Otter Tail Stock

Otter Tail Corporation (OTC), through its subsidiaries, engages in electric utility and manufacturing and plastic pipe businesses.

Segments

The company operates through three segments: Electric, Manufacturing, and Plastics.

Electric includes the generation, purchase, transmission, distribution and sale of electric energy in western Minnesota, eastern North Dakota and northeastern South Dakota. The company serves more than 133,000 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.

Strategy

The company’s long-term focus remains on executing its strategy to grow its business and achieving operational, commercial and talent excellence to strengthen its position in the markets it serves. The company is also targeting an annual increase in its dividend to be in the range of 5 - 7%.

Electric

The company is a vertically integrated, regulated utility with generation, transmission and distribution facilities to serve its more than 133,000 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

The company’s service territory is predominantly rural and agricultural and includes over 400 communities, most of which has populations of less than 10,000. While the company’s customer base includes relatively few large customers, sales to commercial and industrial customers are significant, with two customers accounting for 21% of segment operating revenues for the year ended December 31, 2023.

In addition to retail revenue, the company’s Electric segment generates operating revenues from the transmission of electricity for others over the transmission assets it wholly or jointly owns with other transmission service providers, and from the sale of electricity it generates and sells into the wholesale electricity market.

Generation and Purchased Power

The company primarily relies on company-owned generation, supplemented by power purchase agreements, to supply the energy to meet the company’s customer needs. Wholesale market purchases and sales of electricity are used as necessary to balance supply and demand. The company’s 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.

Under Midcontinent Independent System Operator (MISO) requirements, the company 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.

Capacity Additions

As part of its investment plan to meet the company’s future energy needs, the following projects have been recently undertaken, completed, or acquired:

Ashtabula III Wind Farm is a 62-megawatt (MW) wind farm located in eastern North Dakota.

Hoot Lake Solar is a 49-MW solar farm constructed on and around the company’s Hoot Lake Plant property in Fergus Falls, Minnesota. The facility was placed into commercial operation in August 2023.

Wind Energy Facility Upgrades consisting of the replacement and upgrade of hubs, gearboxes, blades, generators and other components of the company’s Ashtabula, Ashtabula III, Langdon and Luverne wind facilities.

Energy Transition

The company is committed to transitioning to a lower-carbon and increasingly clean energy future, while maintaining affordable and reliable electricity to serve its customers. The company has developed the following goals in furtherance of its 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.

The company’s recent initiatives include retiring the 140-MW coal-fired Hoot Lake Plant, adding the 150-MW Merricourt Wind Energy Center and the 49-MW Hoot Lake Solar facility to its resource mix and sponsoring energy conservation programs.

From 2005 through 2023, the company has reduced its carbon dioxide (CO2) emissions approximately 39% and increased the amount of renewable generation resources it owns or purchases through power purchase agreements by approximately 420-MW. The company owns or contracts energy generation that is 37% renewable.

Resource Materials

The company sources coal for its coal-fired power plants through requirements contracts. The company’s coal supply contracts for its Big Stone Plant and Coyote Station have expiration dates in 2024 and 2040, respectively.

The supply agreement between the Coyote Station owners, including the company, 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.

Coal is transported to Big Stone Plant by rail and is provided under a common carrier rate which includes a mileage-based fuel surcharge.

The company purchases natural gas for use at its combustion turbine facilities based on anticipated short-term resource needs.

Transmission and Distribution

The company’s transmission and distribution assets deliver energy from energy generation sources to its customers. In addition, the company earns revenue from the transmission of electricity over its wholly or jointly owned transmission assets for others under approved rate tariffs. As of December 31, 2023, the company is the sole or joint owner of approximately 14,000 miles of transmission and distribution lines.

Midcontinent Independent System Operator (MISO)

MISO is an independent, non-profit organization that operates the transmission facilities owned by other entities, including the company, within its regional jurisdiction and administers energy and generation capacity markets. MISO has operational control of the company’s 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

In 2022, MISO approved several projects within the first tranche of its long-range transmission plan, which includes two new 345 kV transmission projects. The company will have a varying level of ownership interest in these projects, which will be completed over several years and are at various stages of planning and development:

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. This jointly owned project 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 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. This jointly owned project is expected to be completed in 2031.

Seasonality

As a result, the company’s Electric segment operating results regularly fluctuate on a seasonal basis. The company monitors the level of heating and cooling degree days in a period to assess the impact of weather-related effects on its operating results between periods.

Public Utility Regulation

The company 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. The company operates under approved retail electric tariff rates in all three states it serves.

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). In 2021, the North Dakota Legislative Assembly enacted a provision requiring investor-owned electric utilities to submit an IRP to the North Dakota Public Service Commission (NDPSC) and granted the NDPSC the authority to adopt rules and regulations for the preparation and submission of IRPs. The NDPSC's rules and regulations were finalized and became effective on January 1, 2023. Under the finalized regulation, utilities are required to submit a 15-year advance IRP every three years.

Renewable Energy Standard

The company meets 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 the company, 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 kiloWatt (kW) or less. The company meets the current solar requirement with a combination of owned solar generation and solar renewable energy certificate (REC) purchases. The company plans to comply with the requirements of this standard in the future through a combination of its existing and projected renewable generation fleet and the purchase of RECs.

Minnesota Clean Energy Bill

In February 2023, Minnesota enacted the Clean Energy Bill, 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.

Customers

The company’s metal fabrication business primarily serves Midwestern and Southeastern U.S. manufacturers in the recreational vehicle, lawn and garden, agricultural, construction, and industrial and energy equipment end markets. The company’s plastic products business serves primarily U.S. customers in the horticulture, medical and life sciences, industrial, recreational and electronics industries. The principal method of production distribution is by direct shipment to the company’s customers through direct customer pick-up or common carrier ground transportation.

Plastics

Plastics consists of businesses producing 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 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.

Customers

PVC pipe products are marketed through a combination of independent sales representatives, company salespersons and customer service representatives. Customers for the company’s PVC pipe products consist primarily of wholesalers and distributors, and the principal method for distribution of its products is by common carrier ground transportation.

History

The company was founded in 1907. It was incorporated in 2009 under the laws of the state of Minnesota. The company was formerly known as Otter Tail Power Company and changed its name to Otter Tail Corporation in 2001.