Otter Tail Corp

NASDAQ:OTTR

Earnings Call Transcript 2020-Q3

[Operator]

Good morning and welcome to the Otter Tail Corporation's Third Quarter 2020 Earnings Conference Call. Today's call is being recorded and we will hold a question-and-answer session after the prepared remarks.

I will now turn the call over to the company for their opening comments.

[Loren Hanson, Investor Relations]

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 third quarter 2020 earnings results. Our complete earnings release and slides accompanying this call are available on 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.

[Chuck MacFarlane, President and Chief Executive Officer]

Thank you, Loren. Good morning, everyone. Welcome to our third quarter 2020 earnings call. Otter Tail Corporation continues to support 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 we are designed to help ensure continued electric reliability and operational excellence across our companies.

With a majority of our employees now living in areas where there's been a spike in new COVID-19 cases, we remain diligent in our precautionary health and safety efforts based on the recommendations from the CDC, regional health organizations, and state and local government mandates.

Currently, 17% of our employees are working remotely. Since March, we have had 93 confirmed COVID-19 cases across the corporation, of which, 20 remain active. We continue to monitor this dynamic event and how it is impacting the economy and our electric and manufacturing platforms.

Please refer to Slide 6 as I begin my comments on Q3. We're [into] $0.87 per share this quarter compared with $0.62 per share in the third quarter of 2019. The increase was primarily driven by our Plastics and Electric segments. Kevin, will provide more detailed discussion of our financial performance in his comments.

But a brief overview of Q3 results are Electric segment earnings per share increased $0.16, primarily due to increasing investments in our Merricourt Wind Energy Center and Astoria Station, a favorable decision regarding the state jurisdictional treatment of federally approved transmission rates, effective cost management targeted at offsetting the impacts of COVID-19 and lower operating expense.

Our Manufacturing segment earnings were flat quarter-over-quarter, but experienced higher margins due to productivity improvements. Sales continue to be negatively impacted by COVID-19. However, BTD has seen a rebound in sales to the recreational vehicle and lawn and garden end markets.

Our Plastic segment had an outstanding quarter with earnings per share increasing $0.11 driven by increased volume and margins resulting from strong market demand coupled with favorable market pricing. And our corporate cost increased by $0.02 primarily due to increased performance based incentive accruals resulting from improved year-to-date results.

Based on our year-to-date performance and our updated view of the potential impacts on our businesses and COVID-19, we are raising and narrowing our 2020 diluted earnings per share guidance to be in the range of $2.26 to $2.36 from our previously announced guidance of $2.10 to $2.30 per share. You will note that the midpoint of our updated guidance is now slightly above the midpoint of our original 2020 guidance.

As noted in the earnings release, we continue to take actions to help mitigate financial risks from COVID-19 impacts on our businesses. Key impacts to the utility include lower commercial and industrial sales, partially offset by increased residential usage. We have provisioned for anticipated increasing bad debt expense and waived late fees. We've undertaken significant O&M reductions and filed for differed accounting for COVID-19 related impacts.

Although we continue to see some volume reduction in our Manufacturing segment from COVID-19, we continue to focus on reducing O&M expenses to help mitigate those reductions. Also, our revised outlook now anticipates a stronger economic recovery of their end-markets for the remainder of 2020.

As mentioned, our Plastic segment is performing exceptionally well in 2020 with the limited effects from COVID-19. Slide 11 provides an updated view of the annual revenue impacts by customer class for the utility. The current view of the estimated overall utility sales impact for 2020 related to COVID-19 is a negative $0.05 to $0.07 per share. Those impacts are included in our revised guidance.

Otter Tail Power, along with many other utilities suspend disconnects for late payments and waived late payment fees for residential and small business customers during this pandemic. It is expected this will have a negative $0.02 EPS impact related to increased bad debt expense. Disconnect processes were reinstated in North and South Dakota in mid-September.

As shown on Slide 12, we filed our Minnesota general rate case on November 2. Our last Minnesota rate review was filed in 2016. Investment in cleaner energy generation is the primary driver for this request. Merricourt Wind Energy Center, our 150-megawatt wind generation facility in North Dakota, and Astoria Station, our 245-megawatt simple cycle natural gas combustion turbine in South Dakota, are part of our plan to meet customers’ future energy needs. And our new customer information system, which focuses on enhancing customer experience is also a driver for the request. It allows customers more access and options related to their energy use and the company services.

We proposed to increase revenues from Minnesota rates by $14.5 million or approximately 6.8%. We also requested approval to implement decoupling on customer bills to stabilize revenue apart from energy sales. If approved, this will go into effect with final rates. Even with this increase, Otter Tail Power will continue to have some of the lowest rates in the country. Otter Tail Power continues to grow through capital investments in generation, transmission and technology projects.

As shown on Slide 13, rate base is expected to grow at an annual rate of 8.6% between 2019 and 2024 in a constructive regulatory environment.

On Slide 16, construction continues on the Merricourt Wind Energy Center, the largest capital project in Otter Tail Power’s history. The project is scheduled for completion by the end of December 2020. Though there is a risk associated with supply chain and construction labor due to COVID-19, all 75 towers have been erected and topped out with commissioning underway. The first turbine was energized on October 14, producing the first megawatt of energy in the new wind farm.

On Slide 17, Astoria Station construction remains on-time and on-budget. Major construction milestones were reached in the third quarter with all major equipment on-site and in place, the gas interconnection complete and the generator tie line complete. The project is moving into the testing and commissioning phase. Despite COVID-19 construction labor risk, we expect it will be commercially operational in Q1 next year.

In mid-June, Otter Tail Power submitted a response to the Minnesota Public Utilities Commission request for projects to potentially help the state in COVID-19 economic recovery. As shown on Slide 18, the company submitted 12 projects with a total cost estimate to be in the range of $153 million to $173 million with construction or completion dates that would occur in the near term if we obtained authorization.

Approximately 30% or $50 million of those investments are outside of our current capital expenditure plan. The projects proposed include solar generation, infrastructure and reliability improvements, an outage management system, accelerated vegetation management, and electric vehicle infrastructure and rate pilot. Generally, this would be an advancement of projects that were previously in some stage of consideration.

On Slide 19, Otter Tail Power announced in September, the $60 million Hoot Lake solar project. This is a 49-megawatt project we plan to build on land around Hoot Lake plant in Fergus Falls, Minnesota. The project will include up to 170,000 solar panels and will generate enough energy to power approximately 10,000 homes each year. This project offers us a unique opportunity to reuse our existing Hoot Lake transmission interconnection along with substation and plant land after retiring the Hoot Lake coal plant in 2021.

Solar generation has several advantages that make this the right energy resource for us to implement at this time and at this location. Over the past few years, the cost of solar energy has significantly decreased while efficiency has increased. Construction may begin as early as 2021. Once the project is completed, up to 35% of customers’ energy will come from renewable resources.

Slide 20 outlines an opportunity to grow rate base and increase earnings. Self-fund is an election by the MISO transmission owner, in this case Otter Tail Power, to fund the initial network upgrades associated with new generator interconnections and recover the investment from those interconnection customers through a monthly revenue requirement over 20 years. The company has secured 28 of 33 facility service agreements and approximately 90% of the construction has been completed to-date. Key risks continue to be weather and potential COVID-19 impacts.

We continue to monitor the progress on the federal regional haze rule process in North Dakota. The North Dakota Department of Environmental Quality, DEQ, and the state of North Dakota have many milestones to reach before the state submits its implementation plan to the Environmental Protection Agency. Coyote Station owners continue to analyze the data and decisions that will impact the plant and our employees, customers and communities.

We'll know more in early 2021 when the DEQ begins the public comment period regarding its recommendation on Coyote Station’s compliance strategy. The DEQ is scheduled to submit the North Dakota state implementation plan at the EPA in July of 2021. Each of the owners is uniquely positioned to serve its stakeholders today and in the future. Our shared priorities are continuing to serve customers with reliable, low-cost electricity.

Turning to our Manufacturing segment, we are encouraged that BTD has seen an uptick in sales in the recreational vehicle and lawn garden end markets as OEMs start to rebuild their depleted inventories. And despite overall sales – lower overall sales, BTD has improved their margins through productivity enhancements.

Our Plastic segment, we continue to benefit from a strong residential construction market. Through the end of September, new housing starts were up 11%, compared to a year ago. They've also benefited from a tight market resulting from major pipe converters, reduced production in the second quarter of 2020, while the residential construction market remains strong.

There has been limited impact to construction efforts from COVID-19, two resin suppliers invoking force majeure, which positively impacted PVC pipe sale prices, concerns over hurricanes creating limited availability of PVC resin supplies, and increased global demand for PVC resin. These factors resulted in higher quarter-over-quarter sales volumes and increased pipe prices.

I would also like to recognize Steve Laskey, who recently retired as President of the Plastic segment. Steve has had an outstanding career with Otter Tail Corporation and as a leader in the PVC pipe industry. Steve joined Otter Tail with the acquisition of Vinyl Tech in 2000 and as President of the business. In 2009, Steve was promoted to the President of the Plastic segment driving great results for the group.

Steve developed a very strong reputation for driving operational excellence and leaves the business well positioned with a long developed succession plan. We have estimated that over 4.3 billion pounds or the equivalent of nearly 150,000 semi-truck loads of PVC pipe were produced from both pipe facilities under his leadership. We wish Steve well in his retirement.

Looking ahead, we continue to enhance our balanced electric generation mix. We anticipate by 2023 Otter Tail Power customers will receive 35% of their energy from renewable resources, and our carbon emissions will be at least 30% below 2005 levels, all while keeping residential rates well below the national average.

With growing investor concern about companies generating more than 25% of revenues from thermal coal, it's assuring to note Otter Tail Corporation’s percentage of revenue from coal assets is significantly 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’ve maintained our long-term target of 5% to 7% annual EPS growth of our 2019 base.

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

[Kevin Moug]

Well, thanks, Chuck, and good morning, everyone. Our third quarter financial results were outstanding given the ongoing business and economic challenges we face. Revenues were up 3% with earnings increasing over 45% driven by a strong performance in our Plastics and Electric businesses. Please refer to Slides 26 and 27 as I discuss the quarter.

The Electric segment net earnings increased $7.1 million quarter-over-quarter. This increase was driven by increased Minnesota and North Dakota renewable resource rider revenues related to the Merricourt Wind Energy Center and from the generation cost recovery rider in North Dakota in conjunction with the construction of the Astoria Station.

There were increased Minnesota transmission cost recovery revenues due to a favorable decision regarding the state jurisdictional treatment of federally approved transmission rate incentives, increased retail revenues related to increased residential kilowatt hour sales due to favorable weather impacts and offset in part by lower kilowatt hour sales to commercial and industrial customers, mainly due to COVID-19 related impacts. And favorable weather positively impacted earnings by $0.03 a share compared to the third quarter of 2019.

Other items favorably impacting electric segment earnings during the quarter were decreased O&M expenses due to an increase in the proportion of labor costs, capitalized from ongoing construction activity and a decrease in other expenses due to cost management initiatives to address the impacts of COVID-19. These decreases were offset in part by an increase in bad debt expense mainly due to the adoption of COVID related service suspensions and debt collection policies.

Other positive impacts include transmission service revenues due to an increase in facility service agreement revenues related to transmission upgrades to accommodate independent generator access to the transmission grid and AFUDC revenues on the Astoria Station project related to the Minnesota share of the construction work in progress. Offsetting these increases were higher depreciation and property tax expense associated with rate base additions and interest expense associated with higher long-term debt levels associated with financing our rate base growth.

The net earnings for the Manufacturing segment slightly increased quarter-over-quarter. The key items impacting these quarterly results were at BTD, revenues decreased $5.4 million driven by a $4.1 million decline in material prices, which were passed on to the customer and a $1.3 million decrease in sales volumes. The decreased sales volumes resulted from lower parts sales to construction and industrial equipment manufacturers, but were partially offset by increased parts sales to recreational vehicle and lawn and garden end-markets.

The increase in revenues related to favorable pricing was offset by lower tooling and scrap revenues. We also had a reduction in cost of goods sold from the lower material costs passed on to customers and lower sales volumes along with increased productivity more than offset the lower revenues resulting in an increase in net income quarter-over-quarter. In the T.O Plastics, the revenues and earnings decreased due to lower sales mainly as a result of softness from COVID-19 related impacts on their end-markets.

Our Plastic segment earnings increased $4.9 million, due to a 21% increase in pounds of pipes sold and widening pipe resin spreads. The higher sales volumes were attributable to increased sales to distributors who rebuilt inventory levels in a tight pipe market after lowering inventory levels last quarter due to the uncertainty of COVID-19 related impacts on sales. Cost of goods sold increased $5.1 million due to the increased sales volumes, partially offset by a 6.3% decrease in the cost per pound of pipes sold.

In our corporate costs, net of tax increased approximately $1 million primarily due to increased performance based incentive accruals driven by our improved financial results. And for the nine months ended September 30, 2020, we delivered a 13% increase in earnings per share compared with the same time a year ago. This has been driven in large part by our large rate-based projects in the electric utility and favorable business conditions in our Plastic segment. And all of our operating companies have performed admirably this year given the COVID health and economic crisis facing our country.

We continue to generate strong cash flow from operations and have the appropriate levels of liquidity under our credit facilities to support our business operations. As of October 31, 2020, the total amount available under both facilities was $286 million. During the third quarter, we issued the remaining tranche of $40 million senior unsecured notes under a delayed draw from the $175 million private placement notes that were issued in October of 2019.

And we also raised approximately $8 million in equity under our aftermarket dividend reinvestment and employee stock purchase plans. Since the fourth quarter of 2019, we have raised $55 million or approximately 73% of our equity needs. We expect to issue up to an additional $20 million of common equity under these programs into 2021 depending on conditions in the equity capital markets caused by COVID-19 pandemic or other factors.

And now, let's move on to our business outlook on Slide 34 and review our updated 2020 annual earnings guidance. We are raising and narrowing our 2020 overall diluted earnings per share guidance range to $2.26 to $2.36 based on our year-to-date financial results and an updated view of current business conditions in our Plastics and Manufacturing segments. Also, the impact of COVID-19 on our Electric segment has been less than originally expected.

Our 2020 diluted earnings per share guidance also includes $0.03 of dilution associated with the planned issuance of common equity to help fund construction projects in Otter Tail Power company.

The following items contribute to our revised earnings guidance for 2020. Moving on to the 2020 guidance for our Electric segment, key items include the capital spending on Merricourt and Astoria Station rate based projects of $177 million and $81 million, respectively, in 2020. The Merricourt project has rider recovery mechanisms in all three state jurisdictions.

The Astoria Station project has rider recovery mechanisms in South Dakota and North Dakota, and this project earns AFUDC in Minnesota and is expected to be recovered through the rate case in Minnesota and has already been approved in our integrated resource plan.

We also expect increased revenues related to $25 million in anticipated capital spending for self-funded generator interconnection agreements. We do not have any major planned generation planned outages for 2020. There were $3.1 million of planned outage costs in 2019.

An additional item expected to positively impact our 2020 Electric earnings include the decision by the Minnesota Supreme Court that ruled in Otter Tail Power company's favor relating to maintaining the incremental return earned on for jurisdiction transmission lines. The estimated impact of this decision was an increased 2020 earnings of approximately $0.05 a share.

And on a go-forward basis, the positive impact of this decision is – on an annual basis is $0.01 a share. We have updated our Minnesota transmission cost recovery rider filing with new rates incorporating the results of this decision. And just as a reminder, we did record the effect of this decision in the third quarter as we discussed earlier.

Favorable impact of $0.02 of weather on 2020, compared to normal and these items have been offset by 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 $0.06 to $0.08 a share. Otter Tail Power company continues to work on obtaining regulatory relief to mitigate the impact of COVID-19 on its operating results. Our current Electric segment guidance does not assume recovery of any of these items in 2020.

We also have increased expenses 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 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 of debt financing completed in October of 2019. And this updated guidance also assumes for a planned contribution to the Otter Tail Power company foundation of $0.02 a share.

We're also raising and narrowing our guidance range for the Manufacturing segment. We now estimate an increase of $0.05 a share from the mid-point of our August 3, 2020 guidance. This upward revision is driven by stronger-than-expected recovery in the second half of the year, compared to our previous assumptions. And backlog for the Manufacturing segment is approximately $63 million for 2020, compared with the $56 million one year ago.

We are raising and narrowing earnings guidance range for our Plastic segment. Sales volumes in 2020 are now expected to be approximately 5% higher than 2019 given the strong year-to-date results and our current market conditions. Market conditions continued to improve during the quarter due to the limited effects of COVID-19. We saw two resin suppliers in bulk force measures, which positively impacted PVC pipe sales prices.

Concerns over hurricanes and the Gulf Coast created limited availability of PVC resin supplies, significant global demand for resin and having limited PVC pipe inventory across the country. We've also included now, in this updated segment guidance, a plan contribution by the Plastics group to the Otter Tail Corporation’s Foundation of $0.03 a share.

In our corporate costs, net of tax are expected to be higher than 2019 and our previous 2020 guidance due to increased employee benefit costs resulting from the significant increase in 2020 earnings and planned contributions to Otter Tail Corporation’s Foundation of $0.03 a share.

Both our strong year-to-date financial results and current business conditions position us to achieve our updated earnings per share guidance range of $2.26 to $2.36. All of our operating companies are performing well in this challenging business environment. Longer-term, we remain focused on executing our strategic initiatives to grow our business and achieve operational and commercial excellence.

Otter Tail Power company plans to grow its rate based in very supportive regulatory environments and an 8.6% compounded annual growth rate over the next five years driven by investments in renewable and natural gas generation, technology and infrastructure and transmission projects. We expect the electric utility will provide approximately 75% of our overall earnings over time.

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. With this, we expect to be able to deliver total shareholder return of 8% to 10% over the long-term consisting of two components.

First, our earnings per share are expected to increase at a 5% to 7% growth rate. And secondly, our current dividend yield of approximately 3.6%. And looking forward, we would expect to grow the dividend along with earnings per share growth of 5% to 7% compounded annual growth rate, and maintain a dividend payout ratio between 60% and 70%.

Our company is on solid footings with a strong balance sheet, ample liquidity to support our businesses, and investment grade corporate credit ratings.

We’re now ready to take your questions.

[Operator]

[Operator Instructions] Our first question comes from Chris Ellinghaus with Siebert Williams. You line is open.

[Chris Ellinghaus, Siebert Williams]

Hey, guys, how are you?

[Chuck MacFarlane, President and Chief Executive Officer]

Fine. Good morning, Chris.

[Kevin Moug]

Good morning, Chris.

[Chris Ellinghaus, Siebert Williams]

Have you got a – the $0.03 donation that you talked about, is that a fourth quarter event?

[Chuck MacFarlane, President and Chief Executive Officer]

Yes.

[Chris Ellinghaus, Siebert Williams]

Okay. And the other thing you were talking about the accrual catch-up in the quarter on the transmission, have you got a dollar amount for that?

[Chuck MacFarlane, President and Chief Executive Officer]

Are you referring to that Minnesota Supreme Court?

[Chris Ellinghaus, Siebert Williams]

Yes.

[Chuck MacFarlane, President and Chief Executive Officer]

The dollar amount, Chris, for the quarter, I think, it was right around $2.5 million.

[Chris Ellinghaus, Siebert Williams]

Okay. And can we – is there any reason that we should be expecting that the Minnesota interim would be effective at the end of the year?

[Chuck MacFarlane, President and Chief Executive Officer]

Chris, the interim, we filed in November 2. And if the filings deemed complete, interim would go in at the first of the year of 2021. And the final rate request is $14.5 million. The interim rate request is $13.6 million.

[Chris Ellinghaus, Siebert Williams]

But given the COVID, is there any reason or is it even statutorily possible for them to delay the interim rate?

[Chuck MacFarlane, President and Chief Executive Officer]

You know, it is possible. We look at this rate – you know, in Minnesota, it's a formulaic interim rate. So, you know, if the filing is deemed not complete for some reason that would be the issue.

[Chris Ellinghaus, Siebert Williams]

And would COVID be considered an exigent circumstance that they could bring up?

[Chuck MacFarlane, President and Chief Executive Officer]

You know, it's possible, but we don't feel that that's likely.

[Chris Ellinghaus, Siebert Williams]

Got it. Alright, thanks, guys. It was a wonderful quarter. Appreciate it.

[Chuck MacFarlane, President and Chief Executive Officer]

Thanks.

[Kevin Moug]

Thank you, Chris.

[Operator]

Thank you. Our next question comes from Sophie Karp with KeyBanc. Your line is open.

[Sophie Karp, KeyBanc]

Hi, good morning, guys. Congrats on the quarter.

[Chuck MacFarlane, President and Chief Executive Officer]

Thanks, Sophie.

[Kevin Moug]

Thank you.

[Sophie Karp, KeyBanc]

A couple of questions from me if I may. So with the – your new guidance, correct me if I'm wrong, but you're actually above the initial 2020 guidance that you had pre-COVID a little bit. It was pretty impressive. Could you maybe give us some sense of what kind of trajectory you’re envisioning going into 2021? You know, and some of the – which of the moving parts here that are propelling this guidance now above the original expectations despite what we’re having? You know, as far as the macro backdrop could be sustained maybe on a go-forward basis as opposed to just being [indiscernible]. Thank you.

[Kevin Moug]

Yes, Sophie, this is Kevin. You know, we'll come out with our 2021 guidance in February with our connection with our year-end earnings release. I mean, one of the things to point to would be, you know, our long-term stated EPS growth goals of 5% to 7% of the 2019 base earnings of $2.17 a share, sorry. You know, I think, if you look at just the businesses high level, the utility, we continue to see rate base growth, investments and earnings, you know, from the electric utility as a result of those investments that we're making.

You know, and then, as we look at the assumptions around the Manufacturing and Plastics, you know, certainly plastics has probably not been impacted by COVID as we perhaps thought. But on Manufacturing, you know, we still would be under this view of it’s, you know, slow or some referred to it as a swoosh type recovery. You know, in Manufacturing, we – you know, the assumptions in the third – that we had for the third quarter, they were – you know, actual results were a little stronger than where we were, but we aren't seeing any significant change in that slow recovery in our Manufacturing segment.

You know I think we have to recognize that the Plastics earnings this year are going to be a record earnings year for us. There are certainly some conditions that we see here in the business today that, you know, we're trying to work through to see just what we think looks like and how they move into 2021. So, you know, I think we have to be, you know, cautious there with Plastics as we head into 2021, but, you know, those are some high level thoughts that hopefully help you.

[Sophie Karp, KeyBanc]

Yes. No, this is very helpful. Thank you. Another question I had was on the Minnesota rate case, I guess, besides from the [indiscernible] which is always debated, do you see any points there that you expect to be contentious with other stakeholders? Or is it a fairly straightforward rate case for you?

[Chuck MacFarlane, President and Chief Executive Officer]

Sophie, this is Chuck. It's largely a capital driven rate case, which is the Minnesota portion of the Astoria gas plant, which has been approved in there, our IRP. We have built it in the time described and under the cost described, so that accounts for more than half of the increase request. The customer service information system is another probably 10% to 15% of the request with some O&M growth and ROE levels rounding out the case. So, you know, we're viewing it as largely a capital recovery case on – majority of which have been through regulatory prudence review.

[Sophie Karp, KeyBanc]

So, nothing is controversial about this, you expect?

[Chuck MacFarlane, President and Chief Executive Officer]

We don't believe so.

[Sophie Karp, KeyBanc]

Thank you. That's all from me.

[Operator]

Thank you. [Operator Instructions] And I'm currently showing no further questions at this time. I’d like to turn the call back over to Chuck MacFarlane for closing remarks.

[Chuck MacFarlane, President and Chief Executive Officer]

Thank you for your questions and interest in Otter Tail Corporation. With continued execution on our rate base growth opportunities at the utility and emphasis on operational and commercial performance at our manufacturing platform, we remain confident in our ability to deliver long-term shareholder value. And although many challenges and uncertainties related to COVID-19 remain, our employees remain diligent and determined to address those challenges.

Based on our strong third quarter and year-to-date performance and our updated view of potential impacts from COVID-19, we are raising and narrowing our 2020 diluted earnings per share guidance to be in the range $2.26 to $2.36 from our previous guidance of $2.10 to $2.30.

Thank you for joining our call. We appreciate your interest in Otter Tail Corporation and we 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.