainly fluid and subject to updates as we continue to go through the year. But I think basically that's the conditions we're seeing today. And we're expecting those based on today's conditions we're expecting those to continue into that first part of 2022.

And you mentioned resin supplier adjusting allocations due to the dynamics you just discussed. Are you facing allocation supply shortages as well, or given that you're only like 2% of the market, you're able to get what you need to hit your targets?

Brian, we're getting what we need to meet current demands, but we're not getting anything in addition to build existing inventory levels.

We are on allocation.

So the allocations continue. It's -- but basically the resin that comes into the plant converted to pipe and it's moved right out on a truck to be sold. So we're not getting any extra resin if you will to be able to build our inventories back up to what we typically have in the business.

Got it. Understood. And then just real quickly on the manufacturing side, some of your large end market customers, obviously, are facing their own supply issues in raw material inflation. But are you sensing that this is temporary? And, I mean, are you meeting their demand, or is there demand exceeding what's actually available in the marketplace right now?

Well, from our perspective Brian, we're meeting what our customers need. Steel supply has certainly improved here over the last handful of months. And so we're able to meet their needs. But I think Polaris and others are still having other supply constraints in their supply chain that is causing them to still having difficulties to get their inventory levels built back up to where they would like them to be. But we continue to monitor the steel supply to make sure we're getting what we need to meet customer demand certainly impacted by all the new hires that we've had into the business and having some productivity challenges there as we bring those people up to full speed.

Okay. So is it fair to say that there's pent-up demand from your end market customers going forward and into 2022 as they look to replenish dealer inventory?

Yes.

Okay, got it. Thank you very much.

Thanks.

Thank you. The next question comes from the line of Sophie Karp from KeyBanc. Your line is open.

Hi, good morning. Congrats on a strong quarter and thank you for taking my question. So can I maybe ask you about that cryptocurrency mining customers that you added? And I guess, I'm just kind of curious if you plan to add more if you have any visibility if that's something that's going to grow in your territory? And is there any, kind of, impact on the margins that is different from a typical electric customer that you had?

Hi Sophie, this is Chuck. We do have interest. As I'm sure most utilities do now with these types of loads. We did in a couple of years ago established a super large general rate in North Dakota and it allows us to -- it's a tariff rate but each individual installation, there's requirements on how the minimum megawatts, the minimum capacity factor and those types of things. Each one has to be individually approved by the commission. So we continue to look at those but there's only a certain number of sites and certain available resources not personnel but resources in terms of generating facilities and market purchases and those types of things to meet that. So we continue to have interest. We do have a filed rate and we continue to meet and work for these customers.

So is there any differentiated impact on your margin, or is it pretty much the same as any other customer?

No, they -- I mean they are a lower margin customer. They just take a lot of energy and have the ability to curtail. So, we don't necessarily have to provide for a capacity requirement.

Understood. Thank you. And then my other question was about your IRP and sort of how you will be determining the low-cost resource right, during that process. Can you maybe get a little bit more granular, and walk us through, how exactly that is determined, for example, when you compare PPA versus something you would build on your own, right? So is that based on the levelized cost of energy, or is that based on just total cost to build? Because clearly, it's a different financial structure something that would be in rates versus just the straight up PPA agreement? So any color on that would be helpful on, how you generally approach or how your commissions rather require you to approach that cost comparison?

Sure. We use our capacity planning model, which we put in both the upfront capital costs or a PPA price and escalation. But to answer your question, it generally drives on the levelized cost of energy whether the resource is a PPA or self-build. And we utilize that and come up with a lease cost overall plan. And the commission generally approves a requirement because a lot of these -- it's a 15-year plan. So the costs or the projects or the additional resource changes could be five years to 10 years out. And generally, it's a 15-year plan and there's a five-year action plan or five-year plan at the Minnesota Commission, would work on approving. And many times those approvals are generic requests because they are four to five years out. And from that point then we go up and try to climb -- say it's a solar resource or a wind resource. We would go out and try to find the lease cost resource of that category after the plan is approved.

Right. So that will be our peers discussed that they're having a difficult time owning those assets renewable assets specifically due to the tax normalization issue with a regulatory construct. And they actually discussed in formula affiliate, non-regulated affiliate to be able to build and own on those resources. Did you find that it is also a challenge for you, or are you able to work through those issues?

From a tax perspective, we have been able to have a good tax appetite somewhat beneficial from our non-utility companies having a tax creation. And so to-date we have not needed to look for outside equity, tax equity sponsors and we are watching the reconciliation bill and the ability to use that maintains a longer ITC or PTC window. Our IRP is filed assumed that the ramp down that's in the current law goes forward, and then the ability to have direct pay credits would change that dynamic also.

Thank you. Appreciate the comments. I’ll jump back in the queue.

[Operator Instructions] There are no further questions in queue. I will now turn the call back to Chuck.

Thank you for your questions and interest in Otter Tail Corporation. Our outstanding year-to-date results reflect the collective efforts of the people of Otter Tail Corporation and unique market conditions. Our long-term focus remains on executing our growth strategies. For the utility, our strategy is to continue to invest in rate base growth opportunities over the long-term and drive efficiency in our operating and maintenance expenses, which will lower our overall risk, create more predictable earnings stream, and maintain our credit quality. The utility is complemented by well-run strategic manufacturing and plastic pipe businesses, which provide organic growth opportunities from new products and services, market expansion and increased efficiencies. Based on our strong year-to-date results and our updated view of the remainder of the year, we are raising our 2021 diluted earnings per share to $4.05 to $4.20 from our previous guidance of $3.50 to $3.65. Thank you for joining our call. We appreciate your interest in Otter Tail Corporation, and we look forward to speaking with you next quarter.

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