Good morning, and welcome to Otter Tail Corporation's 2023 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 opening comments.

Good morning, everyone, and welcome to our 2023 earnings conference call. My name is Beth Eiken, and I'm Otter Tail Corporation's Manager of Investor Relations. Last night, we announced our 2023 fourth quarter and annual 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 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. 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, 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 President and CEO, Mr. Chuck MacFarlane.

Thank you, Beth. Good morning and welcome to our 2023 year-end earnings call. Please refer to slide four as I begin my comments on our annual results. Otter Tail Corporation delivered record-setting earnings in 2023, driven by strong financial performance across all of our segments, as well as a significant corporate cost savings. We generated diluted earnings per share of $7, beating the record of $6.78 set last year, and significantly exceeding our original expectations for the year. The Electric segment earnings increased 6% from 2022, primarily driven by higher commercial and industrial sales, lower pension costs and the recovery of rate-based investments. Manufacturing segment earnings increased modestly from 2022. Plastic segment earnings decreased 4%, primarily due to a decrease in sales volume. Our corporate cost center generated earnings in 2023 due to the returns earned on our short-term investments funded by the significant cash flows generated over the last few years. In a moment, Todd will provide a more detailed discussion of our 2023 financial results, as well as our expectations for ‘24 earnings. Slide five shows our five-year compounded annual growth rate in earnings per share, with and without the impact of our Plastic segment. Even without the impact of the extraordinary results generated by our Plastic segment over the last few years, we produce a compounded annual growth rate in earnings per share of nearly 12%. With the impact of Plastic segment included, this jumps to approximately 28%. Turning to slide six, Otter Tail Power is committed to transitioning to a lower carbon and increasingly clean energy future, while maintaining affordable and reliable Electric service to our customers. We have undertaken numerous initiatives in recent years to reduce our carbon footprint, including retiring our Hoot Lake coal plant and constructing and placing into service our Merricourt Wind…

Thank you, Chuck, and good morning everyone. 2023 was another remarkable year for Otter Tail. We delivered record-breaking earnings with diluted earnings per share of $7, beating the record previously set last year. 2023 also marked the 85th consecutive year of paying dividends to our shareholders. Earlier this month we announced our 2024 indicated annual dividend of $1.87 per share, which is a 6.9% increase from the 2023 annual dividend. I will now provide an overview of our 2023 financial results. Please follow along on slide 29. Electric segment earnings increased approximately $4.5 million or 6% over 2022, driven by higher commercial and industrial sales, a reduction in pension expenses, and other post-retirement plan costs, and the recovery of rate-based investments. These are partially offset by increased operating and maintenance expenses and the impact of unfavorable weather. Manufacturing segment earnings increased approximately $500,000 or 2% compared to 2022. Sales volumes for BTD manufacturing increased in 2023 as compared to 2022, driven by the construction, industrial and agriculture end markets, as well as incremental volumes from being awarded additional work with existing customers. Partially offsetting this increase, T.O. Plastics sales volumes within the horticulture end market declined in 2023 compared to last year, as customers worked to reduce their built-up inventory levels and return to more normal seasonal buying patterns. Our manufacturing segment businesses worked to adjust sales prices in response to labor and non-steel material cost inflation. Plastic segment earnings decreased $7.6 million in 2023 or approximately 4% from 2022. The decrease was primarily driven by a decline in sales volumes, partially offset by higher gross profit margins. The decrease in sales volumes was largely driven by distributor inventory management efforts and softer end market demand. Distributors worked to destock or reduce their inventory levels during the first half of…

(Operator Instructions) Our first question comes from the line of Chris Ellinghaus with Siebert Williams Shank & Company, LLC. Your line is now open.

Hey everybody. Good day.

Hey Chris.

Chuck, can you talk about the IRP in Minnesota and what kind of progress has been made since the meeting? And do you have a firm date for going back?

Sure Chris. Thanks for the question. So we had a hearing on January 4, and we and other parties will be providing supplemental comments on our proposed plan that was put in, in December of ‘23, specifically talking about two parts. One, the direct assignment of some new renewables to the Minnesota jurisdiction. This is associated with meeting both, the carbon-free standard and their use of externalities in planning, which the Dakotas do not use. And then the concept of our Coyote coal plant, we're a partial owner with other utilities in that facility. We're a 35% total owner, so roughly half of that or 17% of the plant output goes to our Minnesota customers. And we would put that on a particular program that MISO has, that they can dispatch that in times of extreme load. But it would limit – historically that's been called on maybe a couple, three days a year. And that would allow continued capacity accreditation and reliability afforded by that, but limit the amount of CO2 emissions attributable to Minnesota under that. We anticipate that the comments will come in and that we will have another hearing scheduled sometime in April with probably a decision in the May timeframe.

Okay, great. What are your thoughts on the Plastics business at this point? You gave us some revised thoughts on what normal looks like, but do you have any visibility into what your outlook is for next year at this point?

Yeah. Chris, I think as we tried to articulate in the text here and the script, our belief is that the major distributors, we sell to distributors, and these distributors would in turn sell to contractors that put in residential projects, work on highway projects, close to anything that would need sewer and water pipes. And we feel that those distributors, because it was a scarcity issue, I mean, we were on resin curtailment and other things in ‘21 and ‘22, there was simply a pipe shortage, and they bought up significant amounts, both at the end use contractor and distributor levels, which they had to destock in 2023 effectively. And so we believe that volumes will go back up from ‘23 levels as a lot of that inventory out in the other channels has been put in the ground effectively. And if we maintain a new housing start level at the $1.4 million, which is down from a few years prior, but really is a pretty good pace when you look back. We've got it on a slide, slide 25. At that level, we continue to see pretty good pipe volume. So I don't know if that's helpful, but we anticipate volume to go up in ‘24 from ‘23.

Okay. Chuck, you were sort of pointing out that earnings and rate base have grown pretty linearly. With your new CAGR for rate base, absent the Plastics variability in the future, shouldn't we be thinking that you are kind of at or above the upper end of your 5% to 7% at this point? Have you got any thoughts on where you are in that range at this point?

Sure, Chris. Well, historically we made the point that we have – did a pretty good conversion of rate base in the earnings growth. We do think that that will be a little more difficult as we go forward. It will require more additional rate cases, and there's also a concern of the inflation we've seen in O&M costs over the past period, would tend to have us push the earnings growth now a little bit below our rate base growth level.

Okay. One last simple one, where did you stand on cash at the end of the year?

Chris, we were just over $200 million.

And so part of – I suppose, part of the earnings growth story also will be as you utilize that extra cash for utility CapEx, you'll lose some of those interest earnings. Is that sort of part of your thinking there?

That is correct. I mean, we don't have any equity financing needs. So to maintain our capital structure for OTP, we would need to provide some equity infusions to maintain that. So that would reduce our capital or our cash investments at Otter Tail Corporation.

Okay. Thanks for the details. I appreciate it.

Thank you.

Thank you. Our next question comes from the line of Brian Russo with Sidoti. Your line is now open.

Yeah hi, good morning.

Good morning, Brian.

Hi, Brian.

Hey, just on the utility, I appreciate the added information on the supplemental IRP. Is the supplemental IRP investments included in the five year CapEx yet?

So Brian, what we have in our CapEx plan for the five years is we've got the wind repowers, that's in the early part of the five year plan. We also do have a portion of the solar investment in the five year plan. Our Astoria on-site fuel is not currently in the $1.3 billion. And then the additional wind that we have out in the 2029 time period, there is a small portion that is in there in that 2027, ‘28 time period.

Okay, got it. So the $200 million increase, is that mostly the MISO transmission projects as you just kind of move forward a year and those investments pick up? Or is there a scenario where the supplemental IRP is driving incremental utility investments versus the prior IRP?

Yeah. So the $1.3 billion versus the $1.1 billion in the previous plan is driven primarily by the addition of the solar, and then also the additional MISO transmission, bringing in that year 2028 where we've got a little more spend.

Okay, great. And the scenario that you just discussed in response to the question on the 5% to 7% growth with the accelerated rate-based growth, is that why you're forecasting 7% utility EPS growth in 2024 versus a rate-based growth of 8.5%, or is there something else driving that?

Yeah, I would say overall, over the long term, we tend to be closer to that one-to-one. We do have some variations by year, whether it be because of weather or just timing on recovery. So the 7% is just driven by a number of factors and I would expect we would be closer to the one-to-one ratio as we go over the long term.

Okay, great. And just curious, was Coyote coal plant dispatched this past January with the well below average temperatures?

Yeah Brian, Coyote is dispatched at a fairly high level all the time, so.

Oh, okay. Understood. And switching to Plastics, so the new normalized earnings of $45 to $50 million versus I think your prior normalized earnings of $36 million to $41 million, does that include the Vinyltech capacity expansion, the second half of this year?

That includes both the Phase 1 and Phase 2 expansions at Vinyltech.

Okay, so you might...

In fact, within our volume projections as well as forecasted resin and the spreads, and the volume projection does include the expansion.

Okay, got it. So in the 65-35 utility and then unregulated earnings mix, that's – the 35%, that's where the $45 million to $50 million of Plastics normalized earnings are included, correct?

That is correct.

And do you think that normalized earnings will be realized for full year of 2025 or just given kind of the trajectory you're conveying on PVC prices, that margins might stay elevated through year-end 2024 and into 2025?

Yeah, at this point, we see the gradual decline in the spread over 2024 and into 2025. So ultimately, based upon our current projection, we wouldn't realize that normal level of earnings until 2026. So 2025 currently in our projections is elevated. If you look at the midpoint of our guidance, it would be about $2.72 for Plastics in 2024. A $45 million to $50 million of earnings would be about $1.10. So we expect it will gradually decline between ‘24 and ‘26.

Okay, great. Thank you very much.

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

Hey, guys. Good morning. Congrats on the results and thank you for taking my question.

Hey Sophie.

I have three. The first question I have is I wonder if you have any opinion on the EPA, the new proposed rule to – or is the initiative to replace lead pipes in the next 10 years. Would that be beneficial to your PVC business? And what do you think are the odds of this kind of taking shape?

Hi, Sophie. This is Chuck. What we look at is most of the lead pipe issues in the EPA are service lines. We do very little PVC on service lines. But we think that a lot of municipalities will look at the economics of having to replace service lines on an aged main, water main in the street if you will, and that we anticipate some impact, not a lot, some impact of just overall water system upgrades, including main and service laterals, which are the lead pipes, are the homes from the main to the service. We do see that the IIJA had about $55 billion in funds associated for wastewater improvement. Our feeling is that has not yet made its way into the actual projects yet. A lot of that money has not been allocated to the states yet. So we anticipate that that will have some support in the out years, but we're not looking at it as a major increase in PVC volumes.

Got it. Got it. Thank you. And then my other question was, could you – like your regulatory lag or I guess lack of regulatory lag is very impressive here. Could you remind us just how much of your CapEx is going through riders, trackers and like other mechanisms like that, as opposed to rate cases?

Well, the five-year plan, about 50% of it is planned to be through riders, and only about 10%, actually under 10% is projected to be recovered through rate cases.

Got it. Got it. Thank you. And then lastly, a little bit of an open-ended question, but maybe could you describe what kind of distribution and opportunities are you seeing in your five-year plan? So I guess we understand the generation and MISO transmission, but when it comes to distribution plans, given the specifics of your service territory, what are you focusing your attention on?

So our distribution spending is more upgrade or replacements. We've been increasing our capital spending on distribution assets significantly over the last few years, and that's projected to continue over these five years. I believe, of the $1.3 billion, close to $350 million, $400 million is distribution.

And it's mostly just upgrades to the existing infrastructure?

Upgrades and replacements.

Got it. Well, thank you. That's all I have.

Thank you. [Operator Instructions] With no additional questions, I will now turn the call back over to Chuck for his closing remarks.

Thank you for joining our call in your interest in Otter Tail Corporation. Over the long term, I believe we are well positioned with our diversified business model which provides the opportunity for enhanced returns to achieve our financial targets. We expect to produce long-term compounded growth and diluted earnings per share of 5% to 7% and to increase our dividend in the range of 5% to 7% annually. Thank you again for joining our call. If you have any questions, please reach out to Investor Relations, and we look forward to speaking with you next quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect.