Item 1. Business
ITEM 1. BUSINESS
Otter Tail Corporation (OTC) is a holding company which has strategically invested in a portfolio of diversified operations including an electric utility and manufacturing and plastic pipe businesses with corporate offices located in Fergus Falls, Minnesota and Fargo, North Dakota.
We classify our five operating companies into three reportable segments consistent with our business strategy and management structure. The following table depicts our three segments, and the subsidiary entities included within each segment:
ELECTRIC SEGMENT MANUFACTURING SEGMENT PLASTICS SEGMENT
Otter Tail Power Company (OTP) BTD Manufacturing, Inc. (BTD) Northern Pipe Products, Inc. (Northern Pipe)
T.O. Plastics, Inc. (T.O. Plastics) Vinyltech Corporation (Vinyltech)
Electric includes the generation, purchase, transmission, distribution and sale of electric energy in western Minnesota, eastern North Dakota and northeastern South Dakota. Otter Tail Power (OTP), our primary business since 1907, serves approximately 134,000 customers in more than 400 communities across a predominantly rural and agricultural service territory.
Manufacturing consists of businesses engaged 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, material handling components and extruded raw material stock. These businesses have manufacturing facilities in Georgia, Illinois and Minnesota and sell products primarily in the United States.
Plastics consists of businesses producing polyvinyl chloride (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.
Throughout the remainder of this report, we use the terms "Company," "us," "our," or "we" to refer to OTC and its subsidiaries collectively. We will also refer to our Electric, Manufacturing and Plastics segments and our individual subsidiaries as indicated above.
INVESTMENT AND GROWTH STRATEGY
Our investment and growth strategy is focused on our electric utility as our foundational business, complemented by our investments in our Manufacturing and Plastics segments (collectively, our Manufacturing Platform). This strategic diversification allows us to maintain a moderate risk profile while driving growth through rate base investments in our Electric segment and organic growth opportunities in our Manufacturing Platform. This strategy and risk profile are designed to provide a more predictable earnings stream, to provide growth over long-term cycles, to produce returns above the utility industry average, to support investment grade credit ratings, and to provide for dividend payments to our shareholders.
Our long-term focus remains on executing our strategy to grow our business and achieving operational, commercial and talent excellence to strengthen our position in the markets we serve. Our long-term financial objectives include achieving a compounded annual growth rate in earnings per share in the range of 6 to 8%, with a long-term earnings mix of approximately 65% from our Electric segment and 35% from our Manufacturing Platform. We also are targeting an annual increase in our dividend to be in the range of 6 to 8%. We expect our earnings growth and cash flow generation to be driven by rate base investments in our Electric segment and from existing capacities and recent investments within our Manufacturing and Plastics segments.
Since 2021, our earnings mix has diverged from our long-term target of 65% from our Electric segment and 35% from our Manufacturing Platform and our earnings growth rate has exceeded our long-term targeted growth rate primarily due to market conditions within the PVC pipe industry. These conditions have led to significant revenue, earnings and cash flow growth in our Plastics segment. Currently, we expect these industry conditions to gradually normalize through 2027. As they do, we expect earnings and cash flow generation within our Plastics segment to moderate from current levels. Once these industry conditions have normalized, we expect to achieve our long-term financial objectives as outlined above.
We will continue to review our business portfolio to identify additional opportunities to improve our risk profile, enhance our credit metrics and generate additional sources of cash to support the organic growth opportunities in our Electric, Manufacturing, and Plastics segments. We will also evaluate opportunities to allocate capital to potential acquisitions. We are a committed long-term owner and do not acquire companies in pursuit of short-term gains. However, we will divest of businesses which no longer fit into our strategy and risk profile over the long term.
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We maintain a set of criteria used in evaluating the strategic fit of our operating businesses. The operating company should:
• Maintain a minimum level of net earnings and a return on invested capital in excess of the Company’s weighted-average cost of capital,
• Have a strategic differentiation from competitors and a sustainable cost advantage,
• Operate within a stable and growing industry and be able to quickly adapt to changing economic cycles, and
• Have a strong management team committed to operational and commercial excellence.
Our actual mix of earnings for the years ended December 31, 2024 and 2023 along with an historical average and long-term expectation are shown below:
HUMAN CAPITAL
Our employees are a critical resource for our business and an integral part of our success. We strive to provide an environment of opportunity and accountability where people are valued and empowered to do their best work. We are focused on the health and safety of our employees and creating a culture of inclusion, excellence and learning. We monitor various metrics and objectives associated with i) employee safety, ii) workforce stability, iii) management and workforce demographics, iv) leadership development and succession planning v) productivity, and vi) employee engagement. We have established the following in furtherance of these efforts:
Safety - Safety is one of our core values. In managing our business, we focus on the safety of our employees and have implemented safety programs and management practices to promote a culture of safety. Safety is also a metric used and evaluated in determining annual incentive compensation. We continually monitor the Occupational Safety and Health Administration Total Recordable Incident Rate (number of work-related injuries per 100 employees for a one-year period) and Lost Time Incident Rate (number of employees who lost time due to work-related injuries per 100 employees for a one-year period). New cases are reported and evaluated for corrective action during monthly safety meetings attended by safety professionals at all locations. Our 2024 Total Recordable Incident Rate was 1.64, compared to 1.70 in 2023 and our Lost Time Incident Rate was 0.16 in 2024, compared to 0.53 in 2023.
Employee and Leadership Development, Succession Planning and Training Programs - We invest in training and professional development for employees, management and leaders throughout the Company to ensure all have the necessary training and skills to perform their work well, and to build enterprise-wide understanding of our culture, strategy and processes. Annual succession planning, individual development planning, mentoring, and supervisory and leadership development programs all play a role in ensuring a capable leadership team now and in the future. Our skill progression and technical training programs help to retain a stable and skilled workforce.
Workforce Stability - Recruiting, retaining and developing employees is an important factor in our continued success and growth. We regularly evaluate our recruiting programs, employee retention and turnover rates.
Employee Engagement - To enhance the effectiveness of our workforce and to help our companies continue to be places where our employees choose to work and thrive, we have undertaken a multi-year series of employee engagement surveys. We use the feedback to help shape the employee programs of our organization.
Human Rights - We are committed to the protection of our employee’s freedom of expression and freedom of organization and assembly.
Inclusive Workplace - We hold every employee accountable for their behavior in maintaining a workplace free of discrimination and harassment. We have implemented education initiatives for all employees, aimed at inclusive leadership and a respectful workplace.
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Code of Business Ethics - We require employees to complete training on several topics associated with our code of business ethics to reinforce our commitment to compliance with laws, regulations and values that guide who we are and how we do business.
As of December 31, 2024, we employed 2,133 full-time employees as shown in the table below:
Segment/Organization Employees
Electric Segment
OTP (1)
798
Manufacturing Segment
BTD 960
T.O. Plastics 162
Segment Total 1,122
Plastics Segment
Northern Pipe 93
Vinyltech 82
Segment Total 175
Corporate 38
Total 2,133
(1) Includes all full-time employees of Otter Tail Power Company, including employees working at jointly owned facilities. Labor costs associated with employees working at jointly owned facilities are allocated to each of the co-owners based on their ownership interest.
As of December 31, 2024, 371 employees of OTP were represented by local unions of the International Brotherhood of Electrical Workers under two separate collective bargaining agreements expiring on August 31, 2026 and October 31, 2026. OTP has not experienced any strike, work stoppage or strike vote, and considers its present relations with employees to be good. None of the employees of our other operating companies are represented by local unions.
ELECTRIC Contribution to Operating Revenues: 39% (2024), 39% (2023), 38% (2022)
OTP, headquartered in Fergus Falls, Minnesota, is a vertically integrated, regulated utility with generation, transmission and distribution facilities to serve its approximately 134,000 residential, commercial and industrial customers in a service area encompassing approximately 70,000 square miles of western Minnesota, eastern North Dakota and northeastern South Dakota.
CUSTOMERS
Our service territory is predominantly rural and agricultural and includes over 400 communities, most of which have populations of less than 10,000. While our customer base includes relatively few large customers, sales to commercial and industrial customers are significant and in 2024 two customers combined accounted for 19% of segment operating revenues.
The following charts summarize our retail electric revenues by state and by customer segment for the years ended December 31, 2024 and 2023:
In addition to retail revenue, our Electric segment also generates operating revenues from the transmission of electricity for others over the transmission assets we wholly or jointly own with other transmission service providers, and from the sale of electricity we generate and sell into the wholesale electricity market.
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COMPETITIVE CONDITIONS
Retail electric sales are made to customers in assigned service territories. As a result, most retail customers do not have the ability to choose their electric supplier. Competition is present in some areas from municipally owned systems, rural electric cooperatives and, in certain respects, from on-site generators and co-generators. Electricity also competes with other forms of energy.
Competition also arises from customers supplying their own power through distributed generation, which is the generation of electricity on-site or close to where it is needed, designed to meet specific, local needs. The adoption of distributed generation can be impacted by the availability of tax credits associated with the development and use of distributed energy. Distributed energy resources can include combined heat and power, solar photovoltaic, wind, battery storage, thermal storage and demand-response technologies.
The degree of competition may vary from time to time depending on relative costs and supplies of other forms of energy and advances in technology. Irrespective of the competitive environment, we are focused on providing value to our customers and ensuring our retail rates remain among the lowest in the region and in the nation. In 2024, our summer residential rates were 16% below the regional average and 30% below the national average.
The following table presents our average retail rate per kilowatt-hour (kwh) by customer class and in total for the years ended December 31, 2024 and 2023:
Revenue per kwh 2024 2023
Residential 11.38 ¢ 10.82 ¢
Commercial & Industrial 7.03 ¢ 7.02 ¢
Total Retail 7.98 ¢ 7.90 ¢
Wholesale electricity markets are competitive under the Federal Energy Regulatory Commission (FERC) open access transmission tariffs, which require utilities to provide nondiscriminatory access to all wholesale users. In addition, the FERC has established a competitive process for the construction and operation of certain new electric transmission facilities under federal regulation. Certain states, including the three states in our service territory, have laws which provide the incumbent transmission owner the right of first refusal to construct and own new transmission facilities. Future changes to the laws which provide for the right of first refusal could impact the competitive conditions related to the construction of new transmission facilities.
OTP has franchises to operate as an electric utility in substantially all of the incorporated municipalities it serves. Franchise rights generally require periodic renewal. No franchises are required to serve unincorporated communities in any of the three states OTP serves.
GENERATION AND PURCHASED POWER
OTP primarily relies on company-owned generation, supplemented by power purchase agreements, to supply the energy to meet our customer needs. Wholesale market purchases and sales of electricity are used as necessary to balance supply and demand. Our mix of owned generation and wholesale market energy purchases to meet customer demand are impacted by wholesale energy prices and the relative cost of each energy source with wholesale market energy being utilized when it is determined to be beneficial to customers.
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As of December 31, 2024, OTP’s wholly or jointly owned plants and facilities, as well as in place power purchase agreements, and their dependable kilowatt (kW) capacity were:
Capacity /
Purchased Power
in kW
Owned Generation:
Baseload Plants
Big Stone Plant (1)
264,700
Coyote Station (2)
151,200
Total Baseload Plants 415,900
Combustion Turbine and Small Diesel Units
Astoria Station 288,800
Solway
50,000
All Other 77,900
Total Combustion Turbine and Small Diesel Units 416,700
Owned Wind Facilities (rated at nameplate)
Merricourt 150,000
Ashtabula III 62,400
Luverne 49,500
Ashtabula 48,000
Langdon 40,500
Total Owned Wind Facilities 350,400
Hoot Lake Solar (rated at nameplate)
49,900
Hydroelectric Facilities 1,000
Total Owned Generation Capacity 1,233,900
Power Purchase Agreements:
Purchased Wind Power (rated at nameplate and greater than 2,000 kW)
Edgeley 21,000
Langdon 19,500
Total Purchased Wind 40,500
Total Generating Capacity 1,274,400
(1) Reflects OTP's 53.9% ownership percentage of jointly owned facility.
(2) Reflects OTP's 35.0% ownership percentage of jointly owned facility.
The following charts summarize the percentage of our generating capacity by source, including owned and jointly owned facilities and through power purchase arrangements, as of December 31, 2024 and 2023:
Under the Midcontinent Independent System Operator (MISO) requirements, OTP is required to provide sufficient capacity through wholly or jointly owned generating capacity or power purchase agreements to meet its monthly weather-normalized forecast demand, plus a reserve obligation. MISO operates under a seasonal resource adequacy construct in which generation resources are accredited and planning reserve margin requirements are implemented on a seasonal basis. Current planning reserve margin requirements range between 9.0% and 33.9%, depending on the season.
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The following charts summarize the percentage of retail kwh sold by source during the years ended December 31, 2024 and 2023:
Capacity Additions
As part of our investment plan to meet our future energy needs, the following projects are under development or construction:
Wind Energy Facility Upgrades consist of the replacement and upgrade of hubs, gearboxes, blades, generators and other components of our Ashtabula, Ashtabula III, Langdon and Luverne wind facilities at a total cost of approximately $230 million. Once complete, we expect the increased energy production from these facilities will be equivalent to an additional 40 megawatts (MW) of generation. Our Langdon facility upgrades were completed in the fourth quarter of 2024 and we anticipate the remaining facilities will be completed in 2025. Once complete, the energy production from each of these facilities is eligible for production tax credits (PTCs) over a ten-year period. We expect these projects will lower customer costs through a combination of fuel savings and the tax credit benefits afforded to our customers.
Solway Solar is a solar facility currently under development that is planned to be constructed adjacent to our existing Solway natural gas plant in northern Minnesota. The project is expected to add an additional 50 MW of generating capacity. We estimate the facility will be operational by the end of 2026 and OTP's capital investment is estimated to be $100 million. The recovery of the costs of this project remains subject to regulatory approval.
Abercrombie Solar is solar facility currently under development in southeastern North Dakota. In October 2024, we entered into a purchase agreement to acquire the development assets of the project, including approximately 3,400 acres of land, interconnection agreements, state and local permits, and all other assets of the project. We anticipate we will close on the purchase of the development project in late 2025 or early 2026 and estimate the facility will be operational by the end of 2028. Once complete, the facility is expected to have a generating capacity of 295 MW. OTP's capital investment in the project is estimated to be $450 million. The recovery of the costs of this project remains subject to regulatory approval.
ENERGY TRANSITION
OTP is transitioning to a lower-carbon and increasingly clean energy future, while maintaining affordable and reliable electricity to serve our customers. We have developed the following goals in furtherance of our efforts to support the energy transition:
Own or purchase energy generation that is 55% renewable by 2030 .
Reduce carbon emissions from owned generation resources 50% by 2030 from 2005 levels.
Reduce carbon emissions from owned generation resources 97% by 2050 from 2005 levels.
We have undertaken numerous initiatives to reduce our carbon footprint and mitigate greenhouse gas (GHG) emissions in the process of generating electricity for our customers. Our recent initiatives include adding the 49 MW Hoot Lake Solar facility to our resource mix, the investment in our wind energy facility upgrades, the commencement of development of the 50 MW Solway Solar and 295 MW Abercrombie Solar facilities, and sponsoring energy conservation programs.
From 2005 through 2024, we have reduced our carbon dioxide (CO 2 ) emissions approximately 40% and increased the amount of renewable generation resources we own or purchase through power purchase agreements by approximately 420 MW. We currently own or contract energy generation that is 37% renewable.
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The following chart depicts our energy resource mix, which is the electricity we used to serve our customers in 2005 and 2024, and the projected mix in 2030 and 2050. The amounts include energy generated from owned resources, procured through power purchase agreements and energy purchased in the wholesale market:
RESOURCE MATERIALS
Coal is the principal fuel burned at our jointly owned Big Stone and Coyote Station generating plants. Coyote Station, a mine-mouth facility, burns North Dakota lignite coal. Big Stone Plant burns western subbituminous coal. We source coal for our coal-fired power plants through requirements contracts which do not include minimum purchase requirements but do require all coal necessary for the operation of the respective plant to be purchased from the counterparty. Our coal supply contracts for our Big Stone Plant and Coyote Station have expiration dates in 2026 and 2040, respectively.
The supply agreement between the Coyote Station owners, including OTP, and the coal supplier includes provisions requiring the Coyote Station owners to purchase the membership interests and pay off or assume loan and lease obligations of the coal supplier, as well as complete mine closing and post-mining reclamation, in the event of certain early termination events and at the expiration of the coal supply agreement in 2040. See below and Note 1 to our consolidated financial statements included in this report on Form 10-K for additional information.
Coal is transported to Big Stone Plant by rail and is provided under a common carrier rate which includes a mileage-based fuel surcharge.
We purchase natural gas for use at our combustion turbine facilities based on anticipated short-term resource needs. We procure natural gas from multiple vendors at spot prices in a liquid market primarily under firm delivery contracts.
TRANSMISSION AND DISTRIBUTION
Our transmission and distribution assets deliver energy from energy generation sources to our customers. In addition, we earn revenue from the transmission of electricity over our wholly or jointly owned transmission assets for others under approved rate tariffs. As of December 31, 2024, we were the sole or joint owner of approximately 14,000 miles of transmission and distribution lines.
Midcontinent Independent System Operator
MISO is an independent, non-profit organization that operates the transmission facilities owned by other entities, including OTP, within its regional jurisdiction and administers energy and generation capacity markets. MISO has operational control of our transmission facilities above 100 kilovolts (kV). MISO seeks to optimize the efficiency of the interconnected system, provide solutions to regional planning needs and minimize risk to reliability through its security coordination, long-term regional planning, market monitoring, scheduling and tariff administration functions.
Transmission Additions
MISO Tranche 1.0. In 2022, MISO approved several projects within the first tranche of its long-range transmission plan. Within the first tranche of projects, OTP will be a partial owner of two new 345 kV transmission projects. These projects will be developed and constructed over several years and OTP's total investment in these projects is estimated to be $475 million.
Jamestown-Ellendale includes the construction of a new 345 kV transmission line in southeastern North Dakota spanning approximately 95 miles from Jamestown, North Dakota to Ellendale, North Dakota. This project is in the initial stages of planning and development and is expected to be completed in 2028.
Big Stone South-Alexandria-Big Oaks includes the construction of a new 345 kV transmission line in eastern South Dakota and western Minnesota and the addition of a second circuit to an existing 345 kV line in central Minnesota. The new transmission
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line will span approximately 100 miles between Big Stone, South Dakota and Alexandria, Minnesota. A second circuit will be added to the existing transmission line spanning from Alexandria, Minnesota to Big Oaks, Minnesota. This project is in the initial stages of planning and development and is expected to be completed in 2032.
MISO Tranche 2.1. In December 2024, MISO approved several projects within the second tranche of its long-range transmission plan. Within this second tranche of projects, we anticipate OTP will be a partial owner of three projects, including a new 345 kV transmission line, a new 765 kV transmission line, and the addition of a second circuit to an existing 345 kV transmission line. These projects will be developed and constructed over several years and OTP's total investment in these projects is estimated to be $700 million.
Bison-Alexandria includes the construction of a second 345 kV circuit, which is being added to an existing transmission line in eastern North Dakota and western Minnesota. This project is in the initial stages of planning and development and is expected to be completed in 2032.
Maple River-Cuyuna includes the construction of a new 345 kV transmission line in eastern North Dakota and western Minnesota, as well as investment in substation expansion. This project is in the initial stages of planning and development and is expected to be completed in 2033.
Big Stone South-Brookings County includes the construction of a new 765 kV transmission line in eastern South Dakota, as well as investment in substation expansion. This project is in the initial stages of planning and development and is expected to be completed in 2034.
Joint Targeted Interconnection Queue (JTIQ). In December 2024, MISO and Southwest Power Pool (SPP) approved a set of transmission projects that are part of a collaboration between MISO and SPP to construct high-voltage transmission lines along the MISO and SPP seam, which spans seven states - Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota and South Dakota. These projects will improve reliability and resolve constraints in the transmission system to allow for up to 30 gigawatts of new generation to be added to the system.
OTP expects to participate in one JTIQ project, being the sole owner of a new 345 kV transmission line spanning from Big Stone, South Dakota to Hankinson, North Dakota, and a partial owner of a new 345 kV line spanning from Hankinson, North Dakota to Bison, North Dakota. In October 2023, the U.S. Department of Energy (DOE) approved a grant in an amount up to 25% of the total JTIQ project costs. OTP's capital investment in these projects, after the impact of the 25% DOE grant, is estimated to be $450 million.
SEASONALITY
Electricity demand is affected by seasonal weather differences, with peak demand occurring in the summer and winter months. As a result, our Electric segment operating results regularly fluctuate on a seasonal basis. In addition, fluctuations in electricity demand within the same season but between years can impact our operating results. We monitor the level of heating and cooling degree days in a period to assess the impact of weather-related effects on our operating results between periods.
PUBLIC UTILITY REGULATION
OTP is subject to regulation of rates and other matters in each of the three states in which it operates and by the federal government for, among other matters, the interstate transmission of electricity. OTP operates under approved retail electric tariff rates in all three states it serves. Tariff rates are designed to recover plant investments, a return on those investments and operating costs. In addition to determining rate tariffs, state regulatory commissions also authorize return on equity (ROE), capital structure and depreciation rates of our capital investments. Decisions by our regulators significantly impact our operating results, financial position and cash flows.
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Below is a summary of the regulatory agencies with jurisdiction over OTP covered by each regulatory agency:
Regulatory
Agency Areas of Regulation
Minnesota Public Utilities Commission
(MPUC)
Retail rates, issuance of securities, depreciation rates, capital structure, public utility services, construction of major facilities, establishment of exclusive assigned service areas, contracts with subsidiaries and other affiliated interests and other matters.
Selection or designation of sites for new generating plants (50,000 kW or more) and routes for transmission lines (100 kV or more).
Review and approval of fifteen-year Integrated Resource Plan.
North Dakota Public Service Commission
(NDPSC) Retail rates, certain issuances of securities, construction of major utility facilities and other matters.
Approval of site and routes for new electric generating facilities (>500 kW for wind generating facilities; >50,000 kW for non-wind generating facilities) and high voltage transmission lines (>115 kV).
Review and approval of fifteen-year Integrated Resource Plan.
South Dakota Public Utilities Commission
(SDPUC) Retail rates, public utility services, construction of major facilities, establishment of assigned service areas and other matters.
Approval of sites and routes for new electric generating facilities (100,000 kW or more) and most transmission lines (115 kV or more).
Federal Energy Regulatory Commission
(FERC) Wholesale electricity sales, transmission and sale of electric energy in interstate commerce, interconnection of facilities, hydroelectric licensing and accounting policies and practices.
Compliance with North American Electric Reliability Corporation (NERC) reliability standards, including standards on cybersecurity and protection of critical infrastructure.
In addition to base rates, which are established through periodic rate case proceedings within each state jurisdiction, there are other mechanisms for recovery of our capital investments and operating costs between rate cases. The following table summarizes these recovery mechanisms:
Recovery Mechanism Jurisdiction(s) Additional Information
Fuel Clause Adjustment (FCA) MN, ND, SD Provides for periodic billing adjustments for changes in prudently incurred costs of fuel and purchased power. In North and South Dakota, fuel and purchased power costs are generally adjusted on a monthly basis. In Minnesota, fuel and purchased power costs are estimated on an annual basis and the accumulated difference between actual and estimated cost is refunded or recovered, subject to regulatory approval, in subsequent periods.
Transmission Cost Recovery Rider (TCR) MN, ND, SD Provides for the recovery of costs outside of a general rate case for investments in new or modified electric transmission assets and certain MISO transmission service and related costs.
Renewable Resource Rider (RRR) MN, ND Provides for the recovery of costs outside of a general rate case for investments in certain new renewable energy projects.
Energy Conservation and Optimization Rider (ECO) MN Under Minnesota law, OTP is required to save 1.75% of its gross retail energy revenues through the energy conservation and optimization program. Recovery of these costs outside of a general rate case occurs through the ECO rider.
Electric Utility Infrastructure Costs Rider (EUIC) MN Provides for the recovery of costs for investments made to replace or modify existing infrastructure if the replacement or modification conserves energy or uses energy more efficiently.
Metering and Distribution Technology Cost Recovery Rider (MDT) ND Provides for the recovery of costs for advanced metering infrastructure, outage management systems and demand response projects.
Generation Cost Recovery Rider (GCR) ND Provides for the recovery of costs outside of a general rate case for investments in new generation facilities.
Energy Efficiency Plan (EEP) SD Provides for the recovery of costs from energy efficiency investments.
Phase-In Rider (PIR) SD Provides for the recovery of costs outside of a general rate case for investments in new generation facilities and advanced grid infrastructure.
Resource Planning
Under Minnesota law, utilities are required to submit for approval by the Minnesota Public Utilities Commission (MPUC) a 15-year advance Integrated Resource Plan (IRP). An IRP is a set of resource options a utility could use to meet the service needs of its customers over the forecast period, including an explanation of the utility’s supply and demand circumstances, and the extent to
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which each resource option would be used to meet those service needs. The MPUC’s findings of fact and conclusions regarding IRPs are considered to be prima facie evidence, subject to rebuttal, in future rate reviews and other proceedings.
Under North Dakota law, utilities are required to submit for approval by the North Dakota Public Service Commission (NDPSC) a 15-year advance IRP every three years.
South Dakota does not have a formal advance IRP process.
Capital Structure Petition
Minnesota law requires an annual filing of a capital structure petition with the MPUC. In this filing, the MPUC reviews and approves OTP's capital structure. Once approved, OTP may issue securities without further petition or approval, provided the issuance is consistent with the purposes and amounts set forth in the approved petition. OTP’s current capital structure approved by the MPUC on July 30, 2024, allows for an equity-to-total-capitalization ratio between 47.2% and 57.7%, with total capitalization not to exceed $2.2 billion.
Renewable Energy Standard
Minnesota has adopted a renewable energy standard requiring utilities to generate or procure sufficient renewable generation such that the following percentages of total retail electric sales to Minnesota customers come from qualifying renewable sources: 25% by 2025 and 55% by 2035. Qualifying renewable sources are classified as wind, hydropower, hydrogen and certain biomass generation. We met the current renewable sources requirements with a combination of owned renewable generation and purchases from renewable generation sources. Minnesota law also requires 1.5% of total Minnesota retail electric sales by public utilities to be supplied by solar energy. For a public utility with between 50,000 and 200,000 retail electric customers, such as OTP, at least 10% of the 1.5% requirement must be met by solar energy generated by or procured from solar photovoltaic devices with a nameplate capacity of 40 kW or less. We met the current solar requirement with a combination of owned solar generation and solar renewable energy certificate (REC) purchases. We plan to comply with the requirements of this standard in the future through a combination of our existing and projected renewable generation fleet.
Minnesota Clean Energy Law
In February 2023, Minnesota enacted the Clean Energy Law, which requires electric utilities to generate or procure sufficient electricity from carbon-free resources, to provide retail customers in Minnesota with at least the following percentages of carbon-free electric energy: 80% by 2030, 90% by 2035, and 100% by 2040. Carbon-free resources include wind, solar, hydropower and nuclear generation. To provide flexibility, the law allows electric utilities to use RECs to offset carbon emissions and for the MPUC to consider whether a regulated utility's requirement to meet established standards should be delayed due to affordability or reliability impacts. We anticipate at least 80% of our Minnesota retail sales will be served with carbon-free generation by 2030, in compliance with Minnesota's clean energy requirements.
ENVIRONMENTAL REGULATION
OTP is subject to stringent federal and state environmental standards and regulations regarding, among other things, air, water and solid waste pollution. OTP's facilities have been designed, constructed and, as necessary, updated to operate in compliance with applicable environmental regulations. However, new or amended laws and regulations or changes in interpretations of current laws and regulations may require additional pollution control equipment or other emission reduction measures which may require future capital investments or ongoing operating and monitoring costs.
Financial Impacts
For the five-year period ended December 31, 2024, OTP invested approximately $4.8 million in environmental control equipment, including $1.7 million in 2024. Our capital budget for the next five years includes approximately $9.0 million of capital investments in environmental control equipment. The timing and amount of our expenditures may change as the regulatory environment changes.
Emerging Environmental Regulation
Regional Haze Rule (RHR). The Environmental Protection Agency (EPA) adopted the RHR 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 state implementation plans (SIPs) that work towards achieving natural visibility conditions by the year 2064; to set goals to ensure reasonable progress is being made; and to periodically evaluate whether those goals and progress are on track or whether additional emission reductions are necessary. The second RHR implementation period covers the years 2018-2028.
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 North Dakota Department of Environmental Quality (NDDEQ) submitted its SIP to the EPA in August 2022. In its plan, the NDDEQ concluded it is not reasonable to require additional emission controls during this planning period.
On December 2, 2024, the EPA published its final ruling on North Dakota's SIP, approving certain aspects of the plan and disapproving other aspects of the plan. Regarding the partial disapproval, the EPA found that North Dakota failed to submit a long-
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term strategy that includes enforceable emissions limitations, compliance schedules, and other measures necessary to make reasonable progress on national visibility goals. Specific to Coyote Station, the EPA found that North Dakota relied on non-statutory visibility modeling to reject the installation of additional nitrogen oxides (NOx) and sulfur dioxide (SO 2 ) emission controls.
Having disapproved, in part, the North Dakota SIP, the EPA now must promulgate a Federal Implementation Plan within two years from the issuance of its final decision. The Federal Implementation Plan may include emission controls required to satisfy the requirements of the RHR.
We cannot predict with certainty the final resolution of regional haze compliance in North Dakota and specifically the impact, if any, on the operations of Coyote Station. However, significant emission control investments could be required which may have a material impact on our operating results, financial condition and liquidity. Alternatively, such investments may prove to be uneconomic and result in the early closure, sale of or withdrawal from our interest in Coyote Station.
Clean Air Act. In May 2024, the EPA finalized new regulations under Section 111 of the Clean Air Act to regulate GHG emissions from existing and new fossil fuel-based power plants. The final rule establishes subcategories for new combustion turbines and existing coal-fired power plants to achieve certain CO 2 emission reduction levels based on the respective subcategory. For existing coal-fired power plants, the applicable subcategory is based upon the date at which the plant will cease operations.
For existing coal-fired power plants anticipated to be operated after January 2039, the regulation set a Best System of Emission Reduction (BSER) based on 90% capture and sequestration of CO 2 emissions with a compliance date of January 2032. For existing coal-fired power plants anticipated to be operated after January 2032 but plan to cease operations before January 2039, the regulation set a BSER of 40% co-firing with natural gas, which would result in a 16% reduction in CO 2 emissions rate with a compliance date of January 2030. Coal-fired power plants with federally enforceable plans to cease operations by January 2032 are not subject to this regulation.
Several states and industry groups have filed lawsuits challenging the new regulation, arguing the EPA has overstepped its authority under the Clean Air Act.
We continue to review and evaluate the final regulations and the ongoing legal challenges. We cannot at this time conclude what the impact may be on our power plants and the potential impact to our operating results, financial condition and liquidity. However, significant emission control investments could be required, which may have a material impact on our operating results, financial condition and liquidity. Alternatively, such investments may prove to be uneconomic and result in the early closure, sale of or withdrawal from our interest in a coal-fired plant. Coyote Station and Big Stone Plant, our two co-owned coal-fired power plants, are within the scope of the regulations but our combustion turbines are not within the scope of the final regulation.
Coal Combustion Residual (CCR) Regulation. In May 2024, the EPA published a final rule amending CCR regulations, which introduce new requirements for the management of coal ash at active coal-fired power plants and inactive coal-fired power plants with a legacy surface impoundment. The regulations impose new requirements including groundwater monitoring, closure standards, post-closure care obligations and potential remediation activities. We anticipate we will incur costs related to coal ash removal and groundwater monitoring in the future as a result of the amended regulation; however, we continue to review and evaluate the overall impact this regulation may have on our business, including potential impacts to our operating results, financial condition and liquidity.
Mercury and Air Toxics Standards. In May 2024, the EPA published final regulations to strengthen and update Mercury and Air Toxics Standards for coal-fired power plants, tightening the emission standard for toxic metals and finalizing a reduction standard for mercury from existing lignite-fired sources. We continue to review and evaluate the overall impact this regulation may have on our business, including potential impacts to our operating results, financial condition and liquidity.
Climate Change and Greenhouse Gas Regulation
Global climate change presents a significant energy and environmental policy challenge. Combustion of fossil fuels for the generation of electricity is a considerable source of CO 2 emissions, which is the primary GHG emitted by our utility operations. The federal government, many states and international organizations are pursuing climate policies to regulate GHG emissions as part of a broad-based effort to limit global warming.
The Minnesota Clean Energy Law, passed in 2023, requires electric utilities to generate or procure sufficient electricity from carbon-free resources to provide retail customers in Minnesota with at least the following percentages of carbon-free electric energy: 80% by 2030, 90% by 2035, and 100% by 2040.
The implementation of climate change programs, such as the Minnesota Clean Energy Law, regulations under the Clean Air Act and other existing or future federal or state regulations targeting GHG emissions, may have a significant impact on our utility business.
While the future financial impact of any current, proposed or pending regulation of GHG or other emissions is unknown at this time, any capital or operating costs incurred for additional pollution control equipment or emission reduction measures could materially
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adversely impact our future operating results, financial position and liquidity unless such costs could be recovered through related rates and/or future market prices for energy.
MANUFACTURING Contribution to Operating Revenues: 26% (2024), 30% (2023), 27% (2022)
Our Manufacturing businesses are engaged in the production of metal or plastics products sold to commercial customers. The following is a brief description of each of these businesses:
BTD Manufacturing, Inc. (BTD), with facilities in Detroit Lakes and Lakeville, Minnesota, Washington, Illinois and Dawsonville, Georgia, provides metal fabrication services for custom machine parts and metal components. BTD is a full-service contract metal fabricator with capabilities in metal stamping and fabrication, tool and die, machining, tube bending, welding, assembly and product painting.
T.O. Plastics, Inc. (T.O. Plastics) , with facilities in Otsego and Clearwater, Minnesota, manufactures thermoformed plastics products, including its own line of horticulture containers and custom packaging products for the medical and industrial product markets.
CUSTOMERS
Our metal fabrication business primarily serves Midwestern and Southeastern U.S. original equipment manufacturers (OEM) in the recreational vehicle, lawn and garden, agricultural, construction, industrial, energy equipment and other end markets. Our customers include some of the largest recreational vehicle and equipment manufacturers based in the U.S.
Our plastic products business primarily serves U.S. customers in the horticulture, medical and life sciences, industrial, recreational and electronics industries. Most of our horticulture products are sold through distributors. Our customer packaging products are manufactured to customer specifications and sold directly to the end customer.
Although we sell our products to a large number of customers across a diverse group of end markets, two customers combined to account for approximately 36% of segment operating revenues in 2024.
The principal method of production distribution is by direct shipment to our customers through direct customer pick-up or common carrier ground transportation.
The following presents our revenue by end market for the years ended December 31, 2024 and 2023:
COMPETITIVE CONDITIONS
We compete in a highly fragmented market with competition from both domestic and international entities. Our competitors vary in size, ranging from small companies focused on certain end markets or geographical area, to large companies with broad manufacturing capabilities and domestic and international geographical reach. Competition can be geographically regionalized as customers procure products locally to manage cost and minimize logistical complexities. Certain competitors may have broader product lines, more manufacturing capacity and greater distribution capabilities than we do.
We believe the principal competitive factors in our Manufacturing segment are product performance, quality, price, technical innovation, cost effectiveness, customer service and breadth of product line. We intend to continue to compete based on high quality products, innovative production technologies, cost-effective manufacturing techniques, close customer relations and support, and increasing product offerings.
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In December 2024, we completed an expansion project at our Georgia location, which added approximately 162,000 square feet of owned manufacturing and warehouse space and will replace a warehouse facility that is currently being leased near the same location. This expansion provides additional manufacturing capacity in the southeastern U.S. to meet customer demand as their manufacturing base expands in the same region.
RESOURCE MATERIALS
We use raw materials in the products we manufacture, including, among others, steel, aluminum, and polystyrene and other plastics resins. Managing price volatility and ensuring raw material availability are important aspects of our business. We attempt to pass increases in the costs of these raw materials through to our customers. Increases in the costs of raw materials that cannot be passed on to customers could have a negative effect on profit margins. Additionally, a certain amount of residual material (scrap) is a by-product of the manufacturing and production processes. Declines in commodity prices for these scrap materials due to weakened demand or excess supply can negatively impact the profitability of our Manufacturing segment.
ENVIRONMENTAL REGULATION
Our manufacturing businesses are subject to environmental, health and safety laws and regulations, including those governing discharges to air and water, the management and disposal of hazardous substances, the cleanup of contaminated sites and health and safety matters.
PLASTICS Contribution to Operating Revenues: 35% (2024), 31% (2023), 35% (2022)
Our Plastics businesses produce PVC pipe at plants in North Dakota and Arizona. The following is a brief description of these businesses:
Northern Pipe Products, Inc. (Northern Pipe) , located in Fargo, North Dakota, manufactures and sells PVC pipe for municipal water, rural water, wastewater, storm drainage systems and other uses in the northern, midwestern, south-central and western regions of the United States as well as central and western Canada.
Vinyltech Corporation (Vinyltech) , located in Phoenix, Arizona, manufactures and sells PVC pipe for municipal water, wastewater, water reclamation systems and other uses in the western, northwest and south-central regions of the United States.
PVC pipe is manufactured through an extrusion process, during which PVC compound (a dry powder-like substance) is blended with other materials and introduced into an extrusion machine, where it is heated to a molten state and then forced through a sizing apparatus to produce the pipe. The newly extruded pipe is pulled through a series of water-cooling tanks, marked to identify the type of pipe and cut to finished lengths. We produce pipe in a variety of diameters ranging from 3/4" to 24" and in varying lengths, generally from 10 feet to 20 feet.
CUSTOMERS
Our PVC pipe is used in municipal and wastewater systems, residential and commercial plumbing applications, and rural water systems.
Our pipe products are marketed through a combination of independent sales representatives, company salespersons and customer service representatives. Substantially all of our products are sold through distribution partners, which range from large, national distributors to smaller regional or local distributors. In 2024, two customers, both of which are distributors of PVC pipe, combined to account for 52% of segment operating revenues.
The principal method for distribution of our products is by common carrier ground transportation.
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The following presents our revenue by end market for the years ended December 31, 2024 and 2023:
COMPETITIVE CONDITIONS
Competition in the plastic pipe industry arises from other PVC pipe manufacturers and the fungible nature of the product. Due to shipping costs, competition is usually regional instead of national in scope. The principal factors of competition are price, customer service, product availability, shipping costs and product performance.
Industry competition is characterized by a limited number of competitors, with the three largest competitors capturing a significant portion of the overall market. These competitors have a broader geographical reach, integration with PVC resin producers, greater manufacturing capacity and national relationships with key distribution partners. We compete on a regional basis, serving our core markets with strong customer service and high-quality products.
In addition to competition with other PVC pipe manufacturers, our PVC pipe competes with other products that serve the same end markets, including ductile iron, high-density polyethylene (HDPE), steel and concrete pipe products.
We will continue to compete based on our high level of service quality, including being a responsive and reliable partner to our customers, through maintaining product availability, by producing high-quality products and using cost-effective production techniques.
In December 2024, we completed an expansion project at our Arizona location, which added approximately 62,000 square feet of manufacturing, warehouse and office space, allowing for additional manufacturing capacity, including the ability to produce large diameter pipe to serve our customers in our regional market.
RESOURCE MATERIALS
PVC resins are acquired in bulk and shipped to our facilities by rail. There are four vendors from which we can source our PVC resin requirements and in 2024 we utilized all four vendors to source our PVC resin. Our contractual arrangements to acquire resin generally include estimated annual order quantities, with no required minimum purchases, and include variable pricing based on market prices for resin. The supply of PVC resin may also be limited due to manufacturing capacity and the limited availability of raw material components, along with rail transportation disruptions from PVC resin plants to our facilities. 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 part of the United States. The loss of a key vendor or any interruption or delay in the supply of PVC resin could disrupt the ability of our Plastics segment businesses to manufacture products, cause customers to cancel orders or result in increased expenses for obtaining PVC resin from alternative sources, if such sources were available. We believe we have good relationships with our key raw material vendors.
Due to the commodity nature of PVC resin and the dynamic supply and demand factors worldwide, historically the market for PVC resin has been cyclical and subject to significant fluctuations in price.
In addition to PVC resin, we use certain other materials, such as stabilizers, waxes, gaskets and lumber, in the process of manufacturing and shipping our PVC pipe products. We generally source these materials from a limited number of suppliers, and supply chain constraints or disruptions related to these materials could disrupt our ability to manufacture or ship products and could result in increased costs.
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SEASONALITY
Demand for our PVC pipe products can be impacted by seasonal weather differences, with generally lower sales volumes realized in the first quarter of the year when cold temperatures and frozen ground across the northern portion of our footprint can delay or prevent construction activity and consequently delay or prevent customer orders of PVC pipe.
ENVIRONMENTAL REGULATION
Our plastics businesses are subject to environmental, health and safety laws and regulations, including those governing discharges to air and water, the management and disposal of hazardous substances, the cleanup of contaminated sites and health and safety matters.
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