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

Explicit Guidance:

• FY2026 Adjusted Diluted EPS: Midpoint affirmed at $5.88 with a narrowed guidance range of $5.73 to $6.03 (previously $5.68–$6.08); excludes after-tax impact of Q2 legal settlement.
• FY2026 Financial Objectives: Management remains confident in delivering 2026 objectives despite Q3 headwinds.
• Plastics Segment Earnings (2027–2028): Expect earnings to continue declining through end of 2027; target 2028 earnings within a range of $45–$50 million.
• Long-Term Growth Targets: Anticipate delivering long-term EPS growth of 7–9% and total shareholder return of 10–12%, contingent on plastics earnings normalizing in 2028.
• Capital Investment (Otter Tail Power): Reaffirmed five-year plan totaling $1.9 billion; incremental investment opportunity increased to $850 million (up from $750 million) for the current period.
• Corporate Guidance: Midpoint for corporate cost center increased due to better-than-expected Q3 results.

Business-Segment Outlook:

• Otter Tail Power: Reaffirmed five-year rate-based compounded annual growth rate (CAGR) of 10%, with earnings expected to grow similarly over the planning period. Plan is not dependent on securing large loads, which remain incremental.
• Plastics Segment: Anticipates continued decline in average sales price (PVC pipe) and volumes through end of 2027 due to elevated mortgage rates and increasing developed lot inventory. However, revenue streams are shifting toward water infrastructure demand (data centers, large manufacturing facilities) to offset softening new housing market volumes.
• Manufacturing Segment: Outlook is positive for RV, lawn/garden, horticulture, construction (OEM demand up), and industrial end markets. Agriculture remains challenging but expected to show slight improvement in 2027.
• Operational Efficiency: Manufacturing segment focusing on improving productivity and managing costs following Q3 pressures from higher production costs and new employee onboarding.

Market and Competitive Outlook:

• Pricing Dynamics: PVC pipe average sales price declined 9% YoY in Q3 (slowing rate of decline vs. prior quarters); however, PVC resin and input costs rose 10% YoY. Pricing strength was observed despite broader market softness due to elevated Q2 customer demand and supply constraints.
• Demand Trends: Construction and industrial end markets are improving; recreational and agricultural sectors show mixed but stabilizing trends.
• Competition/Positioning: Otter Tail Power maintains competitive advantage with electric rates well below national/regional averages, supporting large load attraction and customer affordability.

Macro / Industry Outlook:

• Housing Market: Continued softening in the new housing market and elevated mortgage rates are expected to exert downward pressure on new home construction and associated plastics demand through 2027.
• Interest Rates/Capital: Elevated mortgage rates and increased developed lot inventory identified as key drivers for sector headwinds.
• Regulatory Environment: Minnesota rate case ongoing with a modified request for net revenue increase of $38.7 million (down from $42.3 million); evaluation of rate cases in other jurisdictions continuing.
• Infrastructure/Utilities: Regulatory comments from Minnesota Department of Commerce suggest additional renewable generation and battery storage as alternatives to natural gas.

Strategic Initiatives:

• Renewable Generation:
  • Solway Solar: Anticipated operational in H1 2027.
  • Abercrombie Solar: Anticipated operational in H2 2028.
  • Battery Storage: Facility expected to come online in 2028.
• Capacity Expansion: Leveraging added large-diameter manufacturing capacity at the Phoenix facility to offset volume declines; new capacity in Arizona and Georgia already active.
• Wind Project: Upsizing potential wind project investment from 200 MW to 300 MW, contributing to the incremental capital increase.
• Transmission: Developing large regional transmission projects; proactive engagement with landowners and local governments despite increasing complexity.
• Debt Management: Anticipates retiring and not replacing outstanding parent-level debt by end of 2026; plans to fund growth without accessing equity capital markets.
• Capital Planning: Expect to provide a revised five-year capital spending plan at the year-end earnings call in February 2027.

Risks and Headwinds to Outlook:

• Transmission Timelines: Increased complexity in siting and development of large regional transmission projects poses a risk to original timelines for the five-year capital plan.
• Construction Costs: Higher production costs, increased labor, vegetation management, and plant outage-related costs are pressuring margins.
• Plastics Market: Compressed margins driven by the divergence between declining PVC pipe prices and rising resin/input costs.
• One-Time Adjustments: Earnings impacted by timing of vendor rebate recognition (inventory vs. earnings benefit).
• Corporate Costs: Higher Q3 costs driven by lower income tax benefits and reduced investment income; future levels subject to volatility.

Management Tone on the Future:

• Confidence Level: "Confident" in delivering 2026 financial objectives and the long-term 10% utility growth plan, though acknowledging a "more difficult environment" for transmission projects.
• Strategic Shift: Expressing "not satisfied" with Q3 segment results due to cost/productivity pressures but "encouraged" by improving industry conditions in non-plastics sectors.
• Hedges: Explicitly notes that plastics earnings may decline through 2027 before normalizing; highlights that actual results may vary materially due to seasonality and market timing.

Miscellaneous:

• Balance Sheet: Maintained financial strength with an equity layer of 61% of total capital and over $600 million in available liquidity (including >$250 million cash/securities).
• Financial Adjustments: FY2026 guidance excludes after-tax impact of Q2 legal settlement expense.
• FY2027 Electric Performance: Year-to-date (first nine months of 2027) electric segment earnings up 14% vs. prior year.
• FY2027 Manufacturing Performance: Year-to-date segment earnings up 28% vs. prior year despite Q3 decline.