Q4 2023 Otter Tail Corp Earnings Call
Participants
Beth Eiken; IR Contact Officer; Otter Tail Corp
Charles MacFarlane; President and Chief Executive Officer; Otter Tail Corp
Todd Wahlund; Chief Financial Officer, Vice President; Otter Tail Corp
Christopher Ellinghaus; Analyst; Siebert Williams Shank
Brian Russo; Analyst; Sidoti & Company
Sophie Karp; Analyst; KeyBanc Capital Markets Inc.
Presentation
Operator
Good morning, and welcome to Outotec Corporation's 2023 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 opening comments.
Beth Eiken
Good morning, everyone, and welcome to our 2023 earnings conference call. My name is Beth Eiken, and I'm Otter Tail Corporation's Manager of Investor Relations.
Last night, we announced our 2023 fourth quarter and annual financial results. Our complete earnings release and slides accompanying this call are available on our website at Autobytel.com. Our recording of this 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 Todd walling, Otter Tail Corporation's Vice President 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're 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 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.
I will now turn the call over to Otter Tail Corporation's President and CEO, Mr. Chuck MacFarlane.
Charles MacFarlane
First, your books.
Good morning, and welcome to our 2023 year end earnings call. Please refer to Slide 4.
As I begin my comments on our annual results.
Otter Tail Corporation delivered record-setting earnings in 2023, driven by strong financial performance across all of our segments.
As well as significant corporate cost savings. We generated diluted earnings per share of $7, beating the record of $6.78 set last year and significantly exceeding our original expectations for the year. The electric segment earnings increased 6% from 2022, primarily driven by higher commercial and industrial sales, lower pension costs and the recovery of rate base investments. Manufacturing segment earnings increased modestly from 2022.
Plastics segment earnings decreased 4%, primarily due to decrease in sales volume.
Our corporate cost center generated earnings in 2023 due to the returns earned on our short-term investments funded by the significant cash flows generated over the last few years. In a moment, Todd will provide a more detailed discussion of our 2023 financial results as well as our expectations for 24 earnings.
Slide 5 shows our five-year compounded annual growth rate and earnings per share with and without the impact of our Plastics segment, even without the impact of the extraordinary results generated by our Plastics segment. Over the last few years, we produced a compounded annual growth rate and earnings per share of nearly 12%, with the impact of plastic segment included this jumps to approximately 28%.
Turning to slide 6, Otter Tail Power's committed to transitioning to a lower-carbon and increasingly clean energy future while maintaining affordable and reliable electric service to our customers.
We have undertaken numerous initiatives in recent years to reduce our carbon footprint, including retiring our Hoot Lake coal plant and constructing and placing into service our Merricourt Wind Energy Center and our Hoot Lake solar facility.
Despite taking these initiatives, we modified our near term carbon reduction targets in response to changing market conditions, including higher natural gas prices and a higher than originally forecast dispatch levels of our coal owned coal facilities. Our updated carbon reduction targets are to own and contracted energy generation that is 55% renewable by 2030 to reduce our carbon emissions from own generation resources by 50% from 25 levels. By 2030 and to reduce our carbon emissions from own generation resources by 97% from 25 levels by 2050.
Slide 5 provides a few examples of the way in which we act upon our values, focusing on safety, people and community. We are proud to share that in 2023, our two foundations gave nearly $1.2 million to strengthen the communities in which our team members work and live.
Slide 10 provides an overview of Otter Tail Power's updated 5-year capital spending plan.
The updated plan includes $1.3 billion of capital investment over the next 5-year period and is expected to produce annual rate base growth of 7.7%. Otter Tail Power has a strong record for translating rate-based growth into earnings. In the previous year period, we converted average rate base growth into earnings growth at a one to one ratio. I'll now provide a few details on several projects within the existing 5-year planning period and beyond.
Slide 11 summarizes Otter Tail Power's advanced metering infrastructure project with a total investment of approximately $60 million advanced metering infrastructure or AMI lays the groundwork necessary for improved outage response and communication, which improves our customers' experience. Additionally, the infrastructure is able to integrate data and systems, allowing us to better understand peak energy use and offer energy and cost saving options to customers. We are targeting to upgrade more than 174,000 meters across our service territory and anticipate completing the project in 2025. We believe this project will reduce operating expenses through technology-enabled savings.
Turning to slide 12, we have commenced repowering our four legacy wind farms with an investment of approximately $230 million, which includes replacing Hub's rotors and blades on the existing wind towers.
Once complete, this project is expected to be equivalent to adding 40 megawatts of new wind generation with a 50% capacity factor. This project qualifies for renewed production tax credits with the passage of the inflation Reduction Act and is anticipated to lower customer bills, demonstrating our continued focus and commitment customer affordability.
Slide 13 summarizes Otter Tail Power's investment under Tranche one of Mitel's long-range transmission plan. Otter Tail Power will co-own two tranche one projects, the Jamestown Ellendale and the Big Stone South Alexandria, big-box three 45 kV transmission project. Our team is focused on project development and coordinating these complex projects with our co-owners of projects have first approval for construction work in progress recovery, ensuring the timely recovery of our capital investments. In total, we estimate our capital investment in these projects to be approximately $420 million, with 70% of the capital investment to occur before 2029. These investments are expected to have a very limited impact on our retail customer rates as they are allocated across the entire Maestro Midwest footprint. Our team continues to monitor developments at Maestro regarding potential Tranche two transmission projects, Maestro continues to indicate Tranche two projects will be approved sometime in mid 2024. While we expect some investment opportunities arising from Tranche two projects, our updated 5-year capital plan does not include any estimates of future investments for these potential projects. In addition to transmission investment opportunities available through missiles, long-range transmission plan, myself and the Southwest Power Pool or SPP partner to develop the joint targeted interconnection queue, portfolio of projects focused on improving the interconnection queue. Backlog along the missile SVPC., the Minnesota Department of Commerce on behalf of myself and SPP. applied to the US Department of Energy for funding to support the JTIQ. project, U.S. Department of Energy awarded $464 million or 25% of the estimated cost to five of these projects, one of which we are expecting to co-develop with Xcel Energy. While the recovery of these projects still needs approval from for, we are optimistic about the eventual outcome of the potential investment opportunity, which currently falls outside of our 5-year planning period.
Turning to slide 14, while we continue to focus on identifying up to opportunities for capital investments to support safe, reliable and increasingly clean electric service to our customers.
Affordability remains one of our top priorities from 2018 to 2023. Otter Tail Power's electric rates have consistently remained well below the national and regional averages, even during a time in which Otter Tail Power placed significant capital investment into service in 2023. Specifically, auto sales residential rates were 30% below the national average and 15% below the regional hub.
Slide 5 summarizes Otter Tail Power's key regulatory matters in 2020.
For Next, I will give a more detailed update on our integrated resource plan and North Dakota rate case.
Turning to slide 16, Otter Tail Power submitted an additional supplemental resource plan filing to the Minnesota Public Utilities Commission in December 2023. In this supplemental filing, we outlined our updated plan to meet the needs of our Minnesota customers and included a proposal to modify our resource modeling methodology. This new method may lead to directly assigning certain new generation resources to a single jurisdiction as needed. This is expected to provide additional flexibility in adding new generation resources that meet the needs of our customers in each jurisdiction. We serve our preferred plan for Minnesota customers as outlined in our December filing includes the addition of solar and wind investments and requests to designate the Minnesota portion of Coyote Station as an available maximum energy resource starting in 2029 the Minnesota portion of Coyote Station would only operate in limited emergency situations. If our request is approved by the Minnesota Commission, which will reduce the output of the facility and its greenhouse gas emissions while preserving reliability for our customers. We expect increased clarity on our five year resource additions following IRP and related regulatory actions in 2024.
Turning to Slide 17. For the first time since 2017, we filed a general rate case in the North Dakota Public Service with the North Dakota Public Service Commission in November of 2023 in our rate case filing were posted proposed to increase net revenues by approximately $17 million or 8.4% based on a requested ROE of 10.6% on an equity layer of 53.5%. In December, the Public Service Commission approved our interim rate request with interim rates taking effect on January first, 2024 customers will see an average net increase of approximately 6%.
Turning to our manufacturing segment on Slide 20. Our BTV. GEORGE expansion project is progressing well and we expect to complete the project in early 2025.
Looking to our end market outlook on slide 22, we expect many of the end markets our manufacturing segment serves to soften in 2024.
Despite this softness, we continue to win additional work with existing customers as they look to us to add value over the past two years, we have been awarded major programs with existing customers, which are scheduled to come to market in 2024 and should allow VTD. to maintain or grow revenue even with softer or OEM outlook with the recreational vehicle, lawn and garden construction and agricultural end markets. Dealer inventory has largely normalized to pre-pandemic levels.
The recreational vehicle and lawn and garden end markets continue to be impacted by lower consumer discretionary spending in response to inflation and higher interest rates. Construction and agriculture end markets or markets are forecasting to be down 5% to 10% this year. Power-generation, however, continues to be a healthy end market for us as demand remained strong. The outlook for the horticulture end market continues to be relatively stable as the channel works through the inventory purchased in 2022 and early 2023.
In response to scarcity concerns T.O. Plastics sales volumes decreased in 2023 as compared to 2022 as customers reduce their inventory levels and are returning to normal seasonal buying patterns.
Slide 23 provides an overview of our Plastics segment. While plastic earnings declined slightly from our extraordinary results in 2022. Our plastic business continues to capitalize on favorable industry conditions and produce strong financial results compared to pre-pandemic levels.
Slide 24 highlights historical resin costs and PVC sales pipe pricing profit margins were higher in 2023 as compared to 2022 as the cost of PVC resin and other input costs fell more rapidly than the sales price of PVC pipe.
The sales price of PVC pipe continues to decline steadily from historic highs reached in 2022. The vinyl tech site improvement and expansion project is underway, and we project to increase capacity by approximately 8% or $26 million. We expect to bring this new capacity online in the second half of 2024 at a total cost of approximately $50 million. Additionally, we are planning to add another line to vinyl Tec, which is expected to add $26 million as well and should become fully operational in early 2026.
I'll now turn it over to Todd to provide additional commentary on our 23 financial results and our expectations for 2020 for.
Todd Wahlund
Thank you, Chuck, and good morning, everyone. 2023 was another remarkable year for Otter Tail. We delivered record-breaking earnings with diluted earnings per share of $7, beating the record previously previously set last year. 2023 also marked the 85th consecutive year of paying dividends to our shareholders. Earlier this month, we announced our 2024 indicated annual dividend of $1.87 per share, which is a 6.9% increase from the 2023 annual dividend. And I will now provide an overview of our 2023 financial results. Please follow along on Slide 29. Electric segment earnings increased approximately $4.5 million or 6% over 2022, driven by higher commercial and industrial sales, a reduction in pension expenses and other post retirement plan costs and the recovery of rate base investments. These are partially offset by increased operating and maintenance expenses and the impact of unfavorable weather manufacturing segment earnings increased approximately $500,000 or 2% compared to 2022. Sales volumes for BTD manufacturing increased in 2023 as compared to 2022, driven by the construction, industrial and agriculture end markets as well as incremental volumes from being awarded additional work with existing customers. Partially offsetting this increase T.O. Plastics sales volumes within the horticulture end market declined in 2023 compared to last year as customers work to reduce their built-up inventory levels and return to more normal seasonal buying patterns. Our manufacturing segment businesses worked to adjust sales prices in response to labor and non-steel material cost inflation. Plastics segment earnings decreased $7.6 million in 2023 or approximately 4% from 2022. The decrease was primarily driven by a decline in sales volumes, partially offset by higher gross profit margins. The decrease in sales volumes was largely driven by distributor inventory management efforts and softer end market demand. Distributors work to destock or reduce their inventory levels during the first half of 2023 after building up their inventory levels in previous years.
In response to market uncertainty and supply chain challenges, gross profit margins were higher in 2023 as compared to 2022, driven by the sales price to the cost of resin spread. While sales prices of PVC pipe remain elevated as compared to historic levels, they have receded from the unprecedented highs reached in 2022 and continued to steadily decline. Corporate costs declined $12.7 million in 2023 as compared to 2022, primarily driven by the returns earned on our short-term investments funded by the significant cash flows generated by our businesses over the last three years, market-based gains on our corporate investments in 2023 and lower employee health care claims also contributed to decreased corporate costs, the higher level of earnings and free cash flow generated by our diversified business model in recent years has also helped to strengthen our balance sheet.
Turning to slide 30, our consolidated equity layer as of December 31, 2023, was 61.4% as compared to 59.4% as of December 31, 2022, and 53.7% as of December 31, 2021. Further in response to our strengthened balance sheet and credit metrics. Fitch Ratings upgraded both Otter Tail Corporation and Otter Tail Power during 2023 with the close of 2023 we are ending the year in an enviable position with a balance sheet capable of supporting future growth opportunities in 2024 and beyond.
Looking to 2024 and turning to slide 31, we are initiating our 2024 diluted earnings per share guidance range of $5.13 to $5.43, which assumes an earnings mix of approximately 41% from our electric segment and 59% 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% non electric. As we anticipate Plastics segment earnings to remain elevated in 2024 compared to our long-term view of normal earnings for this segment.
In the Plastics segment, we project on an eventual normal level of earnings between 45 and $50 million due to an expected continuing downward trend of sales prices and resin spreads occurring throughout 2024 and into 2025.
Our 2024 guidance is premised on the following assumptions by segment electric segment earnings are expected to increase 7% from 2023 levels due to returns generated from an 8.5% increase in average rate base through recovery of interim revenues resulting from the general rate case filed in North Dakota and lower operating and maintenance expenses, partially offset by forecasted higher depreciation and interest expense. Manufacturing segment earnings are anticipated to increase 4% from 2023 earnings due to higher sales volumes of favorable product mix, improved productivity and lower costs at BTBTD. manufacturing, partially offset by product pricing pressures and higher manufacturing costs.
At T.O. Plastics, we expect BTD's sales volumes to modestly increase in 2024 as compared to 2023 due to continued growth with existing customers despite end market softness. Additionally, in 2023 BTD. was very focused on hiring and added 200 new team members throughout the year. Our focus has shifted from hiring to retain and train and expect to see productivity gains in 2024 as our new employees gain more experience, Plastics segment earnings are expected to decrease in 2024 as compared to 2023. This assumes the sales price of PVC pipe will continue to decline from current levels throughout the year, causing margin compression. We expect this resulting margin compression to be partially offset by an increase in sales volumes. We believe customers have returned to more normal buying patterns as customers are through their destocking efforts, which impacted sales volumes in 2023 last Lastly, we expect corporate costs will increase in 2024 due to lower market-based gains on our corporate-owned life insurance policies and increased expenses associated with our self-insured health plan, partially offset by lower incentive compensation costs and higher earnings on short-term cash investments. Our updated 5-year capital spending plan, which is a key driver of earnings growth for our electric segment is included in more detail on Slide 32. Relative to the previous plan, our updated 5-year capital spending plan includes additional solar generation investment as well as more transmission investments resulting in a projected compounded annual growth rate on rate base of 7.7% compared to their previous plan of 6.5% our electric utility. Otter Tail Power has many opportunities for growth over the next five year period and beyond and continues to execute well on its growth plans while keeping customer rates low. In order to finance this growth at Otter Tail Power, we project issuing debt on an annual basis for the next five years.
Slide 33 provides a summary of our 5-year financing plan, we expect to retire and not replace our $80 million parent-level debt when it matures in 2026. Our exposure to increased borrowing costs continues to be low risk.
We do not have any outstanding borrowings on our parent credit facility and the amounts drawn on the utility facility primarily relate to capital projects, which we expect to largely replace with long-term debt in the first quarter of 2024.
The impact of these borrowings is fully considered in our 2024 guidance. Additionally, due to the significant amount of cash and earnings generated over the past few years. We have no external equity needs over the year period, differentiating us from many of our peers within the utility space who will look to access the market in order to fund the rate base growth, we feel well positioned to deliver upon our earnings guidance in 2024 as well as meet our long-term investment targets.
As summarized on slide 36, our diversified business model continues to produce significant total shareholder return serving us and our stakeholders well, we enter this new year with a sizable five-year capital spending plan, allowing for additional investment into our businesses to support future growth so that we are best positioned to serve our customers. We are in an excellent position to support this growth. With our strong balance sheet, ample liquidity and investment grade credit ratings. We are now ready to take your questions.
Question and Answer Session
Operator
As a reminder, please press star one one or your telephone and wait for your name to be announced to?
It is star one.
And our first question comes from the line of Chris Ellinghaus with Siebert Williams Shank & Company LLC. Your line is now open.
Christopher Ellinghaus
Hey, everybody, good day. I'm Chris. Chuck, can you talk about the IRP. in Minnesota and you know, what kind of progress has been made since the meeting. Do you have a firm date for it we're going back?
Charles MacFarlane
Sure, Chris. Thanks for the question. So we had a hearing on January fourth and we will we and other parties will be providing supplemental comments on our proposed plan that was put in in December of 23.
Specifically talking about on two parts, one, the direct assignment of some new renewables to the Minnesota jurisdiction. This is associated with meeting both the the carbon free standard and their use of externalities in planning and which the Dakotas do not Hughes.
And then the concept of our Coyote coal plant, we are a partial owner with other utilities in that facility, and we're a 35% total owner. So roughly half of that or 17% of the plant output goes to our Minnesota customers in. And we would put that on a particular program that missle has that they can dispatch that in times of extreme load, but it would it would limit it historically that's been called on maybe a couple of three days a year. And that would allow continued capacity accreditation and reliability afforded by that, but limit the amount of CO2 emissions attributable to the Minnesota. Under that we anticipate that the comments will come in and that we will have a another hearing scheduled sometime in April was probably a decision in the May time.
Christopher Ellinghaus
Okay, great. On what are your thoughts on the plastics business at this point you gave us some revised thoughts on what normal looks like, but do you have any visibility into what your outlook is for next year points?
Charles MacFarlane
Chris, I think there's room I'd articulate in the text here in the script.
Our belief is that in all the major distributors we sell to distributors and these distributors went in turn sell to contractors that that put in and our residential projects work on highway projects, those to anything that would need sewer and water pipe and <unk>. We feel that those distributors because it was a scarcity issue.
I mean we were on resin curtailment and other things. In 21 and 22, there was simply have a pipe shortage and they bought up significant amounts both at the end use contractor and distributor levels, which they had a destock in 2023 effectively. And so we believe that the volumes will go back up from 23 levels as a lot of that inventory out in the other channels has been put in the ground effectively. And we maintain a new housing start level at $1.4 million, which is down from from a few years prior, but really is a pretty good pace.
When you look back, we've got it on a slide on slide 25 that at that level we continue to see pretty good pipe volume. So I don't know if that's helpful, but we anticipate volume to go up in 24 from 23.
Christopher Ellinghaus
Okay. Chuck, you are pointing out that the earnings and rate base have grown pretty linearly with your new kegger for rate base, absent the plastics variability in the future, should we be thinking that you're kind of at or above the upper end of your 5% to 7%?
No, at this point, have you got any thoughts on where you're in that range at this point Sure, Chris, while historically we made the point that we have a pretty good conversion rate base and earnings growth, we do think that that will be a little more difficult as we go forward, it will require some more additional rate cases.
Charles MacFarlane
And there's also a concern of the inflation we've seen in O&M costs over the past period would tend to have us push the earnings growth now a little bit below our rate base growth level of cash from one last simple one, where do you stand on cash at the end of the year as we were just over $200 million.
Christopher Ellinghaus
And now so part of I suppose part of the earnings growth story also will be as you utilize that extra cash for for utility CapEx, you'll lose some of those interest earnings. Is that sort of part of your thinking there?
Todd Wahlund
That is correct. I mean, we don't have any equity financing needs. So to maintain our capital structure for OTP., we would need to provide some equity infusions to maintain that.
So that would reduce our capital. Our cash investments at Otter Tail Corporation.
Christopher Ellinghaus
Okay. Thanks for the details. Appreciate it again.
Operator
Thank you. Our next question comes from the line of Brian Russo with Sidoti. Your line is now open.
Brian Russo
Hi, good morning.
Charles MacFarlane
Wondering right about it.
Brian Russo
Just on the utility, I appreciate the added information on the supplemental IRP or is the supplemental IRP investments included in the five year CapEx?
Todd Wahlund
Yes, Brian, what we have in our CapEx plan for the five years is we've got the wind repowering that's in the early part of the five year plan. We also do have a portion of the solar investment in the five year plan or Astoria on-site fuel is not currently in the $1.31 billion. And then the additional wind that we have out in the 2029 time period. There is a small portion that is in there in that 27, 28 time period.
Brian Russo
Okay, got it. So the $200 million increase. Is that mostly the Maestro transmission projects as you just kind of move forward a year and that those investments pick up or do you know, is there a scenario where the supplemental IRP is driving incremental utility investments versus the prior IRP year.
Todd Wahlund
So the $1.3 billion versus the $1.1 billionin the previous plan is driven primarily by the addition of the solar and then also the additional Maestro transmission you're bringing in year 2028 where we've got a little more spend.
Brian Russo
Okay, great. And the scenario that you just discussed in response to the question on the 5% to 7% growth would be accelerated rate base growth. Is that why you're forecasting 7% utility EPS growth in 2024 versus the rate base growth of 8.5%? Or is there something else I'm driving that?
Todd Wahlund
Yes. I would say overall, over the long term we tend to be closer that one to one. We do have some variations by year, whether it be because of weather or just timing on recovery side, the seven percentage is driven by a number of factors. And I would expect we would be closer to the one to one ratio as we go over the long term.
Brian Russo
Okay, great. And just curious was Coyote coal plant dispatch this past January, you know, with die of well below average temperatures?
Charles MacFarlane
Yes, Brian, Kyle is dispatched a fairly high level overtime.
Brian Russo
Okay, understood. And huge switching to plastics. So the new normalized earnings of $45 million to $50 million versus I think your prior, you know, normalized earnings of $36 million to $41 million. Does that include the vinyl tech capacity expansion, the second half this year.
Todd Wahlund
That includes both Phase one and Phase two expansions at biotech. So okay, actually then our volume projections as well as forecasted resin and the spreads and the volume projection does include the expansion.
Brian Russo
Okay, got it. So in this $65 million, $35 million utility and then unregulated earnings mix, some debt that's due to the 35%, that's where the $45 million to $50 million of plastics normalized more normalized earnings are included? Correct?
Todd Wahlund
It is correct.
Brian Russo
And do you think that normalized earnings will be realized for full year of 2025? Or just given kind of the trajectory you're conveying on PVC. prices that margins might stay elevated through year-end?
2024 and into 2025.
Todd Wahlund
At this point, we see the gradual decline in the spread over 24 and into 2025. So ultimately, based upon our current projection, we wouldn't REALIZE that normal level of earnings until 2026. So 2025 currently in our projections is elevated. If you look at the midpoint of our guidance, it would be about $2.72 for plastics in 2020 for a 45 to $50 million of earnings would be about $1.10. So we expect it will gradually decline between 24 and 26.
Brian Russo
Okay, great. So thank you very much.
Operator
Thank you. Our next question comes from the line of Sophie Karp with KeyBanc. Your line is now open.
Sophie Karp
Again, good morning. Congrats on the results and thank you for taking my question. And so I have a I have three the first question. I have is them. And I wonder if you have any opinion on the EPA for the new, can you propose Pro to this initiative to replace lead pipe in the next 10 years, would that be beneficial to your PVC business? And what do you think are the odds of this kind of taken shape?
Charles MacFarlane
Sophie, this is Chuck. While we look at is most of the lead pipe issues in the APA, our service lines. We do very little PVC on service lines, but we think that a lot of municipalities will look at the economics of having to replace service lines on an aged, Maine Water main in the street, if you will, and that we anticipate some impact, not a lot some impact of just overall water system upgrades, including main and service laterals, which are the are the lead pipes, are the and from the main to the surface, we do see that on the IGA had about $55 billion in funds associated for water wastewater improvement are feeling that that has not yet made its way into in the actual projects yet. A lot of that money has not been allocated to the states yet. So we anticipate that that will have some support in the out years, but we're not looking at it as a major increase in PVC volumes.
Sophie Karp
Got it.
Charles MacFarlane
Got it.
Sophie Karp
Thank you. And then my other question was could you your regulatory lag or I guess lack of regulatory lag is very impressive here and could you remind us just how much of your CapEx is going through riders it trackers and like other mechanisms like that as opposed to rate cases of the five-year plan about 50% of it is planned to be through riders and only about 10%, actually under 10% is projected to be recovered through rate cases.
Operator
Got it.
Charles MacFarlane
Thank you.
Sophie Karp
And then lastly, a little bit of an open-ended question, but maybe could you describe what kind of distribution opportunities are you in your five-year plan? So I guess we understand the generation and Maestro transmission. But when it comes to distribution plans, given if you have your service territory, what are you focusing your attention on?
Todd Wahlund
So our distribution spending is more upgrade or replacements.
And we've been increasing our capital spending on distribution assets significantly over the last few years, and that's projected to continue over these five years. I believe of the $1.3 billion, close to $350 million, $400 million is distribution, and it's mostly just upgrades to the existing infrastructure upgrades and replacements.
Sophie Karp
Got it. Thank you.
Operator
So I have thank you. As a reminder to ask a question at this time, please star one one on your touchtone telephone. With no additional questions. I will now turn the call back over to <unk> for his closing remarks.
Charles MacFarlane
Thank you for joining our call and interest in Otter Tail Corporation. Over the long term, I believe we are well positioned with our diversified business model, which provides the opportunity for enhanced returns to achieve our financial targets. We expect to produce long-term compounded growth in diluted 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. If you have any questions, please reach out to Investor Relations, and we look forward to speaking with you next quarter.
Operator
So this concludes today's conference call. Thank you for your participation. You may now disconnect.
