Overview

Otter Tail Corporation and its subsidiaries form a diverse group of businesses
with operations classified into three segments: Electric, Manufacturing and
Plastics. Our primary financial goals are to maximize earnings and cash flows
and to allocate capital profitably toward growth opportunities that will
increase shareholder value. Meeting these objectives enables us to preserve and
enhance our financial capability by maintaining desired capitalization ratios
and a strong interest coverage position and preserving investment grade credit
ratings on outstanding securities, which, in the form of lower interest rates,
benefits both our customers and shareholders.



Our strategy is to continue to grow our largest business, the regulated electric
utility, which will lower our overall risk, create a more predictable earnings
stream, improve our credit quality and preserve our ability to fund the
dividend. Over time, we expect the electric utility business will provide
approximately 75% to 85% of our overall earnings. We expect our manufacturing
and plastic pipe businesses will provide 15% to 25% of our earnings and will
continue to be a fundamental part of our strategy. The actual mix of earnings in
2019, 2018 and 2017 was 68%, 66% and 68%, respectively, from our electric
utility business and 32%, 34% and 32%, respectively, from our manufacturing and
plastic pipe businesses, including unallocated corporate costs.



We expect that reliable utility performance along with rate base investment
opportunities over the next five years will provide us with a strong base of
revenues, earnings and cash flows. We also look to our manufacturing and plastic
pipe companies to provide organic growth as well. Organic, internal growth comes
from new products and services, market expansion and increased efficiencies. We
expect much of our growth in these businesses in the next few years will come
from utilizing



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expanded plant capacity from capital investments made in previous years. We will
also evaluate opportunities to allocate capital to potential acquisitions in our
Manufacturing and Plastics segments. We are a committed long-term owner and
therefore we do not acquire companies in pursuit of short-term gains. However,
we will divest operating companies that no longer fit into our strategy and risk
profile over the long term.


Major growth strategies and initiatives in our future include:

? Planned capital budget expenditures of approximately $984 million for the

years 2020 through 2024, of which $897 million is for capital projects at

Otter Tail Power Company (OTP), including:

o $260 million for renewable wind and solar energy generation and conservation,

including the Merricourt Wind Energy Center (Merricourt) scheduled for

completion in 2020, the exercise of a purchase option to transfer the

Ashtabula III wind farm to OTP in 2022, an investment in solar generation in

2023 and routine wind-power replacement projects.

o $169 million for numerous potential technology and infrastructure projects to

transform future operations, including automated metering, telecommunications,

geographic information systems, work and asset management systems, financial

information systems, system infrastructure reliability improvements, outage


    management systems, and storage projects.


  o $134 million for routine distribution plant replacement projects.

o $117 million for transmission assets including new construction and routine

replacement projects.

o $99 million for the Astoria Station natural gas-fired generation plant to

replace Hoot Lake Plant capacity.

? Continued investigation and evaluation of organic growth opportunities and

evaluation of opportunities to allocate capital to potential acquisitions in


    our Manufacturing and Plastics segments.




In 2019:



? Our Electric segment net income increased 8.5% to $59.0 million from $54.4

million in 2018.

? Our Manufacturing segment net income increased 0.5% to $12.9 million from

$12.8 million in 2018.

? Our Plastics segment net income decreased 13.6% to $20.6 million from $23.8

million in 2018.

? Our net cash from operations was $185.0 million compared with $143.4 million

in 2018.

? Capital expenditures at OTP totaled $187.4 million as work was completed on

the Big Stone South-Ellendale Multi-Value Transmission Project (MVP) and OTP

started construction on both Merricourt and Astoria Station.

? OTP issued $100 million aggregate principal amount of its senior unsecured

notes in a private placement. OTP used a portion of the $100 million proceeds

from the issuance to repay $69.9 million of existing indebtedness under the

OTP Credit Agreement, primarily incurred to fund OTP capital expenditures, and


    will use the remainder of the proceeds to pay for additional capital
    expenditures and for other general purposes.


  ? We paid out $55.7 million in common dividends in 2019.



The following table summarizes our consolidated results of operations for the years ended December 31:





(in thousands)               2019          2018
Operating Revenues:
Electric                   $ 459,048     $ 450,198
Manufacturing                277,204       268,409
Plastics                     183,251       197,840
Total Operating Revenues   $ 919,503     $ 916,447
Net Income (Loss):
Electric                   $  59,046     $  54,431
Manufacturing                 12,899        12,839
Plastics                      20,572        23,819
Corporate                     (5,670 )      (8,744 )
Total Net Income           $  86,847     $  82,345




Electric segment revenues increased $8.8 million (2.0%) due to an $18.2 million
(4.7%) increase in retail sales revenue, resulting mainly from higher rates and
increased rider revenues, partially offset by decreases in transmission services
and wholesale sales revenue. Manufacturing segment revenues increased $8.8
million (3.3%). Revenues at BTD Manufacturing, Inc. (BTD) increased
$9.5 million, with increased parts sales to customers in all of BTD's end-market
manufacturers except energy. Plastics segment revenues decreased $14.6 million
(7.4%) due to decreased sales volume and lower pipe prices.



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The $4.5 million increase in net income in 2019 compared with 2018 reflects the following:

? A $4.6 million increase in Electric segment net income from increased retail

revenue due to increases in transmission rider revenues, general and interim

rate increases in North Dakota and South Dakota and a reduction in power plant

maintenance expenses.

? A $0.1 million increase in Manufacturing segment net income with increased

sales volumes and revenues at BTD being mostly offset by lower sales and

reduced margins at T.O. Plastics.

? A $3.2 million decrease in Plastics segment net income resulted from reduced

sales and lower margins.

? Corporate net losses decreased $3.1 million mainly as a result of higher

investment income, increased tax savings and a reduction in contributions to


  our charitable foundation after our initial $2.0 million funding in 2018.



Following is a more detailed analysis of our operating results by business segment for the years ended December 31, 2019 and 2018, followed by a discussion of our financial position at the end of 2019 and our outlook for 2020.





Results of Operations



This discussion and analysis should be read in conjunction with our consolidated
financial statements and related notes. See note 2 to consolidated financial
statements included in this report on Form 10-K for additional information on
our lines of business, locations of operations and principal products and
services. For a comparison of fiscal year 2018 against fiscal year 2017, see
Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our report on Form 10-K for the fiscal year ended
December 31, 2018, filed with the SEC on February 22, 2019 and incorporated by
reference into this report on Form 10-K.



Intersegment Eliminations-Amounts presented in the following segment tables for
2019 and 2018 operating revenues, cost of goods sold, and other nonelectric
operating expenses will not agree with amounts presented in the consolidated
statements of income due to the elimination of intersegment transactions. The
amounts of intersegment eliminations by income statement line item are listed
below:



Intersegment Eliminations (in thousands)   2019      2018
Operating Revenues:
Electric                                   $  49     $  57
Product Sales                                  6        --
Cost of Products Sold                         34        21
Other Nonelectric Expenses                    21        36




                                    Electric


The following table summarizes the results of operations for our Electric segment for the years ended December 31:





(in thousands)                                2019             % change     

2018


Retail Sales Revenues from Contracts
with Customers                            $     405,446                  4     $     388,690
Changes in Accrued Revenues under
Alternative Revenue Programs                      1,032                335              (439 )
Total Retail Sales Revenue                $     406,478                  5     $     388,251
Transmission Services Revenue                    40,542                (14 )          46,947
Wholesale Revenues - Company Generation           5,007                (35 )           7,735
Other Revenues                                    7,070                 (3 )           7,322
Total Operating Revenues                  $     459,097                  2     $     450,255
Production Fuel                                  59,256                (11 )          66,815
Purchased Power - System Use                     72,066                  5            68,355
Other Operation and Maintenance
Expenses                                        153,529                 (1 )         155,534
Depreciation and Amortization                    60,044                  7            55,935
Property Taxes                                   15,785                  1            15,585
Operating Income                          $      98,417                 12     $      88,031
Electric kilowatt-hour (kwh) Sales (in
thousands)
Retail kwh Sales                              4,969,089                 --         4,976,960
Wholesale kwh Sales - Company
Generation                                      198,569                (27 )         271,841
Heating Degree Days                               7,240                  5             6,904
Cooling Degree Days                                 392                (31 )             567




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Results of operations for the Electric segment are impacted by fluctuations in
weather conditions and the resulting demand for electricity for heating and
cooling. The following table shows heating and cooling degree days as a percent
of normal.



                       2019        2018
Heating Degree Days     115.6 %     111.0 %
Cooling Degree Days      85.0 %     123.5 %




The following table summarizes the estimated effect on diluted earnings per
share of the difference in retail kwh sales under actual weather conditions and
expected retail kwh sales under normal weather conditions in 2019 and 2018, and
between years.



                                       2019 vs      2019 vs      2018 vs
                                        Normal        2018        Normal

Effect on Diluted Earnings Per Share $ 0.078 $ 0.005 $ 0.073






2019 Compared with 2018

The $18.2 million increase in retail revenue includes:

? A $10.4 million increase in transmission cost recovery revenues due to recent


    investments in transmission infrastructure and transmission costs not
    currently recovered in base rates.

? A $2.4 million increase in Minnesota Renewable Resource Adjustment (RRA) rider

revenues due to increased cost recovery requirements resulting from the

expiration of federal production tax credits (PTCs) in November 2018 on a

company-owned wind farm.

? A $2.3 million increase in retail revenue related to the recovery of fuel and

purchased power costs incurred to serve retail customers.

? A $1.9 million increase in retail revenue in South Dakota due to the reversal

of a tax refund provision in connection with OTP's 2018 South Dakota rate case

settlement agreement.

? A $1.4 million increase in average electric prices mainly related to interim


    and final rate increases in South Dakota.


  ? A $0.9 million increase in revenue related to the establishment of a

generation cost recovery rider in North Dakota in 2019 to provide for a return


    on funds invested in Astoria Station during its construction phase.


  ? A $0.3 million increase in revenue related to the recovery of increased
    conservation improvement program expenditures in 2019.

? A $0.3 million increase in revenue mainly driven by a 4.9% increase in heating

degree days in 2019 partially offset by a 30.9% decrease in cooling degree


    days between the years.



These items were partially offset by:

? A $1.8 million decrease in retail revenue due to a decrease in kwh sales to


    residential customers.




Transmission services revenues decreased $6.4 million mainly due to a $5.0
million decrease associated with reductions in capital spending and collections
through the Midcontinent Independent System Operator, Inc. (MISO) tariff. OTP
also recorded an additional $1.4 million estimated refund obligation due to a
November 21, 2019 FERC ruling related to the methodology used to determine the
Return on Equity (ROE) component of the transmission rate under the MISO tariff.
This is mainly based on a reduced ROE from 10.82% to 10.38% for the period from
September 28, 2016 through December 31, 2019. The reduced ROE is based on a
newly established 9.88% ROE plus the 50-point Regional Transmission Organization
adder granted by the FERC on January 5, 2015. The FERC ruling is subject to
rehearing requests.



Wholesale electric revenues decreased $2.7 million resulting from a 27.0%
decrease in wholesale kwh sales due to fewer opportunities for wholesale sales
as Coyote Station was offline during the second quarter of 2019 due to an
extended maintenance outage and Hoot Lake Plant Unit 2 was offline for
maintenance and repairs in June and July 2019. The decrease in revenues also
resulted from decreased regional market demand in the third quarter of 2019 due
to cooler summer weather, which also drove down wholesale electricity prices.



Production fuel costs decreased $7.6 million mainly as a result of a 16.4%
decrease in kwhs generated from our fuel-burning plants due to the maintenance
outage at Coyote Station and due to maintenance and repairs at Hoot Lake Plant
as noted above. The decrease in fuel costs related to the decrease in generation
was partially offset by a 6.1% increase in the cost of fuel per kwh generated at
OTP's fuel-burning plants. The increased cost-per-kwh generated is mostly due to
the absorption of Coyote Creek Mining Company's fixed coal mining costs on less
delivered fuel to Coyote Station during its planned spring 2019 maintenance
outage.



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The cost of purchased power to serve retail customers increased $3.7 million due
to a 23.1% increase in kwhs purchased as a result of purchasing replacement
power during the maintenance outages at Coyote Station and Hoot Lake Plant. The
increase in kwh purchases was partially offset by a 5.1% decrease in kwh
purchases in the fourth quarter of 2019 related to Big Stone Plant's
availability during the fourth quarter of 2019 compared to the same period last
year when the plant was down for scheduled maintenance. The increased costs due
to the increase in kwhs purchased were partially mitigated by a 14.4% decrease
in the cost per kwh purchased resulting from lower wholesale energy prices in
2019.


Electric operating and maintenance expenses decreased $2.0 million due to:

? A $3.3 million decrease in external service costs at Big Stone Plant primarily

related to its fall 2018 maintenance outage.

? A $1.1 million decrease in expenses for vegetation and transmission line

maintenance.

? A $0.8 million decrease in software support costs and regulatory filing fees.

? A $0.7 million reduction in employee benefits mainly related to decreased

health insurance costs.

? A $0.5 million decrease in expense related to an increase in overhead cost

capitalization due to increased capital spending in 2019.

? A $0.4 million decrease in pollution control expenses resulting from decreases

in generation at both Coyote Station and Hoot Lake Plant during their 2019


    maintenance outages.



These items were partially offset by:

? A $2.4 million increase in costs related to Coyote Station's 2019 extended

maintenance outage.

? A $1.4 million increase in MISO transmission services expenses due to an


    increase in third-party MVPs in 2019.


  ? A $0.7 million increase in costs at Hoot Lake Plant due to 2019 turbine
    repairs.


  ? A $0.3 million increase in conservation program expenditures in 2019.



Depreciation expense increased $4.1 million due to capital additions including the Big Stone South-Ellendale 345kV transmission line energized in February 2019, the new customer information system put in service in 2019 and other recent transmission plant upgrades.

Property tax expense increased $0.2 million due to capital additions, mainly transmission assets, in South Dakota and Minnesota.





                                 Manufacturing


The following table summarizes the results of operations for our Manufacturing segment for the years ended December 31:





(in thousands)                    2019         % change        2018
Operating Revenues              $ 277,204              3     $ 268,409
Cost of Products Sold             215,179              5       205,699
Other Operating Expenses           29,895              1        29,650
Depreciation and Amortization      14,261             (4 )      14,794
Operating Income                $  17,869             (2 )   $  18,266




2019 Compared with 2018

The $8.8 million increase in revenues in our Manufacturing segment includes the following:

? At BTD, revenues increased $9.5 million due to growth in parts revenue of

$12.3 million from increased sales to customers in recreational vehicle,

construction, industrial, agricultural, and lawn and garden end markets,

partially offset by reduced sales in energy end markets. Included in the parts

revenue increase is the pass through of higher material costs of $0.7 million,

with the remaining increase due to $11.6 million in higher sales volume. The

increase in parts revenue was partially offset by a $2.8 million (31.9%)

decrease in revenue from scrap metal sales due to a 28.2% decrease in scrap


    metal prices.




  ? At T.O. Plastics, revenues decreased $0.7 million due to a $0.7 million

reduction in extrusion and other industrial sales, a $0.6 million decrease in

sales to a customer bringing more production in house and a $0.2 million

reduction in sales of horticultural containers, partially offset by a $0.5


    million increase in life science product sales and a $0.3 million increase in
    sales of scrap material.




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The $9.5 million increase in cost of products sold in our Manufacturing segment includes the following:

? Cost of products sold at BTD increased $8.4 million, including $11.8 million

in increased material costs with $11.1 million due to the increased sales

volume and $0.7 million passed through to customers. The increase in material

costs combined with a $0.7 million increase in overhead costs was partially

offset by a $4.1 million increase in reimbursements of tooling costs from


    customers.



? Cost of products sold at T.O. Plastics increased $1.1 million mainly due to

increased labor costs driven by increased production hours and by wage

increases. T.O. Plastics' gross margin percentage decreased from 2018 to 2019


    as a result of a customer's decision to bring more production in house.




The $0.5 million decrease in depreciation in our Manufacturing segment includes
a decrease of $0.4 million at BTD as a result of certain assets reaching the
ends of their depreciable lives.



                                    Plastics


The following table summarizes the results of operations for our Plastics segment for the years ended December 31:





(in thousands)                    2019        % change           2018
Operating Revenues              $ 183,257            (7 )   $ 197,840
Cost of Products Sold             139,974            (6 )     148,881
Other Operating Expenses           11,393            (8 )      12,323
Depreciation and Amortization       3,451            (7 )       3,719
Operating Income                $  28,439           (14 )   $  32,917




2019 Compared with 2018

Plastics segment revenues decreased $14.6 million due to a 4.2% decrease in
pounds of polyvinyl chloride (PVC) pipe sold and a 3.3% decrease in PVC pipe
prices. Wet weather conditions across our sales territory negatively impacted
2019 sales along with lower demand in the Midwest and West Coast states. Cost of
products sold decreased $8.9 million due to the decrease in sales volume and a
1.9% decrease in the cost per pound of pipe sold. The decrease in pipe prices
net of the decrease in costs resulted in a 7.7% decrease in gross margin per
pound of PVC pipe sold. Plastics segment operating expenses decreased
$0.9 million mainly due to a decrease in incentive compensation related to
decreased operating income.



                                   Corporate



Corporate includes items such as corporate staff and overhead costs, the results
of our captive insurance company and other items excluded from the measurement
of operating segment performance. Corporate is not an operating segment. Rather,
it is added to operating segment totals to reconcile to totals on our
consolidated statements of income.



(in thousands)                   2019        % change       2018
Other Operating Expenses        $ 9,515             (1 )   $ 9,607
Depreciation and Amortization       330             51         218



Corporate operating expenses decreased $0.1 million in 2019 as compared to 2018 due to the following:





  ? There was no contribution made in 2019 to the Otter Tail Corporation
    Foundation as compared to a $2.0 million contribution in 2018.



? The decrease in charitable contributions was mostly offset by increases in


    stock incentive and health benefit costs not allocated to the operating
    business segments.




                         Consolidated Interest Charges



(in thousands)       2019       % change        2018
Interest Charges   $ 31,411             3     $ 30,408

The $1.0 million increase in interest charges in 2019 compared with 2018 is due to:

? A $0.8 million increase in interest expense related to interest expense on the

$100 million in notes issued by OTP on October 10, 2019.



? A $0.5 million increase in interest on short-term borrowings between the years

resulting from a $9.1 million increase in average short-term debt outstanding

between the years and a 50 basis points increase in the average interest rate

paid on short-term debt between periods, mainly as a result of an increase in

Otter Tail Corporation's average short-term borrowings relative to a decrease

in OTP's average short-term borrowings. Otter Tail Corporation's short-term


    borrowing rates are higher than OTP's short-term borrowing rates.




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? A $0.3 million increase in interest expense due to a full year of interest

compared with 11 months of interest on the $100 million in notes issued by OTP


    in February 2018.



These increases in interest expense were partially offset by a $0.5 million increase in capitalized interest expense at OTP due to an increase in capital expenditures at OTP subject to interest capitalization.





       Consolidated NONSERVICE COST COMPONENTS OF POSTRETIREMENT BENEFITS



(in thousands)                                           2019       % 

change 2018 Nonservice Cost Components of Postretirement Benefits $ 4,293 (22 ) $ 5,509






The $1.2 million decrease in nonservice cost components of postretirement
benefits in 2019 compared with 2018 is mostly due to a decrease in pension plan
nonservice costs, mainly actuarial loss amortization expenses, partially offset
by interest cost increases on all postretirement benefit plans at Otter Tail
Corporation and OTP.



                           Consolidated OTHER INCOME



(in thousands)    2019        % change       2018

Other Income     $ 5,112             48     $ 3,461

The $1.7 million increase in other income in 2019 compared with 2018 includes:

? A $1.1 million increase in cash values of corporate-owned life insurance


    policies.



? A $0.4 million increase in allowance for equity funds used during construction


    (AFUDC) on OTP construction work in progress.




                           Consolidated Income Taxes


Income tax expense increased $2.8 million to $17.4 million in 2019 from $14.6 million in 2018, mainly due to the expiration of federal PTCs on OTP's wind farms.

The following table provides a reconciliation of income tax expense calculated at the federal statutory rate on income before income taxes reported on our consolidated statements of income:





                                                              For the Year Ended December 31,
(in thousands)                                                   2019                  2018
Income Before Income Taxes                                 $        104,288

$ 96,933 Tax Computed at the Company's Federal Statutory Rate (21% for 2019 and 2018)

                                    $         21,901       $       20,356
Increases (Decreases) in Tax from:
State Income Taxes Net of Federal Income Tax Expense                  3,561                5,210
Differences Reversing in Excess of Federal Rates                     (3,357 )             (3,432 )

Permanent Differences, R&D Tax Credits, Unitary Tax and Other Adjustments

                                                    (1,315 )             (1,864 )

North Dakota Wind Tax Credit Amortization - Net of Federal Taxes

                                                        (1,033 )             (1,033 )
Corporate-owned Life Insurance                                         (749 )                 (3 )
Excess Tax Deduction - Equity Method Stock Awards                      (744 )               (708 )
Allowance for Funds Used During Construction - Equity                  (501 )               (431 )
Employee Stock Ownership Plan Dividend Deduction                       (281 )               (298 )
Investment Tax Credit Amortization                                      (41 )                (98 )
Federal PTCs                                                             --               (3,111 )
Total Income Tax Expense                                   $         17,441       $       14,588
Effective Income Tax Rate                                              16.7 %               15.0 %




Federal PTCs are recognized as wind energy is generated based on a per kwh rate
prescribed in applicable federal statutes. In November 2018, the eligibility
period for OTP to earn federal PTCs on its currently energized wind farms ended.
North Dakota wind energy credits are based on dollars invested in qualifying
facilities and are being recognized on a straight-line basis over 25 years.



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Impact of Inflation



OTP operates under regulatory provisions that allow price changes in fuel and
certain purchased power costs to be passed to most retail customers through
automatic adjustments to its rate schedules under fuel clause adjustments. Other
increases in the cost of electric service must be recovered through timely
filings for electric rate increases with the appropriate regulatory agency.



Our Manufacturing and Plastics segments consist entirely of businesses whose
revenues are not subject to regulation by ratemaking authorities. Increased
operating costs are reflected in product or services pricing with any
limitations on price increases determined by the marketplace. Raw material
costs, labor costs, fuel and energy costs and interest rates are important
components of costs for companies in these segments. Any or all of these
components could be impacted by inflation or other pricing pressures, with a
possible adverse effect on our profitability, especially where increases in
these costs exceed price increases on finished products. In recent years, our
operating companies have faced strong inflationary and other pricing pressures
with respect to steel, fuel, resin, and health care costs, which have been
partially mitigated by pricing adjustments.



Liquidity


The following table presents the status of our lines of credit as of December 31, 2019 and December 31, 2018:





                                                     In Use on        Restricted due to       Available on       Available on
                                                   December 31,          Outstanding          December 31,       December 31,
(in thousands)                     Line Limit          2019           Letters of Credit           2019               2018
Otter Tail Corporation Credit
Agreement                         $    170,000     $       6,000     $                --     $      164,000     $      120,785
OTP Credit Agreement                   170,000                --                  15,476            154,524            160,316
Total                             $    340,000     $       6,000     $            15,476     $      318,524     $      281,101




We believe we have the necessary liquidity to effectively conduct business
operations for an extended period if needed. Our balance sheet is strong, and we
are in compliance with our debt covenants. Financial flexibility is provided by
operating cash flows, unused lines of credit, strong financial coverages,
investment grade credit ratings and alternative financing arrangements such as
leasing.



We believe our financial condition is strong and our cash, other liquid assets,
operating cash flows, existing lines of credit, access to capital markets and
borrowing ability because of investment-grade credit ratings, when taken
together, provide adequate resources to fund ongoing operating requirements and
future capital expenditures related to expansion of existing businesses and
development of new projects. On May 3, 2018 we filed a shelf registration
statement with the Securities and Exchange Commission (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, which expires on May 3, 2021. On May 3, 2018, we also
filed a shelf registration statement with the SEC for the issuance of up to
1,500,000 common shares until May 3, 2021, under the Company's Automatic
Dividend Reinvestment and Share Purchase Plan (the Plan), which permits shares
purchased by participants in the Plan to be either new issue common shares or
common shares purchased in the open market. The Company began issuing common
shares in the fourth quarter of 2019 to meet the requirements of the Plan rather
than purchasing shares in the open market. On November 8, 2019, we entered into
a Distribution Agreement with KeyBanc Capital Markets Inc. ("KeyBanc") under
which we may offer and sell our common shares from time to time through KeyBanc,
as our distribution agent, up to an aggregate sales price of $75 million through
an At-the-Market offering program. In the fourth quarter of 2019, we received
proceeds of $17,458,621 net of $220,995 paid to KeyBanc from the issuance of
347,000 shares under this program.



Equity and debt financing will be required in the period 2020 through 2024 given
the expansion plans related to our Electric segment to fund construction of new
rate base investments. Also, such financing will be required should we decide to
reduce borrowings under our lines of credit or refund or retire early any of our
presently outstanding debt, to complete acquisitions or for other corporate
purposes. Our operating cash flows and access to capital markets can be impacted
by macroeconomic factors outside our control. In addition, our borrowing costs
can be impacted by changing interest rates on short-term and long-term debt and
ratings assigned to us by independent rating agencies, which in part are based
on certain credit measures such as interest coverage and leverage ratios.



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The determination of the amount of future cash dividends to be declared and paid
will depend on, among other things, our financial condition, improvement in
earnings per share, cash flows from operations, the level of our capital
expenditures and our future business prospects. As a result of certain statutory
limitations or regulatory or financing agreements, restrictions could occur on
the amount of distributions allowed to be made by our subsidiaries. See note 7
to consolidated financial statements included in this report on Form 10-K for
additional information. The decision to declare a dividend is reviewed quarterly
by the board of directors. On February 4, 2020 our board of directors increased
the quarterly dividend from $0.35 to $0.37 per common share.



2019 Cash Flows Compared with 2018 Cash Flows



Net cash provided by operating activities was $185.0 million in 2019 compared
with $143.4 million in 2018. Primary reasons for the $41.6 million increase in
net cash provided by operations between the periods were:



? A $23.1 million decrease in cash used for working capital items mainly due to

significant changes in inventories, accounts payable and accounts receivable


    between the periods.


  o Inventory balances decreased by $8.4 million during 2019 compared to an

increase of $18.2 million in 2018. This change is due to decreases in raw

material costs, primarily steel, from 2018 to 2019 and lower sales volumes in

the Plastics segment during 2019 compared to 2018.

o The level of increases in accounts receivable declined by $6.7 million from

2018 to 2019, primarily due to higher raw material costs reflected in customer

billings in 2018 when compared with 2019. Our average collection period on a

consolidated basis remained steady at approximately 31 days.

o The reductions in cash used for inventories and accounts receivable between

the years were partially offset by a $15.2 million reduction in cash from an

increase in accounts payable and other current liabilities in 2018 compared

with essentially no change in these items in 2019. The primary reason for the

increase in accounts payable and other current liabilities in 2018 was due to

the recording of refunds for the TCJA and interim rate refunds in North Dakota

and South Dakota.

? An $11.2 million increase from changes in regulatory asset and liability

balances related to fuel cost and Minnesota environmental cost recovery riders


    included in changes in deferred debits and other assets and changes in
    noncurrent liabilities and deferred credits.


  ? A $4.5 million increase in net income.


  ? A $3.4 million increase in depreciation and amortization expense.

? A $1.5 million increase in non-cash stock-based compensation expense in 2019.

These items were partially offset by:

? A $2.5 million increase in discretionary contributions to the corporation's


    funded pension plan in 2019.




Net cash used in investing activities was $209.5 million in 2019 compared with
$107.4 million in 2018. The $102.1 million increase in cash used for investing
activities includes a $101.9 million increase in capital expenditures, mainly
due to a $100.1 million increase in cash used for capital expenditures at OTP
related to construction of Merricourt and Astoria Station projects and various
transmission projects and upgrades. Cash used for capital expenditures at T.O.
Plastics increased $1.4 million between periods mainly related to the
replacement of a warehouse roof that collapsed during a snowstorm in March 2019.



Net cash provided by financing activities was $44.8 million in 2019 compared
with $51.4 million in cash used for financing activities in 2018. The $96.2
million increase in cash flows from financing activities includes an $81.2
million reduction in repayments of short-term debt and $20.3 million in proceeds
from the issuance of stock in 2019 as we began issuing new common shares under
our At-the-Market offering program launched in November 2019 and also began
issuing new common shares to fulfill the requirements of our Automatic Dividend
Reinvestment and Share Purchase Plan in the fourth quarter of 2019 to raise
capital to fund OTP's major construction projects.



          [[Image Removed]]          [[Image Removed]]



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Capital Requirements



Capital Expenditures

We have a capital expenditure program for expanding, upgrading and improving our
plants and operating equipment. Typical uses of cash for capital expenditures
are investments in electric generation facilities and environmental upgrades,
transmission and distribution lines, manufacturing facilities and upgrades,
equipment used in the manufacturing process, and computer hardware and
information systems. The capital expenditure program is subject to review and is
revised in light of changes in demands for energy, technology, environmental
laws, regulatory changes, business expansion opportunities, the costs of labor,
materials and equipment and our consolidated financial condition.



Cash used for consolidated capital expenditures was $207.4 million in 2019, $105.4 million in 2018 and $132.9 million in 2017. Estimated capital expenditures for 2020 are $385 million. Total capital expenditures for the five-year period 2020 through 2024 are estimated to be approximately $984 million, including:

? $260 million for renewable wind and solar energy generation and conservation,

including Merricourt scheduled for completion in 2020, the exercise of a

purchase option to transfer Ashtabula III wind farm to OTP in 2022, an

investment in solar generation in 2023 and routine wind-power replacement

projects.

? $169 million for numerous potential technology and infrastructure projects to

transform future operations, including automated metering, telecommunications,

geographic information systems, work and asset management systems, financial

information systems, system infrastructure reliability improvements, outage


    management systems, and storage projects.


  ? $134 million for routine distribution plant replacement projects.

? $117 million for transmission assets including new construction and routine

replacement projects.

? $99 million for the Astoria Station natural gas-fired generation plant to

replace Hoot Lake Plant capacity.

? $87 million in our Manufacturing and Plastics segments mainly for replacement


    of existing equipment.



The breakdown of 2017, 2018 and 2019 actual cash used for capital expenditures and 2020 through 2024 estimated capital expenditures by segment is as follows:





(in millions)   2017      2018      2019      2020      2021      2022      2023      2024       2020-2024
Electric        $ 119     $  87     $ 187     $ 369     $ 124     $ 162     $ 140     $ 101     $       897
Manufacturing      10        13        14        12        14        14        15        13              67
Plastics            4         4         6         4         4         4         4         4              20
Corporate          --         1        --        --        --        --        --        --              --
Total           $ 133     $ 105     $ 207     $ 385     $ 142     $ 180     $ 159     $ 118     $       984




Contractual Obligations

The following table summarizes our contractual obligations at December 31, 2019
and the effect these obligations are expected to have on our liquidity and cash
flow in future periods.



                                                Less than             1-3             3-5       More than
(in millions)                      Total           1 Year           Years           Years         5 Years
Debt Obligations              $      698     $          6     $       170     $        --     $       522
Coal Contracts                       596               23              46              48             479
Interest on Debt
Obligations                          468               33              58              48             329
Other Purchase Obligations
(including land easements)           327              270              49               1               7
Capacity and Energy
Requirements                         205               25              25              23             132
Postretirement Benefit
Obligations                          115                5              11              13              86
Right-of-Use Asset
Operating Lease Obligations           26                5               9               7               5
Total Contractual Cash
Obligations                   $    2,435     $        367     $       368     $       140     $     1,560




Coal contract obligations are based on estimated coal consumption and costs for
the delivery of coal to Coyote Station from Coyote Creek Mining Company under
the lignite sales agreement that ends in 2040. Postretirement Benefit
Obligations include estimated cash expenditures for the payment of retiree
medical and life insurance benefits and supplemental pension benefits under our
unfunded Executive Survivor and Supplemental Retirement Plan, but do not include
amounts to fund our noncontributory funded pension plan, as we are not currently
required to make a contribution to that plan.



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CAPITAL RESOURCES



Financial flexibility is provided by operating cash flows, unused lines of
credit, strong financial coverages, investment grade credit ratings, and
alternative financing arrangements such as leasing. Equity or debt financing
will be required in the period 2020 through 2024 given the expansion plans
related to our Electric segment to fund construction of new rate base and
transmission investments, in the event we decide to reduce borrowings under our
lines of credit, to refund or retire early any of our presently outstanding
debt, to complete acquisitions or for other corporate purposes. There can be no
assurance that any additional required financing will be available through bank
borrowings, debt or equity financing or otherwise, or that if such financing is
available, it will be available on terms acceptable to us. If adequate funds are
not available on acceptable terms, our businesses, results of operations and
financial condition could be adversely affected.



On May 3, 2018 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, which expires on May 3, 2021. On May 3, 2018 we also
filed a shelf registration statement with the SEC for the issuance of up to
1,500,000 common shares under our Automatic Dividend Reinvestment and Share
Purchase Plan (the Plan), which permits shares purchased by participants in the
Plan to be either new issue common shares or common shares purchased in the open
market. The shelf registration for the Plan expires on May 3, 2021. On November
8, 2019 the Company entered into a Distribution Agreement with KeyBanc under
which we may offer and sell our common shares from time to time through KeyBanc,
as our distribution agent, up to an aggregate sales price of $75 million through
an At-the-Market offering program.



Debt



Following are brief descriptions of the short-term and long-term credit and debt
agreements currently in place at Otter Tail Corporation and OTP. See note 10 to
our consolidated financial statements included in this report on Form 10-K for
additional information on the terms, provisions, restrictions and covenants
under these agreements.



Short-Term Debt



On October 29, 2012 we entered into a Third Amended and Restated Credit
Agreement (the OTC Credit Agreement), which provided for an unsecured $130
million revolving credit facility that could be increased subject to certain
terms and conditions. On October 31, 2019 the OTC Credit Agreement was amended
to extend its expiration date by one year from October 31, 2023 to October 31,
2024, and to increase the amount of the revolving credit facility to $170
million. The amendment also provides that this facility can be increased to $290
million subject to certain terms and conditions. Borrowings under the OTC Credit
Agreement bear interest at LIBOR plus 1.50%, subject to adjustment based on our
senior unsecured credit ratings or the issuer rating if a rating is not provided
for the senior unsecured credit.



On October 29, 2012 OTP entered into a Second Amended and Restated Credit
Agreement (the OTP Credit Agreement), providing for an unsecured $170 million
revolving credit facility that may be increased to $250 million on the terms and
subject to the conditions described in the OTP Credit Agreement. On October 31,
2019 the OTP Credit Agreement was amended to extend its expiration date by one
year from October 31, 2023 to October 31, 2024. OTP can draw on this credit
facility to support the working capital needs and other capital requirements of
its operations, including letters of credit in an aggregate amount not to exceed
$50 million outstanding at any time. Borrowings under this line of credit bear
interest at LIBOR plus 1.25%, subject to adjustment based on the ratings of
OTP's senior unsecured debt or the issuer rating if a rating is not provided for
the senior unsecured debt.



Long-Term Debt



On September 12, 2019,OTP entered into a Note Purchase Agreement (the 2019 Note
Purchase Agreement) with the purchasers named therein, pursuant to which OTP
agreed to issue to the purchasers, in a private placement transaction, $175
million aggregate principal amount of OTP's senior unsecured notes consisting of
(a) $10,000,000 aggregate principal amount of its 3.07% Series 2019A Senior
Unsecured Notes due October 10, 2029 (the Series 2019A Notes), (b) $26,000,000
aggregate principal amount of its 3.52% Series 2019B Senior Unsecured Notes due
October 10, 2039 (the Series 2019B Notes), (c) $64,000,000 aggregate principal
amount of its 3.82% Series 2019C Senior Unsecured Notes due October 10, 2049
(the Series 2019C Notes), (d) $10,000,000 aggregate principal amount of its
3.22% Series 2020A Senior Unsecured Notes due February 25, 2030 (the Series
2020A Notes), (e) $40,000,000 aggregate principal amount of its 3.22% Series
2020B Senior Unsecured Notes due August 20, 2030 (the Series 2020B Notes), (f)
$10,000,000 aggregate principal amount of its 3.62% Series 2020C Senior
Unsecured Notes due February 25, 2040 (the Series 2020C Notes) and (g)
$15,000,000 aggregate principal amount of its 3.92% Series 2020D Senior
Unsecured Notes due February 25, 2050 (the Series 2020D Notes).



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On October 10, 2019 OTP issued the Series 2019A Notes, Series 2019B Notes and
Series 2019C Notes (the 2019 Notes) pursuant to the 2019 Note Purchase
Agreement. OTP used a portion of the $100 million proceeds from the issuance to
repay $69.9 million of existing indebtedness under the OTP Credit Agreement,
primarily incurred to fund OTP capital expenditures, and intends to use the
remainder of the proceeds to pay for additional capital expenditures and for OTP
general corporate purposes. The Series 2020A Notes, the Series 2020C Notes and
the Series 2020D Notes are expected to be issued on February 25, 2020 and the
Series 2020B Notes are expected to be issued on August 20, 2020, subject to the
satisfaction of certain customary conditions to closing.



On February 27, 2018 OTP issued $100 million aggregate principal amount of its
4.07% Series 2018A Senior Unsecured Notes due February 7, 2048 (the 2018 Notes)
pursuant to a Note Purchase Agreement dated as of November 14, 2017 (the 2018
Note Purchase Agreement). Proceeds from the 2018 Notes were used to repay
outstanding borrowings under the OTP Credit Agreement.



On December 13, 2016 Otter Tail Corporation issued $80 million aggregate
principal amount of its 3.55% Guaranteed Senior Notes due December 15, 2026 (the
2026 Notes) pursuant to a Note Purchase Agreement dated as of September 23, 2016
(the 2016 Note Purchase Agreement). Our obligations under the 2016 Note Purchase
Agreement and the 2026 Notes are guaranteed by our Material Subsidiaries (as
defined in the 2016 Note Purchase Agreement, but specifically excluding OTP).



On February 27, 2014 OTP issued $60 million aggregate principal amount of its
4.68% Series A Senior Unsecured Notes due February 27, 2029 and $90 million
aggregate principal amount of its 5.47% Series B Senior Unsecured Notes due
February 27, 2044 pursuant to a Note Purchase Agreement dated as of August 14,
2013 (the 2013 Note Purchase Agreement).



On December 1, 2011 OTP issued $140 million aggregate principal amount of its
4.63% Senior Unsecured Notes due December 1, 2021 pursuant to a Note Purchase
Agreement dated as of July 29, 2011 (the 2011 Note Purchase Agreement).



OTP also has outstanding its $122 million senior unsecured notes issued in three
series consisting of $30 million aggregate principal amount of 6.15% Senior
Unsecured Notes, Series B, due 2022; $42 million aggregate principal amount of
6.37% Senior Unsecured Notes, Series C, due 2027; and $50 million aggregate
principal amount of 6.47% Senior Unsecured Notes, Series D, due 2037
(collectively, the 2007 Notes). The 2007 Notes were issued pursuant to a Note
Purchase Agreement dated as of August 20, 2007 (the 2007 Note Purchase
Agreement).



Financial Covenants

We were in compliance with the financial covenants in our debt agreements as of December 31, 2019.





No Credit or Note Purchase Agreement contains any provisions that would trigger
an acceleration of the related debt as a result of changes in the credit rating
levels assigned to the related obligor by rating agencies.



Our borrowing agreements are subject to certain financial covenants. Specifically:

? Under the OTC Credit Agreement and the 2016 Note Purchase Agreement, we may

not permit the ratio of our Interest-bearing Debt to Total Capitalization to

be greater than 0.60 to 1.00 or permit our Interest and Dividend Coverage

Ratio to be less than 1.50 to 1.00 (each measured on a consolidated basis). As

of December 31, 2019, our Interest and Dividend Coverage Ratio calculated

under the requirements of the OTC Credit Agreement and the 2016 Note Purchase


    Agreement was 4.51 to 1.00.




  ? Under the 2016 Note Purchase Agreement, we may not permit our Priority
    Indebtedness to exceed 10% of our Total Capitalization.




  ? Under the OTP Credit Agreement, OTP may not permit the ratio of its

Interest-bearing Debt to Total Capitalization to be greater than 0.60 to 1.00.

? Under the 2007 Note Purchase Agreement and 2011 Note Purchase Agreement, OTP

may not permit the ratio of its Consolidated Debt to Total Capitalization to

be greater than 0.60 to 1.00 or permit its Interest and Dividend Coverage

Ratio to be less than 1.50 to 1.00, in each case as provided in the related

borrowing agreement, and OTP may not permit its Priority Debt to exceed 20% of

its Total Capitalization, as provided in the related agreement. As of December

31, 2019, OTP's Interest and Dividend Coverage Ratio and Interest Charges

Coverage Ratio, calculated under the requirements of the 2007 Note Purchase


    Agreement and 2011 Note Purchase Agreement, was 3.71 to 1.00.



? Under the 2013 Note Purchase Agreement, the 2018 Note Purchase Agreement, and

the 2019 Note Purchase Agreement, OTP may not permit its Interest-bearing Debt


    to exceed 60% of Total Capitalization and may not permit its Priority
    Indebtedness to exceed 20% of its Total Capitalization, in each case as
    provided in the related agreement.



As of December 31, 2019, our ratio of Interest-bearing Debt to Total Capitalization was 0.47 to 1.00 on a consolidated basis and 0.49 to 1.00 for OTP. Neither Otter Tail Corporation nor OTP had any Priority Indebtedness outstanding as of December 31, 2019.


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OFf-Balance-Sheet Arrangements





We and our subsidiary companies have outstanding letters of credit totaling
$18.2 million, but our line of credit borrowing limits are only restricted by
$15.5 million in outstanding letters of credit. We do not have any other
off-balance-sheet arrangements or any relationships with unconsolidated entities
or financial partnerships. These entities are often referred to as structured
finance special purpose entities or variable interest entities, which are
established for the purpose of facilitating off-balance-sheet arrangements or
for other contractually narrow or limited purposes. We are not exposed to any
financing, liquidity, market or credit risk that could arise if we had such
relationships.



2020 BUSINESS OUTLOOK



We anticipate 2020 diluted earnings per share to be in the range of $2.22 to
$2.37. The midpoint of the 2020 earnings per share guidance reflects a 6% growth
rate off 2019 diluted earnings per share. Our 2020 diluted earnings per share
guidance also includes $0.05 of dilution associated with the planned issuance of
common equity under our At-the-Market Offering Program and Dividend Reinvestment
and Employee Stock Purchase Plans to help fund our construction projects at OTP.



We have taken into consideration strategies for improving future operating
results, the cyclical nature of some of our businesses, and current regulatory
factors facing our Electric segment. We expect capital expenditures for 2020 to
be $385 million compared with actual cash used for capital expenditures of $207
million in 2019. Our Electric Segment accounts for 96% of our 2020 planned
capital expenditures. The increase in our planned expenditures is largely driven
by the Merricourt Wind Energy Center and Astoria Station natural gas-fired
electric plant rate base projects.



Segment components of our 2020 diluted earnings per share guidance range compared with 2019 actual earnings are as follows.





                    2019 EPS by        2020 EPS Guidance
                      Segment           Low          High
Electric           $        1.48     $     1.67     $  1.70
Manufacturing      $        0.32     $     0.31     $  0.35
Plastics           $        0.51     $     0.43     $  0.47
Corporate          $       (0.14 )   $    (0.19 )   $ (0.15 )
Total              $        2.17     $     2.22     $  2.37
Return on Equity            11.6 %         11.0 %      11.7 %



The following items contribute to our earnings guidance for 2020.

? We expect our Electric segment to provide approximately 75% of our

consolidated earnings in 2020 with an increase over 2019 segment net income

based on:

o Capital spending on the Merricourt and Astoria Station rate base projects of

$178 million and $81 million, respectively, in 2020. The Merricourt project

has rider recovery mechanisms in place in Minnesota and South Dakota and in

process for approval in North Dakota. The Astoria Station project has rider

recovery mechanisms in place in South Dakota and North Dakota. This project

earns AFUDC in Minnesota, is expected to be recovered through a rate case in

Minnesota and has already been approved in our integrated resource plan.

o Increased revenues related to $22 million in anticipated capital spending for

self-fund generator interconnection agreements.

o No planned generation plant outages for 2020. Plant outage costs totaled $3.1


    million in 2019.




partially offset by:



o Normal weather in 2020. Weather favorably impacted 2019 earnings by $0.08 per

share compared to normal.

o Increased expenses caused in large part by a decrease in the discount rate

used for the pension plan and a lower rate used for our long-term rate of

return. The discount rate for 2020 is 3.47% compared with 4.50% for 2019. For

each 25-basis point decline in the discount rate, pension expense increases

approximately $1,041,000. The assumed long-term rate of return for 2020 is

6.88% compared with 7.25% in 2019. Each 25-basis point decline in this rate

equates to approximately $734,000 in increased pension expense.

o Higher depreciation and property tax expense due to large capital projects

being put into service.

o Increased interest costs associated with a full year's interest expense on the

$100 million of senior unsecured notes that were issued in October 2019 and

interest on the $35 million and $40 million of senior unsecured notes expected


    to be issued in February and August of 2020, respectively.




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? We expect net income from our Manufacturing segment to be flat compared with

2019 based on:

o Slightly lower earnings at BTD due to an expected decline in sales driven

mostly by lower sales volumes in the recreational vehicle markets. Scrap

revenues are expected to decline slightly as well based on lower sales volumes

with scrap prices staying flat between the years.

o An increase in earnings from T.O. Plastics mainly driven by year-over-year

sales growth in horticulture, life science and industrial markets.

o Backlog for the manufacturing companies of approximately $179 million for 2020

compared with $211 million one year ago. Raw material price deflation is

driving backlog down by $19 million and the remaining $13 million decrease in


    backlog is volume driven.


? We expect 2020 net income from our Plastics segment to be lower than 2019

based on lower expected operating margins in 2020. This is due to an expected

decline in sale prices of pipe and flat year-over-year resin prices, partially

offset by slightly higher sales volumes in 2020 compared to 2019.

? Corporate costs, net of tax, are expected to be higher in 2020 compared with

2019 primarily driven by higher short-term borrowing costs at the corporate


    level and higher income tax expense, partially offset by lower employee
    benefit and health care costs.



The following table shows our 2019 capital expenditures and 2020 through 2024 anticipated capital expenditures and electric utility average rate base.





(in millions)               2019        2020        2021        2022        2023        2024        Total
Capital Expenditures:
Electric Segment:
Renewables and Natural
Gas Generation                         $   260     $    18     $    51     $    30     $    --     $    359
Technology and
Infrastructure                               7          18          47          54          43          169
Distribution Plant
Replacements                                22          27          34          25          26          134
Transmission (includes
replacements)                               61          26           8          13           9          117
Other                                       19          35          23          18          23          118
Total Electric Segment     $   187     $   369     $   124     $   163     $   140     $   101     $    897
Manufacturing and
Plastics Segments               20          16          18          17          19          17           87
Total Capital
Expenditures               $   207     $   385     $   142     $   180     $   159     $   118     $    984
Total Electric Utility
Average Rate Base          $ 1,170     $ 1,418     $ 1,573     $ 1,634     $ 1,690     $ 1,739
Rate Base Growth                          21.2 %      10.9 %       3.9 %       3.4 %       2.9 %




The capital expenditure plan for the 2020-2024 time period calls for Electric
segment capital expenditures of $897 million based on the need for additional
wind and solar in rate base, capital spending for Astoria Station (part of our
replacement solution for Hoot Lake Plant when it is retired in 2021),
technology-related investments and distribution and transmission investments.
Given this capital expenditure plan, our compounded annual growth rate in rate
base is projected to be 8.2% over the 2019 to 2024 timeframe.



Execution on the currently anticipated Electric segment capital expenditure plan
is expected to grow rate base and be a key driver in increasing utility earnings
over the 2020 through 2024 timeframe.



Our outlook for 2020 is dependent on a variety of factors and is subject to the
risks and uncertainties discussed in Item 1A. Risk Factors, and elsewhere in
this report on Form 10-K.



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Critical Accounting Policies Involving Significant Estimates





Our significant accounting policies are described in note 1 to our consolidated
financial statements included in this report on Form 10-K. The discussion and
analysis of the financial statements and results of operations are based on our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of these consolidated financial statements requires management to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities.



We use estimates based on the best information available in recording
transactions and balances resulting from business operations. Estimates are used
for such items as depreciable lives, asset impairment evaluations, tax
provisions, collectability of trade accounts receivable, self-insurance
programs, unbilled electric revenues, interim rate refunds, warranty reserves
and actuarially determined benefits costs and liabilities. As better information
becomes available or actual amounts are known, estimates are revised. Operating
results can be affected by revised estimates. Actual results may differ from
these estimates under different assumptions or conditions. Management has
discussed the application of these critical accounting policies and the
development of these estimates with the Audit Committee of the board of
directors. The following critical accounting policies affect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements.


Pension and Other Postretirement Benefits Obligations and Costs



Pension and postretirement benefit liabilities and expenses for our electric
utility and corporate employees are determined by actuaries using assumptions
about the discount rate, expected return on plan assets, rate of compensation
increase and healthcare cost-trend rates. See note 11 to our consolidated
financial statements included in this report on Form 10-K for additional
information on our pension and postretirement benefit plans and related
assumptions.



These benefits, for any individual employee, can be earned and related expenses
can be recognized and a liability accrued over periods of up to 30 or more
years. These benefits can be paid out for up to 40 or more years after an
employee retires. Estimates of liabilities and expenses related to these
benefits are among our most critical accounting estimates. Although deferral and
amortization of fluctuations in actuarially determined benefit obligations and
expenses are provided for when actual results on a year-to-year basis deviate
from long-range assumptions, compensation increases and healthcare cost
increases or a reduction in the discount rate applied from one year to the next
can significantly increase our benefit expenses in the year of the change. Also,
a reduction in the expected rate of return on pension plan assets in our funded
pension plan or realized rates of return on plan assets that are well below
assumed rates of return or an increase in the anticipated life expectancy of
plan participants could result in significant increases in recognized pension
benefit expenses in the year of the change or for many years thereafter because
actuarial losses can be amortized over the average remaining service lives of
active employees.



The pension benefit cost for 2020 for our noncontributory funded pension plan is
expected to be $6.8 million compared to $3.4 million in 2019, reflecting a
decrease in the estimated discount rate used to determine annual benefit cost
accruals from 4.5% in 2019 to 3.47% in 2020. The assumed rate of return on
pension plan assets is 6.88% for 2020 compared with 7.25% for 2019. In selecting
the discount rate, we consider the yields of fixed income debt securities, which
have ratings of "Aa" published by recognized rating agencies, along with bond
matching models specific to our plan's cash flows as a basis to determine the
rate.



Subsequent increases or decreases in actual rates of return on plan assets over
assumed rates or increases or decreases in the discount rate or rate of increase
in future compensation levels could significantly change projected costs. For
2019, all other factors being held constant: a 0.25 increase in the discount
rate would have decreased our 2019 pension benefit cost by $842,000; a 0.25
decrease in the discount rate would have increased our 2019 pension benefit cost
by $1,041,000; a 0.25 increase in the assumed rate of increase in future
compensation levels would have increased our 2019 pension benefit cost by
$563,000; a 0.25 decrease in the assumed rate of increase in future compensation
levels would have decreased our 2019 pension benefit cost by $545,000; and a
0.25 increase (or decrease) in the expected long-term rate of return on plan
assets would have decreased (or increased) our 2019 pension benefit cost by
$734,000.



Increases or decreases in the discount rate or in retiree healthcare cost inflation rates could significantly change our projected postretirement healthcare benefit costs. A 0.25 increase in the discount rate would have decreased our 2019 postretirement medical benefit costs by $191,000. A 0.25 decrease in the discount rate would have increased our 2019 postretirement medical benefit costs by $358,000.





We believe the estimates made for our pension and other postretirement benefits
are reasonable based on the information that is known at the point in time the
estimates are made. These estimates and assumptions ae subject to a number of
variables and are subject to change.



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Taxation

We are required to make judgments regarding the potential tax effects of various
financial transactions and our ongoing operations to estimate our obligations to
taxing authorities. These tax obligations include income, real estate and use
taxes. These judgments could result in the recognition of a liability for
potential adverse outcomes regarding uncertain tax positions that we have taken.
While we believe our liability for uncertain tax positions as of December 31,
2019 reflects the most likely probable expected outcome of these tax matters in
accordance with the requirements of Accounting Standards Codification (ASC)
Topic 740, Income Taxes, the ultimate outcome of such matters could result in
additional adjustments to our consolidated financial statements. However, we do
not believe such adjustments would be material.



Deferred income taxes are provided for revenue and expenses which are recognized
in different periods for income tax and financial reporting purposes. We assess
our deferred tax assets for recoverability taking into consideration our
historical and anticipated earnings levels, the reversal of other existing
temporary differences, available net operating loss carryforwards and available
tax planning strategies that could be implemented to realize the deferred tax
assets. Based on this assessment, management must evaluate the need for, and
amount of, a valuation allowance against our deferred tax assets. As facts and
circumstances change, adjustments to the valuation allowance may be required.



Goodwill Impairment

Goodwill is required to be evaluated annually for impairment, according to ASC
350-20-35, Goodwill - Subsequent Measurement. We perform qualitative assessments
of goodwill impairment and quantitative goodwill impairment testing annually in
the fourth quarter. In addition, the quantitative testing is performed on an
interim basis whenever events or circumstances indicate that the carrying amount
of goodwill may not be recoverable. Examples of such events or circumstances may
include a significant adverse change in business climate, weakness in an
industry in which our reporting units operate or recent significant cash or
operating losses with expectations that those losses will continue.



Under Generally Accepted Accounting Principles in the United States, we have the
option of first performing a qualitative assessment to test goodwill for
impairment on a reporting-unit basis. If, after applying the qualitative
assessment, we conclude that it is not more likely than not that the fair value
of the reporting unit is less than its carrying value, the quantitative goodwill
impairment test is not required. If, after performing the qualitative
assessment, we conclude that it is more likely than not that the fair value of
the reporting unit is less than its carrying value, we would perform the
quantitative goodwill impairment test.



The quantitative goodwill impairment test is a two-step process performed at the
reporting unit level. We have determined the reporting units for our goodwill
impairment test are our operating segments, or components of an operating
segment, that constitute a business for which discrete financial information is
available and for which our chief operating decision makers regularly review the
operating results. See note 2 to our consolidated financial statements included
in this report on Form 10-K for additional information on our operating
segments. The first step of the quantitative impairment test involves comparing
the fair value of each reporting unit to its carrying value. If the fair value
of a reporting unit exceeds its carrying value, the test is complete and no
impairment is recorded. If the fair value of a reporting unit is less than its
carrying value, step two of the test is performed to determine the amount of
impairment loss, if any. The impairment is computed by comparing the implied
fair value of the reporting unit's goodwill to the carrying value of that
goodwill. If the carrying value is greater than the implied fair value, an
impairment loss must be recorded. At December 31, 2019 the fair value
substantially exceeded the carrying value at all our reporting units.



Conducting a qualitative assessment to determine if the fair value of a
reporting unit is more likely than not in excess of its carrying value and
determining the fair value of a reporting unit under quantitative testing
requires judgment and the use of significant estimates which include assumptions
about the reporting unit's future revenue, profitability and cash flows, amount
and timing of estimated capital expenditures, inflation rates, weighted average
cost of capital, operational plans, and current and future economic conditions,
among others. The fair value of each reporting unit is determined using a
combination of income and market approaches. We use a discounted cash flow
methodology for our income approach. Under this approach, the discounted cash
flow model determines fair value based on the present value of projected cash
flows over a specified period and a residual value related to future cash flows
beyond the projection period. Both values are discounted using a rate which
reflects the best estimate of the weighted average cost of capital at each
reporting unit. Under the market approach, we estimate fair value using
multiples derived from comparable enterprise value to EBITDA multiples,
comparable price earnings ratios, comparable enterprise value to sales multiples
and if available, comparable sales transactions for comparative peer companies
for each respective reporting unit. These multiples are applied to operating
data for each reporting unit to arrive at an indication of fair value. When
performing a qualitative assessment, we evaluate whether forecast scenarios used
in the most recent quantitative fair value calculation continue to be reasonable
considering industry events and the reporting unit's current circumstances. We
believe the estimates and assumptions used in our impairment assessments are
reasonable and based on available market information, but variations in any of
the assumptions could result in materially different calculations of fair value
and determinations of whether or not impairment is indicated.



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Forward-Looking Information - Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995





This report on Form 10-K contains forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 (the Act). When used in
this Form 10-K and in future filings by the Company with the SEC, in the
Company's press releases and in oral statements, words such as "may," "will,"
"expect," "anticipate," "continue," "estimate," "project," "believes" or similar
expressions are intended to identify forward-looking statements within the
meaning of the Act. Such statements are based on current expectations and
assumptions and entail various risks and uncertainties that could cause actual
results to differ materially from those expressed in such forward-looking
statements. Such risks and uncertainties include the various factors set forth
in Item 1A. Risk Factors of this report on Form 10-K and in our other SEC
filings.

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