Good day ladies and gentlemen and welcome to Otter Tail First Quarter 2017 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference call is being recorded. I will now like to turn the call over to Otter Tail.

Good morning, everyone, and welcome to our call. My name is Loren Hanson, and I manage the Investor Relations area at Otter Tail. Last night, we announced our first quarter 2017 results. Our complete earnings release and slides accompanying this earnings call are available on our website at www.ottertail.com. A replay of the call will be available on our website later today. With me on the call today is Chuck MacFarlane, Otter Tail Corporation’s President and CEO; and Kevin Moug, Otter Tail Corporation’s Senior Vice President and Chief Financial Officer. Before we begin today’s call, I’d like to remind you that during the course of the call, we will be making forward-looking statements. As noted on Slide 2, these statements represent our current judgment or opinion of what the future holds. They are subject to risks and uncertainties that may cause actual results to differ materially from forward-looking statements made today. So please be advised about placing undue reliance on any of these statements. Our forward-looking statements are described in more detail in our filings with the Securities and Exchange Commission, which we encourage you to review. Otter Tail Corporation disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise. For opening remarks, I would now like to turn the call over to Otter Tail Corporation’s President and CEO, Mr. Chuck MacFarlane. Chuck?

Thank you, Loren and good morning everyone. For the quarter net income was $19.5 million or $0.49 a share. This was better than planned and $0.11 better than last year. As pointed out in the press release, although all of the operating segments improved net income. Minnesota interim rate revenue at the utility drove the overall improvement. Weather was also slightly more favorable for the utility this year although mild winter weather did negatively impact Otter Tail Power's first quarter earnings per share by $0.02 compared to normal. Improvement in the manufacturing platform was largely a result of improving prices on scrap metal sales, lower operating costs and lower interest costs, which Kevin will describe in a few moments. I credit our employees. They are dedicated to cost management and they work toward operational excellence. Their retention helps us manage events such as unfavorable weather at the utility and difficult economic factors that continue to effect our manufacturing platform. We are confident in our business model that combines a strong regulated electric utility with the portfolio of manufacturing businesses to enhance long-term returns. My remarks today will focus on continuing execution of our strategy to grow rate base, which includes the utilities rate case decision, the Minnesota Commission decision on the utility's resource plan; and transmission investment that is underway. I will also update you on each of our manufacturing companies. On March 2, a year after Otter Tail Power filed its rate case, the Minnesota Public Utilities Commission granted a revenue increase of 6.3%. This compares with the utilities modified request of 7.4% submitted during rebuttal testimony. The Minnesota Commission set the return on equity at 9.41% on an equity layer of 52.5%. The Commissioners complemented the utility's operational performance and we believe, we received more favorable treatment as…

Well, good morning, everyone. Please refer to Slides 11 and 12 as I discuss our first quarter results. Utility net earnings increased $3 million quarter-over-quarter. Key drivers of the 24% increase in net earnings were, an increase in retail revenues of $2.8 million net of an estimated refund related to interim rates that went into effect in mid-April of 2016; increased retail revenue related to colder weather in the first quarter of 2017 compared to the first quarter last year; heating-degree days increased by 10% between the quarters; weather positively impacted earnings per share by approximately $0.02 quarter-over-quarter. Compared to normal, weather negatively impacted earnings per share by $0.02. Increased MISO transmission tariff revenue related to increased investment in regional transmission projects and lower operating and maintenance expenses. These items were offset in part by lower kilowatt-hour sales as well as lower prices to industrial customer as a result of a customer opting for market base pricing in July of 2016; lower environmental rider revenues due to increased investment balances; and lower conservation improvement program incentive revenues. Our manufacturing segment net earnings increased $319,000 quarter-over-quarter. Revenues decreased quarter-over-quarter for BTD by $2.2 million mainly due to reduced sales of transportation fixtures for wind turbine blades and tooling sales, offset in part by higher scrap metal sales due to more favorable pricing. Also contributing to BTD's higher net income were lower operating expenses and lower interest costs. At T.O. Plastics, revenues and earnings increased quarter-over-quarter. Horticultural sales increased driven by unit volume growth, offset by lower selling prices. The lower selling prices were impacted by increased competition in the marketplace. Life sciences, which includes medical packaging and research products had a $200,000 revenue increase quarter-over-quarter. Earnings also benefited from lower operating expenses and lower interest costs. Our Plastics segment's revenues increased…

Thank you. [Operator Instructions] And our first question comes from Paul Ridzon from KeyBanc. Your line is now open.

Good morning, congratulations on the quarter.

Thank you, Paul.

Are there any – are you caught up with your refunds or could we see some more refunds from interim rates flowing to the second quarter?

Hey, Paul. This is Kevin. As of the end of the quarter, our estimated refund is trued up to the – as the result of the oral arguments and deliberations that occurred in the March timeframe, the final order was issued yesterday. And so we're in line and trued up with, as we review that order, we were relatively trued up against the order. There is one item that we have outstanding related to a private letter ruling that we agreed to go get with the Department of Commerce. That's – it has to do with treatment of accumulated deferred income taxes to the extent that that comes back differently than where we're at, that could have some impact on the estimated refund. But we're pretty well trued up now.

Thank you. And then the tax benefit you've had from the stock comp, is that ongoing or what should we expect in the coming quarters?

There will be no more of that this year. So it's really a – the result of – we switch the accounting for those performance share awards in the fourth quarter to the equity method. And when those – it was the 2014 awards that we're in the money through based on the three-year return ending 2016. That was paid out in the first quarter of 2017. And given that the fair value of the awards were higher than what the grant date fair value was, then we get this tax benefit that benefited lower corporate costs. But it won't happen again because our performance share awards are, to the extent they're in the money. They're issued and awarded annually based on the performance, the three-year performance. So the next time we could see something would be in February of 2018.

Got it. And then depreciation at the utility was down a little bit. Did that impact net income or was your dollar-for-dollar revenue offset?

It impacted net income some, but there was also, the offset as you suggest but we did have an order that came out of the commission that related to assets at Hoot Lake and the orders said we should extend the life over which those assets are depreciated. So we did have some pick up there as a result of that order.

Because your revenue was still based on – but that would be trued up with when you implemented new rates, is that fair?

I don't think so.

Okay. Thank you very much.

Thank you. And our next question comes from Tate Sullivan from Sidoti. Your line is now open.

Hi, thank you and good morning. If I may start with the Plastics division, you mentioned, first, why – why, what do you see that makes you think you have the lower sales volume of PVC pipe?

Tate, this is Kevin. Just as we look at the forecast for the rest of the year in terms of demand. We're seeing lower forecasted sales compared to last year somewhere in that kind of 1% to 2% range. And there was a – as Chuck mentioned in his comments, we did see a real burst of volume in March related to, I would say, pent-up demand that was out there because of some of the issues that occurred with inclement weather in our regions that we sell into. So there was a real pick up there in March relating to buying pipe in advance of announced increases. And now as we look out through the rest of the year, we're seeing kind of what we would expect to be normal volumes of pipe to be sold through the rest of the year such that we don't expect it to get back to the same levels last year. But having said that, we are starting to see a uplift in sales pipe prices that are kind of coincide with these resin increases that are occurring as well. So we are looking to see some improved margins there but we aren't seeing a pickup to last year's volume yet.

What does it normally entail? I mean is it residential development that may point to 2016 is a near term peak in the sales of your PVC pipe or the whole industries are? Is it government or can you just give me some macro reasons that maybe in 2016?

Sure. I think that certainly, residential development or construction and housing starts is an indicator that we look at – construction starts in general, ex-residential is another indicator. And then just in terms of interest rates that can be an indicator as well in terms of what could happen with volumes.

Okay. Thank you and…

We believe the fourth quarter of 2016, a lot of these large distributors were holding off on major purchases. So take into consideration that Q4 of 2016 was probably a low volume accounts this quarter and a lot of that sort of rollover into the first quarter of 2017.

Okay. And then manufacturing, I think – have you indicated before a net profit margin goal for that business? And I may have missed your comments when you're talking about your outlook for 2017. Do you see higher sales in that business in 2017?

Yes, we have – Tate, Kevin here. We have publicly stated that we have a goal of getting the Manufacturing segment to a return on sales of 5%. Now as it relates to 2017 forecasted sales for BTD, we expect flat sales year-over-year for the reasons that were indicated in our script comments. We're seeing some volume growth a bit at T.O. Plastics. But we don't, we're still on a, call it, a glide path to get to the 5% return on sales. We don't expect that, our guidance does not anticipate getting to a 5% return on sales of this year. There's still headwinds that we continue to work through, primarily at BTD, in terms of our three locations that will take us a while to get back to the 5%.

We do anticipate being at or above 5% in the other manufacturing companies. It would be BTD that would be under that target in 2017.

Okay understood. Okay thank you very much.

And our next question comes from Chris Ellinghaus from Williams Capital. Your line is now open.

Good morning guys, how are you.

Good.

Good.

Chuck if I heard you correctly, you said that the first quarter results were better than planned. Given – well I suppose it depends what the magnitude is but any reason not to adjust the guidance given better than expected first quarter.

Thanks Chris. They were slightly better. And I think that the main issue – we had planned this. We knew that there would be one quarter, where we would have interim rates in affecting in 2017 and not in 2016, for the remaining three quarters, you are going to have with interim rates very – year-over-year comparables will be much closer. So we anticipated that when we set guidance and it has effectively has come out that way and we are still a little bit behind on weather.

As far as and the PVC volumes being at record levels in the first quarter, and given your sort of overall slightly lower expectations for volumes, where will the sort of delta come from throughout the rest of the year? Is that volumetric sort of benefit in the first quarter is going to come out in the second quarter? Is that sort of throughout the rest of the year? Have you got any insight into that.

Yeah, Chris, in general that volume comes out through the rest of the year as we look out in the forecast, we expect that welcome to come out throughout the rest of the year is where we're seeing it.

Okay, Kevin you said something about electric sales volumes can you just repeat that.

Oh, sure, we had a reference to lower industrial kilowatt-hour sales quarter-over-quarter. And it was due to reduced, we saw some reduced volumes in our industrial base and then we saw some lower pricing in the first quarter with our major pipeline customer. There was different pricing metrics that kicked in, in July of 2016 with our major pipeline customer that weren't in place in the first quarter of a year ago. And, so we saw lower revenues as a result of that. We don't expect, I said differently, we do expect that the pipeline customer is going to continue on their current levels of forecast, with us for 2017. So we aren’t seeing any erosion there but it was just this one – the pricing change that occurred and then some lower volumes across the industrial base.

Okay.

And in addition to that, I mean the large pumping loads are on forecast. We had, what I would consider, an abnormally high first quarter in 2016 of pipeline load just by some of the projects that they had undergoing and constraints they had in their system across additional pumping load if you will.

Okay, that is good. Steel scrap for manufacturing, can you just give us some directional numbers there, sort of what was the increase and what sort of proportionality for the improvement in manufacturing earnings was the scrap pricing.

And Chris it is Kevin, so on a quarter-over-quarter basis scrap revenues were up about $760,000 quarter-over-quarter. And so that ultimately just drops straight through your tax effect, drops straight through to the bottom line and so that really helped offset the lower revenues that we experienced quarter-over-quarter.

What kind of percent increase in prices was that?

It was pretty much all driven by pipe – metal scrap metal, increases. The volumes were relatively consistent between the quarters. So it was pretty much driven by prices and that is just an improving, there has been an improving market, for pricing in scrap metal over the last year.

Okay great thanks for the details guys.

[Operator Instructions] And I am not showing any further questions at this moment. I would like to turn the call back over to Chuck MacFarlane for any further remarks.

Thank you. Well to summarize, net earnings increased $0.11 quarter-over-quarter from continuing operations. Otter Tail Power completed it’s first general rate case in Minnesota in six years and received an overall 6.3% rate increase. The Minnesota Commission approved Otter Tail Power’s resource plan that supports our buildout strategy. And our manufacturing segment has improved earnings. And we are reaffirming our 2017 earnings guidance of $1.60 to $1.75 per share. Thank you for joining our call and for your interest in Otter Tail Corporation. We look forward to speaking with you next quarter.

Ladies and gentlemen, thanks you for participating in today’s conference. This concludes today’s program you may all disconnect. Everyone have a great day.