Otter Tail Corp

NASDAQ:OTTR

Earnings Call Analysis

Otter Tail Reports Record Q3 Earnings

Otter Tail Corporation set a record with Q3 earnings per share (EPS) of $2.19, with an updated full-year EPS guidance range from $6.76 to $6.96. This result, above the previous $5.70 to $6.00 guidance, was significantly boosted by the Plastics segment's performance. The company maintained a steady increase in the Electric segment and achieved an 11% compounded annual growth rate in EPS from 2018 through 2023, notwithstanding Plastics. Capital investments in projects like the Hoot Lake Solar and potential transmission works contribute to sustained growth, with the rate base growth rate expected at 6.5% annually over five years. Otter Tail is set to commit $1.1 billion over this period, with 80% recoverable through existing rates. A proposed rate case in North Dakota could increase revenues by $17 million, translating to an 8.4% rise, hinging on a requested 10.6% return on equity.

Record-Setting Quarterly Earnings and Upward Revision in EPS Guidance

The company achieved record-setting quarterly earnings, generating $2.19 per share, surpassing previous benchmarks with contributions from Manufacturing and Plastics segments, and reduced corporate costs. They revised their 2023 diluted earnings per share guidance upwards to $6.76 to $6.96, indicating robust performance and positive outlook.

Solid Growth Trajectory and Commitment to Clean Energy

Maintaining a compound annual growth rate (CAGR) in earnings per share of 11% from 2018 through 2023, excluding the Plastics segment, the company shows significant growth. Otter Tail Power's move towards renewables, targeting nearly 40% of energy sources from renewables, exemplifies its commitment to sustainability and a cleaner energy future.

Strategic Project Execution and Significant Expansion

Successfully completing the Hoot Lake Solar project, the company adds an operational, cost-effective solar facility to its assets, leveraging existing transmission rights and infrastructure. Continuation of critical transmission projects with an expected capital investment of around $420 million, and a $1.1 billion capital investment projection over five years reinforce their strategic and financial planning depth.

Rate Case Filings and Diverse End-market Performance

With the upcoming general rate case in North Dakota, targeted at an 8.4% revenue increase, the company aims to enhance financial outcomes. They observed shifting trends with higher-end models gaining traction in recreational vehicle markets, stability in construction, and the electoral end markets.

Manufacturing Segment Upgrades and Economic Headwinds

While horticulture sales volumes diminished due to market normalization, the Plastics segment's stronger operating margins resulted in heightened earnings guidance, with the main drivers being PVC pipe pricing and margins despite a general market retraction. The utility segment is still expected to grow by 6% in 2023 over the previous year, reflecting stable and continuing progress.

Financial Strength and Low-Risk Borrowing

The company's current cash position and balance sheet set them apart in the utility sector, with no equity needs anticipated for the next five years despite considerable CapEx plans, implying a low-risk posture regarding rising borrowing costs.

Future Growth Prospects with Companies like Stanley Black & Decker

The company anticipates growth in partnerships with major firms like Stanley Black & Decker and Caterpillar, adding to its strength in delivering quality services in core markets such as recreational vehicle, agriculture, and construction.

Backlog Trends and Guidance Adjustments

Despite a year-over-year reduction in backlog, driven primarily by a decline in steel prices, the work pipeline remains robust, with a sustained demand for services that competitors fail to match in timeliness and quality.

Long-Term Earnings and Dividend Growth

The elevated guidance of $6.76 to $6.96 per share represents a 17% rise from the former range. The company's utility growth strategy, alongside its Manufacturing and Plastics units, positions it to achieve a 5% to 7% long-term compounded annual growth in earnings per share, with a parallel increase in dividends annually.

Earnings Call Transcript 2023-Q3

[Operator]

Good morning, and welcome to Otter Tail Corporation's Third Quarter 2023 Earnings Conference Call. Today's call is being recorded. 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.

[Beth Osman, executive]

Good morning, everyone, and welcome to our Third Quarter 2023 Earnings Conference Call. My name is Beth Osman, and I'm Otter Tail Corporate Manager of Investor Relations. Last night, we announced our third quarter financial results. Our complete earnings release and slides accompanying this call are available on our website at ottertail.com. A recording of this call will be available on our website later today. With me on the call today are Charles MacFarlane, Otter Tail Corporation's President and CEO; Kevin Moug, Otter Tail Corporation's Senior Vice President of Finance and CFO. Before we begin, I want to remind you that we will be making forward-looking statements during the course of this call. As noted on Slide 2, these statements represent our current views and expectations of future events. They are subject to risks and uncertainties, which may cause actual results to differ from those presented here. So please be advised about placing undue reliance on any of these statements. Our forward-looking statements are described in more details 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. I will now turn the call over to Otter Tail Corporation's President and CEO, Mr. Charles MacFarlane.

[Chuck MacFarlane, executive]

Thank you, Beth. Good morning, and welcome to our third quarter 2023 earnings call. Please refer to Slide 4 as I begin my comments on our third quarter results. Through the combined efforts of our employees and diversified business model, we delivered record-setting quarterly earnings. We generated earnings per share of $2.19, driven by increased earnings from our Manufacturing and Plastics segments. Along with the reduction in corporate costs, our Electric segment earnings in the quarter were largely flat to last year but are up 7% on a year-to-date basis. Based on our strong quarterly and year-to-date results and revised expectations for the remainder of the year, we are increasing our 2023 diluted earnings per share guidance to a range of $6.76 to $6.96 from our previous range of $5.70 to $6. This increase is primarily driven by plastic segment performance, continuing to remain stronger than previously expected. In a moment, Kevin will provide a more detailed discussion of our third quarter financial results and our expectations for the remainder of the year. Slide 5 shows our expected 5-year compounded annual growth rate in earnings per share with and without the impact of our Plastics segment through the end of 2023 based on the midpoint of our updated earnings guidance. We expect to produce a compounded annual growth rate in earnings per share from 2018 through 2023 of 11% exclusive of our Plastics segment. The additional earnings and cash flows generated by our Plastics segment over this time period provides additional strength through our already strong credit metrics, liquidity and capital structure and allow us for capital investment in our operating companies. Turning to Slide 7, we illustrate Otter Tail Power's efforts in working toward a cleaner energy future. With Hoot Lake Solar becoming operational in August of this year, we expect nearly 40% of Otter Tail Power's owned and contracted energy sources will come from renewable resources. This represents an exciting milestone as we continue to transition to a cleaner energy future while still maintaining reliability and affordability for the communities we serve. Turning to Slide 11. In March, Otter Tail Power filed its supplemental integrated resource plan with each of our 3 state utility commissions. In Minnesota, we received initial comments from interveners in September and filed reply comments yesterday. We anticipate a hearing with the Minnesota Public Utilities Commission in early 2024, and we expect to receive initial comments from the North Dakota Public Service Commission sometime next week and anticipate an informal hearing later this year. Slide 12 provides an overview and status update on our significant capital investment projects. Our team continues to effectively execute our project plans, working to secure projects that are completed on time and on budget. I will now provide a few details on several projects. On Slide 13, an overview of Otter Tail Power's 49-megawatt Hoot Lake solar project is provided. The construction of the facility was completed on time and on budget and became fully operational in August. The facility was constructed on and near the retired Hoot Lake coal plant property in Fergus Falls, allowing us the unique opportunity to utilize existing transmission rights, land and substation assets. Hoot Lake Solar is the lease cost and third largest operating solar site in the state of Minnesota, and its completion marks another step towards a cleaner energy future. Slide 14 summarizes Otter Tail Power's investments under tranche Hana MISO's long-range transmission plan. Otter Tail Power will co-own 2 tranche 1 projects, the Jamestown Ellendale and the Big Stone South Alexandria to Big Oaks 345 KV transmission projects. Our team is focused on project development and coordinating these complex projects with our co-owners. Both projects have FERC approval for construction work in progress recovery, ensuring the timely recovery of our capital investment. In total, we estimate Otter Tail's capital investment in these projects will be approximately $420 million with 30% of the capital investment to occur before 2028. These investments have very limited impact on our retail customer rates as they are allocated across the MISO Midwest footprint. Our team continues to monitor developments at MISO regarding potential tranche 2 transmission projects.MISO is currently indicating tranche 2 projects will be approved in 2024. While we expect some investment, opportunity for Otter Tail Power rising from tranche 2 projects, our 5-year capital plan does not include any estimates of future investments for these projects. In addition to the transmission investment opportunities available through MISO's long-range transmission planning, MISO and the Southwest Power Pool or SPP recently partnered to develop the joint targeted interconnection queue or JTIQ portfolio projects focused on improving the reliability of the grid where the 2 regional transmission organizations connect. The Minnesota Department of Commerce on behalf of MISO and SPP, applied to the U.S. Department of Energy for funding to support the JTIQ projects. The DOE awarded $464 million to 5 of these projects, one of which we are expecting to codevelop with Xcel Energy. While these projects still need to go through the approval process with FERC, we are optimistic about the eventual outcome and the potential investment opportunity. Similar to the MISO tranche 2 projects, we have not yet included this project in our 5-year capital forecast. Turning to Slide 15. We intend to repower 4 of our legacy wind farms in 2024 and 2025 with an investment of approximately $230 million. Each project qualifies for renewed production tax credits with the passage of the inflation Reduction Act and is anticipated to lower customer bills, demonstrating outer Tail Power's continued focus and commitment to customer affordability. Slide 16 provides an overview of Otter Hill Power's capital spending plan. The plan includes $1.1 billion of capital investment over the next 5-year period and produces a 6.5% annual compound growth rate and rate base over this time frame. It is important to highlight that we have potential additional renewable investment opportunities after 2027, as outlined in our IRP as well as incremental transmission investment opportunities relating to MISO Tranche 2 and JTIQ projects. We anticipate approximately 80% of our capital investments will be recovered through existing rates or riders. Slide 17 provides an overview of key regulatory matters for 2023. Based on the results of our cost-of-service studies, we determined it prudent to file a general rate case in North Dakota. We will be filing our case on November 2, 2023. The Slide 18 provides a summary of our planned rate case filing with the North Dakota Public Service Commission in which we will be proposing a rate net increase in revenues of approximately $17 million or 8.4% based on a requested ROE of 10.6% on an equity layer of 53.5%. The rate case is driven by increases in our operating costs since our last case filing in the state of North Dakota, which was over 6 years ago. Even with this increase, Otter Tail Power will continue to have some of the lowest rates in the country. Turning to our manufacturing segment on Slide 22. End market demand is mixed, but our existing customers continue to look to us to add value, resulting in incremental volumes from winning additional work with existing customers. Within the recreational vehicle and lawn and garden end markets, discretionary spending is being impacted by inflation and rising interest rates. However, within the recreational vehicle end market specifically, we have seen a shift to higher-end models as buyers of these models seem to be better insulated from economic pressures. Construction remains a strong end market for us as distributors are still experiencing low levels of inventory with a buildup of fleet replacement needs over the last few years. The agricultural end market is stabilizing as inventory has started to build. And the power generation end market continues to be healthy for us as demand remains high and inventory levels low. Our BTD George expansion expected to cost approximately $20 million is currently underway. We expect to bring the additional capacity online in early 2025. At T.O. Plastics, sales volumes in the horticulture end market decreased in Q3 as lead times have normalized and customers continue to work through inventory purchased early due to scarcity concerns, resulting in lower operating revenues this quarter as compared to the same time last year. Slide 25 provides an overview of our Plastics segment. Sales volumes were relatively flat in Q3 compared to the same time last year, and we believe distributor inventory destocking is generally complete. Slide 26 highlights historic resin costs and PVC pipe pricing. The Plastics segment produced stronger operating margins as our sales price to resin spreads have improved compared to the third quarter of 2022. The sales price of PVC pipe has receded from historic highs and continues to do so. This decline is at a pace slower than the reduction in cost of resin and other materials over the same time frame. Our updated PVC pipe pricing expectations as well as related margins for the remainder of the year are the primary drivers for increased 2023 earnings guidance that Kevin will expand on. The Vinyltech expansion and plant upgrade is underway, and we anticipate the expansion will increase capacity by approximately 8% or 26 million pounds for the segment. We currently expect to bring this new capacity online in the second half of 2024 at a cost of $50 million. I'll now turn it over to Kevin to provide additional commentary on our third quarter results and our updated outlook for 2023.

[Kevin Moug, executive]

Well, thank you, Chuck. Good morning, everyone. We delivered record-setting quarterly financial results with diluted earnings per share of $2.19. Our financial results for the trailing 12 months ended September 30, 2023, result in a 21.8% return on equity on an equity layer of approximately 62%. Please follow on Slide 30 as I provide an overview of our third quarter segment earnings. Electric segment earnings decreased approximately $300,000 or 1% as compared to the third quarter of 2022. This was driven by increased operating and maintenance expenses primarily due to higher labor costs and strategic spending initiatives, higher depreciation expense and the impact of unfavorable weather. These items were partially offset by increased rider recovery revenues from our Hoot Lake Solar and Astabula 3 investments, increased commercial and industrial sales volumes and lower pension plan costs. The Manufacturing segment earnings increased $1.2 million or nearly 20% compared to the same time last year. Key elements driving this increase include the following: TV manufacturing has been successful in adjusting sales prices in response to the labor and non-steel material cost inflation, resulting in higher profit margins in the third quarter of 2023 as compared to the same time last year. Also, sales volumes for BTD manufacturing increased in the third quarter, driven by end market demand in the construction, recreational vehicle and power generation end markets as well as incremental volumes from winning additional work with existing customers as they continue to look to us to add value. Partially offsetting this increase, TO plastic sales volumes within the horticulture end market declined in the third quarter of 2023 compared to the same time last year as customers continue their destocking efforts and return to more normal buying patterns. Plastics segment earnings increased $3.2 million or approximately 6% compared to the third quarter of 2022. The increase in earnings is primarily due to increased profit margins for this segment as our sales price to resin spread improved in the third quarter of this year as compared to the same time a year ago. Both the sales price of PVC pipe and the cost of resin continued to decline, but the sales price has declined at a rate slower than resin costs. Sales volumes were largely flat as compared to the same time last year, and we believe customers are generally through their destocking efforts. Corporate costs declined $3.6 million in this quarter compared to the same time last year. This improvement resulted from lower employee health insurance claim costs and the investment income earned on our short-term cash equivalents in the third quarter of 2023 was higher due to improved yields and higher invested funds.Moving on to our updated earnings guidance. Slide 33 provides an updated outlook. We are increasing our earnings per share guidance to a range of $6.76 to $6.96, a 17% increase from the midpoint of our previous guidance range of $5.70 to $6. We are tightening the range of expected earnings for our Electric segment and expect our utility to produce earnings growth of 6% over 2022. We are increasing the manufacturing segment earnings guidance due to the strength of third quarter earnings as higher sales volumes; margin improvement and higher research and development credits drove earnings growth at BTD. We are increasing the earnings guidance for our Plastics segment due to continued strength in sales prices and related operating margins of PVC pipe. While sales prices and margins have begun to recede from historic highs, the rate of decline continues to be slower than we anticipated. We expect sales prices to decline modestly over the fourth quarter, resulting in a decline in operating margins. Additionally, we now expect stronger sales volumes in the fourth quarter as distributors are generally through their destocking efforts with demand rebounding in advance of a seasonal decline anticipated in the latter part of the fourth quarter. And finally, we are improving our guidance for corporate costs. This relates to our third quarter results and an increase in expected earnings on our short-term cash equivalents due to higher level of invested funds and increased yields on those investments. Additionally, we expect lower employee health care costs through the remainder of the year. We now expect our earnings mix for 2023 to be approximately 30% from our Electric segment and 70% from our Manufacturing and Plastics segments net of corporate costs. This anticipated mix deviates from our long-term expected earnings mix of approximately 65% electric and 35% nonelectric as our Plastics segment continues to produce elevated earnings. We continue to monitor various economic indicators, such as single and multifamily housing starts interest rates and consumer confidence levels to ensure we are well positioned across our portfolio when change occurs. Our diversified business model continues to generate strong financial results for our stakeholders and has put us in an enviable position. The higher level of earnings and cash flows generated over the last 2 years continues to strengthen our balance sheet. Looking to Slide 32. Our consolidated equity layer as of September 30, 2023, was nearly 62% as compared to 59.4% as of December 31, 2022 and 53.7% as of December 31, 2021. In September, Fitch upgraded the credit rating of both Otter Tail Corporation and Otter Tail Power Company in response to our strengthened financial position and credit metrics. S&P maintained its credit rating for Otter Tail Power Company. We believe it is prudent to retain our excess cash given all the regulated investment opportunities existing at Otter Tail Power Company, not only in the current 5-year period, but beyond. Additionally, our current cash position and balance sheet differentiates us from others in the utility sector as we have no equity needs over the next 5 years despite our sizable CapEx plans. With our strong financial position and track record of being able to deliver our capital investments on time and on budget, we feel confident in our ability to continue to execute on our rate base growth plans. Our exposure to rising borrowing costs continues to be low risk. We don't have any outstanding borrowings on our parent company facility and the amounts drawn on the utility facility primarily related to capital projects. The increased cost of these borrowings is fully considered in our updated 2023 guidance. As of September 30, 2023, our parent debt to total company debt is 9%. The $80 million, 3.55% parent company note matures in December of 2026. And this is our only outstanding debt at the parent level. Slide 39 reflects the collective strategies of our platforms and financial performance targets. This business model continues to serve us well, and we remain in the enviable position to fund our rate base growth opportunities at the utility with a strong balance sheet, ample liquidity to support our businesses and strong investment-grade corporate credit ratings.

[Chuck MacFarlane, executive]

Before we open the call for questions, I want to take a moment to recognize Kevin, who recently announced his retirement effective at the end of the year. I'd like to thank Kevin for his years of service and contributions to Otter Tail Corporation, its employees and customers. Kevin has been a pillar of integrity for our company and has helped us shepherd through challenging times and enviable financial success. With the deepest gratitude, we congratulate Kevin and wish him all the best in his retirement.

[Kevin Moug, executive]

Thanks for the kind words, Chuck. My 27 years of working for Otter Tail is filled with wonderful memories, challenges and accomplishments. It has been an honor to work for the company, alongside the employees across our electric and manufacturing platforms. It has also been a privilege to have worked with all of you, and I value the relationships we have developed. The support and confidence you have provided me during my tenure is most appreciated. The company is in wonderful hands. And so on January 1, I will hand the football to Todd Wallan as my successor. He is well prepared to move into the role as he has served as VP of Financial Planning and Treasury, at the corporate level, VP of Finance and Planning for our manufacturing platform and most recently as Chief Financial Officer and VP of Finance for Otter Tail Power Company.

[Chuck MacFarlane, executive]

Thank you, Kevin. I, too, extend my congratulations and best wishes to you and your retirement. Your leadership has been an outstanding model to follow, and I appreciate all your guidance and coaching over the years. I'm grateful for the opportunity to continue your legacy of excellence and execution on a solid growth strategy. We are now ready to take your questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Christopher Ellinghaus with Siebert Williams Shank & Co.

[Christopher Ellinghaus, analyst]

Chuck, could you talk about the IRP process? What are you hearing from interveners so far?

[Chuck MacFarlane, executive]

Well, in the Minnesota filing, which we filed reply comments yesterday, We have comments from the Clean Energy Organization, most office of Attorney General and the Minnesota Department of Commerce. The environmental intervenors brought up issues on the retirement timing of Kyle and Big Stone is related to the proposed CO2 regulations in front of the EPA replied to that. There is also some comments in there about Otter Tail's use of renewable energy credits to meet the Minnesota clean energy standard by 2040. And then some comments by the OAG had very similar comments. The DOC reviewed our modeling and inputs and did not have substantial comments on their own modeling at that time.

[Christopher Ellinghaus, analyst]

Okay. Great. Kevin, can you sort of talk about the plastics business? And have you got any sort of update on your thoughts on the glide path to a more normal time?

[Kevin Moug, executive]

Yes, Chris, as we both said in our comments that this life path down is just taking longer than we would have expected. I think we mentioned on the second quarter call, we are starting to see downward pressure in the residential commercial market, particularly in the Northern Pipe territory as some competitors drop prices as they were looking to pick up some market share. The declines in the municipal water market, while they're softening, they aren't softening to the levels that we expected when we updated our guidance at the end of the second quarter. As we look today into clearly, conditions are stronger than we expected in the middle of the year, as evidenced by the strong third quarter and another uplift in the guidance for 2023. We aren't seeing anything today, any kind of catalyst that says there should be any precipitous drop in pricing as we head into 2024. And we continue to monitor those conditions. We'll certainly provide an update on the -- when we give 2024 guidance in February, where those conditions are, but we think that the path to a more normal view of earnings is probably longer than what we had previously expected. We said in the second quarter call that we expect that we'll see some type of normalization in the last half of 2024. I think that glide path is still there, Chris, but it could continue to be longer while it starts to come back in the last half of '24 and into '25. I still think there's a -- as we see it today, a longer glide to get back to normal.

[Christopher Ellinghaus, analyst]

Okay. Great. And Chuck, can you just remind us of the procedural sort of schedule in North Dakota. Is it still a 7-month statutory review?

[Chuck MacFarlane, executive]

Yes, Chris, it is, and in many cases in North Dakota, there are settlements that occur before that 7 months, but a fully litigated case has approximately 7-month window.

[Christopher Ellinghaus, analyst]

Okay. And in the rate case, can we presume the test year is something in 2024? And is the $17 million, is that the base revenue request?

[Chuck MacFarlane, executive]

The $17 million is the net new -- we're in the process. We have a number of riders that would roll into base rates, but the net new revenue request is the $17 million. And we do use 2024, North Dakota has forecast test year.

[Christopher Ellinghaus, analyst]

Okay. Great. Good luck with retirement. We're going to miss you. Thanks for the details, everybody.

[Kevin Moug, executive]

Yes. Thanks, Chris. We'll see you at EEI.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Sophie Karp with KeyBanc Capital Markets.

[Unknown Analyst]

This is actually Michael Seven in for Sophie. I was just wondering on the manufacturing segment, if you could remind us how much capacity the Georgia expansion project were on?

[Chuck MacFarlane, executive]

In terms of dollar size, Mike?

[Unknown Analyst]

Just total capacity addition.

[Chuck MacFarlane, executive]

Yes. I think it's adding collectively around $40 million of capacity.

[Kevin Moug, executive]

Yes. And we would estimate that current capacity in sort of revenue for that site would be between $60 million and $65 million. So an upgrade of an additional $40 million.

[Unknown Analyst]

And then how much visibility do you have there with those same customers? And are you expecting a slowdown there in the near term?

[Chuck MacFarlane, executive]

In terms of Georgia?

[Unknown Analyst]

Just in the manufacturing segment there, you talked about the additional business from current customers.

[Chuck MacFarlane, executive]

Yes. I mean we've seen really continued healthy growth with John Deere across our kind of footprint of plants, Mike, we continue to experience growth with Polaris as well. And then in the Southeast in Dawsonville, we continue to -- because of that acquisition we did in 2015 and the growth there. We continue to see good growth with companies like Stanley Black & Decker, Caterpillar as well.

[Unknown Analyst]

Got it. And then turning back to the North Dakota rate case filing. Is there anything specific that will stand out? Any new mechanisms you'll be exploring?

[Chuck MacFarlane, executive]

Michael, one thing we may look at is implementing some form of a sales adjustment. I would not consider it decoupling, but we have large customers in North Dakota and an ability to adjust on a sales basis is something we'll bring forward. We don't have -- currently have decoupling in North Dakota.

[Operator]

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

[Brian Russo, analyst]

I apologize if I missed this earlier, but where are you in the development of your tranche -- MISO tranche 1 transmission projects?

[Chuck MacFarlane, executive]

Sure, Brian, it's Chuck. We have 2 projects, one in North Dakota that goes from our existing James Down substation to Ellendale substation owned by MDU. And we are in the process of routing, securing easements or options for easements and those types of things in that facility. And then one that goes from our Big Stone South, which is just outside of Minnesota and South Dakota to Alexandria, Minnesota. And we have -- in Minnesota, there's a process where you file a certificate of need that has been filed jointly with Excel because this line ultimately emanates in a second circuit on existing line to the northwest corner of the Twin Cities. And then once the certificate need is reviewed by the commission, then we also would put in for a routing permit. We have public meetings with landholders. One round, we'll do another round of that as the potential routing window narrows in those processes. So because of the kind of a 2-step process, you get a certificate of need first, followed by a route permit in Minnesota. That process generally takes a little longer than in North Dakota, where it's sort of a single certificate of need and routing process.

[Brian Russo, analyst]

Okay. Great. And then just also on the utility, what was the EPS impact of weather versus normal in the third quarter?

[Chuck MacFarlane, executive]

It was $0.02, I believe.

[Brian Russo, analyst]

Okay. And then just lastly, on the fact...

[Chuck MacFarlane, executive]

There's a $0.01. It was $0.02 negative to Q3, '22.

[Brian Russo, analyst]

Okay. Great. And then just on the manufacturing side, specifically BTD. How would you characterize the third quarter performance? I suspect it exceeded your expectations, which is why you raised the midpoint of that segment's guidance? And then also, if you could just talk about the backlog of $107 million, which is down year-over-year from $141 million. I know there are 2 components. One is just price of steel, right? So it doesn't necessarily indicate slowdown of business, but I just thought you could elaborate on that trend?

[Chuck MacFarlane, executive]

Sure. As it relates to the third quarter, we talked about both the ability to continue to get price increases to help offset increasing labor and other nonmaterial-related costs. So the company has continued to excel very well in being able to do that. We saw stronger volumes as well, as we mentioned, that helped drive the increased profitability quarter-over-quarter. And the other item that happened in the quarter, Brian, it's referenced in the press release, and I indicated it in my guidance comments is the R&D -- amount of R&D credits that were recorded in the third quarter at BTD. So we do a fair amount of R&D work for our customers. That's one of our, I would call it, our core competencies that BTD has that helps keep customers engaged with us. And we estimate what we expect our R&D credits to be for the year. And then once we finish up, for example, we finished up 2022, we then engage an outside firm to do an R&D credit study for us, in this case, '23, and they come in and they look at the nature of the product nature of, I should say, products, projects that we did during the year. And what was the nature? Were they more complex? Was it more materials, those types of things. And we saw about $1 million uplift in R&D credits in the third quarter that we hadn't fully anticipated. It was driven primarily by increased work that we did for one of our customers that was I'll call it, heavier type steel and more complex projects they were working on. So we were able to recognize an additional amount of R&D credit over and above what we had been estimating for that. And then as the inflation Reduction Act allowed for another method to recognize R&D credits and that new method that was under the inflation Reduction Act, that allowed us to get additional R&D credits as well as a result of that law that's in the IRA. And so there was a pickup there in our estimate of where we thought it was going to be. And then as we revised our estimate in '23 based on that new method that also provided was part of that $1 million uplift. And I think we've got it listed as a $0.02 impact on the earnings walk slide in the earnings call materials. And so those are the drivers of Q3 results that largely contributed to our uplift in the earnings guidance.

[Kevin Moug, executive]

Maybe, Brian, on the productivity side, when we had the second quarter call, we had indicated we had in the process, the 3 prior quarters, BTD was trying to increase employee levels of 20% to 25% amount. And during the third quarter, while we continue to recruit, we have more stabilized our employee level. So we saw improving productivity of the overall workforce there.

[Brian Russo, analyst]

Okay. Great. And then just on the backlog, the trends you're seeing there year-over-year? And is there any read-throughs?

[Chuck MacFarlane, executive]

Yes. In terms of backlog, the primary difference there in the backlog is just because of the steel pricing between the years, Brian, is what's driving that. But in terms of the work we're seeing from our customers, they continue to look to us for provide services that their other supplier base, either is not providing time way or not providing quality type work. So they continue to look to BTD not only currently but on a go-forward basis to deliver the product that they need for their end-use product, whether it be in recreational vehicle or ag or construction. But the biggest difference would be in the steel price between the years. Also on that backlog, part of the reduction would certainly be not a big piece, but it would be in there is just we've seen a decline in the horticultural end market backlog between this year and at the same time a year ago.

[Brian Russo, analyst]

Okay. Great. Appreciate it. And Kevin, all the best and good luck in the future.

[Kevin Moug, executive]

Thank you, Brian. Appreciate it.

[Operator]

Thank you. With no other questions, I will now turn the call back over to Chuck for his closing remarks.

[Chuck MacFarlane, executive]

Thank you for joining our call and your interest in Otter Tail Corporation. Based on our third quarter and year-to-date results as well as our continued strength within our Plastics segment, we are raising our 23 earnings per share guidance to the range of $6.76 to $6.96, an increase of approximately 17% from our previous guidance range of $5.70 to $6. Over the long term, I believe we are well positioned with our utility growth strategy and predictable earnings stream, complemented by our strategic manufacturing and plastic businesses to achieve our financial targets. We expect to produce long-term compounded growth in earnings per share of 5% to 7% and to increase our dividend in the range of 5% to 7% annually. Thank you again for joining our call, and we look forward to speaking with you next quarter.

[Operator]

Thank you for participating. This concludes today's program, and you may now disconnect.