Otter Tail (OTTR) - 2022 Q4 - Earnings Call Transcript

Financial Data and Key Metrics Changes - Consolidated revenues increased approximately 22% to $1.46 billion, and consolidated earnings were$ 284 million, with diluted earnings per share of $6.78, a 60% increase from 2021 [10][15][40] - Return on equity in 2022 was 25.6%, compared to 19.2% in 2021 [40] - Corporate costs were impacted by increased employee healthcare costs and professional service expenses, but were partially offset by lower interest expenses [26][49] Business Segment Data and Key Metrics Changes - Electric segment earnings improved by 10%, driven by increased revenues from commercial and industrial customers [10][23] - Manufacturing segment net earnings increased by$ 3.8 million, with an 18% increase in revenues due to higher sales volumes [24] - Plastics segment net earnings increased by $97.6 million, with revenues up approximately 35% due to significant increases in sales price per pound of PVC pipe [25][39] Market Data and Key Metrics Changes - The recreational vehicle and lawn & garden markets are expected to soften in 2023, while agriculture, power generation, and horticulture markets are anticipated to remain strong [21] - The backlog for the Manufacturing segment as of December 31, 2022, was approximately$ 388 million, compared to $391 million a year ago [28] Company Strategy and Development Direction - The company is targeting to reduce carbon emissions from owned generation resources by approximately 50% from 2005 levels by 2025 and 97% by 2050 [17] - A capital investment plan of$ 1.1 billion over the next five years is expected to produce a 6.4% annual compounded growth rate in rate base [37] - The company expects to produce compound growth in earnings per share of 5% to 7% off a base of 2024 earnings [69] Management's Comments on Operating Environment and Future Outlook - Management anticipates a transitional year in 2023 as industry conditions within the PVC pipe industry normalize, with expected earnings per share in the range of $3.76 to$ 4.06 [44][80] - The company is actively managing the impacts of inflation across all operating companies and monitoring various economic indicators [29][50] Other Important Information - The company completed the purchase of the Ashtabula III wind farm, providing a lower-cost alternative than maintaining the purchase power agreement [19] - The Inflation Reduction Act has increased the investment tax credit on the Hoot Lake Solar project from 26% to 40% [6] Q&A Session Summary Question: How is the balance sheet affecting strategic plans for the utility? - Management noted that the strong balance sheet provides additional flexibility for future rate base projects, with an uplift in the capital plan driven by the Inflation Reduction Act [34][35] Question: Can you provide details on the Plastics expansion? - The total costs for the Plastics expansion, including a second line, are expected to be around $50 million, with the expansion timeline set for 2027 [36][73] Question: What is the outlook for the utility and rate cases? - Management does not anticipate any rate cases in 2023, with the possibility of one in North Dakota [63] Question: What are the expectations for earnings in 2023? - Earnings for the Manufacturing segment are expected to decline by 10% due to a slowing manufacturing sector, while earnings at T.O. Plastics are expected to be flat year-over-year [46][47] Question: How is the company managing inflationary pressures? - The company expects lower corporate costs in 2023, but inflationary increases in salary and benefit costs are anticipated [49]