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Item 8. Financial Statements and Supplementary Data

2022-02-16 compared with 2021-02-19 · 358 added, 546 removed, 912 unchanged (50% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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Rate and Regulatory Matters—Impact of Rate Regulation on the Financial Statements—Refer to Notes 1, and 5 to the financial statements.

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This guidance allows for the recording of a regulatory asset or liability for certain costs or credits which otherwise would be recognized in the statement of income or comprehensive income based on an expectation that the cost will be recovered or returned in future rates.

This guidance also provides for adjustments to rates outside of a general rate proceeding to encourage or incentivize investments in certain areas such as conservation, renewable energy, pollution reduction or control, improved infrastructure of the transmission grid or other programs that provide benefits to the general public under public policy, laws or regulations

This guidance also provides for adjustments to rates outside of a general rate case proceeding to encourage or incentivize investments in certain areas such as conservation, renewable energy, pollution reduction or control, improved infrastructure of the transmission grid or other programs that provide benefits to the general public under public policy, laws or regulations.

The Company is subject to rate regulation by state and federal regulatory agencies (collectively, the “Commissions”), which have jurisdiction with respect to the rates of electric distribution companies in Minnesota, North Dakota and South Dakota.

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

The Company assesses the probability of recovery of regulatory assets and the obligations arising from regulatory liabilities on a quarterly basis.

Probability estimates incorporate numerous factors, including recent rate making decisions, historical precedents for similar matters, the regulatory environments in which the Company operates, and the impact these incurred costs may have on customers.

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• We evaluated the Company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.

• We read relevant regulatory orders issued by the Commissions for the Company, regulatory statutes, interpretations, procedural memorandums, filings made by interveners, and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions’ treatment of similar costs under similar circumstances.

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The Manufacturing reporting unit’s operating results and cash flows are sensitive to changes in demand.

The goodwill balance was $37.6 million as of December 31, 2020, of which $18.3 million was allocated to the Manufacturing

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reporting unit.

The goodwill balance was $37.6 million as of December 31, 2021, of which $18.3 million relates to the Manufacturing reporting unit.

The fair value of the Manufacturing reporting unit exceeded its carrying value as of the measurement date and, therefore, no impairment was recognized.

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– Historical operating results and cash flows.

– Internal communications to management and the Board of Directors.

– Internal communications between management and the Board of Directors.

– Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies.

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We have served as the Company’s auditor since 1944.

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OTTER TAIL CORPORATION

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Shareholders' Equity

Common Shares:

50,000,000 share authorized of $ 5 par value;

Common Stock:

50,000,000 shares authorized of $ 5 par value;

41,551,524 and 41,469,879 outstanding

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See accompanying notes to consolidated financial statements.

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OTTER TAIL CORPORATION

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Nonservice Cost Components of Postretirement Benefits 2,016 3,437 4,293

Other Income 6,055 5,112 3,461

Other Income (Expense), net 2,900 6,055 5,112

Income Before Income Taxes 212,821 116,057 104,288

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See accompanying notes to consolidated financial statements.

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OTTER TAIL CORPORATION

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Other Comprehensive Income (Loss):

Unrealized Gain (Loss) on Available-for-Sale Securities:

Reversal of Previously Recognized Losses (Gains) Realized on Sale of Investments and Included in Other Income During Period 13 16 ( 105 )

Unrealized Gains (Losses) Arising During Period 184 147 ( 61 )

Income Tax (Expense) Benefit ( 42 ) ( 34 ) 35

Available-for-Sale Securities, net of tax 155 129 ( 131 )

Pension and Postretirement Benefit Plans:

Actuarial (Losses) Gains net of Regulatory Allocation Adjustment ( 3,571 ) ( 2,779 ) 1,919

Amortization of Unrecognized Postretirement Benefit Losses and Costs 550 565 985

Income Tax Benefit (Expense) 796 576 ( 755 )

Adjustment to Income Tax Expense Related to 2017 Tax Cuts and Jobs Act — — ( 531 )

Pension and Postretirement Benefit Plan, net of tax ( 2,225 ) ( 1,638 ) 1,618

Unrealized (Loss) Gain on Available-for-Sale Securities, net of tax benefit (expense) of $ 52 , ($ 42 ) and ($ 34 )

( 196 ) 155 129

Pension and Other Postretirement Benefit Plan, net of tax (expense) benefit of ($ 766 ), $ 796 and $ 576

2,179 ( 2,225 ) ( 1,638 )

Total Other Comprehensive Income (Loss)

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See accompanying notes to consolidated financial statements.

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OTTER TAIL CORPORATION

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(in thousands, except common shares outstanding) Common

(in thousands, except common stock outstanding) Common

Outstanding Par Value,

Shares Additional Paid-In Capital Retained

Stock Additional Paid-In Capital Retained

Earnings Accumulated

Comprehensive

Income (Loss) 1

Total Shareholders' Equity

Income (Loss) Total Shareholders' Equity

Balance, December 31, 2018 39,664,884 $ 198,324 $ 344,250 $ 190,433 $ ( 4,144 ) $ 728,863

Common Stock Issuances, Net of Expenses 178,601 893 ( 986 ) ( 93 )

Common Stock Retirements and Forfeitures ( 71,208 ) ( 356 ) ( 2,655 ) ( 3,011 )

Stock Issuances, Net of Expenses 347,000 1,735 15,367 — — 17,102

Stock Issued Under Dividend Reinvestment and Stock Purchase Plans 53,339 267 2,391 — — 2,658

Stock Issued Under Share-Based Compensation Plans, Net of Shares Withheld for Employee Taxes 92,368 462 ( 3,176 ) — — ( 2,714 )

Net Income — — — 86,847 — 86,847

Other Comprehensive Income 1,487 1,487

Other Comprehensive Loss — — — — ( 1,509 ) ( 1,509 )

Stranded Tax Transfer — — — 784 ( 784 ) —

Stock Compensation Expense — — 5,958 — — 5,958

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Balance, December 31, 2019 40,157,591 $ 200,788 $ 364,790 $ 222,341 $ ( 6,437 ) $ 781,482

Common Stock Issuances, Net of Expenses 547,931 2,740 17,036 19,776

Common Stock Retirements and Forfeitures ( 55,224 ) ( 276 ) ( 2,454 ) ( 2,730 )

Stock Issuances, Net of Expenses 868,484 4,342 32,466 — — 36,808

Stock Issued Under Dividend Reinvestment and Stock Purchase Plans 365,267 1,826 13,221 — — 15,047

Stock Issued Under Share-Based Compensation Plans, Net of Shares Withheld for Employee Taxes 78,537 393 ( 2,515 ) — — ( 2,122 )

Net Income — — — 95,851 — 95,851

Other Comprehensive Loss — — — — ( 2,070 ) ( 2,070 )

Stranded Tax Transfer 784 ( 784 ) —

Stock Compensation Expense — — 6,284 — — 6,284

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Balance, December 31, 2020 41,469,879 $ 207,349 $ 414,246 $ 257,878 $ ( 8,507 ) $ 870,966

Common Stock Issuances, Net of Expenses 1,350,505 6,752 45,050 51,802

Common Stock Retirements and Forfeitures ( 38,217 ) ( 191 ) ( 1,878 ) ( 2,069 )

Stock Issued Under Dividend Reinvestment and Stock Purchase Plans 11,540 58 446 — — 504

Stock Issued Under Share-Based Compensation Plans, Net of Shares Withheld for Employee Taxes 70,105 351 ( 1,840 ) — — ( 1,489 )

Net Income — — — 176,769 — 176,769

Other Comprehensive Loss ( 2,070 ) ( 2,070 )

Other Comprehensive Income — — — — 1,983 1,983

Stock Compensation Expense — — 6,908 — — 6,908

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Balance, December 31, 2021 41,551,524 $ 207,758 $ 419,760 $ 369,783 $ ( 6,524 ) $ 990,777

1 Accumulated Other Comprehensive Income (Loss) as of December 31 is comprised of the following:

(in thousands) 2020 2019 2018

Unrealized Gain (Loss) on Marketable Equity Securities:

Before Tax $ 265 $ 68 $ ( 95 )

Tax Effect ( 56 ) ( 14 ) 20

Stranded Tax Effect — — ( 10 )

Unrealized Gain (Loss) on Marketable Equity Securities, net of tax 209 54 ( 85 )

Unamortized Actuarial Losses and Prior Service Costs Related to Pension and Postretirement Benefits:

Before Tax ( 11,793 ) ( 8,772 ) ( 6,558 )

Tax Effect 3,077 2,281 1,705

Stranded Tax Effect — — 794

Unamortized Actuarial Losses and Prior Service Costs Related to Pension and Postretirement Benefits, net of tax ( 8,716 ) ( 6,491 ) ( 4,059 )

Accumulated Other Comprehensive Loss:

Before Tax ( 11,528 ) ( 8,704 ) ( 6,653 )

Tax Effect 3,021 2,267 1,725

Stranded Tax Effect — — 784

Net Accumulated Other Comprehensive Loss $ ( 8,507 ) $ ( 6,437 ) $ ( 4,144 )

See accompanying notes to consolidated financial statements.

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OTTER TAIL CORPORATION

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Deferred Income Taxes 28,896 15,201 12,026

Change in Deferred Debits and Other Assets ( 26,130 ) ( 15,502 ) 941

Discretionary Contribution to Pension Plan ( 10,000 ) ( 11,200 ) ( 22,500 )

Change in Noncurrent Liabilities and Deferred Credits 34,421 33,534 ( 2,414 )

Allowance for Equity/Other Funds Used During Construction ( 4,063 ) ( 2,553 ) ( 2,194 )

Allowance for Equity Funds Used During Construction ( 822 ) ( 4,063 ) ( 2,553 )

Stock Compensation Expense 6,908 6,284 5,958

Other, net ( 3,035 ) 222 764

Cash (Used for) Provided by Current Assets and Current Liabilities:

Change in Receivables ( 6,328 ) ( 1,860 ) ( 8,559 )

Change in Inventories 5,686 8,419 ( 18,236 )

Change in Other Current Assets ( 573 ) 2,919 ( 754 )

Change in Payables and Other Current Liabilities 19,744 ( 171 ) 14,997

Change in Interest Payable and Income Taxes Receivable 2,675 1,625 396

Changes in Operating Assets and Liabilities:

Receivables ( 60,994 ) ( 6,328 ) ( 1,860 )

Inventories ( 54,313 ) 5,686 8,419

Regulatory Assets ( 4,803 ) ( 4,070 ) 710

Other Assets ( 14,146 ) ( 5,227 ) 385

Accounts Payable 38,734 3,832 ( 5,060 )

Accrued and Other Liabilities 28,386 19,262 13,074

Regulatory Liabilities 1,948 7,204 4,258

Pension and Other Postretirement Benefits 7,101 8,451 7,831

Net Cash Provided by Operating Activities 231,243 211,921 185,037

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Proceeds from Disposal of Noncurrent Assets 9,702 5,011 8,519

Cash Used for Investments and Other Assets ( 9,110 ) ( 10,626 ) ( 4,372 )

Purchases of Investments and Other Assets ( 9,383 ) ( 9,110 ) ( 10,626 )

Net Cash Used in Investing Activities ( 171,510 ) ( 375,652 ) ( 209,472 )

Financing Activities

Change in Checks Written in Excess of Cash 4,849 ( 2,814 ) ( 345 )

Net Short-Term Borrowings (Repayments) 74,997 ( 12,599 ) ( 93,772 )

Net Borrowings (Repayments) on Short-Term Debt 10,166 74,997 ( 12,599 )

Proceeds from Issuance of Common Stock 696 52,432 20,338

Common Stock Issuance Expenses ( 648 ) ( 577 ) ( 108 )

Payments for Shares Withheld for Employee Tax Obligations ( 2,069 ) ( 2,730 ) ( 3,011 )

Proceeds from Issuance of Long-Term Debt 140,000 75,000 100,000

Short-Term and Long-Term Debt Issuance Expenses ( 370 ) ( 950 ) ( 761 )

Payments for Retirement of Long-Term Debt ( 140,169 ) ( 182 ) ( 172 )

Dividends Paid ( 64,864 ) ( 60,314 ) ( 55,723 )

Net Cash Provided by Financing Activities

143,695 44,773 ( 51,384 )

Payments for Shares Withheld for Employee Tax Obligations ( 1,507 ) ( 2,069 ) ( 2,730 )

Other, net ( 3,681 ) 3,831 ( 4,341 )

Net Cash (Used in) Provided by Financing Activities ( 59,359 ) 143,695 44,773

Net Change in Cash and Cash Equivalents 374 ( 20,036 ) 20,338

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Supplemental Disclosure of Noncash Investing Activities

Transactions Related to Capital Additions Not Settled in Cash $ 34,265 $ 37,429 $ 13,757

Accrued Property, Plant and Equipment Additions $ 12,081 $ 34,265 $ 37,429

See accompanying notes to consolidated financial statements

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OTTER TAIL CORPORATION

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Summary of Significant Accounting Policies

Otter Tail Corporation and its subsidiaries (collectively, the "Company", "us", "our" or "we") form a diverse, multi-platform business consisting of a vertically integrated, regulated utility with generation, transmission and distribution facilities complimented by manufacturing businesses providing metal fabrication for custom machine parts and metal components, manufacturing of extruded and thermoformed plastic products, and manufacturing of PVC pipe products.

Otter Tail Corporation (OTC) and its subsidiaries (collectively, the "Company", "us", "our" or "we") form a diverse, multi-platform business consisting of a vertically integrated, regulated utility with generation, transmission and distribution facilities complemented by manufacturing businesses providing metal fabrication for custom machine parts and metal components, manufacturing of extruded and thermoformed plastic products, and manufacturing of PVC pipe products.

We classify our business into three segments:

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These consolidated financial statements are presented in accordance with U.S.

generally accepted accounting principles and include the accounts of Otter Tail Corporation and its wholly owned subsidiaries.

All intercompany balances and transactions have been eliminated in consolidation except profits on sales to our regulated electric utility company from our nonregulated businesses, which is in accordance with the accounting requirements of regulated operations.

generally accepted accounting principles and include the accounts of OTC and its wholly owned subsidiaries.

All intercompany balances and transactions have been eliminated in consolidation except, as applicable, profits on sales to our regulated electric utility company from our nonregulated businesses, which is in accordance with the accounting requirements of regulated operations.

Use of Estimates

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Reclassifications

Certain reclassifications of amounts previously reported have been made to the accompanying consolidated balance sheets to maintain consistency and comparability between periods presented.

The reclassifications had no impact on previously reported current assets, total assets, current liabilities, noncurrent liabilities and deferred credits, or shareholders' equity.

Certain reclassifications of amounts previously reported have been made to the accompanying consolidated balance sheets and statements of cash flows to maintain consistency and comparability between periods presented.

The reclassifications had no impact on previously reported current assets, total assets, current liabilities, noncurrent liabilities and deferred credits, shareholders' equity, net cash provided by operating activities, net cash used in investing activities, net cash (used in) provided by financing activities, or cash and cash equivalents.

Regulatory Accounting

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In the event OTP ceases to meet the criteria to apply the guidance for regulated operations, the regulatory assets and liabilities that no longer meet such criteria would be removed from the consolidated balance sheet and included in the consolidated statement of income as an expense or income item in the period in which the application of this guidance ceases.

The accounting policies followed by OTP are subject to the Uniform System of Accounts of the FERC.

These accounting policies differ in some respects from those used by our nonelectric businesses.

Cash Equivalents

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Revenues from all these sources meet the criteria to be classified as revenue from contracts with customers and are recognized over time as energy is delivered or transmitted.

Revenue is recognized based on the metered quantity of electricity

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delivered or transmitted at the applicable rates.

Revenue is recognized based on the metered quantity of electricity delivered or transmitted at the applicable rates.

For electricity delivered and consumed after a meter is read but prior to the end of the reporting period, OTP records revenue and an unbilled receivable based on estimates of the kilowatt-hours (kwh) of energy delivered to the customer.

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Plastics Segment Revenues.

Our Plastics segment businesses earn revenue predominantly from the sale and delivery of standardized polyvinyl chloride (PVC) pipe products produced at their manufacturing facilities.

Revenue from the sale of these products is recognized at the point in time when the product is shipped based on prices agreed to in a purchase order.

For revenue recognized on shipped products, there is no further obligation to provide services related to such products.

The shipping terms used in these instances are FOB shipping point.

Our Plastics segment businesses earn revenue predominantly from the sale and delivery of standardized PVC pipe products produced at their manufacturing facilities.

Revenue from the sale of these products is recognized at the point in time when the product is shipped as there is no further obligation to provide services related to such products and the shipping terms are FOB shipping point.

We have one customer within our Plastics segment for which we produce and store a product made to the customer’s specifications and design under a build and hold agreement.

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Inventories are valued at the lower of cost or net realizable value.

Cost for fuel, material and supply inventories of our Electric segment are determined on an average cost basis.

Cost for raw material, work in process and finished goods inventories of our Manufacturing and Plastics segments are determined on a first-in first-out (FIFO) basis.

Costs for fuel, material and supply inventories of our Electric segment are determined on an average cost basis.

Costs for raw material, work in process and finished goods inventories of our Manufacturing and Plastics segments are determined on a first-in first-out (FIFO) basis.

Inventories consist of the following as of December 31, 2021 and 2020:

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Total Inventories $ 148,490 $ 92,165

Corporate-owned life insurance policies are recorded at cash surrender value.

Debt, marketable equity securities, and money market funds are recorded at fair value.

We invest in and hold, through a rabbi trust, corporate-owned life insurance policies to provide future funding for obligations under our supplemental pension plan and a non-qualified deferred compensation plan.

The polices are recorded at cash surrender value and there are no restrictions on our ability to surrender the policies.

We hold debt, mutual fund investments and money market funds either as investments within our captive insurance entity or to provide future funding for obligations under non-qualified deferred compensation plans.

These investments are recorded at fair value.

Debt securities are deemed to be available-for-sale securities, accordingly unrealized gains and losses are generally excluded from earnings and recognized in accumulated other comprehensive income.

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Declines in fair value deemed to be other-than-temporary result in the recognition of unrealized losses, or a portion thereof, in earnings.

Unrealized gains and losses on marketable equity securities and money market funds are recognized in earnings immediately.

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Unrealized gains and losses on mutual and money market funds are recognized in earnings immediately.

The following is a summary of our investments at December 31, 2021 and 2020:

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Corporate-Owned Life Insurance Policies $ 41,078 $ 36,825

Debt Securities 9,260 8,184

Corporate and Government Debt Securities 9,202 9,260

Mutual Funds 5,432 1,662

Money Market Funds 949 4,075

Marketable Equity Securities 1,662 1,586

Other Investments 29 34

Total Investments $ 56,690 $ 51,856

The amount of unrealized gains and losses on debt securities as of December 31, 2020 and 2019 are not material and no unrealized losses were deemed to be other-than-temporary.

In addition, the amount of unrealized gains and losses on marketable equity securities still held as of December 31, 2020 and 2019 are not material.

Property, Plant and Equipment, Retirements and Depreciation

Utility plant is stated at original cost.

The amount of unrealized gains and losses on debt securities as of December 31, 2021 and 2020 is not material and no unrealized losses were deemed to be other-than-temporary.

In addition, the amount of unrealized gains and losses on marketable equity securities still held as of December 31, 2021 and 2020 is not material.

Property, Plant and Equipment

Electric plant is stated at original cost.

The cost of additions includes contracted work, direct labor and materials, allocable overheads and allowance for funds used during construction.

The amount of interest capitalized on electric utility plant was $ 2.1 million in 2020, $ 1.7 million in 2019 and $ 1.2 million in 2018.

The amount of interest capitalized to electric plant was $ 0.6 million in 2021, $ 2.1 million in 2020 and $ 1.7 million in 2019.

The cost of depreciable units of property retired less salvage is charged to accumulated depreciation.

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Removal costs, when incurred, are charged against the regulatory liability.

Maintenance, repairs and replacement of minor items of property are charged to operating expenses.

Maintenance, repairs and replacement of minor items are charged to operating expenses as incurred.

The provisions for utility depreciation for financial reporting purposes are made on the straight-line method based on the estimated remaining service lives of the properties.

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OTP's interest in each jointly owned facility is reflected in the consolidated balance sheets on a pro-rata basis and OTP's share of direct revenue and expenses are included in operating revenues and expenses in the consolidated statements of income.

Each participant in the jointly owned facilities finance their own investment.

Each participant in the jointly owned facilities finances its own investment.

Goodwill and Other Intangible Assets

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Our impairment testing includes both an optional qualitative assessment and the quantitative impairment assessment.

Our qualitative assessment includes an analysis of relevant events and circumstances to determine if it is more likely than not that the fair value of the reporting units exceeds its book value.

Our qualitative assessment includes an analysis of relevant events and circumstances to determine if it is more likely than not that the fair value of the reporting unit exceeds its book value.

If, after this assessment, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, no additional analysis is necessary.

In contrast, if after the assessment we determine it is more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we elect to skip the optional qualitative assessment, the quantitative impairment assessment is performed.

The quantitative assessment is a single-step test that identifies both the existence of impairment and the amount of impairment loss by comparing the estimated fair value of a reporting unit to its carrying value, with any excess carrying value of the fair value being recognized as an impairment loss.

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Intangible assets with finite lives, which primarily consist of customer relationships, are carried at cost less accumulated amortization.

The cost of the intangible assets are amortized over their estimated useful lives, which generally range from 15 to 20 years.

The quantitative assessment is a single-step test that identifies both the existence of impairment and the amount of impairment loss by comparing the estimated fair value of a reporting unit to its carrying value, with any excess carrying value over the fair value being recognized as an impairment loss.

Intangible assets with finite lives, which primarily consist of customer relationships, are carried at estimated fair value at the time of acquisition less accumulated amortization.

The costs of the intangible assets are amortized over their estimated useful lives, which generally range from 15 to 20 years.

We recognize right-of-use lease assets and a corresponding lease liability at the lease commencement date.

The length of our lease agreements vary from less than one year year to approximately ten years .

The length of our lease agreements varies from less than one year to approximately ten years .

We have elected to not record lease assets and liabilities for leases with a lease term at commencement of 12 months or less;

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We estimate our incremental borrowing rate by incorporating considerations of lease term and lessee entity.

We elected at the time of adopting the current leasing guidance on January 1, 2019 under an allowed practical expedient to continue with the historical accounting treatment for land easement arrangements in effect at the adoption date.

Accordingly, we have not recognized any lease assets or liabilities for such arrangements.

Recoverability of Long-Lived Assets

We review our long-lived assets including, among other assets, property, plant and equipment, amortizing intangible assets and right-of-use lease assets, whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable.

We determine potential impairment by comparing the carrying amount of the assets with net cash flows expected to be provided by operating activities of the business or related assets.

We determine potential impairment by comparing the carrying amount of the assets with the net cash flows expected to be provided by operating activities of the business or related assets.

If the sum of the expected future net cash flows is less than the carrying amount of the assets, an impairment loss would be recognized.

Such an impairment loss would be measured as the amount by which the carrying amount exceeds the fair value of the asset, where fair value is based on the discounted cash flows expected to be generated by the asset.

Such an impairment loss would be measured as the amount by which the carrying amount exceeds the fair value of the asset.

Asset Retirement Obligations

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The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities, or priced with models using highly observable inputs, such as commodity options priced using observable forward prices and volatilities.

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Level 3 – Significant inputs to pricing have little or no observability as of the reporting date.

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(CCMC), a subsidiary of The North American Coal Corporation, for the purchase of lignite coal to meet the coal supply requirements of Coyote Station for the period beginning in May 2016 and ending in December 2040.

The price per ton paid by the Coyote Station owners under the LSA reflects the cost of production, along with an agreed profit and capital charge.

The price per ton paid by the Coyote Station owners under the LSA reflects the cost of production, along with an agreed upon profit and capital charge.

CCMC was formed for the purpose of mining coal to meet the coal fuel supply requirements of Coyote Station from May 2016 through December 2040 and, based on the terms of the LSA, is considered a variable interest entity (VIE) due to the transfer of all operating and economic risk to the Coyote Station owners, as the agreement is structured so that the price of the coal would cover all costs of operations as well as future reclamation costs.

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In the event the contract is terminated prior to the end of the term due to certain events, OTP’s maximum exposure to additional costs, as a result of its involvement with CCMC, and potential impairment loss if recovery of those costs is denied by regulatory authorities, could be as high as $ 45.0 million, OTP’s 35 % share of CCMC’s unrecovered costs as of December 31, 2021.

New Accounting Standards Adopted

Credit Losses.

In June 2016 the Financial Accounting Standards Board (FASB) issued new authoritative guidance codified in Accounting Standards Codification (ASC) 326, Financial Instruments-Credit Losses, changing how entities account for credit losses on receivables and certain other assets effective for interim and annual periods beginning on or after December 31, 2019.

The guidance requires the use of a current expected credit loss model, which may result in earlier recognition of credit losses than under previous accounting standards.

We adopted this guidance on January 1, 2020.

Adoption of the standard did not have a material impact on our consolidated financial statements and we did not record a cumulative effect adjustment to retained earnings on adoption as allowed for under the guidance.

Cloud Computing Costs.

In August 2018 the FASB issued new authoritative guidance codified in ASC 350-40 , Internal-Use Software, to address a customer's accounting for implementation costs incurred in a cloud computing arrangement that is a service contract.

The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

The amendment also provides guidance for the presentation implementation costs in a cloud computing arrangement in the statement of financial position, the statement of income, and the statement of cash flows.

The amendment was effective for interim and annual periods beginning on or after December 15, 2019, with early adoption permitted in any interim period.

We adopted the amendment on January 1, 2020.

There was no impact to our consolidated financial statements on adoption, but we began capitalizing implementation costs incurred in cloud computing arrangements post-adoption.

Segment Information

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Corporate operating costs include items such as corporate staff and overhead costs, the results of our captive insurance company and other items excluded from the measurement of operating segment performance.

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Corporate assets consist primarily of cash, prepaid expenses, investments and fixed assets.

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Intersegment operating revenues are not material for any period presented.

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The following provides the identifiable assets by segment and corporate assets as of December 31, 2021 and 2020:

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Total $ 2,754,830 $ 2,578,354

Concentrations

Our Plastics segment businesses use PVC resin as a critical component within their PVC pipe manufacturing process.

There are a limited number of PVC resin suppliers in the U.S., and in 2021, we sourced all of our PVC resin needs from two vendors.

Although there are a limited number of PVC resin suppliers, we believe that other suppliers could provide PVC resin on comparable terms.

Additionally, most U.S.

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 or other extreme weather events that occur in this region.

The loss of a key vendor, or any interruption or delay in the supply of PVC resin could cause production delays, a possible loss of sales, or result in increased costs to secure resin, all of which would adversely affect our operating results.

Entity-Wide Information

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Noncontract Revenues Included Above — —

Electric Segment - Alternative Revenue Program Revenues 6,936 1,032 ( 439 )

Electric Segment - ARP Revenues ( 791 ) 6,936 1,032

Total Operating Revenues from Contracts with Customers $ 1,197,635 $ 883,171 $ 918,471

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Receivables, net of allowance for credit losses $ 174,953 $ 113,959

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The following is a summary of activity in the allowance for credit losses for the years ended December 31, 2021 and 2020:

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100 240 192 341

Fuel Clause Adjustments 1

Various — 73 — 62

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Plant Removal Obligations Asset lives 8,306 101,595 — 98,707

Fuel Clause Adjustment Up to 1 year

10,947 — 3,982 —

Alternative Revenue Program Riders Up to 1 year

Fuel Clause Adjustments Up to 1 year

1,554 — 10,947 —

Alternative Revenue Program Riders Various 5,772 3,336 3,581 470

Pension and Other Postretirement Benefit Plans Up to 1 year

2,603 — 1,959 —

Deferred Rate Case Expenses Various — — — 401

ISO Cost Recovery Trackers Up to 2 years

Derivative Instruments Up to 1 year

Other Various 395 62 176 77

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These unrecognized benefit costs and actuarial losses and gains are eligible for treatment as regulatory assets or liabilities based on their probable inclusion in future electric rates.

Alternative Revenue Program Riders regulatory assets and liabilities are revenue not yet collected from customers or amounts subject to refund, respectively, primarily due to investments in qualifying transmission, conservation, renewable resource, environmental, and other generation assets.

Alternative Revenue Program Riders regulatory assets and liabilities are revenues not yet collected from customers or amounts subject to

refund, respectively, primarily due to investments in qualifying transmission, conservation, renewable resource, environmental and other generation assets.

Asset Retirement Obligations represent the difference in timing of recognition of expense arising from these obligations and the amount recovered from customers.

ISO Cost Recovery Trackers represents costs incurred to serve Minnesota customers or the under collection of revenue based on expected versus actual construction costs on eligible projects.

Independent System Operator (ISO) Cost Recovery Trackers represent costs incurred to serve Minnesota customers or the under-collection of revenue based on expected versus actual construction costs on eligible projects.

Unrecovered Project Costs reflect costs incurred for abandoned generation and transmission assets and accelerated depreciation expense on a to-be-retired generation asset expected to be recovered from customers.

Deferred Rate Case Expenses relate to costs incurred in conjunction with recent rate cases that are currently or are expected to be recovered from customers.

Table of Content s

Debt Reacquisition Premiums represent costs to retire debt which are being recovered from customers over the remaining original lives of the reacquired debt.

Deferred Income Taxes represents income tax benefits, arising primarily from property-related timing differences, that will be refunded to customers as these timing differences reverse.

Fuel Clause Adjustments represent the under- or over-collection of fuel costs to be returned to or collected from customers.

Deferred Income Taxes represent income tax benefits, arising primarily from property-related timing differences, that will be refunded to customers as these timing differences reverse.

Plant Removal Obligations represent amounts collected from customers to be used to cover actual removal costs as incurred.

Fuel Clause Adjustments represent the over-collection of fuel costs to be returned to customers.

Regulatory Matters

Minnesota TCR.

On October 22, 2020, the MPUC approved OTP's request for a Minnesota TCR rider update.

This rider update request followed a Minnesota Supreme Court opinion issued on April 22, 2020, concluding the MPUC lacked the authority to amend an existing TCR rider approved under Minnesota state law to include the costs and revenues associated with certain OTP transmission assets.

Accordingly, the rider update excluded the costs and revenues associated with these assets, which had the effect of allowing OTP to recover the appropriate return on these assets from Minnesota customers dating back to the last TCR rider update in September 2016.

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

Depreciable Lives.

On July 30, 2020 the MPUC ordered a reduction in the remaining depreciable lives of Hoot Lake Plant and seven hydroelectric plants.

The MPUC stipulated recoverability of the resulting increase in depreciation expense would be determined in OTP's next rate case.

Based on the relevant facts and circumstances, we concluded the additional depreciation expense is probable of recovery and we have recognized a regulatory asset for the amount of incremental expense in 2020, which amounted to $ 2.8 million.

Derivative Instruments represent unrealized gains recognized on derivative instruments.

On final settlement of such instruments, any realized gains or losses are recovered from or paid to customers.

Property, Plant and Equipment

22 unchanged sentences

Depreciation expense for the years ended December 31, 2021, 2020 and 2019 totaled $ 85.8 million, $ 78.6 million and $ 71.9 million.

Table of Content s

The following table provides OTP’s ownership percentages and amounts included in the December 31, 2021 and 2020 consolidated balance sheets for OTP’s share of each of these jointly owned facilities:

16 unchanged sentences

Big Stone South–Ellendale 345 kV line 50.0 % 106,353 — ( 2,433 ) 103,920

50.0 % 106,343 — ( 819 ) 105,524

Fargo–Monticello 345 kV line 14.2 % 78,184 — ( 8,029 ) 70,155

3 unchanged sentences

Intangible Assets

The following tables summarizes our goodwill by segment as of December 31, 2020 and 2019:

The following table summarizes our goodwill by segment as of December 31, 2021 and 2020:

(in thousands) 2021 2020

15 unchanged sentences

Total $ 22,517 $ 12,373 $ 10,144

Amortization expense for these intangible assets was as follows for the years ended December 31, 2020, 2019 and 2018:

Amortization expense for these intangible assets for the years ended December 31, 2021, 2020 and 2019 totaled $ 1.1 million, $ 1.1 million, and $ 1.2 million.

Annual amortization expense for these intangible assets for the next five years is:

(in thousands) 2022 2023 2024 2025 2026

Amortization Expense $ 1,100 $ 1,100 $ 1,100 $ 1,092 $ 1,090

Estimated annual amortization expense for these intangible assets for the next five years is:

(in thousands) 2021 2022 2023 2024 2025

Estimated Amortization Expense $ 1,100 $ 1,100 $ 1,100 $ 1,100 $ 1,092

Table of Content s

We lease coal rail cars, warehouse and office space, land and certain office, manufacturing and material handling equipment under varying terms and conditions.

27 unchanged sentences

Weighted-Average Discount Rate 5.09 % 5.45 %

Prior to adopting new lease accounting guidance on January 1, 2019, we accounted for operating leases by recognizing lease cost on a straight-line basis over the lease term.

Lease expense for the year ended December 31, 2018 was $ 6.3 million.

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Short-Term and Long-Term Borrowings

The following is a summary of our outstanding short and long-term borrowings by borrower, Otter Tail Corporation (OTC) or Otter Tail Power Company (OTP), as of December 31, 2020 and 2019:

The following is a summary of our outstanding short- and long-term borrowings by borrower, OTC or OTP, as of December 31, 2021 and 2020:

(in thousands) OTC OTP Total OTC OTP Total

10 unchanged sentences

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

Otter Tail Corporation is party to a Third Amended and Restated Credit Agreement (the OTC Credit Agreement) and OTP is party to a Second Amended and Restated Credit Agreement (the OTP Credit Agreement) both of which provide for revolving lines of credit to support operations.

Borrowings may be used for working capital needs and other capital requirements, to refinance certain indebtedness and for the issuance of letters of credit in an aggregate not to exceed $ 40 million for the OTC Credit Agreement and $ 50 million for the OTP Credit Agreement.

Each credit facility includes an accordion provision allowing the borrower to increase the available borrowing capacity, subject to certain terms and conditions.

The borrowing capacity can be increased to $ 290 million for the OTC Credit Agreement and to $ 250 million for the OTP Credit Agreement.

Each credit facility charges a variable rate of interest on outstanding balances and applies a commitment fee based on the average unused amount available to be drawn under the respective facility.

The variable rate of interest to be charged is based on a benchmark interest rate, either the Prime Rate, the Federal Funds Rate or LIBOR, as selected by the borrower at the time of an advance, plus an applicable credit spread.

The credit spread ranges from zero to 2.00 % depending on the benchmark interest rate selected and is subject to adjustment based on the credit ratings of the borrower.

As of December 31, 2020, the LIBOR based credit spread was 1.50 % and 1.25 % under the OTC Credit Agreement and OTP Credit Agreement, respectively.

The weighted-average interest rate on outstanding borrowings as of December 31, 2020 and 2019 was 1.61 % and 3.20 %.

Each credit facility contains a number of restrictions on the borrower, including restrictions on its ability to merge, sell assets, make investments, create or incur liens on assets, guarantee the obligations of any other party, and engage in transactions with related parties.

Each credit facility also contains customary affirmative covenants, including financial covenants as further described below, and certain events of default.

Each credit facility expires on October 31, 2024.

Both the OTC Credit Agreement and the OTP Credit Agreement include LIBOR as a benchmark interest rate in determining the applicable rate of interest to charge on outstanding borrowings.

LIBOR is currently expected to be eliminated by January 1, 2022.

Both credit agreements contain a provision to determine how interest rates will be established in the event a replacement for LIBOR has not been identified before the agreement expires.

The agreements require the parties to jointly agree on an alternate rate of interest, such as the Secured Overnight Financing Rate, that gives due consideration to prevailing market convention for determining a rate of interest for syndicated loans in the United States at such time.

The parties will enter into amendments to these agreements to reflect any alternate rate of interest and other related changes to the agreements as may be applicable.

If for any reason an agreement cannot be reached on an alternate rate of interest, then any borrowings under the agreements will be determined using the Prime Rate plus a margin based on the borrower's long-term debt ratings at the time of borrowing.

Table of Content s

On September 30, 2021, OTC entered into a Fourth Amended and Restated Credit Agreement (the OTC Credit Agreement) and OTP entered into a Third Amended and Restated Credit Agreement (the OTP Credit Agreement) amending and restating the previously existing credit agreements to extend the maturity date of each credit facility to September 30, 2026.

The agreements both provide for $ 170.0 million unsecured revolving lines of credit to support operations, fund capital expenditures, refinance certain indebtedness and provide for the issuance of letters of credit in an aggregate amount not to exceed $ 40.0 million under the OTC Credit Agreement and $ 50.0 million under the OTP Credit Agreement.

Each credit facility includes an accordion provision allowing the borrower, subject to certain conditions, to increase the borrowing capacity under the facility;

up to $ 290.0 million under the OTC Credit Agreement and up to $ 250.0 million under the OTP Credit Agreement.

Borrowings under each credit facility are subject to a variable rate of interest on outstanding balances and a commitment fee is charged based on the average unused amount available to be drawn under the respective facility.

The variable rate of interest to be charged is based on a benchmark interest rate, either LIBOR or a Base Rate, as defined in the credit agreements, selected by the borrower at the time of an advance, subject to the conditions of each agreement, plus an applicable credit spread.

The credit spread ranges from zero to 2.00 %, depending on the benchmark interest rate selected and is subject to adjustment based on the credit ratings of the relevant borrowers.

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

Each credit facility contains a number of restrictions on the borrower, including restrictions on the ability to merge, sell assets, make investments, create or incur liens on assets, guarantee the obligations of any other party and engage in transactions with related parties.

The agreements also contain certain financial and non-financial covenants and defined events of default.

Both the OTC Credit Agreement and the OTP Credit Agreement include interest rates determined by a reference to LIBOR.

The applicable LIBOR tenors are currently scheduled to be eliminated on June 30, 2023.

In the event that LIBOR is no longer available, both credit agreements contain provisions for the replacement of LIBOR as the benchmark rate with the Secured Overnight Finance Rate (SOFR).

The transition to SOFR may be triggered by the discontinuation or loss of representativeness of the applicable LIBOR tenors or as earlier elected by the borrowers, subject to approval by the lender.

Long-Term Debt

10 unchanged sentences

OTP Series 2020B Senior Unsecured Notes 3.22 % 08/20/30 40,000 40,000

OTP Series 2021A Senior Unsecured Notes 2.74 % 11/29/31 40,000 —

OTP Series 2007D Senior Unsecured Notes 6.47 % 08/20/37 50,000 50,000

5 unchanged sentences

OTP Series 2020D Senior Unsecured Notes 3.92 % 02/25/50 15,000 15,000

OTP Series 2021B Senior Unsecured Notes 3.69 % 11/29/51 100,000 —

OTC PACE Note 2.54 % 03/18/21 — 169

3 unchanged sentences

Total Long-Term Debt Net of Unamortized Debt Issuance Costs $ 734,014 $ 624,432

During the year ended December 31, 2020, OTP issued in a private placement pursuant to our 2019 Note Purchase Agreement, its Series 2020A, Series 2020B, Series 2020C and Series 2020D notes for aggregate proceeds of $ 75.0 million.

On June 10, 2021, OTP entered into a Note Purchase Agreement pursuant to which OTP agreed to issue, in a private placement transaction, $ 230.0 million of senior unsecured notes consisting of (a) $ 40.0 million of 2.74 % Series 2021A Senior Unsecured Notes due November 29, 2031, (b) $ 100.0 million of 3.69 % Series 2021B Senior Unsecured Notes due November 29, 2051 and (c) $ 90.0 million of 3.77 % Series 2022A Senior Unsecured Notes due May 20, 2052.

During the year ended December 31, 2021, OTP issued its Series 2021A and Series 2021B notes for aggregate proceeds of $ 140.0 million, which were used to repay the Series 2011A notes.

The issuance of the Series 2022A notes is scheduled to close, subject to the satisfaction of certain customary conditions to closing, in May 2022.

Our guaranteed and unsecured notes require the borrower to maintain various financial covenants, as further described below.

These notes provide for prepayment options allowing for a full or partial repayment at 100% of the principal amount so repaid, together with unpaid accrued interest and a make-whole amount, as defined.

These notes provide for prepayment options allowing for a full or partial prepayment at 100% of the principal amount so prepaid, together with unpaid accrued interest and a make-whole amount, as defined.

These notes also include restrictions on the borrowers, including its ability to merge, sell assets, create or incur liens on assets, guarantee the obligations of any other party and engage in transactions with related parties.

5 unchanged sentences

As of December 31, 2021, OTC and OTP were in compliance with these financial covenants.

Employee Postretirement Benefits

Pension Plan and Other Postretirement Benefits

We sponsor a noncontributory funded pension plan which covers substantially all corporate employees and OTP nonunion employees hired prior to September 1, 2006, and all union employees of OTP hired prior to November 1, 2013, excluding Coyote Station employees.

Coyote Station employees hired before January 1, 2009 are covered under the plan.

The plan provides 100 % vesting after five vesting years of service and for retirement compensation at age 65 , with reduced compensation in cases of retirement prior to age 62 .

We reserve the right to discontinue the plan, but no change or discontinuance may affect the pensions theretofore vested.

The pension plan has a trustee who is responsible for pension payments to retirees and a separate pension fund manager responsible for managing the plan's assets.

An independent actuary assists us in performing the necessary actuarial valuations for the plan.

The plan assets consist of common stock and bonds of public companies, U.S.

government securities, cash and cash equivalents and alternative investments.

The Company sponsors a noncontributory funded pension plan (the "Pension Plan"), an unfunded, nonqualified Executive Survivor and Supplemental Retirement Plan ("ESSRP"), both accounted for as defined benefit pension plans, and a postretirement healthcare plan accounted for as an other postretirement benefit plan.

The Pension Plan, which previously covered substantially all corporate and OTP employees, was closed to new employees in 2013.

The plan provides retirement compensation to all covered employees at age 65 , with reduced compensation in cases of retirement prior to age 62 .

Participants are fully vested after completing five years of vesting service.

The plan assets consist of equity funds, fixed income funds, cash and cash equivalents and alternative investments.

None of the plan assets are invested in common stock or debt securities of the Company.

Table of Content s

The following table lists components of net periodic pension benefit cost for the years ended December 31, 2020, 2019 and 2018:

(in thousands) 2020 2019 2018

Service Cost–Benefit Earned During the Period $ 6,621 $ 5,491 $ 6,459

Interest Cost on Projected Benefit Obligation 13,053 14,412 13,452

Expected Return on Assets ( 22,021 ) ( 21,297 ) ( 21,199 )

Amortization of Prior Service Cost:

From Regulatory Asset — 5 16

From Other Comprehensive Income 1

Amortization of Net Actuarial Loss:

From Regulatory Asset 8,924 4,642 7,135

From Other Comprehensive Income 1

Net Periodic Pension Cost 2

$ 6,797 $ 3,376 $ 6,046

1 Corporate cost included in nonservice cost components of postretirement benefits.

2 Allocation of costs:

2020 2019 2018

Service costs included in OTP capital expenditures

$ 1,842 $ 1,365 $ 1,542

Service costs included in electric operation and maintenance expenses 4,621 3,994 4,756

Service costs included in other nonelectric expenses 159 132 161

Nonservice costs capitalized 48 ( 526 ) ( 99 )

Nonservice costs included in nonservice cost components of postretirement benefits 127 ( 1,589 ) ( 314 )

Weighted average assumptions used to determine net periodic pension cost for the years ended December 31, 2020, 2019 and 2018:

2020 2019 2018

Discount Rate 3.47 % 4.50 % 3.90 %

Long-Term Rate of Return on Plan Assets 6.88 % 7.25 % 7.50 %

Rate of Increase in Future Compensation Level:

Participants to Age 39 4.50 % 4.50 % 4.50 %

Participants Age 40 to Age 49 3.50 % 3.50 % 3.50 %

Participants Age 50 and Older 2.75 % 2.75 % 2.75 %

The following table presents amounts recognized in the consolidated balance sheets as of December 31, 2020 and 2019:

(in thousands) 2020 2019

Regulatory Assets:

Unrecognized Prior Service Cost $ — $ —

Unrecognized Actuarial Loss 137,500 120,592

Total Regulatory Assets $ 137,500 $ 120,592

Accumulated Other Comprehensive Loss:

Unrecognized Prior Service Cost $ — $ —

Unrecognized Actuarial (Gain) Loss 128 ( 82 )

Total Accumulated Other Comprehensive Loss $ 128 $ ( 82 )

Noncurrent Liability $ 67,718 $ 55,004

Funded status as of December 31, 2020 and 2019:

(in thousands) 2020 2019

Accumulated Benefit Obligation $ ( 385,302 ) $ ( 346,723 )

Projected Benefit Obligation $ ( 428,396 ) $ ( 384,785 )

Fair Value of Plan Assets 360,678 329,781

The ESSRP, an unfunded plan, provides for defined benefit payments to executive officers and certain key management employees on their retirement for life, or to their beneficiaries on their death.

The ESSRP was amended and restated in 2019 to i) freeze the participation in the restoration retirement benefit component of the plan and ii) freeze benefit accruals under the restoration retirement benefit component of the plan for all participants of the plan, except any participants deemed to be grandfathered participants.

The postretirement healthcare plan, closed to new participants in 2010, provides a portion of health insurance benefits for retired and covered corporate and OTP employees.

To be eligible for retiree health insurance benefits, the employee must be 55 years of age with a minimum of 10 years of service.

The plan is an unfunded plan and accordingly holds no plan assets.

Pension Plan Assets.

We have established a Retirement Plans Administration Committee to develop and monitor our investment strategy for our Pension Plan assets.

Our investment strategy includes the following objectives:

• The assets of the plan will be invested in accordance with all applicable laws in a manner consistent with fiduciary standards including Employee Retirement Income Security Act standards of 1974 (ERISA) (if applicable).

Specifically:

◦ The safeguards and diversity that a prudent investor would adhere to must be present in the investment program.

◦ All transactions undertaken on behalf of the Pension Plan must be in the best interest of plan participants and their beneficiaries.

• The primary objective is to provide a source of retirement income for its participants and beneficiaries.

• The near-term primary financial objective is to improve and protect the funded status of the plan.

• A secondary financial objective is to minimize pension funding and expense volatility where possible.

We have developed an asset allocation target, measured at investment market value, to provide guideline percentages of investment mix.

This investment mix is intended to achieve the financial objectives of the plan.

The permitted range is a guide and will at times not reflect the actual asset allocation due to market conditions, actions of our investment managers and required cash flows to and from the Pension Plan.

The following table presents our target asset allocation permitted range along with the actual asset allocation as of December 31, 2021 and 2020:

Permitted Actual Allocation

Asset Class Range 2021 2020

Return Enhancement 20 – 60 % 47 % 58 %

Risk Management 40 – 80 % 50 39

Alternatives 0 – 20 % 3 3

Total 100 % 100 %

Return Enhancement investments are those that seek to provide equity-like, long-term capital appreciation.

Examples include equity securities, including dynamic asset allocation funds, and higher yielding fixed income securities, such as high yield bonds and emerging market debt.

Risk Management investments seek to decrease downside risk or act as a hedge against plan liabilities.

Examples are cash and fixed income instruments.

Alternative investments seek to either provide return enhancement through long-term appreciation or risk management through decreased downside risk.

The defining characteristic of these asset types is uncorrelated source of returns, less liquidity and private market access.

Examples include investments in the SEI Energy Debt Collective Fund.

The following presents the fair value inputs classified within the fair value hierarchy used to measure Pension Plan assets at December 31, 2021 and 2020 and assets measured using the net asset value (NAV) practical expedient:

(in thousands) Level 1 Level 2 Level 3 NAV Total

December 31, 2021

Equity Funds $ 149,479 $ — $ — $ — $ 149,479

Fixed Income Funds 184,987 — — — 184,987

Hybrid Funds 11,776 — — — 11,776

Treasury Securities 28,173 — — — 28,173

SEI Energy Debt Collective Fund — — — 12,797 12,797

Total $ 374,415 $ — $ — $ 12,797 $ 387,212

December 31, 2020

Cash Equivalents $ 4 $ — $ — $ — $ 4

Equity Funds 180,169 — — — 180,169

Fixed Income Funds 159,556 — — — 159,556

Hybrid Funds 11,729 — — — 11,729

SEI Energy Debt Collective Fund — — — 9,220 9,220

Total $ 351,458 $ — $ — $ 9,220 $ 360,678

The investments held by the SEI Energy Debt Collective Fund on December 31, 2021 and 2020 consist mainly of below investment grade high yield bonds and loans of U.S.

energy companies which trade at a discount to fair value.

Redemptions are allowed semi-annually with a 95 -day notice period, subject to fund director consent and certain gate, holdback and suspension restrictions.

Subscriptions are allowed monthly with a three-year lock up on subscriptions.

The fund’s assets are valued in accordance with valuations reported by the fund’s sub-advisor or the fund’s underlying investments or other independent third-party sources, although SEI in its discretion may use other valuation methods, subject to compliance with ERISA, as applicable.

On an annual basis, as determined by the investment manager in its sole discretion, an independent valuation agent is retained to provide a valuation of the illiquid assets of the fund and of any other asset of the fund.

Funded Status.

Table of Content s

The following table provides a reconciliation of the changes in the fair value of plan assets and the plan’s benefit obligations for the years ended December 31, 2020 and 2019:

The following table provides a reconciliation of the changes in the fair value of plan assets and the actuarially computed benefit obligation for the years ended December 31, 2021 and 2020 and the funded status of the plans as of December 31, 2021 and 2020:

Pension Benefits (Pension Plan) Pension Benefits (ESSRP) Postretirement Benefits

(in thousands) 2021 2020 2021 2020 2021 2020

Reconciliation of Fair Value of Plan Assets:

Change in Fair Value of Plan Assets:

Fair Value of Plan Assets at January 1 $ 360,678 $ 329,781 $ — $ — $ — $ —

Actual Return on Plan Assets 32,816 35,474 — — — —

Discretionary Company Contributions 11,200 22,500

Company Contributions 10,000 11,200 1,562 1,505 2,695 2,662

Benefit Payments ( 16,282 ) ( 15,777 ) ( 1,562 ) ( 1,505 ) ( 8,385 ) ( 6,694 )

Participant Premium Payments — — — — 5,690 4,032

Fair Value of Plan Assets at December 31 387,212 360,678 — — — —

Estimated Asset Return 10.7 % 19.3 %

Reconciliation of Projected Benefit Obligation:

Projected Benefit Obligation at January 1 $ 384,785 $ 328,442

Change in Benefit Obligation:

Benefit Obligation at January 1 $ 428,396 $ 384,785 $ 47,894 $ 43,966 $ 70,185 $ 71,437

Service Cost 7,462 6,621 187 179 1,722 1,847

1 unchanged sentence

Benefit Payments ( 16,282 ) ( 15,777 ) ( 1,562 ) ( 1,505 ) ( 8,385 ) ( 6,694 )

Actuarial Loss 39,714 51,582

Projected Benefit Obligation at December 31 $ 428,396 $ 384,785

Weighted average assumptions used to determine benefit obligations at December 31, 2020 and 2019:

Discount Rate 2.78 % 3.47 %

Rate of Increase in Future Compensation Level:

Participants to Age 39 4.50 % 4.50 %

Participants Age 40 to Age 49 3.50 % 3.50 %

Participants Age 50 and Older 2.75 % 2.75 %

The assumed long-term rate of return on plan assets is based primarily on asset category studies using historical market return and volatility data with forward looking estimates based on existing financial market conditions and forecasts of capital markets.

Modest excess return expectations versus some market indices are incorporated into the return projections based on the actively managed structure of the investment programs and their records of achieving such returns historically.

We review our rate of return on plan asset assumptions annually.

The assumptions are largely based on the asset category rate-of-return assumptions developed annually with our pension plan investment advisors, as well as input from actuaries who work with the pension plan and benchmarking to peer companies with similar asset allocation strategies.

Market-related value of plan assets.

Our expected return on plan assets is determined based on the expected long-term rate of return on plan assets and the market-related value of plan assets.

We base actuarial determination of pension plan expense or income on a market-related valuation of assets, which reduces year-to-year volatility.

This market-related valuation calculation recognizes investment gains or losses over a five -year period from the year in which they occur.

Investment gains or losses for this purpose are the difference between the expected return calculated using the market-related value of assets and the actual return based on the fair value of assets.

Since the market-related valuation calculation recognizes gains or losses over a five-year period, the future value of the market-related assets will be impacted as previously deferred gains or losses are recognized.

Measurement Dates:

Net Periodic Pension Cost 2020-01-01 2019-01-01

End of Year Benefit Obligations January 1, 2020 projected to December 31, 2020 January 1, 2019 projected to December 31, 2019

Market Value of Assets 2020-12-31 2019-12-31

We had no minimum funding requirement as of December 31, 2020 but made discretionary plan contributions of $ 10.0 million in January 2021.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid out from plan assets:

(in thousands) 2021 2022 2023 2024 2025 Years 2026-2030

Benefit Payments $ 16,536 $ 17,050 $ 17,694 $ 18,298 $ 18,856 $ 100,797

Table of Content s

The following objectives guide the investment strategy of our pension plan (the Plan):

• The assets of the Plan will be invested in accordance with all applicable laws in a manner consistent with fiduciary standards including Employee Retirement Income Security Act standards (if applicable).

Specifically:

◦ The safeguards and diversity that a prudent investor would adhere to must be present in the investment program.

◦ All transactions undertaken on behalf of the Plan must be in the best interest of plan participants and their beneficiaries.

• The primary objective of the Plan is to provide a source of retirement income for its participants and beneficiaries.

• The near-term primary financial objective of the Plan is to improve the funded status of the Plan.

• A secondary financial objective is to minimize pension funding and expense volatility where possible.

The asset allocation strategy developed by the Company’s Retirement Plans Administration Committee (the Committee) is based on the current needs of the Plan and the objectives listed above.

An asset/liability review is conducted annually or as often as necessary to assess the impact of various asset allocations on funded status and other financial variables.

The current needs of the Plan, the overall investment objectives above, the investment preferences and risk tolerance of the Committee and the desired degree of diversification suggest the need for an investment allocation including multiple asset classes.

The asset allocation in the table below contains guideline percentages, at market value, of the total Plan invested in various asset classes.

The Permitted Range is a guide and will at times not reflect the actual asset allocation as this will be dictated by market conditions, the independent actions of the Committee and/or Investment Managers and required cash flows to and from the Plan.

The Permitted Range anticipates this fluctuation and provides flexibility for the Investment Managers’ portfolios to vary around the target without the need for immediate rebalancing.

The Investment Manager will proactively monitor the asset allocation and will direct the purchases and sales to remain within the stated ranges.

The policy of the Plan is to invest assets in accordance with the allocations shown below:

Permitted Range

Asset Class / PBO Funded Status < 85% PBO >=85% PBO >=90% PBO >=95% PBO >=100% PBO

Equity 39 % — 59 % 34 % — 54 % 24 % — 44 % 14 % — 34 % 0 % — 20 %

Investment Grade Fixed Income 22 % — 42 % 30 % — 50 % 40 % — 60 % 53 % — 73 % 70 % — 100 %

Below Investment Grade Fixed Income 1

0 % — 15 % 0 % — 15 % 0 % — 15 % 0 % — 10 % 0 % — 10 %

5 % — 20 % 5 % — 20 % 5 % — 20 % 0 % — 15 % 0 % — 15 %

1 Includes (but not limited to) High Yield Bond Fund and Emerging Markets Debt funds.

2 Other category may include cash, alternatives, and/or other investment strategies that may be classified other than equity or fixed income, such as the Dynamic Asset Allocation fund or the SEI Energy Debt Collective Fund.

Pension plan asset allocations at December 31, 2020 and 2019, by asset category are as follows:

Asset Allocation 2020 2019

Global MGD Volatility Fund ( mixed equities fund )

19.3 % 20.4 %

Large Capitalization Equity Securities 11.8 11.3

International Equity Securities 9.9 9.3

Emerging Markets Equity Fund 4.5 4.2

Small and Mid-Capitalization Equity Securities 4.5 4.1

SEI Dynamic Asset Allocation Fund 3.2 3.1

Equity Securities 53.2 52.4

Fixed-Income Securities and Cash 44.2 44.7

Other – SEI Energy Debt Collective Fund 2.6 2.9

100.0 % 100.0 %

The following table presents the pension fund assets measured at fair value and included in Level 1 of the fair value hierarchy and assets measured using the NAV practical expedient to fair valuation as of December 31, 2020 and 2019:

(in thousands) 2020 2019

Assets in Level 1 of the Fair Value Hierarchy $ 351,458 $ 320,241

SEI Energy Debt Collective Fund at NAV 9,220 9,540

Total Assets $ 360,678 $ 329,781

Table of Content s

Fair Value Measurements of Pension Fund Assets:

The following table presents the Company’s pension fund assets measured at fair value and included in Level 1 of the fair value hierarchy as of December 31, 2020 and 2019:

(in thousands) 2020 2019

Global MGD Volatility Fund ( mixed equities fund )

Participant Premium Payments — — — — 5,690 4,032

Plan Amendments — — — — — ( 3,891 )

Actuarial Loss (Gain) ( 14,539 ) 39,714 ( 907 ) 3,805 ( 1,792 ) 1,061

Benefit Obligation at December 31 $ 416,697 $ 428,396 $ 46,840 $ 47,894 $ 69,311 $ 70,185

Funded Status $ ( 29,485 ) $ ( 67,718 ) $ ( 46,840 ) $ ( 47,894 ) $ ( 69,311 ) $ ( 70,185 )

Amounts Recognized in Consolidated Balance Sheet at December 31:

Current Liabilities $ — $ — $ ( 2,352 ) $ ( 1,557 ) $ ( 2,830 ) $ ( 2,826 )

Noncurrent Liabilities and Deferred Credits ( 29,485 ) ( 67,718 ) ( 44,488 ) ( 46,337 ) ( 66,481 ) ( 67,359 )

Total Liabilities $ ( 29,485 ) $ ( 67,718 ) $ ( 46,840 ) $ ( 47,894 ) $ ( 69,311 ) $ ( 70,185 )

The accumulated benefit obligation of our Pension Plan was $ 378.3 million and $ 385.3 million as of December 31, 2021 and 2020.

The accumulated benefit obligation of our ESSRP was $ 46.8 million and $ 47.7 million as of December 31, 2021 and 2020.

The following assumptions were used to determine benefit obligations as of December 31, 2021 and 2020:

Pension Benefits (Pension Plan) Pension Benefits (ESSRP) Postretirement Benefits

2021 2020 2021 2020 2021 2020

Large Capitalization Equity Securities Mutual Fund 42,697 37,357

International Equity Securities Mutual Funds 35,607 30,653

Small and Mid-Capitalization Equity Securities Mutual Fund 16,111 13,447

SEI Dynamic Asset Allocation Mutual Fund 11,729 10,168

Emerging Markets Equity Fund 16,146 13,792

Fixed Income Securities Mutual Funds 159,192 147,639

Cash Management – Money Market Fund 369 1

Total Assets $ 351,458 $ 320,241

The investments held by the SEI Energy Debt Collective Fund on December 31, 2020 and 2019 consist mainly of below investment grade high yielding bonds and loans of U.S.

energy companies which trade at a discount to fair value.

Redemptions are allowed semi-annually with a 95-day notice period, subject to fund director consent and certain gate, holdback and suspension restrictions.

Subscriptions are allowed monthly with a three-year lock up on subscriptions.

The fund’s assets are valued as of the close of business on the last business day of each calendar month and are available 30 days after the end of a calendar quarter.

We review and verify the reasonableness of the year-end valuations.

Executive Survivor and Supplemental Retirement Plan (ESSRP)

The ESSRP is an unfunded nonqualified benefit plan for certain executive officers and key management employees that provides for defined benefit payments to these employees on their retirement for life or to their beneficiaries on their death.

In addition, the ESSRP provides for survivor benefit payments to beneficiaries of the plan participants.

On December 26, 2019, the Company’s Board of Directors amended and restated the ESSRP to provide for (i) the freezing of participation in the restoration retirement benefit component of the ESSRP and (ii) the freezing of benefit accruals under the restoration retirement benefit component of the ESSRP for all participants, except those designated as a grandfathered participant, effective December 31, 2019.

The following table lists components of net periodic pension benefit cost for the years ended December 31, 2020, 2019 and 2018:

Discount Rate 3.03 % 2.78 % 2.93 % 2.61 % 3.01 % 2.75 %

Rate of Increase in Future Compensation n/a n/a 3.00 % 3.00 % n/a n/a

Participants to Age 39 4.50 % 4.50 % n/a n/a n/a n/a

Participants Ages 40 to 49 3.50 % 3.50 % n/a n/a n/a n/a

Participants Age 50 and Older 2.75 % 2.75 % n/a n/a n/a n/a

Healthcare Cost Immediate Trend Rate n/a n/a n/a n/a 6.16 % 6.44 %

Healthcare Cost Ultimate Trend Rate n/a n/a n/a n/a 4.50 % 4.50 %

Year the Rate Reaches the Ultimate Trend Rate n/a n/a n/a n/a 2038 2038

The pension benefit liability of our Pension Plan decreased $ 38.2 million from December 31, 2020 to December 31, 2021 primarily due to an increase in the discount rate used to measure the obligation, from 2.78 % to 3.03 %, respectively, and from actual returns on Pension Plan investments in 2021 exceeding the expected return for the year.

Net Periodic Benefit Cost.

A portion of service cost may be capitalized as a cost of self-constructed property, plant and equipment.

When recognized in the consolidated statements of income, service cost is recognized within one of the components of operating expenses.

Nonservice cost components of net periodic benefit cost may be deferred and recognized as a regulatory asset under the accounting guidance for regulated operations.

When recognized in the consolidated statements of income, nonservice cost components are recognized as nonservice cost components of postretirement benefits.

The following table lists the components of net periodic benefit cost of our defined benefit pension plans and other postretirement benefits for the years ended December 31, 2021, 2020 and 2019:

Pension Benefits (Pension Plan) Pension Benefits (ESSRP) Postretirement Benefits

(in thousands) 2021 2020 2019 2021 2020 2019 2021 2020 2019

Service Cost–Benefit Earned During the Period $ 179 $ 418 $ 408

Interest Cost on Projected Benefit Obligation 1,449 1,735 1,589

Service Cost $ 7,462 $ 6,621 $ 5,491 $ 187 $ 179 $ 418 $ 1,722 $ 1,847 $ 1,286

Interest Cost 11,660 13,053 14,412 1,228 1,449 1,735 1,891 2,393 3,083

Expected Return on Assets ( 22,359 ) ( 22,021 ) ( 21,297 ) — — — — — —

Amortization of Prior Service Cost — — 14 — — 22 ( 5,733 ) ( 4,792 ) —

From Regulatory Asset — 5 20

From Other Comprehensive Income 1

Amortization of Net Actuarial Loss 10,914 9,144 4,756 620 434 472 3,774 4,310 1,609

From Regulatory Asset 93 124 206

From Other Comprehensive Income 1

Net Periodic Pension Cost 2

$ 2,062 $ 2,647 $ 2,979

1 Amortization of prior service costs and net actuarial losses from other comprehensive income are included in nonservice cost components of postretirement benefits on the face of the Company’s consolidated statements of income.

2 Allocation of costs:

2020 2019 2018

Service costs included in electric operation and maintenance expenses $ — $ 104 $ 99

Service costs included in other nonelectric expenses 179 314 309

Nonservice costs included in nonservice cost components of postretirement benefits 1,883 2,229 2,571

Weighted average assumptions used to determine net periodic pension cost for the years ended December 31, 2020, 2019 and 2018:

Net Periodic Benefit Cost $ 7,677 $ 6,797 $ 3,376 $ 2,035 $ 2,062 $ 2,647 $ 1,654 $ 3,758 $ 5,978

The following table includes the impact of regulation on the recognition of periodic benefit cost arising from pension and other postretirement benefits for the years ended December 31, 2021, 2020, 2019:

(in thousands) 2021 2020 2019

Net Periodic Benefit Cost $ 11,366 $ 12,617 $ 12,001

Net Amount Amortized (Deferred) Due to the Effect of Regulation 21 ( 533 ) ( 513 )

Net Periodic Benefit Cost Recognized $ 11,387 $ 12,084 $ 11,488

The following assumptions were used to determine net periodic benefit cost for the years ended December 31, 2021, 2020 and 2019:

Pension Benefits (Pension Plan) Pension Benefits (ESSRP) Postretirement Benefits

2021 2020 2019 2021 2020 2019 2021 2020 2019

Discount Rate 2.78 % 3.47 % 4.50 % 2.61 % 3.36 % 4.46 % 2.75 % 3.43 % 4.44 %

Rate of Increase in Future Compensation Level 3.50 % 3.40 % 2.92 %

Table of Content s

The following table presents amounts recognized in the consolidated balance sheets as of December 31, 2020 and 2019:

Long-Term Rate of Return on Plan Assets 6.51 % 6.88 % 7.25 % n/a n/a n/a n/a n/a n/a

Rate of Increase in Future Compensation n/a n/a n/a 3.00 % 3.50 % 3.40 % n/a n/a n/a

Participants to Age 39 4.50 % 4.50 % 4.50 % n/a n/a n/a n/a n/a n/a

Participants Ages 40 to 49 3.50 % 3.50 % 3.50 % n/a n/a n/a n/a n/a n/a

Participants Age 50 and Older 2.75 % 2.75 % 2.75 % n/a n/a n/a n/a n/a n/a

We develop our estimated discount rate through the use of a hypothetical bond portfolio method.

This method derives the discount rate from the average yield of a collection of high credit quality bonds which produce cash flows similar to our anticipated future benefit payments.

We estimate the assumed long-term rate of return on plan assets based primarily on asset category studies using historical market return and volatility data with forward looking estimates based on existing financial market conditions and forecasts of capital markets.

Modest excess return expectations versus

some market indices are incorporated into the return projections based on the actively managed structure of the investment programs and their records of achieving such returns historically.

The following table presents the amounts not yet recognized as components of net periodic benefit cost as of December 31, 2021 and 2020:

Pension Benefits (Pension Plan) Pension Benefits (ESSRP) Postretirement Benefits

(in thousands) 2021 2020 2021 2020 2021 2020

3 unchanged sentences

Total Regulatory Assets $ 102,737 $ 137,500 $ 2,525 $ 2,681 $ 12,863 $ 12,659

Projected Benefit Obligation Liability – Net Amount Recognized $ ( 47,894 ) $ ( 43,966 )

Accumulated Other Comprehensive Loss:

Unrecognized Prior Service Cost $ — $ — $ — $ 1 $ ( 242 ) $ ( 386 )

Unrecognized Actuarial Loss 12,030 9,170

Unrecognized Actuarial (Gain) Loss ( 1,020 ) 128 10,660 12,030 ( 160 ) 21

Total Accumulated Other Comprehensive Loss $ ( 1,020 ) $ 128 $ 10,660 $ 12,031 $ ( 402 ) $ ( 365 )

The following table provides a reconciliation of the changes in the fair value of plan assets and the plan’s projected benefit obligations for the years ended December 31, 2020 and 2019 and a statement of the funded status as of December 31 of both years:

(in thousands) 2020 2019

Reconciliation of Fair Value of Plan Assets:

Fair Value of Plan Assets at January 1 $ — $ —

Actual Return on Plan Assets — —

Employer Contributions 1,505 1,475

Benefit Payments ( 1,505 ) ( 1,475 )

Fair Value of Plan Assets at December 31 $ — $ —

Reconciliation of Projected Benefit Obligation:

Projected Benefit Obligation at January 1 43,966 39,699

Service Cost 179 418

Interest Cost 1,449 1,735

Benefit Payments ( 1,505 ) ( 1,475 )

Curtailments — ( 1,671 )

Actuarial Loss 3,805 5,260

Projected Benefit Obligation at December 31 $ 47,894 $ 43,966

Weighted average assumptions used to determine benefit obligations at December 31, 2020 and 2019:

Discount Rate 2.61 % 3.36 %

Rate of Increase in Future Compensation Level:

3.00 % 3.50 %

The ESSRP is unfunded and has no assets;

contributions are equal to the benefits paid to plan participants.

The following benefit payments, which reflect future service, as appropriate, are expected to be paid:

(in thousands) 2021 2022 2023 2024 2025 Years 2026-2030

Benefit Payments $ 1,575 $ 2,049 $ 2,723 $ 2,707 $ 2,645 $ 14,348

What changed 10-K

Item 8. Financial Statements and Supplementary Data