Otter Tail Corp

NASDAQ:OTTR

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Otter Tail Corporation 2020 First Quarter Earnings Conference Call. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to the speakers today from Otter Tail Corporation. Thank you. Please go ahead.

[Loren Hanson, Assistant Secretary]

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 first quarter 2020 earnings results. Our complete earnings release and slides accompanying this call are available at our website at ottertail.com. A recording 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.

[Charles MacFarlane, President, CEO & Director]

Thank you, Loren. Good morning, everyone. Welcome to our first quarter 2020 earnings call. Before I begin my prepared remarks, I would like to recognize all those who have been impacted by COVID-19, and extra thanks to the medical personnel and first responders serving our communities. Otter Tail Corporation is supporting all the locations we serve with collective efforts to mitigate the spread of COVID-19. Our business continuity plans put the health and safety of our employees and our communities at the forefront and are designed to help ensure continued electric reliability and operational excellence across our companies.

Our press release outlines actions we've taken to date. Currently, 21% of our employees are working remotely, with only 12 confirmed cases of COVID-19 across the corporation. We will remain diligent in our precautionary health and safety efforts. We continue to monitor this dynamic event and how it's going to impact the economy and our electric and manufacturing platforms. While all of our operating companies have been deemed critical infrastructure businesses, some of our locations have been impacted more than others.

Please refer to Slide 7 as I begin my comments. We earned $0.60 a share this quarter compared with $0.66 a share for the first quarter of 2019. The primary reasons for the decline are electric segment earnings declined $0.07, primarily due to $0.09 of unfavorable weather. Manufacturing segment earnings were flat quarter-over-quarter. However, we estimate the impact on the last half of March from COVID-19 reduced our earnings per share by $0.01.

The plastic segment earnings increased $0.05, primarily due to strong volumes, and our corporate costs were negatively impacted by $0.04, primarily due to losses on our investments related to corporate-owned life insurance and investments held at our captive insurance company associated with the volatile equity markets in March.

In light of the COVID-19 outbreak and uncertainty regarding the extent and duration of efforts to mitigate the virus, we are revising our 2020 diluted earnings per share guidance to be in the range of $2.00 to $2.25 from the previous guidance of $2.22 to $2.37 per share.

Slide 8 lists the major impacts of mitigation responses to COVID-19. The impacts to the utility include lower commercial and industrial sales, particularly in oil pumping and ethanol production. This is slightly offset by increased residential usage. We have provisioned for anticipated increasing bad debt expense and waived late fees. Additionally, any significant delay in major utility capital projects due to supply chain or worker health issues would reduce rider revenues. We have undertaken significant O&M reductions and filed for deferred accounting for COVID-19 related impacts.

We are also seeing significant volume reductions in our manufacturing segment, primarily driven by declining sales volumes and forecasts at BTD. BTD has implemented rotating furloughs and reduced O&M expenses to mitigate this volume drop. Additionally, after a strong first quarter in the plastic segment, we anticipate declining volumes for the remainder of the year. Lower PVC prices and lower pipe sales prices may negatively impact margins.

Otter Tail Power experienced COVID-19 related impacts on commercial and industrial loads starting in April. The relative EPS sensitivities by customer class are listed on Slide 14. The estimated overall utility sales impact for 2020 related to COVID-19 is a negative $0.08. Most of this decline is associated with lower expected oil pumping and ethanol production load. Those ongoing impacts are included in our revised guidance. Otter Tail Power, along with many other utilities, has temporarily suspended disconnects for late payments and waived late payment fees for residential and small business customers during this pandemic. It is expected that this will have a negative $0.02 EPS impact.

Otter Tail Power continues to grow through capital investments and generation and transmission projects. As shown on Slide 15, rate base is expected to grow by an annual rate of over 8% between 2019 and 2024 in a constructive regulatory environment.

On Slide 18, the Merricourt Wind Energy Center, which started construction last August, remains on budget but is slightly delayed. More than two-thirds of all civil work and project foundations are complete. The project has received Minnesota and North Dakota renewable resource rider eligibility and South Dakota phase-in rider recovery. While risks associated with supply chain and construction labor has increased due to COVID-19, we expect to begin commercial operation by the end of the year. It is estimated that this project will cost approximately $258 million and will generate enough energy to power more than 65,000 homes. This is the largest capital project in Otter Tail Power history.

On Slide 19, Astoria Station construction remains on time and on budget. We awarded the general work contract in the fourth quarter last year. Astoria will be a 245-megawatt natural gas combustion turbine. It will complement our wind generation by providing a reliable backstop when the wind isn't blowing, and it will have flexible operating options and low CO2 emissions. We expect to invest approximately $158 million in this project. And even with increased COVID-19 construction labor risk, we anticipate it will be online near year end 2020.

In August we began construction on the second phase of the South Dakota transmission project, a new 43-mile, 115 kV transmission line from Lake Norden to Astoria, South Dakota. Phase II engineering is 90% complete. We've obtained 100% of the project easements and have set approximately 28 of the 43 total miles of structures. We anticipate to energize the line in mid-2021.

As shown on Slide 21, we have the opportunity to add approximately $45 million of rate base associated with new generator interconnection upgrades as proposed by the MISO generator interconnection process. Self-fund is an election by the transmission owner, in this case Otter Tail Power, to fund the initial network upgrades associated with new generator interconnections. To date, FERC has approved 23 of 33 facility service agreements, or FSAs, between interconnection customers and Otter Tail Power. We have another 4 FSAs filed with FERC, and MISO is preparing an additional 6. Otter Tail will fund and earn a return on and a return of the capital costs of these network upgrades over a 20-year period from these interconnection customers.

Now turning to our manufacturing segment. BTD, our contract metal fabricator, has been significantly impacted by COVID-19. They have now cut back on operating levels and implemented temporary rotating furloughs of nearly 55% of their workforce over the second quarter, as BTD has implemented -- been impacted by customer plant shutdowns across all end markets it serves. Additional cost-cutting measures may be taken at BTD, depending on the length and severity of the market softness for its products.

T.O. Plastics is anticipating future market softness and has taken steps to reduce workforce hours and implemented a hiring freeze. To date, our plastic segment has not seen a major impact on their business. However, recently announced resin price decreases are expected to put downward pressure on operating margins. Resin prices are declining, as are PVC pipe prices, and distributors are reducing inventory. We have decreased production in our Fargo plant in response to reduced demand. Additional cost-cutting measures may be taken by our PVC pipe manufacturing companies, depending on the length and severity of the reduced demand for PVC pipe as the impact of COVID-19 continues to develop.

In looking forward, we continue to enhance our balanced electric generation mix. We anticipate that by 2022, Otter Tail Power customers will receive 30% of their energy from renewable resources, and our carbon emissions will be at least 30% below 2005 levels, all while keeping average residential rates nearly 30% below the national average.

With growing investor concern about companies generating more than 25% of revenues from thermal coal, it's assuring to note that Otter Tail Corporation's percentage of revenue from coal assets is well below that threshold. The percentage of consolidated revenues from our coal assets was 14% in 2019 and is projected to decline to 11% by 2022. We continue to execute on our strategic objectives to grow our businesses, achieve operational and commercial excellence and develop our talent. And we maintain our long-term target of 5% to 7% annual EPS growth off a 2019 base.

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

[Kevin Moug, SVP & CFO]

Thanks, Chuck, and good morning, everyone. Let me start with an overview of our first quarter results, and please refer to Slide 26 as I discuss the quarter. Our electric segment net earnings decreased $2.5 million quarter-over-quarter. Key drivers of this were a $5 million decrease in retail revenues due to milder weather between the quarters, as evidenced by a 19.6% decrease in heating degree days. Weather negatively impacted earnings by $0.09 a share compared to the first quarter of 2019. There was a $1 million decrease in retail revenue in South Dakota related to the first quarter 2019 reversal of a refund provision recorded in 2018 as part of the 2017 Tax Cuts and Jobs Act. The South Dakota rate case settlement agreement eliminated the refund requirement.

The decrease in retail revenues were partially offset by increased Minnesota and North Dakota renewable resource rider revenues related to the Merricourt Wind Energy Center project, increased retail revenues from increased kilowatt-hour sales to industrial and other customers. This is apart from the weather-related decrease in retail kilowatt-hour sales, increased revenues from the generation cost recovery rider in North Dakota in conjunction with the construction of Astoria Station and increased revenues from the South Dakota phase-in rider in conjunction with the Astoria Station and Merricourt projects. Other items impacting electric segment earnings were increased O&M expenses related to increased labor and employee benefit-related costs and higher depreciation expense associated with rate base additions in 2019 and lower income tax expense.

Net earnings for the manufacturing segment were flat quarter-over-quarter. Key items impacting the results were at BTD, revenues decreased $10.2 million due to a $9.8 million decline in part sales to its major end markets. $7.1 million in the decreased sales relates to lower material costs passed on to the customer, with the balance primarily representing lower sales volumes. Of the decreased sales volumes, approximately $2.5 million is attributable to COVID-19 related production curtailments that occurred in the last half of March.

Our scrap revenues were also down due to a 20% decrease in scrap metal prices and a 15% decrease in scrap sales volumes. These decreases in parts and scrap revenues were partially offset by an increase in tooling revenues. Lower cost of goods sold resulted from decreased sales volumes and lower material costs passed on to customers. Our decreased gross margins were partially offset by lower operating interest and income tax expense. And in total, BTD's earnings decreased $200,000. We estimate the COVID-19 issues that developed in the last half of March impacted BTD's first quarter earnings by approximately $0.01 a share. This relates to reduced sales as customers started to invoke temporary plant shutdowns, which caused lost labor productivity and costs related to personal protective equipment and the payment of healthcare premiums for furloughed employees.

T.O. Plastics revenues increased $800,000 due to increased horticultural sales. The increased revenues were more than offset by higher cost of goods sold, driven by increased production and increased rental costs from additional warehouse space. Operating income was also favorably impacted during the quarter due to the receipt of insurance proceeds from the settlement of the March 2019 partial roof collapse. These items resulted in a $300,000 increase in T.O.'s quarter-over-quarter earnings.

Our plastic segment earnings increased $1.7 million due to an increase in pounds of pipe sold, offset by a slight decrease in pipe sales prices. Our first quarter 2019 sales volumes were negatively impacted by poor weather conditions across our sales territory. Our cost of goods sold increased $3.9 million due to the increased sales volumes. A 4.7% decrease in the cost per pound of pipe sold more than offset lower pipe sales prices, resulting in an 8.4% increase in gross margins.

Our corporate costs were negatively impacted by $0.04, primarily due to losses on our investments related to corporate-owned life insurance and investments held at our captive insurance company that were associated with the volatile equity markets in March.

In looking at our liquidity needs, our modeling continues to show we have sufficient liquidity under our credit facilities based on current assumptions of how COVID-19 is expected to impact our business. We do have a risk tolerance metric in place to maintain a minimum of $50 million of liquidity based on the current line limit of the Otter Tail Corporation credit facility. This facility also has an accordion feature to upsize to $290 million, subject to certain terms and conditions. The Otter Tail Power Company credit facility can also be upsized to $250 million based on certain terms and conditions. We did upsize the Otter Tail Corporation credit facility to $170 million in October of 2019, and we don't have any debt maturities due until December of 2021.

We also positioned ourselves well from a liquidity standpoint at the end of 2020 with early execution of our financing plan, given our increased capital spend. In 2019 we completed a $175 million private placement of debt for Otter Tail Power Company. $100 million was funded in October of '19, $35 million funded in February of 2020 and the remaining $40 million will fund in August of 2020.

We have raised $30 million or approximately 39% of our equity needs through the first quarter of 2020 before the impact of COVID-19 on the equity markets. We would expect to issue additional equity of $40 million to $45 million for the balance of 2020. To the extent the markets take a while to recover, we have ample liquidity in our credit facilities to support our capital plans.

Let's now move to our business outlook on Slide 33, and I'll review the expected impacts on our operating companies from COVID-19 and the assumptions around our updated guidance. Our current assumptions are based on expectations the second quarter will be negatively impacted. We then expect to see gradual recovery as efforts across the country result in a flattening of the infection rate curve, and employees are able to safely return to work while maintaining safe work practices. We can then anticipate our customers' demands for our products to increase and our plants to run at higher levels of capacity in the third and fourth quarters.

Our assumptions are based on information published by the Institute for Health Metrics and Evaluation, which is an independent population health research center at the University of Washington. New COVID-19 state-by-state U.S. analyses from the IHME have found some states could relax some aspects of social distancing measures in early May if robust containment strategies are implemented. Our assumptions are also based on economists' view that call for a significant drop in second quarter GDP, followed by significant year-over-year increases in the third and fourth quarters.

The COVID-19 pandemic and related impacts are without precedent. Therefore, while we believe our assumptions are reasonable and the reports on which they are based are reliable, they may prove to be inaccurate. If our assumptions are not correct and we experience a prolonged economic impact from COVID-19, our outlook will need to be revised accordingly.

All of these actions have resulted -- or all of these items have resulted in actions taken across the corporation to reduce workforce, mostly through furloughs in our contract metal manufacturing business and to reduce general and administrative expenses, including reducing pay for employees, officers and directors and delaying planned wage increases. We continue to review if additional actions may be appropriate throughout the corporation.

As a result of the abovementioned items, we are revising and widening our 2020 diluted earnings per share guidance range, mainly due to the anticipated effects of the COVID-19 outbreak and the measures put in place to slow its spread. We now expect our 2020 diluted earnings per share to be in the range $2.00 to $2.25 compared to our previously announced guidance of $2.22 to $2.37. Our 2020 diluted earnings per share guidance also includes $0.04 of dilution associated with the planned issuance of common equity under our at-the-market offering program and dividend reinvestment in employee stock purchase plans to help fund construction projects at Otter Tail Power Company. And it is important to note that our electric and plastic segments guidance remains largely unchanged. Our revisions to the guidance are driven by COVID-19 impacts on our manufacturing segment.

The following items contribute to our revised earnings guidance for 2020. We are maintaining the upper end of the original guidance for our electric segment, but widening the range to reflect added risks related to the impacts of COVID-19. Our 2020 guidance includes capital spending on the Merricourt and Astoria Station rate base projects of $178 million and $81 million, respectively. The Merricourt project has rider recovery mechanisms in all three state jurisdictions. The Astoria Station project has rider recovery mechanisms in South and North Dakota. The project earns AFUDC in Minnesota and is expected to be recovered through a rate case in Minnesota and has already been approved in our integrated resource plan, increased revenues related to $22 million of anticipated spending for self-funded generator interconnection agreements, and there are no planned generation plant outages for 2020. Plant outage costs totaled $3.1 million in 2019.

Additional items expected to positively impact our 2020 electric earnings include the recent decision by the Minnesota Supreme Court ruling in Otter Tail Power Company's favor related to the incremental return earned on FERC jurisdiction transmission lines. The estimated impact of this decision is an increase to 2020 earnings of $0.05 a share. Going forward, the positive impact of this decision on an annual basis is $0.01 a share. We are updating our Minnesota transmission cost recovery rider filing with new rates incorporating the results of the decision in order to reverse the original Minnesota Public Utilities Commission order. We have also implemented $0.08 a share of cost reduction efforts to mitigate the impact of COVID-19.

The above items are offset by the impact of unfavorable weather during the first quarter of 2020 and the assumption of normal weather for the remaining months of the year. Weather favorably impacted our 2019 earnings by $0.08 a share compared to normal. We have increased expenses that were caused in large part by a decrease in the discount rate used for the pension plan and a lower rate used for our long-term rate of return. Slide 34 and our Business Outlook section provide further sensitivity around our pension assumptions.

Higher depreciation and property tax expense due to large capital projects being put into service increased interest costs related to the issuance of the $175 million debt financing that was completed in October of 2019, and reductions in commercial and industrial demand related to the negative impacts of COVID-19, as some customers in our jurisdictions have had to either completely shut down or curtail operations, given reduced demands for their products and services. We also expect to incur increased costs of bad debts, personal protective equipment and the loss of late fee revenue. The total estimated impact of these items ranges from $0.08 to $0.12 a share.

We now expect net income from our manufacturing segment to be lower than 2019 and lower than our original 2020 guidance. This is based on an estimated reduction in manufacturing segment earnings of $0.15 a share from the midpoint of our original guidance to the midpoint of our updated guidance. This is due to the effects of and our response to the COVID-19 outbreak.

Backlog for the manufacturing segment of approximately $127 million for 2020 compares with $165 million a year ago. Raw material price deflation is driving backlog down by $8 million, and the remaining $30 million decrease in backlog is volume driven. We are maintaining our guidance range for the plastic segment in spite of the expectations resin prices will be decreasing over the second quarter. This decline in resin prices could put downward pressure on sales prices of PVC pipe, which in turn could impact operating margins. We also expect the volume of pounds sold in 2020 will be down 3% to 6% as a result of concerns COVID-19 could have on planned 2020 infrastructure projects.

And we are revising our original guidance range for corporate costs net of tax, primarily due to the significant decline in the stock market related to COVID-19 and the impact on our investment and corporate-owned life insurance and investments held at our captive insurance company. While we have implemented mitigation efforts to lower our corporate labor and non-labor costs, we don't expect to fully recover the drop in value of these investments before the end of the year.

We are in a challenging business environment, and we will weather this storm. There is uncertainty as to how long the disruption of economic activity could last, and we won't be immune to its effects. Our short-term focus is to take the necessary actions to position our companies to be resilient through these challenges. Our long-term focus remains on executing our strategic initiatives to grow our business and achieve operational and commercial excellence.

Otter Tail Power Company plans to grow its rate base in very supportive regulatory environments at an 8.2% compounded annual growth rate over the next 5 years, driven by investments in renewable and natural gas generation, technology and infrastructure and transmission projects. Over time, the electric utility will provide approximately 75% of our overall earnings.

The manufacturing and plastic segments will also provide organic growth over the long term. These two segments are expected to provide around 25% of our earnings over time, and we expect to be able to deliver total shareholder return of 8% to 10% over the long term. This consists of 2 components. First, our earnings per share are expected to increase at a 5% to 7% growth rate. And secondly, our current dividend yield is approximately 3%. Looking forward, we would expect to grow the dividend along with earnings per share growth of 5% to 7% compounded annual growth rate and maintaining a dividend payout ratio of between 60% to 70%. And our company is on solid footings. We have a strong balance sheet, we have ample liquidity to support our businesses and we have investment-grade corporate credit ratings.

We're now ready for your questions.

[Operator]

[Operator Instructions]. Your first question comes from the line of Chris Ellinghaus with Siebert Williams.

[Christopher Ellinghaus, Siebert Williams Shank & Co.]

Just a couple of things. As you were describing the guidance, so you're expecting some sort of gradual improvement in Q3 and Q4. Kevin, are you not anticipating any kind of impacts from the beginning of flu season in the fourth quarter?

[Kevin Moug, SVP & CFO]

Chris, our improvements in Q3 and Q4 are expected in large part in manufacturing for BTD as it relates to what we're seeing from our customers and what their announced -- initially, what their announced temporary plant shutdowns were and now what we're seeing them announce as they bring back their plants up -- not necessarily to full production, but they're starting to bring them back up online. And so as we're looking out, we know Q2 is going to be a tough quarter because of the temporary plant shutdowns that were starting to be implemented in the last part of March and through April or early May. And then as they're bringing their plants up, we're basing our assumptions based on, one, the economists' view of a recovery in the third and fourth quarter and then based on what we're seeing from our customers. Typically, I would say our fourth quarter still will be down based on our assumptions and what we're seeing from the economy. We're not assuming a full recovery back to where we were. It's just a bounce back from where the second quarter was, or is expected to be, excuse me.

[Christopher Ellinghaus, Siebert Williams Shank & Co.]

Okay, so it's some improvement over where you think the second quarter level is, but not normal.

[Kevin Moug, SVP & CFO]

Right.

[Christopher Ellinghaus, Siebert Williams Shank & Co.]

Okay. The idea of a filing of a Minnesota case in November -- have you spoken to the commission to see what their attitude is towards a filing at that sort of time in the economy?

[Charles MacFarlane, President, CEO & Director]

We are in weekly communication with all of our commissions on COVID-related items including reliability, but also discussions on bad debt and lost late fees, no disconnects -- those types of issues. And our current plan is, and we have not received counter feedback, is to continue to plan on filing in Minnesota in November of this year.

[Christopher Ellinghaus, Siebert Williams Shank & Co.]

Okay, yes, I just wanted to see if you had gotten any kind of adverse response on that concept. You talk about, in the plastic segment, some lower volumes and some potential margin contraction. Is that sort of level that you're thinking about, is that looking at your guidance with really no change to the plastics? Is that offset by first quarter? Or can you just give us a little more color on -- the way you describe it seems a little more negative than is reflected in the guidance numbers.

[Kevin Moug, SVP & CFO]

We do have roughly baked in here, there's $0.05 of uplift from the strong first quarter results. And then we're seeing through these reduced volumes and potential pressures on margins, I guess it would be another $0.05, then, of reduction to bring us back to the midpoint of the range.

[Christopher Ellinghaus, Siebert Williams Shank & Co.]

Okay, so the net-net, it's neutral based on the rest of the year offsetting the first quarter?

[Kevin Moug, SVP & CFO]

Right.

[Christopher Ellinghaus, Siebert Williams Shank & Co.]

Okay. This is maybe outside the scope of today, but what is your general thought process on how the COVID-19 pandemic slips into 2021? Are you anticipating 2021 having adverse impacts as well at this point?

[Kevin Moug, SVP & CFO]

Chris, as we look to 2021, based on the current assumptions we have in place, we certainly would expect that, particularly in the manufacturing side, that there isn't going to -- we're not going to see an immediate bounce back from 2020 to where we would have probably originally thought 2021 was going to be. We would see a recovery, but not back to where we were. We have good rate base investments in place at the utility. I think there's going to be -- our current view would be in manufacturing, there's impacts from COVID into 2021 that we'll continue to monitor, just as it won't come back as quickly as we would have expected, but that's kind of what our current views would be right now.

[Operator]

Your next question comes from the line of Brian Russo with Sidoti.

[Brian Russo, Sidoti & Company]

First of all, thank you for the detailed assumptions and updated guidance. Just on the BTD sales degradation, are you seeing double-digit percentage decreases through the end of this year and/or any margin assumptions you could provide?

[Kevin Moug, SVP & CFO]

The impact from our original budget guidance in terms of revenues, we're seeing a 15% reduction from the original guidance that we came out with in February as it related to BTD to what we now have baked in for our updated guidance here. And that is across all of our end markets that we're seeing that, which has been based on, as I mentioned earlier, these temporary plant shutdowns that we've been monitoring across our entire customer footprint for BTD.

And then, of course, in addition to that, we are seeing continued pressure on scrap pricing and the impact there. And then just the fact that the plants aren't as busy, we're seeing a negative impact from applied labor and overhead as well. We were able to implement roughly $0.07 of cost mitigation efforts in the manufacturing segment to help compensate for the COVID items and the lower scrap, which gets us to that $0.15 reduction from midpoint to midpoint.

[Brian Russo, Sidoti & Company]

Okay, so it's a $0.15 per share reduction from the midpoint. That wasn't 15% decrease in volumes?

[Kevin Moug, SVP & CFO]

Well, there's two numbers that I use. They both happen to be 15. One was a 15% reduction in revenue, largely driven at BTD from what we had in the original plans to today. And then the impact of COVID in the manufacturing segment is a net $0.15 a share from the midpoint to the midpoint.

[Brian Russo, Sidoti & Company]

Got it, okay. And just onto the electric side, it looks like, based on your guidance and the assumptions that you've provided, you're able to offset pretty much all of the COVID impacts -- related sales degradation and any incremental bad debt expense, et cetera. Are those O&M cuts sustainable post-2020?

[Charles MacFarlane, President, CEO & Director]

They're made up of -- the utility normally does annual wage increases in April. Those have been frozen at last year's number for the non-union employees at this point. And we have taken a fairly significant reduction in outside contractor and consultant costs, some of which are line clearance. So we would anticipate that a lot of these costs would have to be put back in, in 2021.

[Brian Russo, Sidoti & Company]

Okay, got it. And you mentioned on the ATM of $0.04 as if that's incremental to your corporate expense outlook. But I thought that ATM of $40 million to $45 million was already in place and expected throughout 2020. Is it just a reflection of the decline in stock price, or am I missing something there?

[Kevin Moug, SVP & CFO]

No, that was all baked into our original guidance; you're correct. And we're just reaffirming that that's still in there. It's nothing new. It's just an affirmation of what the expected impact -- I mean, we said in the first, in the February call, that the guidance anticipated $0.05 of dilution. This is just an update to that. The dilution is now, instead of $0.05, we expect it to be about $0.04. But it's not in addition to what we were doing.

[Brian Russo, Sidoti & Company]

Okay, got it. Okay, understood. And then just on the Merricourt commentary earlier, it's still on schedule for yearend 2020, but it might slip into 2021. And the way to put that in context in terms of earnings, it just means that the recovery under the rider mechanisms just get stretched out over a longer period or window of time until that's operational?

[Charles MacFarlane, President, CEO & Director]

Yes, Brian. The extension, you are correct. If the capital investment is delayed, it runs through our rider, sort of as an automatic tracker mechanism on the investment. We still anticipate that the project will be completed before the end of the year, and it will be PTC qualified mid-fourth quarter. But you are correct. The earnings impact would be a delay in capital investment flowing through a rider that reduces revenue.

[Brian Russo, Sidoti & Company]

All right. Then just a -- what's really the downside risk in the manufacturing? Is it extended stay-at-home provisions and nonessential business closures extended past what you've assumed in your guidance? Or is it a prolonged recession post lifting of the various provisions that we have across the country?

[Kevin Moug, SVP & CFO]

Yes, Brian, it could be a combination of both. To the extent that the customers' temporary plant shutdowns that have occurred and now, as they start to bring those back up, to the extent that there's an event that causes those to go back into shutdown mode, there would be downside risk to our forecast. And then, of course, if there is ultimately a prolonged recession, that would cause us to have to make adjustments as well.

[Brian Russo, Sidoti & Company]

Okay, and then just on an unrelated topic, I'm just curious. With the plastic subsidiaries that you have, have you pursued the idea of providing products and/or supplies to the health industry response efforts in terms of PPE or anything like that? Or that's just totally way off?

[Charles MacFarlane, President, CEO & Director]

Our T.O. Plastics, our thermal forming plastics company, is making face shields for PPE for hospitals and other places, just normal, other plant production. So we are doing that already.

[Kevin Moug, SVP & CFO]

Maybe just to add to your earlier question, I think that's -- you see that we have a $0.09 range in our guidance for the manufacturing segment, which is clearly wider than the other segments and the corporate cost center. And that's, as we look at that segment, we certainly have recognized there is risk here to the plan in terms of where we're at and what potential things could still create downside risk. So we've tried to reflect that in our current guidance range. But to the extent, based on our current assumptions as we've talked about, but to the extent that we did see changes in those assumptions driven through customers having extended plant shutdowns or those types of things or an extended recession, that could certainly impact that guidance.

[Operator]

Your next question comes from the line of Sophie Karp with KeyBanc.

[Sophie Karp, KeyBanc Capital Markets]

Can you guys maybe give us some color on how your volumes are shaping up across different customer classes, and also the way, maybe, how your rate structure is set up? Are you seeing the potential to offset some of the volume loss to C&I customers to residential? Or is it just not feasible in your service territory?

[Charles MacFarlane, President, CEO & Director]

I'll give you a couple of things. April, just for April sales, and we really viewed that the majority of the -- we did not see significant electric impacts in the last half of March. But for April, and our residential, our commercial and our industrial are effectively -- you see on Page 14 of the presentation -- really a third residential, a third commercial, a third industrial. We knew that our residential sales for April were up approximately 3%, commercial was down 5% and industrial was down 15%. And within industrial, I would comment that a majority of that are components of oil pumping and ethanol production, which are both impacted by the reduction in driving and petroleum usage. If you look out for a full year, we anticipate that overall, residential will be up 0.5% over what we had budgeted, small commercial will be down 3% to 5% over 2020 and industrial will be down in the 10% to 12% range, with much smaller margins on the industrial load.

[Operator]

[Operator Instructions]. There are currently no other questions. I would like to turn the call back to the company CEO, Chuck MacFarlane, for closing remarks.

[Charles MacFarlane, President, CEO & Director]

Thank you for your questions and your interest in Otter Tail Corporation. While our short-term focus has shifted to mitigation efforts of COVID-19 related impacts, our long-term focus remains on executing our growth strategies that are expected to increase shareholder value. For the utility, our strategy is to continue to invest in rate base growth opportunities. The utility is complemented by well-run strategic manufacturing and plastic pipe businesses, which provide organic growth from new products and services, market expansion and increased efficiencies.

In light of the recent COVID-19 outbreak and uncertainty regarding the extent and duration of efforts to mitigate the transmission of the virus, we are revising our 2020 diluted earnings per share guidance to be in the range of $2.00 to $2.25 from the previous guidance of $2.20 to $2.37.

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

[Operator]

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