What changed in this filing

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Item 1. Business

2022-02-16 compared with 2021-02-19 · 174 added, 127 removed, 194 unchanged (61% of the section changed)

Otter Tail Corporation has interests in diversified operations that include an electric utility and manufacturing and plastic pipe businesses with corporate offices located in Fergus Falls, Minnesota and Fargo, North Dakota.

We classify our five operating companies into three segments consistent with our business strategy and management.

The following depicts our three segments and the subsidiary entities included within each segment:

Otter Tail Corporation (OTC) has interests in diversified operations that include an electric utility and manufacturing and plastic pipe businesses with corporate offices located in Fergus Falls, Minnesota and Fargo, North Dakota.

We classify our five operating companies into three reportable segments consistent with our business strategy and management structure.

The following table depicts our three segments and the subsidiary entities included within each segment:

ELECTRIC SEGMENT MANUFACTURING SEGMENT PLASTICS SEGMENT

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Electric includes the generation, purchase, transmission, distribution and sale of electric energy in western Minnesota, eastern North Dakota and northeastern South Dakota.

OTP, our largest operating subsidiary and primary business since 1907, serves more than 133,000 customers in 422 communities across a predominantly rural and agricultural service territory.

OTP, our largest operating subsidiary and primary business since 1907, serves more than 133,000 customers in more than 400 communities across a predominantly rural and agricultural service territory.

Manufacturing consists of businesses in the following manufacturing activities:

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The PVC pipe is sold primarily in the western half of the United States and Canada.

Throughout the remainder of this report, we use the terms "Company", "us", "our", or "we" to refer to Otter Tail Corporation and its subsidiaries collectively.

Throughout the remainder of this report, we use the terms "Company", "us", "our", or "we" to refer to OTC and its subsidiaries collectively.

We will also refer to our Electric, Manufacturing and Plastics segments and our individual subsidiaries as indicated above.

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We maintain a moderate risk profile by investing in rate base growth opportunities in our Electric segment and organic growth opportunities in our Manufacturing and Plastics segments.

This strategy and risk profile are designed to provide a more predictable earnings stream, maintain our credit quality and preserve our ability to fund our dividend.

This strategy and risk profile are designed to provide a more predictable earnings stream, maintain our credit quality and preserve our ability to fund our dividend payments.

Our goal is to deliver annual growth in earnings per share between five and seven percent over the next several years, using 2020 diluted earnings per share as the base for measurement.

We expect our earnings growth to come from rate base investments in our Electric segment and from planned earnings growth arising from existing capacities within our Manufacturing and Plastics segments.

We will continue to review our business portfolio to identify additional opportunities to improve our risk profile, enhance our credit metrics and generate additional sources of cash to support the growth opportunities in our electric utility.

We expect our earnings growth to come from rate base investments in our Electric segment and from existing capacities and planned investments within our Manufacturing and Plastics segments.

We will also evaluate opportunities to allocate capital to potential acquisitions within our Manufacturing and Plastics segments.

We are a committed long-term owner and do not acquire companies in pursuit of short-term gains.

However, we will divest businesses which no longer fit into our strategy and risk profile over the long term.

We maintain a set of criteria used in evaluating the strategic fit of our operating businesses.

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Over time, we expect our Electric segment will provide approximately 70% of our overall earnings and our Manufacturing and Plastics segments will collectively provide approximately 30% of our overall earnings and continue to be a fundamental part of our strategy.

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Our actual mix of earnings in 2020, 2019, 2018and the average for the five-year period ended December 31, 2020 is as follows:

Our actual mix of earnings for the years ended December 31, 2021, 2020, 2019 was as follows:

Our 2021 earnings mix was impacted by significantly higher earnings in our Plastics segment as unique supply and demand conditions during the year in the PVC pipe industry led to earnings levels not previously experienced.

We expect our earnings mix to return back to our targeted mix of 70% from the Electric segment and 30% from the Manufacturing and Plastics segments over the long term as these industry conditions subside.

HUMAN CAPITAL

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We have established the following programs in furtherance of these efforts:

• Safety is one of our core values.

We engage a third party to conduct conformity assessments annually.

We continually monitor the Occupational Safety and Health Administration Total Recordable Incident Rate and Lost Time Incident Rate.

New cases are reported and evaluated for corrective action during monthly safety calls attended by safety professionals at all locations.

• We extend leadership development into the organization to build enterprise-wide understanding of our culture, strategy and processes.

Safety - Safety is one of our core values.

In managing our business, we focus on the safety of our employees and have implemented safety programs and management practices to promote a culture of safety.

Safety is also a metric used and evaluated in determining annual incentive compensation.

We continually monitor the Occupational Safety and Health Administration (OSHA) Total Recordable Incident Rate (number of work-related injuries per 100 employees for a one-year period) and Lost Time Incident Rate (number of employees who lost time due to work-related injuries per 100 employees for a one-year period).

New cases are reported and evaluated for corrective action during monthly safety meetings attended by safety professionals at all locations.

Our 2021 Total Recordable Incident Rate was 1.86, compared to 1.42 in 2020 and our Lost Time Incident Rate was 0.57, compared to 0.55 in 2020.

In both 2021 and 2020 these rates were favorable to the rates of our peers.

Leadership Development and Training Programs - We extend leadership development throughout the organization to build enterprise-wide understanding of our culture, strategy and processes.

Annual succession planning, individual development planning, mentoring, and supervisory and leadership development programs all play a role in ensuring a capable leadership team now and in the future.

Our skill progression and technical training programs help ensure we have a skilled and stable workforce.

• To enhance productivity and employee engagement, and to help our companies continue to be places where our employees choose to work and thrive, we have undertaken a multi-year series of employee engagement surveys.

Our skill progression and technical training programs help to retain a stable and skilled workforce.

Workforce Stability - Retaining and developing our employees is an important factor in our continued success and growth.

We regularly evaluate our employee retention and turnover rates.

Employee Engagement - To enhance productivity and employee engagement, and to help our companies continue to be places where our employees choose to work and thrive, we have undertaken a multi-year series of employee engagement surveys.

We use the feedback to help shape the future of our organization.

• We communicate annually to all employees on our Code of Conduct to help ensure understanding of the common principles that guide who we are and how we do business.

Code of Business Ethics - We communicate annually to all employees on our code of business ethics to reinforce our commitment to compliance with laws, regulations and values that guide who we are and how we do business.

Across our operating companies and including our corporate team as of December 31, 2021, we employed 2,487 full-time employees:

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Segment Total 182

(1) Includes all full-time employees of Otter Tail Power Company, including employees working at jointly-owned facilities.

Labor costs associated with employees working at jointly-owned facilities are allocated to each of the co-owners based on their ownership interest.

At December 31, 2021, 358 employees of OTP are represented by local unions of the International Brotherhood of Electrical Workers under two separate collective bargaining agreements expiring on August 31, 2023 and October 31, 2023.

OTP has not experienced any strike, work stoppage or strike vote, and considers its present relations with employees to be good.

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None of the employees of our other operating companies are represented by local unions.

The demographics of our workforce, including our Board of Directors, as of December 31, 2021 was as follows:

% Female % Racially and Ethnically Diverse

Board of Directors (1)

CEO Direct Reports 33 % — %

Management 22 % 4 %

Non-Management Employees 17 % 19 %

(1) Includes the new director appointed to our Board effective January 1, 2022.

ELECTRIC Contribution to Operating Revenues:

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While our customer base includes relatively few large customers, sales to commercial and industrial customers are significant, with one industrial customer accounting for 10% of segment operating revenues for the year ended December 31, 2021.

The following summarizes our retail electric revenues by state and by customer segment for the years ended December 31, 2020 and 2019:

In addition to retail revenue, our Electric segment also earns operating revenues from the transmission of electricity for others over the transmission assets we wholly or jointly own with other transmission service providers, and from the sale of electricity we generate and sell into the wholesale electricity market.

The following charts summarize our retail electric revenues by state and by customer segment for the years ended December 31, 2021 and 2020:

In addition to retail revenue, our Electric segment also generates operating revenues from the transmission of electricity for others over the transmission assets we wholly or jointly own with other transmission service providers, and from the sale of electricity we generate and sell into the wholesale electricity market.

COMPETITIVE CONDITIONS

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Electricity also competes with other forms of energy.

Competition also arises from customers supplying their own power through distributed generation, which is the generation of electricity on-site or close to where it is needed in small facilities designed to meet local needs.

Distributed energy resources can include combined heat and power, solar photovoltaic, wind, battery storage, thermal storage and demand-response technologies.

The degree of competition may vary from time to time depending on relative costs and supplies of other forms of energy and advances in technology.

however, we believe OTP is well positioned to be successful in a competitive environment.

A comparison of OTP's electric retail rates to the rates of other investor-owned utilities, cooperatives and municipals in the states OTP serves indicates OTP's rates are competitive.

Competition also arises from distributed generation, which is the generation of electricity on-site or close to where it is needed in small facilities designed to meet local needs.

Distributed energy resources are utility- or customer-owned resources on the distribution grid that can include combined heat and power, solar photovoltaic, wind, battery storage, thermal storage, and demand-response technologies.

Wholesale electricity markets are competitive under the FERC's open access transmission tariffs, which require utilities to provide nondiscriminatory access to all wholesale users.

Irrespective of the competitive environment, we are focused on providing value to our customers and ensuring our retail rates remain among the lowest in the region and in the nation.

The following table presents our average retail rate per kilowatt-hour (kwh) by customer class and in total for the years ended December 31, 2021 and 2020:

Revenue per kwh 2021 2020

Residential 10.90 ¢ 10.05 ¢

Commercial & Industrial 7.52 ¢ 7.40 ¢

Total Retail 8.47 ¢ 8.15 ¢

Wholesale electricity markets are competitive under the Federal Energy Regulatory Commission (FERC) open access transmission tariffs, which require utilities to provide nondiscriminatory access to all wholesale users.

In addition, the FERC has established a competitive process for the construction and operation of certain new electric transmission facilities whereby electric transmission providers, including the Midcontinent Independent System Operator, Inc.

(MISO), of which OTP is a member, are required to remove from their tariffs a federal right of first refusal to construct transmission facilities selected in a regional transmission plan for purposes of cost allocation.

The FERC is contemplating potential reforms for electric regional transmission planning, cost allocation and generator interconnection processes.

While the ultimate regulatory outcome is uncertain at this time, changes to the regulatory framework could impact future transmission investments.

OTP has franchises to operate as an electric utility in substantially all of the incorporated municipalities it serves.

Franchise rights generally require periodic renewal.

No franchises are required to serve unincorporated communities in any of the three states that OTP serves.

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No franchises are required to serve unincorporated communities in any of the three states OTP serves.

GENERATION AND PURCHASED POWER

OTP primarily relies on company-owned generation, supplemented by purchase power agreements, to supply the energy to meet our customer needs.

Wholesale market purchases and sales of electricity are used as necessary to balance supply and demand as seasonal or other variations occur.

As of December 31, 2020, OTP’s wholly or jointly owned plants and facilities and their dependable kilowatt (kW) capacity was:

Capacity in kW

Wholesale market purchases and sales of electricity are used as necessary to balance supply and demand.

Our mix of owned generation and wholesale market energy purchases to meet customer demand are impacted by wholesale energy prices and the relative cost of each energy source.

As of December 31, 2021, OTP’s wholly or jointly owned plants and facilities, as well as in place purchased power agreements, and their dependable kilowatt (kW) capacity were:

Purchased Power

Owned Generation:

Baseload Plants

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Coyote Station (2)

Hoot Lake Plant 143,100

Total Baseload Net Plant 548,100

Total Baseload Plants 406,800

Combustion Turbine and Small Diesel Units

Hydroelectric Facilities 2,500

Astoria Station 249,700

All Other 102,800

Total Combustion Turbine and Small Diesel Units 352,500

Owned Wind Facilities (rated at nameplate)

Merricourt Wind Energy Center (75 turbines) 150,000

Luverne Wind Farm (33 turbines) 49,500

Ashtabula Wind Center (32 turbines) 48,000

Langdon Wind Center (27 turbines) 40,500

Merricourt Wind Energy Center 150,000

Luverne Wind Farm 49,500

Ashtabula Wind Center 48,000

Langdon Wind Center 40,500

Total Owned Wind Facilities 288,000

Total 946,500

(1) Reflects OTP's 53.9% ownership percentage of jointly-owned facility

(2) Reflects OTP's 35.0% ownership percentage of jointly-owned facility

In addition to the owned facilities described above, OTP had the following purchased power agreements in place on December 31, 2020:

Purchased Power

Hydroelectric Facilities 2,600

Total Owned Generation Capacity 1,049,900

Purchased Power Agreements:

Purchased Wind Power (rated at nameplate and greater than 2,000 kW)

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Total Purchased Wind 102,900

Purchase of Capacity (in excess of 1 year and 500 kW)

Great River Energy (through May 2021)

The following summarizes the percentage of our generating capacity by source, including owned and jointly-owned facilities and through power and capacity purchase arrangements, as of December 31, 2020, and the percentage of retail kilowatt-hours (kwh) sold by source during the year ended December 31, 2020:

Total Generating Capacity 1,152,800

(1) Reflects OTP's 53.9% ownership percentage of jointly-owned facility

(2) Reflects OTP's 35.0% ownership percentage of jointly-owned facility

The following charts summarize the percentage of our generating capacity by source, including owned and jointly-owned facilities and through power purchase arrangements, as of December 31, 2021 and 2020:

Under MISO requirements, OTP is required to have sufficient capacity through wholly or jointly-owned generating capacity or purchased power agreements to meet its monthly weather-normalized forecast demand, plus a reserve obligation.

OTP met its obligation for the 2020-2021 planning year and anticipates meeting this obligation prospectively.

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The following charts summarize the percentage of retail kilowatt-hours (kwh) sold by source during the years ended December 31, 2021 and 2020:

Capacity Retirements and Additions

Hoot Lake Plant, our 142-meagwatt coal-fired power plant in Fergus Falls, Minnesota is approved for retirement in mid-2021.

As part of our investment plan to meet our future energy needs, we have the following projects at various stages of planning and construction or have been recently completed:

Hoot Lake Plant, our 142-megawatt coal-fired power plant in Fergus Falls, Minnesota was retired in mid-2021.

As part of our investment plan to meet our future energy needs, we have the following significant projects at various stages of planning and construction or that have been recently completed:

Merricourt Wind Energy Center (Merricourt) is a 150-megawatt wind farm located in southeastern North Dakota.

Construction of the wind farm commenced in 2019 and the facility was in commercial operation in December 2020 at a cost of approximately $260.0 million.

Construction of the wind farm commenced in 2019 and the facility was placed into commercial operation in December 2020, with a total cost of approximately $260 million.

Astoria Station Natural Gas Plant (Astoria) is a 245-megawatt simple cycle natural gas combustion turbine generation facility near Astoria, South Dakota.

Construction began in 2019 and we anticipate the facility will be substantially complete in the first quarter of 2021.

We anticipate total project costs will be $152.5 million.

Hoot Lake Plant Solar (HLP Solar) is a 49-megawatt solar farm under development on land on and around our Hoot Lake Plant in Fergus Falls, Minnesota.

The project will include up to 150,000 solar panels at an anticipated cost of $60.0 million.

We anticipate, subject to permitting and regulatory approval, the facility will be in commercial operation no later than the end of 2023.

Construction commenced in 2019 and the facility was placed into commercial operation in February 2021, with a total cost of approximately $160 million.

Hoot Lake Solar is a 49-megawatt solar farm under development on land on and around our Hoot Lake Plant in Fergus Falls, Minnesota, with an anticipated cost of approximately $60 million.

We anticipate the facility will be in commercial operation by the end of 2023.

ENERGY TRANSITION

Otter Tail Power is committed to transitioning to a lower-carbon and increasingly clean energy future, while maintaining low cost and reliable electricity to serve our customers.

We have developed the following goals in the furtherance of our efforts to support the energy transition:

Provide 30% of energy generated from renewable resources to our customers by 2023 .

Reduce carbon emissions from owned generation resources by 50% by 2025 from 2005 levels.

Reduce carbon emissions from owned generation resources by 97% by 2050 from 2005 levels.

To date, we have undertaken numerous initiatives to reduce our carbon footprint and mitigate greenhouse gas emissions in the process of generating electricity for our customers.

Our initiatives include increasing the efficiency of our plants, adding renewable energy to our resource mix and sponsoring energy conservation programs.

From 2005 through 2021, we have reduced our carbon dioxide emissions approximately 39% and increased the amount of renewable generation resources we own or contract through purchase power agreements by approximately 370 megawatts.

Our future resource plans to deliver low-cost, reliable and increasingly clean energy to our customers include the addition of 49 megawatts of solar energy from Hoot Lake Solar in 2023 along with the resource additions as outlined in our Integrated Resource Plan, including the addition of 150 megawatts of solar generation and 100 megawatts of wind generation by 2027.

Our resource plan also proposes to withdraw from Coyote Station, our jointly owned coal-fired generation facility by the end of 2028.

The following chart depicts our energy resource mix in 2005 and 2021 and the projected mix in 2025 and 2030 if our preferred plan within our Integrated Resource Plan is approved in each of the jurisdictions in which we operate.

The amounts include energy generated from owned resources, procured through purchase power agreements and energy purchased in the wholesale market:

RESOURCE MATERIALS

Coal is the principal fuel burned at our Big Stone, Coyote and Hoot Lake generating plants.

Coal is the principal fuel burned at our jointly-owned Big Stone and Coyote Station generating plants.

Coyote Station, a mine-mouth facility, burns North Dakota lignite coal.

Hoot Lake Plant and Big Stone Plant burn western subbituminous coal transported by rail.

Big Stone Plant burns western subbituminous coal transported by rail.

We source coal for our coal-fired power plants through requirements contracts which do not include minimum purchase requirements but do require all coal necessary for the operation of the respective plant to be purchased from the counterparty.

Our coal supply contracts for our Hoot Lake Plant, Big Stone Plant and Coyote Station have expiration dates in 2023, 2022 and 2040, respectively.

The supply agreement between the Coyote Station owners, including OTP, and the coal supplier includes provisions requiring the Coyote Station owners to purchase the membership interests of the coal supplier in the event of certain early termination events and at the expiration of the coal supply agreement in 2040.

Our coal supply contracts for our Big Stone Plant and Coyote Station have expiration dates in 2022 and 2040, respectively.

The supply agreement between the Coyote Station owners, including OTP, and the coal supplier includes provisions requiring the Coyote Station owners to purchase the membership interests and pay off or assume loan and lease obligations of the coal supplier, as well as complete mine closing and post-mining reclamation, in the event of certain early termination events and at the expiration of the coal supply agreement in 2040.

See Note 1 to our consolidated financial statements included in this report on Form 10-K for additional information.

Coal is transported to our non-mine-mouth facilities, Big Stone Plant and Hoot Lake Plant, by rail and is provided under a common carrier rate which includes a mileage-based fuel surcharge.

Coal is transported to our non-mine-mouth facility, Big Stone Plant, by rail and is provided under a common carrier rate which includes a mileage-based fuel surcharge.

We purchase natural gas for use at our combustion turbine facilities based on anticipated short-term resource needs.

We procure natural gas from multiple vendors at spot prices in a liquid market primarily under firm delivery contracts.

TRANSMISSION AND DISTRIBUTION

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In addition, we earn revenue from the transmission of electricity over our wholly or jointly owned transmission assets for others under approved rate tariffs.

As of December 31, 2020, we were the whole or partial owner of over 8,900 miles of transmission and distribution lines.

As of December 31, 2021, we were the sole or joint owner of over 9,000 miles of transmission and distribution lines.

Midcontinent Independent System Operator, Inc.

MISO is an independent, non-profit organization that operates the transmission facilities owned by other entities, including OTP, within its regional jurisdiction and administers energy and generation capacity markets.

MISO has operational control of our transmission facilities above 100 kV.

MISO has operational control of our transmission facilities above 100 kiloVolts (kV).

MISO seeks to optimize the efficiency of the interconnected system, provide solutions to regional planning needs and minimize risk to reliability through its security coordination, long-term regional planning, market monitoring, scheduling and tariff administration functions.

Electricity demand is affected by seasonal weather differences, with peak demand occurring in the summer and winter months.

As a result, our Electric segment operating results may fluctuate on a seasonal basis.

As a result, our Electric segment operating results regularly fluctuate on a seasonal basis.

In addition, fluctuations in electricity demand within the same season but between years can impact our operating results.

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PUBLIC UTILITY REGULATION

OTP is subject to regulation of rates and other matters in each of the three states in which it operates and by the federal government for certain interstate operations.

OTP is subject to regulation of rates and other matters in each of the three states in which it operates and by the federal government for, among other matters, the interstate transmission of electricity.

OTP operates under approved retail electric tariff rates in all three states it serves.

Tariff rates are designed to recover plant investments, a return on those investments and operating costs.

In addition to determining rate tariffs, state regulatory commissions also authorize ROE, capital structure and depreciation rates of our plant investments.

Decisions by our regulators can significantly impact our operating results, financial position and cash flows.

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Below is a summary of the regulatory agencies with jurisdiction of electric rates over OTP along with the percentage of electric revenue for the year ended December 31, 2020 covered by each regulatory agency:

Regulatory % of

Agency Revenue Areas of Regulation

In addition to determining rate tariffs, state regulatory commissions also authorize return on equity (ROE), capital structure and depreciation rates of our plant investments.

Decisions by our regulators significantly impact our operating results, financial position and cash flows.

Below is a summary of the regulatory agencies with jurisdiction of electric rates over OTP covered by each regulatory agency:

Agency Areas of Regulation

Minnesota Public Utilities Commission

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50,000 kW for non-wind generating facilities) and high voltage transmission lines (115 kV or more).

Review and approval of ten-year facility plan.

Review and approval of ten-year facility plan and Integrated Resource Plan.

South Dakota Public Utilities Commission

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Federal Energy Regulatory Commission

(FERC) 10% Wholesale electricity sales, transmission and sale of electric energy in interstate commerce, interconnection of facilities, hyrdoelectric licensing and accounting policies and practices.

Compliance with NERC reliability standards, including standards on cybersecurity and protection of critical infrastructure.

In addition to base rates, there are other mechanisms for recovery of plant investments, including a return on investment, and operating expenses.

The following is a summary of these recovery mechanisms:

(FERC) Wholesale electricity sales, transmission and sale of electric energy in interstate commerce, interconnection of facilities, hydroelectric licensing and accounting policies and practices.

Compliance with North American Electric Reliability Corporation (NERC) reliability standards, including standards on cybersecurity and protection of critical infrastructure.

In addition to base rates, which are established through periodic rate case proceedings within each state jurisdiction, there are other mechanisms for recovery of plant investments, including a return on investment and operating expenses, between rate cases.

The following table summarizes these recovery mechanisms:

Recovery Mechanism Jurisdiction(s) Additional Information

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Renewable Resource Rider (RRR) MN, ND Provides for recovery of costs outside of a general rate case for investments in certain new renewable energy projects.

Generation Cost Recovery Rider (GCR) ND Provides for the recovery of costs outside of a general rate case for investments in new generation facilities.

Phase-In Rider (PIR) SD Provides for the recovery of costs outside of a general rate case for investments in new generation facilities.

Conservation Improvement Program (CIP) MN Under Minnesota law, OTP is required to invest at least 1.5% of its gross operating revenues on energy conservation improvements.

Recovery of these costs outside of a general rate case occurs through the CIP.

Recovery of these costs outside of a general rate case occurs through the CIP rider.

Electric Utility Infrastructure Costs Rider (EUIC) MN Provides for recovery of costs for investments made to replace or modify existing infrastructure if the replacement or modification conserves energy or uses energy more efficiently.

Generation Cost Recovery Rider (GCR) ND Provides for the recovery of costs outside of a general rate case for investments in new generation facilities.

Energy Efficiency Plan (EEP) SD Provides for the recovery of costs from energy efficiency investments.

Phase-In Rider (PIR) SD Provides for the recovery of costs outside of a general rate case for investments in new generation facilities.

Renewable Energy Standard

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We met the current renewable sources requirements with a combination of owned renewable generation and purchases from renewable generation sources.

Minnesota law also requires 1.5% of total Minnesota electric sales by public utilities to be supplied by solar energy by 2020.

Minnesota law also requires 1.5% of total Minnesota electric sales by public utilities to be supplied by solar energy.

For a public utility with between 50,000 and 200,000 retail electric customers, such as OTP, at least 10% of the 1.5% requirement must be met by solar energy generated by or procured from solar photovoltaic devices with a nameplate capacity of 40 kWs or less.

OTP has purchased sufficient solar renewable energy credits (SRECs) to meet 100% of its 2020 obligation and approximately 70% of its 2021 obligation.

OTP plans to purchase Solar Renewable Energy Credits (SRECs) to meet its obligations until its Hoot Lake Solar and other solar projects are complete and operational.

OTP plans to purchase SRECs to meet its 2021 obligation, for which compliance will be measured as of April 30, 2022.

Under certain circumstances and after consideration of costs and reliability issues, the MPUC may modify or delay implementation of the standards.

We are evaluating potential options for maintaining compliance and meeting the solar energy standard beyond 2021.

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Integrated Resource Plan (IRP)

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An IRP is a set of resource options a utility could use to meet the service needs of its customers over the forecast period, including an explanation of the utility’s supply and demand circumstances, and the extent to which each resource option would be used to meet those service needs.

The MPUC’s findings of fact and conclusions regarding IRPs are considered to be evidence, subject to rebuttal, in future rate reviews and other proceedings.

The MPUC’s findings of fact and conclusions regarding IRPs are considered to be prima facie evidence, subject to rebuttal, in future rate reviews and other proceedings.

Typically, IRPs are submitted every two years.

On April 26, 2017 the MPUC approved OTP’s 2017-2031 IRP filing with modifications and setting requirements for the next IRP.

The approved IRP with modifications included the following items:

• The addition of 200 MW of wind resources in the 2018 to 2020 timeframe.

• The addition of 30 MW of solar resources by 2020 to comply with Minnesota's Solar Energy Standard.

• The addition of up to 250 MW of peaking capacity in 2021.

• Average annual energy savings of 46.8 gigawatt-hours (1.6% of retail sales).

• The addition of 100 MW to 200 MW of wind resources in the 2022 to 2023 timeframe.

The MPUC has granted us an extension for filing our next IRP to September 1, 2021.

The extension provides additional time to assess the potential impact of two key Environmental Protection Agency (EPA) regulations:

the federal Regional Haze Rule (RHR) and the Affordable Clean Energy (ACE) Rule.

In connection with the extension, OTP made a supplemental filing on December 31, 2020 summarizing the results of scenario modeling evaluating RHR compliance cost options and a Coyote Station 2028 retirement scenario.

The filing indicated, when modeled with externalities, that capital investments in additional environmental controls at Coyote Station does not result in the lowest-cost mix of resources for our customers.

This IRP supplemental filing includes only a subset of our resource planning analysis and it is not conclusive.

In addition, we cannot conclude how RHR will impact Coyote Station as key milestones remain in developing the state implementation plan in North Dakota.

Finally, OTP is one of four partners in Coyote Station and cannot make a unilateral decision on its future.

We expect to have more definitive information about the most cost-effective resource mix to meet customer needs when the next IRP is filed on September 1, 2021.

In 2021, the North Dakota Legislative Assembly enacted a provision requiring investor-owned electric utilities to submit an IRP to the NDPSC and granted the NDPSC the authority to adopt rules and regulations for the preparation and submission of integrated resource plans.

To date, the NDPSC has not established any formal rules and regulations.

On September 1, 2021, OTP filed its 2022 IRP concurrently with regulators in the three states where OTP operates, Minnesota, North Dakota and South Dakota.

The 2022 IRP includes OTP’s preferred plan for meeting customers’ anticipated capacity and energy needs while maintaining system reliability and low electric service rates.

The components of OTP's preferred plan include:

• the addition of dual fuel capability at our Astoria Station natural gas plant, allowing for the plant to burn fuel oil in addition to natural gas;

• the addition of 150 megawatts of solar generation in 2025;

• the addition of 100 megawatts of wind generation in 2027;

• the commencement of the process of withdrawing from our 35 percent ownership interest in Coyote Station, a jointly owned, coal-fired generation plant, by December 31, 2028;

• the addition of 50 megawatts of solar generation in 2033.

The 2022 IRP includes requests for approval of certain activities planned to commence within the next five years, which include the addition of dual fuel capacity at our Astoria Station natural gas plant, the addition of 150 megawatts of solar generation and commencement of the withdrawal from our ownership interest in Coyote Station.

Although the 2022 IRP includes planned actions beyond 2026, regulators will not act upon or approve planned actions in periods beyond 2026 as part of our 2022 IRP filing.

The preferred plan proposes to, subject to regulatory approval, create a regulatory asset as a vehicle to recover costs related to a future withdrawal from Coyote Station, including the net book value of the plant on the withdrawal date, anticipated decommissioning costs and any required costs incurred as a result of an early termination of the existing lignite sales agreement, under which Coyote Station acquires all of its lignite coal from a nearby mine.

As part of the filing, OTP developed an estimate of the reasonably foreseeable costs of withdrawing from Coyote Station at the end of 2028 of $68.5 million.

These costs may differ from actual results due to the uncertainty and timing of future events associated with the terms and conditions of a withdrawal.

Capital Structure Petition

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Once approved, OTP may issue securities without further petition or approval, provided the issuance is consistent with the purposes and amounts set forth in the approved petition.

The MPUC approved OTP’s most recent capital structure petition on July 15, 2020, allowing for an equity-to-total-capitalization ratio between 47.5% and 58.1%, with total capitalization not to exceed $1.70 billion until the MPUC issues a new capital structure order for 2021.

OTP’s current capital structure approved by the MPUC on January 26, 2022, allows for an equity-to-total-capitalization ratio between 48.0% and 58.7%, with total capitalization not to exceed $1.7 billion.

ENVIRONMENTAL REGULATION

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however, there can be no assurance that future costs will be granted recovery.

Alternatively, additional pollution control equipment or other emission reduction measures may prove to be uneconomic with the potential to lead to an early closure of a facility.

Alternatively, additional pollution control equipment or other emission reduction measures may prove to be uneconomic with the potential to lead to the exiting of a facility earlier than originally planned.

As it relates to our jointly owned facilities, we may determine it is necessary to transfer, sell or otherwise divest of our ownership, or the ownership group may determine the early closure of a facility is necessary.

For the five-year period ended December 31, 2021, OTP invested approximately $13.3 million, including $0.9 million in 2021, in environmental control facilities.

Our 2021 and 2022 construction budgets include approximately $1.4 million and $1.2 million for such expenditures.

Our construction budgets for the next five years include an approximately $6.0 million of capital investments in environmental control equipment.

The timing and amount of our expenditures may change as the regulatory environment changes.

Among current regulatory requirements, the Regional Haze Rule (RHR) could have the most significant impact on our operating results, financial condition and cash flows.

The EPA adopted the RHR in 1999 as an effort to improve visibility in national parks and wilderness areas.

Among current regulatory requirements, the Regional Haze Rule (RHR) could have the most significant impact on our operating results, financial condition and liquidity.

The Environmental Protection Agency (EPA) adopted the RHR in 1999 as 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 work towards achieving natural visibility conditions by the year 2064.

The second RHR implementation period covers the years 2018-2028, with state implementation plans to be submitted to the EPA by July 31, 2021.

States are required to assess reasonable progress with the RHR and determine what additional emission reductions are appropriate, if any.

The second RHR implementation period covers the years 2018-2028.

States are required to submit a state implementation plan to assess reasonable progress with the RHR and determine what additional emission reductions are appropriate, if any.

Coyote Station, OTP's co-owned coal-fired power plant in North Dakota is subject to assessment in the second implementation period under the North Dakota state implementation plan.

In September 2021, the North Dakota Department of Environmental Quality (NDDEQ) made public a draft of its state implementation plan.

The plan concluded it is not reasonable to require additional emission controls during this planning period.

Following a consultation and public comment period and any subsequent modifications to the plan, the NDDEQ will submit its state implementation plan to the EPA for approval.

In January 2022, the EPA provided preliminary comments on the North Dakota state implementation plan in which it expressed disagreement with the NDDEQ's recommendation to forgo additional emission controls.

See Note 13 to our consolidated financial statements included in the report on Form 10-K for additional information.

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Climate Change and Greenhouse Gas Regulation

Present and future federal, state, regional and international environmental regulations to address global climate change and reduce greenhouse gas (GHG) emissions may have a significant impact on our utility business.

Combustion of fossil fuels for the generation of electricity is a considerable source of CO 2 emissions, which is the primary GHG emitted by our utility operations.

Regulatory measures to address climate change continue to evolve.

In January 2021, the EPA's Affordable Clean Energy Rule (ACE Rule) was vacated by the U.S.

Court of Appeals for the District of Columbia Circuit and remanded to the EPA for further consideration.

Future federal regulatory measures, including in response to the vacated rule ACE Rule, will be impacted by the Biden administration's priorities and objectives.

While the eventual outcome of GHG regulation is unknown, we are taking steps to reduce our carbon footprint and mitigate CO 2 emission levels in the process of generating electricity for our customers.

Our initiatives include increasing the efficiency of our plants, adding renewable energy to our resource mix, and sponsoring energy conservation programs.

While the future financial impact of any current, proposed or pending litigation or regulation of GHG or other emissions is unknown at this time, any capital or operating costs incurred for additional pollution control equipment or emission reduction measures could materially adversely impact our future operating results, financial position and cash flows unless such costs could be recovered through related rates and/or future market prices for energy.

Global climate change presents a significant energy and environmental policy challenge.

Combustion of fossil fuels for the generation of electricity is a considerable source of carbon dioxide (CO 2 ) emissions, which is the primary greenhouse gas (GHG) emitted by our utility operations.

The federal government and many states are pursuing climate policies to regulate GHG emissions as part of a broad based effort to limit global warming.

In February 2021, the U.S.

rejoined the United Nations Framework Convention on Climate Change (the Paris Agreement), which is a legally binding international treaty on climate change adopted by over 190 countries.

The goal of the Paris Agreement is to limit global temperature increase to well below 2° Celsius compared to pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5° Celsius.

The Biden Administration has announced the goal of reducing greenhouse gas emissions by 50 to 52 percent from 2005 levels in 2030 and to reach 100 percent carbon pollution-free electricity by 2035 as part of the U.S.

plan to achieve the goals under the Paris Agreement.

The implementation of climate change programs, such as the Paris Agreement, and federal or state regulations targeting GHG emissions may have a significant impact on our utility business.

Specific regulatory measures to address climate change continue to evolve.

In January 2021, the EPA's Affordable Clean Energy Rule (ACE Rule), which required states to develop plans for GHG emissions from coal-fired power plants, was vacated by the U.S.

Court of Appeals for the District of Columbia Circuit.

In October 2021, the U.S.

Supreme Court agreed to hear a consolidated challenge to the Court of Appeals decision.

The Supreme Court's decision, expected in mid-2022, could significantly impact the legal authority of the EPA to regulate CO 2 and other greenhouse gas emissions.

While the future financial impact of any current, proposed or pending litigation or regulation of GHG or other emissions is unknown at this time, any capital or operating costs incurred for additional pollution control equipment or emission reduction measures could materially adversely impact our future operating results, financial position and liquidity unless such costs could be recovered through related rates and/or future market prices for energy.

MANUFACTURING Contribution to Operating Revenues:

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Our metal fabrication business primarily serves Midwestern and Southeastern U.S.

manufacturers in the recreational vehicle, agricultural, oil and gas, lawn and garden, industrial and energy equipment end markets.

manufacturers in the recreational vehicle, lawn and garden, agricultural, construction, and industrial and energy equipment end markets.

Our plastic products business serves primarily U.S.

customers in the medical and life sciences, industrial, recreational and electronics industries.

The principal method of production distribution is by direct shipment to our customers through common carrier ground transportation.

customers in the horticulture, medical and life sciences, industrial, recreational and electronics industries.

The principal method of production distribution is by direct shipment to our customers through direct customer pick-up or common carrier ground transportation.

No single customer or product of our manufacturing businesses accounted for 10% or more of our consolidated operating revenue in 2021.

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RESOURCE MATERIALS

We use raw materials in the products we manufacture, including steel, aluminum, and polystyrene and other plastics resins.

We use raw materials in the products we manufacture, including, among others, steel, aluminum, and polystyrene and other plastics resins.

Managing price volatility and ensuring raw material availability are important aspects of our business.

We attempt to pass increases in the costs of these raw materials on to our customers.

We attempt to pass increases in the costs of

these raw materials on to our customers.

Increases in the costs of raw materials that cannot be passed on to customers could have a negative effect on profit margins.

3 unchanged sentences

Our manufacturing businesses are subject to environmental, health and safety laws and regulations, including those governing discharges to air and water, the management and disposal of hazardous substances, the cleanup of contaminated sites and health and safety matters.

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PLASTICS Contribution to Operating Revenues:

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The newly extruded pipe is pulled through a series of water-cooling tanks, marked to identify the type of pipe and cut to finished lengths.

Together our Plastic segment businesses have the current capacity to produce approximately 300 million pounds of PVC pipe annually.

PVC pipe products are marketed through a combination of independent sales representatives, company salespersons and customer service representatives.

1 unchanged sentence

No single customer of the PVC pipe companies accounted for 10% or more of our consolidated operating revenues in 2021.

However, two customers combined to account for 45% of our 2020 Plastics segment operating revenue.

However, two customers, both of which are distributors of PCV pipe, combined to account for 50% of our 2021 Plastics segment operating revenue.

COMPETITIVE CONDITIONS

2 unchanged sentences

The principal factors of competition are price, customer service and product performance.

We compete not only against other plastic pipe manufacturers, but also ductile iron, steel and concrete pipe producers.

We compete not only against other plastic pipe manufacturers, but also ductile iron, high-density polyethylene, steel and concrete pipe producers.

Pricing pressure will continue to affect our operating margins in the future.

3 unchanged sentences

There are four vendors from which we can source our PVC resin requirements.

Two vendors provided over 99% of total resin purchases in 2020.

In 2021 we sourced all of our PVC resin needs from two vendors.

The supply of PVC resin may also be limited primarily due to manufacturing capacity and the limited availability of raw material components.

resin production plants are located in the Gulf Coast region.

These plants are subject to the risk of damage and production shutdowns because of exposure to hurricanes that occur in this part of the United States.

These plants are subject to the risk of damage and production shutdowns because of exposure to hurricanes or other extreme weather events that occur in this part of the United States.

The loss of a key vendor, or any interruption or delay in the supply of PVC resin could disrupt the ability of the Plastics segment to manufacture products, cause customers to cancel orders or result in increased expenses for obtaining PVC resin from alternative sources, if such sources were available.

1 unchanged sentence

Due to the commodity nature of PVC resin and PVC pipe and the dynamic supply and demand factors worldwide, historically the markets for both PVC resin and PVC pipe have been very cyclical with significant fluctuations in prices and gross margins.

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In addition to PVC resin, we use certain other materials, such as tin stabilizer, gaskets and lumber, in the process of manufacturing and shipping our PVC pipe products.

We generally source these materials from a limited number of suppliers, and supply chain constraints or disruptions related to these materials could disrupt our ability to manufacture or ship products and could result in increased costs.

Demand for our PVC pipe products can be impacted by seasonal weather differences, with generally lower sales volumes realized in the first quarter of the year when cold temperatures and frozen ground across the northern portion of our footprint can delay or prevent construction activity.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business