Loren Hanson - IR Chuck MacFarlane - President & CEO Kevin Moug - SVP & CFO

Paul Ridzon - KeyBanc

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 2017 results and issued 2018 guidance. Our complete earnings release and slides accompanying this 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 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 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 2017 results.

Please refer to Slide 5 as I begin my comments. Earnings per share from continuing operations were $1.81, this includes reduction of $0.05 per diluted share related to tax reform.

Our adjusted earnings per share from continuing operations excluding the impact of tax reform is at $1.86, this succeeds our updated 2017 earnings guidance with $1.75 to $1.85. Our PVC pipe companies, Northern Pipe Products and Vinyltech, had an outstanding year producing and selling record amounts of pipe.

They were also positively impacted by market dynamics associated with last year's historic hurricanes. We believe this resulted in an estimate positive impact at $0.09 which we don't expect to occur again this year.

We appreciate employee efforts across our organization as all were key contributors to our success in 2017. Diluted earnings per share from continuing operations grew 13% and adjusted diluted earnings per share were 16.25% when compared to the $1.60 per share from 2016.

Our stock performed well; total return which includes the dividend was 12.1%. Our dividend yield was 2.9% at year end, and overall return-on-equity was 10.6%.

Our Board of Directors increased the dividend by 4.7% for an indicated annual rate of $1.34 per share. With continued execution on utility growth projects and improving markets conditions in our manufacturing segment, we remain confident in our ability to deliver shareholder value.

We have set our 2018 earnings guidance at $1.80 to $1.95 a share. This includes an uplift of an estimated $0.05 a share related to the impact of lower tax rates for our manufacturing platform and corporate cost center.

Any amount related to our electric utility will ultimately benefit customers either through lower rates or in system investments to serve them. Otter Tail power employees had many accomplishments in 2017.

A record safety year matching 2016 for the lowest number of OSHA recordable injuries in company history. Minnesota Commission approval of the 2017 to 2031 resource plan that included upto 200 megawatts of wind, 250 megawatts of natural gas, and 30 megawatts of smaller generation additions by 2021.

Continued high customer satisfaction scores as measured by JD Power & Associates, the Edison Electric Institute's Emergency Recovery Award for outstanding efforts related to a challenging 2016 Christmas Ice Storm. A 5.3% revenue increase based on an authorized 9.41% return-on-equity in our Minnesota general rate case.

A general rate filing in North Dakota requesting an increase of non-fuel based rates of 8.7%. Interim rates have gone into effect, we anticipate an adjustment to the case related to the tax pact.

And the completion of the Big Stone South Brookings 345 kV transmission project we have discussed on previous calls. The Company also continued to manage several other major projects including the Big Stone South Ellendale transmission project and the Merricourt and Astoria [ph] regeneration additions; here is a brief update on each.

The Big Stone South Ellendale 345 kV transmission project is on-budget and on-schedule. We are 50% owner in this 163-mile line with MDU and Otter Tail Power is the lead developer.

The project has obtained all lease months, completed all 750 foundations, set 70% of the structures and remains on-schedule to be energized in 2019. Combined with the recently completed Big Stone South Brookings line, it will expand the high voltage transmission grid, improve system reliability and resilience and enable renewables and other generation sources to connect to the system.

The map on Slide 6 shows it's relative location. Our combined investment in the Big Stone South Brookings and Big Stone South Ellendale projects is approximately $200 million.

These are multi-value projects within MISO allowing formulae rate recovery from all customers in MISO's upper Midwest footprint. As part of implementing our resource plan, Otter Tail power has entered into definitive agreements to purchase 150 megawatt wind farm to be built in Southeastern North Dakota near Merricourt in 2019.

At approximately $270 million it will be the largest capital project in Company history. With this addition, nearly 30% of electricity to supply Otter Tail Power customers will come from renewables.

We also will construct a 250 megawatt simple cycle natural gas plant near Astoria, South Dakota. We expect the project to cost $165 million and to be in service in 2021.

These two generation projects are included in the list to rate based projects on Slide 7. We passed several milestones in 2017, both received Advanced Determination of Prudence from the North Dakota Public Service Commission.

The decision include cost caps which if exceeded would require any amount of the cap to be recovered in a general rate case. The Merricourt project received a revised North Dakota site permit related to design changes.

The Minnesota Public Utilities Commission confirmed the Merricourt project will be eligible for rider recovery again with a soft cost cap. The Astoria project has received its air and water permits, and we expect a decision on its site permit by October 2018.

Both projects are proceeding through MISO's interconnection process. These projects are part of our electric platforms planned to grow rate base by an annual growth rate of 9% from 2017 to 2022.

Otter Tail power plants to make capital investments of approximately $900 million between 2018 and 2022 as shown on Slide 10. Slide 11 shows our regulatory framework which continues to be constructive.

As noted on the slide, 35% of our future project investments are eligible for rider recovery while under-construction. Our manufacturing companies also experienced several accomplishments in 2017.

Safety performance at our PVC pipe companies was excellent. Vinyltech completed the year with no OSHA recordable injuries and Northern Pipe Products earned Liberty Mutual Gold Award for safety for the sixth consecutive year.

The fabricator, a leading industry publication recognized BTD with its industry award highlighting BTD's safety record, shop floor improvements, customer satisfaction, new products and services and philanthropy. T.O.

Plastics achieved 8% overall sales growth. Sales increased in all of its major end markets; horticulture containers, life science products and industrial packaging.

Our plastics segment saw more pounds and earned higher margins than expected due in-part the hurricane related market dynamics. I want to commend our plastic companies again on their performance; they are efficient low cost operators with a solid sales team.

Employee expertise was evident during the historic hurricanes that hit the south central and southeast United States in late summer. The petrochemical industry executed significant plant shutdowns as the storms progress.

Our major resin suppliers declared force measure due to down production facilities, raw material shortages and the lack of inbound and outbound rail transportation. But Northern Pipe and Vinyltech worked closely with resin producers to reallocate our orders to plants that were not impacted.

Our companies were able to deliver when contractors and PVC pipe distributors began to be concerned about the availability of pipe for ongoing and planned construction projects throughout the western United States. The backlog at both companies spiked and production and shipping rates escalated.

With the experience of working through similar previous situation, our pipe companies managed the dynamics of the storm impact extremely well. We don't expect devastating storms like this to occur very often.

We're proud of our team and their ability to meet the increased demand. Before turning the discussion over to Kevin, I also want to point out that our custom metal fabricator, BTD, achieved $2.3 million in earnings improvement before the impact of taxes.

BTD is our largest manufacturing business, our investment in the companies Minnesota facilities has provided additional capabilities and capacity, and BTD's expansion into the southeast has created new opportunities. We are in a good position and I'll led the customer base in agriculture, energy and recreational utility vehicles has begun to show economic recovery.

In 2018 we will focus on continuing to improve BTD profitability, we will also continue to execute Otter Tail Power's large transmission and generation projects and we will work to provide a positive outcome in our North Dakota rate case. We believe this will allow us to deliver on our 2018 guidance with $1.80 to $1.95 earnings per share.

Now I'll turn it over to Kevin for the financial perspective.

Thanks, Chuck and hello, everyone. This morning I will cover the following topics; our 2017 financial results, our liquidity position, strength of our balance sheet and corporate credit ratings, the increase in our 2018 indicated annual dividend, our updated 5-year capital expenditure budget and our 2018 business outlook.

We are pleased with our 2017 financial performance. Our revenues grew approximately 6% with all of our reportable segments showing year-over-year revenue increases.

We earned $1.81 a share which includes the $0.05 share reduction in earnings from tax reform, a non-cash write-off of deferred taxes. The $1.81 a share represents a 13% year-over-year growth when compared with our $1.60 a share in 2016.

And we'll now provide a more detailed review of 2017 earnings as shown on Slides 13 through 16. The electric segment net earnings decreased $383,000 year-over-year.

This change is a result of a number of items. We experienced increases in revenues due to better year-over-year weather which improved earnings by $0.03 a share.

Our North Dakota transmission riders increased due to more investments. Our revenues also declined due to a net $2.9 million decrease from declining rate base due to higher accumulated depreciation and lower return-on-equity on transmission related to the Minnesota rate case decision to share the higher return-on-equity with Minnesota customers.

The change in estimate reducing our unbilled revenues lowered Minnesota conservation improvement program incentives and lowered North Dakota and South Dakota environmental cost recovery riders due to lower rate base from higher accumulated depreciation. Our O&M cost were basically flat between the years, property tax has increased due to more capital investments and income tax expense increased related to tax reform and a proportion of supplemental return and program costs that are not allowed for recovery.

The net earnings for our manufacturing segment increased $2.7 million year-over-year before the impact of tax reform. The following factors contributed to this; at BTD, revenues improved from more product sales of recreational vehicle and lawn and garden equipment, as well as an improved scrap metal market; both contributed to improved operating income.

This was offset, in part, by increased operating expenses and income taxes. The effect of these items resulted in addition to lower interest cost resulted in approximately $2.3 million increase in net earnings at BTD before tax reform.

2017 BTD results were also positively impacted by a $2.6 million decrease in deferred tax liabilities due to tax reform. At T.O.

Plastics, revenues and earnings increased with improved sales of its life science, horticultural and industrial products resulting in improved earnings of approximately $400,000. Tax reform impact was not significant at T.O.

Plastics. Our Plastics segment's revenues and earnings increased year-over-year as a result of the 7.2% increase in pounds of pipes sold as well as 11.5% increase in PVC pipe sales prices.

Year-over-year improvement in our normal business operations provided approximately $4.4 million or $0.11 per share of the segments increase in net earnings. The remaining increase in net earnings was driven by two items; first, an increase of approximately $3.4 million in earnings or an estimated $0.09 per share related to the impact of Hurricane Harvey hitting the Gulf Coast region in late August.

Second, $3.3 million or $0.08 per share in tax savings related to lower tax rates established by the tax reform with reduced deferred tax liabilities. In our corporate expenses, net of taxes, and before the impact of tax reform decreased $1.2 million primarily due to lower labor costs and increased allocation to operating companies.

Corporate did record a $7.2 million increase in income tax expense for a reduction in deferred tax assets related to lower tax rates established under the tax reform. Moving to Slide 17, let's review our financial condition and liquidity.

Last year had limited equity financing and we don't expect any equity issuances in 2018. We did amend our two credit agreements in 2017 to extend their exploration dates by one year to October 31, 2022.

Between expected cash flow generated from 2018 operating activities and these credit facilities we have the appropriate levels of liquidity to support, both our business platforms. On November 14, 2017 we entered into a 30-year $100 million 4.07% private placement transaction.

The funding of this transaction occurred on February 7, 2018. The proceeds from this transaction were used to pay down borrowings on Otter Tail powers.

Credit agreement and to help finance the two MBP transmission projects at the utility. In terms of our credit ratings, last year S&P revised both Otter Tail Corporation's and Otter Tail Power's outlook to positive from stable on improving financial measures.

Our FFO to debt metrics as parent [ph] have ranged from approximately 21% to 29% and at the utility from approximately 20% to 24% respectively from 2013 to 2017. We expect these metrics to remain strong in light of tax reform impacts and now we are committed to maintaining investment grade credit ratings and we'll manage our operations to reflect that commitment.

As shown on Slide 18, the Board of Directors increased and indicated annualized dividend rate from $1.28 per share to $1.34 per share. This 4.7% increase which is higher than our historical dividend growth rate is a result of our solid 2017 performance and our 2018 outlook which includes the positive impact to our earnings from tax reform, the Company's strong balance sheet, liquidity, cash generation profile and our commitment to enhancing shareholder returns.

The board believes this year's dividend increase represents an appropriate use of capital. And note, that we have paid dividends on our stock for 79 years for 317 consecutive quarters.

Let me provide an overview as shown on Slide 19 of our capital expenditures. We expect capital expenditures for 2018 to be $110 million.

We continue to invest in transmission projects designated by MISO as multi-value projects and renewable and natural gas fire generation. This will continue to positively impact the corporation's earnings and returns on capital.

The five-year capital expenditure plan calls for approximately $900 million in utility projects. The plan also includes $72 million for the manufacturing and plastics businesses.

Our updated compounded annual growth rate in rate base growth is projected to be 9% using 2017 as the base year; this is due to the impact of lower deferred taxes as a result of tax reform. Our rate based growth is expected to grow approximately an additional $100 million over this timeframe.

We don't expect this to have any material impact to our equity needs and would expect to be able to continue to meet our needs through our after-market and dividend reinvestment programs. Please advance to Slides 20 and 21 for a discussion of our 2018 business outlook.

Our 2018 earnings guidance is in the range of $1.80 to $1.95 of earnings per share. This guidance reflects our current mix of business operations, strategies for improving future results and an uplift from lower tax rates due to the tax rate reduction that occurred to 2017 tax cuts and jobs act.

We expect to see $0.05 a share increase in our manufacturing platform and corporate cost center as a result of the lower tax rates. Our Electric segment's 2018 net income is expected to be higher than 2017 based on normal weather.

Milder than normal weather in 2017 caused a reduction in diluted earnings per share of $0.04 compared to normal. A constructive outcome in the North Dakota rate case filed in November last year with a full year of increased interim rates in 2018 and increased transmission investments.

These items were offset by increased operating and maintenance expenses related to a planned outage at Big Stone Plant, higher pension, medical workers compensation retiree medical benefits. The increase in pension cost as a result of a decrease in the discount rate from 4.6% to 3.9%.

Higher property tax expense due to large transmission projects being put into service and increased interest expense related to replacing short-term debt with long-term debt carrying higher interest rate combined with increased borrowings to fund capital expenditures. We expect increased earnings from our manufacturing segment in 2018 due to improved operating margins at BTD through cost reductions and improved productivity.

Increased earnings at T.O. Plastics primarily driven by increased sales in horticulture, life sciences and industrial end markets.

And lower income taxes of approximately $0.04 per share as a result of the lower tax rates implemented from tax reform. The backlog for this segment is approximately $163 million for 2018 compared with $118 million a year ago.

We expect our plastics segment 2018 net income to be lower than 2017. Last year's results included earnings from the hurricane.

The estimated impact from the non-recurring nature of the hurricanes on 2017 earnings is approximately $0.09 a share. We also expect lower operating margins in 2018 due to flat to lower expected sales prices offset by increasing resin prices and sales volumes similar to last year.

And our corporate cost, net of tax are expected to be higher in 2018. The higher costs are driven primarily by the lower tax rate in effect for 2018.

As we look to 2017 there are several items I would like to comment on. First, tax reform has created a utility-wide concern about its impact on credit metrics.

Our strong equity ratio and FFO to debt metrics at both the parent and utility certainly position us favorably. We also aren't exposed to the risk of deductibility of hold co-interest expense.

We expect to maintain our credit ratings and we'll be able to absorb the tax reform implications to our utility without any material impact on our financing plans. Overall, we expect to stay within our earnings per share growth rate of 4% to 7% while customers get the benefit of continued investment and lower tax rates for the electric utility.

We expect the pass-through of lower taxes to customers will likely be amortized overtime. And we also expect to see an uplift in earnings per share from our manufacturing platform and corporate cost center as a result of the tax reform of approximately $0.05 a share.

Second, we believe our 2018 guidance further positions us to achieve a 4% to 7% compounded annual growth rate and earnings per share using 2017's $1.81 a share from continuing operations. Our 2018 guidance is dependent on the business and economic challenges our two platforms will face this year.

Key initiatives include the constructive outcome in the North Dakota rate case, BTD's continued operational improvements across all occasions to further improve our return on sales margins and continued strong earnings, cash flows and returns on invested capital from the plastic segment. We expect plastic segment earnings to be lower than 2017; however, in large part due to the non-recurring nature of the earnings uplift we experienced from the hurricane in 2017.

And as we head into 2018, we have a new accounting standard ahead of us relating to revenue recognition. While I don't usually talk technical accounting stuff with you, I would be remised if I don't comment on the new standard which will be adopted during the first quarter.

We have analyzed the various revenue streams across our respective [ph] businesses and don't expect to have any change in revenue recognition methods under the new standard and the impact of adoption will be immaterial. We are now ready to take your questions, and after the Q&A Chuck will return with a few closing remarks.

Chuck, I think you mentioned sort of improving outlook at BTD; can you give us any color on that? Is that really what is reflected in the backlog increase?

We're clearing seeing an uptick in activity in backlog compared year-over-year at BTD, that's a large portion of that difference in backlog. So we're just seeing more activity in the oil and gas space, in the recreational vehicle and slight improvement in Ag.

What also has happened -- you've heard us talk about over the last few years as how these customers went out and asked for price reductions from their supplier base and we've been through that and now what's happened is there is a lot of the smaller contract metal manufacturers that took that business on the lower prices or either at capacity or they have had difficulty delivering to the customers at the prices that they had agreed to and I think the customers have recognized that there is an important factor that you want your supplier base to be strong financially and be there to deliver products on-time with the quality specs that they expect and so we've -- the backlog as Chuck referred to is increasing but it's also due because there has been a recognition by customers that -- of our capabilities and those capabilities come at higher price and so we're seeing that to occur in the marketplace.

Are you seeing some of the customers come back a little because some of those competitors weren't able to produce the quality that you can?

Yes, and delivery times.

Kevin, about tax reform; the $0.05 that you described to tax reform -- is that sort of your thinking about what the sort of durable portion of tax reform benefits will look like as you sort of see the businesses start to reflect them in pricing?

Yes, that's our view. We have not had so far any pushback from customers, particularly on the manufacturing side where they are thinking that they should get some kind of piece of this.

Basically we've had a few questions asked about what we intend to do with it in terms of more investments in those types of things in the business but we're not getting any pressure in terms of having to share that with customers, we don't expect that. So the short answer to your question is yes, that's kind of the durable portion we expect to have.

As far as the North Dakota case goes and your range that you gave in the earnings guidance, are you reserving any portion of the current interim rates?

We will start to be as we head into 2018 once we get interim rates just went into effect here on January 1, we're looking at now the impact of tax reform and as we get more color in response from the commission as we head through the case we will continue to establish allowances for estimated refunds where we think it's appropriate and that's kind of included in our forward-looking.

The North Dakota Commission has not filed any rebuttal testimony or anything at this point also.

So you will do that on an issue by issue basis as the case proceeds?

Yes.

Can you remind me, I don't remember if there was any third quarter weather benefit or drag versus normal? Was there anything in the third quarter?

Third quarter was slightly positive if I remember right.

And as far as your guidance on the pipe business, are some of those sort of negatives other than the hurricane sort of normalization; are those things that may change throughout the year, is that just your sort of expectations on where resin maybe throughout the year? Is that something that maybe a little variable throughout the year?

The guidance as we came out here is based on kind of the current conditions as we see them and we will typically or we will update that every quarter as we do our normal forecasting process but as we head into '18, we -- there is at least a norm straight now, there is a $0.03 resin increase announced for February and another $0.04 that sometime in the March-April timeframe. Now whether that fully sticks or not time will tell but the resin manufacturers did not get the resin increase that they were hoping to get back in the fourth quarter of '17.

So we're contemplating at least as we come out here with our initial guidance that there is additional resin cost increases here as we head into the year that impacts that guidance. The other thing is we are right now seeing kind of flat to potentially declining sales prices.

And so if you kind of think about our guidance, before the tax reform plastics made $18.4 million in 2017. If you back out the hurricane that's $3.4 million, so that gets you to a $15 million net income number.

And then when you look at our guidance of $0.36 to $0.40 it really puts you in $14.4 million to $16 million kind of guidance range. So that's based on as I said kind of the current conditions as we see them for '18 and we will continue to update that every quarter when we come up with our -- when we look at where our guidance should be for the year.

On PVC, Trump administration is supposed to come out with some infrastructure plan today; how do you foresee PVC having any benefits from whatever he may come up with on infrastructure?

I think that there is potential for uplift. I mean I saw some initial releases yesterday where the infrastructure has the potential impact for water and wastewater projects and so I think that as we look out, there is potential opportunity that the plastics business would be able to take advantage of and I guess we'll continue to watch all that unfolds and where we think it's going to be but at least that first blush, it certainly looks like there could be a uplift or potential positive impact for us.

Did plastics benefit at all from any kind of bleeding of the hurricane impact into the fourth quarter?

When we came out in the third quarter, September -- third quarter had about a $0.04 uplift in earnings from the hurricane which all occurred in September. And then in the fourth quarter, I mean for the year we said there is about a $0.09 uplift and so there was an additional kind of $0.05 that occurred in October-November timeframe from the hurricane and we had estimated when we came out in the third quarter that we thought the total year impact would be about $0.08 and that we were closer ended up being $0.09.

I think that answers your question.

So you think that's washed through the system by now?

Yes.

And then how much of your backlogs were booked before tax reform was signed on a percentage basis?

The $163 million for manufacturing would have all been booked before the tax reform.

Any contracts you're signing now or you're not seeing any margin hit?

No.

You had some comments on resin price increases; I kind of missed a large part of that commentary. Could you just hit that at high level again?

Sure. What's been announced is a potential $0.03 increase in resin in February and then there is another $0.04 that's been announced for the March-April timeframe.

And how do your customers respond to those announcements? Are they stockpiling?

We haven't seen any stockpiling yet but if you look back in our -- what typically would happen where there is announced increases like that, if customers inventories are down they will typically buy in advance of potential increases.

And do you have a sense of where your customers inventory stand?

The ultimate inventory is sitting out in contractors yards, kind of across our region and so we don't have a real good flavor in terms of initially as we head into the year, our volumes so far have been relatively in line with what we expected.

And then lastly, there was something in your press release last night; 2018 CapEx of $110 million with CapEx cash spending at 137 [ph], that kind of drove me for a little -- could you kind of clarify that?

Which part of the release are you referring to Paul? I mean, in 2018 the $110 million.

2018 business outlook, we expect CapEx of 2018 with $110 million compared -- I misread, I'm sorry.

Otter Tail Corporation continues its two platform company delivering shareholder value through our core electric utility and disciplined manufacturing companies. However, our operating companies focus on the long-term compound and annual earnings per share growth goal that Kevin just described.

All of them contributed to our excellent 2017 financial results and all of them have promising futures. We expect 2018 earnings to be in the range of $1.80 to $1.95 a share as we execute our objectives to grow our businesses, achieve operational and commercial excellence and develop our employees.

I want to extend our appreciation to employees across our organization for their hard work and results this year. We appreciate their diligence and initiative.

Thank you for joining our call, we appreciate your interest in Otter Tail Corporation and look forward to speaking with you next quarter.