Otter Tail Corp 10-K

ITEM 8. FINANCIAL STATEMENTS REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Otter Tail Corporation Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Otter Tail Corporation and subsidiaries (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the “financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the criteria established in Internal Control—Integrated Framework (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report Regarding Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 37 Table of Contents Rate and Regulatory Matters—Impact of Rate Regulation on the Financial Statements—Refer to Notes 1, and 5 to the financial statements. Critical Audit Matter Description The Company’s regulated Electric segment accounts for the financial effects of regulation in accordance with ASC 980, Regulated Operations . This guidance allows for the recording of a regulatory asset or liability for certain costs or credits which otherwise would be recognized in the statement of income or comprehensive income based on an expectation that the cost will be recovered or returned in future rates. This guidance also provides for adjustments to rates outside of a general rate 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 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. Accounting for the economics of rate regulation impacts multiple financial statement line items and disclosures, such as property, plant, and equipment, regulatory assets and liabilities, operating revenues and expenses, depreciation expense, income taxes and multiple disclosures in the notes to the financial statements. There is a risk that the Commissions will not approve full recovery of the costs of providing utility service or full recovery of all amounts invested in the utility business and a reasonable return on that investment. As a result, we identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about impacted account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, (2) a disallowance of capital expenditures or operating costs that management believes were prudently incurred, and (3) a refund to customers. Given that management’s accounting judgements are based on assumptions about the outcome of future decisions by the Commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due its inherent complexities. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the uncertainty of future decisions by the Commissions included the following, among others: • We tested the effectiveness of management’s controls over the evaluation of the likelihood of (1) the recovery in future rates of costs incurred as property, plant, and equipment and deferred as regulatory assets, and (2) a refund or a future reduction in rates that should be reported as regulatory liabilities. We also tested the effectiveness of management’s controls over the initial recognition of amounts as property, plant, and equipment; regulatory assets or liabilities; and the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates or of a future reduction in rates. • We evaluated the Company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments. • We read relevant regulatory orders issued by the Commissions for the Company, regulatory statutes, interpretations, procedural memorandums, filings made by interveners, and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions’ treatment of similar costs under similar circumstances. We evaluated the external information and compared to management’s recorded regulatory asset and liability balances for completeness. • We inquired of management about property, plant, and equipment that may be abandoned. We inspected the capital-projects budget and construction-in-process listings and inquired of management to identify projects that are designed to replace assets that may be retired prior to the end of the useful life. We inspected minutes of the board of directors and regulatory orders and other filings with the Commissions to identify any evidence that may contradict management’s assertion regarding probability of an abandonment. • We compared actual spend for projects that have been capitalized to property, plant, and equipment to budget. We evaluated regulatory filings for any evidence that intervenors are challenging full recovery of the cost of any capital projects. • We obtained an analysis from management and letters from internal and external legal counsel, as appropriate, regarding probability of recovery for regulatory assets or refund or future reduction in rates for regulatory liabilities not yet addressed in a regulatory order to assess management’s assertion that amounts are probable of recovery or a future reduction in rates. Goodwill—Manufacturing Reporting Unit—Refer to Notes 1 and 7 to the financial statements Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company performs quantitative assessments of goodwill annually as of December 31 (the “measurement date”) and more frequently as events or circumstances require. The Company estimates the fair value of its Manufacturing reporting unit by primarily using the discounted cash flow model. The determination of the fair value using the discounted cash flow model requires management to make significant estimates and assumptions related to forecasts of future operating results and cash flows. The Manufacturing reporting unit’s operating results and cash flows are sensitive to changes in demand. The goodwill balance was $37.6 million as of December 31, 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. 38 Table of Contents We identified goodwill for the Manufacturing reporting unit as a critical audit matter because of the significant judgments made by management to estimate its fair value and the difference between its fair value and carrying value and the sensitivity of the Manufacturing reporting unit’s operations to changes in demand. This required a high degree of auditor judgment and an increased extent of effort when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to forecasts of future operating results and cash flows. How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to forecasts of future operating results and cash flows used by management to estimate the fair value of the Manufacturing reporting unit included the following, among others: • We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the Manufacturing reporting unit, such as controls related to forecasts of future operating results and cash flows. • We evaluated management’s ability to accurately forecast future operating results and cash flows by comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s operating results and cash flow forecasts by comparing the forecasts to: – Historical operating results and cash flows. – Internal communications 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. /s/ Deloitte & Touche LLP Minneapolis, Minnesota February 16, 2022 We have served as the Company’s auditor since 1944. 39 Table of Contents OTTER TAIL CORPORATION CONSOLIDATED BALANCE SHEETS December 31, (in thousands, except share data) 2021 2020 Assets Current Assets Cash and Cash Equivalents $ 1,537 $ 1,163 Receivables, net of allowance for credit losses 174,953 113,959 Inventories 148,490 92,165 Regulatory Assets 27,342 21,900 Other Current Assets 17,032 5,645 Total Current Assets 369,354 234,832 Noncurrent Assets Investments 56,690 51,856 Property, Plant and Equipment, net of accumulated depreciation 2,124,605 2,049,273 Regulatory Assets 125,508 168,395 Intangible Assets, net of accumulated amortization 9,044 10,144 Goodwill 37,572 37,572 Other Noncurrent Assets 32,057 26,282 Total Noncurrent Assets 2,385,476 2,343,522 Total Assets $ 2,754,830 $ 2,578,354 Liabilities and Shareholders' Equity Current Liabilities Short-Term Debt $ 91,163 $ 80,997 Current Maturities of Long-Term Debt 29,983 140,087 Accounts Payable 135,089 120,618 Accrued Salaries and Wages 31,704 27,451 Accrued Taxes 19,245 18,831 Regulatory Liabilities 24,844 16,663 Other Current Liabilities 55,671 32,139 Total Current Liabilities 387,699 436,786 Noncurrent Liabilities and Deferred Credits Pensions Benefit Liability 73,973 114,055 Other Postretirement Benefits Liability 66,481 67,359 Regulatory Liabilities 234,430 233,973 Deferred Income Taxes 188,268 153,376 Deferred Tax Credits 16,661 17,405 Other Noncurrent Liabilities 62,527 60,002 Total Noncurrent Liabilities and Deferred Credits 642,340 646,170 Commitments and Contingencies (Note 13) Capitalization Long-Term Debt, net of current maturities 734,014 624,432 Shareholders' Equity Common Stock: 50,000,000 shares authorized of $ 5 par value; 41,551,524 and 41,469,879 outstanding at December 31, 2021 and 2020 207,758 207,349 Additional Paid-In Capital 419,760 414,246 Retained Earnings 369,783 257,878 Accumulated Other Comprehensive Loss ( 6,524 ) ( 8,507 ) Total Shareholders' Equity 990,777 870,966 Total Capitalization 1,724,791 1,495,398 Total Liabilities and Shareholders' Equity $ 2,754,830 $ 2,578,354 See accompanying notes to consolidated financial statements. 40 Table of Contents OTTER TAIL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, (in thousands, except per-share amounts) 2021 2020 2019 Operating Revenues Electric $ 480,321 $ 446,088 $ 459,048 Product Sales 716,523 444,019 460,455 Total Operating Revenues 1,196,844 890,107 919,503 Operating Expenses Electric Production Fuel 59,327 46,296 59,256 Electric Purchased Power 65,409 61,698 72,066 Electric Operating and Maintenance Expenses 159,669 150,848 153,529 Cost of Products Sold (excluding depreciation) 488,370 329,257 355,119 Other Nonelectric Expenses 65,394 55,051 50,782 Depreciation and Amortization 91,358 82,037 78,086 Electric Property Taxes 17,609 17,034 15,785 Total Operating Expenses 947,136 742,221 784,623 Operating Income 249,708 147,886 134,880 Other Income and Expense Interest Charges 37,771 34,447 31,411 Nonservice Cost Components of Postretirement Benefits 2,016 3,437 4,293 Other Income (Expense), net 2,900 6,055 5,112 Income Before Income Taxes 212,821 116,057 104,288 Income Tax Expense 36,052 20,206 17,441 Net Income $ 176,769 $ 95,851 $ 86,847 Weighted-Average Common Shares Outstanding: Basic 41,491 40,710 39,721 Diluted 41,818 40,905 39,954 Earnings Per Share: Basic $ 4.26 $ 2.35 $ 2.19 Diluted $ 4.23 $ 2.34 $ 2.17 See accompanying notes to consolidated financial statements. 41 Table of Contents OTTER TAIL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, (in thousands) 2021 2020 2019 Net Income $ 176,769 $ 95,851 $ 86,847 Other Comprehensive Income (Loss): 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) 1,983 ( 2,070 ) ( 1,509 ) Total Comprehensive Income $ 178,752 $ 93,781 $ 85,338 See accompanying notes to consolidated financial statements. 42 Table of Contents OTTER TAIL CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands, except common stock outstanding) Common Stock Outstanding Par Value, Common Stock Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders' Equity Balance, December 31, 2018 39,664,884 $ 198,324 $ 344,250 $ 190,433 $ ( 4,144 ) $ 728,863 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 Loss — — — — ( 1,509 ) ( 1,509 ) Stranded Tax Transfer — — — 784 ( 784 ) — Stock Compensation Expense — — 5,958 — — 5,958 Common Dividends ($ 1.40 per share) — — — ( 55,723 ) — ( 55,723 ) Balance, December 31, 2019 40,157,591 $ 200,788 $ 364,790 $ 222,341 $ ( 6,437 ) $ 781,482 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 ) Stock Compensation Expense — — 6,284 — — 6,284 Common Dividends ($ 1.48 per share) — — — ( 60,314 ) — ( 60,314 ) Balance, December 31, 2020 41,469,879 $ 207,349 $ 414,246 $ 257,878 $ ( 8,507 ) $ 870,966 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 Income — — — — 1,983 1,983 Stock Compensation Expense — — 6,908 — — 6,908 Common Dividends ($ 1.56 per share) — — — ( 64,864 ) — ( 64,864 ) Balance, December 31, 2021 41,551,524 $ 207,758 $ 419,760 $ 369,783 $ ( 6,524 ) $ 990,777 See accompanying notes to consolidated financial statements. 43 Table of Contents OTTER TAIL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, (in thousands) 2021 2020 2019 Operating Activities Net Income $ 176,769 $ 95,851 $ 86,847 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 91,358 82,037 78,086 Deferred Tax Credits ( 744 ) ( 1,221 ) ( 1,348 ) Deferred Income Taxes 28,896 15,201 12,026 Discretionary Contribution to Pension Plan ( 10,000 ) ( 11,200 ) ( 22,500 ) 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 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 Investing Activities Capital Expenditures ( 171,829 ) ( 371,553 ) ( 207,365 ) Proceeds from Disposal of Noncurrent Assets 9,702 5,011 8,519 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 Net Borrowings (Repayments) on Short-Term Debt 10,166 74,997 ( 12,599 ) Proceeds from Issuance of Common Stock 696 52,432 20,338 Proceeds from Issuance of Long-Term Debt 140,000 75,000 100,000 Payments for Retirement of Long-Term Debt ( 140,169 ) ( 182 ) ( 172 ) Dividends Paid ( 64,864 ) ( 60,314 ) ( 55,723 ) 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 Cash and Cash Equivalents at Beginning of Period 1,163 21,199 861 Cash and Cash Equivalents at End of Period $ 1,537 $ 1,163 $ 21,199 Supplemental Disclosures of Cash Flow Information Cash Paid During the Year for: Interest, net of amount capitalized $ 36,881 $ 33,199 $ 30,132 Income Taxes $ 8,445 $ 5,177 $ 4,797 Supplemental Disclosure of Noncash Investing Activities Accrued Property, Plant and Equipment Additions $ 12,081 $ 34,265 $ 37,429 See accompanying notes to consolidated financial statements 44 Table of Contents OTTER TAIL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Overview 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: Electric, Manufacturing and Plastics. Note 2 includes an additional description of the segments and financial information regarding each segment. Principles of Consolidation These consolidated financial statements are presented in accordance with U.S. generally accepted accounting principles and include the accounts of 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 We use estimates based on the best information available in recording transactions and balances resulting from business operations. As better information becomes available, or actual amounts are known, the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates. Reclassifications Certain reclassifications of amounts previously reported have been made to the accompanying consolidated balance sheets 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 Our regulated electric utility company, Otter Tail Power Company (OTP), is subject to regulation of rates and other matters by state utility commissions in Minnesota, North Dakota and South Dakota and by the Federal Energy Regulatory Commission (FERC) for certain interstate operations. OTP accounts for the financial effects of regulation in accordance with accounting guidance for regulated operations. This guidance allows for the recording of a regulatory asset for certain costs which otherwise would be recognized in the statement of income or comprehensive income based on an expectation that the cost will be recovered in future rates. This guidance also requires the recording of a regulatory liability for certain credits which would otherwise be recognized in the statement of income or comprehensive income based on an expectation that the amount will be returned to customers in future rates. Amounts recorded as regulatory assets and regulatory liabilities are generally recognized in the statements of income at the time they are reflected in customer rates. In the event OTP ceases to meet the criteria to apply the guidance for regulated operations, the regulatory assets and liabilities that no longer meet such criteria would be removed from the consolidated balance sheet and included in the consolidated statement of income as an expense or income item in the period in which the application of this guidance ceases. Cash Equivalents We consider all highly liquid debt instruments purchased with maturity of 90 days or less to be cash equivalents. Revenue from Contracts with Customers Due to our diverse business operations, the recognition of revenue from contracts with customers depends on the product produced and sold or service performed. We recognize revenue from contracts with customers at prices that are fixed or determinable as evidenced by an agreement with the customer, when we have met our performance obligation under the contract and it is probable that we will collect the amount to which we are entitled in exchange for the goods or services transferred or to be transferred to the customer. Depending on the product produced and sold or service performed and the terms of the agreement with the customer, we recognize revenue either over time, in the case of delivery or transmission of electricity or related services or the production and storage of certain custom-made products, or at a point in time for the delivery of standardized products and other products made to customer specifications where the terms of the contract require transfer of the completed product. Provisions for sales returns, early payment terms discounts, and volume-based variable pricing incentives are recorded as reductions to revenue at the time revenue is recognized based on customer history, historical information and current trends. We include revenues received for shipping and handling in operating revenues. Expenses paid for shipping and handling are recorded as part of cost of goods sold. Sales or other taxes collected from customers are excluded from operating revenues. Electric Segment Revenues. Most Electric segment revenues are earned from the generation, transmission and sale of electricity to retail customers at rates approved by state regulatory commissions. OTP also earns revenue from the transmission of electricity for others over the transmission assets it owns separately, or jointly with other transmission service providers, under rate tariffs established by the independent transmission system operator and approved by the FERC. A third source of revenue for OTP comes from the generation and sale of electricity to wholesale customers at contract or market rates. Revenues from all these sources meet the criteria to be classified as revenue from contracts with customers and are recognized over time as energy is delivered or transmitted. Revenue is recognized based on the metered quantity of electricity 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. 45 Table of Contents Manufacturing Segment Revenues. Our Manufacturing segment businesses earn revenue predominantly from the production and delivery of custom-made or standardized parts to customers across several industries and certain businesses also earn revenue from the production and sale of tools and dies to other manufacturers. For the production and delivery of standardized products and other products made to customer specifications where the terms of the contract require transfer of the completed product, we have met our performance obligation and recognize revenue at the point in time when the product is shipped. At this point we have no further obligation to provide services related to such products. The shipping terms used in these transactions are FOB shipping point. Plastics Segment Revenues. Our Plastics segment businesses earn revenue predominantly from the sale and delivery of standardized 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. For sales to this customer, we recognize revenue as the custom-made product is produced, adjusting the amount of revenue for volume rebate variable pricing considerations we expect the customer will earn and applicable early payment discounts we expect the customer will take. Ownership of the pipe transfers to the customer prior to delivery and we are paid a negotiated fee for storage of the pipe. Revenue for storage of the pipe is also recognized over time as the pipe is stored. Alternative Revenue In addition to recognizing revenue from contracts with customers, our Electric segment business also records revenue under alternative revenue program (ARPs) requirements. Certain rate rider mechanisms qualify as ARP revenues as they provide for adjustments to rates outside of a general rate case proceeding to encourage or incentivize investments in certain areas such as conservation, renewable energy, pollution reduction or control, improved infrastructure of the transmission grid or other programs that provide benefits to the general public under public policy, laws or regulations. ARP riders generally provide for the recovery of specified costs and investments and include an incentive component to provide the regulated utility with a return on amounts invested. We accrue ARP revenue on the basis of cost incurred, investments made and returns on those investments that qualify for recovery through established riders. ARP revenue is disclosed separately from revenue from contracts with customers and we have elected to report ARP revenue on a net basis, whereby amounts initially recorded as ARP revenue in a period are presented net of the reversal of amounts previously recognized as ARP revenue that are reclassified and recorded as revenue from contracts with customers when such amounts are included in the price of electricity to customers. Receivables and Allowance for Credit Losses We grant credit to our customers in the normal course of business with repayment terms generally ranging from 30 to 90 days after the invoice date. Late fees are assessed on certain receivables once they are 30 days past due. Unbilled receivables represent estimates of energy delivered to customers but not yet billed. Receivables are stated at the billed or estimated unbilled amount less an allowance for estimated credit losses. An allowance for credit losses is established based on losses expected to occur over the contractual life of the receivable. We estimate an allowance for credit losses on our trade and unbilled receivables by evaluating historical aging and write-off history, adjusted for current and forecasted economic conditions, for groups of receivables that share similar economic characteristics. Other receivables are evaluated by reviewing individual accounts, considering aging, financial condition of the debtor, recent payment history and other relevant factors. Account balances are written-off in the period they are deemed to be uncollectible. Inventories Inventories are valued at the lower of cost or net realizable value. 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: (in thousands) 2021 2020 Finished Goods $ 39,903 $ 22,046 Work in Process 35,705 16,210 Raw Material, Fuel and Supplies 72,882 53,909 Total Inventories $ 148,490 $ 92,165 Investments 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. We evaluate whether declines in fair value of debt securities below the cost basis are other-than-temporary. Declines in fair value deemed to be other-than-temporary result in the recognition of unrealized losses, or a portion thereof, in earnings. Unrealized gains and losses on mutual and money market funds are recognized in earnings immediately. 46 Table of Contents The following is a summary of our investments at December 31, 2021 and 2020: (in thousands) 2021 2020 Corporate-Owned Life Insurance Policies $ 41,078 $ 36,825 Corporate and Government Debt Securities 9,202 9,260 Mutual Funds 5,432 1,662 Money Market Funds 949 4,075 Other Investments 29 34 Total Investments $ 56,690 $ 51,856 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 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. Amounts recovered in rates for future removal costs are recorded as regulatory liabilities. Removal costs, when incurred, are charged against the regulatory liability. Maintenance, repairs and replacement of minor items 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. Gains or losses on group asset dispositions are taken to the accumulated provision for depreciation reserve and impact current and future depreciation rates. Property, plant and equipment of nonelectric operations are carried at historical cost and are depreciated on a straight-line basis over the assets’ estimated useful lives. The cost of additions includes contracted work, direct labor and materials, allocable overheads and capitalized interest. No interest was capitalized in 2021, 2020 or 2019. Maintenance and repairs are expensed as incurred. Gains or losses on asset dispositions are included in the determination of operating income. The estimated service lives for rate-regulated electric assets and nonelectric assets are included below: Service Life Range (years) Low High Electric Assets: Production Plant 9 83 Transmission Plant 51 75 Distribution Plant 16 70 General Plant 5 60 Nonelectric Assets: Equipment 2 12 Buildings and Leasehold Improvements 5 40 Jointly Owned Facilities OTP is a joint owner in two coal-fired steam-powered electric generation plants: Big Stone Plant near Big Stone City, South Dakota and Coyote Station near Beulah, North Dakota. OTP is also a joint owner, with other regional utilities, in five major transmission lines. OTP's interest in each jointly owned facility is reflected in the consolidated balance sheets on a pro-rata basis and OTP's share of direct revenue and expenses are included in operating revenues and expenses in the consolidated statements of income. Each participant in the jointly owned facilities finances its own investment. Goodwill and Other Intangible Assets Goodwill is recognized and initially measured as any excess of the acquisition-date consideration transferred in a business combination over amounts recognized for the net identifiable assets acquired. Goodwill is not amortized but is tested for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not result in an impairment of goodwill. Impairment testing is performed at the reporting unit level, which is defined as an operating segment or one level below an operating segment. We perform our impairment testing in the fourth quarter of each year and have identified three reporting units that carry a goodwill balance. Our impairment testing includes both an optional qualitative assessment and the quantitative impairment assessment. Our qualitative assessment includes an analysis of relevant events and circumstances to determine if it is more likely than not that the fair value of the reporting 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 over the fair value being recognized as an impairment loss. 47 Table of Contents 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. Leases We recognize right-of-use lease assets and a corresponding lease liability at the lease commencement date. 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; such leases are expensed on a straight-line basis over the lease term. If a lease contains an option to extend the lease term and there is reasonable certainty the option will be exercised, the option is considered in the lease term at inception. We have elected to not separate non-lease components (e.g., common area maintenance) from lease components on real estate leases, accordingly the recognized lease asset and lease liability incorporate in their measurement payments for non-lease components. Certain leases include variable lease payments as the amounts are subject to change over the lease term. We are unable to determine the interest rate implicit in our leases thus we apply our incremental borrowing rate to capitalize the right-of-use asset and lease liability. We estimate our incremental borrowing rate by incorporating considerations of lease term and lessee entity. 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 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. Asset Retirement Obligations Legal obligations related to the future retirement of long-lived assets are recognized as asset retirement obligations (ARO). An ARO is recognized in the period in which the legal obligation is incurred and the amount of the obligation can be reasonably estimated, with an offsetting increase to the associated long-lived asset. AROs are initially recognized at fair value and increased with the passage of time (accretion), with accretion expense recognized in the consolidated statements of income. ARO estimates are revised periodically with any adjustment reflected in the ARO and associated long-lived asset. Income Taxes We use the asset and liability method to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of all temporary differences between the carrying amounts of assets and liabilities and their respective tax bases. Deferred taxes are recorded using the tax rates scheduled by tax law to be in effect in the periods when the temporary differences reverse. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that a portion or all of the deferred tax assets will not be realized. The realizability of deferred tax assets takes into consideration forecasts of future taxable income, the reversal of other existing temporary differences, available net operating loss carryforwards and available tax planning strategies. Changes in valuation allowances are included in the provision for income taxes in the period of the changes. We recognize the tax effects of all tax positions that are more-likely-than-not to be sustained on audit based solely on the technical merits of those positions as of the balance sheet date. Changes in the recognition or measurement of such positions are recognized in the provision for income taxes in the period of the changes. We classify interest and penalties on tax uncertainties as components of the provision for income taxes. We amortize investment tax credits and state wind energy credits over the estimated lives of the related property. Stock-Based Compensation Stock-based compensation awards are measured at the grant date fair value of the award and compensation expense is recognized on a straight-line basis over the applicable service or performance period. The service period may be limited to the period until such time that a recipient is retirement eligible as determined under the award agreement. Awards granted to employees eligible for retirement on the date of grant are expensed in the period of grant. We recognize the effects of award forfeitures as they occur. Fair Value Measurements Fair value is defined as the price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Three levels of inputs may be used to measure fair value: Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed by the New York Stock Exchange and commodity derivative contracts listed on the New York Mercantile Exchange. Level 2 – Pricing inputs are other than quoted prices in active markets but are either directly or indirectly observable as of the reported date. The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities, or priced with models using highly observable inputs, such as commodity options priced using observable forward prices and volatilities. Level 3 – Significant inputs to pricing have little or no observability as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation and may include complex and subjective models and forecasts. 48 Table of Contents In instances where the determination of the fair value measurement is based on inputs from different levels within the hierarchy, the level in the hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Variable Interest Entity In October 2012, the Coyote Station owners, including OTP, entered into a lignite sales agreement (LSA) with Coyote Creek Mining Company, L.L.C. (CCMC), a subsidiary of The North American Coal Corporation, for the purchase of lignite coal to meet the coal supply requirements of Coyote Station for the period beginning in May 2016 and ending in December 2040. The price per ton paid by the Coyote Station owners under the LSA reflects the cost of production, along with an agreed 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. The Coyote Station owners are required to buy certain assets of CCMC at book value should they terminate the contract prior to the end of the contract term and are providing a guarantee of the value of the equity of CCMC because the Coyote Station owners are required to buy the membership interests of CCMC at the end of the contract term at equity value. Under current accounting standards, the primary beneficiary of a VIE is required to include the assets, liabilities, results of operations and cash flows of the VIE in its consolidated financial statements. No single owner of Coyote Station owns a majority interest in Coyote Station and none, individually, has the power to direct the activities that most significantly impact CCMC. Therefore, none of the owners individually, including OTP, is considered a primary beneficiary of the VIE and the Company is not required to include CCMC in its consolidated financial statements. If the LSA terminates prior to the expiration of its term or the production period terminates prior to December 31, 2040 and the Coyote Station owners purchase all of the outstanding membership interests of CCMC, the owners will satisfy or, if permitted by CCMC’s applicable lenders, assume all of CCMC’s obligations owed to CCMC’s lenders under its loans and leases. The Coyote Station owners have limited rights to assign their rights and obligations under the LSA without the consent of CCMC’s lenders during any period in which CCMC’s obligations to its lenders remain outstanding. In the event the contract is terminated prior to the end of the term due to certain events, OTP’s maximum exposure to additional costs, as a result of its involvement with CCMC, and potential impairment loss if recovery of those costs is denied by regulatory authorities, could be as high as $ 45.0 million, OTP’s 35 % share of CCMC’s unrecovered costs as of December 31, 2021. 2. Segment Information We classify our business into three segments, Electric, Manufacturing and Plastics, consistent with our business strategy, organizational structure and our internal reporting and review processes used by our chief operating decision maker to make decisions regarding allocation of resources, to assess operating performance and to make strategic decisions. Electric includes the production, transmission, distribution and sale of electric energy in Minnesota, North Dakota and South Dakota by OTP. In addition, OTP is a participant in the Midcontinent Independent System Operator, Inc. (MISO) markets. OTP’s operations have been our primary business since 1907. Manufacturing consists of businesses in the following manufacturing activities: contract machining, metal parts stamping, fabrication and painting, and production of plastic thermoformed horticultural containers, life science and industrial packaging, and material handling components. These businesses have manufacturing facilities in Georgia, Illinois and Minnesota and sell products primarily in the United States. Plastics consists of businesses producing PVC pipe at plants in North Dakota and Arizona. The PVC pipe is sold primarily in the western half of the United States and Canada. Certain assets and costs are not allocated to our operating segments. Corporate operating costs include items such as corporate staff and overhead costs, the results of our captive insurance company and other items excluded from the measurement of operating segment performance. Corporate assets consist primarily of cash, prepaid expenses, investments and fixed assets. Corporate is not an operating segment, rather it is added to operating segment totals to reconcile to consolidated amounts. 49 Table of Contents Information for each segment and our unallocated corporate costs for the years ended December 31, 2021, 2020 and 2019 are as follows: (in thousands) 2021 2020 2019 Operating Revenue 1 Electric $ 480,321 $ 446,088 $ 459,048 Manufacturing 336,294 238,770 277,204 Plastics 380,229 205,249 183,251 Total $ 1,196,844 $ 890,107 $ 919,503 Depreciation and Amortization Electric $ 71,343 $ 63,171 $ 60,044 Manufacturing 15,436 14,933 14,261 Plastics 4,354 3,604 3,451 Corporate 225 329 330 Total $ 91,358 $ 82,037 $ 78,086 Operating Income (Loss) Electric $ 106,964 $ 107,083 $ 98,417 Manufacturing 24,114 16,103 17,869 Plastics 132,760 37,823 28,439 Corporate ( 14,130 ) ( 13,123 ) ( 9,845 ) Total $ 249,708 $ 147,886 $ 134,880 Interest Charges Electric $ 33,043 $ 29,848 $ 26,548 Manufacturing 2,239 2,215 2,345 Plastics 587 644 718 Corporate 1,902 1,740 1,800 Total $ 37,771 $ 34,447 $ 31,411 Income Tax Expense (Benefit) Electric $ 1,663 $ 12,480 $ 12,867 Manufacturing 4,704 2,939 2,784 Plastics 34,374 9,718 7,309 Corporate ( 4,689 ) ( 4,931 ) ( 5,519 ) Total $ 36,052 $ 20,206 $ 17,441 Net Income (Loss) Electric $ 72,458 $ 66,778 $ 59,046 Manufacturing 17,186 11,048 12,899 Plastics 97,823 27,582 20,572 Corporate ( 10,698 ) ( 9,557 ) ( 5,670 ) Total $ 176,769 $ 95,851 $ 86,847 Capital Expenditures Electric $ 140,031 $ 356,581 $ 187,362 Manufacturing 20,690 10,587 14,268 Plastics 11,040 4,322 5,452 Corporate 68 63 283 Total $ 171,829 $ 371,553 $ 207,365 1 Amounts reflect operating revenues to external customers. Intersegment operating revenues are not material for any period presented. 50 Table of Contents The following provides the identifiable assets by segment and corporate assets as of December 31, 2021 and 2020: (in thousands) 2021 2020 Identifiable Assets Electric $ 2,283,776 $ 2,233,399 Manufacturing 251,044 191,005 Plastics 162,565 99,767 Corporate 57,445 54,183 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 No single customer accounted for over 10% of our consolidated operating revenues for the years ended December 31, 2021, 2020 and 2019. All of our long-lived assets are located within the United States and substantially all of our operating revenues are to customers located within the United States. 3. Revenue We present our operating revenues to external customers, in total and by amounts arising from contracts with customers and ARP arrangements, disaggregated by revenue source and segment for the years ended December 31, 2021, 2020 and 2019: (in thousands) 2021 2020 2019 Operating Revenues Electric Segment Retail: Residential $ 135,361 $ 127,260 $ 131,988 Retail: Commercial and Industrial 262,408 254,951 267,125 Retail: Other 7,715 7,311 7,365 Total Retail 405,484 389,522 406,478 Transmission 48,835 44,001 40,542 Wholesale 17,936 4,857 5,007 Other 8,066 7,708 7,021 Total Electric Segment 480,321 446,088 459,048 Manufacturing Segment Metal Parts and Tooling 283,527 199,463 236,032 Plastic Products and Tooling 40,231 34,055 35,173 Other 12,536 5,252 5,999 Total Manufacturing Segment 336,294 238,770 277,204 Plastics Segment PVC Pipe 380,229 205,249 183,251 Total Operating Revenue 1,196,844 890,107 919,503 Less: Noncontract Revenues Included Above — — Electric Segment - ARP Revenues ( 791 ) 6,936 1,032 Total Operating Revenues from Contracts with Customers $ 1,197,635 $ 883,171 $ 918,471 51 Table of Contents 4. Receivables Receivables as of December 31, 2021 and 2020 are as follows: (in thousands) 2021 2020 Receivables Trade $ 142,297 $ 87,048 Other 10,591 8,939 Unbilled Receivables 23,901 21,187 Total Receivables 176,789 117,174 Less Allowance for Credit Losses ( 1,836 ) ( 3,215 ) Receivables, net of allowance for credit losses $ 174,953 $ 113,959 The following is a summary of activity in the allowance for credit losses for the years ended December 31, 2021 and 2020: (in thousands) 2021 2020 Beginning Balance $ 3,215 $ 1,339 Additions Charged to Expense 93 3,138 Reductions for Amounts Written-Off, Net of Recoveries ( 1,472 ) ( 1,262 ) Ending Balance $ 1,836 $ 3,215 5. Regulatory Matters Regulatory Assets and Liabilities The following presents our current and long-term regulatory assets and liabilities as of December 31, 2021 and 2020 and the period we expect to recover or refund such amounts: Period of 2021 2020 (in thousands) Recovery/Refund Current Long-Term Current Long-Term Regulatory Assets Pension and Other Postretirement Benefit Plans 1 See below $ 7,791 $ 114,961 $ 11,037 $ 146,071 Alternative Revenue Program Riders 2 Up to 2 years 11,889 5,564 8,871 9,373 Asset Retirement Obligations 1 Asset lives — 742 — 8,462 ISO Cost Recovery Trackers 1 Up to 2 years — 1,342 1,079 867 Unrecovered Project Costs 1 Up to 5 years 2,136 1,455 361 2,989 Deferred Rate Case Expenses 1 Various 607 1,131 360 230 Debt Reacquisition Premiums 1 Up to 30 years 100 240 192 341 Fuel Clause Adjustments 1 Up to 1 year 4,819 — — — Other 1 Various — 73 — 62 Total Regulatory Assets $ 27,342 $ 125,508 $ 21,900 $ 168,395 Regulatory Liabilities Deferred Income Taxes Asset lives $ — $ 129,437 $ — $ 134,719 Plant Removal Obligations Asset lives 8,306 101,595 — 98,707 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 — Derivative Instruments Up to 1 year 6,214 — — — Other Various 395 62 176 77 Total Regulatory Liabilities $ 24,844 $ 234,430 $ 16,663 $ 233,973 1 Costs subject to recovery without a rate of return. 2 Amount eligible for recovery includes an incentive or rate of return. Pension and Other Postretirement Benefit Plans represent benefit costs and actuarial losses and gains subject to recovery or refund through rates as they are expensed or amortized. These unrecognized benefit costs and actuarial losses and gains are eligible for treatment as regulatory assets or liabilities based on their probable inclusion in future electric rates. Alternative Revenue Program Riders regulatory assets and liabilities are revenues not yet collected from customers or amounts subject to 52 Table of Contents 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. 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. Debt Reacquisition Premiums represent costs to retire debt which are being recovered from customers over the remaining original lives of the reacquired debt. 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. 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. 6. Property, Plant and Equipment Major classes of property, plant and equipment as of December 31, 2021 and 2020 include: (in thousands) 2021 2020 Electric Plant in Service Production $ 1,332,067 $ 1,172,362 Transmission 722,739 690,647 Distribution 574,488 545,221 General 129,151 123,122 Electric Plant in Service 2,758,445 2,531,352 Construction Work in Progress 74,926 203,078 Total Gross Electric Plant 2,833,371 2,734,430 Less Accumulated Depreciation and Amortization 817,302 778,988 Net Electric Plant $ 2,016,069 $ 1,955,442 Nonelectric Property, Plant and Equipment Equipment $ 203,390 $ 197,389 Buildings and Leasehold Improvements 56,908 55,441 Land 13,652 5,900 Nonelectric Property, Plant and Equipment 273,950 258,730 Construction Work in Progress 16,611 9,290 Total Gross Nonelectric Property, Plant and Equipment 290,561 268,020 Less Accumulated Depreciation and Amortization 182,025 174,189 Net Nonelectric Property, Plant and Equipment 108,536 93,831 Net Property, Plant and Equipment $ 2,124,605 $ 2,049,273 Depreciation expense for the years ended December 31, 2021, 2020 and 2019 totaled $ 85.8 million, $ 78.6 million and $ 71.9 million. 53 Table of Contents 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: (dollars in thousands) Ownership Percentage Electric Plant in Service Construction Work in Progress Accumulated Depreciation Net Plant December 31, 2021 Big Stone Plant 53.9 % $ 338,699 $ 260 $ ( 110,604 ) $ 228,355 Coyote Station 35.0 % 182,610 1,110 ( 107,894 ) 75,826 Big Stone South–Ellendale 345 kV line 50.0 % 106,194 — ( 4,052 ) 102,142 Fargo–Monticello 345 kV line 14.2 % 78,184 — ( 9,069 ) 69,115 Big Stone South–Brookings 345 kV line 50.0 % 52,975 — ( 3,613 ) 49,362 Brookings–Southeast Twin Cities 345 kV line 4.8 % 26,291 — ( 2,843 ) 23,448 Bemidji–Grand Rapids 230 kV line 14.8 % 16,331 — ( 2,995 ) 13,336 December 31, 2020 Big Stone Plant 53.9 % $ 332,611 $ 2,552 $ ( 103,504 ) $ 231,659 Coyote Station 35.0 % 180,991 732 ( 108,603 ) 73,120 Big Stone South–Ellendale 345 kV line 50.0 % 106,353 — ( 2,433 ) 103,920 Fargo–Monticello 345 kV line 14.2 % 78,184 — ( 8,029 ) 70,155 Big Stone South–Brookings 345 kV line 50.0 % 53,036 — ( 2,822 ) 50,214 Brookings–Southeast Twin Cities 345 kV line 4.8 % 26,291 — ( 2,468 ) 23,823 Bemidji–Grand Rapids 230 kV line 14.8 % 16,331 — ( 2,670 ) 13,661 7. Intangible Assets The following table summarizes our goodwill by segment as of December 31, 2021 and 2020: (in thousands) 2021 2020 Manufacturing $ 18,270 $ 18,270 Plastics 19,302 19,302 Total Goodwill $ 37,572 $ 37,572 Our annual goodwill impairment testing, performed in the fourth quarters of 2021 and 2020, indicated no impairment existed as of the test date. The following table summarizes the components of our intangible assets at December 31, 2021 and 2020: (in thousands) Gross Amount Accumulated Amortization Net Carrying Amount December 31, 2021 Customer Relationships $ 22,491 $ 13,469 $ 9,022 Other 26 4 22 Total $ 22,517 $ 13,473 $ 9,044 December 31, 2020 Customer Relationships $ 22,491 $ 12,370 $ 10,121 Other 26 3 23 Total $ 22,517 $ 12,373 $ 10,144 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 54 Table of Contents 8. Leases We lease coal rail cars, warehouse and office space, land and certain office, manufacturing and material handling equipment under varying terms and conditions. All leases are classified as operating leases. The components of lease cost and lease cash flows for the years ended December 31, 2021 and 2020 are as follows: (in thousands) 2021 2020 Lease Cost Operating Lease Cost $ 5,298 $ 5,837 Variable Lease Cost 1,020 1,166 Total Lease Cost $ 6,318 $ 7,003 Lease Cash Flows Operating Cash Flows from Operating Leases $ 5,642 $ 5,431 A summary of operating lease right-of-use lease assets and lease liabilities as of December 31, 2021 and 2020 is as follows: (in thousands) 2021 2020 Right of Use Lease Assets 1 $ 19,133 $ 19,114 Lease Liabilities Current 2 4,168 4,479 Long-Term 3 15,309 15,314 Total Lease Liabilities $ 19,477 $ 19,793 1 Included in Other Noncurrent Assets in the consolidated balance sheets. 2 Included in Other Current Liabilities in the consolidated balance sheets. 3 Included in Other Noncurrent Liabilities in the consolidated balance sheets. Operating lease assets obtained in exchange for new operating liabilities amounted to $ 2.1 million and $ 1.4 million for the years ended December 31, 2021 and 2020. Maturities of lease liabilities as of December 31, 2021 for each of the next five years and in the aggregate thereafter are as follows: (in thousands) Operating Leases 2022 $ 4,998 2023 4,766 2024 4,225 2025 3,384 2026 1,614 Thereafter 2,470 Total Lease Payments $ 21,457 Less: Interest 1,980 Present Value of Lease Liabilities $ 19,477 The weighted-average remaining lease term and the weighted-average discount rate as of December 31, 2021 and 2020 are as follows: 2021 2020 Weighted-Average Remaining Lease Term (in years) 4.9 5.3 Weighted-Average Discount Rate 5.09 % 5.45 % 55 Table of Contents 9. Short-Term and Long-Term Borrowings 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: 2021 2020 (in thousands) OTC OTP Total OTC OTP Total Short-Term Debt $ 22,637 $ 68,526 $ 91,163 $ 65,166 $ 15,831 $ 80,997 Current Maturities of Long-Term Debt — 29,983 29,983 169 139,918 140,087 Long-Term Debt, net of current maturities 79,746 654,268 734,014 79,695 544,737 624,432 Total $ 102,383 $ 752,777 $ 855,160 $ 145,030 $ 700,486 $ 845,516 Short-Term Debt The following is a summary of our lines of credit as of December 31, 2021 and 2020: 2021 2020 (in thousands) Line Limit Amount Outstanding Letters of Credit Amount Available Amount Available OTC Credit Agreement $ 170,000 $ 22,637 $ — $ 147,363 $ 104,834 OTP Credit Agreement 170,000 68,526 13,159 88,315 140,068 Total $ 340,000 $ 91,163 $ 13,159 $ 235,678 $ 244,902 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. 56 Table of Contents Long-Term Debt The following is a summary of outstanding long-term debt by borrower as of December 31, 2021 and 2020: (in thousands) Entity Debt Instrument Rate Maturity 2021 2020 OTC Guaranteed Senior Notes 3.55 % 12/15/26 $ 80,000 $ 80,000 OTP Series 2011A Senior Unsecured Notes 4.63 % 12/01/21 — 140,000 OTP Series 2007B Senior Unsecured Notes 6.15 % 08/20/22 30,000 30,000 OTP Series 2007C Senior Unsecured Notes 6.37 % 08/02/27 42,000 42,000 OTP Series 2013A Senior Unsecured Notes 4.68 % 02/27/29 60,000 60,000 OTP Series 2019A Senior Unsecured Notes 3.07 % 10/10/29 10,000 10,000 OTP Series 2020A Senior Unsecured Notes 3.22 % 02/25/30 10,000 10,000 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 OTP Series 2019B Senior Unsecured Notes 3.52 % 10/10/39 26,000 26,000 OTP Series 2020C Senior Unsecured Notes 3.62 % 02/25/40 10,000 10,000 OTP Series 2013B Senior Unsecured Notes 5.47 % 02/27/44 90,000 90,000 OTP Series 2018A Senior Unsecured Notes 4.07 % 02/07/48 100,000 100,000 OTP Series 2019C Senior Unsecured Notes 3.82 % 10/10/49 64,000 64,000 OTP Series 2020D Senior Unsecured Notes 3.92 % 02/25/50 15,000 15,000 OTP Series 2021B Senior Unsecured Notes 3.69 % 11/29/51 100,000 — OTC PACE Note 2.54 % 03/18/21 — 169 Total $ 767,000 $ 767,169 Less: Current Maturities Net of Unamortized Debt Issuance Costs 29,983 140,087 Unamortized Long-Term Debt Issuance Costs 3,003 2,650 Total Long-Term Debt Net of Unamortized Debt Issuance Costs $ 734,014 $ 624,432 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 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. Aggregate maturities of long-term debt obligations at December 31, 2021 for each of the next five years are as follows: (in thousands) 2022 2023 2024 2025 2026 Debt Maturities $ 30,000 $ — $ — $ — $ 80,000 Financial Covenants Certain of OTC's and OTP's short-term and long-term debt agreements require the borrower, whether OTC or OTP, to maintain certain financial covenants, including a maximum debt to total capitalization of 0.60 to 1.00, a minimum interest and dividend coverage ratio of 1.50 to 1.00, and a maximum level of priority indebtedness. As of December 31, 2021, OTC and OTP were in compliance with these financial covenants. 10. Employee Postretirement Benefits Pension Plan and Other Postretirement Benefits 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 . 57 Table of Contents 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. 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. 58 Table of Contents 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 U.S. 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. 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 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 — — — — 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 — — — — 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 Interest Cost 11,660 13,053 1,228 1,449 1,891 2,393 Benefit Payments ( 16,282 ) ( 15,777 ) ( 1,562 ) ( 1,505 ) ( 8,385 ) ( 6,694 ) 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. 59 Table of Contents 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 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 $ 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 ) — Amortization of Net Actuarial Loss 10,914 9,144 4,756 620 434 472 3,774 4,310 1,609 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 % 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 60 Table of Contents 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 Regulatory Assets: Unrecognized Prior Service Cost $ — $ — $ — $ — $ ( 13,989 ) $ ( 19,579 ) Unrecognized Actuarial Loss 102,737 137,500 2,525 2,681 26,852 32,238 Total Regulatory Assets $ 102,737 $ 137,500 $ 2,525 $ 2,681 $ 12,863 $ 12,659 Accumulated Other Comprehensive Loss: Unrecognized Prior Service Cost $ — $ — $ — $ 1 $ ( 242 ) $ ( 386 ) 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 ) Cash Flows. We made discretionary contributions to our Pension Plan of $ 10.0 million, $ 11.2 million and $ 22.5 million in 2021, 2020 and 2019, respectively. As of December 31, 2021, we had no minimum funding requirements for our Pension Plan, but made a discretionary contribution of $ 20.0 million in February 2022. Contributions to our ESSRP and postretirement healthcare plan are equal to the benefits paid to plan participants. The following reflects anticipated benefit payments to be paid in each of the next five years and in the aggregate for the five year period thereafter under our pension plans and postretirement healthcare plan: (in thousands) 2022 2023 2024 2025 2026 2027-2032 Projected Pension Plan Benefit Payments $ 17,200 $ 17,860 $ 18,428 $ 18,947 $ 19,427 $ 102,905 Projected ESSRP Benefit Payments 1,981 2,570 2,781 2,715 2,828 14,941 Projected Postretirement Benefit Payments 3,001 3,126 3,209 3,324 3,432 17,225 Total $ 22,182 $ 23,556 $ 24,418 $ 24,986 $ 25,687 $ 135,071 401K Plan We sponsor a 401K plan for the benefit of all corporate and subsidiary company employees. Contributions made to these plans totaled $ 6.5 million for 2021, $ 5.3 million for 2020 and $ 5.3 million for 2019. 11. Asset Retirement Obligations (AROs) We have recognized AROs related to our coal-fired generation plants, natural gas combustion turbines and wind turbines. The cost of AROs include items such as site restoration, closure of ash pits, and removal of certain structures, generators, asbestos and storage tanks. We have other legal obligations associated with the retirement of a variety of other long-lived tangible assets used in electric operations where the estimated settlement costs are individually and collectively immaterial. We have no assets legally restricted for the settlement of any AROs. A reconciliation of the carrying amounts of AROs for the years ended December 31, 2021 and 2020 is as follows: (in thousands) 2021 2020 Beginning Balance $ 23,821 $ 12,656 New Obligations Recognized — 8,062 Adjustments Due to Revisions in Cash Flow Estimates ( 568 ) 3,110 Accrued Accretion 938 570 Settlements — ( 577 ) Ending Balance $ 24,191 $ 23,821 The new AROs recognized during the year ended December 31, 2020 arose from obligations associated with our Merricourt wind farm and Astoria Station natural gas plant. 12. Income Taxes Income before income taxes for the years ended December 31, 2021, 2020 and 2019 consists entirely of domestic earnings. 61 Table of Contents The provision for income taxes charged to income for the years ended December 31, 2021, 2020 and 2019 consisted of the following: (in thousands) 2021 2020 2019 Current Federal Income Taxes $ 6,806 $ 3,631 $ 5,156 State Income Taxes 939 2,415 1,333 Deferred Federal Income Taxes 18,180 11,450 8,859 State Income Taxes 10,716 3,751 3,167 Tax Credits North Dakota Wind Tax Credit Amortization, Net of Federal Tax ( 586 ) ( 1,033 ) ( 1,033 ) Investment Tax Credit Amortization ( 3 ) ( 8 ) ( 41 ) Total $ 36,052 $ 20,206 $ 17,441 The reconciliation of the statutory federal income tax rate to our effective tax rate for each of the years ended December 31, 2021, 2020 and 2019 is as follows: 2021 2020 2019 Federal Statutory Rate 21.0 % 21.0 % 21.0 % Increases (Decreases) in Tax from: State Taxes on Income, Net of Federal Tax 4.7 4.0 3.4 Production Tax Credits (PTCs) ( 5.9 ) ( 1.1 ) — Amortization of Excess Deferred Income Taxes ( 2.0 ) ( 3.6 ) ( 3.2 ) North Dakota Wind Tax Credit Amortization, Net of Federal Tax ( 0.3 ) ( 0.9 ) ( 1.0 ) Allowance for Equity Funds Used During Construction ( 0.1 ) ( 0.7 ) ( 0.5 ) Other, Net ( 0.5 ) ( 1.3 ) ( 3.0 ) Effective Tax Rate 16.9 % 17.4 % 16.7 % We began to generate PTCs from our Merricourt wind farm in the fourth quarter of 2020, once the asset was placed in service and commenced operations. Deferred tax assets and liabilities were composed of the following on December 31, 2021 and 2020: (in thousands) 2021 2020 Deferred Tax Assets Benefit Liabilities $ 41,724 $ 41,292 Retirement Benefits Liabilities 40,766 40,650 Tax Credit Carryforward 32,420 35,132 Regulatory Tax Liability 34,527 33,124 Cost of Removal 26,512 25,920 Differences Related to Property 10,251 7,486 Net Operating Loss Carryforward 1,323 1,379 Other 6,999 3,423 Valuation Allowance — ( 800 ) Total Deferred Tax Assets $ 194,522 $ 187,606 Deferred Tax Liabilities Differences Related to Property $ ( 307,542 ) $ ( 271,064 ) Retirement Benefits Regulatory Asset ( 40,766 ) ( 40,650 ) Excess Tax Over Book Pension ( 24,578 ) ( 18,696 ) Other ( 9,904 ) ( 10,572 ) Total Deferred Tax Liabilities $ ( 382,790 ) $ ( 340,982 ) Deferred Income Taxes $ ( 188,268 ) $ ( 153,376 ) At December 31, 2021, we concluded, based upon all available evidence, it was more likely than not that we will generate sufficient future taxable income to realize certain of our state deferred tax assets. As a result, we released the $ 0.8 million valuation allowance associated with these deferred tax assets and recognized a corresponding benefit from income taxes in the consolidated statements of income for the year ended 62 Table of Contents December 31, 2021. Our conclusions regarding the realizability of such deferred tax assets was based on anticipated future taxable income within the respective state jurisdiction and the recent extension of the net operating loss carryforward period in this state. The following is a schedule of tax credits and tax net operating losses available as of December 31, 2021 and the respective periods of expiration: (in thousands) Amount 2022-2032 2033-2038 2039-2043 Federal Tax Credits $ 9,136 $ — $ — $ 9,136 State Net Operating Losses 1,675 1,675 — — State Tax Credits 29,318 — 39 29,279 The following table summarizes the activity for unrecognized tax benefits for the years ended December 31, 2021, 2020 and 2019: (in thousands) 2021 2020 2019 Balance on January 1 $ 771 $ 1,488 $ 1,282 Increases (decreases) for tax positions taken during a prior period 11 ( 178 ) 37 Increases for tax positions taken during the current period 189 175 339 Decreases due to settlements with taxing authorities — ( 575 ) — Decreases as a result of a lapse of applicable statutes of limitations ( 144 ) ( 139 ) ( 170 ) Balance on December 31 $ 827 $ 771 $ 1,488 The balance of unrecognized tax benefits as of December 31, 2021 would reduce our effective tax rate if recognized. The total amount of unrecognized tax benefits as of December 31, 2021 is not expected to change significantly within the next 12 months. We classify interest and penalties on tax uncertainties as components of the provision for income taxes in the consolidated statements of income. The Company and its subsidiaries file a consolidated U.S. federal income tax return and various state income tax returns. As of December 31, 2021, with limited exceptions, we are no longer subject to examinations by taxing authorities for tax years prior to 2018 for federal and North Dakota income taxes and prior to 2017 for Minnesota state income taxes. 13. Commitments and Contingencies Commitments Construction and Other Purchase Commitments: As of December 31, 2021, OTP had commitments under contracts, including its share of construction program and other commitments, extending into 2023 of approximately $ 68 million. OTP’s other commitments charged to rent expense totaled $ 0.3 million, $ 0.1 million and $ 0.3 million in 2021, 2020 and 2019, respectively. Electric Utility Capacity and Energy Requirements and Coal Purchase and Delivery Contracts: OTP has commitments for the purchase of capacity and energy requirements under agreements extending into 2044. OTP also has contracts providing for the purchase and delivery of a significant portion of its current coal requirements. OTP’s current coal purchase agreements for Coyote Station expire at the end of 2040. OTP has an agreement for the purchase of Big Stone Plant’s coal requirements through December 31, 2022. There is no fixed minimum purchase requirement under this agreement but all of Big Stone Plant’s coal requirements for the period covered must be purchased under this agreement. OTP Land Easements: OTP has commitments to make future payments for land easements not classified as leases, extending into 2050, of approximately $ 34.5 million. Land easement payments charged to rent expense totaled $ 1.3 million, $ 1.3 million and $ 0.6 million in 2021, 2020 and 2019, respectively. Our future construction program and other commitments, capacity and energy agreement commitments, coal purchase and coal delivery contract commitments and contractual land easements payments as of December 31, 2021 are as follows: (in thousands) Construction Program and Other Commitments Capacity and Energy Requirements Coal Purchase Commitments Land Easement Payments 2022 $ 889 $ 20,390 $ 22,793 $ 1,364 2023 14,678 11,854 23,955 1,388 2024 879 11,828 23,955 1,412 2025 886 11,784 24,369 1,437 2026 479 11,753 25,103 1,432 Beyond 2026 6,697 109,003 428,304 27,461 Total $ 24,508 $ 176,612 $ 548,479 $ 34,494 63 Table of Contents Contingencies FERC ROE. In November 2013 and February 2015, customers filed complaints with the FERC seeking to reduce the ROE component of the transmission rates that MISO transmission owners, including OTP, may collect under the MISO tariff rate. The FERC's most recent order, issued on November 19, 2020, adopted a revised ROE methodology and set the base ROE at 10.02% (10.52% with an adder) effective for the fifteen-month period from November 2013 to February 2015 and on a prospective basis beginning in September 2016. The order also dismissed any complaints covering the period from February 2015 to May 2016. The November 2020 opinion is subject to judicial review. We have deferred recognition and recorded a refund liability of $ 2.5 million as of December 31, 2021. This refund liability reflects our best estimate of required refunds to customers once all regulatory and judicial proceedings are finalized. Regional Haze Rule (RHR). The RHR was adopted in an effort to improve visibility in national parks and wilderness areas. The RHR requires states, in coordination with the EPA and other governmental agencies, to develop and implement plans to achieve natural visibility conditions. The second RHR implementation period covers the years 2018-2028. States are required to submit a state implementation plan to assess reasonable progress with the RHR and determine what additional emission reductions are appropriate, if any. Coyote Station, OTP's jointly owned coal-fired power plant in North Dakota, is subject to assessment in the second implementation period under the North Dakota state implementation plan. In September 2021, the North Dakota Department of Environmental Quality (NDDEQ) made public a draft of its state implementation plan. The plan concluded it is not reasonable to require additional emission controls during this planning period. Following a consultation and public comment period, and any subsequent modifications to the plan, the NDDEQ will submit its state implementation plan to the EPA for approval. In January 2022, prior to the submission to the EPA by the NDDEQ, the EPA provided preliminary comments on the draft North Dakota state implementation plan in which it expressed disagreement with the NDDEQ's recommendation to forgo additional emission controls. We cannot predict with certainty the impact the state implementation plan may have on our business until the state implementation plan has been approved or otherwise fully acted on by the EPA. However, significant emission control investments could be required and the recovery of such costs from customers would require regulatory approval. Alternatively, investments in emission control equipment may prove to be uneconomic and result in the early retirement of, or the sale of our interest in, Coyote Station, subject to regulatory approval. We cannot estimate the financial effects such a retirement or sale may have on our consolidated operating results, financial position or cash flows, but such amounts could be material and the recovery of such costs from customers would be subject to regulatory approval. Westmoreland Coal Company (Westmoreland) Arbitration. In December 2018, insurers for Westmoreland, Westmoreland and its affiliated companies filed an arbitration demand against the co-owners of Coyote Station, including OTP, a 35 % co-owner. The claimant insurers were pursuing recovery in the amount of $ 5.5 million, plus prejudgment interest to recover business interruption insurance proceeds paid to Westmoreland or its affiliates arising from a boiler feed pump explosion in December 2014 at the facility. The explosion and ensuing repairs reduced the amount of coal purchased from a Westmoreland affiliate under an existing coal purchase agreement. The Westmoreland insurers claimed the co-owners breached the minimum purchase obligations in the coal purchase agreement. As of December 31, 2021, an agreement to settle the matter was reached, and OTP's proportionate share of the settlement payment did not have a material effect on its 2021 financial results. Other Contingencies. We are party to litigation and regulatory enforcement matters arising in the normal course of business. We regularly analyze relevant information and, as necessary, estimate and record accrued liabilities for matters in which a loss is probable of occurring and can be reasonably estimated. We believe the effect on our consolidated operating results, financial position and cash flows, if any, for the disposition of all matters pending as of December 31, 2021, other than those relating to the RHR, will not be material. 14. Stockholders' Equity Capital Structure In addition to authorized and outstanding common stock, the Company has 1,500,000 authorized no par value cumulative preferred shares and 1,000,000 authorized no par value cumulative preference shares. No cumulative preferred or cumulative preference shares were outstanding at December 31, 2021 or 2020. Shelf Registrations On May 3, 2021, upon the expiration of a prior shelf registration, 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 shelf registration in 2021. On May 3, 2021, upon the expiration of a second prior shelf registration, 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. In 2021, we issued 115,180 shares under this program and no proceeds were received, as all shares issued were purchased on the open market. As of December 31, 2021, 1,384,820 shares remain available for purchase or issuance under the Plan. The shelf registration for the plan expires in May 2024. Dividend Restrictions OTC is a holding company with no significant operations of its own. The primary source of funds for payments of dividends to our shareholders is from dividends paid or distributions made by our subsidiaries. As a result of certain statutory limitations or regulatory or financing agreements, restrictions could occur on the amount of distributions allowed to be made by our subsidiaries. Both the OTC Credit Agreement and OTP Credit 64 Table of Contents Agreement contain restrictions on the payment of cash dividends upon a default or event of default, including failure to maintain certain financial covenants. As of December 31, 2021, we were in compliance with these financial covenants. Under the Federal Power Act, a public utility may not pay dividends from any funds properly included in a capital account. What constitutes “funds properly included in a capital account” is undefined in the Federal Power Act and the related regulations; however, the FERC has consistently interpreted the provision to allow dividends to be paid as long as i) the source of the dividends is clearly disclosed, ii) the dividend is not excessive and iii) there is no self-dealing on the part of corporate officials. The MPUC indirectly limits the amount of dividends OTP can pay to the Company by requiring an equity-to-total-capitalization ratio between 47.5 % and 58.1 % based on OTP’s capital structure requirements as of December 31, 2021. As of December 31, 2021, OTP’s equity-to-total-capitalization ratio including short-term debt was 52.5 % and its net assets restricted from distribution totaled approximately $ 681.2 million. Under the current capital structure requirement as of December 31, 2021, total capitalization for OTP could not exceed $ 1.7 billion. The MPUC approved OTP’s most recent capital structure petition on January 26, 2022, allowing for an equity-to-total-capitalization ratio between 48.0 % and 58.7 %, with total capitalization not to exceed $ 1.7 billion. 15. Accumulated Other Comprehensive Income (Loss) The Company's other comprehensive income consists of unamortized actuarial losses and prior service costs related to pension and other postretirement benefits and unrealized gains and losses on marketable securities classified as available-for-sale. The income tax expense or benefit associated with amounts reclassified from accumulated other comprehensive income (loss) and reflected in the consolidated statement of income are recognized in the same period as the amounts are reclassified. The following table shows the changes in accumulated other comprehensive loss for the years ended December 31, 2021, 2020 and 2019: (in thousands) Pension and Other Postretirement Benefits Net Unrealized Gain (Losses) on Available-for-Sale Securities Total Balance, December 31, 2018 $ ( 4,059 ) $ ( 85 ) $ ( 4,144 ) Other Comprehensive Income (Loss) Before Reclassifications, net of tax 418 116 534 Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) ( 2,056 ) (1) 13 (2) ( 2,043 ) Total Other Comprehensive Income (Loss) ( 1,638 ) 129 ( 1,509 ) Stranded Tax Transfer ( 794 ) 10 ( 784 ) Balance, December 31, 2019 ( 6,491 ) 54 ( 6,437 ) Other Comprehensive Income (Loss) Before Reclassifications, net of tax 418 145 563 Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) ( 2,643 ) (1) 10 (2) ( 2,633 ) Total Other Comprehensive Income (Loss) ( 2,225 ) 155 ( 2,070 ) Balance, December 31, 2020 ( 8,716 ) 209 ( 8,507 ) Other Comprehensive Income (Loss) Before Reclassifications, net of tax 1,638 ( 132 ) 1,506 Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) 541 (1) ( 64 ) (2) 477 Total Other Comprehensive Income (Loss) 2,179 ( 196 ) 1,983 Balance, December 31, 2021 $ ( 6,537 ) $ 13 $ ( 6,524 ) (1) Included in the computation of net periodic pension and other postretirement benefit costs. See Note 10 for further information. (2) Included in other income (expense), net on the accompanying consolidated statements of income. 16. Share-Based Payments Employee Stock Purchase Plan The 1999 Employee Stock Purchase Plan authorizes the issuance of 1,400,000 common shares, allowing eligible employees to purchase our common shares through payroll withholding at a discount of up to 15 % off the market price at the end of each six-month purchase period. Employee withholding amounts may not be less than $ 10 or more than $ 2,000 per month, subject to certain limitations, as described in the plan. A plan participant may cease making payroll deductions at any time. A participant may not purchase more than 2,000 shares in a given six month purchase period under the plan and may not purchase more than $ 25,000 (fair market value) of common shares under the plan and all other purchase plans (if any) in a calendar year. A participant may withdraw from the plan at any time and elect to receive the balance of their contributions to the plan that have not yet been used to purchase shares in cash. Shares purchased under the plan are automatically enrolled in the Company's dividend reinvestment plan. Shares purchased under the plan may not be assigned, transferred, pledged, or otherwise disposed, except for certain situations allowed by the plan, such as upon death, for a period of 18 months after purchase. For purchase periods between January 1, 2018 and June 30, 2019, the purchase price was 100 % of the market price at the end of each six-month purchase period. For purchase periods beginning after June 30, 2019, the purchase price is 85 % of the market price at the end of each six-month purchase period. At our discretion, shares purchased under the plan can be either new issue shares or shares purchased in the open market. The plan shall automatically terminate when all of the shares authorized under the plan have been issued. 65 Table of Contents We recognize the 15 % discount to the fair market value of the purchased shares as stock-based compensation expense, which amounted to $ 0.2 million, $ 0.2 million and $ 0.1 million for the years ended December 31, 2021, 2020, and 2019. For the years ended December 31, 2021, 2020, and 2019 the amount of shares issued under the plan amounted to 27,975 , 31,661 and 17,104 shares. As of December 31, 2021, there was 290,127 shares available for purchase under the plan. Share-Based Compensation Plan The 2014 Stock Incentive Plan, which was approved by our shareholders in April 2014, authorizes the issuance of 1,900,000 common shares for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards and other stock and stock-based awards. As of December 31, 2021, 722,200 shares were available for issuance under the plan. The plan terminates on December 31, 2023. We grant restricted stock awards to our employees and members of our Board of Directors and stock performance awards to our executive officers and certain other key employees as part of our long-term compensation and retention program. Stock-based compensation cost, recognized within operating expenses in the consolidated statements of income, amounted to $ 6.7 million, $ 6.1 million and $ 5.9 million for the years ended December 31, 2021, 2020 and 2019. The related income tax benefit recognized for these periods amounted to $ 1.8 million, $ 2.1 million and $ 2.3 million. Restricted Stock Awards. Restricted stock awards are granted to employees and members of the Company's Board of Directors. The awards vest, depending on award recipient, either ratably over a period of three to four years or cliff vest after four years . Vesting is accelerated in certain circumstances, including upon retirement. Awards granted to members of the Board of Directors are issued and outstanding upon grant and carry the same voting and dividend rights of unrestricted outstanding common stock. Awards granted to executive officers and other key employees are eligible to receive dividend equivalent payments during the vesting period, subject to forfeiture under the terms of the agreement, but such awards are not issued or outstanding upon grant and do not provide for voting rights. The grant date fair value of each restricted stock award is determined based on the market price of the Company's common stock on the date of grant adjusted to exclude the value of dividends for those awards that do not receive dividend or dividend equivalent payments during the vesting period. The following is a summary of restricted stock award activity for the year ended December 31, 2021: Shares Weighted Average Grant-Date Fair Value Nonvested, Beginning of Year 128,664 $ 44.30 Granted 59,150 43.55 Vested ( 47,646 ) 42.98 Forfeited ( 2,075 ) 40.95 Nonvested, End of Year 138,093 $ 44.48 The weighted-average grant date fair value of granted awards was $ 43.55 , $ 45.97 and $ 48.18 during the years ended December 31, 2021, 2020 and 2019. The fair value of vested awards was $ 2.1 million, $ 2.8 million and $ 2.4 million during the years ended December 31, 2021, 2020 and 2019. As of December 31, 2021, there was $ 2.4 million of unrecognized compensation costs for non-vested restricted stock awards to be recognized over a weighted-average period of 1.83 years. Stock Performance Awards. Stock performance awards are granted to executive officers and certain other key employees. The awards vest at the end of a three-year performance period. The number of common shares awarded, if any, at the end of the performance period ranges from zero to 150 % of the target amount based on two performance measures: i) total shareholder return relative to a peer group and ii) return on equity. The awards have no voting or dividend rights during the vesting period. Vesting of the awards is accelerated in certain circumstances, including upon retirement. The amount of common shares awarded on an accelerated vesting is based either on actual performance at the end of the performance period or the amount of common shares earned at target. The grant date fair value of stock performance awards granted during the years ended December 31, 2021, 2020 and 2019 was determined using a Monte Carlo fair value simulation model incorporating the following assumptions: 2021 2020 2019 Risk-free interest rate 0.18 % 1.42 % 2.52 % Expected term (in years) 3.00 3.00 3.00 Expected volatility 32.00 % 19.00 % 21.00 % Dividend yield 3.60 % 2.80 % 3.00 % The risk-free interest rate was derived from yields on U.S. government bonds of a similar term. The expected term of the award is equal to the three-year performance period. Expected volatility was estimated based on actual historical volatility of our common stock over a three- or five-year period. Dividend yield was estimated based on historic and future yield estimates. 66 Table of Contents The following is a summary of stock performance award activity for the year ended December 31, 2021 (share amounts reflect awards at target): Shares Weighted Average Grant-Date Fair Value Nonvested, Beginning of Year 164,600 $ 42.32 Granted 79,000 38.34 Vested ( 54,000 ) 35.73 Forfeited — — Nonvested, End of Year 189,600 $ 42.54 The weighted-average grant date fair value of granted awards was $ 38.34 , $ 47.79 and $ 42.87 during the years ended December 31, 2021, 2020 and 2019. The fair value of vested awards was $ 2.5 million, $ 3.4 million and $ 6.1 million during the years ended December 31, 2021, 2020 and 2019. As of December 31, 2021, there was $ 0.4 million of unrecognized compensation costs of non-vested stock performance awards to be recognized over a weighted-average period of 1.19 years. 17. Earnings Per Share The numerator used in the calculation of both basic and diluted earnings per share is net income. The denominator used in the calculation of basic earnings per share is the weighted average number of shares outstanding during the period. The denominator used in the calculation of diluted earnings per share is derived by adjusting basic shares outstanding for the dilutive effect of potential shares outstanding, which consist of time and performance based stock awards and employee stock purchase plan shares. The following includes the computation of the denominator for basic and diluted weighted-average shares outstanding for the years ended December 31, 2021, 2020 and 2019: (in thousands) 2021 2020 2019 Weighted Average Common Shares Outstanding – Basic 41,491 40,710 39,721 Effect of Dilutive Securities: Stock Performance Awards 226 116 147 Restricted Stock Awards 87 63 81 Employee Stock Purchase Plan Shares and Other 14 16 5 Dilutive Effect of Potential Common Shares 327 195 233 Weighted Average Common Shares Outstanding – Diluted 41,818 40,905 39,954 The amount of shares excluded from diluted weighted-average common shares outstanding because such shares were anti-dilutive was not material for the years ended December 31, 2021, 2020 and 2019. 18. Derivative Instruments OTP enters into derivative instruments to manage its exposure to future commodity price variability and reduce volatility in prices for our retail electric customers. These derivative instruments are not designated as qualifying hedging transactions but provide for an economic hedge against future price variability. The instruments are recorded at fair value on the consolidated balance sheets, with changes in fair value recorded in the consolidated statements of income. However, in accordance with rate-making and cost recovery processes, we recognize a regulatory asset or liability to defer losses or gains from derivative activity until settlement of the associated derivative instrument. As of December 31, 2021, OTP had outstanding pay-fixed, receive-variable swap agreements with an aggregate notional amount of 263,400 megawatt-hours of electricity, and various settlement dates throughout 2022. As of December 31, 2021, the aggregate fair value of these contracts was $ 6.2 million, which is included in other current assets on the consolidated balance sheets. During the year ended December 31, 2021, contracts matured and were settled in an aggregate amount of $ 3.1 million. 67 Table of Contents 19. Fair Value Measurements The following tables present our assets measured at fair value on a recurring basis as of December 31, 2021 and 2020 classified by the input method used to measure fair value: Level 1 Level 2 Level 3 December 31, 2021 Investments: Money Market Funds $ 949 $ — $ — Mutual Funds 5,432 — — Corporate Debt Securities — 1,333 — Government-Backed and Government-Sponsored Enterprises’ Debt Securities — 7,869 — Derivative Instruments — 6,214 — Total Assets $ 6,381 $ 15,416 $ — December 31, 2020 Investments: Money Market Funds $ 4,075 $ — $ — Mutual Funds 1,662 — — Corporate Debt Securities — 2,627 — Government-Backed and Government-Sponsored Enterprises’ Debt Securities — 6,633 — Total Assets $ 5,737 $ 9,260 $ — The level 2 fair value measurements for government-backed and government-sponsored enterprises’ and corporate debt securities are determined on the basis of valuations provided by a third-party pricing service which utilizes industry accepted valuation models and observable market inputs to determine valuation. Some valuations or model inputs used by the pricing service may be based on broker quotes. The level 2 fair value measurements for derivative instruments are determined by using inputs such as forward electric commodity prices, adjusted for location differences. These inputs are observable in the marketplace throughout the full term of the instrument, can be derived from observable data, or are supported by observable levels at which transactions are executed in the marketplace. In addition to assets recorded at fair value on a recurring basis, we also hold financial instruments that are not recorded at fair value in the consolidated balance sheets but for which disclosure of the fair value of these financial instruments is provided. The following reflects the carrying value and estimated fair value of these assets and liabilities as of December 31, 2021 and 2020: December 31, 2021 December 31, 2020 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Assets: Cash and Cash Equivalents $ 1,537 $ 1,537 $ 1,163 $ 1,163 Total 1,537 1,537 1,163 1,163 Liabilities: Short-Term Debt 91,163 91,163 80,997 80,997 Long-Term Debt 763,997 878,272 764,519 858,455 Total $ 855,160 $ 969,435 $ 845,516 $ 939,452 The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash Equivalents: The carrying amount approximates fair value because of the short-term maturity of these instruments. Short-Term Debt: The carrying amount approximates fair value because the debt obligations are short-term in nature and balances outstanding are subject to variable rates of interest which reset frequently, a Level 2 fair value input. Long-Term Debt: The fair value of long-term debt is estimated based on current market indications for borrowings of similar maturities with similar terms, a Level 2 fair value input. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 68 Table of Contents