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Otter Tail Corp (OTTR -0.35%)
Q2 2020 Earnings Call
Aug 4, 2020, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and welcome to the Otter Tail Corporation, Second 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 -- Manager of 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 second 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 two, these statements represent our current judgment or opinion of what the future holds. They are subject to risks and uncertainties that may cause actual results to differ materially, so please be advised about placing undue reliance on any of these statements.
Our forward-looking statements are described in more detail in our filings with the Securities and Exchange Commission, which we encourage you to review. Otter Tail Corporation disclaims any duty to update or revise our forward-looking statements due to new information, future events, developments or otherwise.
For opening remarks, I will now turn the call over to Otter Tail Corporation's President and CEO, Mr. Chuck MacFarlane.
Charles S. MacFarlane -- President and Chief Executive Officer
Thank you, Loren. Good morning, everyone. Welcome to our second 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 plan puts the health and safety of our employees and our communities at the forefront and are designed to help ensure continued electric reliability and operational excellence across our companies.
Currently, 15% of our employees are working remotely. We have had 24 confirmed cases of COVID-19 across the corporation, of which only two remain active. We remain diligent in our precautionary health and safety efforts. We continue to monitor this dynamic event, and how it is impacting the economy in our electric and manufacturing platforms.
Please refer to Slide 6 as I begin my comments on Q2. We earned $0.42 per share this quarter compared with $0.39 per share in the second quarter of 2019 primarily driven by increased earnings in our electric segment. Kevin will provide a more detailed discussion of our financial performance in his comments, but a brief overview of the Q2 results are as follows. The electric segment earnings per share increased $0.14 primarily due to increasing investments in our Merricourt Wind Energy Center and Astoria Station along with lower O&M expenses.
The decrease in O&M expense was driven in part by lower quarter-over-quarter plant maintenance expense related to a planned outage at Coyote Station in 2019. Our manufacturing segment earnings per share decreased $0.09 as their end markets were significantly impacted by COVID-19. Our plastics segment earnings decreased $0.03 primarily due to slightly lower sales volumes and lower pipe prices.
And our corporate cost decreased by a $0.01 primarily due to gains on our investments related to corporate-owned life insurance and investments held at our captive insurance company. This improvement is associated with improved equity markets in the second quarter. Based on our year-to-date performance and our updated view of the potential impacts on our businesses from COVID-19 we are raising our 2020 diluted earnings per share guidance to be in the range of $2.10 to $2.30. From our previously announced guidance of $2 per share to $2.25 per share.
Slide 7 lists major impacts and mitigation responses to COVID-19. Key impacts to the utility include lower commercial and industrial sales particularly in oil pumping and ethanol production. Lower commercial and industrial sales have been partially offset by increased residential usage. We have provision for anticipated increasing bad debt expense and waived late fees.
Additionally, any significant delay in major utility capital projects due to supply chain or worker health issues would reduce rider revenues. We have undertaken significant O&M reductions and filed for deferred accounting for COVID-19 related impacts. We continue to see significant volume reductions in our manufacturing segment, primarily driven by declining sales volumes at BTD. BTD has implemented rotating furloughs and reduced approximately 180 positions or 16% of the total workforce across all sites as they continue to reduce O&M expenses to help mitigate the volume drop.
Our Plastics segment experienced reduced sales volumes and lower sales prices as distributors reduced inventory levels early in the quarter due to uncertainty over COVID-19 impacts on sales and expectations of lower pipe prices. However based on our strong first half results and current market conditions, we now anticipate higher sales volumes and the potential for improved sales prices for the remainder of the year.
An updated view of the second quarter and annual revenue impacts by customer class are listed on Slide 12. The current view of estimated overall utility sales impact for 2020 related to COVID-19 is now a negative $0.04 per share to $0.06 per share. Those impacts are included in our revised guidance. Otter Tail Power along with many other utilities has suspended disconnects for late payments and waived late payment fees for residential and small business customers during this pandemic.
It is expected we will have a negative $0.02 EPS impact related to increased bad debt expense. We are also expecting disconnect processes to be reinstated in North and South Dakota by mid-August. We currently do not have any active rate cases. We expect to file our next Minnesota rate case in November of 2020, but the COVID-19 pandemic may require special considerations as we see its impact on our customers and sales.
Otter Tail Power continues to grow through capital investment in generation and transmission project. As shown on Slide 13, rate base is expected to grow by 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 before year-end 2020. Though there are risks associated with supply chain and construction labor due to COVID-19, project foundations are complete and recent activity includes ongoing delivery of turbine components to the site. Approximately 80% of major components are in North Dakota and 14 basis have been set and the first turbine was fully erected on July 23rd.
On Slide 17, Astoria Station construction remains on time and on budget. Despite COVID-19 construction labor risk, we expect will be -- it will be online by year-end 2020. The power distribution equipment was energized in July and the natural gas yard is complete. Work continues on our South Dakota Transmission project, a 43 mile 115 KV transmission line from Lake Norden to Astoria, South Dakota. We expect to energize the line in June of 2021. In mid-June, Otter Tail Power submitted a response to the Minnesota Public Utilities Commission request for investment to potentially help the state in COVID-19 economic recovery. As shown on Slide 18, the Company submitted 12 projects with the total cost estimated to be in the range of $153 million to $173 million with construction or completion dates that could occur in the near-term if we obtain authorization.
These projects proposed include a renewable generation system, infrastructure and reliability improvements, outage management system, accelerated vegetation management and electric vehicle infrastructure and rate pilot among others. Generally, this would be an advancement of projects that were previously in some stage of consideration.
Slide 19 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 the interconnection customer through a monthly payment over 20 years.
The Company has secured 27 of 33 facility service agreements and approximately 75% of the construction has been completed to-date. Key risks factors continue to be weather and potential COVID-19 impacts. We continue to monitor the progress on the federal Regional Haze Rule compliance planning 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 plans to the Environmental Protection Agency. Coyote Station owners continue to analyze the data and the 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 a Coyote Station compliance strategy.
The DEQ is scheduled to submit the North Dakota state implementation plan of 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 to continue serving customers with a reliable low cost electricity. Turning to our plastics segment. You may have seen in the news recently, the bridge, railroad bridge collapse in Tempe, Arizona. We are not anticipating any impacts to Vinyltech's production schedule even with potential PVC resin rerouting delays. The plastics segment continues to benefit from a strong housing market as evidenced by new home sales increasing nearly 14% in June.
Looking ahead, we continue to enhance our balanced electric generation mix. We anticipate by 2022 Otter Tail Power customers will receive 30% of their energy from renewable resources and our carbon emissions will be at least 30% below 2005 levels. All while keeping average residential rates nearly 30% below the national average.
With growing investor concern about companies generating more than 25% of revenues from thermal coal, it's assuring to note that Otter Tail Corporation's percentage of revenue from coal assets is well below that threshold. Percentage of consolidated revenues from our coal assets was 13.7% in 2019 and is projected to decline by -- to 11% by 2022. We continue to execute on our strategic objectives to grow our businesses, achieve operational and commercial excellence and develop our talent. And we maintain our long-term target of 5% to 7% annual EPS growth off a 2019 base.
Now I'll turn it over to Kevin for the financial perspective.
Kevin G. Moug -- Chief Financial Officer and Senior Vice President
Well, thanks, Chuck, and good morning, everyone. We are extremely pleased with our second quarter results in light of the challenging business and economic climate. Our earnings per share increased 7.7% over the second quarter last year driven by strong performance in our electric business. Let's refer to Slide 25 as I discuss the quarter.
Electric segment net earnings increased $5.8 million. This increase was driven by increased Minnesota and North Dakota renewable resource rider revenues related to the Merricourt Wind Energy Centre project and from the generation cost recovery rider in North Dakota in conjunction with the construction of the Astoria Station.
Net earnings were also favorably impacted by additional AFUDC on the Astoria Station project related to the Minnesota share of construction work in progress. Weather favorably impacted earnings by $0.02 a share, compared to the second quarter of 2019. We did have an increase in residential revenues during the quarter, but this was more than offset by a decrease in kilowatt-hour sales to commercial and industrial customers primarily due to COVID-19 related impacts.
Other items favorably impacting electric segment earnings during the quarter were decreased O&M expenses due to lower maintenance expenses both at Coyote and Hoot Lake Plant that we incurred in Q2 of 2019. Lower labor and employee benefit expenses and decreased transmission tariff expenses. Offsetting these decreased O&M expenses were higher depreciation associated with rate base additions in 2019 and interest costs related to higher long-term debt levels associated with financing our rate base growth.
Net earnings for the manufacturing segment decreased $3.7 million quarter-over-quarter largely driven by the impacts of COVID-19. Key items impacting this segment's net earnings during the quarter were at BTD revenues were down mainly due to a decline in parts sales as customers across our end markets implemented temporary shutdowns due to COVID-19. These plant shutdowns also resulted in lost labor productivity and increased costs related to personal protective equipment and payment of healthcare costs for furloughed employees.
Revenues were also down due to lower material costs passed on to the customer. Scrap revenues were also down due to a 5% decrease in scrap metal prices and a 47% decrease in scrap sales volume. Lower cost of goods sold net of employee termination cost during the quarter were down due to lower sales volumes and materials costs passed on to the customers.
And our decreased gross profits were partially offset by lower SG&A expenses. In the T.O. Plastics, revenues and earnings decreased due to lower sales across all of its product lines driven largely by market softness related to COVID-19. Our plastics segment earnings decreased due to lower pounds of pipes sold combined with the decrease in pipe sales prices that were partially offset with lower resin prices. The lower sales volumes were attributable to reduced sales to distributors who lowered their inventory levels in anticipation of COVID-19 related impacts on sales and concerns over lower PVC pipe prices stemming from the declining resin price and our corporate costs net of tax were slightly improved quarter-over-quarter.
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 July 31, 2020, the total amount available under both our credit facilities was $286 million. During the quarter, we raised approximately $19 million in equity under our at-the-market dividend reinvestment and employee stock purchase programs. Since the fourth quarter of 2019, we have raised $47 million or approximately 63% of our equity needs. We expect to issue up to an additional $28 million of equity barring any further erosion of the equity capital markets related to the COVID-19 pandemic or other factors.
Slide 32 shows an updated version of our 2020 to 2024 capital expenditure plan. Primarily shifting the timing of expenditures with no material impact on the $1 billion five-year capital plan. We now expect capital expenditures for 2020 to be $380 million of which 96% is earmarked for our electric segment. Planned expenditures for this year include the $177 million for Merricourt and $81 million for Astoria.
The five-year plan calls for approximately $898 million in utility projects, of which approximately 50% will be covered through riders. This estimate includes 70% of the capital projects associated with the Minnesota relief and recovery proposal requested by the Minnesota Public Utility Commission. The plan also includes $84 million for the manufacturing and plastics segments.
Let's move to our business outlook on Slide 33 and review our updated 2020 annual earnings guidance. We are raising our 2020 overall diluted earnings per share guidance range to $2.10 to $2.30. Based on our first half financial results and an updated view of the anticipated effects of COVID-19 on our operating companies.
This improvement is driven by strong first half performance in our plastics segment along with continued favorable business conditions in this segment for the rest of the year. Also the impact of COVID-19, our electric segment has been less than originally expected. And our 2020 diluted earnings per share guidance also includes $0.04 of dilution associated with the planned issuance of common equity to help fund the projects at Otter Tail Power Company.
Our current assumptions for our updated business outlook assume our electric and plastics segment are in a gradual recovery as reflected in our updated guidance ranges. We are seeing a much slower recovery in our manufacturing segment. BTD's customers reduced production levels in the second quarter in response to COVID-19 had caused a sharp decline in orders and revenue. We are now planning for our manufacturing segment plants to run at higher levels of capacity in the third and fourth quarters as customer forecasts are indicating increased demand as production plants are being brought back online.
We continue to believe our assumptions are reasonable based on current business and economic conditions. And we recognize these assumptions could prove to be incorrect given the recent increase in COVID-19 cases, which could result in a further slowing of the broader economic recovery. And the following items contribute to our revised earnings guidance for 2020. For 2020 guidance, our electric segment includes capital spending on the Merricourt and Astoria Station rate base projects in 2020. The Merricourt project has rider recovery mechanisms in all three state jurisdictions.
The Astoria Station project has rider recovery mechanisms in North and South Dakota and this project earns AFUDC in Minnesota and is expected to be recovered through a rate case in Minnesota and has already been approved in our integrated resource plan. Increased revenues related to $25 million in anticipated capital spending for self-funded generator interconnection agreements.
There are no planned generation plant outages scheduled for 2020. We incurred plant outage costs of $3.1 million in 2019. Additional items expected to positively impact our 2020 electric earnings include the recent decision by the Minnesota Supreme Court ruling in Otter Tail Power Company's favor related to maintaining the incremental return earned on FERC jurisdiction transmission lines.
The estimated impact of this decision is an increase to 2020 earnings of $0.05 a share. And going forward, the positive impact of this decision on an annual basis is a $0.01 a share. We are updating our Minnesota transmission cost recovery rider filing with new rates incorporating the results of the decision in order to update the original Minnesota Public Utility Commission order.
We have also implemented $0.03 a share of cost reduction efforts to mitigate the impact of COVID-19. The above items are offset by the impact of unfavorable weather during the first half of 2020 and normal weather being anticipated for the remaining months of the year. Weather favorably impacted 2019 earnings by $0.08 a share compared to normal.
We 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 assumption. 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 that was completed in October of 2019 and reductions in commercial and industrial demand related to the negative impacts of COVID-19 as some customers in our jurisdictions have had to either completely shut down or curtail operations given reduced demands for their products and service.
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 range from $0.06 to $0.08 a share compared with our original estimate of $0.08 to $0.12 a share.
Net income from our manufacturing segment will be lower in 2019 driven by the impact of the COVID-19 pandemic and we now estimate a reduction in manufacturing segment earnings of $0.14 a share from the midpoint of our original guidance to the midpoint of our updated guidance. This is due to the effects of and in response to the COVID-19 pandemic. Backlog for the manufacturing segment is approximately $96 million for 2020 compared with $115 million a year ago. Raw material price deflation is driving backlog down by $10 million and the remaining $9 million decrease in backlog is volume driven.
We are raising our 2020 guidance range for our plastics segment and now expect earnings to be in line with 2019. Sales volumes in 2020 are now expected to be approximately 2% higher in 2019 given the strong first half results and current market conditions. Raw material prices did decrease in the second quarter, but are now expected to trend up in the third quarter. This increase is related to supplier plants being busy tightening of demand and the resin export market strengthening. Our change in the guidance range for corporate costs net of tax is primarily due to the decline in values of our -- on our investments held in corporate-owned life insurance and our captive insurance company related to COVID-19 and its related impacts on the stock market.
While we have implemented mitigation efforts to lower our corporate labor and non-labor costs, we don't expect we will fully recover the drop in value of these investments before the end of the year.
We are pleased by our strong second quarter results given the challenging business and economic conditions we face. Our electric and plastics segments are proving to be quite resilient and our manufacturing segment is managing the business well despite the large drop in revenues. 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 base and very supportive regulatory environments at an 8.6% compounded annual growth rate over the next five years. This is driven by investments in renewable and natural gas generation, technology and infrastructure and transmission projects. Overall, we expect the electric utility will provide approximately 75% of our earnings and the Manufacturing and plastics segments will also continue to provide organic growth over the long-term. These two segments are expected to provide around 25% of our overall earnings over time.
We expect to be able to deliver total shareholder return of 8% to 10% over the long term. This consists of two components. First, our earnings per share are expected to increase at a 5% to 7% growth rate. Secondly, our current dividend yield is approximately 3.9%. Looking forward, we would expect to grow the dividend along with our earnings-per-share growth of 5% to 7%, while maintaining a dividend payout ratio between 60% to 70%. And our Company is on solid footings with a strong balance sheet, ample liquidity to support our business and investment grade corporate credit ratings.
We're now ready to take your questions.
Questions and Answers:
Operator
[Operator Instructions]. Our first question comes from Chris Ellinghaus with Siebert Williams.
Chris Ellinghaus -- Siebert Williams Shank & Co. -- Analyst
Hey, guys. How are you?
Kevin G. Moug -- Chief Financial Officer and Senior Vice President
Good, Chris.
Chris Ellinghaus -- Siebert Williams Shank & Co. -- Analyst
Can you give us a little bit of color on what you're seeing in the recreational vehicle market?
Kevin G. Moug -- Chief Financial Officer and Senior Vice President
Sure. I mean we've -- from Polaris' perspective there has been strengthening in that market. They've seen a fair amount of increased demand as consumers have looked to do more social distancing activities outside. I know that their inventories at the end of their second quarter are low, they are looking to start to rebuild their inventories.
We're starting to see increased levels of forecasts coming from them here in the third and fourth quarters.
So I think in general given consumers efforts to be outside and do activities, the RV market has certainly benefited from that and you've seen that in other RV markets as well. While we don't do anything with bodes. I know that there has been an uptick in that market as well and campers and those things.
Chris Ellinghaus -- Siebert Williams Shank & Co. -- Analyst
Okay, thanks. The improved outlook for the pipe business. Is that principally housing and construction and is that your thought process there?
Kevin G. Moug -- Chief Financial Officer and Senior Vice President
Yes. We saw, I mean, in the second quarter we were -- as we built our forecast for plastics, we certainly expected to see a drop-off in volumes of pipe sold, Chris. And as we went through the second quarter, while volumes were less than last year during the quarter. They ended up being much stronger than what we had forecasted. And so that certainly a strong second quarter compared to our forecast and then these current conditions as we head into the third quarter that we're seeing the housing markets are certainly were favorable in June. And as we look at our -- the demand we're seeing from customers for product we feel real good about the last half of the year.
Chris Ellinghaus -- Siebert Williams Shank & Co. -- Analyst
Do you think that sales were better than you thought because states continue to allow construction to take place during the lockdown?
Kevin G. Moug -- Chief Financial Officer and Senior Vice President
Yeah, I think, that's certainly a key part of it absolutely. Because those projects are outside, it was able to keep those running with social distancing efforts certainly in place, but just the fact that they are outside, certainly helped the plastics business. Certainly it's helped our utility with our Merricourt and Astoria Station projects as well.
Chris Ellinghaus -- Siebert Williams Shank & Co. -- Analyst
Okay, great. The Minnesota program, the economic stimulus concept. Can you give us a little more color on that? What is the process -- for your proposals and is there a open docket at this point?
Charles S. MacFarlane -- President and Chief Executive Officer
Hi, Chris. This is Chuck. There is an open docket. We have submitted the projects I mentioned. You can see on the docket that are listed those 12 and there has been one informational hearing and we need all the utilities in Minnesota are involved in their own submission of items and their intent is to look at those and we have to provide a filing over the next 90 days.
And what's in it? So if you look at the $153 million to $173 million, 70% of those dollars would be in our existing forecast. So there would be approximately 30% new dollars are brought in from outside the five-year period.
They tend to be renewable generation advanced technology, which the majority of that, you're looking at Slide 18 tends to be an AMI project, reliability and infrastructure outage management, load management systems as well as some grid hardening and then electric vehicle some conservation and building upgrades associated with energy efficiency round those out.
So our intent is to know at least on some of these projects here in the third quarter.
Chris Ellinghaus -- Siebert Williams Shank & Co. -- Analyst
And what time frame that they want to see these projects completed in?
Charles S. MacFarlane -- President and Chief Executive Officer
Well, they're just indicating what can you start now. They know there won't be an immediate ramp up necessarily in 2020, but I think they're looking at 2020 and 2021 what projects can you advance to increase labor and job activity in the next 18 months.
Chris Ellinghaus -- Siebert Williams Shank & Co. -- Analyst
Sure. Chuck, you quoted us an impact you're expecting on lower electricity sales. Based on what Kevin was saying for the second quarter. It sounds like the vast majority or maybe half or more of that impact is the second quarter. So does that reflect sort of your view for gradual improvement for the rest of the year? And so we should be thinking that the impact is less sort of sequentially in the next two quarters? And does that also not -- you're thinking that the fourth quarter is kind of getting close to normal?
Charles S. MacFarlane -- President and Chief Executive Officer
I think that I would summarize it very similar to what you just did. It's improving each quarter and particularly we envision our industrial load will be back to normal. That's the one that currently is the most often it is heavily weighted toward oil pumping and ethanol and we believe by the end of the year they'll be back to near forecast levels in the fourth quarter.
Chris Ellinghaus -- Siebert Williams Shank & Co. -- Analyst
Does that suggest also that you're assuming residential goes back to normal or there remains a significant component of work at home for a lot of people still?
Charles S. MacFarlane -- President and Chief Executive Officer
We view that there will be more work at home. It will not be as significant as it was in the second and third quarter. I think we're seeing a little uptick in the third quarter just because of the work at home. We're experiencing probably more air conditioning load than we would have historically in those years even with normal weather.
Chris Ellinghaus -- Siebert Williams Shank & Co. -- Analyst
And your normal weather assumption for the rest of the year, does that also incorporate sort of it looks to be a good July so far?
Charles S. MacFarlane -- President and Chief Executive Officer
No. We set the forecast before the July results would have been known.
Chris Ellinghaus -- Siebert Williams Shank & Co. -- Analyst
Thanks guys. I appreciate it.
Kevin G. Moug -- Chief Financial Officer and Senior Vice President
Thanks, Chris.
Operator
Our next question comes from Sophie Karp with KeyBanc.
Sophie Karp -- KeyBanc Capital Markets, Inc. -- Analyst
Hi. Good morning, guys. Congrats on the quarter.
Charles S. MacFarlane -- President and Chief Executive Officer
Thanks, Sophie.
Sophie Karp -- KeyBanc Capital Markets, Inc. -- Analyst
Just maybe if you could give us a little color on how do you see the margins in plastics development over the second half given what I'm sure is some swings in the commodity price and then your levels of inventory. That would be helpful if you could give us a little more color on that?
Kevin G. Moug -- Chief Financial Officer and Senior Vice President
Yes. Sophie, this is Kevin. I mean the last half we're -- as we look at the business we are expecting in terms of the whole last six months volumes for the last six months compared to the last six months a year ago are slightly down, but we are seeing a slight uptick in our sales prices over the last six months.
And we're seeing stronger margins in general over the last six months as well. We do there is, as I mentioned in my comments, now resin prices are trending back up for the -- in July here and so we expect that there will be some benefit in the sales prices that will help margin as well as we go through the rest of the year and we're seeing a stronger uplift in our Q3 margins.
Typically, we had a real strong fourth quarter last year and we expect that, that will be -- we do anticipate that particularly at Northern Pipe we're going to have weather-related kind of challenges given the country -- part of the country we're in and so we do expect a little bit of a fall-off in margins in the fourth quarter, but those are offset by the stronger margins in the third quarter we're expecting.
Sophie Karp -- KeyBanc Capital Markets, Inc. -- Analyst
Got it. Got it. And so we shouldn't expect that there would be any additional boost from maybe lower priced raw material headwind to Q2?
Kevin G. Moug -- Chief Financial Officer and Senior Vice President
[Speech Overlap] I'm sorry, did you say lower-priced raw materials?
Sophie Karp -- KeyBanc Capital Markets, Inc. -- Analyst
Yeah, I was just wondering if you maybe build inventory at lower levels and you'd be working through that raw materials inventory heading into second half?
Kevin G. Moug -- Chief Financial Officer and Senior Vice President
There will be some of that, Sophie. We get -- under our resin contracts we have what we refer to as 30-day price protection. So if resin prices are going up in July, we don't see that come through our pricing until August. So there will be some buildup of inventory at the lower prices that would be helping the third quarter as well.
Sophie Karp -- KeyBanc Capital Markets, Inc. -- Analyst
Got it, got it. Thank you. And then on Minnesota just wanted to make sure I understand. So this incremental 30% of this -- 30% of the projects are incremental to your existing capital plan. Is that going to fall largely in existing riders that you have there or would you need a separate sort of rate case recovery on that? Just wanted to make sure I heard that right.
Charles S. MacFarlane -- President and Chief Executive Officer
Well, it depends, Sophia. This is Chuck. On the each individual project I would think that the technology items may in Minnesota fall under a distribution rider, but if I had to, yes, these projects a, have not been approved by Minnesota and incremental amounts, the majority would require rate case recovery not rider recovery in the future.
Sophie Karp -- KeyBanc Capital Markets, Inc. -- Analyst
Got it. Thank you so much. I'll jump back into the queue.
Operator
[Operator Instructions]. And I'm not showing any further questions at this time. I'd like to turn the call back over to Chuck.
Charles S. MacFarlane -- President and Chief Executive Officer
Thank you for your questions and interest in Otter Tail Corporation. While many challenges and uncertainties related to COVID-19 remain, we are encouraged by the ongoing efforts our employees across the organization are taking to help mitigate its impact as evidenced by our Q2 results.
And despite these short-term challenges, we remain focused on executing our growth strategies that are designed to create long-term shareholder value. For the utility, our strategy is to continue to invest in rate base growth opportunities. Utility is complemented by well-run strategic manufacturing and plastic pipe businesses, which provide organic growth from new products and services, market expansion and increased efficiencies.
Based on our first half performance and our updated view of potential impacts from COVID-19, we are increasing our 2020 diluted earnings per share guidance to be in the range of $2.10 to $2.30 from our previous guidance of $2 to $2.25. 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
[Operator Closing Remarks].
Duration: 44 minutes
Call participants:
Loren Hanson -- Manager of Investor Relations
Charles S. MacFarlane -- President and Chief Executive Officer
Kevin G. Moug -- Chief Financial Officer and Senior Vice President
Chris Ellinghaus -- Siebert Williams Shank & Co. -- Analyst
Sophie Karp -- KeyBanc Capital Markets, Inc. -- Analyst
