Otter Tail Corporation Third Quarter 2026 Earnings Conference Call - OTTER TAIL CORP

Financial Performance:

• Diluted earnings per share (EPS) for Q3 2026 were $1.41, down from $1.86 in the prior year period.
• Year-to-date (YTD) electric segment earnings increased 14% compared to the prior year.
• Manufacturing segment earnings decreased 3 cents per share for the quarter, though YTD earnings are up 28%.
• Plastic segment earnings decreased $0.34 per share, driven by a 9% decline in average PVC pipe sales price and a 5% volume decrease.
• Corporate costs increased $0.08 per share due to lower income tax benefits and reduced investment income.
• Strong balance sheet maintained with 61% equity-to-capital ratio and over $600 million in available liquidity (including >$250 million in cash and equivalents).

Guidance and Future Outlook:

• Affirmed and narrowed the midpoint of adjusted diluted EPS guidance for the full year to $5.88, with a revised range of $5.73 to $6.03 (previously $5.68–$6.08).
• Reaffirmed a five-year rate-based compounded annual growth rate (CAGR) of 10% for Otter Tail Power.
• Long-term earnings per share growth target remains 7% to 9%, with a total shareholder return target of 10% to 12%.
• Anticipate plastic segment earnings to normalize in 2028, projecting a range of $45 million to $50 million.
• Revised five-year capital investment plan to $1.9 billion for Otter Tail Power, with incremental opportunities increased from $750 million to $850 million.

Business Segments and Product Lines:

• Otter Tail Power: Submitted sur-rebuttal testimony for the Minnesota rate case with a modified net revenue request of $38.7 million (down from $42.3 million); proceeding with the 15-year Integrated Resource Plan.
• Capital Projects: Solway Solar expected operational in H1 2027; Abercrombie Solar in H2 2028; battery storage project targeting 2028 operational status.
• Manufacturing: Leveraging new capacity in Arizona and Georgia to offset headwinds; end markets in RV, lawn/garden, and horticulture remain stable; construction market showing improvement; agriculture facing challenges but showing signs of recovery.
• Plastics: PVC pipe volume decreased as customers advanced purchases prior to resin price hikes; new demand emerging from data centers and large manufacturing facilities for water infrastructure.

Market and Competitive Landscape:

• PVC resin input costs increased 10% year-over-year due to global supply and demand dynamics.
• Housing market remains soft, impacting PVC pipe sales volumes, though water infrastructure demand is increasing.
• Otter Tail Power maintains electric rates well below national and regional averages, supporting competitiveness for new load attraction.
• Management views the diversity of the load pipeline (including clean fuel and thermal storage) as a strategic strength.

Risks and Challenges:

• Transmission project development faces increased complexity regarding siting and local community concerns, posing potential timeline risks.
• Higher production costs, inflation, and labor/vegetation management costs are pressuring operating margins.
• Plastic segment earnings are under pressure from receding sales prices and a softening residential construction market.
• One-time adjustments regarding vendor rebates impacted quarterly earnings and annual guidance projections.

Management Commentary and Tone:

• Tone is confident regarding long-term strategic execution despite short-term headwinds, emphasizing "customer-first" and "project execution" priorities.
• Management acknowledges the challenging environment for infrastructure development but remains committed to the five-year growth plan.
• CFO Tyler Nelson noted that while Q3 results were below expectations due to cost pressures, they were better than anticipated on a quarterly basis.
• CEO Chuck McFarland emphasized the utility's low-cost service model and the strategic value of the diversified manufacturing and plastics segments.

Analyst Questions and Answers:

• Transmission Delays: President Tim Rogosad confirmed that while the need for projects remains, complex local permitting and landowner engagement may cause timeline delays; no immediate changes to the five-year plan are expected, with updates to be provided at year-end.
• Pricing Dynamics: CFO Tyler Nelson clarified that while input costs rose 10%, average PVC prices still declined 9%, though at a slower rate of decline than previous quarters. Pricing strength was supported by Q2 elevated demand; the mix of larger diameter pipes from the new Phoenix facility did not materially impact the overall pricing profile.

Other Key Points:

• Otter Tail Corporation plans to retire its sole parent-level debt by the end of the year without replacing it, funded by internal cash generation.
• The company does not rely on securing large load wins to fund its growth plan, viewing such opportunities as incremental.
• A revised five-year capital spending plan is expected to be presented during the year-end earnings call in February 2027.