Otter Tail Corp Q3 FY2026 earnings call

Otter Tail Power:

• Regulatory Progress: Submitted surrebuttal testimony in the ongoing Minnesota rate case, modifying the requested net revenue increase to $38.7 million (down from $42.3 million) largely due to jurisdictional allocation adjustments. The ALJ hearing was conducted, and the team is working toward a constructive outcome.
• Resource Planning: The 15-year integrated resource plan is progressing with initial comments filed in mid-October. The Minnesota Department of Commerce recommended additional renewable generation and battery storage as alternatives to natural gas; reply comments are due in December.
• Growth Plan: Reaffirmed a five-year rate-based compounded annual growth rate of 10%. The plan does not depend on securing large loads, which remain incremental opportunities.
• Capital Projects: Two solar projects (Solway and Abercrombie) are under construction and on schedule, expected to be operational in the first half of 2027 and last half of 2028, respectively. A battery storage project is expected online in 2028.
• Transmission Risks: Development of large regional transmission projects faces increased challenges regarding siting and local concerns, potentially posing risks to original timelines. Management will provide updates on these timelines at the year-end earnings call.
• Customer Rates: Maintained a commitment to providing low-cost electric service, with rates remaining well below national and regional averages.

Manufacturing & Plastics:

• Market Conditions: Industry conditions are improving in recreational vehicle, lawn and garden, horticulture, construction, and industrial end markets. Agriculture remains challenging but shows slight improvement prospects.
• Pricing and Volumes: PVC pipe average sale prices declined 9% year-over-year, and sales volumes dropped 5%. Resin and input material costs increased 10% due to global supply and demand dynamics.
• Strategic Capacity: Leveraged added manufacturing capacity in Arizona and Georgia, specifically the large diameter capability at the Phoenix facility, to help offset volume declines.
• New Opportunities: Identified growing demand for water infrastructure PVC pipes stemming from data centers and large manufacturing facilities, despite the softening housing market.
• Productivity Focus: Management acknowledged dissatisfaction with quarterly segment results due to cost and productivity pressures but remains focused on improving efficiency and managing costs.

Electric Segment: Year-over-year earnings were flat. However, year-to-date (first nine months) earnings increased by 14% compared to the same period last year. This performance was supported by timely recovery of rate-based investments, higher electric rates in Minnesota and South Dakota, and favorable weather impacts, which offset higher operating and maintenance costs related to labor, vegetation management, and plant outages.

Manufacturing Segment: Earnings decreased by $0.03 per share due to lower gross profit margins driven by higher production costs and reduced productivity from new employee onboarding. Higher general and administrative expenses also contributed to the decline. These negatives were partially offset by higher sales volumes as industry conditions improved in several end markets. Despite the quarterly dip, segment earnings are up 28% on a year-to-date basis.

Plastics Segment: Earnings decreased by $0.34 per share. The decline was primarily driven by a 9% decrease in the average sale price of PVC pipe and a 5% drop in sales volumes. Volume declines resulted from customers advancing purchases ahead of announced resin price increases and a softening housing market. Additionally, material costs rose 10% due to global supply dynamics, compressing margins. A one-time adjustment for estimated vendor rebates also negatively impacted results.

• Adjusted Diluted EPS: Affirmed the midpoint of the adjusted diluted earnings per share guidance range. Narrowed the full range to $5.73–$6.03 from the previous $5.68–$6.08. This range excludes the after-tax impact of a legal settlement expense recognized in Q2.
• Plastics Guidance: Modestly adjusted the midpoint of the plastics guidance range downward. This revision reflects a softening demand environment due to elevated mortgage rates and increased developed lot inventory, which puts downward pressure on new home construction. It also accounts for the one-time vendor rebate adjustment.
• Corporate Costs: Increased the midpoint of the corporate cost center guidance, primarily due to better-than-expected third-quarter results.
• Long-Term Earnings Profile: Reaffirmed that plastic segment earnings are expected to continue declining through the end of 2027. Expected earnings for 2028 are projected to be within a range of $45–$50 million.
• Capital Investment: Reaffirmed the five-year capital investment plan for Otter Tail Power totaling $1.9 billion. Increased the incremental investment opportunity from $750 million to $850 million, largely driven by upsizing a potential wind project from 200 MW to 300 MW.

• Transmission Project Delays: Large regional transmission projects face increased complexity in siting and addressing local concerns, which could delay timelines included in the five-year capital spending plan.
• Housing Market Softness: A weakening new housing market continues to negatively impact plastics segment sales volumes.
• Input Cost Volatility: Global PVC resin supply and demand dynamics have led to a 10% increase in material costs, compressing margins.
• Productivity Pressures: The manufacturing segment faced lower productivity due to the onboarding of new employees, contributing to higher production costs.
• One-Time Adjustments: Financial results were negatively impacted by a one-time adjustment for estimated vendor rebates, creating uncertainty around timing and level of earnings recognition.

Q: What specific factors are causing timeline risks for the transmission projects in the five-year plan, and will the plan be adjusted? / A: President Tim Rogelstad explained that while the need for transmission projects remains clear, there is increasing complexity and difficulty in siting due to local concerns and community engagement requirements. He noted that while they are confident in the projects, these environmental and social hurdles could cause delays. Consequently, the company anticipates providing an update on any necessary adjustments to the five-year plan during the year-end earnings call rather than immediately revising the current plan.

Q: Why did PVC pricing strength not translate into higher average sale prices this quarter despite rising resin costs, and how should we view future pricing dynamics? / A: CFO Tyler Nelson clarified that the average sale price still declined by 9% year-over-year, though the rate of decline slowed compared to previous quarters. He attributed this partial pricing support to elevated customer demand in Q2 resulting from advance purchases ahead of announced resin price hikes. However, he indicated that selling more larger-diameter pipe from the expanded Phoenix facility does not materially impact the relationship between resin costs and the overall pricing profile, suggesting that margin compression may persist if input costs remain high.

Q: How does the company view the strategic value of the plastics segment despite its declining earnings trajectory? / A: While acknowledging that plastic segment earnings are expected to decline through 2027, management emphasized that the segment remains a critical component of their diversified strategy. They expect the business to continue generating accretive returns and incremental cash flow even as profits recede. This cash generation is vital for funding the utility-first growth model without requiring shareholder dilution, positioning the segment as a financial engine supporting long-term objectives despite near-term headwinds.