Otter Tail Corporation (OTTR) Earnings Call Transcript & Summary

Good morning and welcome to the Otter Tail Corporation's 111th Annual Meeting of Shareholders. I would now like to turn the meeting over to the corporation.

Thank you and good morning. I'm Nathan Partain, Chairman of the Board of Directors of Otter Tail Corporation. Welcome to the 2021 Annual Meeting of Shareholders. On behalf of our directors, officers and employees, I thank you for attending. Like last year, we are holding a virtual-only meeting due to the ongoing public health risk posed by the coronavirus pandemic. Your safety and health remains a priority to us, and we believe the virtual platform creates an experience similar to our in-person meetings while also allowing shareholders to participate from anywhere in the world. In light of the financial strain the pandemic has placed on so many in our communities, once again, Otter Tail Corporation Foundation has donated an amount to the local Fergus Falls food shelf, which would otherwise have been spent on meals at an in-person meeting. I would also like to acknowledge and express our appreciation to all of the employees throughout Otter Tail who worked so diligently this past year to establish safe work procedures and to abide those protocols in all they do every day. To our shareholders, I'm grateful for your continued support and investment in Otter Tail Corporation. This past year has been tremendously challenging one for all of us, our people, our business, our communities and our nation. Our thoughts are with those of you who may have suffered or experienced loss during these challenging times. I'm proud of the actions of the Otter Tail Corporation and the Otter Tail Power Company Foundation, which contributed to local food banks and the United Way offices to assist those communities in responding to many of the needs created by the pandemic. These donations are reflective of how the corporation carries out our values to our people and our communities. In spite of these many difficulties, 2020 was a strong financial year for the corporation. Our utility successfully executed on their major generation and transmission projects, and our manufacturing companies navigated the challenging and changing economic conditions and delivered excellent results. Before we get started with the business portion of the meeting, I'd like to go over just a couple of the procedures for asking questions or for voting at our virtual meeting. If you'd like to submit a question at any time during the meeting, you may do so. We will respond during the question-and-answer portion of the meeting immediately following management's presentations. Please observe the agenda and the rules of conduct for the meeting, which have been made available on your welcome screen. Additionally, if you haven't voted your shares, you will need to select the Vote Here button on the page to vote your shares. The polls will remain open until the business portion of the meeting is concluded. Present at today's meeting via the webcast are my fellow Board members: Karen Bohn, John Erickson, Steve Fritze, Kathryn Johnson, Timothy O'Keefe, James Stake and Thomas Webb. And from the corporation's executive team: Chuck MacFarlane, President, Chief Executive Officer and a member of our Board; Kevin Moug, Senior Vice President and Chief Financial Officer; and Jennifer Smestad, Vice President, General Counsel and Corporate Secretary. Amanda Guanzini, Partner; and Kelsey Swanson, Senior Audit Manager, are attending the meeting as representatives of our independent auditor, Deloitte & Touche. Also present is Jan Castillo, a representative of our distribution agent, Broadridge, who will serve as Inspector of Elections of this meeting. Loren Hanson, Manager of Investor Relations, will be moderating our question-and-answer portion of the meeting. And I'd like to take this moment to recognize Loren as this will be his last annual meeting. He has been instrumental in overseeing and facilitating our annual meeting for a number of years. He's been with Otter Tail for 40 years, and most of those supporting and leading the shareholder services and investor relations team. His dedication and service to our shareholders is very much appreciated, and we wish Loren the best in his retirement. He will truly be missed. Turning to the business portion of the meeting. I've been advised by our Corporate Secretary, Jennifer Smestad, that notice of the Annual Meeting of Shareholders was sent on or about March 3, 2021, to all shareholders of record as of February 12, 2021. I can report that holders of the majority of the total shares outstanding and eligible to vote as of the record date are present in person, online or by proxy. There is, therefore, a quorum present, and the meeting is duly constituted. The business of the meeting may proceed. The polls will close following the introduction of the items of business. As a reminder, if you have not yet voted or would like to change your vote, you may do so now online. If you have already voted, your vote has now been counted. We'll now consider the items of business described in the proxy statement. The Board recommends that shareholders vote for each of the following proposals. The first item of business is the election of directors. The Board of Directors has nominated: Karen M. Bohn, Charles S. MacFarlane and Thomas J. Webb for reelection to serve a 3-year term ending at the annual meeting in 2024 and until their successors are duly elected and qualified. The next item of business is the proposal to amend and restate the Articles of Incorporation to increase the maximum number of directors from 9 to 11. The Board believes that the current limit of 9 directors limits the flexibility of the Board to add new directors, even if a strong candidate is identified from time to time for succession planning and transition purposes. 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 last item of business is the proposal to ratify the appointment of Deloitte & Touche, LLP to act as Otter Tail Corporation's independent registered public accounting firm for the year 2021. No other items of business have been brought to the attention of the corporation, and I hereby declare the polls are closed. The final vote, 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've received a preliminary voting report from our Inspector of Elections. And based on that report, all proposals have passed. The preliminary voting results are as follows: all director nominees received at least a majority of the votes cast and all were reelected to serve as directors for a term of 3 years; the amendment and restatement of the Articles of Incorporation to increase the maximum number of directors from 9 to 11 was approved by the required majority of the votes cast; the corporation's executive compensation program was approved on an advisory basis by the required majority of the votes cast; and the appointment of Deloitte & Touche, LLP as auditors for the year 2021 has been ratified by the required majority of the votes cast. This concludes the business portion of the meeting. Next, management will present our financial condition and results of operations for 2020. I'll now turn the meeting over to Kevin Moug to provide a financial report. His knowledge and execution of the corporation's financial objectives have been topnotch. Thank you for your dedication and to enhancing shareholder value. Kevin, now I turn it over to you.

Thank you, Nathan, and good morning, and thank you, everyone, for attending the 2021 Otter Tail Corporation Annual Shareholder Meeting. Recognize in the presentations that you will hear this morning that there are certain risks and uncertainties about our businesses, and these significant risks are discussed in our public filings. 2020 marked a tremendous financial performance despite the challenges presented from the pandemic. We earned $2.34 a share, a 7.8% increase over 2019. Our Electric segment increased earnings supported in large part by our capital investments in energy generation and regional transmission projects. This is particularly impressive when considering that 2020 was impacted by unfavorable weather and the negative impact on COVID on our commercial and industrial sales and increased bad debt expense. Our Plastics segment experienced a record year in earnings caused by certain market conditions resulting in higher volumes of pipe being sold and higher operating margins. Our Manufacturing segment earnings declined because of the detrimental impact on sales because of the pandemic. This was driven by customers who implemented temporary plant shutdowns during the second quarter while attempting to understand how the pandemic was going to affect their businesses. This financial performance resulted in a return on equity of 11.6% on an equity ratio of 51%. Our 2-platform strategy continues to deliver high returns on equity. The utility sector underperformed the markets in 2020 as investors overlooked utility stability and lower risk profile in favor of sectors with higher risk/reward potential. These industry valuation headwinds likely impacted our 2020 stock performance as well. Our total shareholder return as of the end of 2020 has grown at a compounded annual growth rate of 13.4% over the past 5 years despite the impacts of COVID in 2020. Slide 5 highlights our capital expenditure plans for the 2021 to 2025 time frame. We expect capital expenditures for 2021 to be $133 million, of which 85% is earmarked for our Electric segment. Planned expenditures for this year include investments in renewable generation, technology and infrastructure. The 5-year capital expenditure plan calls for approximately $653 million in utility projects, of which approximately 35% will be covered through riders. The plan also includes $109 million for the Manufacturing and Plastics segment. These projects are expected to positively impact the corporation's earnings and returns on capital. The $653 million 5-year utility CapEx spend results in a compounded annual growth rate in rate base of 5% using 2020 as the base year. Our 2020 financing activities consisted of the following items: we issued the remaining tranche of $75 million senior unsecured notes under a delayed draw from the $175 million private placement notes that were issued in October of 2019. We also issued approximately $50 million of common equity in 2020. This, along with the equity issuance in the fourth quarter of 2019, successfully completed the amount of equity we had planned to issue in our financing plans. Both the debt and equity raised were in conjunction with our rate base growth projects at the utility. We do not currently expect to have any additional equity needs in our financing plans over the 2021 to 2025 time frame. Between expected cash flows generated from 2021 operating activities and these credit facilities, we have appropriate levels of liquidity to support our businesses. In February of 2021, the Board of Directors increased our 2021 indicated annualized dividend rate from $1.48 per share to $1.56 per share. This 5.4% 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 the rate base growth driving increased utility earnings. Our Manufacturing and Plastics segments provide additional coverage for the dividend. Otter Tail Power Company plans to grow its rate base in very supportive regulatory environments at a 5% compounded annual growth rate over the next 5 years driven by investments in renewable and natural gas generation, technology and infrastructure and transmission projects. The Manufacturing and Plastics segments will also provide organic growth over the long term. We expect to be able to deliver a total shareholder return of 8% to 10% over the long term, consisting of the 5% to 7% compounded annual growth rate in earnings per share using 2020 as the base year. Our current dividend yield is approximately 3.5%. Looking forward, we would expect to grow the dividend along with earnings per share growth of 5% to 7% compounded annual growth rate and maintain a dividend payout ratio between 60% and 70%. And finally, our 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 our future business prospects. Our business model weathered all the adversity of the pandemic. And as we move into 2021, we are well positioned with our strong balance sheet, ample liquidity to support our businesses and strong investment-grade credit ratings. I want to thank the employees of Otter Tail Corporation and our operating companies for contributing to our successful 2020. Your commitment, patience and willingness to adapt to new workplace challenges resulting from the pandemic are truly appreciated. And thank you to our shareholders for your continued support.

Thank you, Kevin. Before I turn things over to Chuck MacFarlane for our operations report, I'd like to thank the entire management team for their hard work and dedication in 2020, and particular to Chuck for his strong leadership. As shareholders, we'd be proud of the excellent job they've done and which is reflected in the overall results from the last year, which has been recognized by both the debt and equity markets.

Thank you, Nathan. I agree, we are in a good position as a corporation. We have engaged employees at all levels and a skilled and cohesive executive team and a committed Board. Our operating companies, along with our corporate team, continue to persevere through the pandemic. Our information technology systems have supported nearly 700 employees working from home. We remain diligent in our precautionary health and safety efforts based on the recommendations from the CDC, regional health organizations and state and local government. Our business continuity and pandemic plans put the health and safety of our employees, customers and communities at the forefront and are designed to help ensure continued electric reliability and operational excellence across our companies. Let's take a moment to recognize our corporation's and operating companies' tremendous 2020 pandemic response efforts. [Presentation]

Despite the global pandemic challenges, we achieved strong financial results in 2020. We continue to monitor this dynamic event and how it is impacting the economy and our electric and manufacturing platforms. The theme for this year's annual report is people and perseverance. We are proud of our 2020 achievements and look forward to 2021 as we continue to create a strong future through growing our businesses and achieving operational, commercial and talent excellence. We execute the right initiatives at the right times to facilitate measured growth for each of our platforms. 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 investments in generation and transmission projects. On the manufacturing side, BTD, T.O. Plastics, Northern Pipe Products and Vinyltech remain focused on efficient operations and the growth required to meet customer needs. Allow me to address a few highlights from each platform. Otter Tail Power continues to meet goals while providing customers with safe, reliable and affordable electric service. The company achieved a record safety performance for the second year in a row. And they executed on a record capital spending year during a global pandemic, completing 2 significant projects that marked major milestones in the future of our generation resources. I'll touch briefly on the accomplishments. In November, we filed a request with the Minnesota Public Utilities Commission to increase general rates in Minnesota, our first request since 2016. Investments in cleaner energy generation and smarter technologies primarily are driving this request, along with the rising cost of providing electric service. In December, the commission approved our request to begin recovering $6.9 million or a 3.2% increase on an interim basis beginning in January of 2021 as it considers our overall request to increase revenues $14.5 million or 6.77%. We anticipate a decision in late 2021 or early 2022. Even with this increase, Otter Tail Power will continue to have some of the lowest rates in the country. The Merricourt Wind Energy Center concluded construction and began commercial operation in December of 2020. It was completed on time and on budget despite unforeseen pandemic-related challenges. For example, we advanced shipping schedules to move blades out of Brazil before the shutdown with some blade manufacturing moving from Brazil to Colorado. When Spain shut down, manufacturing of half the turbine switchgear moved to Norway. And adjusting train schedules to optimize component inventory, using trucks rather than trains at times to avoid construction delays was critical in maintaining the project schedule. With successful completion, the facility generates enough energy to power more than 65,000 homes. At a cost of $260 million, it is the largest capital project in company history. Astoria Station construction is complete, and we are in the final stages of testing as we expect to begin commercial operation in the near future. This $152 million investment complements our wind generation by providing a reliable backstop when the wind is not blowing, and it has flexible operating options and low emissions. Astoria Station provides 250 megawatts of dispatchable capacity compared to Hoot Lake Plant's 140 megawatts. Astoria is projected to have 85% less carbon emissions than historic Hoot Lake Plant levels. Both Merricourt and Astoria projects prepare us for our Hoot Lake coal plant's May 2021 retirement. On behalf of our Board of Directors and entire organization, thank you to the countless employees, past and present, whose work supporting the plant made possible its long legacy of providing reliable, affordable electricity to our customers. We hope pandemic conditions allow us to commemorate all of these milestone projects live this fall. Whether live or virtual, we'll bring audiences on-site with a 3-part video series and a comprehensive documentary. Here's a glimpse of what's to come. [Presentation]

In September, Otter Tail Power announced plans to build Hoot Lake Solar, a $60 million, 49-megawatt solar farm on company-owned and newly purchased land around Hoot Lake Plant in Fergus Falls, Minnesota. The project will generate enough energy to power approximately 10,000 homes each year. The State of Minnesota has a 10% by 2030 solar energy goal. Hoot Lake Solar will accomplish 4% of this goal. The unique opportunity to wisely reuse the existing Hoot Lake Plant transmission rights and substation means the utility won't have to build miles of expensive additional infrastructure and avoids what can be costly and time-consuming process for transmission interconnection. We expect Hoot Lake Solar to provide more than $120,000 annually in local tax benefit, helping offset some of the tax impact from Hoot Lake Plant's retirement. We are working with neighboring landowners and the City of Fergus Falls to finalize a project that's cost-effective for our customer, meets our energy goals and Minnesota's renewable energy requirements and helps ensure reliable electricity into the future. Construction is slated to begin in 2022. We are enhancing transmission infrastructure by investing approximately $35 million to improve reliability and increase capacity for customers in the southern portion of our service area. The first of this 2-phase transmission project is complete and includes a new 15-mile 115 kV transmission line that connects the expanded Hetland substation to the new Lake Norden substation in South Dakota. Phase 2 of the project is a 43-mile 115 kV transmission line from Lake Norden to Astoria, South Dakota. It is underway, and we expect it to be in service in 2021. The contractor is on-site installing the conductor, and we've set approximately 40 of 43 total miles of structures. We've added more than $50 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. These are largely to accommodate new wind farms being built by renewable developers or neighboring utilities and recover these investments from the interconnection customer through a monthly payment over 20 years. 100% of the construction has been completed, including 3 major 345 kV interconnection substations placed in service during 2020. Otter Tail Power continues to enhance their generation mix to the benefit of our customers and the environment. In 2022, we project that more than 30% of our energy will come from renewables, and carbon emissions from generation resources we own will be at least 40% lower than 2005 levels, all while keeping residential rates among the lowest in the nation. We will be filing our Minnesota resource plan in September of 2021. This plan identifies the most cost-effective combination of resources for reliably meeting customer needs during the next 15 years. While this filing is required only in Minnesota, we developed a strategy for our whole system and filed a plan with North Dakota and South Dakota regulatory commissions. A supplemental filing was submitted to the Minnesota Public Utilities Commission in December of 2020. The plan will provide additional insight on the company's expected path forward with Coyote Station relative to Regional Haze compliance. The wind, natural gas and transmission projects are part of our electric platform's plan to grow rate base. Otter Tail Power grew average rate base by 18% in 2020 and increased earnings by 13.1% in conjunction with the $332 million in rate base projects completed in 2020. The utility's delivery system improvements, renewable resource additions, increased capacity on the transmission for renewable energy and modernized customer experience will drive its expected spend from 2021 through 2025. These investments will allow us to deliver on our commitment to a cleaner energy future while maintaining rates among the lowest in the nation and producing an expected compound annual rate base growth of approximately 5% over the 2020 to 2025 time frame. Now I'll turn to the manufacturing platform. In 2020, Northern Pipe Products and Vinyltech, the PVC pipe manufacturing companies that comprise our Plastics segment, delivered outstanding results. COVID-19 had limited impact on sales and the strong residential housing market, coupled with favorable market conditions, drove record earnings in 2020. As a result of their flexibility and reliable on-time delivery, Northern Pipe Products and Vinyltech operated well during a period of escalating pipe prices and strong demand in the second half of the year. BTD, our contract metal fabricator and the largest manufacturing business, was significantly impacted by the pandemic. The company saw year-over-year revenues decline by 15% due to reductions in end market demand caused by the pandemic and a decline in steel prices that we passed on to customers. As a result of volume declines, operating income fell by 9%. BTD adapted with difficult but necessary cost and workforce reductions, which enabled 0.5% of operating margin growth in a challenging year. After widespread customer plant outages in the second quarter, orders improved during the second half of 2020 with some end markets exceeding pre-pandemic volume levels. The company navigated through unprecedented fluctuations in customer demand while maintaining excellent quality and on-time delivery and reporting another outstanding year of safety performance. T.O. Plastics, our plastics thermal forming manufacturer, is well positioned to meet demand in the horticulture and emerging life science and medical device packaging markets. The company is focused on improving labor productivity and has installed new capital equipment, increasing production capacity to serve those markets. In 2020, T.O. Plastics produced nearly 95% of finished goods for horticulture projects from post-industrial recycled material. The collective efforts of employees across all operating companies contributed to Otter Tail Corporation's perseverance and accomplishment in 2020. Our strategic objectives for 2021 remain the same. We will continue to grow our businesses and achieve operational, commercial and talent excellence. We are well positioned for the future. On behalf of employees across our organization, I thank you for your continued support.

That now concludes the formal presentations for today. I'm now pleased to move to the question-and-answer portion of the meeting. [Operator Instructions] Now I'll ask the moderator, Loren Hanson, to read the questions that have been submitted.

Well, thank you, Nathan, and good morning, everyone. Our first question, and I'll direct this to Nathan, is now really a good time to increase the number of Board members and several hundred thousand dollars to overhead?

Okay. Thanks, Loren, and we always appreciate all the questions from shareholders. Our goal with the amendment that we brought into the proposal today is to provide some flexibility to add new Board members with the idea that we always want to balance out around 9 Board members. But at times, we see very strong candidates, and if we don't have an open position or we know we're going to be having an open position in the next year or so, it'd be nice to bring them on. So the ultimate goal eventually is to make sure we always balance around 9, and we are very conscious of the additional costs that would be added to the overall shareholders. So we're very focused on that. We appreciate your concern. It is a concern of the Board also. Thank you. Loren, additional questions.

Okay. At this point, I'm not seeing anything else in the queue.

[Operator Instructions]

I'm seeing no further questions in the queue, Nathan.

Okay. Well, I appreciate everybody's participation today. I think Kevin and Chuck made very good presentations and provided a nice update for us. So seeing that we've reached the end of the meeting, we want to thank you for attending. I appreciate your continued support, your interest in the corporation. We hope you'll join us again next year for the annual meeting. And please stay safe, and we wish each of you the best. I'll now turn the meeting back over to our operator for final closing.

And thank you for joining us today. The meeting has now concluded. Have a good day.