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Item 7. Management’s Discussion and Analysis

2022-02-16 compared with 2021-02-19 · 211 added, 205 removed, 246 unchanged (63% of the section changed)

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You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes appearing under Item 8 of this Form 10-K.

Otter Tail Corporation and its subsidiaries form a diverse group of businesses with operations classified into three segments:

Otter Tail Corporation (OTC) and its subsidiaries form a diverse group of businesses with operations classified into three segments:

Electric, Manufacturing and Plastics.

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Our Plastics segment manufactures PVC pipe for use in, among other applications, municipal and rural water, wastewater and water reclamation projects.

Our strategy includes investing in rate base growth opportunities in our Electric segment and organic growth opportunities in our Manufacturing and Plastics segments.

Investments in our Electric segment will lower our overall risk, create a more predictable earnings stream, improve our credit quality and preserve our ability to fund our dividend.

Organic growth in our Manufacturing and Plastics segments comes from market expansion, new products and services, increased efficiencies and targeted capital investments.

All of our businesses in 2020 were confronted with operational or financial challenges resulting from the coronavirus (COVID-19) pandemic.

Throughout the pandemic, we focused on maintaining the health and safety of our employees, customers and communities and ensuring continued electrical reliability and continuous delivery of products to our customers.

We expect reliable utility performance along with rate base investment opportunities over the next five years will provide us with a strong and growing base of revenues, earnings and cash flows.

We also look to our manufacturing and plastic pipe companies to provide organic growth as well.

Organic, internal growth comes from new products and services, market and plant expansion and increased efficiencies.

We expect much of our growth in these businesses in the next few years will come from utilizing expanded plant capacity from capital investments made in previous years.

We will also evaluate opportunities to allocate capital to potential acquisitions across our reporting segments.

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

However, we will divest operating companies that no longer fit into our strategy and risk profile over the long term.

Our Electric segment continued the construction of rate base investments, including our Merricourt wind farm and Astoria Station natural gas combustion turbine in 2020.

Merricourt is a 150-megawatt wind farm in southeastern North Dakota.

Construction commenced in 2019 and the project was substantially completed in December 2020.

Astoria Station 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 in commercial operation in the first quarter of 2021.

These rate base investments contributed to our Electric segment earnings growth in 2020.

The operating results of our Manufacturing segment were most significantly impacted by the effects of COVID-19 with product demand significantly decreasing in the second quarter as our customers slowed or temporarily shutdown their plant operations.

Demand rebounded in certain end markets in the third and fourth quarters of 2020.

Our Manufacturing businesses effectively managed their operations to meet the level of demand in the marketplace.

Our Plastic segment businesses were able to capitalize on opportunities in the marketplace arising due to supply disruptions and increasing global demand for PVC resin.

Our ability to meet this demand created opportunities for increased product sales volumes and gross profit margins and resulted in a 33% increase in operating income in 2020.

In 2020 we accessed the capital markets to finance our capital investments.

We issued $75.0 million of debt during 2020 and issued 1.3 million shares of common stock for net proceeds of $49.7 million under our various equity programs.

Finally, we paid an annual dividend of $1.48 per share, or $60.3 million, completing our 82nd consecutive year of dividend payments to our shareholders.

Our net income in 2020 was $95.9 million, or $2.34 per diluted share, an increase of 10.4% from 2019 of $86.8 million, or $2.17 per diluted share.

Our financial results were primarily driven by earnings in our Electric segment from returns on our rate base investments and management of our operating and maintenance expenses, and earnings in our Plastics segments due to increased sales volumes and gross profit margins.

Our earnings mix in 2020 was 70% from our Electric segment and 30% from the combination of our Manufacturing and Plastics segments and unallocated corporate costs.

Electric segment earnings as a percentage of our total earnings were less than our long-term estimate of 75% due to very strong Plastics segment earnings in 2020.

We continue to monitor the progression of the novel coronavirus (COVID-19) and its impact on our businesses, employees, customers, construction contractors and vendors.

As this pandemic continues, we are following the directives and advice of government leaders and medical professionals and have adopted practices to help curtail the spread of the virus and mitigate its impact on our communities, employees, construction contractors, customers and business operations.

Our Electric segment business provides a critical service to our customers and our manufacturing businesses provide products and support to critical infrastructure industries.

We continue to operate our businesses in a manner that is safe for our employees and our customers.

COVID-19 and the resulting economic conditions have had a material negative impact on the results of operations in our Manufacturing segment, and, to a lesser extent, also impacted the results of operations of our Electric and Plastics segments, but have not had a material impact on our consolidated financial position or liquidity.

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Customer demand in our Manufacturing segment declined significantly in the second quarter of 2020.

Sales volumes strengthened in the third and fourth quarters of the year due to strong recreational vehicle and lawn and garden end-market demand.

Within our Electric segment, we experienced reduced demand from commercial and industrial customers, increased costs for bad debts, and had to manage through COVID-19-related disruptions at our construction sites, including Merricourt and Astoria Station, which posed a risk of construction delays and increased project costs.

In our Plastics segment, we experienced lower sales volumes in the second quarter of 2020 as distributors reduced inventory levels given the uncertainty over the impact of COVID-19.

Sales volumes recovered and gross profit margins increased in the third and fourth quarters due to increasing demand and concerns of supply disruptions.

Beginning in April 2020, in response to the actual and anticipated impact of COVID-19 on our business operations, we implemented a variety of policies, including furloughs, shift and pay reductions, wage and hiring freezes, suspension of certain employee benefits, a workforce reduction and other cost reduction efforts to mitigate the negative impact to our financial results.

We continued to monitor the impacts of the pandemic on our businesses throughout the remainder of 2020 and adjusted our response as circumstances evolved.

We expect COVID-19 and the resulting economic conditions will continue to impact demand from commercial and industrial customers within our Electric segment and could disrupt customer demand within our Manufacturing and Plastics segments as the pandemic evolves.

We also expect bad debt costs within our Electric segment will remain elevated due to the economic disruption created by the pandemic.

COVID-19 also could cause disruptions in our capital expenditure plans, including project delays and increased project costs.

Our strategy includes investing in rate base growth opportunities in our Electric segment and capitalizing on organic growth opportunities in our Manufacturing and Plastics segments.

Investments in our Electric segment are expected to produce increased earnings and cash flow potential and lower our overall risk, create a more predictable earnings stream, improve our credit quality and preserve our ability to fund our dividend.

Our Electric segment is complemented by our Manufacturing and Plastics segment businesses, which we expect to contribute to earnings growth by capitalizing on market expansion opportunities and increasing utilization of existing capacities and planned investments to create additional capacity and increased efficiencies.

Collectively, our mix of businesses is expected to contribute to the achievement of our targeted annual growth in earnings per share of five to seven percent over the next several years, using 2020 as the base for measurement.

In 2021, all of our businesses were able to effectively manage through the challenges resulting from the COVID-19 pandemic and other marketplace challenges, including supply chain disruptions and rapidly escalating costs for certain raw material components used in our manufacturing processes.

We continue to remain focused on maintaining the health and safety of our employees, customers and communities and ensuring continued electrical reliability and continuous delivery of our products to our customers.

2021 FINANCIAL RESULTS

Our Electric segment produced earnings growth of 8.5% in 2021, driven by returns on our recent rate base investments.

Our Merricourt wind farm and Astoria Station natural gas plant, which collectively constitute a $420 million investment, were completed and placed in service in the fourth quarter of 2020 and the first quarter of 2021, respectively.

Recovery of these investments and associated operating costs through either rate riders or interim rates provided under our Minnesota rate case led to increasing operating revenues and net income.

Our Manufacturing segment produced earnings growth in 2021 of 55.6%, as strong end market demand across most of the markets we serve led to increased sales volumes.

Higher production volumes to meet customer demand led to improved leveraging of fixed manufacturing costs which, along with increased prices, led to improved gross profit levels.

Our Manufacturing segment was impacted in 2021 by steel supply constraints and a significant increase in steel prices, as further discussed below.

Our Plastics segment produced earnings of $97.8 million in 2021, compared to $27.6 million in 2020.

The unprecedented level of earnings in 2021 resulted from extraordinary industry supply and demand dynamics.

As further described below, supply shortages of resin, the primary raw material used in the manufacturing of PVC pipe, coupled with robust end market demand for PVC pipe led to a rapid escalation in PVC pipe prices and gross margins.

Our ability to manage through these supply disruptions and to deliver products to our customers allowed us to capitalize on these unique industry conditions.

Collectively in 2021, our businesses generated net income of $176.8 million, or $4.23 per diluted share, an increase of 84.4% from $95.9 million, or $2.34 per diluted share, in 2020.

In 2021, we paid an annual dividend of $1.56 per share, or $64.9 million, completing our 83rd consecutive year of dividend payments to our shareholders.

Our earnings mix in 2021 was 41% from our Electric segment and 59% from the combination of our Manufacturing and Plastics segments net of unallocated corporate costs.

Electric segment earnings as a percentage of our total earnings were less than our long-term estimate of 70% due to the unique market conditions that occurred in our Plastics segment.

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

RESOURCE MATERIAL AVAILABILITY AND PRICING

Supply shortages and the cost of steel and resin, two key material inputs to our Manufacturing and Plastics segments, respectively, significantly impacted our operating results in 2021.

Steel supply shortages arose in 2021 following steel mill capacity reductions in 2020 in response to lower demand due to COVID-19.

Production and availability of steel began to improve late in 2021 after steel mill facilities increased production capacities in response to strong market demand for steel products.

The combination of supply shortages and strong end user demand led to significantly increased steel prices.

The increase in steel prices led to increased sale prices for our products at BTD, our metal fabrication business within our Manufacturing segment, as we passed along material cost increases to our customers.

Limited steel availability also heightened the complexity in managing our business, including effective management of our production and shipping schedules.

Steel costs began to recede late in 2021, but we anticipate steel prices will remain elevated relative to historic norms through at least the first half of 2022.

PVC resin is the primary material input of the PVC pipe manufactured by our Plastics segment businesses.

Resin supply disruptions initially arose as a result of production plant shutdowns due to abnormally low temperatures and ice storms in the Gulf Coast region of the United States in the first quarter of 2021 and were exacerbated by hurricane activity in the third quarter of the year.

These supply disruptions, along with robust domestic and global demand for PVC resin led to significantly increased resin prices.

Limited PVC resin resulted in reduced manufacturing of PVC pipe and low pipe inventories across the industry.

The combination of constrained PVC resin supply and the resulting low PVC pipe inventories along with significantly increased PVC resin costs and robust demand for PVC pipe led to rapidly increasing sale prices for PVC pipe, with the increase in sale prices outpacing the increase in PVC resin costs, leading to expanding gross profit margins and a significant increase in earnings in our Plastics segment.

We anticipate these market dynamics will continue through the first quarter of 2022 but begin to subside thereafter.

The marketplace dynamics impacting both our Manufacturing and Plastics segments are fluid and subject to change which may impact our operating results prospectively.

We continue to monitor the progression of COVID-19 and its impact on our business.

As this pandemic continues, we are following the directives and advice of government leaders and medical professionals and have adopted practices to help curtail the spread of the virus and mitigate its impact on our employees, customers, vendors and other business partners, and communities in which we live and work.

While the impact of COVID-19 and the resulting macroeconomic conditions did not materially impact our operating results in 2021, uncertainty remains regarding the magnitude and duration of the pandemic and the resulting potential future financial effects.

Increased infection rates and any future responses to mitigate the spread of the virus, including any potential vaccination mandates that would apply to our employees, could impact our business and our financial results in future periods.

OSHA has issued an ETS requiring all employers with at least 100 employees to ensure their employees are fully vaccinated or require weekly testing for unvaccinated employees, and President Biden has issued an executive order, which requires employees of certain federal contractors

and covered subcontractors to be vaccinated, with no weekly testing option, unless they have an approved disability or religious exemption.

OSHA has withdrawn its ETS, however, they have emphasized that the ETS will continue to serve as its proposal for a permanent standard.

Currently, the mandate set forth by the President's executive order has been halted as several states are challenging its legality and the matter remains in litigation.

If these mandates are upheld in federal court and become effective, we expect one, or both, of these new regulations will apply to at least some, and possibly all, of our businesses which could require us to mandate COVID-19 vaccination of our workforce or have our unvaccinated employees undergo required weekly COVID-19 testing, or some combination thereof, which could be difficult and costly.

Further, additional vaccine and testing mandates may be announced in jurisdictions in which we operate our business, and there could be potential actions by certain states that are in conflict with the federal mandates, the impacts of which remain uncertain.

Requirements to mandate COVID-19 vaccination of our workforce or requirements of our unvaccinated employees to be tested could result in labor disruptions, employee attrition and difficulty securing future labor needs.

We continue to monitor developments involving our workforce, customers, construction contractors, suppliers and vendors and the financial effects on our business.

However, due to the unprecedented and evolving nature of this pandemic, we cannot predict the full extent COVID-19 will have on our results of operations, financial condition and liquidity.

However, due to the unprecedented and evolving nature of this pandemic, we cannot predict the full extent of the impact COVID-19 will have on our operating results, financial condition and liquidity.

FINANCIAL AND OTHER METRICS

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Utility Rate Base is the value of property on which a public utility is permitted to earn a specified rate of return in accordance with rules set by a regulatory agency.

In general, the rate base consists of the value of property used by the utility in providing service.

In general, rate base consists of the value of property used by the utility in providing service.

Rate base can also include:

cash, working capital, materials and supplies, deductions for accumulated provisions for depreciation, contributions in aid of construction, customer advances for construction, accumulated deferred income taxes, and accumulated deferred investment tax credits, dependent on the method that is used in the calculation, which can vary from jurisdiction to jurisdiction.

We present actual and forecasted levels of utility rate base in our outlook to provide an indication of expected investments on which we expect to earn future returns.

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We present actual and forecasted levels of utility rate base to provide an indication of expected investments on which we expect to earn future returns.

RESULTS OF OPERATIONS

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Net Income $ 176,769 $ 95,851 $ 80,918 84.4 %

Operating Revenues decreased $29.4 million primarily due to reduced demand in our Manufacturing segment as our customers were impacted by the economic effects of COVID-19.

In addition, Electric segment operating revenues were impacted by lower recoveries of decreased fuel and purchased power costs and the impact of unfavorable weather, but partially offset by operating revenues earned on our rate base investments.

Plastics segment revenue increased in 2020 due to favorable market conditions benefiting sales volumes and prices.

Operating Revenues increased $306.7 million on a consolidated basis in 2021.

Each operating segment contributed to the growth in operating revenues.

Electric segment operating revenue increased 7.7% primarily due to increased retail, transmission and wholesale revenues.

Manufacturing segment operating revenues increased 40.8% mainly as a result of higher material input costs, primarily steel, which are passed

through to customers, and increased volumes due to strong end market demand.

Plastics segment operating revenues increased 85.3% primarily due to unique supply and demand dynamics resulting from resin supply constraints coupled with robust demand for PVC pipe leading to rapid and significant increases in sale prices of PVC pipe.

See our segment disclosures below for additional discussion of items impacting operating revenues.

Operating Expenses decreased $42.4 million in 2020 primarily due to lower costs of products sold in our Manufacturing segment as a result of the reduced sales volumes and lower fuel and purchased power costs in our Electric segment.

Partially offsetting these decreases were higher costs of products sold in our Plastics segment due to increased sales volumes in 2020 and an increase in committed contributions to our charitable foundations.

Operating Expenses increased $204.9 million in 2021.

Electric segment operating expenses increased 10.1% primarily due to increased production fuel and purchased power costs along with incremental operating costs and depreciation expense rising from our recent rate base investments.

Operating expenses in our Manufacturing segment increased 40.2%, driven by increased cost of products sold, which resulted from higher material input costs and increased sales volumes, and increased other operating expenses.

Operating expenses in our Plastics segment increased 47.8% primarily due to higher costs of products sold from higher resin inputs costs.

See our segment disclosures below for additional discussion of items impacting operating expenses.

Interest Charges increased $3.0 million in 2020 due to debt issuances in our Electric segment in the fourth quarter of 2019 and the first and third quarters of 2020, and increased outstanding borrowings under our short-term debt arrangements.

Interest Charges increased $3.3 million in 2021 due to a $40.0 million long-term debt issuance in August 2020, a higher level of short-term debt borrowings outstanding in 2021 and a lower level of capitalized interest due to the completion and placement in service of Astoria Station in the first quarter of 2021.

The increase in our short- and long-term debt borrowings were largely used to finance the rate base investments in our Electric segment.

Nonservice Cost Components of Postretirement Benefits decreased $0.9 million in 2020 mostly due to a decrease in pension plan nonservice costs, mainly actuarial loss amortization expenses, partially offset by interest cost increases on postretirement benefit plans.

Other Income increased $0.9 million in 2020 due to a $1.5 million increase in allowance for equity funds used during construction (AFUDC) on Electric segment construction work in progress, mainly for the Minnesota share of the Astoria Station project, partially offset by $0.6 million of decreases in the cash values of corporate-owned life insurance policies, interest income and other miscellaneous income.

Income Tax Expense increased $2.8 million in 2020 primarily due to increased income before income taxes along with reductions in certain permanent differences.

These increases were partially offset by production tax credits generated in 2020 from our Merricourt wind farm placed in service in the fourth quarter of 2020.

Nonservice Cost Components of Postretirement Benefits decreased $1.4 million in 2021 mostly due to a decrease in nonservice costs of our postretirement healthcare plan reflecting the effect of plan amendments adopted in 2020 and 2019.

Other Income decreased $3.2 million in 2021 due to a reduction of allowance for equity funds used during construction (AFUDC) on Electric segment investments, mainly for the Minnesota share of Astoria Station.

Astoria Station was placed into service, and the recognition of AFUDC discontinued, in the first quarter of 2021.

Income Tax Expense increased $15.8 million in 2021 primarily due to an increase in income before income taxes, but partially offset by an increase in production tax credits generated from our Merricourt wind farm, which was placed in service in the fourth quarter of 2020.

Our effective tax rate was 16.9% in 2021 and 17.4% in 2020.

See Note 12 to our consolidated financial statements included in the report on Form 10-K for additional information regarding factors impacting our effective tax rate in 2020 and 2019.

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See Note 12 to our consolidated financial statements included in the report on Form 10-K for additional information regarding factors impacting our effective tax rate.

ELECTRIC SEGMENT RESULTS

The following table summarizes the results of operations for our Electric segment for the years ended December 31, 2020 and 2019:

The following table summarizes the operating results of our Electric segment for the years ended December 31, 2021 and 2020:

(in thousands) 2021 2020 $ change % change

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Purchased Power 65,409 61,698 3,711 6.0

Operation and Maintenance Expenses 150,848 153,529 (2,681) (1.7)

Operating and Maintenance Expenses 159,669 150,848 8,821 5.8

Depreciation and Amortization 71,343 63,171 8,172 12.9

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Retail kwh Sales 4,789,879 4,776,687 13,192 0.3 %

Wholesale kwh Sales – Company Generation 236,528 198,569 37,959 19.1

Wholesale kwh Sales 420,044 236,528 183,516 77.6

Heating Degree Days 5,794 6,174 (380) (6.2)

Cooling Degree Days 704 534 170 31.8

Results of operations for the Electric segment are impacted by fluctuations in weather conditions and the resulting demand for electricity for heating and cooling.

The following table shows heating and cooling degree days as a percent of normal.

Our Electric segment operating results are impacted by fluctuations in weather conditions and the resulting demand for electricity for heating and cooling.

The following table presents heating and cooling degree days as a percent of normal for the years ended December 31, 2021 and 2020:

Heating Degree Days 91.3 % 97.2 %

Cooling Degree Days 151.7 % 116.3 %

The following table summarizes the estimated effect on diluted earnings per share of the difference in retail kwh sales under actual weather conditions and expected retail kwh sales under normal weather conditions in 2020 and 2019, and between years.

Effect on Diluted Earnings Per Share $ 0.01 $ 0.01 $ —

Retail Sales Revenue decreased $17.0 million driven by:

• A $25.6 million decrease in revenue related to the recovery of decreased fuel and purchased power costs to serve retail customers.

Decreased demand caused by the milder winter weather and COVID-19-related impacts on our commercial and industrial customers contributed to a 19.0% decrease in kwhs generated for system use.

Purchased power costs decreased, despite a 6.9% increase in kwhs purchased, due to a 19.9% decrease in purchased power prices resulting from a decrease in market demand between periods.

• A $4.4 million decrease in revenue related to decreased kwh consumption due to milder winter weather in 2020 compared with 2019, reflected in the 14.7% decrease in HDDs in 2020 compared with 2019.

The decrease in consumption due to the decrease in HDDs was only partially offset by an increase in consumption related to a 36.2% increase in CDDs in the summer of 2020 compared with the summer of 2019.

• A $2.9 million decrease due to decreased kwh sales to commercial and industrial customers mainly due to COVID-19-related impacts in 2020.

These decreases in revenue were partially offset by:

• An $11.0 million increase in Minnesota and North Dakota Renewable Rider Adjustment revenues related to earning a return on funds invested in Merricourt while the project was under construction.

• A $3.1 million increase in revenues from the North Dakota Generation Rider which went into effect in July 2019 to provide a return on funds invested in Astoria Station while the generation project is under construction.

• A $1.0 million increase due to a positive price variance arising from variances in sales under different tariffs.

• An $0.8 million increase in Conservation Improvement Program (CIP) and transmission cost recovery revenues.

Transmission Services Revenues increased $3.5 million due to increases of $1.9 million in transmission tariff revenues and $1.6 million in revenues from the recovery of infrastructure investment costs from interconnected generators.

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Other Electric Revenue increased $0.7 million, which includes $1.9 million from the recovery of infrastructure investment costs from a large commercial customer in 2020, partially offset by a $1.2 million decrease in revenue from steam sales to an ethanol producer driven by lower natural gas prices resulting in the producer switching to an alternative generation source to meet its steam requirements.

Production Fuel costs decreased $13.0 million mainly as a result of a 22.0% decrease in kwhs generated from our fuel-burning plants due to lower customer demand and a 6.9% increase in kwh purchases for system use.

Decreased system demand and lower prices for alternative fuels and generation sources, which drove market prices for electricity down in 2020, contributed to decreases in generation of 37.7% at Big Stone Plant and 36.7% at Hoot Lake Plant.

These decreases were partially offset by a 13.7% increase in generation at Coyote Station, which was offline for maintenance during the entire second quarter of 2019.

Purchased Power costs to serve retail customers decreased $10.4 million as a result of a 19.9% decrease in purchased power prices, partially offset by a 6.9% increase in kwhs purchased.

The increase in kwhs purchased was mainly due to a decrease in market prices for electricity in 2020 driven by low prices for natural gas-fired generation in combination with lower demand in 2020 due to COVID-19-related declines in electricity use by commercial and industrial consumers.

Operating and Maintenance Expense decreased $2.7 million mainly due to:

• A $2.8 million decrease in contracted services and materials and supplies expenses, mainly related to the Coyote Station's extended maintenance outage and Hoot Lake Plant turbine repairs in the second quarter of 2019 with no comparable expenses in 2020.

• A $2.7 million decrease in transmission tariff expenses related to decreased rates.

• A $1.3 million decrease in travel, meals and employee education expenses due to COVID-19-related travel restrictions.

• A $0.8 million decrease in pollution control reagent costs due to a 22.4% decrease in kwhs generated at Otter Tail Power Company's coal- burning plants.

These decreases in expense were partially offset by:

• A $2.0 million increase in customer bad debt expense provisions, mainly due to adoption of COVID-19-related service suspension and debt collection policies and financial constraints on some customers due to COVID-19.

• A $1.0 million increase in contribution commitments to Otter Tail Power Company's charitable foundation.

• A $0.6 million increase in land easement payments related to Merricourt.

• A $0.6 million increase in CIP expenditures.

• A $0.5 million increase in labor and benefit costs.

Depreciation and Amortization expense increased $3.1 million mainly due to 2019 capital additions for generation and transmission plant, a new customer information system, and the inception of depreciation of Merricourt assets in the fourth quarter of 2020.

Property Taxes increased $1.2 million due to property additions and increased valuations on existing property.

Retail Revenues increased $16.0 million primarily due to the following:

• An $8.1 million increase in fuel recovery revenues primarily resulting from increased production fuel and purchase power costs, both of which were impacted by increasing natural gas prices throughout most of 2021.

Partially offsetting this increase are credits provided to retail customers from increased margins recognized on wholesale sales.

• A $6.6 million increase in rider revenues in our North Dakota and South Dakota jurisdictions primarily to recover our investments in and costs to operate Merricourt and Astoria Station.

• A $5.0 million increase in new retail revenues from an interim rate increase in Minnesota, net of estimated refunds.

These increases in retail revenue were partially offset by the impact of reduced demand, exclusive of the impact of weather, from residential customers, and net of the effect of a change in customer usage mix.

In addition, retail revenue in 2020 benefited from the recognition of $2.6 million of Minnesota transmission rider revenue resulting from a favorable judicial decision regarding the state jurisdictional treatment of federally approved transmission projects.

Transmission Services Revenues increased $4.8 million primarily due to increased recovery of higher transmission costs and increased transmission investment along with increased generator interconnection revenues.

Wholesale Revenues increased $13.1 million as a result of a 77.6% increase in wholesale sales volumes and a 107.9% increase in wholesale prices driven by increased fuel costs and market demand for wholesale energy, which serves to drive up spot market prices for electricity.

Production Fuel costs increased $13.0 million as a result of a 16.9% increase in kwhs generated from our fuel-burning plants, largely driven by output from Astoria Station after energy generation commenced in April of 2021.

Purchased Power costs increased $3.7 million due to a 27.9% increase in the cost per kwh purchased in 2021.

This increase was partially offset by a 17.1% decrease in the volume of purchased power in 2021 as our recent generation additions provide additional generation resources to serve customer demand and market conditions led to operating our facilities at higher capacity factors in lieu of purchasing power at higher market prices.

Operating and Maintenance Expense increased $8.8 million mainly due to:

• A $5.2 million increase in operating and maintenance costs for Merricourt and Astoria Station as these facilities were placed in service in the fourth quarter of 2020 and the first quarter of 2021, respectively.

• A $4.0 million increase in Big Stone plant maintenance costs arising from our planned facility outage, which began in the third quarter and was completed in the fourth quarter of 2021.

• Other additional costs including a $2.2 million increase in transmission tariff expenses and increases in information technology services, insurance costs and increased vegetative maintenance costs.

These expense increases were partially offset by, among other items, a $3.0 million reduction in bad debt expense as customer collections have improved from 2020, which were negatively impacted by the economic effects of COVID-19, along with lower operating costs following the closure of Hoot Lake Plant in May 2021.

Depreciation and Amortization expense increased $8.2 million primarily due to Merricourt and Astoria Station being placed in service in the fourth quarter of 2020 and the first quarter of 2021, respectively.

MANUFACTURING SEGMENT RESULTS

The following table summarizes the results of operations for our Manufacturing segment for the years ended December 31, 2020 and 2019:

The following table summarizes operating results of our Manufacturing segment for the years ended December 31, 2021 and 2020:

(in thousands) 2021 2020 $ change % change

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Operating Income $ 24,114 $ 16,103 $ 8,011 49.7 %

Operating Revenues decreased $38.4 million primarily due to the following:

• At BTD, revenues decreased $37.3 million.

Parts revenue was down $37.5 million, mainly due to decreased sales volumes across all end markets served by BTD, in order of magnitude:

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

The decreased sales mainly resulted from customers implementing temporary plant shutdowns due to the COVID-19 pandemic.

Lower prices related to the pass through of lower material costs accounted for an $18.5 million decrease in parts revenue, partially offset by $1.7 million in revenue increases due to product mix exclusive of the pass through of material cost reductions.

Plastics, revenues decreased $1.1 million.

A $1.3 million increase in horticultural product sales was more than offset by decreases of $1.7 million in life science product sales, $0.5 million in industrial sales and $0.2 million in extrusion sales.

However, COVID-19 had a negative impact on life science product sales as elective and non-critical surgeries and medical procedures were cancelled or delayed.

Industrial product sales decreased due to COVID-19-related impacts on customer’s sales and service activities.

Cost of Products Sold decreased $34.7 million due to the following:

• Cost of products sold at BTD decreased $34.2 million as a result of both the decreased sales volume and the $18.5 million in lower material costs passed through to customers, but also due to labor cost decreases due to second quarter 2020 workforce reductions.

Operating Revenues increased $97.5 million primarily due to the following:

• At BTD, operating revenues increased $91.3 million.

Parts revenue increased $78.4 million, primarily due to a 31.2% increase in material costs, which are passed through to customers, as steel prices increased significantly from the previous year.

Steel prices increased during the year as steel mill production did not match customer demand as mill capacity recovered from shutdowns in 2020 resulting from the COVID-19 pandemic.

Sales volumes increased 6.8% in 2021 from increased and robust end market demand across most markets served.

Demand in 2020 was impacted by COVID-19 after certain customers implemented temporary plant shutdowns in response to the pandemic.

A $7.3 million increase in scrap revenues, with $5.9 million due to higher scrap metal prices and $1.4 million attributable to higher volumes, also contributed to the increase in operating revenues.

Plastics, revenues increased $6.2 million, primarily due to a 12.5% increase in sales volumes as well as 5.6% increase in sale prices.

Increases in horticultural product sales volumes due to strong customer demand during the year were partially offset by decreases in sales to other end market customers.

Sales volumes in 2020 were impacted by the COVID-19 pandemic, as certain end markets experienced reduced demand.

Cost of Products Sold increased $79.1 million due to the following:

• Cost of products sold at BTD increased $76.6 million as a result of both increased material costs and higher sales volumes.

Increased gross profit margins resulting from a higher leveraging of fixed costs due to increased sales volumes were partially offset by lower productivity and increased labor and freight costs.

The lower level of productivity during the year was primarily the result of increased staffing levels to meet higher business volumes and the time required for new employees to achieve peak productivity.

• Cost of products sold at T.O.

Plastics decreased $0.6 million due to a $2.1 million decrease in material costs related to the decrease in sales volume, mostly offset by increases in other indirect costs and an increase in rental costs for more warehouse space.

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Other Operating Expenses decreased $2.6 million primarily due to a $2.1 million decrease in operating expenses at BTD, mainly due to reductions in travel and outside services expenditures related to initiatives taken at BTD to mitigate the negative impacts on sales related to COVID-19.

Operating expenses at T.O.

Plastics decreased $0.5 million, including a $0.3 million write off of the value of destroyed property in 2019 related to the March 2019 partial roof collapse.

Plastics travel and other selling expenses decreased by $0.2 million due to restrictions on activity in response to COVID-19-related safety initiatives.

BTD incurred $1.0 million in termination costs in the second quarter of 2020, with $0.9 million charged to cost of products sold and $0.1 million charged to operating expense, related to headcount reductions across all its sites in response to the ongoing reduction in sales volume.

Depreciation and Amortization increased $0.7 million due to an increase of $0.4 million at BTD related to recent investments in equipment and tooling, and a $0.3 million increase at T.O.

Plastics including several large tooling and equipment projects and the addition of a pelletizer room.

Plastics increased $3.2 million primarily due to increased sales volumes.

Gross profit margins increased as a result of a higher leveraging of fixed costs due to increased sales volumes and better pricing spreads.

Other Operating Expenses increased $9.9 million due to increased staffing levels and associated recruitment costs, travel costs, incentive based compensation and other costs resulting from higher business volumes.

PLASTICS SEGMENT RESULTS

The following table summarizes the results of operations for our Plastics segment for the years ended December 31, 2020 and 2019:

The following table summarizes operating results for our Plastics segment for the years ended December 31, 2021 and 2020:

(in thousands) 2021 2020 $ change % change

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Operating Income $ 132,760 $ 37,823 $ 94,937 251.0 %

Operating Revenues increased $22.0 million due to an 8.0% increase in pounds of PVC pipe sold in combination with a 3.7% increase in the price per pound sold.

The sales volume increase resulted from improved market conditions during the third and fourth quarters of 2020 driven by strong construction markets and concerns over raw material supply and product availability due to two resin suppliers invoking force majeure, anticipated impacts from hurricanes, significant global demand for PVC resin and limited pipe inventory across the country.

Cost of Products Sold increased $8.9 million due to the increase in sales volume, partially offset by a 1.5% decrease in the cost per pound of PVC pipe sold primarily due to lower material input costs.

Other Operating Expenses increased $3.6 million including a $2.0 million contribution commitment to Otter Tail Corporation’s charitable foundation in 2020 and additional increases in other expenses, primarily performance-based compensation.

Operating Revenues increased $175.0 million primarily due to unique supply and demand dynamics during the year.

The average price per pound of PVC pipe sold in 2021 increased 82.1% compared to 2020, which exceeded the 65.5% increase in the cost of PVC resin and other input materials.

The increase in sale prices was largely due to the combination of PVC resin supply constraints, which limited PVC pipe manufacturing output and led to extremely low inventory levels, and strong demand for PVC pipe products.

Resin supply was negatively impacted during the year by production disruptions caused by extreme weather events in the Gulf Coast region of the U.S.

in the first and third quarters of the year.

Pounds of pipe sold in 2021 increased 1.7% compared to the previous year.

Cost of Products Sold increased $80.0 million primarily due to the increase in the cost per pound of PVC pipe sold largely due to higher material input costs.

Other Operating Expenses decreased $0.7 million.

In 2020, our Plastics businesses made a $2.0 million contribution commitment to OTC’s charitable foundation, and no such contribution commitment was made in 2021.

The decrease in foundation contributions was partially offset by an increase in variable costs associated with the increased financial results in 2021.

CORPORATE COSTS

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Operating Loss $ 14,130 $ 13,123 $ 1,007 7.7 %

Other Operating Expenses increased $3.3 million mainly as a result of a $2.5 million contribution commitment to Otter Tail Corporation’s charitable foundation in 2020 and a $1.5 million increase in labor and benefit expenses, partially offset by a $0.6 million decrease in corporate costs charged to subsidiaries.

Other Operating Expenses increased $1.1 million primarily due to increased labor and benefit costs as well as a $3.0 million contribution commitment to OTC’s charitable foundation in 2021, compared to a $2.5 million commitment in the previous year.

REGULATORY RATE MATTERS

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The mechanism requires annual customer refunds of 50% of any weather-normalized revenue creating earnings in excess of the authorized ROE up to a maximum of 9.50% and 100% refunds revenue creating earnings above 9.50%.

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Minnesota Rate Case:

On November 2, 2020, OTP filed a request with the MPUC for an increase in revenue recoverable under general rates in Minnesota.

On November 2, 2020, OTP filed a request with the MPUC for an increase in revenue recoverable through base rates in Minnesota.

In its filing, OTP requested a net increase in annual revenue of approximately $14.5 million, or 6.77%, based on an allowed rate of return on rate base of 7.59% and an allowed rate of return on equity of 10.20% on an equity ratio of 52.5% of total capital.

Through this proceeding, OTP has proposed changes to the mechanism of cost recovery, with some costs moving from riders into base rates and fuel, and purchased power and conservation program costs moving out of base rates and into riders.

Through this proceeding, OTP has proposed changes to the mechanism of cost recovery, with some costs moving from riders into base rates and fuel, purchased power, and conservation program costs moving out of base rates and into riders.

The filing also included a revenue decoupling mechanism proposal.

Such mechanisms are designed to separate a utility's revenue from changes in energy sales.

The decoupling mechanism uses a tracker balance in which authorized customer margins are subject to a true-up mechanism to maintain or cap a given level of revenues.

The decoupling mechanism uses a tracker balance through which authorized customer margins are subject to a true-up mechanism to maintain or cap a given level of revenues.

On December 3, 2020, the MPUC approved an interim annual rate increase of $6.9 million, or 3.2%, effective January 1, 2021.

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In the aggregate, this alternative recovery proposal reduced operating costs and delayed recovery of certain other costs by approximately $7.0 million to lessen the interim rate impact on customers.

In a filing submitted to the MPUC on April 30, 2021, OTP lowered its requested net annual revenue increase from its initial request of $14.5 million to $8.2 million, primarily due to a reduction in operating costs from amounts included in its November 2020 filing.

The cost reductions include, among other items, lower depreciation expense on our wind generation assets due to the extension of depreciable lives from 25 to 35 years and a reduction in postretirement benefit costs.

On February 1, 2022, the MPUC issued its written order.

The key provisions of the order include a revenue requirement of $209.0 million based on a return on rate base of 7.18%, including an allowed return on equity of 9.48% on an equity ratio of 52.5%.

The order also authorizes recovery, over a five-year period, of our remaining Hoot Lake Plant net asset and approves the requested decoupling mechanism for most residential and commercial customer rate groups, with a cap of 4% of annual base revenues.

Following the submission of certain compliance filings and a comment period on such filings, we expect final rates will be implemented in mid-2022.

The following table includes a summary of pending and recently concluded rate rider proceedings:

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TCR - 2018 MN Approved 05/07/20 10.3 01/21/20 See below for additional details.

RRR - 2020 ND Approved 03/18/20 5.8 04/01/20 Includes return on Merricourt construction costs.

CIP - 2021 MN Approved 04/01/21 9.4 12/01/21 Includes recovery of energy conservation improvement costs as well as a demand side management financial incentive.

CIP - 2020 MN Approved 05/01/20 8.2 10/01/20 Includes recovery of energy conservation improvement costs as well as a demand side management financial incentive.

TCR - 2021 MN Requested 11/23/21 7.2 07/01/22 Includes recovery of two new transmission projects.

RRR - 2021 MN Requested 12/06/21 2.7 07/01/22 Includes return on Hoot Lake Solar construction costs and costs associated with the acquisition of the Ashtabula III wind farm.

EUIC - 2021 MN Requested 06/07/21 1.3 01/01/22 Includes recovery of new infrastructure costs, including advanced metering, outage management and demand response systems.

RRR - 2021 ND Approved 03/07/21 11.8 04/01/21 Includes recovery of Merricourt investment and operating costs.

GCR - 2020 ND Approved 06/10/20 6.2 07/01/20 Includes return on Astoria Station construction costs.

TCR - 2020 ND Approved 08/31/20 5.6 01/21/20 Includes recovery of new transmission assets.

TCR - 2021 ND Approved 09/15/21 6.1 01/01/22 Includes recovery of three new transmission projects/programs.

RRR - 2020 ND Approved 03/18/20 5.8 04/01/20 Includes return on Merricourt construction costs.

TCR - 2020 ND Approved 08/31/20 5.7 01/21/20 Includes recovery of seven new transmission assets.

TCR - 2020 ND Approved 11/18/20 5.6 01/01/21 Includes recovery of eight new transmission projects.

GCR - 2021 ND Approved 03/01/21 5.2 07/01/21 Includes recovery of Astoria Station, net of anticipated savings associated with the retirement of Hoot Lake Plant.

TCR - 2020 SD Approved 01/29/20 2.3 03/02/20 Annual update to transmission cost recovery rider.

TCR - 2021 SD Requested 10/29/21 2.2 03/01/22 Annual update to transmission cost recovery rider.

TCR - 2021 SD Approved 02/19/21 2.2 03/01/21 Includes recovery of two new transmission projects.

PIR - 2020 SD Approved 05/31/20 1.6 09/01/20 Includes return on Merricourt and Astoria Station construction costs.

TCR - 2021 ND Approved 11/18/20 5.6 01/01/21 Includes recovery of eight new transmission projects.

RRR - 2021 ND Requested 12/31/20 11.8 — Includes return on Merricourt construction costs.

TCR - 2021 SD Requested 10/30/20 2.2 — Includes recovery of two new transmission projects.

Minnesota TCR:

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With this decision, one-half of the projected TCR rider tracker balance at December 2020 of $13.4 million will be included in the 2021 TCR rider annual revenue requirement, with the remainder included in the next annual update.

The annual updates provide for recovery of approximately $2.6 million in MISO revenues credits to Minnesota customers through the TCR rider prior to September 30, 2020.

As a result, OTP recognized additional rider revenue of $2.6 million during the year ended December 31, 2020.

The annual updates provide for recovery of approximately $2.6 million in MISO revenue credits to Minnesota customers through the TCR rider prior to September 30, 2020.

As a result, OTP recognized additional rider revenue of $2.6 million during the third quarter of 2020.

LIQUIDITY OVERVIEW

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As of December 31, 2021, we were in compliance with all debt covenants (see the Financial Covenant section under Capital Resources below).

We continue to have sufficient liquidity under our credit facilities to support our business based on the current economic environment.

We are closely monitoring our liquidity and capital market conditions given the uncertainty surrounding the impact of COVID-19, which could have an adverse effect on the availability and terms of future debt and equity financing.

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The following table presents the status of our lines of credit as of December 31, 2021 and 2020:

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Total $ 340,000 $ 91,163 $ 13,159 $ 235,678 $ 244,902

We have an internal risk tolerance metric to maintain a minimum of $50 million of liquidity under the Otter Tail Corporation Credit Agreement.

We have an internal risk tolerance metric to maintain a minimum of $50 million of liquidity under the OTC Credit Agreement.

Should additional liquidity be needed, this agreement includes an accordion feature allowing us to increase the amount available to $290 million, subject to certain terms and conditions.

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Net Cash Provided by Operating Activities $ 231,243 $ 211,921

Net Cash Provided by Operating Activities increased $26.9 million primarily due to a $9.0 million increase in net income, a $11.3 million decrease in discretionary contributions to our funded pension plan and a $10.3 million reduction in working capital.

Our working capital decrease was primarily the result of increased accounts payable due to increased construction program costs in our Electric segment.

Our working capital level was also impacted by a decrease in inventories in our Manufacturing segment due to strong sales volumes in the fourth quarter of 2020 and increased outstanding receivables of $6.3 million primarily from our Manufacturing and Plastics segments due to strong sales volumes in the fourth quarter of 2020.

Our average collection period on outstanding receivables on a consolidated basis increased from approximately 31 days in 2019 to approximately 34 days in 2020.

Net Cash Provided by Operating Activities increased $19.3 million primarily due to a $80.9 million increase in net income, but partially offset by an increase in working capital.

Our working capital increase was primarily the result of a $61.0 million increase in accounts receivable and a $54.3 million increase in inventories, which exceeded the increase in accounts payable and accrued and other liabilities.

The increase in accounts receivable was primarily due to increased sales prices in our Manufacturing and Plastics segments, as well as increased sales volumes in our Plastics segment in the fourth quarter of 2021 compared to the fourth quarter of 2020.

The increase in inventories was largely the result of increased material costs within our Manufacturing and Plastics segments.

The increase in material costs of our Plastics segment more than offset the significant decrease in pounds of pipe inventory, which decreased as a result of lower manufacturing output due to resin supply constraints and strong demand for PVC pipe.

The increase in accounts payable was largely due to the increased material costs in our Manufacturing and Plastics segments and increased inventory levels primarily in our Manufacturing segment.

(in thousands) 2021 2020

Net Cash Used in Investing Activities $ 171,510 $ 375,652

Net Cash Used in Investment Activities increased $166.2 million driven by our Electric segment capital investment plan, including construction of our Merricourt and Astoria Station projects.

Net Cash Used in Investment Activities decreased $204.1 million primarily related to our Astoria Station natural gas plant and Merricourt wind farm being under construction during 2020, with the capital spend being substantially complete for both projects by year-end 2020.

(in thousands) 2021 2020

Net Cash Provided by Financing Activities $ 143,695 $ 44,773

Net Cash Provided by Financing Activities increased $98.9 million as we issued debt and equity in 2020 and increased borrowings under our short-term debt agreements primarily to finance our Electric segment capital investments.

We issued $75.0 million of long-term debt in 2020 and increased borrowings under our short-term debt arrangements by $75.0 million.

In addition, we raised net proceeds of $49.7 million from issuances of common shares under our various equity programs, including our At-the-Market offering program and our Automatic Dividend Reinvestment and Share Purchase Plan.

We also paid $60.3 million in common dividends in 2020.

Financing activities in 2019 included the issuance of $100 million of long-term debt and the issuance of common shares generating net proceeds of $17.0 million.

Proceeds from these debt and equity issuances were used to fund Electric segment construction costs and repay $12.6 million in short-term debt.

We paid $55.7 million in common dividends in 2019.

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Net Cash (Used in) Provided by Financing Activities $ (59,359) $ 143,695

Net Cash (Used in) Provided by Financing Activities decreased $203.1 million primarily related to a decrease in construction financing needs within our Electric segment, as capital spending was substantially complete for both Astoria Station and Merricourt by year-end 2020.

In 2021 our financing activities included the issuance of $140.0 million in long-term debt at OTP, which was used to repay long-term debt that matured in December 2021, and $10.2 million of net short-term borrowings on our lines of credit, which were primarily used to fund construction expenditures and support operating activities.

In 2021, we paid $64.9 million in dividends to common shareholders.

In 2020, $75.0 million of long-term debt was issued at OTP, we had $75.0 million of net short-term borrowings on our lines of credit, and we also raised $52.4 million from the issuance of common stock to fund capital expenditures at OTP.

In 2020, we paid $60.3 million in dividends to common shareholders.

CAPITAL REQUIREMENTS

CAPITAL EXPENDITURES

We have a capital expenditure program for expanding, upgrading and improving our plants and operating equipment.

We have a capital expenditure program for expanding, upgrading and improving our facilities and operating equipment.

Typical uses of cash for capital expenditures are investments in electric generation facilities and environmental upgrades, transmission and distribution lines, manufacturing facilities and upgrades, equipment used in the manufacturing process, and computer hardware and information systems.

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Electric Segment:

Renewables and Natural Gas Generation $ 31 $ 104 $ 3 $ 1 $ 1 $ 140

Renewables and Natural Gas Generation $ 30 $ 80 $ 92 $ 92 $ 160 a $ 454

Technology and Infrastructure 26 30 18 — — 74

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Transmission (includes replacements) 26 28 24 20 27 125

Other 29 30 25 23 21 128

Other 30 29 32 36 23 a 150

Total Electric Segment $ 357 $ 140 $ 149 $ 202 $ 201 $ 183 $ 243 $ 978

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Debt Obligations $ 858 $ 121 $ — $ 80 $ 657

Coal Contracts 573 23 47 49 454

Interest on Debt Obligations 570 33 63 63 411

Other Purchase Obligations (including land easements) 77 33 4 4 36

Coal Contracts 548 23 48 49 428

Capacity and Energy Requirements 177 20 24 24 109

Postretirement Benefit Obligations 116 5 12 12 87

Other Purchase Obligations (including land easements) 58 2 18 4 34

Operating Lease Obligations 21 5 9 5 2

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Postretirement benefit obligations include estimated cash expenditures for the payment of retiree medical and life insurance benefits and supplemental pension benefits under our unfunded Executive Survivor and Supplemental Retirement Plan, but do not include amounts to fund our noncontributory funded pension plan, as we are not currently required to make a contribution to that plan.

Off-Balance Sheet Arrangements

As of December 31, 2021, we have outstanding letters of credit totaling $15.9 million, a portion of which reduces our borrowing capacity under our lines of credit.

No outstanding letters of credit are reflected in outstanding short-term debt on our consolidated balance sheets.

We do not have any other off-balance-sheet arrangements or any relationships with unconsolidated entities or financial partnerships.

These entities are often referred to as structured finance special purpose entities or variable interest entities, which are established for the purpose of facilitating off-balance-sheet arrangements or for other contractually narrow or limited purposes.

We are not exposed to any financing, liquidity, market or credit risk that could arise if we had such relationships.

COMMON STOCK DIVIDENDS

We paid dividends to our common stockholders totaling $60.3 million, or $1.48 per share, in 2020.

We paid dividends to our shareholders totaling $64.9 million, or $1.56 per share, in 2021.

The determination of the amount of future cash dividends to be paid will depend on, among other things, our financial condition, improvement in earnings per share, cash flows from operations, the level of our capital expenditures and our future business prospects.

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.

See note 14 to our consolidated financial statements included in this report on Form 10-K for additional information.

See Note 14 to our consolidated

financial statements included in this report on Form 10-K for additional information.

The decision to declare a dividend is reviewed quarterly by our Board of Directors.

On February 4, 2022, our Board of Directors increased the quarterly dividend from $0.39 to $0.4125 per common share.

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CAPITAL RESOURCES

Financial flexibility is provided by operating cash flows, unused lines of credit, strong financial coverages, investment grade credit ratings and alternative financing arrangements such as leasing.

Equity or debt financing will be required in the period 2021 through 2025 given the expansion plans related to our Electric segment to fund construction of new rate base and transmission investments, in the event we decide to reduce borrowings under our lines of credit, to refund or retire early any of our presently outstanding debt, to complete acquisitions or for other corporate purposes.

Debt financing will be required in the five-year period from 2022 through 2025 to refinance maturing debt and to finance our capital investments within our Electric segment.

Our financing plans are subject to change and are impacted by our planned level of capital investments, a decision to reduce borrowings under our lines of credit, to refund or retire early any of our presently outstanding debt, to complete acquisitions or for other corporate purposes.

REGISTRATION STATEMENTS

On May 3, 2018 we filed a shelf registration statement with the SEC under which we 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 through the expiration date of May 3, 2021.

On November 8, 2019 we entered into a Distribution Agreement with KeyBank under which we may offer and sell our common shares from time to time through KeyBank, as our distribution agent, up to an aggregate sales price of $75.0 million through an At-the-Market offering program.

In 2020, we received proceeds of $37.0 million 1 , net of commissions paid to KeyBank of $0.5 million 1 from the issuance of 868,484 1 shares under this program.

In total from the inception of the program through December 31, 2020, we have received proceeds under this program of $54.4 million.

On May 3, 2018 we also filed a shelf registration statement with the SEC for the issuance of up to 1,500,000 common shares under our 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 issued 320,173 shares for proceeds of $13.4 million under the Plan.

On May 3, 2021, we filed a shelf registration statement with the SEC under which we 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.

The registration statement expires in May, 2024.

No shares were issued pursuant to the registration statement in 2021.

On May 3, 2021, we filed a second 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, which provides shareholders, retail customers of OTP and other interested investors a method of purchasing our common shares by reinvesting their dividends and/or making optional cash investments.

Shares purchased under the plan may be new issue common shares or common shares purchased on the open market.

The registration statement expires in May 2024.

In 2021, we issued 115,180 shares under the plan.

All shares issued under the plan to date have been open market purchases and there have been no new issue shares, resulting in no proceeds received by the Company.

As of December 31, 2021, 1,384,820 shares remain available for purchase or issuance under the Plan.

We intend to file new shelf registration statements in 2021 following the expiration of our current registration statements on May 3, 2021.

SHORT-TERM DEBT

Otter Tail Corporation and Otter Tail Power Company are each party to a credit agreement (the OTC Credit Agreement and OTP Credit Agreement, respectively) which provide for unsecured revolving lines of credit.

The agreements generally bear interest at LIBOR plus an applicable credit spread, which is subject to adjustment based on the credit ratings of the issuer.

The LIBOR credit spread for the OTC Credit Agreement and OTP Credit Agreement was 1.50% and 1.25%, respectively, at December 31, 2020.

OTC and OTP are each party to a credit agreement (the OTC Credit Agreement and OTP Credit Agreement, respectively) which provides for unsecured revolving lines of credit.

The agreements generally bear interest at the London Interbank Offered Rate (LIBOR) plus an applicable credit spread, which is subject to adjustment based on the credit ratings of the issuer.

The weighted-average interest rate on all outstanding borrowings as of December 31, 2021 and 2020 was 1.42% and 1.61%.

The following is a summary of key provisions and borrowing information as of and for the year ended December 31, 2021:

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Interest Rate at Year-End 1.6 % 1.4 %

Maturity Date October 31, 2024 October 31, 2024

Maturity Date September 30, 2026 September 30, 2026

1 Each facility includes an accordion featuring allowing the borrower to increase the borrowing limit if certain terms and conditions are met.

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The agreements generally provide for unsecured borrowings at fixed rates of interest with maturities ranging from 2022 to 2051.

One OTP debt instrument with a principal balance of $140.0 million matures in December 2021.

We anticipate issuing long-term debt in 2021 with the proceeds used to satisfy this maturing instrument.

1 In the fourth quarter of 2020, we received proceeds of $11.5 million, net of commission of $0.1 million, from the issuance of 280,400 shares.

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One OTP debt instrument with a principal balance of $30.0 million matures in August 2022.

Pursuant to a Note Purchase Agreement executed in June 2021, OTP intends to issue its Series 2022A notes in May 2022, for aggregate proceeds of $90.0 million, subject to the satisfaction of certain customary conditions to closing, and use a portion of the proceeds to repay the $30.0 million which is maturing in August 2022.

Financial Covenants

Certain of our short- and long-debt agreements require Otter Tail Corporation and OTP to maintain certain financial covenants.

Certain of our short- and long-term debt agreements require OTC and OTP to maintain certain financial covenants.

As of December 31, 2021, we were in compliance with these financial covenants as further described below:

Otter Tail Corporation under its financial covenants, may not permit its ratio of Interest-Bearing Debt to Total Capitalization to exceed 0.60 to 1.00, may not permit its Interest and Dividend Coverage Ratio to be less than 1.50 to 1.00, and may not permit its Priority Indebtedness to exceed 10% of our Total Capitalization.

OTC, under its financial covenants, may not permit its ratio of Interest-Bearing Debt to Total Capitalization to exceed 0.60 to 1.00, may not permit its Interest and Dividend Coverage Ratio to be less than 1.50 to 1.00, and may not permit its Priority Indebtedness to exceed 10% of our Total Capitalization.

As of December 31, 2021, our Interest-Bearing Debt to Total Capitalization was 0.46 to 1.00, our Interest and Dividend Coverage Ratio was 6.82 to 1.00 and we had no Priority Indebtedness outstanding.

OTP under its financial covenants, may not permit its ratio of Debt to Total Capitalization to exceed 0.60 to 1.00, may not permit its Interest and Dividend Coverage Ratio to be less than 1.50 to 1.00, and may not permit its Priority Debt to exceed 20% of its Total Capitalization.

As of December 31, 2020, OTP's Interest-Bearing Debt to Total Capitalization was 0.46 to 1.00, its Interest and Dividend Coverage Ratio was 3.66 to 1.00 and it had no Priority Indebtedness outstanding.

December 31, 2021, OTP's Interest-Bearing Debt to Total Capitalization was 0.48 to 1.00, its Interest and Dividend Coverage Ratio was 3.24 to 1.00 and it had no Priority Indebtedness outstanding.

None of our debt agreements include any provisions that would trigger an acceleration of the related debt as a result of changes in the credit rating levels assigned to the related obligor by rating agencies.

Credit Ratings

The credit ratings of Otter Tail Corporation and OTP as of December 31, 2020 are summarized below:

Otter Tail Corporation OTP

The credit ratings of OTC and OTP as of December 31, 2021 are summarized below:

Otter Tail Corporation Otter Tail Power Company

Moody's Fitch S&P Moody's Fitch S&P

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Outlook Stable Stable Negative Stable Stable Stable

OFF-BALANCE-SHEET ARRANGEMENTS

As of December 31, 2020 we have outstanding letters of credit totaling $17.4 million, a portion of which reduces our borrowing capacity under our lines of credit.

No outstanding letters of credit are reflected in outstanding short-term debt on our consolidated balance sheets.

We do not have any other off-balance-sheet arrangements or any relationships with unconsolidated entities or financial partnerships.

We are not exposed to any financing, liquidity, market or credit risk that could arise if we had such relationships.

CRITICAL ACCOUNTING POLICIES INVOLVING SIGNIFICANT ESTIMATES

Financial statements prepared in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

Preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

While we believe the estimates and judgments we use in preparing our consolidated financial statements are appropriate and are based on the best available information, they are subject to future events and uncertainties regarding their outcome and therefore actual results may materially differ from these estimates.

Management has discussed the application of these critical accounting policies and the development of these estimates with the Audit Committee of our Board of Directors.

The following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.

The following critical accounting policies affect the most significant judgments and estimates used in the preparation of our consolidated financial statements.

REGULATORY ACCOUNTING

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Accordingly, our utility business must adhere to the accounting requirements of regulated operations, which requires the recognition of regulatory assets and regulatory liabilities for amounts that otherwise would impact the statement of income or comprehensive income when it is probable that such amounts will be collected from customers or credited to customers through the rate-making process.

This guidance also provides recognition criteria for adjustments to rates outside of a general rate case proceeding which are provided for 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.

This guidance also provides recognition criteria for adjustments to rates outside of a general rate case proceeding which are provided 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.

Regulatory assets generally represent costs that have been incurred but have been deferred because future recovery from customers, as established through the rate-making process, is probable.

Regulatory liabilities generally represent amounts to be refunded to customers or amounts currently collected from customers for future costs.

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We assess the probability of recovery of regulatory assets and the obligations arising from regulatory liabilities on a quarterly basis.

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Also, a reduction in the expected rate of return on pension plan assets in our funded pension plan or realized rates of return on plan assets that are well below assumed rates of return or an increase in the anticipated life expectancy of plan participants could result in significant increases in recognized pension benefit expenses in the year of the change or for many years thereafter because actuarial losses can be amortized over the average remaining service lives of active employees.

The pension benefit cost for 2021 for our noncontributory funded pension plan is expected to be $8.4 million compared to $6.8 million in 2020, reflecting a decrease in the estimated discount rate used to determine annual benefit cost accruals from 3.47% in 2020 to 2.78% in 2021.

The assumed rate of return on pension plan assets is 6.51% for 2021 compared with 6.88% for 2020.

In selecting the discount rate, we consider the yields of fixed income debt securities, which have ratings of “Aa” published by recognized rating agencies, along with bond matching models specific to our plan’s cash flows as a basis to determine the rate.

Subsequent increases or decreases in actual rates of return on plan assets over assumed rates, increases or decreases in the discount rate, increases in future compensation levels, and increases in retiree healthcare cost inflation rates could significantly change projected costs.

We estimate the discount rate through the use of a hypothetical bond portfolio method, which incorporates yields on a collection of high credit quality bonds that produce cash flows similar to our anticipated future benefit payments.

We estimate the assumed long-term rate of return on

plan assets based on asset category studies using historical market returns and volatility rates with forward looking estimates based on existing and forecasted future market conditions.

At December 31, 2021, we set the discount rate used to measure our pension plan obligations at 3.03% and at 3.01% to measure postretirement healthcare obligations, a 25 and 26 basis point increase, respectively, from the estimates used at December 31, 2020.

Our estimates used to determine benefit cost for 2021 included a discount rate of 2.78% for pension benefits and 2.75% for postretirement healthcare costs, a 69 and 68 basis point decrease, respectively, from 2020 estimates.

In addition, we estimated our assumed rate of return on pension assets to be 6.51% for 2021, a 37 basis point decrease from our 2020 estimate.

The following table summarizes the impact on 2021 pension and postretirement costs for a 0.25 increase or decrease, holding all other variables constant, on certain key assumptions:

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Discount Rate (327) 345

For 2022, we expect pension benefit cost for our pension plan to be $3.0 million compared to $7.7 million in 2021, as the amortization of actuarial losses is reduced in 2022 following actuarial gains recognized as of December 31, 2021.

The estimated discount rate used to determine annual benefit cost accruals increased from 2.78% in 2021 to 3.03% in 2022.

The assumed rate of return on pension plan assets is 6.30% for 2022 compared with 6.51% for 2021.

We believe the estimates made for our pension and other postretirement benefits are reasonable based on the information that is known at the point in time the estimates are made.

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The discount rate applied to the estimated future cash flows reflects our estimate of the weighted-average cost of capital of comparable entities.

To supplement our income approach, we reference various market indications of fair value, where available, and includes fair value estimates using multiples derived from comparable enterprise values to EBITDA and revenue multiples, comparable price earnings ratios and, if available, comparable sales transactions for comparative peer companies.

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To supplement our income approach, we reference various market indications of fair value, where available, and include fair value estimates using multiples derived from comparable enterprise values to EBITDA, comparable price earnings ratios and, if available, comparable sales transactions for comparative peer companies.

Our discounted cash flow methodology incorporates significant estimates, which include assumptions of future operating results and cash flows, which are impacted by economic and industry conditions, the amount and timing of estimated capital expenditures, an estimated terminal growth rate and the selection of an appropriate weighted-average cost of capital, among others.

Our goodwill impairment testing performed in the fourth quarter of 2021 indicated no impairment was present for either reporting unit and the estimated fair value of each reporting unit substantially exceeded the respective carrying value.

As part of our testing we perform various sensitivity analyses to understand if our conclusions are sensitive to changes in certain assumptions.

A 1% decrease in projected operating revenues, a one hundred basis point decrease in projected gross profit margins and a twenty five basis point increase in the discount rate would not lead to a goodwill impairment charge for either reporting unit.

We believe the estimates and assumptions used in our impairment assessments are reasonable and based on the best information available.

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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 7. Management’s Discussion and Analysis