Otter Tail Corp 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Otter Tail Corporation Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Otter Tail Corporation and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on the criteria established in Internal Control—Integrated Framework (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report Regarding Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 35 Table of Content s Rate and Regulatory Matters—Impact of Rate Regulation on the Financial Statements—Refer to Notes 1, and 5 to the financial statements. Critical Audit Matter Description The Company’s regulated Electric segment accounts for the financial effects of regulation in accordance with ASC 980, Regulated Operations . This guidance allows for the recording of a regulatory asset or liability for certain costs or credits which otherwise would be recognized in the statement of income or comprehensive income based on an expectation that the cost will be recovered or returned in future rates. This guidance also provides for adjustments to rates outside of a general rate proceeding to encourage or incentivize investments in certain areas such as conservation, renewable energy, pollution reduction or control, improved infrastructure of the transmission grid or other programs that provide benefits to the general public under public policy, laws or regulations The Company is subject to rate regulation by state and federal regulatory agencies (collectively, the “Commissions”), which have jurisdiction with respect to the rates of electric distribution companies in Minnesota, North Dakota and South Dakota. The Company assess the probability of recovery of regulatory assets and the obligations arising from regulatory liabilities on a quarterly basis. Probability estimates incorporate numerous factors, including recent rate making decisions, historical precedents for similar matters, the regulatory environments in which the Company operates, and the impact these incurred costs may have on customers. Accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures, such as property, plant, and equipment, regulatory assets and liabilities, operating revenues and expenses, depreciation expense, income taxes and multiple disclosures in the notes to the financial statements. There is a risk that the Commissions will not approve full recovery of the costs of providing utility service or full recovery of all amounts invested in the utility business and a reasonable return on that investment. As a result, we identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about impacted account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, (2) a disallowance of capital expenditures or operating costs that management believes were prudently incurred, and (3) a refund to customers. Given that management’s accounting judgements are based on assumptions about the outcome of future decisions by the Commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due its inherent complexities. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the uncertainty of future decisions by the Commissions included the following, among others: • We tested the effectiveness of management’s controls over the evaluation of the likelihood of (1) the recovery in future rates of costs incurred as property, plant, and equipment and deferred as regulatory assets, and (2) a refund or a future reduction in rates that should be reported as regulatory liabilities. We also tested the effectiveness of management’s controls over the initial recognition of amounts as property, plant, and equipment; regulatory assets or liabilities; and the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates or of a future reduction in rates. • We evaluated the Company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments. • We evaluated the Company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments. • We read relevant regulatory orders issued by the Commissions for the Company, regulatory statutes, interpretations, procedural memorandums, filings made by interveners, and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions’ treatment of similar costs under similar circumstances. We evaluated the external information and compared to management’s recorded regulatory asset and liability balances for completeness. • We inquired of management about property, plant, and equipment that may be abandoned. We inspected the capital-projects budget and construction-in-process listings and inquired of management to identify projects that are designed to replace assets that may be retired prior to the end of the useful life. We inspected minutes of the board of directors and regulatory orders and other filings with the Commissions to identify any evidence that may contradict management’s assertion regarding probability of an abandonment. • We compared actual spend for projects that have been capitalized to property, plant, and equipment to budget. We evaluated regulatory filings for any evidence that intervenors are challenging full recovery of the cost of any capital projects. • We obtained an analysis from management and letters from internal and external legal counsel, as appropriate, regarding probability of recovery for regulatory assets or refund or future reduction in rates for regulatory liabilities not yet addressed in a regulatory order to assess management’s assertion that amounts are probable of recovery or a future reduction in rates. Goodwill—Manufacturing Reporting Unit—Refer to Notes 1 and 7 to the financial statements Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company performs quantitative assessments of goodwill annually as of December 31 (the “measurement date”) and more frequently as events or circumstances require. The Company estimates the fair value of its Manufacturing reporting unit by primarily using the discounted cash flow model. The determination of the fair value using the discounted cash flow model requires management to make significant estimates and assumptions related to forecasts of future operating results and cash flows. The Manufacturing reporting unit’s operating results and cash flows are sensitive to changes in demand. The goodwill balance was $37.6 million as of December 31, 2020, of which $18.3 million was allocated to the Manufacturing 36 Table of Content s reporting unit. The fair value of the Manufacturing reporting unit exceeded its carrying value as of the measurement date and, therefore, no impairment was recognized. We identified goodwill for the Manufacturing reporting unit as a critical audit matter because of the significant judgments made by management to estimate its fair value and the difference between its fair value and carrying value and the sensitivity of the Manufacturing reporting unit’s operations to changes in demand. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to forecasts of future operating results and cash flows. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to forecasts of future operating results and cash flows used by management to estimate the fair value of the Manufacturing reporting unit included the following, among others: • We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the Manufacturing reporting unit, such as controls related to forecasts of future operating results and cash flows. • We evaluated management’s ability to accurately forecast future operating results and cash flows by comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s operating results and cash flow forecasts by comparing the forecasts to: – Historical operating results and cash flows. – Internal communications to management and the Board of Directors. – Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies. /s/ Deloitte & Touche LLP Minneapolis, Minnesota February 19, 2021 We have served as the Company’s auditor since 1944. 37 Table of Content s OTTER TAIL CORPORATION CONSOLIDATED BALANCE SHEETS December 31, (in thousands, except share data) 2020 2019 Assets Current Assets Cash and Cash Equivalents $ 1,163 $ 21,199 Receivables, net of allowance for credit losses 113,959 107,631 Inventories 92,165 97,851 Regulatory Assets 21,900 21,650 Other Current Assets 5,645 6,529 Total Current Assets 234,832 254,860 Noncurrent Assets Investments 51,856 45,374 Property, Plant and Equipment, net of accumulated depreciation 2,049,273 1,753,794 Regulatory Assets 168,395 144,138 Intangible Assets, net of accumulated amortization 10,144 11,290 Goodwill 37,572 37,572 Other Noncurrent Assets 26,282 26,567 Total Noncurrent Assets 2,343,522 2,018,735 Total Assets $ 2,578,354 $ 2,273,595 Liabilities and Shareholders' Equity Current Liabilities Short-Term Debt $ 80,997 $ 6,000 Current Maturities of Long-Term Debt 140,087 183 Accounts Payable 130,805 120,775 Accrued Salaries and Wages 26,908 22,730 Accrued Taxes 18,831 17,525 Regulatory Liabilities 16,663 7,480 Other Current Liabilities 22,495 15,048 Total Current Liabilities 436,786 189,741 Noncurrent Liabilities and Deferred Credits Pensions Benefit Liability 114,055 98,970 Other Postretirement Benefits Liability 67,359 71,437 Regulatory Liabilities 233,973 239,906 Deferred Income Taxes 153,376 131,941 Deferred Tax Credits 17,405 18,626 Other Noncurrent Liabilities 60,002 51,911 Total Noncurrent Liabilities and Deferred Credits 646,170 612,791 Commitments and Contingencies (Note 13) Capitalization Long-Term Debt, net of current maturities 624,432 689,581 Shareholders' Equity Common Shares: 50,000,000 share authorized of $ 5 par value; 41,469,879 and 40,157,591 outstanding at December 31, 2020 and 2019 207,349 200,788 Additional Paid-In Capital 414,246 364,790 Retained Earnings 257,878 222,341 Accumulated Other Comprehensive Loss ( 8,507 ) ( 6,437 ) Total Shareholders' Equity 870,966 781,482 Total Capitalization 1,495,398 1,471,063 Total Liabilities and Shareholders' Equity $ 2,578,354 $ 2,273,595 See accompanying notes to consolidated financial statements. 38 Table of Content s OTTER TAIL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, (in thousands, except per-share amounts) 2020 2019 2018 Operating Revenues Electric $ 446,088 $ 459,048 $ 450,198 Product Sales 444,019 460,455 466,249 Total Operating Revenues 890,107 919,503 916,447 Operating Expenses Electric Production Fuel 46,296 59,256 66,815 Electric Purchased Power 61,698 72,066 68,355 Electric Operating and Maintenance Expenses 150,848 153,529 155,534 Cost of Products Sold (excluding depreciation) 329,257 355,119 354,559 Other Nonelectric Expenses 55,051 50,782 51,544 Depreciation and Amortization 82,037 78,086 74,666 Electric Property Taxes 17,034 15,785 15,585 Total Operating Expenses 742,221 784,623 787,058 Operating Income 147,886 134,880 129,389 Other Income and Expense Interest Charges 34,447 31,411 30,408 Nonservice Cost Components of Postretirement Benefits 3,437 4,293 5,509 Other Income 6,055 5,112 3,461 Income Before Income Taxes 116,057 104,288 96,933 Income Tax Expense 20,206 17,441 14,588 Net Income $ 95,851 $ 86,847 $ 82,345 Weighted-Average Common Shares Outstanding: Basic 40,710 39,721 39,600 Diluted 40,905 39,954 39,892 Earnings Per Share: Basic $ 2.35 $ 2.19 $ 2.08 Diluted $ 2.34 $ 2.17 $ 2.06 See accompanying notes to consolidated financial statements. 39 Table of Content s OTTER TAIL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, (in thousands) 2020 2019 2018 Net Income $ 95,851 $ 86,847 $ 82,345 Other Comprehensive Income (Loss): Unrealized Gain (Loss) on Available-for-Sale Securities: Reversal of Previously Recognized Losses (Gains) Realized on Sale of Investments and Included in Other Income During Period 13 16 ( 105 ) Unrealized Gains (Losses) Arising During Period 184 147 ( 61 ) Income Tax (Expense) Benefit ( 42 ) ( 34 ) 35 Available-for-Sale Securities, net of tax 155 129 ( 131 ) Pension and Postretirement Benefit Plans: Actuarial (Losses) Gains net of Regulatory Allocation Adjustment ( 3,571 ) ( 2,779 ) 1,919 Amortization of Unrecognized Postretirement Benefit Losses and Costs 550 565 985 Income Tax Benefit (Expense) 796 576 ( 755 ) Adjustment to Income Tax Expense Related to 2017 Tax Cuts and Jobs Act — — ( 531 ) Pension and Postretirement Benefit Plan, net of tax ( 2,225 ) ( 1,638 ) 1,618 Total Other Comprehensive Income (Loss) ( 2,070 ) ( 1,509 ) 1,487 Total Comprehensive Income $ 93,781 $ 85,338 $ 83,832 See accompanying notes to consolidated financial statements. 40 Table of Content s OTTER TAIL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except common shares outstanding) Common Shares Outstanding Par Value, Common Shares Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) 1 Total Shareholders' Equity Balance, December 31, 2017 39,557,491 $ 197,787 $ 343,450 $ 161,286 $ ( 5,631 ) $ 696,892 Common Stock Issuances, Net of Expenses 178,601 893 ( 986 ) ( 93 ) Common Stock Retirements and Forfeitures ( 71,208 ) ( 356 ) ( 2,655 ) ( 3,011 ) Net Income 82,345 82,345 Other Comprehensive Income 1,487 1,487 Stock Compensation Expense 4,441 4,441 Common Dividends ($ 1.34 per share) ( 53,198 ) ( 53,198 ) Balance, December 31, 2018 39,664,884 $ 198,324 $ 344,250 $ 190,433 $ ( 4,144 ) $ 728,863 Common Stock Issuances, Net of Expenses 547,931 2,740 17,036 19,776 Common Stock Retirements and Forfeitures ( 55,224 ) ( 276 ) ( 2,454 ) ( 2,730 ) Net Income 86,847 86,847 Other Comprehensive Loss ( 1,509 ) ( 1,509 ) Stranded Tax Transfer 784 ( 784 ) — Stock Compensation Expense 5,958 5,958 Common Dividends ($ 1.40 per share) ( 55,723 ) ( 55,723 ) Balance, December 31, 2019 40,157,591 $ 200,788 $ 364,790 $ 222,341 $ ( 6,437 ) $ 781,482 Common Stock Issuances, Net of Expenses 1,350,505 6,752 45,050 51,802 Common Stock Retirements and Forfeitures ( 38,217 ) ( 191 ) ( 1,878 ) ( 2,069 ) Net Income 95,851 95,851 Other Comprehensive Loss ( 2,070 ) ( 2,070 ) Stock Compensation Expense 6,284 6,284 Common Dividends ($ 1.48 per share) ( 60,314 ) ( 60,314 ) Balance, December 31, 2020 41,469,879 $ 207,349 $ 414,246 $ 257,878 $ ( 8,507 ) $ 870,966 1 Accumulated Other Comprehensive Income (Loss) as of December 31 is comprised of the following: (in thousands) 2020 2019 2018 Unrealized Gain (Loss) on Marketable Equity Securities: Before Tax $ 265 $ 68 $ ( 95 ) Tax Effect ( 56 ) ( 14 ) 20 Stranded Tax Effect — — ( 10 ) Unrealized Gain (Loss) on Marketable Equity Securities, net of tax 209 54 ( 85 ) Unamortized Actuarial Losses and Prior Service Costs Related to Pension and Postretirement Benefits: Before Tax ( 11,793 ) ( 8,772 ) ( 6,558 ) Tax Effect 3,077 2,281 1,705 Stranded Tax Effect — — 794 Unamortized Actuarial Losses and Prior Service Costs Related to Pension and Postretirement Benefits, net of tax ( 8,716 ) ( 6,491 ) ( 4,059 ) Accumulated Other Comprehensive Loss: Before Tax ( 11,528 ) ( 8,704 ) ( 6,653 ) Tax Effect 3,021 2,267 1,725 Stranded Tax Effect — — 784 Net Accumulated Other Comprehensive Loss $ ( 8,507 ) $ ( 6,437 ) $ ( 4,144 ) See accompanying notes to consolidated financial statements. 41 Table of Content s OTTER TAIL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, (in thousands) 2020 2019 2018 Operating Activities Net Income $ 95,851 $ 86,847 $ 82,345 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 82,037 78,086 74,666 Deferred Tax Credits ( 1,221 ) ( 1,348 ) ( 1,405 ) Deferred Income Taxes 15,201 11,507 19,224 Change in Deferred Debits and Other Assets ( 26,130 ) ( 15,502 ) 941 Discretionary Contribution to Pension Plan ( 11,200 ) ( 22,500 ) ( 20,000 ) Change in Noncurrent Liabilities and Deferred Credits 34,421 33,534 ( 2,414 ) Allowance for Equity/Other Funds Used During Construction ( 4,063 ) ( 2,553 ) ( 2,194 ) Stock Compensation Expense 6,284 5,958 4,441 Other—Net ( 463 ) 76 — Cash (Used for) Provided by Current Assets and Current Liabilities: Change in Receivables ( 6,328 ) ( 1,860 ) ( 8,559 ) Change in Inventories 5,686 8,419 ( 18,236 ) Change in Other Current Assets ( 573 ) 2,919 ( 754 ) Change in Payables and Other Current Liabilities 19,744 ( 171 ) 14,997 Change in Interest Payable and Income Taxes Receivable 2,675 1,625 396 Net Cash Provided by Operating Activities 211,921 185,037 143,448 Investing Activities Capital Expenditures ( 371,553 ) ( 207,365 ) ( 105,425 ) Proceeds from Disposal of Noncurrent Assets 5,011 8,519 2,378 Cash Used for Investments and Other Assets ( 9,110 ) ( 10,626 ) ( 4,372 ) Net Cash Used in Investing Activities ( 375,652 ) ( 209,472 ) ( 107,419 ) Financing Activities Change in Checks Written in Excess of Cash 4,849 ( 2,814 ) ( 345 ) Net Short-Term Borrowings (Repayments) 74,997 ( 12,599 ) ( 93,772 ) Proceeds from Issuance of Common Stock 52,432 20,338 — Common Stock Issuance Expenses ( 648 ) ( 577 ) ( 108 ) Payments for Shares Withheld for Employee Tax Obligations ( 2,069 ) ( 2,730 ) ( 3,011 ) Proceeds from Issuance of Long-Term Debt 75,000 100,000 100,000 Short-Term and Long-Term Debt Issuance Expenses ( 370 ) ( 950 ) ( 761 ) Payments for Retirement of Long-Term Debt ( 182 ) ( 172 ) ( 189 ) Dividends Paid ( 60,314 ) ( 55,723 ) ( 53,198 ) Net Cash Provided by Financing Activities 143,695 44,773 ( 51,384 ) Net Change in Cash and Cash Equivalents ( 20,036 ) 20,338 ( 15,355 ) Cash and Cash Equivalents at Beginning of Period 21,199 861 16,216 Cash and Cash Equivalents at End of Period $ 1,163 $ 21,199 $ 861 Supplemental Disclosures of Cash Flow Information Cash Paid During the Year for: Interest (net of amount capitalized) $ 33,199 $ 30,132 $ 28,109 Income Taxes $ 5,177 $ 4,797 $ 6,109 Supplemental Disclosure of Noncash Investing Activities Transactions Related to Capital Additions Not Settled in Cash $ 34,265 $ 37,429 $ 13,757 See accompanying notes to consolidated financial statements 42 Table of Content s OTTER TAIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Overview Otter Tail Corporation and its subsidiaries (collectively, the "Company", "us", "our" or "we") form a diverse, multi-platform business consisting of a vertically integrated, regulated utility with generation, transmission and distribution facilities complimented by manufacturing businesses providing metal fabrication for custom machine parts and metal components, manufacturing of extruded and thermoformed plastic products, and manufacturing of PVC pipe products. We classify our business into three segments: Electric, Manufacturing and Plastics. Note 2 includes an additional description of the segments and financial information regarding each segment. Principles of Consolidation These consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles and include the accounts of Otter Tail Corporation and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation except profits on sales to our regulated electric utility company from our nonregulated businesses, which is in accordance with the accounting requirements of regulated operations. Use of Estimates We use estimates based on the best information available in recording transactions and balances resulting from business operations. As better information becomes available (or actual amounts are known), the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates. Reclassifications Certain reclassifications of amounts previously reported have been made to the accompanying consolidated balance sheets to maintain consistency and comparability between periods presented. The reclassifications had no impact on previously reported current assets, total assets, current liabilities, noncurrent liabilities and deferred credits, or shareholders' equity. Regulatory Accounting Our regulated electric utility company, Otter Tail Power Company (OTP), is subject to regulation of rates and other matters by state utility commissions in Minnesota, North Dakota and South Dakota and by the Federal Energy Regulatory Commission (FERC) for certain interstate operations. OTP accounts for the financial effects of regulation in accordance with accounting guidance for regulated operations. This guidance allows for the recording of a regulatory asset for certain costs which otherwise would be recognized in the statement of income or comprehensive income based on an expectation that the cost will be recovered in future rates. This guidance also requires the recording of a regulatory liability for certain credits which would otherwise be recognized in the statement of income or comprehensive income based on an expectation that the amount will be returned to customers in future rates. Amounts recorded as regulatory assets and regulatory liabilities are generally recognized in the statements of income at the time they are reflected in customer rates. In the event OTP ceases to meet the criteria to apply the guidance for regulated operations, the regulatory assets and liabilities that no longer meet such criteria would be removed from the consolidated balance sheet and included in the consolidated statement of income as an expense or income item in the period in which the application of this guidance ceases. The accounting policies followed by OTP are subject to the Uniform System of Accounts of the FERC. These accounting policies differ in some respects from those used by our nonelectric businesses. Cash Equivalents We consider all highly liquid debt instruments purchased with maturity of 90 days or less to be cash equivalents. Revenue from Contracts with Customers Due to our diverse business operations, the recognition of revenue from contracts with customers depends on the product produced and sold or service performed. We recognize revenue from contracts with customers at prices that are fixed or determinable as evidenced by an agreement with the customer, when we have met our performance obligation under the contract and it is probable that we will collect the amount to which we are entitled in exchange for the goods or services transferred or to be transferred to the customer. Depending on the product produced and sold or service performed and the terms of the agreement with the customer, we recognize revenue either over time, in the case of delivery or transmission of electricity or related services or the production and storage of certain custom-made products, or at a point in time for the delivery of standardized products and other products made to customer specifications where the terms of the contract require transfer of the completed product. Provisions for sales returns, early payment terms discounts, and volume-based variable pricing incentives are recorded as reductions to revenue at the time revenue is recognized based on customer history, historical information and current trends. We include revenues received for shipping and handling in operating revenues. Expenses paid for shipping and handling are recorded as part of cost of goods sold. Sales or other taxes collected from customers are excluded from operating revenues. Electric Segment Revenues. Most Electric segment revenues are earned from the generation, transmission and sale of electricity to retail customers at rates approved by state regulatory commissions. OTP also earns revenue from the transmission of electricity for others over the transmission assets it owns separately, or jointly with other transmission service providers, under rate tariffs established by the independent transmission system operator and approved by the FERC. A third source of revenue for OTP comes from the generation and sale of electricity to wholesale customers at contract or market rates. Revenues from all these sources meet the criteria to be classified as revenue from contracts with customers and are recognized over time as energy is delivered or transmitted. Revenue is recognized based on the metered quantity of electricity 43 Table of Content s delivered or transmitted at the applicable rates. For electricity delivered and consumed after a meter is read but prior to the end of the reporting period, OTP records revenue and an unbilled receivable based on estimates of the kilowatt-hours (kwh) of energy delivered to the customer. Manufacturing Segment Revenues. Our Manufacturing segment businesses earn revenue predominantly from the production and delivery of custom-made or standardized parts to customers across several industries and certain businesses also earn revenue from the production and sale of tools and dies to other manufacturers. For the production and delivery of standardized products and other products made to customer specifications where the terms of the contract require transfer of the completed product, we have met our performance obligation and recognize revenue at the point in time when the product is shipped. At this point we have no further obligation to provide services related to such products. The shipping terms used in these transactions are FOB shipping point. Plastics Segment Revenues. Our Plastics segment businesses earn revenue predominantly from the sale and delivery of standardized polyvinyl chloride (PVC) pipe products produced at their manufacturing facilities. Revenue from the sale of these products is recognized at the point in time when the product is shipped based on prices agreed to in a purchase order. For revenue recognized on shipped products, there is no further obligation to provide services related to such products. The shipping terms used in these instances are FOB shipping point. We have one customer within our Plastics segment for which we produce and store a product made to the customer’s specifications and design under a build and hold agreement. For sales to this customer, we recognize revenue as the custom-made product is produced, adjusting the amount of revenue for volume rebate variable pricing considerations we expect the customer will earn and applicable early payment discounts we expect the customer will take. Ownership of the pipe transfers to the customer prior to delivery and we are paid a negotiated fee for storage of the pipe. Revenue for storage of the pipe is also recognized over time as the pipe is stored. Alternative Revenue In addition to recognizing revenue from contracts with customers, our Electric segment business also records revenue under alternative revenue program (ARPs) requirements. Certain rate rider mechanisms qualify as ARP revenues as they provide for adjustments to rates outside of a general rate case proceeding to encourage or incentivize investments in certain areas such as conservation, renewable energy, pollution reduction or control, improved infrastructure of the transmission grid or other programs that provide benefits to the general public under public policy, laws or regulations. ARP riders generally provide for the recovery of specified costs and investments and include an incentive component to provide the regulated utility with a return on amounts invested. We accrue ARP revenue on the basis of cost incurred, investments made and returns on those investments that qualify for recovery through established riders. ARP revenue is disclosed separately from revenue from contracts with customers and we have elected to report ARP revenue on a net basis, whereby amounts initially recorded as ARP revenue in a period are presented net of the reversal of amounts previously recognized as ARP revenue that are reclassified and recorded as revenue from contracts with customers when such amounts are included in the price of electricity to customers. Receivables and Allowance for Credit Losses We grant credit to our customers in the normal course of business with repayment terms generally ranging from 30 to 90 days after the invoice date. Late fees are assessed on certain receivables once they are 30 days past due. Unbilled receivables represent estimates of energy delivered to customers but not yet billed. Receivables are stated at the billed or estimated unbilled amount less an allowance for estimated credit losses. An allowance for credit losses is established based on losses expected to occur over the contractual life of the receivable. We estimate an allowance for credit losses on our trade and unbilled receivables by evaluating historical aging and write-off history, adjusted for current and forecasted economic conditions, for groups of receivables that share similar economic characteristics. Other receivables are evaluated by reviewing individual accounts, considering aging, financial condition of the debtor, recent payment history, and other relevant factors. Account balances are written-off in the period they are deemed to be uncollectible. Inventories Inventories are valued at the lower of cost or net realizable value. Cost for fuel, material and supply inventories of our Electric segment are determined on an average cost basis. Cost for raw material, work in process and finished goods inventories of our Manufacturing and Plastics segments are determined on a first-in first-out (FIFO) basis. Inventories consist of the following as of December 31, 2020 and 2019: (in thousands) 2020 2019 Finished Goods $ 22,046 $ 31,863 Work in Process 16,210 16,508 Raw Material, Fuel and Supplies 53,909 49,480 Total Inventories $ 92,165 $ 97,851 Investments Corporate-owned life insurance policies are recorded at cash surrender value. Debt, marketable equity securities, and money market funds are recorded at fair value. Debt securities are deemed to be available-for-sale securities, accordingly unrealized gains and losses are generally excluded from earnings and recognized in accumulated other comprehensive income. We evaluate whether declines in fair value of debt securities below the cost basis are other-than-temporary. Declines in fair value deemed to be other-than-temporary result in the recognition of unrealized losses, or a portion thereof, in earnings. Unrealized gains and losses on marketable equity securities and money market funds are recognized in earnings immediately. 44 Table of Content s The following is a summary of our investments at December 31, 2020 and 2019: (in thousands) 2020 2019 Corporate-Owned Life Insurance Policies $ 36,825 $ 33,117 Debt Securities 9,260 8,184 Money Market Funds 4,075 2,363 Marketable Equity Securities 1,662 1,586 Other Investments 34 124 Total Investments $ 51,856 $ 45,374 The amount of unrealized gains and losses on debt securities as of December 31, 2020 and 2019 are not material and no unrealized losses were deemed to be other-than-temporary. In addition, the amount of unrealized gains and losses on marketable equity securities still held as of December 31, 2020 and 2019 are not material. Property, Plant and Equipment, Retirements and Depreciation Utility plant is stated at original cost. The cost of additions includes contracted work, direct labor and materials, allocable overheads and allowance for funds used during construction. The amount of interest capitalized on electric utility plant was $ 2.1 million in 2020, $ 1.7 million in 2019 and $ 1.2 million in 2018. The cost of depreciable units of property retired less salvage is charged to accumulated depreciation. Amounts recovered in rates for future removal costs are recorded as regulatory liabilities. Removal costs, when incurred, are charged against the regulatory liability. Maintenance, repairs and replacement of minor items of property are charged to operating expenses. The provisions for utility depreciation for financial reporting purposes are made on the straight-line method based on the estimated remaining service lives of the properties. Gains or losses on group asset dispositions are taken to the accumulated provision for depreciation reserve and impact current and future depreciation rates. Property, plant and equipment of nonelectric operations are carried at historical cost and are depreciated on a straight-line basis over the assets’ estimated useful lives. The cost of additions includes contracted work, direct labor and materials, allocable overheads and capitalized interest. No interest was capitalized in 2020, 2019 or 2018. Maintenance and repairs are expensed as incurred. Gains or losses on asset dispositions are included in the determination of operating income. The estimated service lives for rate-regulated electric assets and nonelectric assets are included below: Service Life Range (years) Low High Electric Assets: Production Plant 9 82 Transmission Plant 51 75 Distribution Plant 15 70 General Plant 5 55 Nonelectric Assets: Equipment 2 12 Buildings and Leasehold Improvements 5 40 Jointly Owned Facilities OTP is a joint owner in two coal-fired steam-powered electric generation plants: Big Stone Plant near Big Stone City, South Dakota and Coyote Station near Beulah, North Dakota. OTP is also a joint owner, with other regional utilities, in five major transmission lines. OTP's interest in each jointly owned facility is reflected in the consolidated balance sheets on a pro-rata basis and OTP's share of direct revenue and expenses are included in operating revenues and expenses in the consolidated statements of income. Each participant in the jointly owned facilities finance their own investment. Goodwill and Other Intangible Assets Goodwill is recognized and initially measured as any excess of the acquisition-date consideration transferred in a business combination over amounts recognized for the net identifiable assets acquired. Goodwill is not amortized but is tested for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not result in an impairment of goodwill. Impairment testing is performed at the reporting unit level, which is defined as an operating segment or one level below an operating segment. We perform our impairment testing in the fourth quarter of each year and have identified three reporting units that carry a goodwill balance. Our impairment testing includes both an optional qualitative assessment and the quantitative impairment assessment. Our qualitative assessment includes an analysis of relevant events and circumstances to determine if it is more likely than not that the fair value of the reporting units exceeds its book value. If, after this assessment, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, no additional analysis is necessary. In contrast, if after the assessment we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we elect to skip the optional qualitative assessment, the quantitative impairment assessment is performed. The quantitative assessment is a single-step test that identifies both the existence of impairment and the amount of impairment loss by comparing the estimated fair value of a reporting unit to its carrying value, with any excess carrying value of the fair value being recognized as an impairment loss. 45 Table of Content s Intangible assets with finite lives, which primarily consist of customer relationships, are carried at cost less accumulated amortization. The cost of the intangible assets are amortized over their estimated useful lives, which generally range from 15 to 20 years. Leases We recognize right-of-use lease assets and a corresponding lease liability at the lease commencement date. The length of our lease agreements vary from less than one year year to approximately ten years . We have elected to not record lease assets and liabilities for leases with a lease term at commencement of 12 months or less; such leases are expensed on a straight-line basis over the lease term. If a lease contains an option to extend the lease term and there is reasonable certainty the option will be exercised, the option is considered in the lease term at inception. We have elected to not separate non-lease components (e.g., common area maintenance) from lease components on real estate leases, accordingly the recognized lease asset and lease liability incorporate in their measurement payments for non-lease components. Certain leases include variable lease payments as the amounts are subject to change over the lease term. We are unable to determine the interest rate implicit in our leases thus we apply our incremental borrowing rate to capitalize the right-of-use asset and lease liability. We estimate our incremental borrowing rate by incorporating considerations of lease term and lessee entity. We elected at the time of adopting the current leasing guidance on January 1, 2019 under an allowed practical expedient to continue with the historical accounting treatment for land easement arrangements in effect at the adoption date. Accordingly, we have not recognized any lease assets or liabilities for such arrangements. Recoverability of Long-Lived Assets We review our long-lived assets, including, among other assets, property, plant and equipment, amortizing intangible assets and right-of-use lease assets, whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. We determine potential impairment by comparing the carrying amount of the assets with net cash flows expected to be provided by operating activities of the business or related assets. If the sum of the expected future net cash flows is less than the carrying amount of the assets, an impairment loss would be recognized. Such an impairment loss would be measured as the amount by which the carrying amount exceeds the fair value of the asset, where fair value is based on the discounted cash flows expected to be generated by the asset. Asset Retirement Obligations Legal obligations related to the future retirement of long-lived assets are recognized as asset retirement obligations (ARO). An ARO is recognized in the period in which the legal obligation is incurred and the amount of the obligation can be reasonably estimated, with an offsetting increase to the associated long-lived asset. AROs are initially recognized at fair value and increased with the passage of time (accretion), with accretion expense recognized in the consolidated statements of income. ARO estimates are revised periodically with any adjustment reflected in the ARO and associated long-lived asset. Income Taxes We use the asset and liability method to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of all temporary differences between the carrying amounts of assets and liabilities and their respective tax bases. Deferred taxes are recorded using the tax rates scheduled by tax law to be in effect in the periods when the temporary differences reverse. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that a portion or all of the deferred tax assets will not be realized. The realizability of deferred tax assets takes into consideration forecasts of future taxable income, the reversal of other existing temporary differences, available net operating loss carryforwards and available tax planning strategies. Changes in valuation allowances are included in the provision for income taxes in the period of the changes. We recognize the tax effects of all tax positions that are more-likely-than-not to be sustained on audit based solely on the technical merits of those positions as of the balance sheet date. Changes in the recognition or measurement of such positions are recognized in the provision for income taxes in the period of the changes. We classify interest and penalties on tax uncertainties as components of the provision for income taxes. We amortize investment tax credits and state wind energy credits over the estimated lives of the related property. Stock-Based Compensation Stock-based compensation awards are measured at the grant date fair value of the award and compensation expense is recognized on a straight-line basis over the applicable service or performance period. The service period may be limited to the period until such time that a recipient is retirement eligible as determined under the award agreement. Awards granted to employees eligible for retirement on the date of grant are expensed in the period of grant. We recognize the effects of award forfeitures as they occur. Fair Value Measurements Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Three levels of inputs may be used to measure fair value: Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed by the New York Stock Exchange and commodity derivative contracts listed on the New York Mercantile Exchange. Level 2 – Pricing inputs are other than quoted prices in active markets but are either directly or indirectly observable as of the reported date. The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities, or priced with models using highly observable inputs, such as commodity options priced using observable forward prices and volatilities. 46 Table of Content s Level 3 – Significant inputs to pricing have little or no observability as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation and may include complex and subjective models and forecasts. In instances where the determination of the fair value measurement is based on inputs from different levels within the hierarchy, the level in the hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Variable Interest Entity In October 2012 the Coyote Station owners, including OTP, entered into a lignite sales agreement (LSA) with Coyote Creek Mining Company, L.L.C. (CCMC), a subsidiary of The North American Coal Corporation, for the purchase of lignite coal to meet the coal supply requirements of Coyote Station for the period beginning in May 2016 and ending in December 2040. The price per ton paid by the Coyote Station owners under the LSA reflects the cost of production, along with an agreed profit and capital charge. CCMC was formed for the purpose of mining coal to meet the coal fuel supply requirements of Coyote Station from May 2016 through December 2040 and, based on the terms of the LSA, is considered a variable interest entity (VIE) due to the transfer of all operating and economic risk to the Coyote Station owners, as the agreement is structured so that the price of the coal would cover all costs of operations as well as future reclamation costs. The Coyote Station owners are required to buy certain assets of CCMC at book value should they terminate the contract prior to the end of the contract term and are providing a guarantee of the value of the equity of CCMC because the Coyote Station owners are required to buy the membership interests of CCMC at the end of the contract term at equity value. Under current accounting standards, the primary beneficiary of a VIE is required to include the assets, liabilities, results of operations and cash flows of the VIE in its consolidated financial statements. No single owner of Coyote Station owns a majority interest in Coyote Station and none, individually, has the power to direct the activities that most significantly impact CCMC. Therefore, none of the owners individually, including OTP, is considered a primary beneficiary of the VIE and the Company is not required to include CCMC in its consolidated financial statements. If the LSA terminates prior to the expiration of its term or the production period terminates prior to December 31, 2040 and the Coyote Station owners purchase all of the outstanding membership interests of CCMC, the owners will satisfy (or if permitted by CCMC’s applicable lenders assume) all of CCMC’s obligations owed to CCMC’s lenders under its loans and leases. The Coyote Station owners have limited rights to assign their rights and obligations under the LSA without the consent of CCMC’s lenders during any period in which CCMC’s obligations to its lenders remain outstanding. In the event the contract is terminated prior to the end of the term due to certain events, OTP’s maximum exposure to additional costs, as a result of its involvement with CCMC, and potential impairment loss if recovery of those costs is denied by regulatory authorities, could be as high as $ 50.0 million, OTP’s 35 % share of CCMC’s unrecovered costs as of December 31, 2020. New Accounting Standards Adopted Credit Losses. In June 2016 the Financial Accounting Standards Board (FASB) issued new authoritative guidance codified in Accounting Standards Codification (ASC) 326, Financial Instruments-Credit Losses, changing how entities account for credit losses on receivables and certain other assets effective for interim and annual periods beginning on or after December 31, 2019. The guidance requires the use of a current expected credit loss model, which may result in earlier recognition of credit losses than under previous accounting standards. We adopted this guidance on January 1, 2020. Adoption of the standard did not have a material impact on our consolidated financial statements and we did not record a cumulative effect adjustment to retained earnings on adoption as allowed for under the guidance. Cloud Computing Costs. In August 2018 the FASB issued new authoritative guidance codified in ASC 350-40 , Internal-Use Software, to address a customer's accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendment also provides guidance for the presentation implementation costs in a cloud computing arrangement in the statement of financial position, the statement of income, and the statement of cash flows. The amendment was effective for interim and annual periods beginning on or after December 15, 2019, with early adoption permitted in any interim period. We adopted the amendment on January 1, 2020. There was no impact to our consolidated financial statements on adoption, but we began capitalizing implementation costs incurred in cloud computing arrangements post-adoption. 2. Segment Information We classify our business into three segments, Electric, Manufacturing and Plastics, consistent with our business strategy, organizational structure and our internal reporting and review processes used by our chief operating decision maker to make decisions regarding allocation of resources, to assess operating performance and to make strategic decisions. Electric includes the production, transmission, distribution and sale of electric energy in Minnesota, North Dakota and South Dakota by OTP. In addition, OTP is a participant in the Midcontinent Independent System Operator, Inc. (MISO) markets. OTP’s operations have been our primary business since 1907. Manufacturing consists of businesses in the following manufacturing activities: contract machining, metal parts stamping, fabrication and painting, and production of plastic thermoformed horticultural containers, life science and industrial packaging, and material handling components. These businesses have manufacturing facilities in Georgia, Illinois and Minnesota and sell products primarily in the United States. Plastics consists of businesses producing PVC pipe at plants in North Dakota and Arizona. The PVC pipe is sold primarily in the western half of the United States and Canada. Certain assets and costs are not allocated to our operating segments. Corporate operating costs include items such as corporate staff and overhead costs, the results of our captive insurance company and other items excluded from the measurement of operating segment performance. 47 Table of Content s Corporate assets consist primarily of cash, prepaid expenses, investments and fixed assets. Corporate is not an operating segment, rather it is added to operating segment totals to reconcile to consolidated amounts. Information for each segment and our unallocated corporate costs for the years ended December 31, 2020, 2019 and 2018 are as follows: (in thousands) 2020 2019 2018 Operating Revenue 1 Electric $ 446,088 $ 459,048 $ 450,198 Manufacturing 238,770 277,204 268,409 Plastics 205,249 183,251 197,840 Total $ 890,107 $ 919,503 $ 916,447 Depreciation and Amortization Electric $ 63,171 $ 60,044 $ 55,935 Manufacturing 14,933 14,261 14,794 Plastics 3,604 3,451 3,719 Corporate 329 330 218 Total $ 82,037 $ 78,086 $ 74,666 Operating Income (Loss) Electric $ 107,083 $ 98,417 $ 88,031 Manufacturing 16,103 17,869 18,266 Plastics 37,823 28,439 32,917 Corporate ( 13,123 ) ( 9,845 ) ( 9,825 ) Total $ 147,886 $ 134,880 $ 129,389 Interest Charges Electric $ 29,848 $ 26,548 $ 26,365 Manufacturing 2,215 2,345 2,230 Plastics 644 718 609 Corporate 1,740 1,800 1,204 Total $ 34,447 $ 31,411 $ 30,408 Income Tax Expense (Benefit) Electric $ 12,480 $ 12,867 $ 5,685 Manufacturing 2,939 2,784 3,393 Plastics 9,718 7,309 8,728 Corporate ( 4,931 ) ( 5,519 ) ( 3,218 ) Total $ 20,206 $ 17,441 $ 14,588 Net Income (Loss) Electric $ 66,778 $ 59,046 $ 54,431 Manufacturing 11,048 12,899 12,839 Plastics 27,582 20,572 23,819 Corporate ( 9,557 ) ( 5,670 ) ( 8,744 ) Total $ 95,851 $ 86,847 $ 82,345 Capital Expenditures Electric $ 356,581 $ 187,362 $ 87,287 Manufacturing 10,587 14,268 13,316 Plastics 4,322 5,452 4,199 Corporate 63 283 623 Total $ 371,553 $ 207,365 $ 105,425 1 Amounts reflect operating revenues to external customers. Intersegment operating revenues are not material for any period presented. 48 Table of Content s The following provides the identifiable assets by segment and corporate assets as of December 31, 2020 and 2019: (in thousands) 2020 2019 Identifiable Assets Electric $ 2,233,399 $ 1,931,525 Manufacturing 191,005 195,742 Plastics 99,767 92,049 Corporate 54,183 54,279 Total $ 2,578,354 $ 2,273,595 Entity-Wide Information No single customer accounted for over 10% of our consolidated operating revenues for the years ended December 31, 2020, 2019 and 2018. All of our long-lived assets are located within the United States and substantially all of our operating revenues are to customers located within the United States. 3. Revenue We present our operating revenues to external customers, in total and by amounts arising from contracts with customers and ARP arrangements, disaggregated by revenue source and segment for the years ended December 31, 2020, 2019 and 2018: (in thousands) 2020 2019 2018 Operating Revenues Electric Segment Retail: Residential $ 127,260 $ 131,988 $ 125,045 Retail: Commercial and Industrial 254,951 267,125 256,331 Retail: Other 7,311 7,365 6,875 Total Retail 389,522 406,478 388,251 Transmission 44,001 40,542 46,947 Wholesale 4,857 5,007 7,735 Other 7,708 7,021 7,265 Total Electric Segment 446,088 459,048 450,198 Manufacturing Segment Metal Parts and Tooling 199,463 236,032 223,765 Plastic Products and Tooling 34,055 35,173 35,836 Other 5,252 5,999 8,808 Total Manufacturing Segment 238,770 277,204 268,409 Plastics Segment PVC Pipe 205,249 183,251 197,840 Total Operating Revenue 890,107 919,503 916,447 Less: Noncontract Revenues Included Above — — Electric Segment - Alternative Revenue Program Revenues 6,936 1,032 ( 439 ) Total Operating Revenues from Contracts with Customers $ 883,171 $ 918,471 $ 916,886 4. Receivables Receivables as of December 31, 2020 and 2019 are as follows: (in thousands) 2020 2019 Receivables Trade $ 87,048 $ 79,286 Other 8,939 8,773 Unbilled Receivables 21,187 20,911 Total Receivables 117,174 108,970 Less Allowance for Credit Losses 3,215 1,339 Receivables, net of allowance for credit losses $ 113,959 $ 107,631 49 Table of Content s The following is a summary of activity in the allowance for credit losses for the years ended December 31, 2020 and 2019: (in thousands) 2020 2019 Beginning Balance $ 1,339 $ 1,407 Additions Charged to Expense 3,138 986 Reductions for Amounts Written-Off, Net of Recoveries ( 1,262 ) ( 1,054 ) Ending Balance $ 3,215 $ 1,339 5. Regulatory Matters Regulatory Assets and Liabilities The following presents our current and long-term regulatory assets and liabilities as of December 31, 2020 and 2019 and the period we expect to recover or refund such amounts: Period of 2020 2019 (in thousands) Recovery/Refund Current Long-Term Current Long Term Regulatory Assets Pension and Other Postretirement Benefit Plans 1 See below $ 11,037 $ 146,071 $ 9,090 $ 130,783 Alternative Revenue Program Riders 2 Up to 3 years 8,871 9,373 8,464 2,844 Asset Retirement Obligations 1 Asset lives — 8,462 — 7,772 ISO Cost Recovery Trackers 1 Up to 2 years 1,079 867 2,033 1,170 Unrecovered Project Costs 1 Up to 3 years 361 2,989 859 478 Deferred Rate Case Expenses 1 Various 360 230 260 489 Debt Reacquisition Premiums 1 Up to 30 years 192 341 201 548 Other 1 Various — 62 743 54 Total Regulatory Assets $ 21,900 $ 168,395 $ 21,650 $ 144,138 Regulatory Liabilities Deferred Income Taxes Asset lives $ — $ 134,719 $ — $ 141,707 Plant Removal Obligations Asset lives — 98,707 — 97,726 Fuel Clause Adjustment Up to 1 year 10,947 — 3,982 — Alternative Revenue Program Riders Up to 1 year 3,581 470 2,857 — Pension and Other Postretirement Benefit Plans Up to 1 year 1,959 — 471 — Deferred Rate Case Expenses Various — — — 401 ISO Cost Recovery Trackers Up to 2 years — 10 — — Other Various 176 67 170 72 Total Regulatory Liabilities $ 16,663 $ 233,973 $ 7,480 $ 239,906 1 Costs subject to recovery without a rate of return. 2 Amount eligible for recovery includes an incentive or rate of return. Pension and Other Postretirement Benefit Plans represent benefit costs and actuarial losses and gains subject to recovery or refund through rates as they are expensed or amortized. These unrecognized benefit costs and actuarial losses and gains are eligible for treatment as regulatory assets or liabilities based on their probable inclusion in future electric rates. Alternative Revenue Program Riders regulatory assets and liabilities are revenue not yet collected from customers or amounts subject to refund, respectively, primarily due to investments in qualifying transmission, conservation, renewable resource, environmental, and other generation assets. Asset Retirement Obligations represent the difference in timing of recognition of expense arising from these obligations and the amount recovered from customers. ISO Cost Recovery Trackers represents costs incurred to serve Minnesota customers or the under collection of revenue based on expected versus actual construction costs on eligible projects. Unrecovered Project Costs reflect costs incurred for abandoned generation and transmission assets and accelerated depreciation expense on a to-be-retired generation asset expected to be recovered from customers. Deferred Rate Case Expenses relate to costs incurred in conjunction with recent rate cases that are currently or are expected to be recovered from customers. 50 Table of Content s Debt Reacquisition Premiums represent costs to retire debt which are being recovered from customers over the remaining original lives of the reacquired debt. Deferred Income Taxes represents income tax benefits, arising primarily from property-related timing differences, that will be refunded to customers as these timing differences reverse. Plant Removal Obligations represent amounts collected from customers to be used to cover actual removal costs as incurred. Fuel Clause Adjustments represent the over-collection of fuel costs to be returned to customers. Regulatory Matters Minnesota TCR. On October 22, 2020, the MPUC approved OTP's request for a Minnesota TCR rider update. This rider update request followed a Minnesota Supreme Court opinion issued on April 22, 2020, concluding the MPUC lacked the authority to amend an existing TCR rider approved under Minnesota state law to include the costs and revenues associated with certain OTP transmission assets. Accordingly, the rider update excluded the costs and revenues associated with these assets, which had the effect of allowing OTP to recover the appropriate return on these assets from Minnesota customers dating back to the last TCR rider update in September 2016. As a result, OTP recognized additional rider revenue of $ 2.6 million during the year ended December 31, 2020. Depreciable Lives. On July 30, 2020 the MPUC ordered a reduction in the remaining depreciable lives of Hoot Lake Plant and seven hydroelectric plants. The MPUC stipulated recoverability of the resulting increase in depreciation expense would be determined in OTP's next rate case. Based on the relevant facts and circumstances, we concluded the additional depreciation expense is probable of recovery and we have recognized a regulatory asset for the amount of incremental expense in 2020, which amounted to $ 2.8 million. 6. Property, Plant and Equipment Major classes of property, plant and equipment as of December 31, 2020 and 2019 include: (in thousands) 2020 2019 Electric Plant in Service Production $ 1,172,362 $ 915,996 Transmission 690,647 647,474 Distribution 545,221 526,146 General 123,122 123,268 Electric Plant in Service 2,531,352 2,212,884 Construction Work in Progress 203,078 177,584 Total Gross Electric Plant 2,734,430 2,390,468 Less Accumulated Depreciation and Amortization 778,988 731,110 Net Electric Plant $ 1,955,442 $ 1,659,358 Nonelectric Property, Plant and Equipment Equipment $ 197,389 $ 187,904 Buildings and Leasehold Improvements 55,441 53,412 Land 5,900 6,040 Nonelectric Property, Plant and Equipment 258,730 247,356 Construction Work in Progress 9,290 7,654 Total Gross Nonelectric Property, Plant and Equipment 268,020 255,010 Less Accumulated Depreciation and Amortization 174,189 160,574 Net Nonelectric Property, Plant and Equipment 93,831 94,436 Net Property, Plant and Equipment $ 2,049,273 $ 1,753,794 Depreciation expense for the years ended December 31, 2020, 2019 and 2018 totaled $ 78.6 million, $ 71.9 million and $ 69.7 million. 51 Table of Content s The following table provides OTP’s ownership percentages and amounts included in the December 31, 2020 and 2019 consolidated balance sheets for OTP’s share of each of these jointly owned facilities: (dollars in thousands) Ownership Percentage Electric Plant in Service Construction Work in Progress Accumulated Depreciation Net Plant December 31, 2020 Big Stone Plant 53.9 % $ 332,611 $ 2,552 $ ( 103,504 ) $ 231,659 Coyote Station 35.0 % 180,991 732 ( 108,603 ) 73,120 Big Stone South–Ellendale 345 kV line 50.0 % 106,353 — ( 2,433 ) 103,920 Fargo–Monticello 345 kV line 14.2 % 78,184 — ( 8,029 ) 70,155 Big Stone South–Brookings 345 kV line 50.0 % 53,036 — ( 2,822 ) 50,214 Brookings–Southeast Twin Cities 345 kV line 4.8 % 26,291 — ( 2,468 ) 23,823 Bemidji–Grand Rapids 230 kV line 14.8 % 16,331 — ( 2,670 ) 13,661 December 31, 2019 Big Stone Plant 53.9 % $ 337,197 $ 384 $ ( 98,654 ) $ 238,927 Coyote Station 35.0 % 184,493 83 ( 108,248 ) 76,328 Big Stone South–Ellendale 345 kV line 1 50.0 % 106,343 — ( 819 ) 105,524 Fargo–Monticello 345 kV line 14.2 % 78,184 — ( 7,011 ) 71,173 Big Stone South–Brookings 345 kV line 50.0 % 53,036 — ( 2,016 ) 51,020 Brookings–Southeast Twin Cities 345 kV line 4.8 % 26,286 — ( 2,086 ) 24,200 Bemidji–Grand Rapids 230 kV line 14.8 % 16,331 — ( 233 ) 16,098 7. Intangible Assets The following tables summarizes our goodwill by segment as of December 31, 2020 and 2019: (in thousands) 2020 2019 Manufacturing $ 18,270 $ 18,270 Plastics 19,302 19,302 Total Goodwill $ 37,572 $ 37,572 Our annual goodwill impairment testing, performed in the fourth quarters of 2020 and 2019, indicated no impairment existed as of the test date. The following table summarizes the components of our intangible assets at December 31, 2020 and 2019: (in thousands) Gross Amount Accumulated Amortization Net Carrying Amount December 31, 2020 Customer Relationships $ 22,491 $ 12,370 $ 10,121 Other 26 3 23 Total $ 22,517 $ 12,373 $ 10,144 December 31, 2019 Customer Relationships $ 22,491 $ 11,259 $ 11,232 Other 179 121 58 Total $ 22,670 $ 11,380 $ 11,290 Amortization expense for these intangible assets was as follows for the years ended December 31, 2020, 2019 and 2018: (in thousands) 2020 2019 2018 Amortization Expense $ 1,146 $ 1,186 $ 1,315 Estimated annual amortization expense for these intangible assets for the next five years is: (in thousands) 2021 2022 2023 2024 2025 Estimated Amortization Expense $ 1,100 $ 1,100 $ 1,100 $ 1,100 $ 1,092 52 Table of Content s 8. Leases We lease coal rail cars, warehouse and office space, land and certain office, manufacturing and material handling equipment under varying terms and conditions. All leases are classified as operating leases. The components of lease cost and lease cash flows for the years ended December 31, 2020 and 2019 are as follows: (in thousands) 2020 2019 Lease Cost Operating Lease Cost $ 5,837 $ 5,371 Variable Lease Cost 1,166 1,068 Total Lease Cost $ 7,003 $ 6,439 Lease Cash Flows Operating Cash Flows from Operating Leases $ 5,431 $ 4,893 A summary of operating lease right-of-use lease assets and lease liabilities as of December 31, 2020 and 2019 is as follows: (in thousands) 2020 2019 Right of Use Lease Assets 1 $ 19,114 $ 21,851 Lease Liabilities Current 2 4,479 4,136 Long-Term 3 15,314 18,193 Total Lease Liabilities $ 19,793 $ 22,329 1 Included in Other Noncurrent Assets in the consolidated balance sheets. 2 Included in Other Current Liabilities in the consolidated balance sheets. 3 Included in Other Noncurrent Liabilities in the consolidated balance sheets. Operating lease assets obtained in exchange for new operating liabilities amounted to $ 1.4 million and $ 6.3 million for the years ended December 31, 2020 and 2019. Maturities of lease liabilities as of December 31, 2020 for each of the next five years and in the aggregate thereafter are as follows: (in thousands) Operating Leases 2021 $ 5,387 2022 4,282 2023 3,905 2024 3,376 2025 2,545 Thereafter 3,301 Total Lease Payments $ 22,796 Less: Interest 3,003 Present Value of Lease Liabilities $ 19,793 The weighted-average remaining lease term and the weighted-average discount rate as of December 31, 2020 and 2019 are as follows: 2020 2019 Weighted-Average Remaining Lease Term (in years) 5.3 6.0 Weighted-Average Discount Rate 5.45 % 5.30 % Prior to adopting new lease accounting guidance on January 1, 2019, we accounted for operating leases by recognizing lease cost on a straight-line basis over the lease term. Lease expense for the year ended December 31, 2018 was $ 6.3 million. 53 Table of Content s 9. Short-Term and Long-Term Borrowings The following is a summary of our outstanding short and long-term borrowings by borrower, Otter Tail Corporation (OTC) or Otter Tail Power Company (OTP), as of December 31, 2020 and 2019: 2020 2019 (in thousands) OTC OTP Total OTC OTP Total Short-Term Debt $ 65,166 $ 15,831 $ 80,997 $ 6,000 $ — $ 6,000 Current Maturities of Long-Term Debt 169 139,918 140,087 183 — 183 Long-Term Debt, net of current maturities 79,695 544,737 624,432 79,812 609,769 689,581 Total $ 145,030 $ 700,486 $ 845,516 $ 85,995 $ 609,769 $ 695,764 Short-Term Debt The following is a summary of our lines of credit as of December 31, 2020 and 2019: 2020 2019 (in thousands) Line Limit Amount Outstanding Letters of Credit Amount Available Amount Available OTC Credit Agreement $ 170,000 $ 65,166 $ — $ 104,834 $ 164,000 OTP Credit Agreement 170,000 15,831 14,101 140,068 154,524 Total $ 340,000 $ 80,997 $ 14,101 $ 244,902 $ 318,524 Otter Tail Corporation is party to a Third Amended and Restated Credit Agreement (the OTC Credit Agreement) and OTP is party to a Second Amended and Restated Credit Agreement (the OTP Credit Agreement) both of which provide for revolving lines of credit to support operations. Borrowings may be used for working capital needs and other capital requirements, to refinance certain indebtedness and for the issuance of letters of credit in an aggregate not to exceed $ 40 million for the OTC Credit Agreement and $ 50 million for the OTP Credit Agreement. Each credit facility includes an accordion provision allowing the borrower to increase the available borrowing capacity, subject to certain terms and conditions. The borrowing capacity can be increased to $ 290 million for the OTC Credit Agreement and to $ 250 million for the OTP Credit Agreement. Each credit facility charges a variable rate of interest on outstanding balances and applies a commitment fee based on the average unused amount available to be drawn under the respective facility. The variable rate of interest to be charged is based on a benchmark interest rate, either the Prime Rate, the Federal Funds Rate or LIBOR, as selected by the borrower at the time of an advance, plus an applicable credit spread. The credit spread ranges from zero to 2.00 % depending on the benchmark interest rate selected and is subject to adjustment based on the credit ratings of the borrower. As of December 31, 2020, the LIBOR based credit spread was 1.50 % and 1.25 % under the OTC Credit Agreement and OTP Credit Agreement, respectively. The weighted-average interest rate on outstanding borrowings as of December 31, 2020 and 2019 was 1.61 % and 3.20 %. Each credit facility contains a number of restrictions on the borrower, including restrictions on its ability to merge, sell assets, make investments, create or incur liens on assets, guarantee the obligations of any other party, and engage in transactions with related parties. Each credit facility also contains customary affirmative covenants, including financial covenants as further described below, and certain events of default. Each credit facility expires on October 31, 2024. Both the OTC Credit Agreement and the OTP Credit Agreement include LIBOR as a benchmark interest rate in determining the applicable rate of interest to charge on outstanding borrowings. LIBOR is currently expected to be eliminated by January 1, 2022. Both credit agreements contain a provision to determine how interest rates will be established in the event a replacement for LIBOR has not been identified before the agreement expires. The agreements require the parties to jointly agree on an alternate rate of interest, such as the Secured Overnight Financing Rate, that gives due consideration to prevailing market convention for determining a rate of interest for syndicated loans in the United States at such time. The parties will enter into amendments to these agreements to reflect any alternate rate of interest and other related changes to the agreements as may be applicable. If for any reason an agreement cannot be reached on an alternate rate of interest, then any borrowings under the agreements will be determined using the Prime Rate plus a margin based on the borrower's long-term debt ratings at the time of borrowing. 54 Table of Content s Long-Term Debt The following is a summary of outstanding long-term debt by borrower as of December 31, 2020 and 2019: (in thousands) Entity Debt Instrument Rate Maturity 2020 2019 OTC Guaranteed Senior Notes 3.55 % 12/15/26 $ 80,000 $ 80,000 OTP Series 2011A Senior Unsecured Notes 4.63 % 12/01/21 140,000 140,000 OTP Series 2007B Senior Unsecured Notes 6.15 % 08/20/22 30,000 30,000 OTP Series 2007C Senior Unsecured Notes 6.37 % 08/02/27 42,000 42,000 OTP Series 2013A Senior Unsecured Notes 4.68 % 02/27/29 60,000 60,000 OTP Series 2019A Senior Unsecured Notes 3.07 % 10/10/29 10,000 10,000 OTP Series 2020A Senior Unsecured Notes 3.22 % 02/25/30 10,000 — OTP Series 2020B Senior Unsecured Notes 3.22 % 08/20/30 40,000 — OTP Series 2007D Senior Unsecured Notes 6.47 % 08/20/37 50,000 50,000 OTP Series 2019B Senior Unsecured Notes 3.52 % 10/10/39 26,000 26,000 OTP Series 2020C Senior Unsecured Notes 3.62 % 02/25/40 10,000 — OTP Series 2013B Senior Unsecured Notes 5.47 % 02/27/44 90,000 90,000 OTP Series 2018A Senior Unsecured Notes 4.07 % 02/07/48 100,000 100,000 OTP Series 2019C Senior Unsecured Notes 3.82 % 10/10/49 64,000 64,000 OTP Series 2020D Senior Unsecured Notes 3.92 % 02/25/50 15,000 — OTC PACE Note 2.54 % 03/18/21 169 351 Total $ 767,169 $ 692,351 Less: Current Maturities Net of Unamortized Debt Issuance Costs 140,087 183 Unamortized Long-Term Debt Issuance Costs 2,650 2,587 Total Long-Term Debt Net of Unamortized Debt Issuance Costs $ 624,432 $ 689,581 During the year ended December 31, 2020, OTP issued in a private placement pursuant to our 2019 Note Purchase Agreement, its Series 2020A, Series 2020B, Series 2020C and Series 2020D notes for aggregate proceeds of $ 75.0 million. Our guaranteed and unsecured notes require the borrower to maintain various financial covenants, as further described below. These notes provide for prepayment options allowing for a full or partial repayment at 100% of the principal amount so repaid, together with unpaid accrued interest and a make-whole amount, as defined. These notes also include restrictions on the borrowers, including its ability to merge, sell assets, create or incur liens on assets, guarantee the obligations of any other party, and engage in transactions with related parties. Aggregate maturities of long-term debt obligations at December 31, 2020 for each of the next five years are as follows: (in thousands) 2021 2022 2023 2024 2025 Debt Maturities $ 140,169 $ 30,000 $ — $ — $ — Financial Covenants Certain of OTC's and OTP's short-term and long-term debt agreements require the borrower, whether OTC or OTP, to maintain certain financial covenants, including a maximum debt to total capitalization of 0.60 to 1.00, a minimum interest and dividend coverage ratio of 1.50 to 1.00, and a maximum level of priority indebtedness. As of December 31, 2020, OTC and OTP were in compliance with these financial covenants. 10. Pension Plan and Other Postretirement Benefits Pension Plan We sponsor a noncontributory funded pension plan which covers substantially all corporate employees and OTP nonunion employees hired prior to September 1, 2006, and all union employees of OTP hired prior to November 1, 2013, excluding Coyote Station employees. Coyote Station employees hired before January 1, 2009 are covered under the plan. The plan provides 100 % vesting after five vesting years of service and for retirement compensation at age 65 , with reduced compensation in cases of retirement prior to age 62 . We reserve the right to discontinue the plan, but no change or discontinuance may affect the pensions theretofore vested. The pension plan has a trustee who is responsible for pension payments to retirees and a separate pension fund manager responsible for managing the plan's assets. An independent actuary assists us in performing the necessary actuarial valuations for the plan. The plan assets consist of common stock and bonds of public companies, U.S. government securities, cash and cash equivalents and alternative investments. None of the plan assets are invested in common stock or debt securities of the Company. 55 Table of Content s The following table lists components of net periodic pension benefit cost for the years ended December 31, 2020, 2019 and 2018: (in thousands) 2020 2019 2018 Service Cost–Benefit Earned During the Period $ 6,621 $ 5,491 $ 6,459 Interest Cost on Projected Benefit Obligation 13,053 14,412 13,452 Expected Return on Assets ( 22,021 ) ( 21,297 ) ( 21,199 ) Amortization of Prior Service Cost: From Regulatory Asset — 5 16 From Other Comprehensive Income 1 — 9 — Amortization of Net Actuarial Loss: From Regulatory Asset 8,924 4,642 7,135 From Other Comprehensive Income 1 220 114 183 Net Periodic Pension Cost 2 $ 6,797 $ 3,376 $ 6,046 1 Corporate cost included in nonservice cost components of postretirement benefits. 2 Allocation of costs: 2020 2019 2018 Service costs included in OTP capital expenditures $ 1,842 $ 1,365 $ 1,542 Service costs included in electric operation and maintenance expenses 4,621 3,994 4,756 Service costs included in other nonelectric expenses 159 132 161 Nonservice costs capitalized 48 ( 526 ) ( 99 ) Nonservice costs included in nonservice cost components of postretirement benefits 127 ( 1,589 ) ( 314 ) Weighted average assumptions used to determine net periodic pension cost for the years ended December 31, 2020, 2019 and 2018: 2020 2019 2018 Discount Rate 3.47 % 4.50 % 3.90 % Long-Term Rate of Return on Plan Assets 6.88 % 7.25 % 7.50 % Rate of Increase in Future Compensation Level: Participants to Age 39 4.50 % 4.50 % 4.50 % Participants Age 40 to Age 49 3.50 % 3.50 % 3.50 % Participants Age 50 and Older 2.75 % 2.75 % 2.75 % The following table presents amounts recognized in the consolidated balance sheets as of December 31, 2020 and 2019: (in thousands) 2020 2019 Regulatory Assets: Unrecognized Prior Service Cost $ — $ — Unrecognized Actuarial Loss 137,500 120,592 Total Regulatory Assets $ 137,500 $ 120,592 Accumulated Other Comprehensive Loss: Unrecognized Prior Service Cost $ — $ — Unrecognized Actuarial (Gain) Loss 128 ( 82 ) Total Accumulated Other Comprehensive Loss $ 128 $ ( 82 ) Noncurrent Liability $ 67,718 $ 55,004 Funded status as of December 31, 2020 and 2019: (in thousands) 2020 2019 Accumulated Benefit Obligation $ ( 385,302 ) $ ( 346,723 ) Projected Benefit Obligation $ ( 428,396 ) $ ( 384,785 ) Fair Value of Plan Assets 360,678 329,781 Funded Status $ ( 67,718 ) $ ( 55,004 ) 56 Table of Content s The following table provides a reconciliation of the changes in the fair value of plan assets and the plan’s benefit obligations for the years ended December 31, 2020 and 2019: (in thousands) 2020 2019 Reconciliation of Fair Value of Plan Assets: Fair Value of Plan Assets at January 1 $ 329,781 $ 269,783 Actual Return on Plan Assets 35,474 52,640 Discretionary Company Contributions 11,200 22,500 Benefit Payments ( 15,777 ) ( 15,142 ) Fair Value of Plan Assets at December 31 $ 360,678 $ 329,781 Estimated Asset Return 10.7 % 19.3 % Reconciliation of Projected Benefit Obligation: Projected Benefit Obligation at January 1 $ 384,785 $ 328,442 Service Cost 6,621 5,491 Interest Cost 13,053 14,412 Benefit Payments ( 15,777 ) ( 15,142 ) Actuarial Loss 39,714 51,582 Projected Benefit Obligation at December 31 $ 428,396 $ 384,785 Weighted average assumptions used to determine benefit obligations at December 31, 2020 and 2019: 2020 2019 Discount Rate 2.78 % 3.47 % Rate of Increase in Future Compensation Level: Participants to Age 39 4.50 % 4.50 % Participants Age 40 to Age 49 3.50 % 3.50 % Participants Age 50 and Older 2.75 % 2.75 % The assumed long-term rate of return on plan assets is based primarily on asset category studies using historical market return and volatility data with forward looking estimates based on existing financial market conditions and forecasts of capital markets. Modest excess return expectations versus some market indices are incorporated into the return projections based on the actively managed structure of the investment programs and their records of achieving such returns historically. We review our rate of return on plan asset assumptions annually. The assumptions are largely based on the asset category rate-of-return assumptions developed annually with our pension plan investment advisors, as well as input from actuaries who work with the pension plan and benchmarking to peer companies with similar asset allocation strategies. Market-related value of plan assets. Our expected return on plan assets is determined based on the expected long-term rate of return on plan assets and the market-related value of plan assets. We base actuarial determination of pension plan expense or income on a market-related valuation of assets, which reduces year-to-year volatility. This market-related valuation calculation recognizes investment gains or losses over a five -year period from the year in which they occur. Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the fair value of assets. Since the market-related valuation calculation recognizes gains or losses over a five-year period, the future value of the market-related assets will be impacted as previously deferred gains or losses are recognized. Measurement Dates: 2020 2019 Net Periodic Pension Cost 2020-01-01 2019-01-01 End of Year Benefit Obligations January 1, 2020 projected to December 31, 2020 January 1, 2019 projected to December 31, 2019 Market Value of Assets 2020-12-31 2019-12-31 Cash flows. We had no minimum funding requirement as of December 31, 2020 but made discretionary plan contributions of $ 10.0 million in January 2021. The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid out from plan assets: (in thousands) 2021 2022 2023 2024 2025 Years 2026-2030 Benefit Payments $ 16,536 $ 17,050 $ 17,694 $ 18,298 $ 18,856 $ 100,797 57 Table of Content s The following objectives guide the investment strategy of our pension plan (the Plan): • The assets of the Plan will be invested in accordance with all applicable laws in a manner consistent with fiduciary standards including Employee Retirement Income Security Act standards (if applicable). Specifically: ◦ The safeguards and diversity that a prudent investor would adhere to must be present in the investment program. ◦ All transactions undertaken on behalf of the Plan must be in the best interest of plan participants and their beneficiaries. • The primary objective of the Plan is to provide a source of retirement income for its participants and beneficiaries. • The near-term primary financial objective of the Plan is to improve the funded status of the Plan. • A secondary financial objective is to minimize pension funding and expense volatility where possible. The asset allocation strategy developed by the Company’s Retirement Plans Administration Committee (the Committee) is based on the current needs of the Plan and the objectives listed above. An asset/liability review is conducted annually or as often as necessary to assess the impact of various asset allocations on funded status and other financial variables. The current needs of the Plan, the overall investment objectives above, the investment preferences and risk tolerance of the Committee and the desired degree of diversification suggest the need for an investment allocation including multiple asset classes. The asset allocation in the table below contains guideline percentages, at market value, of the total Plan invested in various asset classes. The Permitted Range is a guide and will at times not reflect the actual asset allocation as this will be dictated by market conditions, the independent actions of the Committee and/or Investment Managers and required cash flows to and from the Plan. The Permitted Range anticipates this fluctuation and provides flexibility for the Investment Managers’ portfolios to vary around the target without the need for immediate rebalancing. The Investment Manager will proactively monitor the asset allocation and will direct the purchases and sales to remain within the stated ranges. The policy of the Plan is to invest assets in accordance with the allocations shown below: Permitted Range Asset Class / PBO Funded Status < 85% PBO >=85% PBO >=90% PBO >=95% PBO >=100% PBO Equity 39 % — 59 % 34 % — 54 % 24 % — 44 % 14 % — 34 % 0 % — 20 % Investment Grade Fixed Income 22 % — 42 % 30 % — 50 % 40 % — 60 % 53 % — 73 % 70 % — 100 % Below Investment Grade Fixed Income 1 0 % — 15 % 0 % — 15 % 0 % — 15 % 0 % — 10 % 0 % — 10 % Other 2 5 % — 20 % 5 % — 20 % 5 % — 20 % 0 % — 15 % 0 % — 15 % 1 Includes (but not limited to) High Yield Bond Fund and Emerging Markets Debt funds. 2 Other category may include cash, alternatives, and/or other investment strategies that may be classified other than equity or fixed income, such as the Dynamic Asset Allocation fund or the SEI Energy Debt Collective Fund. Pension plan asset allocations at December 31, 2020 and 2019, by asset category are as follows: Asset Allocation 2020 2019 Global MGD Volatility Fund ( mixed equities fund ) 19.3 % 20.4 % Large Capitalization Equity Securities 11.8 11.3 International Equity Securities 9.9 9.3 Emerging Markets Equity Fund 4.5 4.2 Small and Mid-Capitalization Equity Securities 4.5 4.1 SEI Dynamic Asset Allocation Fund 3.2 3.1 Equity Securities 53.2 52.4 Fixed-Income Securities and Cash 44.2 44.7 Other – SEI Energy Debt Collective Fund 2.6 2.9 100.0 % 100.0 % The following table presents the pension fund assets measured at fair value and included in Level 1 of the fair value hierarchy and assets measured using the NAV practical expedient to fair valuation as of December 31, 2020 and 2019: (in thousands) 2020 2019 Assets in Level 1 of the Fair Value Hierarchy $ 351,458 $ 320,241 SEI Energy Debt Collective Fund at NAV 9,220 9,540 Total Assets $ 360,678 $ 329,781 58 Table of Content s Fair Value Measurements of Pension Fund Assets: The following table presents the Company’s pension fund assets measured at fair value and included in Level 1 of the fair value hierarchy as of December 31, 2020 and 2019: (in thousands) 2020 2019 Global MGD Volatility Fund ( mixed equities fund ) $ 69,607 $ 67,184 Large Capitalization Equity Securities Mutual Fund 42,697 37,357 International Equity Securities Mutual Funds 35,607 30,653 Small and Mid-Capitalization Equity Securities Mutual Fund 16,111 13,447 SEI Dynamic Asset Allocation Mutual Fund 11,729 10,168 Emerging Markets Equity Fund 16,146 13,792 Fixed Income Securities Mutual Funds 159,192 147,639 Cash Management – Money Market Fund 369 1 Total Assets $ 351,458 $ 320,241 The investments held by the SEI Energy Debt Collective Fund on December 31, 2020 and 2019 consist mainly of below investment grade high yielding bonds and loans of U.S. energy companies which trade at a discount to fair value. Redemptions are allowed semi-annually with a 95-day notice period, subject to fund director consent and certain gate, holdback and suspension restrictions. Subscriptions are allowed monthly with a three-year lock up on subscriptions. The fund’s assets are valued in accordance with valuations reported by the fund’s sub-advisor or the fund’s underlying investments or other independent third-party sources, although SEI in its discretion may use other valuation methods, subject to compliance with ERISA (as applicable). The fund’s assets are valued as of the close of business on the last business day of each calendar month and are available 30 days after the end of a calendar quarter. On an annual basis, as determined by the investment manager in its sole discretion, an independent valuation agent is retained to provide a valuation of the illiquid assets of the fund and of any other asset of the fund, as determined by the investment manager in its sole discretion. We review and verify the reasonableness of the year-end valuations. Executive Survivor and Supplemental Retirement Plan (ESSRP) The ESSRP is an unfunded nonqualified benefit plan for certain executive officers and key management employees that provides for defined benefit payments to these employees on their retirement for life or to their beneficiaries on their death. In addition, the ESSRP provides for survivor benefit payments to beneficiaries of the plan participants. On December 26, 2019, the Company’s Board of Directors amended and restated the ESSRP to provide for (i) the freezing of participation in the restoration retirement benefit component of the ESSRP and (ii) the freezing of benefit accruals under the restoration retirement benefit component of the ESSRP for all participants, except those designated as a grandfathered participant, effective December 31, 2019. The following table lists components of net periodic pension benefit cost for the years ended December 31, 2020, 2019 and 2018: (in thousands) 2020 2019 2018 Service Cost–Benefit Earned During the Period $ 179 $ 418 $ 408 Interest Cost on Projected Benefit Obligation 1,449 1,735 1,589 Amortization of Prior Service Cost: From Regulatory Asset — 5 20 From Other Comprehensive Income 1 — 17 34 Amortization of Net Actuarial Loss: From Regulatory Asset 93 124 206 From Other Comprehensive Income 1 341 348 722 Net Periodic Pension Cost 2 $ 2,062 $ 2,647 $ 2,979 1 Amortization of prior service costs and net actuarial losses from other comprehensive income are included in nonservice cost components of postretirement benefits on the face of the Company’s consolidated statements of income. 2 Allocation of costs: 2020 2019 2018 Service costs included in electric operation and maintenance expenses $ — $ 104 $ 99 Service costs included in other nonelectric expenses 179 314 309 Nonservice costs included in nonservice cost components of postretirement benefits 1,883 2,229 2,571 Weighted average assumptions used to determine net periodic pension cost for the years ended December 31, 2020, 2019 and 2018: 2020 2019 2018 Discount Rate 3.36 % 4.46 % 3.85 % Rate of Increase in Future Compensation Level 3.50 % 3.40 % 2.92 % 59 Table of Content s The following table presents amounts recognized in the consolidated balance sheets as of December 31, 2020 and 2019: (in thousands) 2020 2019 Regulatory Assets: Unrecognized Prior Service Cost $ — $ — Unrecognized Actuarial Loss 2,681 2,170 Total Regulatory Assets $ 2,681 $ 2,170 Projected Benefit Obligation Liability – Net Amount Recognized $ ( 47,894 ) $ ( 43,966 ) Accumulated Other Comprehensive Loss: Unrecognized Prior Service Cost $ 1 $ 1 Unrecognized Actuarial Loss 12,030 9,170 Total Accumulated Other Comprehensive Loss $ 12,031 $ 9,171 The following table provides a reconciliation of the changes in the fair value of plan assets and the plan’s projected benefit obligations for the years ended December 31, 2020 and 2019 and a statement of the funded status as of December 31 of both years: (in thousands) 2020 2019 Reconciliation of Fair Value of Plan Assets: Fair Value of Plan Assets at January 1 $ — $ — Actual Return on Plan Assets — — Employer Contributions 1,505 1,475 Benefit Payments ( 1,505 ) ( 1,475 ) Fair Value of Plan Assets at December 31 $ — $ — Reconciliation of Projected Benefit Obligation: Projected Benefit Obligation at January 1 43,966 39,699 Service Cost 179 418 Interest Cost 1,449 1,735 Benefit Payments ( 1,505 ) ( 1,475 ) Curtailments — ( 1,671 ) Actuarial Loss 3,805 5,260 Projected Benefit Obligation at December 31 $ 47,894 $ 43,966 Weighted average assumptions used to determine benefit obligations at December 31, 2020 and 2019: 2020 2019 Discount Rate 2.61 % 3.36 % Rate of Increase in Future Compensation Level: 3.00 % 3.50 % Cash flows: The ESSRP is unfunded and has no assets; contributions are equal to the benefits paid to plan participants. The following benefit payments, which reflect future service, as appropriate, are expected to be paid: (in thousands) 2021 2022 2023 2024 2025 Years 2026-2030 Benefit Payments $ 1,575 $ 2,049 $ 2,723 $ 2,707 $ 2,645 $ 14,348 Other Postretirement Benefits We provide a portion of health insurance benefits for retired OTP and corporate employees. The retiree health insurance benefits will be available for all corporate employees and OTP nonunion employees hired prior to September 1, 2006, and all union employees of OTP hired prior to November 1, 2010, excluding Coyote Station employees. Coyote Station employees hired before January 1, 2009 are covered under the plan. To be eligible for retiree health insurance benefits the employee must be 55 years of age with a minimum of 10 years of service. There are no plan assets. We elected to obtain post-65 prescription drug subsidies for our non-union plan participants beginning in 2020 and for our union plan participants beginning in 2021 from an employer group waiver plan. As a result, we will no longer apply for prescription drug subsidies for these participants. The net effect of these plan amendments reduced the projected benefit obligation for the plan by $ 20.9 million as of December 31, 2019 and $ 3.9 million as of December 31, 2020, respectively. The net savings from these changes will be recognized as reduction to expense over the expected remaining service period to retirement-age eligibility for active participants. 60 Table of Content s The following table lists components of net periodic postretirement benefit cost for the years ended December 31, 2020, 2019 and 2018: (in thousands) 2020 2019 2018 Service Cost–Benefit Earned During the Period $ 1,847 $ 1,286 $ 1,526 Interest Cost on Projected Benefit Obligation 2,393 3,083 2,583 Amortization of Prior Service Cost From Regulatory Asset ( 4,677 ) — — From Other Comprehensive Income 1 ( 115 ) — — Amortization of Net Actuarial Loss From Regulatory Asset 4,206 1,571 1,648 From Other Comprehensive Income 1 104 38 42 Net Periodic Postretirement Benefit Cost 2 $ 3,758 $ 5,978 $ 5,799 Effect of Medicare Part D Subsidy $ 1,123 $ ( 179 ) $ ( 470 ) 1 Corporate cost included in nonservice cost components of postretirement benefits. 2 Allocation of costs: 2020 2019 2018 Service costs included in OTP capital expenditures $ 514 $ 320 $ 364 Service costs included in electric operation and maintenance expenses 1,289 935 1,124 Service costs included in other nonelectric expenses 44 31 38 Nonservice costs capitalized 532 1,167 1,020 Nonservice costs included in nonservice cost components of postretirement benefits 1,379 3,525 3,253 Weighted average assumptions used to determine net periodic postretirement benefit cost for the years ended December 31, 2020, 2019 and 2018: 2020 2019 2018 Discount Rate 3.43 % 4.44 % 3.81 % The following table presents amounts recognized in the consolidated balance sheets as of December 31, 2020 and 2019: (in thousands) 2020 2019 Regulatory Asset: Unrecognized Prior Service Credit $ ( 19,579 ) ( 20,363 ) Unrecognized Net Actuarial Loss (Gain) 32,238 $ 35,322 Net Regulatory Asset $ 12,659 $ 14,959 Projected Benefit Obligation Liability – Net Amount Recognized $ ( 70,185 ) $ ( 71,437 ) Accumulated Other Comprehensive (Income) Loss: Unrecognized Prior Service Credit $ ( 386 ) ( 501 ) Unrecognized Net Actuarial Loss (Gain) 21 184 Accumulated Other Comprehensive (Income) Loss: $ ( 365 ) $ ( 317 ) 61 Table of Content s The following table provides a reconciliation of the changes in the fair value of plan assets and the plan’s projected benefit obligations and accrued postretirement benefit cost for the years ended December 31, 2020 and 2019: (in thousands) 2020 2019 Reconciliation of Fair Value of Plan Assets: Fair Value of Plan Assets at January 1 $ — $ — Actual Return on Plan Assets — — Company Contributions 2,662 2,757 Benefit Payments (Net of Medicare Part D Subsidy) ( 6,694 ) ( 7,164 ) Participant Premium Payments 4,032 4,407 Fair Value of Plan Assets at December 31 $ — $ — Reconciliation of Projected Benefit Obligation: Projected Benefit Obligation at January 1 $ 71,437 $ 71,561 Service Cost (Net of Medicare Part D Subsidy) 1,847 1,286 Interest Cost (Net of Medicare Part D Subsidy) 2,393 3,083 Benefit Payments (Net of Medicare Part D Subsidy) ( 6,694 ) ( 7,164 ) Participant Premium Payments 4,032 4,407 Plan Amendments ( 3,891 ) ( 20,864 ) Actuarial Loss 1,061 19,128 Projected Benefit Obligation at December 31 $ 70,185 $ 71,437 Reconciliation of Accrued Postretirement Cost: Accrued Postretirement Cost at January 1 $ ( 56,795 ) $ ( 53,574 ) Expense ( 3,758 ) ( 5,978 ) Net Company Contribution 2,662 2,757 Accrued Postretirement Cost at December 31 $ ( 57,891 ) $ ( 56,795 ) Weighted average assumptions used to determine benefit obligations at December 31, 2020 and 2019: 2020 2019 Discount Rate 2.75 % 3.43 % Assumed healthcare cost-trend rates as of December 31, 2020 and 2019: 2020 2019 Healthcare Cost-Trend Rate Assumed for Next Year 6.44 % 6.72 % Rate to Which the Cost-Trend Rate is Assumed to Decline 4.50 % 4.50 % Year the Rate Reaches the Ultimate Trend Rate 2038 2038 Measurement Dates: 2020 2019 Net Periodic Postretirement Benefit Cost 2020-01-01 2019-01-01 End of Year Benefit Obligations January 1, 2020 projected to December 31, 2020 January 1, 2019 projected to December 31, 2019 Cash flows: The following benefit payments, which reflect expected future service, as appropriate, net of participant premium payments, are expected to be paid: (in thousands) 2021 2022 2023 2024 2025 Years 2026-2030 Benefit Payments $ 2,825 $ 2,955 $ 3,079 $ 3,199 $ 3,295 $ 16,893 401K Plan We sponsor a 401K plan for the benefit of all corporate and subsidiary company employees. Contributions made to these plans totaled $ 5.3 million for 2020, $ 5.3 million for 2019 and $ 4.5 million for 2018. 62 Table of Content s 11. Asset Retirement Obligations (AROs) We have recognized ARO's related to our coal-fired generation plants, natural gas combustion turbine and wind turbines. The cost of AROs include items such as site restoration, closure of ash pits, and removal of certain structures, generators, asbestos and storage tanks. We have other legal obligations associated with the retirement of a variety of other long-lived tangible assets used in electric operations where the estimated settlement costs are individually and collectively immaterial. We have no assets legally restricted for the settlement of any AROs. A reconciliation of the carrying amounts of AROs for the years ended December 31, 2020 and 2019 is as follows: (in thousands) 2020 2019 Beginning Balance $ 12,656 $ 9,117 New Obligations Recognized 8,062 — Adjustments Due to Revisions in Cash Flow Estimates 3,110 3,099 Accrued Accretion 570 440 Settlements ( 577 ) — Ending Balance $ 23,821 $ 12,656 The new AROs recognized during the year ended December 31, 2020 arise from obligations associated with our Merricourt wind farm and Astoria Station natural gas plant. 12. Income Taxes Income before income taxes for the years ended December 31, 2020, 2019 and 2018 arose in its entirety from domestic earnings. The provision for income taxes charged to income for the years ended December 31, 2020, 2019 and 2018 consisted of the following: (in thousands) 2020 2019 2018 Current Federal Income Taxes $ 4,881 $ 5,156 $ 4,960 State Income Taxes 2,415 1,333 1,395 Deferred Federal Income Taxes 11,450 8,859 8,065 State Income Taxes 3,751 3,167 4,410 Tax Credits Production Tax Credits ( 1,250 ) — ( 3,111 ) North Dakota Wind Tax Credit Amortization, Net of Federal Taxes ( 1,033 ) ( 1,033 ) ( 1,033 ) Investment Tax Credit Amortization ( 8 ) ( 41 ) ( 98 ) Total $ 20,206 $ 17,441 $ 14,588 The reconciliation of the statutory federal income tax rate to our effective tax rate for each of the years ended December 31, 2020, 2019 and 2018 is as follows: 2020 2019 2018 Federal Statutory Rate 21.0 % 21.0 % 21.0 % Increases (Decreases) in Tax from: State Taxes on Income, Net of Federal Tax 4.0 3.4 5.3 Differences Reversing in Excess of Federal Rates ( 3.6 ) ( 3.2 ) ( 3.6 ) Production Tax Credits (PTCs) ( 1.1 ) — ( 3.2 ) North Dakota Wind Tax Credit Amortization, Net of Federal Taxes ( 0.9 ) ( 1.0 ) ( 1.1 ) Allowance for Equity Funds Used During Construction ( 0.7 ) ( 0.5 ) ( 0.4 ) Corporate-Owned Life Insurance ( 0.6 ) ( 0.7 ) — Excess Tax Deduction on Stock Awards ( 0.4 ) ( 0.7 ) ( 0.7 ) Other, Net ( 0.3 ) ( 1.6 ) ( 2.3 ) Effective Tax Rate 17.4 % 16.7 % 15.0 % The eligibility period to earn federal PTCs expired for certain of our wind farms in 2018. In 2020, we began to generate PTCs from our Merricourt wind farm placed in service in the fourth quarter of the year. 63 Table of Content s Deferred tax assets and liabilities were composed of the following on December 31, 2020 and 2019: (in thousands) 2020 2019 Deferred Tax Assets Benefit Liabilities $ 41,292 $ 38,130 Retirement Benefits Liabilities 40,650 36,206 Tax Credit Carryforward 35,132 48,910 Regulatory Tax Liability 33,124 35,700 Cost of Removal 25,920 25,604 Differences Related to Property 7,486 6,979 Net Operating Loss Carryforward 1,379 1,475 Other 3,423 6,077 Valuation Allowance ( 800 ) ( 800 ) Total Deferred Tax Assets $ 187,606 $ 198,281 Deferred Tax Liabilities Differences Related to Property $ ( 271,064 ) $ ( 268,495 ) Retirement Benefits Regulatory Asset ( 40,650 ) ( 36,206 ) Excess Tax Over Book Pension ( 18,696 ) ( 17,556 ) Other ( 10,572 ) ( 7,965 ) Total Deferred Tax Liabilities $ ( 340,982 ) $ ( 330,222 ) Deferred Income Taxes $ ( 153,376 ) $ ( 131,941 ) Schedule of expiration of tax credits and tax net operating losses available as of December 31, 2020: (in thousands) Amount 2022-2032 2033-2038 2039-2043 Federal Tax Credits $ 10,440 $ — $ 7,896 $ 2,544 State Net Operating Losses 1,729 1,729 — — State Tax Credits 30,509 — 1,002 29,507 The following table summarizes the activity for unrecognized tax benefits for the years ended December 31, 2020, 2019 and 2018: (in thousands) 2020 2019 2018 Balance on January 1 $ 1,488 $ 1,282 $ 684 Increases (decreases) for tax positions taken during a prior period ( 178 ) 37 6 Increases for tax positions taken during the current period 175 339 778 Decreases due to settlements with taxing authorities ( 575 ) — — Decreases as a result of a lapse of applicable statutes of limitations ( 139 ) ( 170 ) ( 186 ) Balance on December 31 $ 771 $ 1,488 $ 1,282 The balance of unrecognized tax benefits as of December 31, 2020 would reduce our effective tax rate if recognized. The total amount of unrecognized tax benefits as of December 31, 2020 is not expected to change significantly within the next 12 months. We classify interest and penalties on tax uncertainties as components of the provision for income taxes in the consolidated statements of income. There was no amount accrued for interest on tax uncertainties as of December 31, 2020. The Company and its subsidiaries file a consolidated U.S. federal income tax return and various state income tax returns. As of December 31, 2020, with limited exceptions, we are no longer subject to examinations by taxing authorities for tax years prior to 2017 for federal and North Dakota income taxes and prior to 2015 for Minnesota state income taxes. 13. Commitments and Contingencies Commitments Construction and Other Purchase Commitments: At December 31, 2020 OTP had commitments under contracts, including its share of construction program and other commitments, extending into 2022 of approximately $ 40 million. OTP’s other commitments charged to rent expense totaled $ 0.1 million, $ 0.3 million and $ 0.3 million in 2020, 2019 and 2018, respectively. 64 Table of Content s On October 1, 2019 T.O. Plastics entered into a six-year resin supply agreement that commenced on January 1, 2020. Under this resin supply agreement, there are no specified delivery volumes, rather, T.O. Plastics is required to purchase all of a specified class of regrind resin delivered by the supplier at a periodically negotiated price per pound. Based on current forecasted production levels, T.O. Plastics anticipates the quantity of resin delivered under the supply agreement will not exceed its requirements over the six-year term of the supply agreement or exceed the market cost of alternative sources of the resin. T.O. Plastics estimates it will pay the supplier approximately $ 1.9 million annually under this agreement. Electric Utility Capacity and Energy Requirements and Coal Purchase and Delivery Contracts: OTP has commitments for the purchase of capacity and energy requirements under agreements extending into 2044. OTP also has contracts providing for the purchase and delivery of a significant portion of its current coal requirements. OTP’s current coal purchase agreements for Coyote Station expire at the end of 2040. OTP’s current coal purchase agreements for Big Stone Plant expire at the end of 2022. OTP has an agreement with Peabody COALSALES, LLC for the purchase of subbituminous coal for Big Stone Plant’s coal requirements through December 31, 2022. There is no fixed minimum purchase requirement under this agreement but all of Big Stone Plant’s coal requirements for the period covered must be purchased under this agreement. OTP has an all-requirements agreement with Navajo Transitional Energy Co. for the purchase of subbituminous coal for Hoot Lake Plant through December 31, 2023. There are no fixed minimum purchase requirements under this agreement. OTP Land Easements: OTP has commitments to make future payments for land easements not classified as leases, extending into 2050 of approximately $ 36.7 million. Land easement payments charged to rent expense totaled $ 1.3 million, $ 0.6 million and $ 0.6 million in 2020, 2019 and 2018, respectively. Our construction program and other commitments and commitments under capacity and energy agreements, coal purchase and coal delivery contracts and land easements as of December 31, 2020, are as follows: (in thousands) Construction Program and Other Commitments Capacity and Energy Requirements Coal Purchase Commitments Land Easement Payments 2021 $ 31,195 $ 16,280 $ 22,935 $ 1,900 2022 957 11,854 22,793 1,361 2023 233 11,854 23,955 1,386 2024 240 11,828 24,369 1,410 2025 247 11,784 25,103 1,436 Beyond 2025 6,951 120,756 454,020 29,202 Total $ 39,823 $ 184,356 $ 573,175 $ 36,695 Contingencies FERC ROE: In November 2013 and February 2015, customers filed complaints with FERC seeking to reduce the ROE component of the transmission rates that MISO transmission owners, including OTP, may collect under the MISO tariff rate. FERC's most recent order, issued on November 19, 2020, adopted a revised ROE methodology and set the base ROE at 10.02% (10.52% with an adder) effective for the fifteen-month period from November 2013 to February 2015 and on a prospective basis beginning in September 2016. The order also dismissed any complaints covering the period from February 2015 to May 2016. The November 2020 opinion is subject to judicial review. We have deferred recognition and recorded a refund liability of $ 3.4 million as of December 31, 2020. This refund liability reflects our best estimate of required refunds to customers once all regulatory and judicial proceedings are finalized. Regional Haze Rule (RHR): The RHR was adopted in an effort to improve visibility in national parks and wilderness areas. The RHR requires states, in coordination with the EPA and other governmental agencies, to develop and implement plans to achieve natural visibility conditions. The second RHR implementation period covers the years of 2018 and 2028, with state implementation plans to be submitted to the EPA by July 31, 2021. Coyote Station, OTP's jointly-owned coal-fired power plant, is subject to assessment under the North Dakota state implementation plan of the second assessment period of the RHR. We cannot predict with certainty the impact the state implementation plan may have on our business until the plan is finalized and adopted. However, significant emission control investments could be required, and the recovery of such costs from customers would require regulatory approval. Alternatively, investments in emission control equipment may prove to be uneconomic and result in a required early retirement of, or the sale of our interest in, Coyote Station. We cannot estimate the financial effects such a retirement or sale may have on our consolidated operating results, financial position or cash flows, but such amounts could be material and the recovery of such costs from customers would be subject to regulatory approval. Other Contingencies: We are party to litigation and regulatory enforcement matters arising in the normal course of business. We regularly analyze relevant information and, as necessary, estimate and record accrued liabilities for matters in which a loss is probable of occurring and can be reasonably estimated. We believe the effect on our consolidated operating results, financial position and cash flows, if any, for the disposition of all matters pending as of December 31, 2020, other than those relating to the RHR, will not be material. 65 Table of Content s 14. Stockholders' Equity Capital Structure In addition to authorized and outstanding common shares, the Company has 1.5 million authorized no par value cumulated preferred shares and 1.0 million authorized no par value cumulative preference shares. No cumulative preferred or cumulative preference shares were outstanding at December 31, 2020 or 2019. Shelf Registrations On May 3, 2018 we filed a shelf registration statement with the Securities and Exchange Commission (SEC) under which the Company may offer for sale, from time to time, either separately or together in any combination, equity, debt or other securities described in the shelf registration statement, which expires on May 3, 2021. On November 8, 2019, we entered into a Distribution Agreement with KeyBanc Capital Markets Inc.(KeyBanc). Pursuant to the terms of the Distribution Agreement, we may offer and sell our common shares from time to time under an At-the-Market offering program through KeyBanc, as the distribution agent, for the offer and sale of the shares up to an aggregate sales price of $ 75.0 million. In 2020, we received net proceeds of $ 37.0 million, net of commissions paid to KeyBank of $ 0.5 million from the issuance of 868,484 shares under this program. In total from inception of the program through December 31, 2020, we have received proceeds of $ 54.4 million from the issuance of shares under this program. On May 3, 2018, we filed a second shelf registration statement with the SEC for the issuance of up to 1,500,000 common shares under an Automatic Dividend Reinvestment and Share Purchase Plan (the Plan), which permits shares purchased by participants in the Plan to be either new issue common shares or common shares purchased in the open market. The shelf registration for the Plan expires on May 3, 2021. In 2020, we received proceeds of $ 13.4 million from the sale of 320,173 shares under this program. As of December 31, 2020, 899,859 shares remain available for purchase or issuance under the Plan. Dividend Restrictions Otter Tail Corporation is a holding company with no significant operations of its own. The primary source of funds for payments of dividends to our shareholders is from dividends paid or distributions made by our subsidiaries. As a result of certain statutory limitations or regulatory or financing agreements, restrictions could occur on the amount of distributions allowed to be made by our subsidiaries. Both the OTC Credit Agreement and OTP Credit Agreement contain restrictions on the payment of cash dividends upon a default or event of default, including failure to maintain certain financial covenants. As of December 31, 2020, we were in compliance with these financial covenants. Under the Federal Power Act, a public utility may not pay dividends from any funds properly included in a capital account. What constitutes “funds properly included in a capital account” is undefined in the Federal Power Act or the related regulations; however, the FERC has consistently interpreted the provision to allow dividends to be paid as long as i) the source of the dividends is clearly disclosed, ii) the dividend is not excessive and iii) there is no self-dealing on the part of corporate officials. The MPUC indirectly limits the amount of dividends OTP can pay to the Company by requiring an equity-to-total-capitalization ratio between 47.5 % and 58.1 % based on OTP’s 2020 capital structure petition effective by order of the MPUC on July 15, 2020. As of December 31, 2020, OTP’s equity-to-total-capitalization ratio including short-term debt was 53.7 % and its net assets restricted from distribution totaled approximately $ 634 million. Under the 2020 capital structure petition, total capitalization for OTP cannot exceed $ 1.7 billion. 15. Share-Based Payments Employee Stock Purchase Plan The 1999 Employee Stock Purchase Plan authorizes the issuance of 1,400,000 common shares, allowing eligible employees to purchase our common shares through payroll withholding at a discount of up to 15 % off the market price at the end of each six-month purchase period. For purchase periods between January 1, 2018 and June 30, 2019, the purchase price was 100 % of the market price at the end of each six-month purchase period. For purchase periods beginning after June 30, 2019, the purchase price is 85 % of the market price at the end of each six-month purchase period. At our discretion, shares purchased under the plan can be either new issue shares or shares purchased in the open market. As of December 31, 2020, 318,101 shares were available for purchase under the plan. We recognize the 15 % discount to the fair market value of the purchased shares as stock-based compensation expense, which amounted to $ 0.2 million and $ 0.1 million for the years ended December 31, 2020 and 2019. No expense was recognized during the year ended December 31, 2018. Share-Based Compensation Plan The 2014 Stock Incentive Plan, which was approved by our shareholders in April 2014, authorizes the issuance of 1,900,000 common shares for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, and other stock and stock-based awards. As of December 31, 2020, 897,798 shares were available for issuance under the plan. The plan terminates on December 31, 2023. We grant restricted stock awards to our employees and members of our Board of Directors and stock performance awards to our executive officers and certain other key employees as part of our long-term compensation and retention program. Stock-based compensation cost, recognized within operating expenses in the consolidated statements of income, amounted to $ 6.1 million, $ 5.9 million and $ 4.4 million for the years ended December 31, 2020, 2019 and 2018. The related income tax benefit recognized for these periods amounted to $ 2.1 million, $ 2.3 million and $ 1.9 million. 66 Table of Content s Restricted Stock Awards. Restricted stock awards are granted to employees and members of the Company's Board of Directors. The awards vest, depending on award recipient, either ratably over a period of three to four years or cliff vest after four years . Vesting is accelerated in certain circumstances, including upon retirement. Awards granted to members of the Board of Directors are deemed issued and outstanding upon grant and carry the same voting and dividend rights of unrestricted outstanding common stock. Awards granted to executive officers and other key employees are eligible to receive dividend equivalent payments during the vesting period, subject to forfeiture under the terms of the agreement, but such awards are not deemed issued or outstanding upon grant and do not provide for voting rights. The grant date fair value of each restricted stock award is determined based on the market price of the Company's common stock on the date of grant adjusted to exclude the value of dividends for those awards that do not receive dividend or dividend equivalent payments during the vesting period. The following is a summary of restricted stock award activity for the year ended December 31, 2020: Shares Weighted Average Grant-Date Fair Value Nonvested, Beginning of Year 133,847 $ 39.70 Granted 56,500 45.97 Vested ( 57,773 ) 35.49 Forfeited ( 3,910 ) 41.12 Nonvested, End of Year 128,664 $ 44.30 The weighted-average grant date fair value of granted awards was $ 45.97 , $ 48.18 and $ 41.39 during the years ended December 31, 2020, 2019 and 2018. The fair value of vested awards was $ 2.8 million, $ 2.4 million and $ 2.2 million during the years ended December 31, 2020, 2019 and 2018. As of December 31, 2020, there was $ 2.4 million of unrecognized compensation costs for nonvested restricted stock awards to be recognized over a weighted-average period of 1.81 years. Stock Performance Awards. Stock performance awards are granted to executive officers and certain other key employees. The awards vest at the end of a three-year performance period. The number of common shares awarded, if any, at the end of the performance period ranges from zero to 150 % of the target amount based on two performance measures: i) total shareholder return relative to a peer group and ii) return on equity. The awards have no voting or dividend rights during the vesting period. Vesting of the awards is accelerated in certain circumstances, including on retirement. The amount of common shares awarded on an accelerated vesting is based either on actual performance at the end of the performance period or the amount of common shares earned at target. The grant date fair value of stock performance awards granted during the years ended December 31, 2020, 2019 and 2018 was determined using a Monte Carlo fair value simulation model incorporating the following assumptions: 2020 2019 2018 Risk-free interest rate 1.42 % 2.52 % 2.23 % Expected term (in years) 3.00 3.00 3.00 Expected volatility 19.00 % 21.00 % 22.00 % Dividend yield 2.80 % 3.00 % 3.20 % The risk-free interest rate was derived from yields on U.S. government bonds of a similar term. The expected term of the award is equal to the three-year performance period. Expected volatility was estimated based on actual historical volatility of our common stock over a three-year period. Dividend yield was estimated based on historic and future yield estimates. The following is a summary of stock performance award activity for the year ended December 31, 2020 (share amounts reflect awards at target): Shares Weighted Average Grant-Date Fair Value Nonvested, Beginning of Year 161,000 $ 36.57 Granted 55,000 47.79 Vested ( 52,000 ) 30.25 Forfeited — — Nonvested, End of Year 164,000 $ 42.32 The weighted-average grant date fair value of granted awards was $ 47.79 , $ 42.87 and $ 35.73 during the years ended December 31, 2020, 2019 and 2018. The fair value of vested awards was $ 3.4 million, $ 6.1 million and $ 4.7 million during the years ended December 31, 2020, 2019 and 2018. As of December 31, 2020, there was $ 0.8 million of unrecognized compensation costs of nonvested stock performance awards to be recognized over a weighted-average period of 0.57 years. 67 Table of Content s 16. Earnings Per Share The numerator used in the calculation of both basic and diluted earnings per common share is net income. The denominator used in the calculation of basic earnings per common share is the weighted average number of common shares outstanding during the period. The denominator used in the calculation of diluted earnings per common share is derived by adjusting basic shares outstanding for the dilutive effect of potential common shares outstanding, which consist of time and performance based stock awards and employee stock purchase plan shares. The following includes the computation of the denominator for basic and diluted weighted-average shares outstanding for the years ended December 31, 2020, 2019 and 2018: (in thousands) 2020 2019 2018 Weighted Average Common Shares Outstanding – Basic 40,710 39,721 39,600 Effect of Dilutive Securities: Stock Performance Awards 116 147 212 Restricted Stock Awards 63 81 78 Employee Stock Purchase Plan Shares and Other 16 5 2 Dilutive Effect of Potential Common Shares 195 233 292 Weighted Average Common Shares Outstanding – Diluted 40,905 39,954 39,892 The amount of shares excluded from diluted weighted-average common shares outstanding because such shares were anti-dilutive was not material for the years ended December 31, 2020, 2019 and 2018. 17. Fair Value Measurements The following tables present our assets measured at fair value on a recurring basis as of December 31, 2020 and 2019 classified by the input method used to measure fair value: (in thousands) Level 1 Level 2 Level 3 December 31, 2020 Investments: Money Market Funds $ 4,075 $ — $ — Marketable Equity Securities 1,662 — — Corporate Debt Securities — 2,627 — Government-Backed and Government-Sponsored Enterprises’ Debt Securities — 6,633 — Total Assets $ 5,737 $ 9,260 $ — December 31, 2019 Investments: Money Market Funds $ 2,363 $ — $ — Marketable Equity Securities 1,586 — — Corporate Debt Securities — 2,124 — Government-Backed and Government-Sponsored Enterprises’ Debt Securities — 6,060 — Total Assets $ 3,949 $ 8,184 $ — The level 2 fair value measurements for Government-Backed and Government-Sponsored Enterprises’ and Corporate Debt Securities are determined on the basis of valuations provided by a third-party pricing service which utilizes industry accepted valuation models and observable market inputs to determine valuation. Some valuations or model inputs used by the pricing service may be based on broker quotes. In addition to assets recorded at fair value on a recurring basis, we also hold financial instruments that are not recorded at fair value in the consolidated balance sheets but for which disclosure of the fair value of these financial instruments is provided. The following reflects the carrying value and estimated fair value of these assets and (liabilities) as of December 31, 2020 and 2019: December 31, 2020 December 31, 2019 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Cash and Cash Equivalents $ 1,163 $ 1,163 $ 21,199 $ 21,199 Short-Term Debt ( 80,997 ) ( 80,997 ) ( 6,000 ) ( 6,000 ) Long-Term Debt ( 764,519 ) ( 858,455 ) ( 689,764 ) ( 742,279 ) 68 Table of Content s The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash Equivalents: The carrying amount approximates fair value because of the short-term maturity of those instruments. Short-Term Debt: The carrying amount approximates fair value because the debt obligations are short-term and the balances outstanding are subject to variable rates of interest which reset frequently, a Level 2 fair value input. Long-Term Debt: The fair value of long-term debt is estimated based on current market indications for borrowings of similar maturities, a Level 2 fair value input. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.