OTTER TAIL CORPORATION

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OTTER TAIL CORP MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

05/04/2022 | 01:29pm EDT
You should read the following discussion and analysis of our financial condition
and results of operations together with our interim financial statements and the
related notes appearing under Item 1 of this Quarterly Report on Form 10-Q, and
our annual financial statements and the related notes along with the discussion
and analysis of our financial condition and results of operations contained in
our Annual Report on   Form 10-K   for the year ended December 31, 2021.

Otter Tail Corporation and its subsidiaries form a diverse group of businesses
with operations classified into three segments: Electric, Manufacturing and
Plastics. Our Electric business is a vertically integrated, regulated utility
with generation, transmission and distribution facilities to serve our customers
in western Minnesota, eastern North Dakota and northeastern South Dakota. Our
Manufacturing segment provides metal fabrication for custom machine parts and
metal components and manufactures extruded and thermoformed plastic products.
Our Plastics segment manufactures PVC pipe for use in, among other applications,
municipal and rural water, wastewater, and water reclamation projects.

COVID-19

We continue to monitor the progression of COVID-19 and its impact on our
business. As this pandemic continues, we are following the directives and advice
of government leaders and medical professionals and have adopted practices to
help curtail the spread of the virus and mitigate its impact on our employees,
customers, vendors and other business partners, and communities in which we live
and work.

While the impact of COVID-19 did not materially impact our operating results in
2021 or the first quarter of 2022, uncertainty remains regarding the magnitude
and duration of the pandemic and the resulting potential future financial
effects. Increased infection rates and any future responses to mitigate the
spread of the virus, including any potential vaccination mandates that would
apply to our employees, could impact our business and our financial results in
future periods. We continue to monitor developments involving our workforce,
customers, construction contractors, suppliers and vendors, and the financial
effects on our business. However, due to the unprecedented and evolving nature
of this pandemic, we cannot predict the full extent of the impact COVID-19 will
have on our operating results, financial condition and liquidity.

RESOURCE MATERIAL AVAILABILITY AND PRICING
The cost of steel and PVC resin, two key material inputs to our Manufacturing
and Plastics segments, respectively, significantly impacted our operating
results in the first quarter of 2022.

Steel prices increased rapidly throughout 2021 and remained elevated in the
first quarter of 2022. The increase in steel prices has led to increased sale
prices for our products at BTD Manufacturing, Inc. (BTD), our metal fabrication
business within our Manufacturing segment, as we passed along material cost
increases to our customers. Consistent with steel prices, scrap metal prices
also increased throughout 2021 and remained elevated in the first quarter of
2022. Steel costs remain elevated as mill prices and supply chain costs remain
significantly higher than historical levels. While steel costs are expected to
moderate through 2022, they are expected to remain historically high through the
year. Scrap metal prices are also expected to moderate throughout the year.

PVC resin is the primary material input of the PVC pipe manufactured by our
Plastics segment businesses. Resin supply disruptions throughout 2021, along
with robust domestic and global demand for PVC resin, led to significantly
increased resin prices. Resin supply disruptions also resulted in reduced
manufacturing of PVC pipe and low pipe inventories across the industry. The
combination of disrupted PVC resin supply and the resulting low PVC pipe
inventories along with robust demand for PVC pipe led to rapidly increasing sale
prices for PVC pipe throughout 2021, which continued in the first quarter of
2022. The increase in sale prices has outpaced the increase in PVC resin costs,
leading to expanding gross profit margins and a significant increase in earnings
in our Plastics segment. While PVC resin supplies have improved, the price of
PVC resin is now increasing again, driven by rising feedstock prices from energy
supply disruptions resulting from the conflict in Ukraine. This has created an
environment for U.S. resin producers to raise domestic prices and a
strengthening of the export markets for PVC resin. In addition, beginning in the
second half of 2021 and continuing in the first quarter of 2022, supply
constraints for additives and other ingredients aside from PVC resin used to
manufacture PVC pipe prevented PVC pipe manufacturers from being able to build
inventory levels.

We currently expect the unique market dynamics we experienced in 2021 and the
first quarter of 2022 to continue through the second quarter of 2022, but begin
to subside in the second half of 2022 due to anticipated resin price declines
and slowing demand, thus impacting our gross profit margins. Should current
market conditions continue through the second half of 2022, our Plastics segment
financial results could exceed current expectations.

The marketplace dynamics impacting both our Manufacturing and Plastics segments are fluid and subject to change which may impact our operating results prospectively.

RESULTS OF OPERATIONS - QUARTER TO DATE



Provided below is a summary and discussion of our operating results on a
consolidated basis followed by a discussion of the operating results of each of
our segments: Electric, Manufacturing and Plastics. In addition to the segment
results, we provide an overview of our Corporate costs. Our Corporate costs do
not constitute a reportable segment but rather consist of unallocated general
corporate expenses, such as corporate staff and overhead costs, the results of
our captive insurance company and other items excluded from the measurement of
segment performance. Corporate costs are added to operating segment totals to
reconcile to totals on our consolidated statements of income.

                                                                            

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CONSOLIDATED RESULTS The following table summarizes consolidated operating results for the three months ended March 31, 2022 and 2021:


(in thousands)                                             2022               2021           $ change              % change

Operating Revenues                                 $ 374,904          $ 261,710          $ 113,194                  43.3  %
Operating Expenses                                   276,605            217,511             59,094                  27.2
Operating Income                                      98,299             44,199             54,100                 122.4
Interest Charges                                       8,948              9,398               (450)                 (4.8)
Nonservice Cost Components of Postretirement
Benefits                                                 (22)               383               (405)               (105.7)
Other Income                                             260              1,160               (900)                (77.6)
Income Before Income Taxes                            89,633             35,578             54,055                 151.9
Income Tax Expense                                    17,630              5,249             12,381                 235.9
Net Income                                         $  72,003          $  30,329          $  41,674                 137.4  %


Operating Revenues increased $113.2 million primarily due to rising PVC pipe
prices within our Plastics segment and increased material costs leading to
increased sales prices in our Manufacturing segment. Increased retail revenues
partially offset by decreased wholesales revenues within our Electric segment
also contributed to higher operating revenues in the first quarter of 2021
compared to the same period last year. See our segment disclosures below for
additional discussion of items impacting operating revenues.

Operating Expenses increased $59.1 million primarily due to increased costs of
products sold in our Plastics and Manufacturing segments due to increased raw
material costs. Operating expenses in our Electric segment increased primarily
due to higher operating and maintenance expenses and increased purchased power
costs. See our segment disclosures below for additional discussion of items
impacting operating expenses.

Interest Charges decreased $0.5 million due to a decrease in the interest rate
on our $140.0 million of fixed-rate long-term debt that was refinanced in
December 2021, and a lower level of average short-term borrowings outstanding in
2022 compared to 2021.

Nonservice Cost Components of Postretirement Benefits decreased $0.4 million
primarily due to the amortization of actuarial gains resulting from the increase
in the discount rates used to measure our pension benefit and postretirement
benefit liabilities as of December 31, 2021.

Other Income decreased $0.9 million primarily due to investment losses on our corporate-owned life insurance policies during the first quarter of 2022 compared to investment gains in the same period of the previous year.


Income Tax Expense increased $12.4 million primarily due to increased income
before income taxes. Our effective tax rate was 19.7% in the first quarter of
2022 and 14.8% in the first quarter of 2021. The increase in our effective tax
rate was driven by an increase in our income before income taxes without a
corresponding increase in tax credits and other permanent differences that
impact our effective tax rate. See   Note 8   to our consolidated financial
statements included in this Quarterly Report on Form 10-Q for additional
information regarding factors impacting our effective tax rate in 2022 and 2021.

ELECTRIC SEGMENT RESULTS
The following table summarizes Electric segment operating results for the three
months ended March 31, 2022 and 2021:

(in thousands)                                              2022                2021          $ change              % change

Retail Revenues                                    $  113,639          $  105,706          $  7,933                   7.5  %
Transmission Services Revenues                         12,556              11,944               612                   5.1
Wholesale Revenues                                      2,463               4,507            (2,044)                (45.4)
Other Electric Revenues                                 1,758               1,542               216                  14.0
Total Operating Revenues                              130,416             123,699             6,717                   5.4
Production Fuel                                        14,853              14,714               139                   0.9
Purchased Power                                        20,529              19,260             1,269                   6.6
Operating and Maintenance Expenses                     44,278              41,421             2,857                   6.9
Depreciation and Amortization                          18,382              17,308             1,074                   6.2
Property Taxes                                          4,432               4,320               112                   2.6
Operating Income                                   $   27,942          $   26,676          $  1,266                   4.7  %

                                                            2022                2021            change              % change

Electric kilowatt-hour (kwh) Sales (in thousands)
Retail kwh Sales                                    1,515,297           1,348,519           166,778                  12.4  %
Wholesale kwh Sales - Company Generation               66,187              80,423           (14,236)                (17.7)
Heating Degree Days                                     3,821               3,078               743                  24.1


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The operating results of our Electric segment are impacted by fluctuations in
weather conditions and the resulting demand for electricity for heating and
cooling. The following table shows heating degree days as a percent of normal
for the three months ended March 31, 2022 and 2021.

                           2022        2021

Heating Degree Days    111.8  %     89.5  %


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 2022 and 2021, and
between years.

                                        2022 vs      2022 vs      2021 vs
                                        Normal        2021        Normal

Effect on Diluted Earnings Per Share $ 0.04 $ 0.08 $ (0.04)

Retail Revenues increased $7.9 million primarily due to the following:

•A $4.4 million increase in revenues from the favorable impact of weather in the first quarter of 2022 compared to the same period last year.


•A $3.6 million increase in fuel recovery revenues primarily due to increased
production fuel and purchase power costs and a decrease in credits provided to
retail customers from decreased margins recognized on wholesale sales.

•A $2.3 million increase in retail sales volumes from commercial and industrial customers.


•A $2.4 million decrease in interim rate revenue in Minnesota as a result of our
April 2021 filing with the MPUC in which we lowered our requested net annual
revenue increase, primarily due to a reduction in operating costs from amounts
included in our original filing.

Wholesale Revenues decreased $2.0 million as a result of a 18% decrease in
wholesale sales volumes and a 34% decrease in wholesale prices. Wholesale energy
sales in the first quarter of 2021 were comparatively higher due to high prices
driven by high market demand and availability constraints caused by winter storm
activity, which drove up spot market prices for electricity.

Production Fuel costs increased $0.1 million as a result of increased fuel cost
per kwh, which was largely offset by a 15% decrease in kwhs generated from our
fuel-burning plants due to the retirement of our coal-burning Hoot Lake Plant in
May 2021.

Purchased Power costs to serve retail customers increased $1.3 million primarily due to a 59% increase in the volume of purchased power resulting from the retirement of Hoot Lake Plant and increased demand due to cold weather, partially offset by a decrease in the price of purchased power.


Operating and Maintenance Expense increased $2.9 million due to increased
operating and maintenance costs as a result of Merricourt and Astoria Station
because the facilities were fully operational in the first quarter of 2022 and
were ramping up in the previous year because they had recently been placed into
service; increased incentive compensation costs related to current year
financial and operational performance; increased travel costs resulting from
eased COVID restrictions; and increased insurance costs. These increased costs
were partially offset by a decrease in CIP expenses as CIP spending decreased
compared to the previous year.

Depreciation and Amortization expense increased $1.1 million primarily due to Astoria Station being placed in service in February of 2021.


MANUFACTURING SEGMENT RESULTS
The following table summarizes Manufacturing segment operating results for the
three months ended March 31, 2022 and 2021:

(in thousands)                                             2022              2021          $ change              % change

Operating Revenues                                 $ 104,957          $ 75,825          $ 29,132                  38.4  %
Cost of Products Sold (excluding depreciation)        86,161            56,311            29,850                  53.0
Other Operating Expenses                               8,847             8,212               635                   7.7
Depreciation and Amortization                          4,014             3,757               257                   6.8
Operating Income                                   $   5,935          $  7,545          $ (1,610)                (21.3) %


Operating Revenues increased $29.1 million primarily due to a $29.3 million
increase in material costs at BTD, which are passed through to customers, as a
result of higher steel prices. Steel prices increased rapidly throughout 2021
and remained elevated in the first quarter of 2022, which resulted in increased
revenues as we sell through high-priced inventory. Operating revenues also
increased slightly due to price increases related to inflationary costs being
experienced across the business. The increase in operating revenues was
partially offset by a 5% decrease in sales volumes. End market demand has
remained strong, however, supply chain disruptions experienced by our OEM
customers have led to unpredictable shipments of products as customers have
delayed or adjusted their shipment timing in response to other supply chain
challenges they are experiencing, which has negatively impacted our sales
volumes. Increases in sales prices and volumes at T.O. Plastics, due to strong
customer demand in the horticulture sector, also contributed to the segment
increase in operating revenues.

Cost of Products Sold increased $29.9 million primarily due to higher material,
labor and freight costs at BTD. The increase in material cost was largely driven
by increased steel prices as mentioned above. The increases in labor and freight
costs, and lower productivity resulted in lower gross profit margins compared to
the same period in 2021. Aligning labor with unpredictable demand led to lower
production efficiency which had a

                                                                            

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negative impact on gross profit margins. Increases in sales volumes at T.O.
Plastics also impacted costs of products sold, and gross profit margins were
negatively impacted by product mix and increased maintenance and freight costs.

Other Operating Expenses increased $0.6 million due to increases in various cost
categories including salaries and wages, due to increases in headcount compared
to the previous year, and software and service provider costs, partially offset
by lower incentive compensation.

PLASTICS SEGMENT RESULTS
The following table summarizes Plastics segment operating results for the three
months ended March 31, 2022 and 2021:

(in thousands)                                             2022              2021        $ change            % change

Operating Revenues                                 $ 139,531          $ 62,186          $ 77,345                 124.4  %
Cost of Products Sold (excluding depreciation)        65,598            45,666            19,932                  43.6
Other Operating Expenses                               3,964             2,944             1,020                  34.6
Depreciation and Amortization                          1,107               990               117                  11.8
Operating Income                                   $  68,862          $ 12,586          $ 56,276                 447.1  %


Operating Revenues increased $77.3 million primarily due to a 125% increase in
the price per pound of PVC pipe sold. The increase in sale prices was primarily
due to continued strong demand for PVC pipe products and limited PVC pipe
inventories. The unique supply and demand market conditions in the first quarter
of 2022 were a continuation of the market dynamics experienced throughout 2021.
In the first quarter of 2022, we, along with other PVC pipe manufacturers,
experienced supply constraints of additives and other ingredients used to make
PVC pipe, which prevented us and others from being able to build inventory
levels. PVC resin supply disruptions improved during the quarter. Expected
declines in the price of PVC resin did not materialize and resin prices
continued to increase in March due to increasing feedstock prices and stronger
than expected export markets. Sales volumes in the first quarter of 2022 were
consistent with sales volumes in the first quarter of 2021.

Cost of Products Sold increased $19.9 million primarily due to increased PVC
resin and other input material costs, which increased 52% due to the market
conditions described above. Labor, freight and various non-resin material costs
also increased from the previous year.

Other Operating Expenses increased $1.0 million due to increases in various cost categories including compensation costs and sales commissions.


CORPORATE COSTS
The following table summarizes Corporate operating results for the three months
ended March 31, 2022 and 2021:

(in thousands)                        2022         2021      $ change      % change

Other Operating Expenses $ 4,395 $ 2,537 $ 1,858 73.2 % Depreciation and Amortization 45

           71           (26)       (36.6)
Operating Loss                   $ 4,440      $ 2,608      $  1,832         70.2  %


Other Operating Expenses increased $1.9 million primarily due to increased
compensation expenses, including stock and incentive compensation, in the first
quarter of 2022 which were higher than the amount recognized in the same period
in the previous year due to our current year financial performance.

REGULATORY RATE MATTERS

The following provides a summary of general rate case filings, rate rider filings and other regulatory filings that have or are expected to have a material impact on our operating results, financial position or cash flows.


GENERAL RATES
Minnesota Rate Case: On November 2, 2020, OTP filed a request with the MPUC for
an increase in revenue recoverable through base rates in Minnesota. In its
filing, OTP requested a net increase in annual revenue of approximately $14.5
million, or 6.77%, based on an allowed rate of return on rate base of 7.59% and
an allowed rate of return on equity of 10.20% on an equity ratio of 52.5% of
total capital. Through this proceeding, OTP had proposed changes to the
mechanism of cost recovery, with some costs moving from riders into base rates
and fuel, purchased power, and conservation program costs moving out of base
rates and into riders. The filing also included a revenue decoupling mechanism
proposal. Such mechanisms are designed to separate a utility's revenue from
changes in energy sales. The decoupling mechanism uses a tracker balance through
which authorized customer margins are subject to a true-up mechanism to maintain
or cap a given level of revenues.

On December 3, 2020, the MPUC approved an interim annual rate increase of $6.9
million, or 3.2%, effective January 1, 2021. This approval was provided after an
alternative recovery proposal was submitted by OTP which, among other changes,
requested the extension of depreciable lives of certain wind-related assets and
proposed deferral of certain cost recovery decisions to the final rate
determination. In the aggregate, this alternative recovery proposal reduced
operating costs and delayed recovery of certain other costs by approximately
$7.0 million to lessen the interim rate impact on customers.

In a filing submitted to the MPUC on April 30, 2021, OTP lowered its initially
requested net annual revenue increase from $14.5 million to $8.2 million,
primarily due to a reduction in operating costs from amounts included in its
November 2020 filing. Among other items, the cost reductions included lower
depreciation expense on our wind generation assets due to the extension of
depreciable lives from 25 to 35 years and a reduction in postretirement benefit
costs.

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On February 1, 2022, the MPUC issued its written order. The key provisions of
the order include a revenue requirement of $209.0 million, based on a return on
rate base of 7.18% and an allowed return on equity of 9.48% on an equity ratio
of 52.5%. The order also authorizes recovery of our remaining Hoot Lake Plant
net asset over a five-year period, and approves the requested decoupling
mechanism for most residential and commercial customer rate groups with a cap of
4% of annual base revenues.

On March 8, 2022, OTP filed its final rate case compliance filing, which
included final revenue calculations, rate design and resulting tariff revisions,
along with a proposal for interim rate refunds. The final calculations included
a revision to the calculation of interim rates. If approved by the MPUC, this
revision could increase interim revenues in the period the filing is approved by
an amount of approximately $4.0 million. We expect the MPUC will issue its order
and implement final rates in mid-2022.

RATE RIDERS
The following table includes a summary of pending and recently concluded rate
rider proceedings:

  Recovery                                                    Filing              Amount              Effective
  Mechanism          Jurisdiction           Status             Date            (in millions)             Date                             Notes

                                                                                                                        Includes recovery of energy conservation
CIP - 2022                MN             Requested            04/01/22       $         10.8              10/01/22       improvement costs as well as a demand side
                                                                                                                        management financial incentive.
                                                                                                                        Includes recovery of energy conservation
CIP - 2021                MN             Approved             04/01/21                  9.4              12/01/21       improvement costs as well as a demand side
                                                                                                                        management financial incentive.
TCR - 2021                MN             Requested            11/23/21                  7.2              07/01/22       Includes recovery of two new transmission
                                                                                                                        projects.
                                                                                                                        Includes return on Hoot Lake Solar
RRR - 2021                MN             Requested            12/06/21                  7.0              07/01/22       construction costs and costs associated
                                                                                                                        with the acquisition of the Ashtabula III
                                                                                                                        wind farm.
RRR - 2021                ND             Approved             03/07/21                 11.8              04/01/21       Includes recovery of Merricourt investment
                                                                                                                        and operating costs.
                                                                                                                        Includes Merricourt recovery, the proposed
RRR - 2022                ND             Approved             01/05/22                  7.8              04/01/22       purchase of Ashtabula III and credits
                                                                                                                        related to deferred taxes and production
                                                                                                                        tax credits.
TCR - 2021                ND             Approved             09/15/21                  6.1              01/01/22       Includes recovery of three new
                                                                                                                        transmission projects/programs.
TCR - 2020                ND             Approved             11/18/20                  5.6              01/01/21       Includes recovery of eight new
                                                                                                                        transmission projects.
                                                                                                                        Includes recovery of Astoria Station, net
GCR - 2021                ND             Approved             03/01/21                  5.2              07/01/21       of anticipated savings associated with the
                                                                                                                        retirement of Hoot Lake Plant.
GCR - 2022                ND             Requested            03/01/22                  3.3              07/01/22       Annual update to generation cost recovery
                                                                                                                        rider.
TCR - 2020                SD             Approved             01/29/20                  2.3              03/02/20       Annual update to transmission cost
                                                                                                                        recovery rider.
TCR - 2021                SD             Approved             10/29/21                  2.2              03/01/22       Annual update to transmission cost
                                                                                                                        recovery rider.
TCR - 2021                SD             Approved             02/19/21                  2.2              03/01/21       Includes recovery of two new transmission
                                                                                                                        projects.


INTEGRATED RESOURCE PLAN
On September 1, 2021, OTP filed its 2022 Integrated Resource Plan (IRP)
concurrently with regulators in the three states where OTP operates, Minnesota,
North Dakota and South Dakota. The 2022 IRP includes OTP's preferred plan for
meeting customers' anticipated capacity and energy needs while maintaining
system reliability and low electric service rates.

The components of OTP's preferred plan include:

-the addition of dual fuel capability at our Astoria Station natural gas plant;

-the addition of 150 megawatts of solar generation in 2025;

-the addition of 100 megawatts of wind generation in 2027;


-the commencement of the process of withdrawing from our 35 percent ownership
interest in Coyote Station, a jointly owned, coal-fired generation plant, by
December 31, 2028; and

-the addition of 50 megawatts of solar generation in 2033.


Although the 2022 IRP includes planned actions beyond 2026, regulators will not
act upon or approve planned actions in periods beyond 2026 as part of our 2022
IRP filing.

Subject to regulatory approval, the preferred plan proposes to create a
regulatory asset as a vehicle to recover costs related to a future withdrawal
from Coyote Station, including the net book value of the plant on the withdrawal
date, anticipated decommissioning costs and any required costs incurred as a
result of an early termination of the existing lignite sales agreement, under
which Coyote Station acquires all of its lignite coal from a nearby mine. As
part of the filing, OTP developed an estimate of the reasonably foreseeable
costs of withdrawing from Coyote Station at the end of 2028 of $68.5 million.
These costs may differ from actual results due to the uncertainty and timing of
future events associated with the terms and conditions of a withdrawal.

                                                                            

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We currently anticipate the MPUC, barring any delays in the procedural schedule,
will hold deliberations and render a decision on the IRP by the end of 2022.
There currently is no procedural schedule established for this IRP by the North
Dakota Public Service Commission.

LIQUIDITY



LIQUIDITY OVERVIEW
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 us ample liquidity to conduct our business operations, fund our
short-term and long-term capital expenditure plans and satisfy our obligations
as they become due. Our liquidity, including our operating cash flows and access
to capital markets, can be impacted by macroeconomic factors outside of our
control. In addition, our liquidity could be impacted by non-compliance with
covenants under our various debt instruments. As of March 31, 2022, we were in
compliance with all financial covenants (see the Financial Covenants section
under Capital Resources below).

The following table presents the status of our lines of credit as of March 31,
2022 and December 31, 2021:

                                                                                       2022                                     2021
                                                                       Amount             Letters              Amount              Amount
(in thousands)                              Line Limit            Outstanding           of Credit           Available           Available

OTC Credit Agreement                     $  170,000          $      43,281          $        -          $  126,719          $  147,363
OTP Credit Agreement                        170,000                 54,489               7,844             107,667              88,315
Total                                    $  340,000          $      97,770          $    7,844          $  234,386          $  235,678


We have an internal risk tolerance metric to maintain a minimum of $50 million
of liquidity under the OTC Credit Agreement. Should additional liquidity be
needed, this agreement includes an accordion feature allowing us to increase the
amount available to $290 million, subject to certain terms and conditions. The
OTP Credit Agreement also includes an accordion feature allowing OTP to increase
that facility to $250 million, subject to certain terms and conditions.

CASH FLOWS The following is a discussion of our cash flows for the three months ended March 31, 2022 and 2021:


(in thousands)                                     2022          2021

Net Cash Provided by Operating Activities $ 45,416 $ 15,270



Net Cash Provided by Operating Activities increased $30.1 million for the three
months ended March 31, 2022 compared to the three months ended March 31, 2021.
The increase in cash provided by operating activities was primarily the result
of increased earnings during the year, which was partially offset by increased
working capital needs. Our level of working capital increased year over year and
was impacted by increased accounts receivables within our Manufacturing and
Plastics segments, due to strong sales volumes and significantly increased sales
prices in 2022, partially offset by increased accounts payable due to increased
material costs in our Manufacturing and Plastics segments in 2022. Operating
cash flows were also reduced by a discretionary contribution to our pension plan
of $20.0 million during the three months ended March 31, 2022, compared to a
contribution of $10.0 million in 2021.
(in thousands)                                  2022          2021

Net Cash Used in Investing Activities $ 31,449 $ 49,020



Net Cash Used in Investing Activities decreased $17.6 million for the three
months ended March 31, 2022 compared to the three months ended March 31, 2021.
The decrease in capital expenditures was primarily related to costs incurred in
2021 by OTP to complete our Astoria Station project, and other one-time
projects. Capital investment spending in our Manufacturing and Plastics segments
also decreased from the previous year.

(in thousands)                                               2022          

2021

Net Cash (Used in) Provided by Financing Activities $ (14,133) $ 33,799



Net Cash (Used in) Provided by Financing Activities decreased $47.9 million for
the three months ended March 31, 2022 compared to the three months ended
March 31, 2021, primarily as a result of a decrease in financing needs given the
lower level of capital spending in our Electric segment and the increase in cash
provided by operating activities. Financing activities for the three months
ended March 31, 2022 included net proceeds from short-term borrowings of $6.6
million and dividend payments of $17.2 million. Financing activities for the
three months ended March 31, 2021 included net proceeds from short-term
borrowings of $53.9 million, primarily incurred to fund major construction
projects, and dividend payments of $16.2 million.

CAPITAL REQUIREMENTS


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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 in
our electric segment are investments in electric generation facilities,
including wind and solar investments, environmental upgrades, transmission lines
and distribution systems, and computer hardware and information systems. Our
electric segment capital expenditure program is subject to review and regulatory
approval 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 financial condition. Our future
capital expenditure plans also include investments in manufacturing facilities
and facility upgrades, manufacturing equipment additions and upgrades and
additional technology assets to be used in our manufacturing operations. Refer
to Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, of our   Form 10-K   for the year ended December 31, 2021
for our capital expenditure plan for the five year period from 2022 through
2026.

CONTRACTUAL OBLIGATIONS
Our contractual obligations primarily include principal and interest payments
due under our outstanding debt obligations, commitments to acquire coal, energy
and capacity commitments, payments to meet our postretirement benefit
obligations, and payment obligations under land easement and leasing
arrangements. Our contractual obligations as of December 31, 2021 are included
in Item 7, Management's Discussion and Analysis of Financial Condition and
Results of Operations, of our Annual Report on   Form 10-K   for the year ended
December 31, 2021. There were no material changes in our contractual obligations
outside of the ordinary course of our business during the three months ended
March 31, 2022.

Off-Balance Sheet Arrangements
As of March 31, 2022, we have outstanding letters of credit totaling $11.0
million, a portion of which reduces our borrowing capacity under our lines of
credit. No outstanding letters of credit are reflected in outstanding short-term
debt on our consolidated balance sheets. We do not have any other
off-balance-sheet arrangements or any relationships with unconsolidated entities
or financial partnerships that have, or are reasonably likely to have, a
material current or future effect on our financial condition. 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.

COMMON STOCK DIVIDENDS
We paid dividends to our common stockholders totaling $17.2 million, or $0.4125
per share, in the first three months of 2022. The determination of the amount of
future cash dividends to be 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 10   to our consolidated
financial statements included in this Quarterly Report on Form 10-Q for
additional information. The decision to declare a dividend is reviewed quarterly
by our Board of Directors.

CAPITAL RESOURCES


Financial flexibility is provided by operating cash flows, unused lines of
credit and access to capital markets, which is aided by strong financial
coverages and investment grade credit ratings. Debt financing will be required
in the five-year period from 2022 through 2026 to refinance maturing debt and to
finance our capital investments. Our financing plans are subject to change and
are impacted by our planned level of capital investments, decisions to reduce
borrowings under our lines of credit, to refund or retire early any of our
presently outstanding debt, to complete acquisitions, or to use capital for
other corporate purposes.

REGISTRATION STATEMENTS
On May 3, 2021, 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. No new debt or equity has been issued pursuant to the
registration statement. The registration statement expires in May 2024.

On May 3, 2021, we filed a second registration statement with the SEC for the
issuance of up to 1,500,000 common shares under an Automatic Dividend
Reinvestment and a Share Purchase Plan, which provides shareholders, retail
customers of OTP and other interested investors methods of purchasing our common
shares, by reinvesting their dividends or making optional cash investments.
Shares purchased under the plan may be newly issued common shares or common
shares purchased on the open market. As of March 31, 2022, there was 1,348,716
shares available for purchase or issuance under the plan. The registration
statement expires in May 2024.

SHORT-TERM DEBT
OTC and OTP are each party to a credit agreement (the OTC Credit Agreement and
OTP Credit Agreement, respectively) which each provide for unsecured revolving
lines of credit. The following is a summary of key provisions and borrowing
information as of, and for the three months ended, March 31, 2022:

                                                                            

25

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Table of Contents

                                                                       OTC Credit             OTP Credit
(in thousands, except interest rates)                                   Agreement              Agreement

Borrowing Limit                                                $     170,000            $    170,000
Borrowing Limit if Accordion Exercised1                              290,000                 250,000

Amount Restricted Due to Outstanding Letters of Credit as of March 31, 2022

                                                             -                   7,844
Amount Outstanding as of March 31, 2022                               43,281                  54,489

Average Amount Outstanding During the Three Months Ended March 31, 2022

                                                              35,493                  66,098

Maximum Amount Outstanding During the Three Months Ended March 31, 2022

                                                              58,715                  74,519
Interest Rate as of March 31, 2022                                      1.92    %               1.64   %
                                                                                           September 30,
Maturity Date                                                  September 30, 2026                   2026

1Each facility includes an accordion featuring allowing the borrower to increase the borrowing limit if certain terms and conditions are met.



LONG-TERM DEBT
At March 31, 2022, we had $767.0 million of principal outstanding under
long-term debt arrangements. These instruments generally provide for unsecured
borrowings at fixed rates of interest with maturities ranging from 2022 to 2051.
Pursuant to a Note Purchase Agreement executed in June 2021, OTP intends to
issue its Series 2022A notes due May 20, 2052, in May 2022 for aggregate
proceeds of $90.0 million, subject to the satisfaction of certain customary
conditions to closing, and use a portion of the proceeds to repay the $30.0
million Series 2007B Notes which are maturing in August 2022.

  Note 6   to our consolidated financial statements included in this Quarterly
Report on Form 10-Q includes additional information regarding these short-term
and long-term debt instruments.

Financial Covenants Certain of our short- and long-term debt agreements require OTC and OTP to maintain certain financial covenants. As of March 31, 2022, we were in compliance with these financial covenants as further described below:


OTC, under its financial covenants, may not permit its ratio of interest-bearing
debt to total capitalization to exceed 0.60 to 1.00, may not permit its interest
and dividend coverage ratio to be less than 1.50 to 1.00, and may not permit its
priority indebtedness to exceed 10% of our total capitalization. As of March 31,
2022, our interest-bearing debt to total capitalization was 0.45 to 1.00, our
interest and dividend coverage ratio was 8.35 to 1.00, and we had no priority
indebtedness outstanding.

OTP, under its financial covenants, may not permit its ratio of debt to total
capitalization to exceed 0.60 to 1.00, may not permit its interest and dividend
coverage ratio to be less than 1.50 to 1.00, and may not permit its priority
debt to exceed 20% of its total capitalization. As of March 31, 2022, OTP's
interest-bearing debt to total capitalization was 0.47 to 1.00, its interest and
dividend coverage ratio was 3.33 to 1.00, and OTP had no priority indebtedness
outstanding.

CRITICAL ACCOUNTING POLICIES INVOLVING SIGNIFICANT ESTIMATES



The discussion and analysis of our results of operations are based on financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America. Certain of our accounting policies require
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 in the preparation of our consolidated financial
statements. We have disclosed in our Annual Report on   Form 10-K   for the year
ended December 31, 2021 the critical accounting policies that affect our most
significant estimates and assumptions used in preparing our consolidated
financial statements. There have been no material changes to our critical
accounting policies and estimates from those disclosed in the most recent Annual
Report on Form 10-K.

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