Otter Tail Corp 2026 Q2 Earnings Call

Good morning, welcome to our second quarter 2026 earnings conference call. My name is Beth Eakin, and I'm Otter Tail Corporation's Manager of Investor Relations. Last night, we announced our Q2 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'll 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're 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. We'll be referencing certain adjusted financial measures or non-GAAP measures throughout this call, including adjusted net income, adjusted earnings per share, and adjusted return on equity. For more information, please refer to our quarterly earnings release and the non-GAAP reconciliations included in the appendix of our earnings presentation. 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 second quarter earnings call. Please refer to slide four as I begin my remarks with a summary of quarterly highlights. Our team advanced our strategic initiatives during the second quarter, delivering on near-term priorities for the benefit of our customers and shareholders. Otter Tail Power continues to execute on our regulatory agenda. We secured route permits for two of our large regional transmission projects, marking an important milestone in the development of these reliability-driven investments. We also filed our 15-year integrated resource plan with the Minnesota Public Utilities Commission. The IRP outlines our preferred plan for meeting our Minnesota customers' future capacity and energy needs. We believe the requested resources will position us well to continue delivering low-cost, reliable electric service.

Our manufacturing and plastic segment team members successfully capitalize on opportunities for higher sales volumes from the additional capacity recently added at our Georgia and Arizona facilities. Slide five provides a summary of our financial results. We produced adjusted diluted earnings per share of $1.66 compared to $1.85 last year. The expected decrease in earnings was primarily driven by plastic segment performance as the average sales price of our PVC pipe continued to recede. We are initiating an adjusted diluted earnings per share guidance range of $5.68 to $6.08, which excludes the after-tax impact of the PVC pipe legal settlement. This reflects an increase from our original 2026 earnings guidance range of $5.22 to $5.62. Following my operational update, Tyler will provide a detailed discussion of our adjusted quarterly financial results and the outlook for the remainder of the year.

Transitioning now to my operational update for Otter Tail Power, beginning on slide seven. During the second quarter, we, along with other parties to the Minnesota rate case, requested to extend the procedural schedule to provide more time to respond and review discovery requests. The Minnesota Commission approved the request, and the revised procedural schedule is presented on the slide. We submitted our rebuttal testimony late last month. In the filing, we amended our requested net revenue increase to $42.3 million from $44.8 million due to updated test year information. Our team continues to work towards reaching a constructive outcome. Separately, we are finalizing our annual cost of service analysis and will evaluate if a rate case filing is warranted in any of our other jurisdictions. Turning to slide eight, we filed our 15-year integrated resource plan with the Minnesota Commission in May.

Our preferred plan recommends adding a 50-megawatt natural gas facility in 2031 or 2032, a 50-megawatt wind facility in 2035, and another 50-megawatt wind facility in 2040. Our preferred plan also reflects the completion of the projects currently under development or construction from our previously approved resource plan. We expect a hearing and a final order on the IRP in Q2 of 2027. Turning to slide nine, we are reaffirming our five-year rate base compounded annual growth rate of 10% and continue to expect Otter Tail Power's earnings to grow at a similar rate over the planning period. We remain confident in our ability to deliver on our growth plan. We are focused on project execution in an effort to minimize development risk and manage construction timelines and cost.

As a reminder, our plan is not dependent on securing a large load, and this remains an incremental opportunity to what is already a robust plan. Slides 10 and 11 provide an overview of ongoing and future capital projects. Our two solar projects are under construction and are progressing well. We anticipate Solway Solar becoming operational in the first half of 2027 and Abercrombie Solar in 2028. Our battery storage project remains under development, and we continue to target bringing this storage facility online in 2028. Development work also continues on our large regional transmission projects. We secured route permits for both of our MISO Tranche 1 345 kV projects during the second quarter, with the two transmission lines spanning nearly 200 miles in total. Turning to Slide 12, Otter Tail Power remains well-positioned to attract and support large loads.

We continue to engage with a diverse set of companies interested in adding new loads to our system. Phase 1 of our pipeline increases by approximately 350 MW and now totals 1,400 MW. Approximately 35% of the total load opportunity relates to a data center, with the remaining megawatts relating to clean fuel and thermal storage. The diversity of our pipeline is a strength as each load has different needs. For example, the clean fuel and thermal storage opportunities are interruptible, giving us flexibility while still providing an opportunity for significant growth. Additionally, our team filed large load tariffs with the Minnesota, North Dakota, and South Dakota Commissions during the second quarter. The tariff are structured with our existing customers and shareholders in mind, including long-term contract periods and required financial guarantees to avoid stranded costs.

Any costs associated with the new large loads would be directly assigned to the new customer, and a portion of our fixed costs would be allocated to the new load. This allocation would produce a rate credit for existing customers as we are able to distribute our fixed costs across a larger customer base. Providing low-cost electric service to our customers has been and always will be a priority of ours. As Slide 13 illustrates, Otter Tail Power's electric rates have remained well below the national and regional average for many years, and we remain committed to managing customer bill increases. Looking ahead, we project bills to increase between 3%-4% on a compounded annual growth rate over the current five-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 purchases, and other factors, as well as thoughtful planning and effective project execution. Transitioning to our manufacturing platform, Slide 15 provides an overview of the industry conditions impacting manufacturing segment volumes. Industry conditions are improving in many of the end markets we serve. Our team was well-positioned to respond to the increase in demand and effectively leverage the added capacity in Georgia. The recreational vehicle and lawn and garden end markets have largely stabilized, and our horticulture end market remains stable. The construction end market continues to improve as our OEM customers are seeing an increase in demand for their products. The industrial end market remains strong as the products we manufacture are used to support the growing energy demand.

In contrast, agriculture industry conditions remain challenging due to the weak farm economy, with elevated costs, lower relative commodity prices, and ongoing trade disruption. Slide 16 provides an overview of our plastic segment pricing and volume trends. The average sales price of our PVC pipe continued to decline during the second quarter from the same time last year, but at a slower rate, decreasing by 14%. Sales volumes increased 15% from the same time last year, surpassing our expectations for the quarter. As we shared during our Q1 earnings call, we believe our customers sought to secure additional PVC pipe in advance of announced resin price increases. Our team did an excellent job responding to the pull forward in demand, effectively leveraging the expanded capacity at our Phoenix facility and selling more pipe during Q2 than any quarter before.

Separately, we entered into settlement agreements with the 3 classes in the U.S. PVC pipe antitrust litigation during the second quarter, and the court has preliminarily approved these agreements. If final approval is granted by the court in Q4, the settlement agreements will resolve all claims arising from these classes. While not admitting any wrongdoing, fault, or liability, we agreed to pay $103.5 million to resolve the litigation and concluded settling was in the best interest of the company and our shareholders. The settlements meaningfully reduced the uncertainty, distraction, and significant costs and exposure associated with complex antitrust litigation, and most importantly, allows our team members to remain focused on what we do best, serving our customers. With that, I will now turn it over to Tyler to provide his financial update.

Thanks, Chuck, and good morning, everyone. Turning to Slide 18, we generated adjusted diluted earnings per share of $1.66 during the second quarter, a 10% decrease from the same time last year. The expected decline in earnings was primarily from our plastics segment, as we continue on the glide path to earnings levels more in line with our long-term expectations. In addition, corporate costs were higher in the period. As a reminder, our adjusted results exclude the after-tax impact of the legal settlement charges recognized in the second quarter, which amounted to $1.84 per share. Please follow along on Slides 19 and 20 as I provide an overview of our second quarter results by segment. Electric segment earnings decreased slightly from the same time last year. We benefited from higher electric rates from recent rate case activity, including interim rates in Minnesota and final rates in South Dakota.