Good morning, and welcome to Otter Tail Corporation’s Q3 2022 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. I’m the Manager of Investor Relations at Otter Tail. Last night, we announced our third quarter 2022 financial 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 we begin, I want to remind you that we will be making forward-looking statements during 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. 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, 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. For opening remarks, I will now turn the call over to Otter Tail Corporation’s President and CEO, Mr. Chuck MacFarlane.

Thank you, Tyler. Good morning, and welcome to our third quarter 2022 earnings call. Otter Tail Corporation achieved financial results, record financial results for the third quarter, led primarily by another outstanding quarter in our Plastics segment. Please refer to Slide 4 as I begin my comments on our third quarter results. We achieved diluted earnings per share of $2.01, which is an increase of 60% over the third quarter of 2021. All segments produced double-digit year-over-year earnings increases for the quarter. Kevin will provide more detailed discussion of our third quarter financial performance. Slide 5 reflects the earnings profile of our businesses with and without the impact of the Plastics segment. Through dependable earnings and steady growth at OTP, BTD and T.O. Plastics and changes in the corporate cost center, we have experienced a historic 9.8% earnings per share CAGR, excluding the plastics companies Northern Pipe and Vinyltech. The additional earnings and cash flow generated by the Plastics segment in 2021 and 2022, provide additional strength to our already strong credit metrics, liquidity and capital structure and provide for capital investment in our operating companies. Otter Tail Power continues to work toward a cleaner energy future. As shown on Slide 7, assuming forecasted dispatch occurs, we are targeting to reduce carbon emissions from our owned generation resources approximately 50% from 2005 levels by 2025 and 97% by 2050. Additionally, our owned and contracted energy generation will be more than 50% renewable by 2025. Progress continues on Otter Tail Power’s 49-megawatt Hoot Lake Solar project. Project construction began in May of 2022 and is expected to be completed in 2023. All costs and benefits of the project are assigned to Minnesota customers. Recovery for the $60 million investment has been approved through the renewable rider. As we have shared on…

Thank you, Chuck, and good morning, everyone. Another outstanding quarter with consolidated revenues up 21% and net earnings up 60% over the third quarter of 2021. All reporting segments showed quarter-over-quarter earnings growth with the biggest increase driven by the Plastics segment. Please refer to Slide 28, as I provide an overview of our third quarter 2022 segment earnings. The Electric segment net earnings increased $2.3 million or approximately 10.3% over the third quarter of 2021. The increase in earnings was primarily driven by retail megawatt hour sales were up 18.4% quarter-over-quarter driven by increased volumes from commercial and industrial customers, primarily due to a new commercial customer in North Dakota. There was also an increase in fuel recovery revenues, resulting from higher purchase power and production fuel costs related to increase natural gas and market energy costs. These items were partially offset by higher O&M costs related to increases in maintenance costs, including those from the planned outage at Coyote Station. There wasn’t a planned outage in the third quarter of 2021. Maintenance at our wind farm facilities, vegetation management, and higher MISO transmission tariff expenses. Net earnings for the Manufacturing segment increased $2 million from the same quarter a year ago, driven by a 17% increase in sales volumes at BTD as end market demand remains strong and our customers’ supply chains have begun to improve. BTD revenues were also impacted by a decline in scrap revenues due to lower scrap metal prices. T.O. Plastics also experienced higher sales prices and volumes. Segment gross profit margins were positively impacted by increased sales volumes, increased sales pricing and favorable cost absorption. Both BTD and T.O. Plastics continue to do an excellent job of managing through the challenges of associated the current inflationary environment in managing challenging and volatile steel…

[Operator Instructions] Our first question comes from Brian Russo with Sidoti. Brian, your line is open.

Yes. Hi, good morning. So just quickly on the Plastics, your revised guidance based on what you earned year-to-date implies kind of a midpoint Plastics fourth quarter of $0.48, down from $0.90 in the fourth quarter of 2021. If I understood your commentary correctly, volumetric risk along with just due to the slowdown in housing, et cetera, distributors using their own inventory, right? And then combined with margin compression from resin price declines, that $0.48 for in the fourth quarter of 2022, that seems high for a run rate as we go through 2023 before normalizing into that 65-35 reg-on-reg mix in 2024. Is that a good way to look at it?

Yes. I think it is, Brian. We certainly – the fall off here, obviously, the third quarter was still strong, but compared to where we expected the business to perform in the third quarter, it was off somewhat from where our forecasts were driven by these multiple resin price reductions that were announced. I think when we sat with you here at the end of the second quarter, we shared that there was an expectation that there would be $0.14 of resin price reductions over the last half of 2022. By the middle part of the quarter, that had changed from $0.14 to $0.28 of reductions. And then we really started to see this fall off in demand so it was slightly impacted here in the third quarter compared to our expectations and really has impacted the fourth quarter here as compared to where we were at the end of the second quarter on the earnings call. As we – certainly, interest rates, mortgage rates I should say, rising interest rate environment, we are starting to see overall demand, not just our demand, but overall demand across the industry and the other converters to slow here. We continue to look at how we think these trends move into 2023. As we talked about, we certainly think that we’re still going to see an elevated level of earnings, not something as significant as what we’re experiencing here this year. And those – that would continue over the year to drop back, then ultimately in 2024 to that new normal of earnings that we’re talking about. I think it’s important to note that we continue to watch this, watch the market conditions, watch the drivers and continually stay on top of where we think this is going to shake out as we head into 2023, and we’ll certainly have more clarity and color for you at the year-end earnings call.

Okay. Got it. Understood. And then just on the regulated utility, you mentioned a step up in the guidance. Is that kind of a new level based on – that we can work off of and grow the earnings power of the utility due to incremental ongoing C&I customer demand? And just to clarify, the margins you referred to, is that on the C&I customers that’s driving the uplift and should carry forward into subsequent years?

Well, the favorable pricing is one of our commercial customers. They elected to go to fixed rate energy pricing. I believe their contract is for a year. It is possible, Brian, after the year, they could move back to more of a system marginal energy pricing that would impact those margins. So we’ve got to be a little careful about thinking that that could continue when that contract is looked at annually. Having said that, we incrementally added about $80 million of CapEx to the utility CapEx plan here as we updated it for the quarter. And as we look at the range, we certainly think that we would expect to continue to be able to grow off of this range that we’re sharing with you in the updated guidance.

Okay. Got it. And the incremental $80 million of utility CapEx, is that related to kind of the initial development CapEx on the two MISO projects you referred to in the presentation?

Hey, Brian, it’s included in that, better estimates on that. We have removed a 150-megawatt solar project, but have added wind repowering now that the IRA legislation has passed and that the repowering wind credits are back and available. Those were the major items in there.

Okay. Great. And then just one more on the Manufacturing or specifically BTD, are – structurally, are you operating the BTD business better so what seems to be widening margins in 2022 kind of sustainable as we move forward, all else equal with the economics and sensitivity of some of your end markets in recreation, et cetera.? But is that also rebasing BTD and the overall manufacturing higher based on higher productivity and efficiencies?

Hi Brian, this is Chuck. I think the bigger issue, if you go back to the second quarter and before that, the customer take rates – and the way we measure that is on a monthly basis, what they plan to order and what they took was negatively impacted by other suppliers they – supply chain issues they had in other places. So what we thought we were going to build and they were going to take in that month didn’t occur to the rate that it has historically because of other supply chain issues they had. That is beginning to be alleviated and getting back to more normal. Which you can imagine, within a production setting, if what you thought was going to be taken and needed to be built was changed during the month, that causes a lot of inefficiencies in the plant. And as that take rate moves up, we get better efficiencies and productivity.

Okay. Got it. Well, thank you very much.

Thank you.

Thank you. [Operator Instructions] At this time, I’m going to turn the call over to Chuck. Chuck, go ahead.

Thank you for joining our call and your interest in Otter Tail Corporation. Our strategic initiatives to grow our business and achieve operational, commercial and talent excellence continue to strengthen our position in the markets we serve. We remain confident in our long-term ability to grow earnings per share in the range of 5% to 7% compounded annual growth rate using 2024 as a base after Plastics’ transitional year of 2023. With multiple resin price reductions and softening new home development during the third quarter, we have lowered our anticipated sales volume in the Plastics segment and are adjusting our 2022 diluted earnings per share guidance range to $6.42 to $6.72 from our previous guidance of $6.83 to $7.13. We look forward to talking with you next year when we review our 2022 results.

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