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, 2023 and 2022, 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, 2023, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, 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, 2023, based on 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 Control 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 audits 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 Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. 40 T able of Contents 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 regulation of rates and other matters 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 that incurred costs may have on customers. 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 the recording of regulatory assets for certain costs which otherwise would be recognized in the statement of income or comprehensive income based on an expectation that the costs will be recovered in future rates and the recording of regulatory liabilities 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. 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 to 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 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 regulatory assets or liabilities, 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, and the related disclosures in the notes to the financial statements. • 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 obtained an analysis from management 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. /s/ Deloitte & Touche LLP Minneapolis, Minnesota February 14, 2024 We have served as the Company's auditor since 1944. 41 T able of Contents OTTER TAIL CORPORATION CONSOLIDATED BALANCE SHEETS December 31, (in thousands, except share data) 2023 2022 Assets Current Assets Cash and Cash Equivalents $ 230,373 $ 118,996 Receivables, net of allowance for credit losses 157,143 144,393 Inventories 149,701 145,952 Regulatory Assets 16,127 24,999 Other Current Assets 16,826 18,412 Total Current Assets 570,170 452,752 Noncurrent Assets Investments 62,516 54,845 Property, Plant and Equipment, net of accumulated depreciation 2,418,375 2,212,717 Regulatory Assets 95,715 94,655 Intangible Assets, net of accumulated amortization 6,843 7,943 Goodwill 37,572 37,572 Other Noncurrent Assets 51,377 41,177 Total Noncurrent Assets 2,672,398 2,448,909 Total Assets $ 3,242,568 $ 2,901,661 Liabilities and Shareholders' Equity Current Liabilities Short-Term Debt $ 81,422 $ 8,204 Accounts Payable 94,428 104,400 Accrued Salaries and Wages 38,134 32,327 Accrued Taxes 26,590 19,340 Regulatory Liabilities 25,408 17,300 Other Current Liabilities 43,775 56,065 Total Current Liabilities 309,757 237,636 Noncurrent Liabilities and Deferred Credits Pension Benefit Liability 33,101 33,210 Other Postretirement Benefits Liability 27,676 46,977 Regulatory Liabilities 276,547 244,497 Deferred Income Taxes 237,273 221,302 Deferred Tax Credits 15,172 15,916 Other Noncurrent Liabilities 75,977 60,985 Total Noncurrent Liabilities and Deferred Credits 665,746 622,887 Commitments and Contingencies (Note 13) Capitalization Long-Term Debt 824,059 823,821 Shareholders' Equity Common Stock: 50,000,000 shares authorized of $ 5 par value; 41,710,521 and 41,631,113 outstanding at December 31, 2023 and 2022 208,553 208,156 Additional Paid-In Capital 426,963 423,034 Retained Earnings 806,342 585,212 Accumulated Other Comprehensive Income 1,148 915 Total Shareholders' Equity 1,443,006 1,217,317 Total Capitalization 2,267,065 2,041,138 Total Liabilities and Shareholders' Equity $ 3,242,568 $ 2,901,661 See accompanying notes to consolidated financial statements. 42 T able of Contents OTTER TAIL CORPORATION CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, (in thousands, except per-share amounts) 2023 2022 2021 Operating Revenues Electric $ 528,359 $ 549,699 $ 480,321 Product Sales 820,807 910,510 716,523 Total Operating Revenues 1,349,166 1,460,209 1,196,844 Operating Expenses Electric Production Fuel 60,339 65,110 59,327 Electric Purchased Power 78,292 100,281 65,409 Electric Operating and Maintenance Expenses 191,263 181,378 159,669 Cost of Products Sold (excluding depreciation) 454,122 542,944 488,370 Nonelectric Selling, General, and Administrative Expenses 72,663 69,718 65,394 Depreciation and Amortization 97,954 92,597 91,358 Electric Property Taxes 16,614 17,742 17,609 Total Operating Expenses 971,247 1,069,770 947,136 Operating Income 377,919 390,439 249,708 Other Income and Expense Interest Expense ( 37,677 ) ( 36,016 ) ( 37,771 ) Nonservice Cost Components of Postretirement Benefits 10,597 1,075 ( 2,016 ) Other Income (Expense), net 12,650 2,037 2,900 Income Before Income Taxes 363,489 357,535 212,821 Income Tax Expense 69,298 73,351 36,052 Net Income $ 294,191 $ 284,184 $ 176,769 Weighted-Average Common Shares Outstanding: Basic 41,668 41,586 41,491 Diluted 42,039 41,931 41,818 Earnings Per Share: Basic $ 7.06 $ 6.83 $ 4.26 Diluted $ 7.00 $ 6.78 $ 4.23 See accompanying notes to consolidated financial statements. 43 T able of Contents OTTER TAIL CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31, (in thousands) 2023 2022 2021 Net Income $ 294,191 $ 284,184 $ 176,769 Other Comprehensive Income (Loss): Unrealized Gain (Loss) on Available-for-Sale Securities, net of tax (expense) benefit of $( 51 ), $ 115 and $ 52 192 ( 432 ) ( 196 ) Pension and Other Postretirement Benefit Plan, net of tax expense of $ 14 , $ 2,769 and $ 766 41 7,871 2,179 Total Other Comprehensive Income 233 7,439 1,983 Total Comprehensive Income $ 294,424 $ 291,623 $ 178,752 See accompanying notes to consolidated financial statements. 44 T able 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, 2020 41,469,879 $ 207,349 $ 414,246 $ 257,878 $ ( 8,507 ) $ 870,966 Stock Issued Under Dividend Reinvestment and Stock Purchase Plans, Net of Expenses 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 Employee Stock Purchase Plan Expenses — — ( 219 ) — — ( 219 ) Stock Issued Under Share-Based Compensation Plans, Net of Shares Withheld for Employee Taxes 79,589 398 ( 3,321 ) — — ( 2,923 ) Net Income — — — 284,184 — 284,184 Other Comprehensive Income — — — — 7,439 7,439 Stock Compensation Expense — — 6,814 — — 6,814 Common Dividends ($ 1.65 per share) — — — ( 68,755 ) — ( 68,755 ) Balance, December 31, 2022 41,631,113 $ 208,156 $ 423,034 $ 585,212 $ 915 $ 1,217,317 Employee Stock Purchase Plan Expenses — — ( 339 ) — — ( 339 ) Stock Issued Under Share-Based Compensation Plans, Net of Shares Withheld for Employee Taxes 79,408 397 ( 3,485 ) — — ( 3,088 ) Net Income — — — 294,191 — 294,191 Other Comprehensive Income — — — — 233 233 Stock Compensation Expense — — 7,753 — — 7,753 Common Dividends ($ 1.75 per share) — — — ( 73,061 ) — ( 73,061 ) Balance, December 31, 2023 41,710,521 $ 208,553 $ 426,963 $ 806,342 $ 1,148 $ 1,443,006 See accompanying notes to consolidated financial statements. 45 T able of Contents OTTER TAIL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, (in thousands) 2023 2022 2021 Operating Activities Net Income $ 294,191 $ 284,184 $ 176,769 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Depreciation and Amortization 97,954 92,597 91,358 Deferred Tax Credits ( 744 ) ( 745 ) ( 744 ) Deferred Income Taxes 13,508 32,424 28,896 Discretionary Contribution to Pension Plan — ( 20,000 ) ( 10,000 ) Investment (Gains) Losses ( 7,222 ) 3,296 ( 4,524 ) Stock Compensation Expense 7,753 6,814 6,908 Other, net ( 423 ) ( 1,473 ) 667 Changes in Operating Assets and Liabilities: Receivables ( 12,750 ) 30,560 ( 60,994 ) Inventories ( 2,450 ) 5,339 ( 54,313 ) Regulatory Assets 12,479 ( 2,464 ) ( 4,803 ) Other Assets 2,817 ( 368 ) ( 14,146 ) Accounts Payable ( 9,988 ) ( 29,763 ) 38,734 Accrued and Other Liabilities 6 ( 5,490 ) 28,386 Regulatory Liabilities 20,973 ( 6,846 ) 1,948 Pension and Other Postretirement Benefits ( 11,605 ) 1,244 7,101 Net Cash Provided by Operating Activities 404,499 389,309 231,243 Investing Activities Capital Expenditures ( 287,134 ) ( 171,134 ) ( 171,829 ) Proceeds from Disposal of Noncurrent Assets 6,225 4,346 9,702 Purchases of Investments and Other Assets ( 8,378 ) ( 8,283 ) ( 9,383 ) Net Cash Used in Investing Activities ( 289,287 ) ( 175,071 ) ( 171,510 ) Financing Activities Net Borrowings (Repayments) on Short-Term Debt 73,218 ( 82,959 ) 10,166 Proceeds from Issuance of Common Stock — — 696 Proceeds from Issuance of Long-Term Debt — 90,000 140,000 Payments for Retirement of Long-Term Debt — ( 30,000 ) ( 140,169 ) Dividends Paid ( 73,061 ) ( 68,755 ) ( 64,864 ) Payments for Shares Withheld for Employee Tax Obligations ( 3,088 ) ( 2,942 ) ( 1,507 ) Other, net ( 904 ) ( 2,123 ) ( 3,681 ) Net Cash Used in Financing Activities ( 3,835 ) ( 96,779 ) ( 59,359 ) Net Change in Cash and Cash Equivalents 111,377 117,459 374 Cash and Cash Equivalents at Beginning of Period 118,996 1,537 1,163 Cash and Cash Equivalents at End of Period $ 230,373 $ 118,996 $ 1,537 Supplemental Disclosures of Cash Flow Information Cash Paid During the Year for: Interest, net of amount capitalized $ 36,956 $ 35,699 $ 36,881 Income Taxes $ 46,284 $ 43,411 $ 8,445 Supplemental Disclosure of Noncash Investing Activities Accrued Property, Plant and Equipment Additions $ 13,001 $ 12,420 $ 12,081 See accompanying notes to consolidated financial statements 46 T able 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 statements of cash flows to maintain consistency and comparability between periods presented. Other, net operating cash flows previously reported for the years ended December 31, 2022 and 2021, included $ 3.3 million of investment losses and $ 4.5 million of investment gains, respectively, which are presented separately in the current year, and excluded $ 1.7 million and $ 0.8 million of allowance for equity funds used during construction (AFUDC), which were previously presented separately. The reclassifications had no impact on previously reported net cash provided by operating activities, net cash used in investing activities, net cash used in financing activities, or cash and cash equivalents. Certain prior period amounts related to deferred tax assets and deferred tax liabilities included in footnote 12 have been reclassified to conform to the current year presentation. 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 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 sheets and included in the consolidated statement of income as an expense or income item, or in the consolidated statement of comprehensive income as a loss or gain item, in the period in which the application of this guidance ceases. Cash Equivalents We consider all highly liquid investments purchased with maturity dates of 90 days or less to be cash equivalents. Concentration of Deposits We hold deposits with financial institutions which potentially subject us to a concentration risk. These deposits are guaranteed by the Federal Deposit Insurance Corporation up to an insurance limit of $250,000. Currently, our cash deposits exceed federally insured levels. 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 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 products sold. Sales or other taxes collected from customers are excluded from operating revenues. 47 T able of Contents 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 amount of energy delivered to the customer. Manufacturing Segment Revenues. Our Manufacturing segment businesses earn revenue predominantly from the production and delivery of custom-made or standardized parts and products to customers across several industries and 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 free on board (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 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 (ARP) 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, 2023 and 2022: (in thousands) 2023 2022 Finished Goods $ 47,614 $ 43,812 Work in Process 26,354 31,766 Raw Material, Fuel and Supplies 75,733 70,374 Total Inventories $ 149,701 $ 145,952 48 T able of Contents Investments We invest in and hold, through rabbi trusts, corporate-owned life insurance policies to provide future funding for obligations under our supplemental pension plan and a nonqualified 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, and money market fund investments either as investments within our captive insurance entity or to provide future funding for obligations under nonqualified 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. The following is a summary of our investments at December 31, 2023 and 2022: (in thousands) 2023 2022 Corporate-Owned Life Insurance Policies $ 42,287 $ 38,991 Corporate and Government Debt Securities 9,303 8,761 Mutual Funds 7,771 5,503 Money Market Funds 3,125 1,560 Other Investments 30 30 Total Investments $ 62,516 $ 54,845 The amount of unrealized gains and losses on debt securities as of December 31, 2023 and 2022 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, 2023 and 2022 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 AFUDC. The amount of interest capitalized to electric plant was $ 1.9 million in 2023, $ 0.9 million in 2022 and $ 0.6 million in 2021. 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 recorded to accumulated depreciation 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 2023, 2022 or 2021. 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 21 114 Transmission Plant 51 75 Distribution Plant 10 70 General Plant 5 56 Nonelectric Assets: Equipment 2 20 Buildings and Leasehold Improvements 2 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 their own investments. 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 49 T able of Contents 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. 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. Cloud Computing Costs We capitalize implementation costs incurred in cloud computing arrangements that are service contracts consistent with capitalized implementation costs incurred to develop or obtain internal-use software. Costs are amortized on a straight-line basis over the life of the associated contract. Capitalized implementation costs are amortized over periods up to ten years . Capitalized costs and related accumulated amortization are included in other noncurrent assets on the consolidated balance sheets. Below are the amounts of capitalized cost and related accumulated amortization as of December 31, 2023 and 2022: (in thousands) 2023 2022 Cloud Computing Costs $ 12,782 $ 9,024 Accumulated Amortization $ ( 1,505 ) $ ( 897 ) Cloud Computing Costs, net $ 11,277 $ 8,127 Amortization expense of capitalized implementation costs for each of the years ended December 31, 2023, 2022 and 2021 totaled $ 1.3 million, $ 1.4 million, and $ 0.5 million. 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). 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 is determined by taking 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. 50 T able of Contents 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 have elected to account for transferable tax credits as a component of our income tax provision. We recognize the benefit of PTCs as a reduction of income tax expense in the period the credit is generated, which corresponds to the period the energy production occurs. We apply the deferral method of accounting for ITCs and state wind energy credits. Under this method, ITCs and state wind energy credits are amortized as a reduction to income tax expense over the estimated useful lives of the underlying property that gave rise to the credit. Deferred Compensation Plans The Company sponsors two nonqualified deferred compensation plans for the benefit of executive officers and other select employees. Each plan allows participants to defer a specified amount or percentage of base wages or incentive compensation into the plan, subject to certain limitations. The Company, at its discretion, may make employer contributions to either plan during any annual period. Participant and employer deferred amounts are segregated into one or more accounts chosen by the participant. Participants earn a return on deferred amounts based on notional investments in the segregated accounts. Participants can elect lump sum distributions or annual installments of deferred balances during the participant's employment or upon retirement. As of December 31, 2023 and 2022, our liability to participants under these deferred compensation plans was $ 24.6 million and $ 20.6 million. Company contributions to these plans were $ 1.2 million, $ 0.9 million and $ 1.1 million for the years ended December 31, 2023, 2022 and 2021. Gains or (losses) recognized due to changes in our payment obligations in connection with these plans amounted to ($ 3.3 million), $ 3.1 million, and ($ 2.2 million) for the years ended December 31, 2023, 2022 and 2021. 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 on 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. 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. Related Parties The Otter Tail Corporation Foundation and Otter Tail Power Company Foundation are independent not-for-profit charitable entities affiliated with the Company and are not included in the consolidated financial statements of Otter Tail Corporation. Contribution obligations to the two foundations totaling $ 5.5 million and $ 4.3 million were recognized as of December 31, 2023 and 2022. Cash contributions paid to the two foundations during the years ended December 31, 2023, 2022 and 2021 were $ 4.3 million, $ 4.5 million, and $ 3.8 million. Variable Interest Entity In October 2012, the Coyote Station owners, including OTP, entered into an LSA with Coyote Creek Mining Company, LLC, 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 the primary beneficiary of the VIE and the Company is not required to include CCMC in its consolidated financial statements. 51 T able of Contents 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 loss exposure, as a result of its involvement with CCMC, could be as high as $ 40 million, or OTP’s 35 % share of CCMC’s unrecovered costs as of December 31, 2023, if recovery of such a loss is denied by regulatory authorities. Recent Accounting Pronouncements Segment Reporting. In November 2023, the Financial Accounting Standards Board (FASB) issued amended authoritative guidance codified in Accounting Standards Codification (ASC) 280, Segment Reporting. The amended guidance expands annual and interim disclosure requirements for reportable segments, primarily through expanded disclosures about significant segment expenses. The updated standard is effective for our annual periods beginning in 2024 and interim periods beginning in the first quarter of fiscal 2025. Adoption of the amended guidance must be applied retrospectively to all prior periods presented in the financial statements. We are currently evaluating the impact that the updated standard will have on our financial statement disclosures. Income Taxes. In December 2023, the FASB issued amended authoritative guidance codified in ASC 740, Income Taxes. The amended guidance requires additional disaggregated information in effective tax rate reconciliation disclosures and additional disaggregated information about income taxes paid. The updated standard is effective for our annual periods beginning in 2025. The amended guidance is to be applied on a prospective basis with the option to apply the standard retrospectively. We are currently evaluating the impact that the updated standard will have on our financial statement disclosures. 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 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, income and expenses are not allocated to our operating segments. Corporate operating results include items such as corporate staff and overhead costs, the results of our captive insurance company, gains or losses on our investments and returns on our cash equivalent investments. These items and others are excluded from the measurement of operating segment performance. Corporate assets consist primarily of cash, investments, prepaid expenses, and fixed assets. Corporate is not an operating segment, rather it is added to operating segment totals to reconcile to consolidated amounts. 52 T able of Contents Information for each segment and our unallocated corporate costs for the years ended December 31, 2023, 2022 and 2021 are as follows: (in thousands) 2023 2022 2021 Operating Revenue Electric $ 528,359 $ 549,699 $ 480,321 Manufacturing 402,781 397,983 336,294 Plastics 418,026 512,527 380,229 Total 1,349,166 1,460,209 1,196,844 Depreciation and Amortization Electric 75,330 72,050 71,343 Manufacturing 18,495 16,202 15,436 Plastics 4,027 4,205 4,354 Corporate 102 140 225 Total 97,954 92,597 91,358 Operating Income (Loss) Electric 106,521 113,138 106,964 Manufacturing 29,140 29,065 24,114 Plastics 254,402 264,578 132,760 Corporate ( 12,144 ) ( 16,342 ) ( 14,130 ) Total 377,919 390,439 249,708 Interest Expense Electric 33,864 31,950 33,043 Manufacturing 2,295 2,796 2,239 Plastics 602 585 587 Corporate 916 685 1,902 Total 37,677 36,016 37,771 Income Tax Expense (Benefit) Electric 1,648 5,065 1,663 Manufacturing 5,390 5,321 4,704 Plastics 66,066 68,688 34,374 Corporate ( 3,806 ) ( 5,723 ) ( 4,689 ) Total 69,298 73,351 36,052 Net Income (Loss) Electric 84,424 79,974 72,458 Manufacturing 21,454 20,950 17,186 Plastics 187,748 195,374 97,823 Corporate 565 ( 12,114 ) ( 10,698 ) Total 294,191 284,184 176,769 Capital Expenditures Electric 240,695 147,869 140,031 Manufacturing 23,284 17,954 20,690 Plastics 23,029 5,245 11,040 Corporate 126 66 68 Total $ 287,134 $ 171,134 $ 171,829 The following provides the identifiable assets by segment and corporate assets as of December 31, 2023 and 2022: (in thousands) 2023 2022 Identifiable Assets Electric $ 2,533,831 $ 2,351,961 Manufacturing 251,343 245,869 Plastics 164,179 126,318 Corporate 293,215 177,513 Total $ 3,242,568 $ 2,901,661 53 T able of Contents 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 2023, we sourced all of our PVC resin needs from three 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, 2023, 2022 and 2021. All of our long-lived assets are located within the United States and substantially all of our operating revenues are from customers located within the United States. 3. Revenue We present our operating revenues from 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, 2023, 2022 and 2021: (in thousands) 2023 2022 2021 Operating Revenues Electric Segment Retail: Residential $ 135,570 $ 143,888 $ 135,361 Retail: Commercial and Industrial 312,551 318,494 262,408 Retail: Other 7,719 7,918 7,715 Total Retail 455,840 470,300 405,484 Transmission 52,555 52,213 48,835 Wholesale 12,459 18,539 17,936 Other 7,505 8,647 8,066 Total Electric Segment 528,359 549,699 480,321 Manufacturing Segment Metal Parts and Tooling 351,267 338,865 283,527 Plastic Products and Tooling 41,395 49,080 40,231 Scrap Metal 10,119 10,038 12,536 Total Manufacturing Segment 402,781 397,983 336,294 Plastics Segment PVC Pipe 418,026 512,527 380,229 Total Operating Revenue 1,349,166 1,460,209 1,196,844 Less: Noncontract Revenues Included Above Electric Segment - ARP Revenues ( 4,310 ) ( 9,266 ) ( 791 ) Total Operating Revenues from Contracts with Customers $ 1,353,476 $ 1,469,475 $ 1,197,635 4. Receivables Receivables as of December 31, 2023 and 2022 are as follows: (in thousands) 2023 2022 Receivables Trade $ 129,257 $ 112,126 Other 9,084 9,983 Unbilled Receivables 21,324 23,932 Total Receivables 159,665 146,041 Less Allowance for Credit Losses 2,522 1,648 Receivables, net of allowance for credit losses $ 157,143 $ 144,393 54 T able of Contents The following is a summary of activity in the allowance for credit losses for the years ended December 31, 2023 and 2022: (in thousands) 2023 2022 Beginning Balance $ 1,648 $ 1,836 Additions Charged to Expense 2,014 909 Reductions for Amounts Written Off, Net of Recoveries ( 1,140 ) ( 1,097 ) Ending Balance $ 2,522 $ 1,648 5. Regulatory Matters Regulatory Assets and Liabilities The following presents our current and long-term regulatory assets and liabilities as of December 31, 2023 and 2022 and the period we expect to recover or refund such amounts: Period of 2023 2022 (in thousands) Recovery/Refund Current Long-Term Current Long-Term Regulatory Assets Pension and Other Postretirement Benefit Plans 1 See below $ 154 $ 86,134 $ — $ 88,354 Alternative Revenue Program Riders 2 Up to 2 years 3,719 158 5,679 2,508 Asset Retirement Obligations 1 Asset lives — 87 — 1,467 Deferred Income Taxes Asset lives — 6,940 — — Fuel Clause Adjustments 1 Up to 1 year 7,294 — 10,893 — Derivative Instruments 1 Up to 1 year 4,210 — 7,130 — Other 1 Various 750 2,396 1,297 2,326 Total Regulatory Assets 16,127 95,715 24,999 94,655 Regulatory Liabilities Deferred Income Taxes Asset lives — 136,022 — 131,480 Plant Removal Obligations Asset lives — 117,030 8,509 105,733 Fuel Clause Adjustments Up to 1 year 11,350 — 365 — Alternative Revenue Program Riders Up to 1 year 6,885 — 2,504 — North Dakota PTC Refunds Asset lives — 12,011 — 7,136 Pension and Other Postretirement Benefit Plans See below 6,138 11,307 5,589 — Other Various 1,035 177 333 148 Total Regulatory Liabilities $ 25,408 $ 276,547 $ 17,300 $ 244,497 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 refund, respectively, primarily due to investments in qualifying transmission, conservation, renewable resource, environmental and other generation assets, and the impact of decoupling. Asset Retirement Obligations represent the difference in timing of recognition of expense arising from these obligations and the amount recovered from customers. Fuel Clause Adjustments represent the under- or over-collection of fuel costs relative to the estimated cost of fuel included in customer rates, which will be collected from or returned to customers. Derivative Instruments represent unrealized gains and losses recognized on derivative instruments. On final settlement of such instruments, any realized gains or losses are paid to or recovered from customers. Deferred Income Taxes represent the revaluation of accumulated deferred income taxes arising from the change in the federal income tax rate in 2017. This amount is being refunded to customers over the estimated lives of the property assets from which the deferred income taxes originated. Plant Removal Obligations represent amounts collected from customers to be used to cover actual removal costs as incurred. North Dakota PTC Refunds represent PTCs earned from the Merricourt Wind Energy Center. These amounts are being allocated to customers over the life of the asset. Other regulatory assets and liabilities include other amounts that we expect to recover from, or return to, customers in future periods, such as 55 T able of Contents the cost of abandoned projects, costs incurred in connection with recent rate cases, and other items. North Dakota Rate Case On November 2, 2023, OTP filed a request with the NDPSC for an increase in revenue recoverable under general rates in North Dakota. In its filing, OTP requested a net increase in annual revenue of $ 17.4 million, or 8.4 %, based on an allowed rate of return on rate base of 7.85 % and an allowed rate of return on equity of 10.6 % on an equity ratio of 53.5 % of total capital. Through this proceeding, OTP has proposed changes to the mechanism of cost and investment recovery, with recovery moving from riders into base rates. The filing also includes a proposal to implement a sales adjustment mechanism to address potential significant load additions or losses. The filing included an interim rate request of a net increase in annual revenue of $ 12.4 million, or 6.0 %, which was approved by the NDPSC on December 13, 2023, and interim rates went into effect on January 1, 2024. These interim rate revenues, when collected, are subject to potential refund until the finalization of the rate case. 6. Property, Plant and Equipment Major classes of property, plant and equipment as of December 31, 2023 and 2022 include: (in thousands) 2023 2022 Electric Plant in Service Production $ 1,412,826 $ 1,343,097 Transmission 777,613 756,848 Distribution 654,704 612,716 General 144,738 131,718 Electric Plant in Service 2,989,881 2,844,379 Construction Work in Progress 137,212 113,932 Total Gross Electric Plant 3,127,093 2,958,311 Less Accumulated Depreciation and Amortization 851,148 859,988 Net Electric Plant 2,275,945 2,098,323 Nonelectric Property, Plant and Equipment Equipment 233,571 218,770 Buildings and Leasehold Improvements 64,753 61,506 Land 13,600 13,652 Nonelectric Property, Plant and Equipment 311,924 293,928 Construction Work in Progress 38,062 15,170 Total Gross Nonelectric Property, Plant and Equipment 349,986 309,098 Less Accumulated Depreciation and Amortization 207,556 194,704 Net Nonelectric Property, Plant and Equipment 142,430 114,394 Net Property, Plant and Equipment $ 2,418,375 $ 2,212,717 Depreciation expense for the years ended December 31, 2023, 2022 and 2021 totaled $ 90.8 million, $ 84.4 million and $ 85.8 million. 56 T able of Contents The following table provides OTP’s ownership percentages and amounts included in the December 31, 2023 and 2022 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, 2023 Big Stone Plant 53.9 % $ 341,683 $ 820 $ ( 126,904 ) $ 215,599 Coyote Station 35.0 % 188,656 104 ( 115,306 ) 73,454 Big Stone South–Ellendale 345 kV line 50.0 % 106,185 — ( 7,181 ) 99,004 Fargo–Monticello 345 kV line 14.2 % 78,184 — ( 11,238 ) 66,946 Big Stone South–Brookings 345 kV line 50.0 % 53,170 — ( 5,207 ) 47,963 Brookings–Southeast Twin Cities 345 kV line 4.8 % 26,409 83 ( 3,617 ) 22,875 Bemidji–Grand Rapids 230 kV line 14.8 % 16,331 — ( 3,568 ) 12,763 Jamestown– Ellendale 345 kV line 50.0 % — 1,121 — 1,121 Big Stone South–Alexandria 345 kV line 40.0 % — 555 — 555 Alexandria–Big Oaks 345 kV line 14.2 % — 343 — 343 December 31, 2022 Big Stone Plant 53.9 % $ 338,411 $ 557 $ ( 118,044 ) $ 220,924 Coyote Station 35.0 % 183,461 2,315 ( 111,666 ) 74,110 Big Stone South–Ellendale 345 kV line 50.0 % 106,185 — ( 5,587 ) 100,598 Fargo–Monticello 345 kV line 14.2 % 78,184 — ( 10,095 ) 68,089 Big Stone South–Brookings 345 kV line 50.0 % 53,041 — ( 4,406 ) 48,635 Brookings–Southeast Twin Cities 345 kV line 4.8 % 26,291 — ( 3,211 ) 23,080 Bemidji–Grand Rapids 230 kV line 14.8 % 16,331 — ( 3,318 ) 13,013 7. Intangible Assets The following table summarizes our goodwill by segment as of December 31, 2023 and 2022: (in thousands) 2023 2022 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 2023 and 2022, indicated no impairment existed as of the test date. The following table summarizes the components of our intangible assets at December 31, 2023 and 2022: (in thousands) Gross Amount Accumulated Amortization Net Carrying Amount December 31, 2023 Customer Relationships $ 22,491 $ 15,667 $ 6,824 Other 26 7 19 Total 22,517 15,674 6,843 December 31, 2022 Customer Relationships 22,491 14,568 7,923 Other 26 6 20 Total $ 22,517 $ 14,574 $ 7,943 Amortization expense for these intangible assets for each of the years ended December 31, 2023, 2022 and 2021 totaled $ 1.1 million. Annual amortization expense for these intangible assets for the next five years is: (in thousands) 2024 2025 2026 2027 2028 Amortization Expense $ 1,100 $ 1,100 $ 1,092 $ 1,090 $ 554 57 T able of Contents 8. Leases We lease rail cars, warehouse and office space, land, and certain office, manufacturing, material handling, and other 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, 2023, 2022, and 2021 are as follows: (in thousands) 2023 2022 2021 Lease Cost Operating Lease Cost $ 6,309 $ 5,606 $ 5,298 Variable Lease Cost 1,433 1,386 1,020 Short-Term Lease Cost 2,525 1,517 1,465 Total Lease Cost 10,267 8,509 7,783 Lease Cash Flows Operating Cash Flows from Operating Leases $ 6,424 $ 5,592 $ 5,642 A summary of operating lease right-of-use lease assets and lease liabilities as of December 31, 2023 and 2022 is as follows: (in thousands) 2023 2022 Right of Use Lease Assets 1 $ 16,788 $ 18,610 Lease Liabilities Current 2 5,756 5,071 Long-Term 3 11,258 13,876 Total Lease Liabilities $ 17,014 $ 18,947 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 $ 3.6 million and $ 3.7 million for the years ended December 31, 2023 and 2022. Maturities of lease liabilities as of December 31, 2023 for each of the next five years and in the aggregate thereafter are as follows: (in thousands) Operating Leases 2024 $ 6,473 2025 5,357 2026 3,068 2027 2,196 2028 1,059 Thereafter 368 Total Lease Payments 18,521 Less: Interest 1,507 Present Value of Lease Liabilities $ 17,014 The weighted-average remaining lease term and the weighted-average discount rate as of December 31, 2023 and 2022 are as follows: 2023 2022 Weighted-Average Remaining Lease Term (in years) 3.4 4.2 Weighted-Average Discount Rate 5.40 % 4.73 % 58 T able 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, 2023 and 2022: 2023 2022 (in thousands) OTC OTP Total OTC OTP Total Short-Term Debt $ — $ 81,422 $ 81,422 $ — $ 8,204 $ 8,204 Current Maturities of Long-Term Debt — — — — — — Long-Term Debt, net of current maturities 79,849 744,210 824,059 79,798 744,023 823,821 Total $ 79,849 $ 825,632 $ 905,481 $ 79,798 $ 752,227 $ 832,025 Short-Term Debt The following is a summary of our lines of credit as of December 31, 2023 and 2022: 2023 2022 (in thousands) Line Limit Amount Outstanding Letters of Credit Amount Available Amount Available OTC Credit Agreement $ 170,000 $ — $ — $ 170,000 $ 170,000 OTP Credit Agreement 170,000 81,422 9,132 79,446 152,223 Total $ 340,000 $ 81,422 $ 9,132 $ 249,446 $ 322,223 OTC is party to a Fifth Amended and Restated Credit Agreement (the OTC Credit Agreement) and OTP is party to a Fourth Amended and Restated Credit Agreement (the OTP Credit Agreement). 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 to increase the borrowing capacity under the facility, subject to certain conditions, up to $ 290.0 million and $ 250.0 million under the OTC Credit Agreement and OTP Credit Agreement, respectively. 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 SOFR 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 borrower. The weighted-average interest rate on all outstanding borrowings as of December 31, 2023 and 2022 was 6.70 % and 5.61 %. 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 require the borrower to maintain various financial covenants, as further described below. Each credit facility expires on October 29, 2027. 59 T able of Contents Long-Term Debt The following is a summary of outstanding long-term debt by borrower as of December 31, 2023 and 2022: (in thousands) Entity Debt Instrument Rate Maturity 2023 2022 OTC Guaranteed Senior Notes 3.55 % 12/15/26 $ 80,000 $ 80,000 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 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 % 11/29/51 100,000 100,000 OTP Series 2022A Senior Unsecured Notes 3.77 % 05/20/52 90,000 90,000 Total 827,000 827,000 Less: Unamortized Long-Term Debt Issuance Costs 2,941 3,179 Total Long-Term Debt Net of Unamortized Debt Issuance Costs $ 824,059 $ 823,821 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 borrower, 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, 2023 for each of the next five years are as follows: (in thousands) 2024 2025 2026 2027 2028 Debt Maturities $ — $ — $ 80,000 $ 42,000 $ — 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, 2023, OTC and OTP were in compliance with these financial covenants. Guaranties OTC's obligations under the terms of its Guaranteed Senior Notes are unconditionally and irrevocably guaranteed by its subsidiaries, Varistar Corporation, BTD Manufacturing, Inc., Northern Pipe Products, Inc., and Vinyltech Corporation. 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 . 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 60 T able of Contents 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, 2023 and 2022: Permitted Actual Allocation Asset Class Range 2023 2022 Return Enhancement 35 – 60 % 48 % 48 % Risk Management 40 – 80 % 51 51 Alternatives 0 – 20 % 1 1 Total 100 % 100 % Return Enhancement investments are those that seek to provide equity-like, long-term capital appreciation. Examples include equity securities, including dynamic asset allocation funds, and higher yielding fixed income securities, such as high yield bonds and emerging market debt. Risk Management investments seek to decrease downside risk or act as a hedge against plan liabilities. Examples are cash and fixed income instruments. Alternative investments seek to either provide return enhancement through long-term appreciation or risk management through decreased downside risk. The defining characteristic of these asset types is uncorrelated source of returns, less liquidity and private market access. Examples include investments in the SEI Energy Debt Collective Fund. The following presents the fair value inputs classified within the fair value hierarchy used to measure Pension Plan assets at December 31, 2023 and 2022 and assets measured using the net asset value (NAV) practical expedient: (in thousands) Level 1 Level 2 Level 3 NAV Total December 31, 2023 Equity Funds $ 127,159 $ — $ — $ — $ 127,159 Fixed Income Funds 167,604 — — — 167,604 Hybrid Funds 10,980 — — — 10,980 U.S. Treasury Securities 23,218 — — — 23,218 SEI Energy Debt Collective Fund — — — 1,518 1,518 Total 328,961 — — 1,518 330,479 December 31, 2022 Equity Funds 124,327 — — — 124,327 Fixed Income Funds 156,424 — — — 156,424 Hybrid Funds 9,756 — — — 9,756 U.S. Treasury Securities 19,587 — — — 19,587 SEI Energy Debt Collective Fund — — — 3,703 3,703 Total $ 310,094 $ — $ — $ 3,703 $ 313,797 The investments held by the SEI Energy Debt Collective Fund on December 31, 2023 and 2022 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 61 T able of Contents 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, 2023 and 2022 and the funded status of the plans as of December 31, 2023 and 2022: Pension Benefits (Pension Plan) Pension Benefits (ESSRP) Postretirement Benefits (in thousands) 2023 2022 2023 2022 2023 2022 Change in Fair Value of Plan Assets: Fair Value of Plan Assets at January 1 $ 313,797 $ 387,212 $ — $ — $ — $ — Actual Return on Plan Assets 34,196 ( 76,485 ) — — — — Company Contributions — 20,000 2,197 2,205 3,167 2,294 Benefit Payments ( 17,514 ) ( 16,930 ) ( 2,197 ) ( 2,205 ) ( 8,900 ) ( 8,173 ) Participant Premium Payments — — — — 5,733 5,879 Fair Value of Plan Assets at December 31 330,479 313,797 — — — — Change in Benefit Obligation: Benefit Obligation at January 1 308,055 416,697 35,624 46,840 49,947 69,311 Service Cost 3,698 6,576 72 195 565 1,338 Interest Cost 16,436 12,344 1,889 1,341 2,416 2,041 Benefit Payments ( 17,514 ) ( 16,930 ) ( 2,197 ) ( 2,205 ) ( 8,900 ) ( 8,172 ) Participant Premium Payments — — — — 5,733 5,879 Plan Amendments — — — — ( 17,493 ) — Actuarial (Gain) Loss 8,126 ( 110,632 ) 392 ( 10,547 ) ( 2,123 ) ( 20,450 ) Benefit Obligation at December 31 318,801 308,055 35,780 35,624 30,145 49,947 Funded Status $ 11,678 $ 5,742 $ ( 35,780 ) $ ( 35,624 ) $ ( 30,145 ) $ ( 49,947 ) Amounts Recognized in Consolidated Balance Sheets at December 31: Noncurrent Assets $ 11,678 $ 5,742 $ — $ — $ — $ — Current Liabilities — — ( 2,679 ) ( 2,414 ) ( 2,469 ) ( 2,970 ) Noncurrent Liabilities and Deferred Credits — — ( 33,101 ) ( 33,210 ) ( 27,676 ) ( 46,977 ) Net Asset (Liability) $ 11,678 $ 5,742 $ ( 35,780 ) $ ( 35,624 ) $ ( 30,145 ) $ ( 49,947 ) The accumulated benefit obligation of our Pension Plan was $ 288.8 million and $ 283.2 million as of December 31, 2023 and 2022. The accumulated benefit obligation of our ESSRP was $ 35.8 million and $ 35.6 million as of December 31, 2023 and 2022. In 2023, the Company amended its postretirement healthcare plan to eliminate, for Medicare-eligible participants, the employer-sponsored group waiver medical plan and instead allow participants to select an individual medical plan through a private marketplace exchange. The Company now provides these plan participants with an annual reimbursement to subsidize their medical premiums. The effect of the plan amendment reduced the Company’s projected benefit obligation by $ 20.1 million. The reduced benefit obligation included a $ 2.6 million reduction attributable to an increase in the discount rate used to measure the plan liability, which was 6.06 % at the time of the amendment, compared to 5.52 % used at December 31, 2022. The $ 17.5 million of savings attributable to the plan change is being recognized as a reduction to expense over 4.8 years, the expected remaining service period to retirement-age eligibility for active participants. 62 T able of Contents The following assumptions were used to determine benefit obligations as of December 31, 2023 and 2022: Pension Benefits (Pension Plan) Pension Benefits (ESSRP) Postretirement Benefits 2023 2022 2023 2022 2023 2022 Discount Rate 5.57 % 5.51 % 5.53 % 5.51 % 5.53 % 5.52 % Long-Term Rate of Compensation Increase n/a n/a 3.00 % 3.00 % n/a n/a Participants up to Age 39 (1) 4.50 % 4.50 % n/a n/a n/a n/a Participants Ages 40 to 49 (2) 4.50 % 3.50 % n/a n/a n/a n/a Participants Age 50 and Older (3) 3.75 % 2.75 % n/a n/a n/a n/a Healthcare Cost Immediate Trend Rate n/a n/a n/a n/a 6.97 % 7.50 % Healthcare Cost Ultimate Trend Rate n/a n/a n/a n/a 4.00 % 4.00 % Year the Rate Reaches the Ultimate Trend Rate n/a n/a n/a n/a 2048 2048 (1) Amount reflects rate of compensation increases for both union and non-union employees. (2) Amount reflects rate of compensation increases for union employees. The rate of compensation increases for non-union employees is 3.50 %. (3) Amount reflects rate of compensation increases for union employees. The rate of compensation increases for non-union employees is 3.00 %. The measurement of the plan asset or benefit obligation recognized for our Pension Plan, ESSRP and postretirement healthcare benefit plan included the following significant actuarial adjustments: • For the Pension Plan, an increase in the discount rate in 2023 and 2022 reduced our obligation by $ 2.2 million and $ 117.1 million. Changes in retirement rate, percentage married, spouse age, benefit election, benefit commencement age and wage assumptions increased our benefit obligation in 2023 by $ 7.9 million. Changes in plan participant census data increased our benefit obligation by $ 3.1 million in 2023. Actual returns on Pension Plan assets in 2023 were $ 34.2 million, compared to an expected return of $ 25.9 million, impacting our obligation by $ 8.3 million. • For the ESSRP, an increase in the discount rate in 2023 and 2022 reduced our obligation by $ 0.1 million and $ 10.2 million. • For the postretirement healthcare plan, a plan amendment during 2023, as described above, decreased our benefit obligation by $ 17.5 million. An increase in the discount rate in 2023 and 2022 reduced our obligation by $ 1.3 million and $ 17.9 million. Revised estimates of healthcare cost trends and participant contribution assumptions increased the benefit obligation by $ 1.1 million in 2023. 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, 2023, 2022 and 2021: Pension Benefits (Pension Plan) Pension Benefits (ESSRP) Postretirement Benefits (in thousands) 2023 2022 2021 2023 2022 2021 2023 2022 2021 Service Cost $ 3,698 $ 6,576 $ 7,462 $ 72 $ 195 $ 187 $ 565 $ 1,338 $ 1,722 Interest Cost 16,436 12,344 11,660 1,889 1,341 1,228 2,416 2,041 1,891 Expected Return on Assets ( 25,914 ) ( 23,684 ) ( 22,359 ) — — — — — — Amortization of Prior Service Cost — — — — — — ( 6,649 ) ( 5,733 ) ( 5,733 ) Amortization of Net Actuarial Loss — 7,865 10,914 — 567 620 — 3,063 3,774 Net Periodic Benefit Cost $ ( 5,780 ) $ 3,101 $ 7,677 $ 1,961 $ 2,103 $ 2,035 $ ( 3,668 ) $ 709 $ 1,654 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, 2023, 2022 and 2021: (in thousands) 2023 2022 2021 Net Periodic Benefit Cost $ ( 7,487 ) $ 5,913 $ 11,366 Net Amount Amortized Due to the Effect of Regulation 1,225 1,121 21 Net Periodic Benefit Cost Recognized $ ( 6,262 ) $ 7,034 $ 11,387 The following assumptions were used to determine net periodic benefit cost for the years ended December 31, 2023, 2022 and 2021: 63 T able of Contents Pension Benefits (Pension Plan) Pension Benefits (ESSRP) Postretirement Benefits 2023 2022 2021 2023 2022 2021 2023 2022 2021 Discount Rate 5.51 % 3.03 % 2.78 % 5.51 % 2.93 % 2.61 % 5.52 % 3.01 % 2.75 % Long-Term Rate of Return on Plan Assets 7.00 % 6.30 % 6.51 % n/a n/a n/a n/a n/a n/a Long-Term Rate of Compensation Increase n/a n/a n/a 3.00 % 3.00 % 3.00 % n/a n/a n/a Participants to Age 39 4.50 % 4.50 % 4.50 % n/a n/a n/a n/a n/a n/a Participants Ages 40 to 49 3.50 % 3.50 % 3.50 % n/a n/a n/a n/a n/a n/a Participants Age 50 and Older 2.75 % 2.75 % 2.75 % n/a n/a n/a n/a n/a n/a We develop our estimated discount rate through the use of a hypothetical bond portfolio method. This method derives the discount rate from the average yield of a collection of high credit quality bonds which produce cash flows similar to our anticipated future benefit payments. We estimate the assumed long-term rate of return on plan assets based primarily on asset category studies using historical market return and volatility data with forward-looking estimates based on existing financial market conditions and forecasts of capital markets. Modest excess return expectations versus some market indices are incorporated into the return projections based on the actively managed structure of the investment programs and their records of achieving such returns historically. The following table presents the amounts not yet recognized as components of net periodic benefit cost as of December 31, 2023 and 2022: Pension Benefits (Pension Plan) Pension Benefits (ESSRP) Postretirement Benefits (in thousands) 2023 2022 2023 2022 2023 2022 Regulatory Assets (Liabilities): Unrecognized Prior Service Cost $ — $ — $ — $ — $ ( 18,845 ) $ ( 8,400 ) Unrecognized Actuarial Loss 85,227 85,367 1,061 979 1,759 3,993 Net Regulatory Assets (Liabilities) 85,227 85,367 1,061 979 ( 17,086 ) ( 4,407 ) Accumulated Other Comprehensive Income (Loss): Unrecognized Prior Service Cost — — — — 498 99 Unrecognized Actuarial Gain (Loss) 1,994 1,978 ( 1,403 ) ( 1,093 ) 707 818 Total Accumulated Other Comprehensive Income (Loss) $ 1,994 $ 1,978 $ ( 1,403 ) $ ( 1,093 ) $ 1,205 $ 917 Cash Flows. We did not make any contributions to our Pension Plan in 2023. We made discretionary contributions of $ 20.0 million and $ 10.0 million in 2022 and 2021. As of December 31, 2023, we had no minimum funding requirements for our Pension Plan. 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) 2024 2025 2026 2027 2028 2029-2033 Projected Pension Plan Benefit Payments $ 18,851 $ 19,274 $ 19,828 $ 20,318 $ 20,882 $ 110,291 Projected ESSRP Benefit Payments 2,747 2,697 2,823 2,994 2,938 14,437 Projected Postretirement Benefit Payments 2,469 2,497 2,544 2,547 2,476 12,045 Total $ 24,067 $ 24,468 $ 25,195 $ 25,859 $ 26,296 $ 136,773 401K Plan We sponsor a 401K plan for the benefit of all corporate and subsidiary company employees. Contributions made to these plans totaled $ 7.8 million for 2023, $ 6.7 million for 2022 and $ 6.5 million for 2021. 11. Asset Retirement Obligations We have recognized Asset Retirement Obligations (AROs) related to our coal-fired generation plants, natural gas combustion turbines, solar facility, 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. As of December 31, 2023 and 2022, $ 0.1 million and $ 2.7 million, respectively, was included in other current liabilities and $ 36.4 million and $ 22.5 million, respectively, was included in other noncurrent liabilities in the consolidated balance sheets related to AROs. 64 T able of Contents A reconciliation of the carrying amounts of AROs for the years ended December 31, 2023 and 2022 is as follows: (in thousands) 2023 2022 Beginning Balance $ 25,182 $ 24,191 New Obligations Recognized 4,506 — Adjustments Due to Revisions in Cash Flow Estimates 8,394 — Accrued Accretion 1,191 991 Settlements ( 2,796 ) — Ending Balance $ 36,477 $ 25,182 12. Income Taxes Income before income taxes for the years ended December 31, 2023, 2022 and 2021 consists entirely of domestic earnings. The provision for income taxes charged to income for the years ended December 31, 2023, 2022 and 2021 consisted of the following: (in thousands) 2023 2022 2021 Current Federal Income Taxes $ 41,253 $ 31,949 $ 6,806 State Income Taxes 15,126 9,568 939 Deferred Federal Income Taxes 9,832 22,480 18,180 State Income Taxes 3,676 9,943 10,716 Tax Credits North Dakota Wind Tax Credit Amortization, Net of Federal Tax ( 586 ) ( 586 ) ( 586 ) Investment Tax Credit Amortization ( 3 ) ( 3 ) ( 3 ) Total $ 69,298 $ 73,351 $ 36,052 The reconciliation of the statutory federal income tax rate to our effective tax rate for each of the years ended December 31, 2023, 2022 and 2021 is as follows: 2023 2022 2021 Income Taxes at Federal Statutory Rate $ 76,332 21.0 % $ 75,082 21.0 % $ 44,692 21.0 % Increases (Decreases) in Tax from: State Taxes on Income, Net of Federal Tax 14,429 4.0 15,049 4.2 9,962 4.7 Production Tax Credits (PTCs) ( 17,394 ) ( 4.8 ) ( 14,985 ) ( 4.2 ) ( 12,503 ) ( 5.9 ) Amortization of Excess Deferred Income Taxes ( 2,205 ) ( 0.6 ) ( 1,625 ) ( 0.5 ) ( 4,262 ) ( 2.0 ) North Dakota Wind Tax Credit Amortization, Net of Federal Tax ( 586 ) ( 0.2 ) ( 586 ) ( 0.2 ) ( 586 ) ( 0.3 ) Other, Net ( 1,278 ) ( 0.3 ) 416 0.2 ( 1,251 ) ( 0.6 ) Income Taxes at Effective Tax Rate $ 69,298 19.1 % $ 73,351 20.5 % $ 36,052 16.9 % PTCs, North Dakota wind tax credits, and excess deferred income taxes related to the federal tax rate reduction in the 2017 Tax Cuts and Jobs Act are returned to customers as a reduction of the rates they are charged and result in a reduction of operating revenues. 65 T able of Contents Deferred tax assets and liabilities were composed of the following on December 31, 2023 and 2022: (in thousands) 2023 2022 Deferred Tax Assets Employee Benefits $ 39,959 $ 39,216 Regulatory Liabilities 56,479 57,353 Tax Credit Carryforwards 21,836 20,209 Cost of Removal 32,993 37,360 Asset Retirement Obligations 9,494 6,557 Net Operating Loss Carryforward 2,336 1,853 Other 11,310 5,550 Total Deferred Tax Assets 174,407 168,098 Deferred Tax Liabilities Differences Related to Property ( 347,885 ) ( 334,201 ) Retirement Benefits Regulatory Asset ( 22,458 ) ( 22,789 ) Pension Expense ( 24,875 ) ( 24,269 ) Other ( 16,462 ) ( 8,141 ) Total Deferred Tax Liabilities ( 411,680 ) ( 389,400 ) Deferred Income Taxes $ ( 237,273 ) $ ( 221,302 ) The following is a schedule of tax credits and tax net operating losses available as of December 31, 2023 and the respective periods of expiration: (in thousands) Amount 2024-2029 2030-2037 2038-2043 State Net Operating Losses $ 2,336 $ 211 $ 2,125 $ — State Tax Credits 21,836 — — 21,836 The following table summarizes the activity for unrecognized tax benefits for the years ended December 31, 2023, 2022 and 2021: (in thousands) 2023 2022 2021 Balance on January 1 $ 923 $ 827 $ 771 Increases for tax positions taken during a prior period 596 44 11 Increases for tax positions taken during the current period 163 260 189 Decreases due to settlements with taxing authorities — — — Decreases as a result of a lapse of applicable statutes of limitations ( 193 ) ( 208 ) ( 144 ) Balance on December 31 $ 1,489 $ 923 $ 827 The balance of unrecognized tax benefits as of December 31, 2023 would reduce our effective tax rate if recognized. The total amount of unrecognized tax benefits as of December 31, 2023 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, 2023, with limited exceptions, we are no longer subject to examinations by taxing authorities for tax years prior to 2020 for federal and North Dakota income taxes and prior to 2019 for Minnesota state income taxes. 13. Commitments and Contingencies Commitments Construction and Other Commitments. As of December 31, 2023, we had commitments under contracts for construction project materials, equipment, plant maintenance, and other services extending into 2046 which totaled approximately $ 17.1 million. Electric Utility Capacity and Energy Requirements. OTP has commitments for the purchase of capacity and energy requirements under contractual agreements, including wind power purchase agreements extending into 2048. Generally, the terms of OTP's wind power purchase agreements require OTP to purchase all of the electricity generated by a particular wind farm and do not include fixed or minimum payments. The required payments are variable and the amounts due are determined based upon the amount of electricity generated. Capacity and energy requirement costs under these agreements totaled $ 5.6 million, $ 13.1 million and $ 11.5 million for the years ended December 31, 2023, 2022 and 2021. Coal Purchase Commitments. OTP has contracts providing for the purchase and delivery of its coal requirements. OTP’s current coal purchase agreement with CCMC for Coyote Station expires December 31, 2040. All of Coyote Station’s coal requirements for the period covered must be purchased under this agreement. The agreement is structured so that the price of the coal covers all of CCMC's operating, financing, and future 66 T able of Contents mine reclamation costs. In the table below we have estimated the future payments to be made under the terms of the agreement until its maturity. OTP has an agreement for the purchase of Big Stone Plant’s coal requirements through December 31, 2024. There is no fixed minimum purchase requirement, and no amounts for this agreement have been included in the table below; however, under this agreement all of Big Stone Plant’s coal requirements for the period covered must be purchased under this agreement. Coal purchase costs under these two agreements totaled $ 43.7 million, $ 45.1 million and $ 40.4 million for the years ended December 31, 2023, 2022 and 2021. Land Easement Payments. OTP has commitments to make payments for land easements not classified as leases. The contractual terms of these easements are generally 99 years or do not have a stated maturity date, however, per the terms of the agreements, our requirement to make payment ends once we cease use of the land. As such, in the table below, we have included payments under these easements through the estimated useful lives of the facilities associated with the easement. The commitments under these arrangements extend into 2055 and total approximately $ 62.4 million. Land easement costs under these agreements totaled $ 1.8 million, $ 1.4 million and $ 1.3 million for the years ended December 31, 2023, 2022 and 2021. Our future commitments as of December 31, 2023 were as follows: (in thousands) Construction Program and Other Commitments Capacity and Energy Requirements Coal Purchase Commitments Land Easement Payments 2024 $ 4,374 $ 245 $ 24,691 $ 1,804 2025 4,051 217 24,593 1,840 2026 1,377 197 25,374 1,845 2027 594 197 25,786 1,882 2028 550 197 25,344 1,921 Beyond 2028 6,165 3,939 359,610 53,107 Total $ 17,111 $ 4,992 $ 485,398 $ 62,399 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. 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. On August 9, 2022, the U.S. Court of Appeals for the District of Columbia Circuit vacated the FERC order citing a lack of reasoned explanation by FERC in its adoption of its revised ROE methodology as outlined in its November 2020 order. The U.S. Court of Appeals remanded the matter to FERC to reopen the proceedings. Significant uncertainty exists as to how FERC will proceed on remand and there is no prescribed timeline under which FERC must act. We have deferred recognition and recorded a refund liability of $ 2.8 million as of December 31, 2023. This refund liability reflects our best estimate of amounts previously collected from customers under the MISO tariff rate that may be required to be refunded to customers once all regulatory and judicial proceedings are complete and a final ROE is established for the periods outlined above. 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 (SIP) 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 SIP. The NDDEQ submitted its SIP to the EPA for approval in August 2022. In its plan, the NDDEQ concluded it is not reasonable to require additional emission controls during this planning period. The EPA has previously expressed disagreement with the NDDEQ's recommendation to forgo additional emission controls and has indicated that such a plan is not likely to be accepted. We cannot predict with certainty the impact the SIP may have on our business until the SIP has been approved or otherwise 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 or the sale of our interest in Coyote Station, subject to regulatory approval. We cannot estimate the ultimate 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 in rates would be subject to regulatory approval. Self-Funding of Transmission Upgrades. The FERC has granted transmission owners within MISO the unilateral authority to determine the funding mechanism for interconnection transmission upgrades that are necessary to accommodate new generation facilities connecting to the electrical grid. Under existing FERC orders, transmission owners can unilaterally determine whether the generator pays the transmission owner in advance for the transmission upgrade or, alternatively, the transmission owner can elect to fund the upgrade and recover over time from the generator the cost of and a return on the upgrade investment (a self-funding). FERC’s orders granting transmission owners this unilateral funding authority has been judicially contested on the basis that transmission owners may be motivated to discriminate among generators in making 67 T able of Contents funding determinations. In the most recent judicial hearing, the petitioners argued to the U.S. Court of Appeals for the District of Columbia that FERC did not comply with a previous judicial order to fully develop a record regarding the risk of discrimination and the financial risk absorbed by transmission owners for generator-funded upgrades. On December 2, 2022, the Court of Appeals ruled in favor of the petitioners remanding the matter to FERC, instructing the agency to adequately explain the basis of its orders. The Court of Appeals decision did not vacate transmission owners’ unilateral funding authority. OTP, as a transmission owner in MISO, has exercised its authority and elected to self-fund previous transmission upgrades necessary to accommodate new system generation. Under such an election, OTP is recovering the cost of the transmission upgrade and a return on that investment from the generator over a contractual period of time. Should FERC, on remand from the Court of Appeals, eliminate transmission owners’ unilateral funding authority, on either a prospective or retrospective basis, our financial results would be impacted. We cannot at this time reasonably predict the outcome of this matter given the uncertainty as to how and when FERC may respond to the judicial remand. 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, 2023 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, 2023 or 2022. 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 2023. On May 3, 2021, upon the expiration of a prior shelf registration, we filed a 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 2023, we issued 105,663 common shares under this program and no proceeds were received, as all shares issued were purchased on the open market. As of December 31, 2023, 1,145,330 shares remained 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 intercompany distributions made by OTC's subsidiaries to OTC. 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 OTC's subsidiaries. Both the OTC Credit Agreement and OTP Credit Agreement contain restrictions on the payment of cash dividends upon a default or event of default, including failure to maintain certain financial covenants. As of December 31, 2023, 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 OTC by requiring an equity-to-total-capitalization ratio between 48.3 % and 59.1 %, with total capitalization not to exceed $ 2.0 billion based on OTP’s capital structure requirements as of December 31, 2023. As of December 31, 2023, OTP’s equity-to-total-capitalization ratio including short-term debt was 54.2 % and its net assets restricted from distribution totaled approximately $ 771.3 million. 68 T able of Contents 15. Accumulated Other Comprehensive Income (Loss) The Company's other comprehensive income (loss) 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 Income (loss) for the years ended December 31, 2023, 2022 and 2021: (in thousands) Pension and Other Postretirement Benefits Net Unrealized Gain (Losses) on Available-for-Sale Securities Total 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 ) Other Comprehensive Income (Loss) Before Reclassifications, net of tax 7,331 ( 433 ) 6,898 Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) 540 (1) 1 (2) 541 Total Other Comprehensive Income (Loss) 7,871 ( 432 ) 7,439 Balance, December 31, 2022 1,334 ( 419 ) 915 Other Comprehensive Income Before Reclassifications, net of tax 59 180 239 Amounts Reclassified from Accumulated Other Comprehensive Income (Loss) ( 18 ) (1) 12 (2) ( 6 ) Total Other Comprehensive Income 41 192 233 Balance, December 31, 2023 $ 1,375 $ ( 227 ) $ 1,148 (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. 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. 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. We recognize the 15 % discount to the fair market value of the purchased shares as stock-based compensation expense, which amounted to $ 0.3 million, $ 0.3 million and $ 0.2 million for the years ended December 31, 2023, 2022 and 2021. For the years ended December 31, 2023, 2022 and 2021 the amount of shares issued under the plan amounted to 26,348 , 26,420 and 27,975 shares. As of December 31, 2023, there were 237,367 shares available for purchase under the plan. Share-Based Compensation Plan The 2023 Stock Incentive Plan, which was approved by our shareholders in April 2023, authorizes the issuance of 979,891 common shares, including 500,000 newly requested common shares, for the granting of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance awards and other stock-based awards. In addition, common shares subject to any outstanding awards under our prior stock incentive plans that are forfeited, canceled or reacquired by the Company will become available for re-issuance under the 2023 Stock Incentive Plan. As of December 31, 2023, 943,192 shares were available for issuance under the plan. The plan terminates on April 17, 2033. 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 $ 7.4 million, $ 6.6 million and $ 6.7 million for the years ended December 31, 2023, 2022 and 2021. The related income tax benefit recognized for these periods amounted to $ 1.6 million, $ 1.7 million and $ 1.8 million. 69 T able of Contents Restricted Stock Awards. Restricted stock awards are granted to executive officers and other key 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, 2023: Shares Weighted-Average Grant-Date Fair Value Nonvested, Beginning of Year 141,551 $ 49.83 Granted 55,205 68.03 Vested ( 45,493 ) 50.02 Forfeited ( 2,350 ) 52.02 Nonvested, End of Year 148,913 $ 56.48 The weighted-average grant-date fair value of granted awards was $ 68.03 , $ 59.95 and $ 43.55 during the years ended December 31, 2023, 2022 and 2021. The fair value of vested awards was $ 3.1 million, $ 3.0 million and $ 2.1 million during the years ended December 31, 2023, 2022 and 2021. As of December 31, 2023, there was $ 3.4 million of unrecognized compensation cost for unvested restricted stock awards to be recognized over a weighted-average period of 1.7 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 (TSR component) and ii) return on equity (ROE component). 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 on actual performance at the end of the performance period. The grant-date fair value of the ROE component of the stock performance awards granted during the years ended December 31, 2023, 2022 and 2021 was determined using the grant date stock price and a discounted cash flow analysis to adjust for expected unearned dividends during the vesting period. The grant-date fair value of the TSR component of the stock performance awards granted during the years ended December 31, 2023, 2022 and 2021 was determined using a Monte Carlo fair value simulation model incorporating the following assumptions: 2023 2022 2021 Risk-free interest rate 4.15 % 1.52 % 0.18 % Expected term (in years) 3.00 3.00 3.00 Expected volatility 34.00 % 32.00 % 32.00 % Dividend yield 2.50 % 2.90 % 3.60 % 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 five-year period. Dividend yield was estimated based on historic and future yield estimates. The following is a summary of stock performance award activity for the year ended December 31, 2023 (share amounts reflect awards at target): Shares Weighted-Average Grant-Date Fair Value Nonvested, Beginning of Year 189,800 $ 45.95 Granted 59,400 61.97 Vested ( 55,000 ) 47.79 Forfeited — — Nonvested, End of Year 194,200 $ 50.33 The weighted-average grant-date fair value of granted awards was $ 61.97 , $ 54.91 and $ 38.34 during the years ended December 31, 2023, 2022 and 2021. The fair value of vested awards was $ 5.3 million, $ 5.1 million and $ 2.5 million during the years ended December 31, 2023, 2022 and 70 T able of Contents 2021. As of December 31, 2023, there was $ 0.4 million of unrecognized compensation cost of unvested stock performance awards to be recognized over a weighted-average period of 0.67 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 shares associated with time and performance based stock awards and our employee stock purchase plan. The following includes the computation of the denominator for basic and diluted weighted-average shares outstanding for the years ended December 31, 2023, 2022 and 2021: (in thousands) 2023 2022 2021 Weighted Average Common Shares Outstanding – Basic 41,668 41,586 41,491 Effect of Dilutive Securities: Stock Performance Awards 269 248 226 Restricted Stock Awards 100 95 87 Employee Stock Purchase Plan Shares and Other 2 2 14 Dilutive Effect of Potential Common Shares 371 345 327 Weighted Average Common Shares Outstanding – Diluted 42,039 41,931 41,818 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, 2023, 2022 and 2021. 18. Derivative Instruments OTP enters into derivative instruments to manage its exposure to future commodity price variability, specifically future wholesale energy and natural gas prices, 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, 2023 and 2022 OTP had outstanding pay-fixed, receive-variable swap agreements with an aggregate notional amount of 187,400 and 295,000 megawatt-hours of electricity. The contracts outstanding as of December 31, 2023 had various settlement dates throughout 2024. As of December 31, 2023 and 2022, the fair value of these derivative instruments was $ 4.2 million and $ 7.1 million, which are included in other current liabilities on the consolidated balance sheets. During the years ended December 31, 2023 and 2022, contracts matured and were settled in an aggregate amount of a $ 16.5 million loss and a $ 1.0 million gain, respectively. Gains and losses recognized on the settlement of derivative instruments are returned to, or recovered from, our electric customers through fuel recovery mechanisms in each state. When recognized in the statement of income, these gains or losses are included in electric purchased power . 71 T able of Contents 19. Fair Value Measurements The following tables present our assets measured at fair value on a recurring basis as of December 31, 2023 and 2022 classified by the input method used to measure fair value: Level 1 Level 2 Level 3 December 31, 2023 Assets Investments: Money Market Funds $ 3,125 $ — $ — Mutual Funds 7,771 — — Corporate Debt Securities — 1,579 — Government Debt Securities — 7,724 — Total Assets 10,896 9,303 — Liabilities Derivative Instruments — 4,210 — Total Liabilities $ — $ 4,210 $ — December 31, 2022 Assets Investments: Money Market Funds $ 1,560 $ — $ — Mutual Funds 5,503 — — Corporate Debt Securities — 1,434 — Government Debt Securities — 7,327 — Total Assets $ 7,063 $ 8,761 $ — Liabilities Derivative Instruments — 7,130 — Total Liabilities $ — $ 7,130 $ — The level 2 fair value measurements for government 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, 2023 and 2022: December 31, 2023 December 31, 2022 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Assets: Cash and Cash Equivalents $ 230,373 $ 230,373 $ 118,996 $ 118,996 Total 230,373 230,373 118,996 118,996 Liabilities: Short-Term Debt 81,422 81,422 8,204 8,204 Long-Term Debt 824,059 710,839 823,821 681,615 Total $ 905,481 $ 792,261 $ 832,025 $ 689,819 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. 72 T able of Contents 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.