Participants

Beth Eiken; IR Contact Officer; Otter Tail Corp

Charles Macfarlane; President, Chief Executive Officer, Director; Otter Tail Corp

Todd Wahlund; Chief Financial Officer, Vice President; Otter Tail Corp

Tate Sullivan; Analyst; Maxim Group

Presentation

Operator

Good morning, and welcome to Otter Tail Corporation's fourth quarter 2024 earnings conference call. Today's call is being recorded. We will hold a question-and-answer session after the prepared remarks. I will now turn the call over to the company for their opening comments.

Beth Eiken

Good morning, everyone, and welcome to our fourth quarter 2024 earnings conference call. My name is Beth Eiken, and I'm Otter Tail Corporation's Manager of Investor Relations. Last night, we announced our fourth quarter and annual financial results. Our complete earnings release and slides can call are available on our website at ottertail.com. A recording of this call will be available on our website later today. With me on the call are Chuck MacFarlane, Otter Tail Corporation's President and CEO; and Todd Wahlund, Otter Tail Corporation's Vice President and CFO.
Before we begin, I want to remind you that we will be making forward-looking statements during the course of this call. As noted on slide 2, these statements represent our current views and expectations of future events. They are subject to risks and uncertainties, which may cause actual results to differ from those presented here. So please be advised against 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. I will now turn the call over to Otter to Corporation's President and CEO, Mr. Chuck MacFarlane.

Charles Macfarlane

Thank you, Beth. Good morning, and welcome to our fourth quarter 2024 earnings call. Please refer to slide 4 as I begin my remarks with an overview of recent highlights. 2024 was a successful year for Otter Tail Corporation. We produced record earnings, generated diluted earnings per share of $7.17, and we continue to produce one of the highest return on equity in the utility industry. We updated our 5-year capital spending plan with Otter Tail Power's portion totaling $1.4 billion, which is a 9% increase over our previous plan. .
The revised plan is expected to produce rate base compounded annual growth rate of 9%, and we continue to expect Otter Tail Power's earnings to increase at a similar rate. With our recent and projected strong financial performance, we are excited to announce increases to our long-term financial targets. Our updated long-term earnings per share growth rate is now 6% to 8% and an increase from our previous 5% to 7%. Slide 5 provides a summary of our quarter and year-to-date financial results.
We are pleased with the record earnings generated during the year on the back of solid performance from our electric and plastics segments. Following my operational update, Todd will provide a more detailed discussion of our 2024 financial results as well as our outlook for 2025. Turning to our electric platform. Otter Tail Power continues to perform well, converting our 2024 rate base growth into earnings growth at approximately a 1:1 ratio.
We executed on our key regulatory priorities and delivered on our significant rate base growth plan, all while maintaining some of the lowest electric rates in the nation. Turning to slide 7. We obtained approval for our fully settled North Dakota general rate case in the fourth quarter. The outcome of the case provided for net annual revenue requirement increase of $13.1 million premised on a return of equity of 10.1% and an equity layer of 53.5%.
The final outcome of the rate case achieved 57% of our amended request. However, if you -- if neutral -- income neutral adjustments are included, this percentage increases to 70%. We appreciate the effort from all parties in our rate case for reaching a constructive outcome that balances various stakeholder interests. Slide 8 and 9 provide an overview of ongoing and future projects. Touching on a few key updates. Our wind repowering project continues to progress well. We completed the equipment upgrades at the first of four owned wind energy centers in the fourth quarter and expect to complete the other three by the end of 2025.
This project continues to be an excellent example of investing capital that serves both our customers and investors as we continue to anticipate this project will lower customer bills through available tax credits and increased energy output. We announced plans in December to add up to 345 megawatts of solar generation, subject to certain regulatory approvals. Our estimated capital investment opportunity for Solway Solar and Abercrombie Solar is $100 million and $400 million, respectively.
We believe these solar facilities will fit the requirements of our approved Minnesota integrated resource plan and represent an opportunity to provide increasingly clean electric service that is also cost effective to our customers. Turning to slide 9. In December, MISO approved several projects within the tranche 2.1 of its long-range transmission plan. We anticipate that Otter Tail Power will co-own three projects included in this portfolio.
These projects will be developed and constructed over several years and we estimate our capital investment opportunity to be $700 million. MISO and SPP's Board also approved the joint targeted interconnection queue or portfolio projects in December. These projects are intended to improve reliability and reduce constraints along the MISO SPPC. We estimate our capital investment opportunity to be $450 million. The majority of the capital investment associated with MISO tranche 2.1 and JTIQ projects fall outside the current 2025 to 2029 planning period but demonstrate the health of our rate-based growth pipeline.
Looking forward, Otter Tail Power updated its 5-year rate base CAGR to 9% from 7.7% and as summarized on Slide 10. Otter Tail Power is expected to convert its rate base growth into earnings growth and a 1:1 ratio over the long term. which is made possible by identifying high-quality projects, effective project execution and minimizing the impact of regulatory lag. As noted on the slide, we expect over 95% of our updated 5-year capital spending plan to be recovered through existing rates or riders, allowing for timely recovery of our capital investments.
Additionally, Otter Tail Power remains well positioned to attract and support large loads. As summarized on slide 11, Otter Tail Power has approximately 970 megawatts of potential new large loads in our pipeline. While we have a significant amount of opportunity relative to our existing 1,000-megawatt system size, it is unlikely that we will add this much new load. Instead, we aim to bring on one to two large customers in the next one to three years and hope to grow with them to support their electric service needs.
Adding a new large load would not only benefit us, but also our current customers as it would enable us to spread out our existing fixed costs. We have and we'll continue to be thoughtful in our negotiations to ensure that we are appropriately mitigating any potential adverse implications of adding new large loads to our existing customers. Additionally, no adjustments have been made to our load growth forecast or five year capital spending plan at this time for these potential new large loads.
Even with the significant capital investment opportunity ahead, we are well positioned to execute our capital spending plan while maintaining affordable electric rates for our customers. We anticipate being able to maintain affordable rates by continuing to leverage our existing low-cost asset base, available tax credits, technology-driven gains, and efficient financing as we have no near-term equity needs. Additionally, transmission investment comprises a significant portion of our updated five year capital spending plan. These investments have limited impact on our retail customer rates as the costs are allocated across the entire MISO system.
Our customer base is comprised of a small percentage of MISO and only pays their pro rata share of the MISO portfolio projects. Turning to slide 12. Otter Tail Power has some of the lowest electric rates in the nation. With our 2024 rates 30% below the national average and 16% below our regional peers. We remain committed to maintaining affordable electric service rates for all of our customers and have demonstrated the ability to do so for many years.
Transitioning to our manufacturing platform, our manufacturing and plastics segment faced dynamic market conditions in 2024 and I am proud of how our team members responded. Starting with our manufacturing segment. BTD and T.O. Plastics experienced end market demand related headwinds in 2024 especially in the second half of the year.
As summarized on slide 14, nearly all of the end markets we serve are being negatively impacted by higher dealer and used inventory levels, inflationary pressures and increased interest rates, and we expect end market conditions to remain challenged in 2025. In response to the challenging market conditions, we took actions in 2024 to tightly manage costs to mitigate the impact of lower sales volumes on earnings and we will continue to evaluate if any further action is needed in 2025.
Despite this downturn, we remain confident in the segment's long-term fundamentals. We expect to focus on reshoring manufacturing operations to the US as well as the existing housing shortage and power demand growth to support volumes over the long term.
Additionally, we expect large equipment manufacturers to continue to look to outsource a portion of their work once end market conditions improve. Slide 15 provides an overview of our Plastics segment pricing and volume trends. Our sales prices of PVC pipe have steadily declined since peaking in mid-2022, decreasing 12% in 2024 compared to 2023 levels.
Sales volumes increased significantly in 2024 due to our customer sales volume growth and end market demand following a period of distributor destocking in 2023. Slide 16 summarizes our long-term earnings expectations of the plastics segment. Our updated projection is that our plastics earnings will decrease through 2027.
We continue to project a range of $45 million to $50 million in annual earnings as our current best estimate and now anticipate reaching this level in 2028. This estimate of earnings is predicated on the assumption that our sales prices continue to decline at a pace similar to what we've experienced since the latter part of 2022 reverting to a pre-2021 gross margin percentage.
However, there are many market dynamics that could materially impact our results and cause them to vary from our projections. Our long-term view of Plastics segment earnings also incorporates the impact of incremental sales volume growth from our recent capacity addition in Phoenix, and the expectation that raw material costs will generally increase with the rate of inflation contributing to the contraction of gross margin during this time. Turning to slide 17, our manufacturing platform remains well positioned to support future growth opportunities.
We completed on time and on budget the first phase of our Vinyltech expansion project in the fourth quarter enhancing our facility and increasing our resin and pipe storage. The first phase also added a line capable of producing large diameter PVC pipe increasing our Plastics segment production capacity by approximately 7%. We look forward to leveraging this new capability at Vinyltech to better serve our customers in the Southwest market while simultaneously freeing up large diameter production capacity at our Northern Pipe products in Fargo.
Our BTD Georgia expansion project continues to progress well. Many of our customers are expanding into the Southeast market, and this project positions us well to support this growth over the long term. We are currently occupying the new space and plan to bring the additional manufacturing capacity online in the first quarter of 2025. This project is expected to increase production capacity for up to $35 million in incremental annual sales.
Separately, I want to take a moment to address the recent change in presidential administration and its potential impact on Otter Tail. While we remain confident in our ability to effectively navigate changing political environment, we will continue to monitor developments that could pose risks to items such as any IRA-related changes, including tax credits and transferability, DOE grant funding for the JTIQ portfolio projects and the impact of potential tariffs on all of our businesses.
While we will watch for any developments impacting tax credit transferability, the impact of this change to Otter Tail would be limited in our 5-year planning period, as we are able to monetize the tax credits we generate due to earnings produced by our electric and manufacturing platforms. I will now turn it over to Todd to provide his financial update.

Todd Wahlund

Thank you, Chuck, and good morning, everyone. 2024 was another remarkable year for Otter Tail. We delivered record earnings with diluted earnings per share totaling $7.7 and compared to $7 in 2023. We ended the year in a position of financial strength with a solid balance sheet and ample liquidity to support our growth initiatives. 2024 also marked the 86th consecutive year in which we've paid dividends. Earlier this month, we announced a 12% increase to our dividend producing an annual indicated dividend for 2025 of $2.10 per share.
This double-digit increase reflects our commitment to delivering shareholder value while maintaining our balanced capital allocation strategy. We remain focused on investing in our electric segment rate base growth while returning capital to our shareholders. Please follow along on slides 19, 20 and 21 as I provide an overview of our 2024 financial results at the consolidated and segment level. Year-to-date, diluted earnings per share increased $0.17 compared to 2023, primarily driven by our Plastics and Electric segments, partially offset by our manufacturing segment and corporate cost center.
Electric segment earnings grew nearly 8% year-over-year with an increase of $0.15 per share, driven by the impact of the interim rate increase as part of our North Dakota rate case, higher rider revenues from the recovery of our rate base investments and increased commercial and industrial sales volumes. These items were partially offset by the impact of unfavorable weather and the cost of our rate base investments and higher depreciation and interest expense. Our utility team with efficient operating and financing costs was able to offset the significant weather-related headwind during the year.
Manufacturing segment earnings decreased $0.18 per share, primarily due to lower sales volumes, higher production costs and less scrap revenue. This was partially offset by lower general and administrative expenses and the favorable impact of product pricing and mix. Manufacturing segment sales volumes decreased 15% from 2023 levels.
The higher production cost was a result of reduced leverage on our fixed manufacturing costs due to decreased production and sales volumes. Despite the down cycle, the fundamentals of the segment remains strong, and we continue to benefit from the incremental earnings and cash flow generated by these businesses.
Our Plastics segment produced strong financial results in 2024, generating record earnings per share of $4.77. Segment earnings increased $0.30 per share from 2023 levels. This increase was primarily due to the impact of higher sales volumes, partially offset by the impact of lower sales prices. Sales volumes increased 27% in 2024. This sales growth was a function of low sales volumes in 2023, driven by customer destocking and competitive conditions for PVC pipe.
Sales volumes in 2024 benefited from customer sales volume growth, especially with our large distribution customers and improved end market demand. Our corporate costs were higher in 2024, primarily due to an increase in employee medical claim levels following a lower-than-expected amount in 2023 and higher variable compensation.
These items were partially offset by higher investment income from an increase in the amount of invested funds arising from the significant amount of cash generated during the year. Turning to slide 22. Our balance sheet remains strong. Our total available liquidity as of December 31, 2024, was $606 million.
We achieved a return on equity of 19% on an equity layer of 62%, outpacing many of our utility peers. We are positioned well to deliver on our growth strategy and consistently deliver shareholder value over the long term. Given the strength of our balance sheet, cash position and no equity needs for at least the next 5 years.
Turning to slide 23. We are initiating our 2025 diluted earnings per share guidance range of $5.68 and to $6.08, which is expected to result in an estimated return on equity near 14%. Our guidance reflects electric segment earnings growth of approximately 7% and as expected, a decline in plastics segment earnings. In addition, manufacturing segment earnings are anticipated to decline as end market conditions remain challenging. Plastic segment earnings are forecasted to be $143 million in 2025 driven by a projected decline in our PVC pipe pricing Partially offsetting the projected decline in product pricing is a modest increase in anticipated sales volumes in 2025 from our new capacity at our Phoenix location.
As Chuck discussed earlier in the call, we continue to believe plastic segment earnings will normalize at a range of $45 million to $50 million. However, we no longer expect our first full year of normal earnings to be in 2026 and but rather 2028. Based on the midpoint of our 2025 guidance range, we are forecasting our consolidated five year compounded annual growth rate in earnings per share to be over 20%, as shown on slide 24. Even without the impact of Plastics segment earnings, we expect this rate to be 8%.
Our updated five year capital spending plan, which is a key driver of earnings growth for our electric segment is included in more detail on slide 25. Compared to our latest plan, our updated capital spending plan includes additional investments in solar generation and transmission. Beyond our updated base five year capital spending plan we project up to $650 million of incremental capital investment opportunity at Otter Tail Power.
Our base capital plan for 2025 through 2029 does not currently include any additional capital investment for wind generation as approved in our Minnesota integrated resource plan as we continue to evaluate, which is more economic for our customers. building and owning a new facility or contracting the energy through a purchase power agreement.
Further, it does not include any capital investment relating to battery storage approved in our IRP or any dual field related projects to address potential changes to -- capacity requirements. Additionally, it does not include any delivery investment relating to potential new large loads, we estimate that for every $100 million of incremental capital investment, our rate base compound annual growth rate would increase by approximately 75 basis points.
Slide 26 summarizes our updated five year financing plan. Even with our upsized capital spending plan, we expect to finance our growth without any equity issuances. We plan to issue debt at Otter Tail Power on an annual basis to help fund its rate base growth plan and maintain its authorized capital structure.
We have $3 million in parent level debt that matures in late 2026 that we plan to retire with existing cash and not replace. The value of our portfolio of companies is evident in our financing plan. We are able to invest the cash flow generated by our manufacturing platform into our utilities rate base growth plan eliminating the need for equity issuance for at least the next five years.
With the strength of our balance sheet, growth opportunities and the talent excellence we have cultivated we have increased our long-term financial targets as summarized on slide 28. We increased our long-term earnings per share growth rate to 6% to 8%, increasing our targeted total shareholder return to 9% to 11%. We anticipate delivering on these targets once Plastics segment earnings have normalized, which is expected to occur in 2028. We continue to target a long-term earnings mix of 65% electric and 35% manufacturing.
We anticipate reaching this earnings mix in 2028 as electric segment earnings continue to grow in line with its rate base growth rate of 9% and Plastics segment earnings have normalized. We are pleased with our results in 2024 and are well positioned going into 2025 to continue to deliver value for our shareholders, customers and employees. We are now ready to take your questions.

Question and Answer Session

Operator

(Operator Instructions)
Our first question comes from the line of Tate Sullivan with Maxim Group.

Tate Sullivan

I think you are just looking at slide 11 in terms of your phases to secure larger loads. And Chuck, did you say earlier that you have agreed to large load agreements with one or two customers or potentially will? And then is that reflected, if so, in the current CapEx guidance for the next five years to start, please?

Charles Macfarlane

Thanks for the question. Yes, if you're looking at that slide, we have -- what we consider an electric service agreement would be the point at which we have a signed agreement with the new large loads, and we do not have any of those. We have term sheets out to a group that have 150 megawatts worth and then we are working with others, but just in an entry level of letter of intent discussions. So we have no signed items, but we would hope to do that in the one to three years.

Todd Wahlund

And just to add to what those are not in our capital spending plan. If you look on slide 25, where we've got the incremental capital investment opportunity that's where we would include some of that capital spending.

Tate Sullivan

Yeah, that's an impressive number. And then does this -- and if you can comment, I mean, does the 970-megawatt letter of intent exclude customers that you haven't entered agreements with? In other words, are you turning away customers expressing interest to have new loads in your service territory?

Charles Macfarlane

I would not say that we're turning away, but that's just the ones that we have had discussions with.

Tate Sullivan

Okay. Understood. And then turning to manufacturing. I mean it's broad-based. You caught the current weakness in the manufacturing and demand, I guess, it's mostly on the steel working outsourced manufacturing side. Is it -- if you would categorize it across the different end markets? Is it the higher interest rates? Is it just cyclical related to the higher demand you had during COVID? Can you comment on that?

Charles Macfarlane

Just a few things, Tate. So some of it is in the recreational vehicle. We think there's a large used inventory and dealer inventory, channel inventory corrections. On agriculture, we do think that's also reflective of commodity prices that have come down in farmer income. Construction is down, but not as much as the others. And lawn and garden has been sort of weak -- that was the first sector to go lower after COVID.

Tate Sullivan

Chuck. And is the expansion of BTD Georgia related to one of those specific end markets or all of it?

Charles Macfarlane

We would say that the current area of BTD, Georgia, we have more construction in that segment than others, but they are all represented at BTD in Georgia.

Tate Sullivan

And the last for me, is most of in the manufacturing, not the plastics part of manufacturing for the manufacturing line on a metal fabrication work versus plastic thermal forming still or has the next change -- last couple of years.

Todd Wahlund

No, the mix is still heavily towards metal fabrication.

Tate Sullivan

Okay, alright, thank you very much.

Operator

Thank you. As there are no remaining questions in the queue, I will turn the call back over to Chuck for his closing remarks.

Charles Macfarlane

Thank you for joining our call and your interest in Otter Tail Corporation. If you have any questions, please reach out to our Investor Relations team, and we look forward to speaking with you next quarter.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.