2020 Second Quarter Earnings Conference Call
R FORWARD-LOOKING STATEMENT This presentation contains statements that may be considered forward-looking statements. Such statements contain the word “expect,” “anticipates” or words of similar meaning, or speak to management’s expectations regarding the EPS growth goals, sales, total shareholder returns, financing activities and rate base growth. These statements speak of Otter Tail’s plans and expectations. Actual results could differ materially, because the realization of those results is subject to many uncertainties including: regulatory approvals and results; the direct or indirect impacts from the novel coronavirus (COVID-19) pandemic on our sales, our operations and our ability to complete construction projects; unanticipated construction costs or delays; economic conditions in the states we do business in; and other factors, some of which are discussed in more detail in Otter Tail’s Form 10-K for the year ended December 31, 2019 or in our other SEC Filings. The information in this presentation was prepared as of May 5, 2020. Otter Tail undertakes no obligation to update any forward-looking information statement to reflect developments after the statement is made. 2
R MANAGEMENT TEAM • Chuck MacFarlane President and Chief Executive Officer • Kevin Moug Senior Vice President and Chief Financial Officer 3
R COMPANY OVERVIEW MANUFACTURING PLATFORM MANUFACTURING SEGMENT PLASTICS SEGMENT Target earnings contributions Electric Manufacturing Electric Manufacturing • Competitive low-cost operations • Long-term growth potential 75% 25% • Constructive regulatory environment • Capacity utilization • Attractive rate base growth • Diversification 4
R MANAGING COVID-19 | WELL POSITIONED OPERATIONALLY • Employee and public safety remains our top priority. • Mitigation efforts in place across the organization. • Utility disconnects suspended and late payment fees waived temporarily for our customers. • No immediate disruptions to our supply chain. • No current general rate case involvement. • Expected $380 million in capital expenditures for 2020. • Electric Segment accounts for 96% driven by renewable and natural gas-fired generation. • No current plan to limit capital expenditures. • Strong balance sheet, ample liquidity, constructive regulatory environment, and commitment to maintaining strong credit ratings and metrics. 5
R Q2 2020 FINANCIAL SUMMARY AND HIGHLIGHTS • Based on our YTD performance and our updated view of the Q2 2020 Q2 2019 impacts from COVID-19, we are raising our 2020 earnings per share (EPS) guidance range to $2.10-$2.30 from $2.00-$2.25 per diluted share. Operating Revenues $192.8 $229.2 • Electric Segment EPS increased $0.14 primarily driven by (in millions) continued execution of rate base growth projects and reduction in O&M expense mainly due to lower QoQ plant maintenance expense related to the extended outage at Net Income $17.0 $15.4 Coyote in 2019. (in millions) • Manufacturing Segment EPS decreased $0.09 primarily due to softening demand in their end markets from COVID-19- related impacts. BTD effectively manages costs to help offset Diluted EPS $0.42 $0.39 lower revenues. • Plastics Segment EPS decreased $0.03 driven by lower volumes of pipe sold and lower pipe prices. • Lower corporate costs positively impact EPS $0.01 driven primarily by recovering equity markets in Q2 resulting in gains on our corporate-owned life insurance and captive insurance investments. 6
KEY COVID-19 FINANCIAL RISKS Potential Impacts Mitigation Factors • Lower commercial and industrial sales • Higher margin residential usage • O&M expense reductions volumes • Increased bad debt expense and waived late • Rigorous COVID-19 safety programs and fees project management Electric Segment • Personal protection equipment costs • Filed for COVID-19 Cost Treatment Orders in • Sequestration/quarantine-related costs all three jurisdictions • Potential capital project delays • Decreased revenue due to temporary • BTD has implemented temporary rotating customer plant shutdowns and lower sell- furloughs. Reduced approximately 180 Manufacturing Segment through positions or 16% of total workforce across all • Lower scrap revenue its sites. • O&M expense reductions • Compressed margins • O&M expense reductions Plastic Segment • Volatile capital markets • No 2020 debt maturities • Adequate liquidity under credit facilities • No further 2020 pension contributions Parent/Liquidity • Up to $28 million of remaining equity needs 7 under ATM, DRIP, and ESPP
ESG Highlights R ESG HIGHLIGHTS 2022 Projections By 2022 we 30% 30% 30% expect our carbon dioxide emissions RENEWABLE LOWER CARBON from owned RESOURCES RATES REDUCTION resources to that we own or secure compared to the from 2005 levels be 33% lower through power national residential than 2005 purchase agreements average levels. 8
R CONSOLIDATED REVENUES FROM COAL ASSETS 2019 2022 11.0% 13.7% 89.0% 86.3% Footnotes: 1. Consolidated revenues include estimated returns on coal generation facility rate base investment, fuel expenses, O&Ms, depreciation, property taxes, and coal conversion taxes. 2. By 2022 the Hoot Lake Plant retirement combined with the Merricourt Wind Energy Center and Astoria Station result in a reduction in revenue and earnings from coal. 9
R ELECTRIC PLATFORM
R ELECTRIC OPERATIONS Net Revenue ($ in millions ) $459.1 $450.3 $446.7 $434.5 $500 $400 $300 Highlights $200 • Rate base growth opportunities $100 • Merricourt Wind Energy Center $0 • Astoria Station natural gas-fired plant 2017 2018 2019 6/30/20 • South Dakota transmission reliability project LTM • Softening commercial and industrial load resulting Net Income ($ in millions) from COVID-19 beginning in Q2 partially offset by $80 increased residential load $62.3 $54.4 $59.0 $49.4 • $60 Constructive regulatory environment • Suspended disconnects for late payments and $40 waived late-payment fees for residential and small $20 business customers during COVID-19 pandemic. • YTD 2020, weather has negatively impacted EPS by $0 $0.07 vs. 2019 2017 2018 2019 6/30/20 LTM 11
R CUSTOMER MIX AND REGULATION – COVID UPDATE Regulatory Matters Revenues by Customer Estimated 2020 Electric Revenue Impact (%) Other, Filing in place for all jurisdictions to request Q2 Annual 2.3% COVID-19 related cost treatment order (Weather Normalized) (YoY) (YoY) 2019 Annual Deprecation Filing Residential 2.0% 2.8% Residential, Updated Transmission Cost Recovery Rider Industrial, Commercial -2.8% 1.1% 32.3% 30.0% filing relating to MN MVP Supreme Court Industrial -18.7% -12.9% Decision Commercial, Total Electric Revenue -3.9% -0.1% Anticipated November 2020 filing of MN rate 35.4% case Decoupling Weather Bad Debt Normalization Trackers No No No 12
R RATE BASE GROWTH Capital spending of $898 million from 2020 to 2024 divided among: Natural Gas Renewable Generation Resource Technology and Addition Additions Infrastructure $87 $289 Investments $103 10% 32% $1.77 11% $1.73 $1.67 $113 Other System $1.59 Replacements $1.42 13% $166 and Additions $140 $1.17 $1.10 18% 16% Regional Transmission Routine Distribution Additions and Replacements and Replacements Additions Amount 2018(A)2019(A) 2020(F) 2021(F) 2022(F) 2023(F) 2024(F) Recovery Mechanism Percentage (in Millions) Depreciation Rate Base (amounts in billions) (Rate Base Replacement) $366 41% Riders $450 50% Rate Case $82 9% Total $898 100% 13
R REGULATORY FRAMEWORK A constructive Riders Minnesota North Dakota South Dakota regulatory environment Rider recovery / Rate Wind Projects Rider recovery / Rate case Phase-In Rider / Rate case provides for timely case recovery of capital Rider recovery / Rate Transmission Rider recovery / Rate case Rider recovery / Rate case and a fair economic case return. In State Preference/ADP/ Phase-In Rider / Rate case Non-renewable We recover Rate case Rate Case (Astoria Station approximately 50% Generation rider eligible) of our five-year MN plants and outstate capital expenditures Environmental plants with ADP: Rider Rider recovery / Rate case Rider recovery / Rate case through riders. recovery/rate case (including phase-in Fuel Clause Trued up annually Trued up monthly Trued up monthly mechanisms and Historical test year with direct billing Forward-looking Forward-looking Rate Cases known-and-measurable generators). test year test year adjustments Allowed ROE 9.41% 9.77% 8.75% 14
R RATE BASE PROJECTS Our Investment Percent Recovery Project In Service (Millions) Complete Mechanisms Big Stone South – Ellendale (MVP) $115 2019 100% Rider Merricourt Wind Energy Center $260 2020 60% Rider/General Rate Case Phase I 2019 100% SD transmission reliability project $39 Rider/General Rate Case Phase II 2021 60% Facility Service Self-fund transmission ~$50 2019-2021 ~75% Agreement Solar investment Up to $60 2021-2023 0% Rider/General Rate Case Astoria Station $154 2020-2021 51% Rider/General Rate Case 245 MW natural gas simple-cycle combustion turbine Innovation 2030 $145 2019-2024 ~5% Rider/General Rate Case Option to Ashtabula III: option to buy 62.4 MW wind farm $50 NA Rider/General Rate Case purchase 2022 15
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