Good morning and welcome to the Otter Tail Corporation’s First Quarter 2019 Earnings Conference Call. Today’s call is being recorded. [Operator Instructions] I will now turn the call over to the company for their opening comments.

Good morning, everyone and welcome to our call. My name is Loren Hanson and I manage Otter Tail’s Investor Relations area. Last night, we announced our first quarter 2019 earnings results. Our complete earnings release and slides accompanying this call are available on our website at ottertail.com. A replay of the call will be available on our website later today. With me on the call today are 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, I want to remind you that we will be making forward-looking statements during this call. As noted on Slide 2, these current 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. 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 due to new information, future events, developments, or otherwise. For opening remarks, I will now turn the call over to Otter Tail Corporation’s President and CEO, Mr. Chuck MacFarlane.

Thank you, Loren. Good morning, everyone. Last night, we released our first quarter results. Please refer to Slide 8 as I begin my comments. Both operating revenues and net income increased slightly quarter-over-quarter and earnings per share remained consistent with first quarter 2018. Our financial performance continues to demonstrate the value of employee’s actions to grow our business, achieve operational and commercial excellence and develop talent. Turning to Slide 10, we will look at some of Otter Tail Power’s first quarter highlights. The Merricourt wind and Astoria station projects along with our South Dakota transmission reliability project and other investments outlined on Slide 12 will produce an approximate annual growth rate of 8% in our rate base between 2018 and 2023 in a constructive regulatory environment. I will touch briefly on several of these projects. The Merricourt generator interconnection agreement was filed with FERC on March 20, 2019, and received FERC approval on April 26. The Merricourt wind generation project will be Otter Tail’s largest capital investment at $270 million. We anticipate closing on the purchase agreement and beginning construction in the last half of 2019. Astoria station remains on schedule. Astoria will be a highly efficient simple cycle natural gas combustion turbine with 245 megawatts of capacity and will provide energy during periods of high demand. We will complement our wind generation by providing a reliable backstop when the wind isn’t blowing and it will have flexible operating options and low CO2 emissions. We will invest $165 million in this project, which includes approximately 70 construction jobs during the peak of the 13-month construction period. We expect Astoria station will be online in 2021. We are enhancing transmission infrastructure in our Southeastern/South Dakota service territory providing an approximate $39 million investment that will improve reliability and provide increased capacity…

Thanks, Chuck and good morning everyone. We are pleased with our first quarter financial results. Consolidated earnings per share for the quarter is ahead of our expectations driven by favorable results in our Electric and Manufacturing segments as well as our corporate cost center. Our PVC pipe company’s first quarter earnings were in line with our earnings expectations. Our 2019 financial plan for Plastics anticipated lower revenues and earnings based on current market conditions, which indicated our 2018 record year would not be repeated. Our current guidance for this segment would indicate 2019 will be our third best year from an earnings perspective. Please refer to Slide 23 as I discuss our first quarter results. Electric segment net earnings increased $2 million quarter-over-quarter. Key drivers for this increase were: increased revenues related to colder weather evidenced by an approximately 13% increase in heating degree days between the quarters. Weather favorably impacted earnings by $0.05 a share compared with the first quarter of 2018. Increased retail revenues in South Dakota due to the reversal of an expected refund related to reduced revenue requirements associated with the Tax Cuts and Jobs Act. The refund of this amount was not required under the terms of our South Dakota partial rate case settlement. Interim rates net of estimated refunds associated with our South Dakota rate case went into effect in October of 2018 increased renewable resource and transmission cost recovery rider revenues in Minnesota. These items were partially offset by lower kilowatt hour sales to industrial and other non-retail customers, lower ship revenues due to decreased ship expenditures in 2019; and other items impacting first quarter earnings were lower O&M expenses, increased depreciation expense and income tax expense due to higher earnings before taxes and the decrease in federal production tax credits, which had…

Thank you. [Operator Instructions] Our first question comes from Chris Ellinghaus with Williams Capital.

Hi guys, how are you?

Good, Chris.

Kevin, the PVC guidance for the year, the first quarter was sort of maybe a little bit below that run rate. Does that suggest that you’re expecting some improvements later in the year?

Yes, Chris, are you referring to the run rate for the year?

Yes. I’m just looking at the earnings in Plastics for the quarter is slightly below the run rate in – that the guidance would suggest or does that mean you’re expecting a little bit better later in the year results?

Yes, we are, Chris, I mean in part, we were – we expected a lower first quarter. Of course, we had weather that affected the – across the territory that impacted volumes, but as we look out the last – the rest of the year, we expect that to move up.

Okay, yes, you mentioned weather came for, also the roof issue at T.O. you said impacted the quarter. Can you quantify either of those?

The roof issue at T.O. from just an increase in operating expenses was $200,000 pre-tax charge as we had to write-off the net book value of the warehouse related to the damage. So, that was the O&M expense. Shipping and – I’m sorry, shipping in March for T.O. was slightly below our plan, but we are – given the difficulties in the first quarter particularly in February with production and the slowness in sales, that’s what’s causing us to bring that. It’s T.O. that’s bringing down the guidance range for Manufacturing by that $0.02 on each side.

Okay. So, the weather impact on Plastics, were you able to quantify that or is that just sort of a qualitative issue?

Well, in terms of the – against our plan, we were down about 8 million pounds against our plan. And so, the weather piece of that probably affected that by, I don’t know, 30% to 40% of that.

Okay. And you mentioned the Coyote rotor issue. Can you give us a little color on timing and cost of that?

Sure, Chris, this is Chuck. This is – its one-row blades, it was – identified some cracking, it was very similar to we had the exact same turbine at Big Stone in the last time we did an overhaul there, we had a similar issue. We believe that it will delay the overall outage by approximately 3 weeks and the – while the majority of the repair is capitalized, it will have an O&M impact of approximately $350,000.

Okay, great. Chuck, can you describe the South Dakota phase-in plan, how that works with the cost recovery?

Sure. In South Dakota, there’s an ability on major capital projects. If you go into the commission before you start them so sort of getting that pre-approval, then they develop a phase-in plan so that you can begin recovery. It’s not a writer, but it acts a lot like a writer once you have approval of it is you define the total costs and the timeframe, and during the period of construction, you are allowed to increase rates on an annual basis, you set up an annual number on each of those. And we will have maybe initial filing on both Merricourt and Astoria on for a phase-in rate, which should go into effect in ‘19 and ‘20.

When during the year will they become effective?

I don’t – it depends on when we file and when we close on the Merricourt project, but I think the filings should occur in the next month and we would hope to start those within 60 days after that.

Okay. Lastly, Chuck, can you give us any color on the continuing improvement in Georgia?

Sure. We’ve just – we’ve had probably a plant that would produce sales of approximately $2.5 million to $3 million a month and we were running into a significant amount of expedite issues, meaning within the factory, we needed to – a number of orders that we were due, we weren’t able to run as larger quantities of child parts and whatnot as we wanted to and we made operational changes and added a warehouse facility that’s allowed us to carry more inventory and therefore meeting our customers’ on-time delivery. As a benchmark on that, we’ve sort of improved from the 65% to 70% on-time delivery in early 2018 to more of a 98% plus on-time delivery in the last half of ‘18 and first quarter of ‘19.

Great. Thanks for the color. I appreciate it, guys.

Okay.

Thanks, Chris.

Thank you. [Operator Instructions] Our next question comes from Tate Sullivan with Maxim Group.

Hi, thank you. Good morning. Thanks for that comment on adding the warehouse facility. Kevin, you mentioned some potential market expansion in Manufacturing and your PVC businesses organic, and is it – are you looking at more warehouse facilities or Otter facilities or what does that market expansion refer to?

Tate, as it relates to the PVC business, we still have capacity that we can grow into in that business. So, there’s no need for any type of current warehouse expansion or anything for PVC. We have roughly 300 million pounds of total capacity between the 2 facilities. If you look back over the last few years, we’ve been selling out somewhere between 80% to 90% of that capacity. So, we have room to grow through – we have the capacity to take on additional volumes through probably mostly market share and those opportunities that present themselves.

Okay. And in Manufacturing –

The warehouse that Chuck was referring to was for BTD-Georgia.

Okay. And do you have capacity addition plans in Manufacturing? Can you go into detail on that?

We don’t have any current capacity plans because we still have plenty of capacity organic growth to grow into across our footprint or plants at BTD and T.O. Plastics. So, our capital investments in the Manufacturing side of the business as you look out over the next 5 years are pretty much to fund depreciation and amortization. We have good capacity in place to grow into. So, we – through organic growth with existing customers and potential new customers, we’re in good shape from a capital standpoint.

Okay. Thank you for that detail. And in Manufacturing as well, I see your net income margin in the quarter – just the quarter was a little above 6%. Have you had or do you continue to have a net income or return on sales target in Manufacturing?

Our total return on sales target for Manufacturing is 6%, for this segment, yes.

And just for some review purposes, what are your tooling revenues in the business for me, please?

I’m going to have to look that up.

No, I mean just background on what they are, are you selling – are you making tools?

Yes. We’re making tooling for product for our customers, so, they’ll come to us with a design for a particular product and in a number of cases, we will design the tools for that product and then produce the product from those tooling.

Okay. And one of the last ones for me, in PVC and as you have been consistent with your message about what PVC can do this year relative to what look like a record year last year. Can you give any demand outlook or comments for the PVC in general?

Demand continue – it’s not going to be obviously at the levels that we saw last year. We’ve talked earlier in the call about our volume being down quarter-over-quarter. The demand has been softened from last year, particularly we’re seeing that right now as we look out through the year, we expect our volumes to be similar to what they were last year. So, nothing. I mean, while they’re certainly flat in the – I’m sure they’re flat, they’re down in the first quarter. Overall, we expect similar volumes based on the conditions in our sales territory in terms of housing starts, construction starts that we certainly follow.

Okay. Thanks. And the last on your total of corporate targets. Is it an 8% EPS CAGR target for the next 5 years versus the 5% to 7% EPS growth rate target for this year? Is that correct?

No. So, our earnings per share growth target is 5% to 7% compounded growth rate using 2018 results.

Okay. Did I miss that?

The 8% – the 8% we referred to is our rate base growth in the utility, which is a CAGR over the same period using 2018 rate base. And I think that’s laid out on Slide – if you look at Slide 11 of the presentation, Tate, we show our rate base growth in that 8%.

Great. Okay, well, thank you very much for all the detail. Have a good day.

Yes, you’re welcome.

Thank you. [Operator Instructions] Speakers, I’m showing no further questions in the queue at this time. I would now like to turn the call back over to management for any closing remarks.

Well, thank you for your questions and support at Otter Tail Corporation. With continued execution on utility growth projects and strong operational performance in our Manufacturing platform, we remain confident in our ability to deliver shareholder value. In 2019, we continue to improve BTD profitability. We are further refining our organic long-term growth strategy for Northern Pipe, Vinyltech and T.O. Plastics. And we continue to execute on Otter Tail Power’s major generation, transmission and technology projects. We believe this will allow us to deliver on our 2019 guidance of $2.10 to $2.25 a share. Thank you for joining our call. We appreciate your interest in Otter Tail Corporation and look forward to speaking with you next quarter.

Ladies and gentlemen, thank you for joining today’s call. You may now disconnect, and have a wonderful day.