Otter Tail Corporation (OTTR) Earnings Call Transcript & Summary

Good morning and welcome to the Otter Tail Corporation 2020 Annual Meeting of Shareholders. I'll now turn the call over to the corporation.

Thank you, operator, and good morning. I'm Nathan Partain, Chairman of the Board of Directors of Otter Tail Corporation, and welcome to the Otter Tail Corporation's 2020 Annual Meeting of Shareholders. On behalf of our directors, officers and employees, I thank you for attending our first virtual annual meeting. We elected this year to hold a virtual-only meeting due to the public health impact of the coronavirus pandemic and to support the health of our shareholders, employees, directors and communities. I'm excited that this platform also allows our shareholders to attend this meeting from anywhere in the world. So we appreciate your attendance today. For those shareholders that have attended our in-person shareholder meetings, you know that we normally provide snacks and a meal. Due to the move to a virtually-only meeting this year and in light of the financial strain the pandemic has placed on so many in our community, the Otter Tail Foundation will be donating to the local Fergus Falls Food Shelf the amount which would have been spent on the meal here today. I'd also like to acknowledge and express my appreciation on behalf of the Board of Directors to all of the employees throughout Otter Tail who have been working hard amidst the COVID-19 pandemic to be safe, keep their teams safe and to adapt to the new business culture and challenges we have. As members of the -- as member and as Chairman of the Otter Tail Corporation Board of Directors, I'm grateful for your continued support and investment in Otter Tail Corporation. As you will hear in today's presentations, 2019 was a strong year for the corporation. Our utility continues to successfully execute their major generation and transmission projects, and our manufacturing companies remain focused on their operational and commercial performance. Before we get started with the business portion of the meeting, I'd like to go over a few of the mechanics of our virtual meeting and provide you with a brief overview of how the process will work today. Our goal is to run this meeting similar to our in-person meetings. If you'd like to submit a question today at any time during the meeting, you may do so by clicking the message icon located in the upper right-hand of your welcome screen. We will respond to the questions submitted during the question-and-answer portion of the meeting, immediately following management's presentations. For your reference, the agenda and the rules of conduct for the meeting have also been made available on your welcome screen. We ask for your observation of these rules as we proceed through the meeting. Additionally, if you haven't voted your share, online voting instructions are located at the bottom of the welcome screen. We will need to -- you will need to select the proxy push voting link to vote your shares. The voting polls will remain open until the formal business portion of the meeting is conducted and concluded. You can access the welcome screen at any time by clicking the information icon located at the upper left-hand of your screen. Should you experience any challenges navigating the site or the online voting process, please call the technical support phone number shown at the bottom of the welcome screen. Present at today's meeting via the live webcast are my fellow Board members: Karen Bohn, John Erickson, Steve Fritze, Kathryn Johnson, Tim O'Keefe, Jim Stake, and Tom Webb. And from the corporation's executive group, Chuck MacFarlane, President, Chief Executive Officer and a member of the Board; Kevin Moug, Senior Vice President and Chief Financial Officer; and Jennifer Smestad, Vice President, General Counsel and Corporate Secretary. Also present are representatives of Equiniti, who is transfer agent and will serve as the inspector of elections for this meeting. Now turning to the business at hand. This is the 110th Annual Meeting of the Shareholders of Otter Tail Corporation. Notice of the Annual Meeting of Shareholders was sent to, on or about March 10, 2020, to all of our shareholders of record as of February 20, 2020. Copies of the annual report of the corporation and proxy statement were made available online at the corporation's website on March 9, 2020. I have been advised by our Corporate Secretary, Jennifer Smestad, that the legal requirements for conducting the meeting have been completed. Notice of the Meeting was mailed or sent by e-mail on March 9, 2020, to all of our shareholders of record at February 20, 2020. In addition, certain of these shareholders were mailed notice of proxy materials beginning on March 10, 2020, notice of the change to the virtual meeting and the proxy supplement materials were mailed on March 20, 2020. The corporation has received an affidavit of mailing from Equiniti shareholder services, which acted as the corporation's agent of these mailings. I can report that holders of more than 78% of the total shares outstanding eligible to vote as of the record date are present by proxy. There is a quorum present, and the meeting is duly constituted and the business of the meeting may be -- may proceed. The polls will close following the introduction of the items of business. And as a reminder, if you have not yet voted or would like to change your vote, you may do so online. If you have already voted, your vote has been counted. I will now consider the items of business described in the proxy statement. First, for directors, the items of business is the election of directors. The terms of directors of John D. Erickson, Nathan I. Partain and James B. Stake expire at the time of this meeting. The Board of Directors has nominated Mr. Erickson, Mr. Partain and Mr. Stake for reelection for a 3-year term ending at the annual meeting in 2023 and until their successors are duly elected and qualified. The next item of business is the proposal to approve in a nonbinding advisory vote the compensation provided to the named executive officers as described in the proxy statement. And the next item of business is the proposal to ratify the appointment of Deloitte & Touche to act as the Otter Tail Corporation's independent registered public accounting firm for the year 2020. That concludes the listing of items of business for consideration by shareholders at this meeting. No other items of business have been brought to the attention of the corporation before the deadline of January 9, 2020. And I hereby declare that the polls are now closed. The final vote total, including ballots properly submitted today, will be reported in our Form 8-K to be filed with the SEC within 4 business days following this meeting. We'll also post the Form 8-K on our website at ottertail.com. I have received the preliminary report from Equiniti covering the proposals presented at the meeting. And based on the report of the preliminary results of the votes on the items of business, they are as follows. I declare that all the nominees, Mr. Erickson, Mr. Partain and Mr. Stake received at least the majority of the votes cast and all were elected to serve as directors for a term of 3 years. I further declare that the shareholders supported the corporation's executive compensation program by 70% of the votes cast. Lastly, the appointment of Deloitte & Touche as auditors for the year 2020 has been ratified by 97% of the votes cast. This concludes the business portion of our meeting, and the meeting is now adjourned. But next on the agenda is our business review of the corporation by management. The first one will be the financial report. And I'll now turn the meeting over to Kevin Moug to provide a financial report for the corporation. His knowledge and execution of the financial requirements for running a public company are top-notch, and he has the skill set that we need in the current tough business environment that we do face. I appreciate his dedication in enhancing the shareholder value. And now I'll turn this portion of the meeting over to Kevin to provide you an update.

Well, thank you, Nathan, and good morning, everyone, and thank you for attending the 2020 Otter Tail Corporation Annual Shareholders' Meeting. Recognize in the presentations you will hear this morning that there are certain risks and uncertainties across our businesses, and these significant risks are discussed in our public filings. 2019 was another strong year for us financially. We earned $2.17 per share, which is an increase of 5.3% over 2018. The increase was primarily driven by our Electric segment, supported in large part by our continued investments in our growing rate base. Our Manufacturing segment earnings were flat year-over-year. BTD's earnings grew approximately 14%, but were offset by a disappointing year-over-year decline in T.O. Plastics earnings of 54%. And as expected, our Plastics segment earnings were down from our record year in 2018. Our 2019 return on equity was 11.6% on an equity ratio of 52.9%. Our 2-platform strategy continues to deliver higher returns on equity on a higher equity layer when compared to holding company peers. And the successful execution of these strategies continues to result in impressive shareholder returns. Our total shareholder return as of the end of 2019 had grown at a compounded annual growth rate of 14.7% over the past 5 years. We expect capital expenditures for 2020 to be $385 million. 96% of our 2020 capital spend is in Otter Tail Power Company and is largely driven by construction of our Merricourt Wind Project and the Astoria natural gas station. These projects are expected to positively impact the corporation's earnings and returns on capital. The 5-year capital expenditure plan calls for $984 million in capital spend. 91% of this spend or $897 million is for utility projects, and approximately 40% of this spend will be recovered through riders. The remaining $87 million is for the Manufacturing and Plastics segments. Our utility rate base growth is projected to increase at a compounded annual growth rate of 8.2% using 2019 as the base year. We certainly are in challenging times with the impact of COVID-19 on people's health and our economy. We have financial models in place to monitor expected impacts of COVID-19 on our businesses and do stress testing to measure our liquidity position so it does not fall below our minimum risk tolerance of available liquidity under our parent company credit facility. We continue to maintain adequate liquidity to operate our businesses and fund our ongoing capital program. Our $270 million revolving credit facilities, which expire October 31, 2024, contain accordion features that allow Otter Tail Corporation and Otter Tail Power Company to increase our liquidity up to $290 million for Otter Tail Corporation and up to $250 million for Otter Tail Power Company, subject to certain terms and conditions. We also positioned ourselves well from a liquidity standpoint heading into 2020, with early execution of our financing plan, given our increased capital spend. In 2019, we completed $175 million private placement of debt for Otter Tail Power Company. And our total equity needs over the 5-year time frame are $75 million, of which approximately 37% has already been raised. We started to issue equity in the fourth quarter of 2019. We issued $19.8 million in new equity net of commissions during the fourth quarter last year and issued $8.2 million in the first quarter of '20 before the impact of COVID-19 on the equity markets. We would expect to issue an additional equity of $40 million to $45 million for the balance of 2020. And to the extent the markets take a while to recover, we have ample liquidity in our credit facilities to support our capital plans. We currently have approximately $305 million of availability under these lines, and our next maturity of long-term debt isn't until December of 2021. Between expected cash flow generated from 2020 operating activities and these credit facilities, we have the appropriate levels of liquidity to support our businesses. The common dividend we have paid for the last 80 years is an important piece of our strategy to return value to our shareholders. In February of 2020, the Board of Directors increased our 2020 indicated annualized dividend rate from $1.40 per share to $1.48 per share. This 5.7% increase is supported by our financial flexibility, which is provided by operating cash flows, liquidity under our credit facilities and solid financial coverage ratios. Our dividend is covered by the regulated earnings of Otter Tail Power Company, and this coverage is expected to improve over the next 5 years, with rate-based growth driving increased utility earnings. Our Manufacturing and Plastics segments earnings provide additional coverage for the dividend. We are in a challenging business environment, and we will weather this storm. There is uncertainty as to how long the disruption of economic activity could last, and we won't be immune to its effects, but we will take the necessary actions to position our companies to be resilient through these challenges. As a result of the impacts COVID-19 is expected to have across our businesses, we will provide an update in our quarterly report on Form 10-Q and in our first quarter earnings release and call. But rest assured, we are in a position of strength with the strategies we have in place to deliver long-term shareholder value. Otter Tail Power Company plans to grow its rate base in very supportive regulatory environments at an 8.2% compounded annual growth rate over the next 5 years, driven by investments in renewable and natural gas generation, technology and infrastructure and transmission projects. Over time, the electric utility will provide approximately 75% of our overall earnings. The Manufacturing and Plastics segments will also provide organic growth over the long term. These 2 segments are expected to provide around 25% of our earnings over time. We expect to be able to deliver total shareholder return of 8% to 10% over the long term and this consists of 2 components. First, our earnings per share are expected to increase in the range of 5% to 7% over the long term; and second, our current dividend yield is approximately 3%. Looking forward, we would expect to grow the dividend along with earnings growth of 5% to 7% earnings per share and maintaining a dividend payout ratio between 60% to 70%. And finally, future dividend decisions will be based on our financial condition, improvement in earnings per share, cash flow from operations, the level of capital expenditures and the future business prospects. And our company is on solid footing with a strong balance sheet and corporate credit ratings. I want to thank the employees of Otter Tail Corporation and our operating companies for contributing to our successful 2019. And also thanks to our shareholders for your continued support.

Thanks, Kevin. I appreciate your remarks. And before I turn things over to Chuck for the operational report, I'd like to thank the entire management team for their hard work and dedication in 2019 and to Chuck for his leadership. As shareholders, we should be proud of the excellent job they've all done, which is reflected in the overall results for the last year and also has been recognized both by the debt and equity markets. So with this, I'll turn it over to Chuck MacFarlane to give us an update. Chuck?

Thank you, Nathan. While there's near-term focus on COVID-19 response, I agree we are in a good position as a corporation. We have engaged employees at all levels, a skilled and cohesive executive team and committed Board. Before I begin my prepared remarks, I'd like to take a moment to recognize a special member of our corporate accounting team. Debbie Wilke will be celebrating her 40th anniversary on June 2, and will be retiring in early July. Debbie joined Otter Tail Power Company in June of 1980 as an accountant. Since then, she has held roles of Computer Programmer, Senior Account Manager, Manager of General Accounting and Manager of Tax and Payables. She has been in her current role as VP of Accounting, Tax and Reporting since July of 1998. During her time as VP, she has overseen the filing of 88 10-Ks and 10-Qs and over 1,300 state and federal tax returns. Her accuracy and attention to detail is unmatched. Debbie, you've been a tremendous asset to Otter Tail and a leader in making sure we have good financial controls and processes. For that, we will always be grateful. Enjoy retirement and spending time with the grandchildren. We wish you well. As Nathan mentioned, it was necessary to switch to a virtual meeting this year due to the public health impact of COVID-19. I hope the login was straightforward and smooth, but please call the 800 number located on the welcome screen if you experience any difficulties navigating the site. I would like to recognize all of those that are impacted by the virus, especially the medical community and first responders. Otter Tail Corporation is supporting all locations we serve with collective efforts to mitigate the spread of COVID-19. Our business continuity plans put the health and safety of our employees and our communities at the forefront, and we are designed to help ensure continued electric reliability and operational excellence across our operating companies. Based on recommendations from the Centers for Disease Control and Prevention and regional health organizations, we are working to slow the spread of the virus. Some of the actions we've taken include implementing policies for employees to exercise social distancing or adapt physical barriers; increasing sanitation efforts across all operating companies; activating internal preparedness teams across all operating companies; shifting in-person meetings to technology-based meetings, similar to what we are doing today; encouraging employees to conduct work from home where possible; requiring sick employees or those who have tested for the virus to stay home; eliminating nonessential work travel, including travel between operating companies; eliminating nonessential visitors or vendors in Otter Tail Corporation facilities; requiring employees to self-quarantine if they've been out of the country on a cruise or near a United States hotspot; maintaining appropriate staffing for all critical business functions and remaining open and available to serve customers. We will remain diligent in our precautionary health and safety efforts. This is a rapidly evolving situation that could lead to extended disruption of economic activity. We continue to monitor this event and how it's going to impact the economy in our electric and manufacturing platforms. The theme for this year's annual report is achieve and accelerate. We are energized by our 2019 achievements and look forward to 2020, accelerating into a new decade of success. We know our success depends on our understanding the environments in which we operate, how we define our role within them and how we deliver value. We are a 2-platform company that delivers shareholder value through a high-performing electric utility and 4 disciplined manufacturing companies. On the electric side, Otter Tail Power continues to grow through capital investment in generation and transmission projects. On the Manufacturing side, BTD, T.O. Plastics, Northern Pipe Products and Vinyltech remain focused on efficient operations and growth required to meet customer needs. Allow me to address a few highlights from each platform. Otter Tail Power had many accomplishments in 2019. The company had another strong safety year. I'd like to give special recognition to Otter Tail Power Company employees who marked 2019 with the company's best OSHA rate on record, an outstanding achievement award from the Minnesota Safety Council for company-wide safety performance in 2019. And they continue to manage and execute on their large capital projects, Merricourt Wind Energy Center, Astoria Station, Phase 2 of the South Dakota Transmission Reliability upgrade and self-fund transmission projects, all began construction in 2019. I'll touch briefly on each of these projects. The Merricourt Wind Energy Center remains on time and on budget. More than 2/3 of the civil work and project foundations are complete. The project has received Minnesota Renewable Resource rider eligibility, North Dakota Advanced Determination of Prudence and South Dakota phase-in rate recovery. We estimate this project will cost approximately $250 million and will generate enough energy to power more than 65,000 homes. This is the largest capital project in Otter Tail Power history, and we anticipate beginning commercial operation in the fourth quarter of 2020. Astoria Station construction remains on time and on budget. We awarded the general work contract last quarter. Astoria is a highly efficient 245-megawatt natural gas combustion turbine. It will complement our wind generation by providing a reliable backstop when the wind isn't blowing, and it has flexible operating options and low CO2 emissions. We expect to invest approximately $158 million in this project and anticipate it will be online near year-end 2020. With both Merricourt and Astoria projects moving forward as scheduled, we remain on schedule to retire Hoot Lake Plant mid next year. You may recall that the existing Hoot Lake Plant site was not an option for a large gas unit. It would have required a 40-mile natural gas line extension into the Hoot Lake site at approximately $1.5 million per mile. We continue to work with plant employees to help them consider various other opportunities within the company, and we continue to work with the city of Fergus as we consider the future of the plant site. We completed the first of a 2-phase transmission project to improve reliability for customers that live in the southern part of our service area. The first phase was a new 15-mile 115 kV transmission line that connects the expanded Hetland substation to a new Lake Norden substation in South Dakota. In August, we began construction on the second phase of this project, a new 43-mile, 150 kV transmission line from Lake Norden to Astoria, South Dakota. Phase 2 engineering is 90% complete. We've attained 99% of project easements, and we've set approximately 18 of the total 43 miles of structures. We expect to energize the line in mid-2021. We have the opportunity to add $45 million of rate base associated with new generator interconnection upgrades as proposed by the MISO generator interconnection process. Self-fund is an election by the MISO transmission owner, in this case, Otter Tail Power, to fund the initial network upgrades associated with new generator interconnections. To date, FERC has approved 14 of 33 facility service agreements or FSAs between these generation interconnection customers and Otter Tail Power Company. We have another 14 FSAs filed with FERC, and MISO is preparing an additional 5. Otter Tail will fund and then return on -- and a return of the capital cost of these network transmission upgrades over a 20-year period from these generator interconnection customers. Otter Tail Power continues to enhance their generation mix to the benefit of customers and the environment. By 2022, carbon dioxide emissions from OTP generation resources will be approximately 30% lower than in 2005. Otter Tail Power customers will receive 30% of their energy from renewable resources, all while keeping average residential rates nearly 30% below the national average. Otter Tail Power is actively pursuing a utility scale solar project of 30 megawatts or greater. Construction could take place in the next 3 years. At present, 47 small solar units totaling approximately 700 kW are connected to Otter Tail system. The Minnesota Public Utilities Commission approved an extension until September 1, 2021, for the filing of our next integrated resource plan. By 2028, generation resources subject to round 2 of the Regional Haze Rule, including Coyote Station, likely will be required to undertake emissions controls measures reasonably consistent with those of other North Dakota coal plants in round 1 last decade. Delaying our resource plan filing will allow us to better understand the direction of the environmental regulation and develop a more informed plan. The wind, natural gas and transmission projects are part of our electric platforms plan to grow rate base. Our projected annual investment in those projects totals approximately $500 million. To put this in context, this represents approximately 43% of our current $1.2 billion rate base. Otter Tail Corporation will invest approximately $984 million in Otter Tail Power Company projects between 2019 and 2024, with a projected annual rate base growth rate of 8%. Now I'll turn to the Manufacturing platform. BTD, which celebrated its 40th anniversary last year, is the largest of our manufacturing companies with more than 1,300 employees and 5 facilities in Minnesota, Illinois and Georgia. Its customers are familiar brands such as Polaris, Toro, John Deere, Cummins, Caterpillar and Honda. Last year, BTD performed well, increasing net income by nearly 14%. The Washington-Illinois plant continues to be impacted by the effects of soft oil and gas markets as it has a concentration of parts used in the oil and gas fracking machinery. The company reduced employee counts in Illinois and Detroit Lakes, Minnesota sites last year as part of the sales, inventory and operations planning process. They continue to balance production output and inventory levels to ensure continued on-time delivery, all while successfully managing metal price pass-through. The Georgia facility significantly improved profitability as sales grew nearly 20% in 2019. The company achieved this while reporting its lowest OSHA rate on record and its highest on-time delivery rate in history. The Lakeville, Minnesota location also received an outstanding achievement award from the Minnesota Safety Council for safety performance in 2019. T.O. Plastics had a difficult year dealing with a partial warehouse roof collapse from a snowstorm in the spring of 2019. They also had a negative change in their sales mix due to a customer bringing more production in-house. And they continued to deal with hiring and retaining adequate staffing levels. We continue to focus on operational excellence and look to expand through building customer relationships and new product launches. Our Plastics segment maximized margins despite a decrease in pounds of pipes sold and lower pipe prices. Lower sales volumes resulted primarily from poor weather conditions across our service territory last year, combined with lower overall demand for the product in both the Midwest and West Coast states we serve. Despite the lower revenue and earnings reported last year, this segment continues to provide strong cash flows to support our dividend and returns on invested capital. As part of succession planning, strategic succession planning, Northern Pipe Products announced Terry Mitzel as company President. Mitzel has been employed at Northern Pipe Products for more than 12 years. His most recent roles were Vice President of Sales and Marketing, preceded by Director of Sourcing. In his role as President, Mitzel oversees the executive leadership team and continues to manage the resin buying process for the Plastics segment. We are confident his experience and skills, coupled with the strong team and momentum existing in Northern Pipe Products, will continue to lead to achievement of outstanding customer service, operational excellence and talent development. Both companies are implementing continuous improvement projects to enhance efficiency and capacity. I would summarize by saying all our companies contributed to our excellent 2019 financial results. Our strategic business objectives for 2020 remain the same. We will grow our businesses, achieve operational and commercial excellence and continue to develop talented employees in our companies. They have my confidence. I hope these success stories help you share my appreciation for them. On behalf of the employees across our organization, I thank you for your continued support.

Okay. Thanks, Chuck, and I appreciate the up-to-date on the operational aspects of the company. That concludes our formal presentation of today's meeting. I'm now pleased to move to the question-and-answer portion of the meeting. And as a reminder, shareholders who wish to ask questions may do so by clicking the message icon located in the upper right-hand of your welcome screen. Also as stated earlier, please be mindful of the rules of conduct to provide you upon entering the meeting and remain available for reference on the welcome screen. We're going to take questions for about 30 minutes or until we exhaust the list of questions this morning. In order to give as many people as possible a chance to participate, each shareholder will be limited to 2 questions. I'll now ask our moderator of the meeting, Manager of Investor Relations and Corporation, Loren Hanson, to read questions as they have been submitted. So if you have a question, we would love to see your questions at this time. So with that, I'll turn the question over to Loren, and he can read the first question that we may have that has been submitted by our shareholders. Loren?

Thank you, Nathan. At this point, we don't have any questions in the queue. So if anybody wants to go ahead and ask a question, please do so now.

Okay. We'll continue to wait for a few more minutes to see if anybody has any questions that they want to submit to us. I think we had very thorough reports provided by management, both from the financial aspects from Kevin and the operational aspects from Chuck and his team. Okay. Still no questions. We must have been really thorough this year with our presentations. We're going to wait a few more minutes, not to keep everybody on the line all day. Hopefully, we can get a few questions. But if not, the corporation always remains open to your questions. Loren is always willing to accept any and all questions from shareholders. They can be submitted in writing to us, and we're always appreciative of your interest in the corporation and glad to respond to your questions at that time. I'll keep it open for a few more minutes to make sure that we give everybody a chance to do that. And then we'll move forward with closing out the meeting if there's no questions. I'll go back to Loren. He's the one that is in control center in Fergus Falls that can tell us whether we have any more questions. Anything else in the queue that you've received, Loren?

No, not at this time. Oh, just a second. We might have just gotten our first. Well, let me double-check here. No. No questions at this point.

Well, we appreciate everybody's attention this morning and coming in to listen to our first virtual shareholder meeting. We look forward to having an in-person meeting next year, although we may add the web portion to the meeting to allow people that cannot make the trip to Fergus Falls to do it. So seeing that we have no questions in the queue, this will conclude our 2020 annual meeting of shareholders. I want to thank you for your attention and your attendance today. I appreciate your continued support and interest in the corporation. We hope you're able to join us next year's annual meeting at Fergus Falls. And please be safe, and we wish each of you the best in these trying times. Take care, and we'll see you next year. Thank you.

Once again, we'd like to thank you for participating on today's conference call. You may now disconnect.