Executive Summary / Key Takeaways

• Otter Tail Corporation's unique diversified model, combining a regulated electric utility with manufacturing and plastics segments, provides financial strength and cash flow to fund significant utility infrastructure investments without needing external equity for at least five years.
• First quarter 2025 results met expectations, with Electric segment earnings growing due to favorable weather and capital investment recovery, offsetting expected declines in Manufacturing and Plastics segments facing market headwinds and price normalization, respectively.
• The company affirmed its 2025 diluted EPS guidance range of $5.68 to $6.08 (midpoint $5.88), projecting approximately 7% earnings growth in the Electric segment and anticipating continued normalization in the non-electric businesses.
• A robust Electric segment capital expenditure plan of $1.4 billion through 2029 is expected to drive a 9% rate base CAGR and translate into approximately 1:1 EPS growth, supported by ongoing projects like wind repowering, solar development, MISO transmission, and securing new large loads.
• Key risks include potential impacts from U.S. trade and tax policy changes, ongoing litigation and a DOJ investigation in the Plastics segment, and persistent end market softness in the Manufacturing segment, which the company is actively managing through cost controls and strategic positioning.

A Unique Model Powering Forward

Otter Tail Corporation stands apart in the utility landscape, operating not just a vertically integrated electric utility but also complementing it with diverse manufacturing and plastics businesses. This multi-platform structure, a legacy of the company's evolution from its origins as Otter Tail Power Company in 1907, forms the bedrock of its investment thesis. In an environment where many utilities face significant capital needs for grid modernization and clean energy transition, Otter Tail's non-electric segments provide a crucial source of enhanced returns and incremental cash flow. This strategic diversification allows the company to fund its ambitious utility growth plans from within, a distinct advantage in the current capital market environment.

The Electric segment, Otter Tail Power Company (OTP), serves a vital role providing power across parts of Minnesota, North Dakota, and South Dakota. Its strategic focus is on maintaining reliable, affordable service while investing in the future grid. This involves deploying modern technologies like Advanced Metering Infrastructure (AMI), integrating renewable generation, and strengthening transmission infrastructure. While the company's generation mix still includes coal, it is actively transitioning, adding wind and solar capacity. Competitors like Xcel Energy (XEL) and DTE Energy (DTE) are also heavily invested in clean energy transitions and grid modernization. While XEL and DTE, as larger, more pure-play utilities, may possess greater scale and potentially more advanced proprietary technologies in specific areas like renewable integration or grid management software, Otter Tail Power is implementing standard industry technologies effectively. The AMI project, now substantially complete with over 170,000 meters updated, is expected to reduce operating expenses through lower meter reading costs and technology-enabled savings, while also improving customer service. The wind repowering project, with the first of four facilities upgraded in late 2024 and the rest expected by the end of 2025, leverages modern equipment to increase energy output and qualify for Production Tax Credits (PTCs), which are passed back to customers, lowering bills. Development continues on two solar projects totaling up to 345 MW, aligning with the Minnesota Integrated Resource Plan and aiming to provide cost-effective, cleaner energy. Furthermore, participation in MISO transmission projects (Tranche 1, 2.1, and potentially JTIQ) enhances grid reliability and efficiency, with costs broadly allocated across the MISO footprint, limiting the impact on OTP's retail customers. While specific quantifiable technological advantages over all competitors are not detailed, OTP's strategic implementation of these standard technologies supports its goal of maintaining some of the lowest electric rates in the nation, a key competitive differentiator in its service territory.

The Manufacturing segment, comprising BTD (metal fabrication) and T.O. Plastics (extruded/thermoformed plastics), caters to diverse end markets including recreational vehicles, agriculture, construction, and horticulture. The Plastics segment focuses on PVC pipe manufacturing for water and electrical conduit applications. These segments operate in competitive environments with peers like Parker Hannifin (PH) in manufacturing and Berry Global (BERY) in plastics. While PH and BERY, as larger, more specialized players, may benefit from scale and potentially more advanced manufacturing processes or materials science, Otter Tail's manufacturing platform leverages its regional presence and customer relationships. Recent capacity expansions, such as the completed BTD Georgia facility and the ongoing Vinyltech Phoenix expansion, are strategic moves to grow with customers in key geographic markets and enhance product offerings, like the addition of large diameter pipe capability in the Southwest.

Performance and Outlook: A Tale of Two Platforms

Otter Tail's first quarter 2025 financial results underscore the dynamics of its diversified model. Consolidated operating revenues decreased slightly to $337.353 million compared to $347.068 million in Q1 2024, primarily due to lower sales volumes in the Manufacturing segment, partially offset by gains in the Electric segment from fuel recovery and favorable weather. Consolidated net income for the quarter was $68.099 million, down from $74.338 million in the prior year period, but in line with management's expectations.

The Electric segment delivered growth, with net income rising to $24.708 million in Q1 2025 from $22.470 million in Q1 2024. This was driven by a 7.1% increase in retail revenues, benefiting from favorable weather compared to an unseasonably warm Q1 2024 and increased fuel recovery revenues. Operating expenses saw increases in purchased power costs (up 37.1%) due to higher volume and price of market energy purchases, and depreciation (up 12.5%) as new assets were placed in service. Interest expense also rose (up 19.0%) due to recent long-term debt issuances. However, a significant decrease in income tax expense (a $4.008 million benefit in Q1 2025 vs. a $1.175 million expense in Q1 2024) resulted from an increase in Production Tax Credits (PTCs) tied to higher wind generation, including from the recently repowered facility.

In contrast, the Manufacturing segment experienced a significant decline in net income, falling to $1.532 million in Q1 2025 from $5.261 million in Q1 2024. Operating revenues decreased 17.8%, primarily due to a 13% decrease in sales volumes across key end markets like recreational vehicles, agriculture, and construction, as manufacturers and dealers continued inventory management efforts amidst softening demand. Lower steel costs (passed through) and decreased scrap revenue also contributed to the revenue decline. While cost of products sold decreased, gross profit margins were negatively impacted by reduced leveraging of fixed manufacturing costs and increased labor costs.

The Plastics segment also saw a decrease in net income, reporting $43.439 million in Q1 2025 compared to $46.740 million in Q1 2024. Operating revenues were relatively flat, decreasing slightly by 0.2%. The primary driver of the earnings decline was an 11% decrease in average sales prices for PVC pipe compared to Q1 2024, continuing the downward trend from the mid-2022 peak. This price pressure was largely offset by a robust 13% increase in sales volumes, fueled by strong distributor and end market demand and the added capacity from the Vinyltech expansion completed in late 2024. Lower PVC resin costs, driven by increased domestic supply, provided a partial offset to the price declines. Selling, general, and administrative expenses increased significantly (up 35.6%), partly due to costs associated with ongoing litigation.

Looking ahead, management affirmed its consolidated 2025 diluted earnings per share guidance range of $5.68 to $6.08, with a midpoint of $5.88. This outlook anticipates approximately 7% earnings growth from the Electric segment, driven by continued rate base expansion and recovery mechanisms. The Manufacturing segment is expected to see continued earnings decline as market headwinds persist. The Plastics segment is projected to experience a further decline in earnings as PVC pipe prices continue to normalize, although this is expected to be partially mitigated by increased sales volumes from recently added capacity and lower input costs. Management projects Plastics segment annual earnings to normalize in the range of $45 million to $50 million, now expected to be achieved by 2028, based on prices reverting to pre-2021 gross margin percentages while incorporating volume growth and inflationary cost increases.

The long-term vision is for the Electric segment to become a larger contributor to overall earnings. The updated five-year capital expenditure plan for OTP totals $1.4 billion through 2029, expected to result in a 9% compounded annual growth rate in rate base and translate into a commensurate 1:1 EPS growth. This plan includes investments in wind repowering, solar projects, AMI, and significant transmission projects under MISO's long-range plan. Beyond this base plan, management sees up to $650 million in incremental CapEx opportunities at OTP, including potential investments related to new large loads.

Financial Strength and Strategic Positioning

Otter Tail's diversified structure underpins its financial strength. As of March 31, 2025, the company reported total available liquidity of $607.2 million, comprising $284.8 million in cash and cash equivalents and $322.4 million available under credit facilities. The consolidated equity layer stood at a healthy 62%. This robust financial position, coupled with strong operating cash flow generation (though down in Q1 2025 compared to a strong Q1 2024 due to timing factors), enables a compelling financing strategy. The company projects funding its entire five-year capital plan through 2029 without the need for external equity issuances. This is a significant differentiator, leveraging the cash generated by the non-electric businesses to support the capital-intensive utility growth, thereby avoiding potential shareholder dilution faced by many pure-play utilities. The plan includes annual debt issuances at OTP to maintain its authorized capital structure and the retirement of $80 million in parent-level debt maturing in late 2026 using existing cash.

The company is actively pursuing opportunities to add new large loads to the Electric system, with over 1,000 MW of potential demand in the pipeline relative to its existing 1,000 MW system size. A significant milestone was achieved in Q1 2025 with the execution of a service agreement for a new customer located near the Big Stone Plant, representing approximately 155 MW of load (mostly non-firm). Management is targeting an in-service date later this year, subject to regulatory approvals and construction, and emphasizes thoughtful negotiations to mitigate adverse impacts on existing customers, noting that appropriately managed new loads can benefit all customers by spreading fixed costs.

Risks on the Horizon

Despite the strategic advantages and growth plans, Otter Tail faces notable risks. Macroeconomic conditions and U.S. trade policy changes, particularly tariffs, could impact the cost of materials for electric capital projects, potentially affecting timing and recovery. While most raw materials for manufacturing are domestically sourced, higher domestic steel prices are anticipated, though expected to be passed through. Changes to tax credit legislation under the Inflation Reduction Act (IRA), including potential modifications to transferability, are being monitored, although near-term renewable projects are expected to qualify, and the ability to monetize credits internally mitigates some risk.

Significant legal and regulatory uncertainties exist. The Plastics segment is currently subject to class action lawsuits alleging antitrust violations related to PVC pipe pricing and a DOJ grand jury subpoena. The potential outcome and financial impact of these matters are currently undeterminable but could be material. In the Electric segment, the resolution of FERC proceedings regarding unilateral transmission owner funding authority for generator interconnections could impact financial results. Furthermore, the EPA's proposed rule on Regional Haze could necessitate significant emission control investments or lead to the early retirement/sale of the Coyote Station interest, subject to regulatory approval.

The Manufacturing segment continues to grapple with end market demand headwinds driven by inventory levels, inflation, and interest rates, particularly in the RV and agriculture sectors. Low-priced import competition also poses a challenge for T.O. Plastics. While management is implementing cost controls and sees long-term opportunities in reshoring and outsourcing, near-term performance remains pressured.

Conclusion

Otter Tail Corporation's investment narrative is compellingly shaped by its unique diversified business model. This structure provides a resilient foundation, generating significant cash flow from its non-electric segments that strategically fuels the capital-intensive growth of its regulated electric utility. While the company faces near-term headwinds in its Manufacturing and Plastics segments, reflected in the expected decline from record 2024 earnings, the Electric segment continues its steady growth trajectory, driven by a robust capital investment plan focused on grid modernization, renewable integration, and transmission infrastructure.

The ability to fund this substantial utility growth pipeline without external equity issuances for the foreseeable future is a key competitive advantage, enhancing financial flexibility and shareholder value. As the company executes on its strategic initiatives, including manufacturing capacity expansions and securing new large electric loads, and navigates regulatory and legal challenges, investors will be focused on the successful execution of the utility capital plan, the pace of normalization in the Plastics segment, and the management of risks associated with trade policy, tax legislation, and litigation. The path to achieving the targeted 6% to 8% long-term EPS growth and the 65% electric/35% non-electric earnings mix by 2028 hinges on these factors, positioning Otter Tail as a unique opportunity leveraging diversification for sustainable utility expansion.