Good morning, and welcome to Otter Tail Corporation's First Quarter 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 their opening comments.

Good morning, and welcome to our first quarter 2023 earnings conference call. My name is Tyler Nelson. Last night, we announced our first quarter 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 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 the course of 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. 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, Tyler. Good morning, and welcome to our first quarter 2023 earnings call. Please refer to slide 4 as I begin my comments on our first quarter results. We are pleased with our first quarter financial results. We generated earnings per share of $1.49. As expected, our earnings declined compared to the first quarter of last year as earnings from our Plastics segment receded from historic highs. In contrast, our electric and manufacturing segments each produced double-digit earnings growth in the first quarter of 2023. Based on our first quarter results and expectations for the remainder of the year, we are increasing our 2023 earnings guidance range from $4.55 to $4.85 per share, an increase of approximately 20% from our previous guidance, driven by increased earnings from our Plastics and Manufacturing segments. In a moment, Kevin will provide a more detailed discussion of our first quarter financial results and our expectations for the remainder of the year. Slide 5 illustrates our expected five-year compounded annual growth rate in earnings per share through the end of 2023, with and without the impact of our Plastics segment. Through dependable earnings and steady growth at Otter Tail Power, BTD, T.O. Plastics and changes in corporate costs, we expect to produce a compounded annual growth in earnings per share from 2018 through the five years ending 2023 of 9.5%. This excludes the results of our Plastics segment. The additional earnings and cash flow generated by our Plastics segment over this time period provide additional strength to our already strong credit metrics, liquidity and capital structure and allow for capital investment in our operating companies. Turning to slide 7. We illustrate Otter Tail Power's efforts in working toward a cleaner energy future. We are targeting to reduce carbon emissions from our generation resources by approximately 50% from 2005 levels by 2025 and 97% by 2050, assuming historic MISO dispatch occurs. Additionally, our owned and contracted energy generation is forecast to be more than 50% renewable by 2025. In March, Otter Tail Power filed its supplemental integrated resource plan. The filing incorporated the effects of the passage of the Inflation Reduction Act, changes in our forecasted customer load, the adoption of the MISO seasonal capacity construct and increased MISO reserve margin requirements. One specific item to mention is the increase in MISO's winter reserve margin, which increased from 8% to 25%. This significantly impacts Otter Tail Power, a winter peaking utility. Our preferred plan requests authority to add on-site liquefied natural gas storage at Astoria Station in 2026, add 200 megawatts of solar generation in 2027 to 2028 and commence activities to prepare for the addition of 200 megawatts of additional wind generation in the 2029 time frame. Our preferred plan also requests authority to withdraw from our 35% ownership interest in Coyote Station should major non-routine capital investment be required at the facility. In addition to those actions, we outlined in our IRP our intention to repower our four legacy wind farms in 2024 through 2026 at an estimated cost of approximately $200 million. It is anticipated that this investment will reduce customer rates. The levelized cost of energy per megawatt hour in the revised IRP is lower than the plan submitted in 2021, reflecting our focus on customer affordability. Slide 12 provides an overview and status update on our significant capital investment projects. Our team continues to effectively execute project plans, working to secure projects that are completed on time and on budget. I will now provide a few details on several projects. On slide 13, we provide an overview of the Ashtabula III wind farm acquisition, which Otter Tail Power completed on January 3. Since 2013, we have had a purchase power agreement to purchase the offtake of this facility. Acquiring the facility provides a lower cost alternative than maintaining the power purchase agreement. Regulatory recovery of our $51 million investment began in the first quarter of 2023. Construction continues on Otter Tail Power's 49-megawatt Hoot Lake Solar project. Construction began in May of 2022 and is expected to be completed in the second half of 2023. All costs and benefits of the project are assigned to Minnesota customers. Recovery of the $60 million investment has been approved through the renewable rider. Passage of the Inflation Reduction Act has increased the investment tax credit on this project from 26% to 40%. Slide 15 provides a summary of Otter Tail Power's investments under Tranche 1 of MISO's Long Range Transmission Plan. Our Tail will be co-owner in two Tranche 1 projects, the Jamestown to Ellendale and Big Stone South to Alexandria 345 kV transmission projects. Our team is focused on project development and planning, coordinating these complex projects with our co-owners. We have filed for construction work in progress with FERC for each project to ensure timely recovery of our capital investment. In total, we estimate Otter Tail's capital investment in these projects to be approximately $390 million. 40% of the capital investment is expected to occur in the next five years. These investments have a very minimal impact on OTP's retail customers as the costs are allocated across the MISO Midwest footprint. Our team continues to monitor developments at MISO regarding Tranche 2 transmission projects, which are expected to be approved in mid-2024. While we expect some investment opportunities for Otter Tail Power arising from the Tranche 2 projects, our five-year capital plan does not include any estimates for future projects. Slide 16 provides an overview of Otter Tail Power's capital spending plan. We have updated our capital plan to incorporate the capital investments included in our supplemental IRP filing. The plan includes $1.1 billion of capital investment over the next five-year period, an increase of approximately $50 million over our prior capital plan and produces a 6.5% annual compound growth rate in rate base over this time frame. It is important to highlight that most of the capital investment from our solar and wind investments outlined in our IRP occurs after 2027 and therefore are not reflected in this five-year horizon. We anticipate approximately 80% of our capital investments will be recovered through existing rates or riders. This rate base growth is a key driver in our ability to produce earnings per share growth at our targeted level of 5% to 7%. Slide 17 provides an overview of key regulatory matters on our agenda for 2023. Our utility team is off to a good start and on track to accomplish our most important regulatory filings in 2023. Additionally, as we complete our internal cost of service studies this year, we will determine whether a North Dakota general rate case will be filed in late 2023. Turning to our Manufacturing segment on slide 21. End market demand in agriculture, construction, and energy markets is driving volume growth and profitability at BTD. Steel prices in the first quarter of 2023 are substantially lower than the first quarter of last year, but we did see a sharp increase in steel prices near the end of March. BTD continues to manage inflationary cost pressures in the business, partially through increased product pricing. Plastics earnings were driven by product pricing and the sourcing of low-cost material inputs, which led to increased gross profit margins in the quarter. Sales volume in the horticulture end market did soften in the first quarter as lead time improvements across the industry resulted in decreased order backlogs. Slide 24 provides an overview of our Plastics segment. Continuing the trend from the last half of 2022, sales volume continued to be soft in the first quarter of 2023 as distributors and contractors manage their inventory levels. Slide 25 highlights our recent resin and PVC pricing. We continue to benefit from elevated PVC pipe pricing despite resin costs receding from historic highs. PVC pipe prices remained higher than estimated for the first quarter of the year and early into the second quarter. Our updated pricing expectations for the remainder of the year are the primary driver for our increased 2023 earnings guidance that Kevin will expand on. I will now turn it over to Kevin to provide additional commentary on our first quarter results and our updated outlook for 2023.

Thank you, Chuck, and good morning, everyone. We are pleased with our first quarter financial results. We generated diluted earnings per share of $1.49. This is the second-best first quarter results we have ever reported, second only to the first quarter last year. As expected, our operating revenues and earnings declined from the record first quarter of 2022, driven by lower sales volumes in our Plastics segment. Both our Electric and Manufacturing segments delivered double-digit quarter-over-quarter earnings growth. Please refer to slide 29, as I provide an overview of our first quarter segment earnings. Electric segment net earnings increased $4 million or approximately 21% over the first quarter of 2022. The increase in earnings was primarily driven by higher commercial and industrial sales volumes, including a full quarter impact in 2023 from our new commercial customer in North Dakota that was brought online in the first quarter of 2022. We increased driver revenues from the recovery of construction costs at Hoot Lake Solar and the commencement of recovery of our investment in Ashtabula III, and lower pension and other post-retirement plan costs based on an increased discount rate and expected returns on plan assets for 2023. These items were partially offset by higher O&M costs driven by maintenance expenses from an outage at Big Stone Plant, increased interest costs related to short-term borrowings on the Otter Tail Power credit facility, and the impact of weather conditions compared to the first quarter of 2022. Manufacturing segment earnings increased $2.8 million or 68% over the first quarter of 2022, driven by a 19% increase in sales volumes at BTD, due to end market demand in agriculture, construction, energy, and power generation. Favorable product mix and pricing initiatives have offset inflationary cost pressures at BTD, while increased product pricing and the availability of low-cost raw material inputs drove earnings growth at T.O. Plastics. Steel prices, which impact our revenues but generally do not impact earnings since we pass-through price variability to customers, were 21% lower in the first quarter of 2023 compared to last year. Scrap metal prices, which tend to follow steel prices and do impact our earnings, were lower in the first quarter of 2023 compared to the first quarter of last year. Net earnings from the Plastics segment decreased $17.2 million or 34% compared to 2022. Sales volumes declined 46% compared to the first quarter of last year, as distributors and contractors reduced purchase volumes and tightly managed inventory levels against the backdrop of higher interest rates and lower housing market activity. Poor weather conditions, including a prolonged winter season in the upper Midwest, and heavy rains in California also impacted sales volumes in the first quarter of 2023. Resin costs have receded from record highs experienced in 2022. In total, our material costs were down approximately 20% in the first quarter of 2023. Sales prices for PVC pipe remain near historic highs and increased approximately 7% from the first quarter of last year. Our corporate costs were positively impacted by earnings generated from our short-term cash equivalent investments and market-based gains recognized on our corporate-owned life insurance policies. Lower health insurance claims also positively impacted first-quarter earnings in 2023. Slide 31 includes an updated business outlook for 2023. We are increasing our earnings per share guidance to a range of $4.55 to $4.85, a 20% increase from the midpoint of our initial guidance of $3.76 to $4.06. We are maintaining our earnings guidance for the Electric segment. Our Manufacturing segment earnings guidance is increasing due to increased sales volumes at BTD compared to our original view. This is driven by demand in energy, agriculture, power generation, and construction markets. We expect increases in scrap metal revenues from a combination of higher scrap volumes due to increased production activity and higher scrap metal pricing. While we are being affected by inflationary cost pressures in our manufacturing segment, we expect product pricing initiatives and a favorable product mix to largely offset the impact of higher costs that we are experiencing. Additionally, we are increasing our earnings guidance for our Plastics segment, due to elevated sales prices producing stronger-than-anticipated margins in the first half of 2023. We currently anticipate margins will begin to compress in the second half of the year as industry supply and demand dynamics normalize, which will put downward pressure on sales prices of PVC pipe. Partially offsetting increased margin expectations in the first half of the year is lower sales volumes, as we continue to see distributors and contractors tightly manage inventory levels. These assumptions reflect our current expectations for the remainder of 2023. We currently anticipate a decline in profitability in the last half of 2023 compared to our expectations for the first half of the year. Should the current market conditions persist through the last half of the year, we could see further upside to Plastics segment earnings. Finally, we are decreasing our guidance for corporate costs in 2023 due to higher expected earnings on our short-term cash equivalent investments, gains recognized on corporate investments in the first quarter, and lower expected employee health insurance claims. These items will be partially offset by increased incentive compensation costs. We now expect our earnings mix for 2023 to be approximately 43% from our Electric segment and 57% from our Manufacturing and Plastics segments net of corporate costs. We continue to monitor various economic indicators, such as single and multi-family housing starts, interest rates, and consumer confidence levels to ensure we are well-positioned when changes occur. Additionally, we are actively managing the impacts of inflation across all of our operating companies. There continue to be concerns related to the rising interest rate environment and what impacts that will have on earnings in 2023, especially related to variable rate debt and the need to refinance or issue new debt during the year. We continue to assess our exposure to rising borrowing costs as low risk. Our variable rate debt consists of two credit facilities. We don't expect to have any outstanding borrowings on our parent company facility and minimum amounts are going to be drawn on the utility facility. The increased cost of these borrowings is considered in our updated 2023 guidance due to our higher levels of earnings and cash flows over the last two years. We are in the enviable position of being able to earn a return on our excess cash. We don't have any new debt issuances scheduled until 2024, and our next scheduled bond maturity is in December of 2026. While we recognize the additional risk of having non-electric businesses in our portfolio, these businesses have the ability to generate high levels of earnings and cash flows during strong economic times, as demonstrated over the last two years. The uplift in earnings, especially driven by the performance of the Plastics segment, has further strengthened our equity. As of March 31, 2023, we have a consolidated equity layer of 59%, and we expect that to increase further during the remainder of the year. This offers us a distinct advantage compared to the utility sector, as we have no equity needs in our five-year financing plan. Our updated 2023 guidance reflects elevated earnings from our manufacturing platform. We currently expect our earnings mix to move to 65% from our Electric segment and 35% from our Manufacturing platform beginning in 2024. As part of this shift in earnings mix, we now expect the normalized earnings from our Plastics segment to be in the range of $36 million to $41 million. Slide 37 reflects the collective strategies of our platforms and financial performance targets. This business model serves us well, and we remain well-positioned to fund our rate base growth opportunities at the utility with our strong balance sheet and ample liquidity to support our businesses and maintain strong investment-grade corporate credit ratings. We're now ready to take your questions.

One moment please. Our first question comes from Tate Sullivan of Maxim Group. Your line is now open.

Hi. Good day. First focusing on your decline, the comment, Kevin, you said decline in profits in the second half of 2023, if plastics pricing decreases what conditions could cause the plastic pricing to be more resilient than you expect? I mean starting there, please?

We have continued to experience stronger sales prices than we anticipated during the first quarter of 2023 and into the second quarter, despite the inventory management efforts by distributors and contractors due to the high inventory levels from 2022 and the ongoing softness in the construction markets. We expect these conditions to persist for the remainder of the year. As distributors and contractors manage their inventories, we anticipate that volumes will begin to recover. We expect our volumes in the second half of 2023 to align with those in the second half of 2022. However, there are signs in the market that sales prices may start to decrease, and we are monitoring this closely while proceeding with caution for the rest of the year. Should the current decrease in some product pricing not continue and sales prices remain robust, especially since PVC pipe is not a significant expense in overall construction projects, we see potential upside for the year, although we have not included this in our guidance.

I guess how far in terms of the visibility ahead in the business? I mean, is it the distributors, your customers, I mean, do they not place orders rather than a month ahead of time, or how are they managing inventory? And what kind of visibility do you have into their orders? How far ahead do they place orders for your PVC pipe?

We have real good visibility through the second quarter.

Okay.

There are certainly orders starting to be placed somewhat beyond that, but not in large quantities. Visibility is good through the second quarter, and as we move through the second quarter, we'll gain better insight into the third and fourth quarters. Currently, we are beginning to notice indicators that sales prices might start to decrease in the second half of the year. We also anticipate some reduction in resin prices starting in the latter part of the second quarter and continuing into the third quarter. This is another factor we are considering, as a decline in resin prices typically correlates with a decrease in sales prices as well.

Before I turn it over to you, have you noticed any indications of new competitors entering the market or increased competition, considering these historical margins? Or does it generally take a considerable amount of time to establish a new PVC facility?

We haven't seen any new competition. The cost of entry is pretty significant to build a PVC pipe plant. There haven't been any announcements from competitors regarding plans to enter the market. While we've announced an expansion of the biotech facility to add another line, there hasn't been anything significant in terms of new competitors coming in.

Thank you very much.

Thank you. One moment for our next question. Our next question comes from Tate Sullivan of Maxim Group. Your line is now open.

Thank you for taking my follow-up. Regarding BTD, similar to my question about plastics, what does it look like? I understand it may vary by end market, but can you clarify the pricing and contract terms? Will these be short-term monthly contracts for manufacturing parts, or could they extend up to a year? Please provide some insight on the contract structures in BTD.

Yes, Tate. It's going to vary depending on the requests that will come from the customer in terms of what their specific product or parts that they need, and what's the life cycle of the particular piece of equipment or product they're building. We could be asked for a request to build a part for a particular piece of equipment that has a life cycle of three to five years, and that we would be looking to build parts for that over that period of time. We also get requests for replacement parts from customers. So it certainly varies depending on each customer's specific needs in relation to the manufacturing backlog. Our current backlog today is about $289 million at March 31 of 2023, which compares with $339 million at the same time a year ago; there's about a $56 million difference in steel prices between those two periods.

And then I saw this is slide 23; you point to power generation outlook being positive in terms of data centers. Are you doing some parts for generators in that market? If you can comment there?

Yes, Tate, this is Chuck. We provide components for on-site backup generation for the entire facility.

We saw some increases driven by key demand in the data center segment from Amazon, Google, and Facebook.

Okay. Thank you. And then, Chuck, when you mentioned earlier when you commented on repowering the wind farms from the utility, is that replacing turbines, adding more towers? Can you provide more details?

Generally, in the industry, these facilities were put in place from 2007 to 2009. We would replace blades, rotors, and hubs, but the tower foundation and internal wiring will remain. We generally need to increase the book value of the asset by 80% for it to qualify for new tax credits. So we are working on that. The foundation will stay the same; however, the project will involve larger blades and new generators, along with associated internals.

Well, thank you very much for answering my questions.

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

Thank you for joining our call and for your interest in Otter Tail Corporation. Based on our first quarter results and expected higher sales volume and scrap income at BTD, along with anticipated stronger margins in our Plastics segment, we are raising our 2023 earnings per share guidance to a range of $4.55 to $4.85, an increase of approximately 20% from our initial range of $3.76 to $4.06. Over the long term, we are well-positioned with our utility growth strategy and predictable earnings stream, complemented by our strategic Manufacturing and Plastics businesses to achieve our financial targets. We expect to produce compounded growth in earnings per share of 5% to 7% off a base of 2024 earnings and increase our dividend in the range of 5% to 7% annually. Thank you again for joining our call. We look forward to speaking with you next quarter.