Otter Tail Earnings Call: Utility Strength vs. Plastics Weakness

Otter Tail ((OTTR)) has held its Q4 earnings call. Read on for the main highlights of the call.

Otter Tail’s latest earnings call painted a picture of a company with a very strong utility core but mounting pressure from its cyclical non‑regulated businesses. Management highlighted sector‑leading returns, robust liquidity and a growing rate base, yet investors must contend with a falling EPS trend and sharp earnings compression in the Plastics unit that is unlikely to fully normalize before 2028.

Full-Year EPS, 2026 Outlook and Downward Trend

Otter Tail reported 2025 diluted EPS of $6.55, down 9% year over year, though results landed toward the upper end of its guidance range. Management launched 2026 EPS guidance of $5.22–$5.62, with a $5.42 midpoint that implies a further earnings decline even as it still equates to an above‑average ROE of about 12%.

Electric Segment Strength and Growth Momentum

The electric segment remained the clear earnings engine, with profits rising more than 7% year over year, or $0.16 per share, on rate base recovery, higher residential and commercial volumes and favorable weather. Looking ahead to 2026, the company expects electric earnings to climb about 14% on the back of a matching 14% increase in average rate base.

Rate Cases and Interim Revenue Support

Regulatory progress is underpinning near‑term earnings, with Minnesota interim rates of $28.6 million effective from the start of 2026 and South Dakota interim rates of $5.7 million in place from December 2025. Both sets of interim rates are subject to refund, and management anticipates final Minnesota rates will not be set until roughly mid‑2027, keeping some regulatory timing risk in play.

Rate Base Growth and Capital Spending Plan

Otter Tail reaffirmed a five‑year compounded rate base growth rate of 10% for Otter Tail Power, supported by a capital plan totaling $1.9 billion. Management continues to guide investors to an almost one‑for‑one relationship between rate base expansion and EPS growth over time, underscoring the central role of the regulated utility in driving long‑term value.

Renewables, Storage and Energy Transition Projects

On the clean energy front, the company completed a wind repowering program expected to boost output by about 20% while extending renewable tax credits for another decade. It is also advancing a 75 MW, four‑hour battery storage project of roughly $120 million with rider recovery approved in Minnesota, alongside construction of Solway Solar and acquisition of Abercrombie Solar assets, all slated to come online between 2026 and 2028.

Balance Sheet Strength and Liquidity Cushion

Otter Tail closed 2025 with $386 million of cash on hand and reported a utility return on equity of 16% on a 63% equity layer, putting it near the top of its peer group. Management believes this financial strength will allow it to fund the $1.9 billion capital plan without issuing external equity at least through 2030, reducing dilution risk for shareholders.

Dividend Growth and Shareholder Return Targets

The board approved a 10% dividend increase, bringing the annual indicated payout to $2.31 per share and marking the second straight year of double‑digit dividend hikes. Long‑term, the company is targeting EPS growth of 7%–9% and total shareholder returns of 10%–12%, signaling confidence that utility‑driven growth and disciplined capital allocation can offset cyclical headwinds.

Manufacturing and Plastics Expansion Initiatives

In its non‑regulated businesses, Otter Tail is adding capacity even as earnings soften, with a new BTD facility in Georgia ready and phase two at Vinyltech nearing completion. Northern Pipe Products is also planning an approximately 20‑million‑pound capacity increase by about 2028, while Plastics volumes rose 8% year over year, laying groundwork for eventual recovery when pricing stabilizes.

Improved Input Costs in Plastics

The Plastics segment benefited from roughly 14% lower material input costs, including PVC resin, which helped to partially cushion margin pressure. However, these cost improvements were not enough to offset the impact of sliding selling prices, leaving overall profitability under significant pressure.

Capital Structure Discipline and Debt Strategy

At the corporate level, Otter Tail plans to retire $80 million of parent‑level debt maturing later this year and not replace it, which will leave no debt at the parent. Future borrowing will be raised at the utility subsidiary each year to fund investments while maintaining its authorized capital structure, aligning leverage with regulated assets and cash flows.

Consolidated EPS Decline and Earnings Mix Shift

The company’s consolidated diluted EPS fell 9% in 2025 to $6.55, and the 2026 midpoint guidance of $5.42 signals another step down in earnings. This trajectory underscores a shifting mix in which robust utility growth is being overshadowed in the near term by sharp declines in the more volatile Plastics and Manufacturing segments.

Severe Earnings Compression in Plastics

Plastics earnings dropped by $0.72 per share in 2025, a 15% decline, and management expects another roughly 36% fall in 2026 as pipe prices continue to reset lower. The company now views 2028 as the timeframe for earnings in this business to normalize to about $45 million–$50 million annually, which is well below recent peak levels.

Accelerating PVC Price Declines

Average PVC sales prices fell 15% versus 2024, with the decline accelerating through 2025 to end the year about 20% below the prior‑year period. Management expects 2026 average PVC pricing to be another 20% lower than 2025, a steep drop that will weigh heavily on Plastics margins despite volume growth and lower input costs.

Manufacturing Segment Demand Headwinds

Manufacturing earnings decreased by $0.06 per share, or 16%, reflecting softer demand across key end markets like lawn and garden and agriculture. Dealer inventory overhang and heightened competition from low‑cost importers in horticulture compounded the weakness, limiting the segment’s ability to offset Plastics volatility.

Transmission Project Risks and Regulatory Challenges

Otter Tail flagged delays and resistance on MISO Tranche 1 transmission projects, citing siting challenges from landowners and local governments. A complaint at the regulator affecting MISO Tranche 2.1 could also push out project timing and associated benefits, introducing uncertainty around some planned grid investments.

Large Load Pipeline and Demand Uncertainty

The company’s large‑load pipeline lost a 155 MW project that moved into service, while a sizable 430 MW data center opportunity remains only in a second‑phase evaluation. Because this data center is not yet contracted, Otter Tail cannot fully plan the timing or scale of incremental investment, leaving potential upside more speculative for now.

Customer Bill Pressure and Affordability

The capital plan is expected to drive customer bill increases of about 3%–4% annually over the next five years, though the company cautions that year‑to‑year and jurisdictional differences will occur. Management acknowledged that affordability could become a concern, which may influence future rate design, regulatory outcomes and pacing of investments.

Rising Depreciation, Interest and Corporate Costs

Growing rate base is boosting depreciation and interest expense, creating a drag that partially offsets the earnings uplift from new utility investments. Additionally, corporate costs are projected to rise in 2026 owing to lower investment income and higher labor expenses, moderating the overall earnings contribution from the electric segment.

Uncertainty Around Plastics Earnings Trajectory

Management emphasized that predicting long‑term Plastics earnings remains difficult, with the potential for significant variance relative to current projections. This uncertainty adds an additional layer of execution and forecasting risk to Otter Tail’s consolidated growth targets, particularly over the next few years while prices reset.

Forward Guidance Anchored by Utility Growth

For 2026, Otter Tail’s EPS guidance range of $5.22–$5.62, underpinned by a strong utility returning roughly 12% ROE at the midpoint, sets expectations for modest earnings contraction before growth resumes. The company reiterated a 10% five‑year rate base CAGR, a $1.9 billion capital plan, rising electric earnings and no external equity issuance through at least 2030, while acknowledging that a 36% drop in Plastics earnings and a 3%–4% annual rise in customer bills will shape the near‑term risk‑reward profile.

Otter Tail’s call ultimately balanced confidence in its regulated utility engine with caution around cyclical and project‑related risks. For investors, the story is one of short‑term EPS pressure and Plastics volatility against a backdrop of strong balance sheet metrics, growing clean‑energy assets and an increasingly utility‑centric earnings mix supported by a rising dividend.