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OFFON

OTTER TAIL CORPORATION

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

08/06/2021 | 12:23pm EST
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 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, 2020.
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 the novel coronavirus (COVID-19) and
its impact on our businesses, employees, customers, construction contractors and
vendors. 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 communities,
employees, construction contractors, customers and business operations. Our
Electric segment business provides a critical service to our customers and our
manufacturing businesses provide products and support to critical infrastructure
industries. We continue to operate our businesses in a manner that is safe for
our employees and our customers.
Beginning in March 2020, COVID-19 and the resulting economic conditions
negatively impacted operating results of our Manufacturing segment as customer
demand declined significantly in the second quarter of 2020. Sales volumes
strengthened in the third and fourth quarters of 2020 due to strong recreational
vehicle and lawn and garden end-market demand. Our Electric and Plastics
segments operating results were also impacted in 2020. Within our Electric
segment, we experienced reduced demand from commercial and industrial customers
and increased costs for bad debts. In our Plastics segment, we experienced lower
sales volumes in the second quarter of 2020 as distributors of our products
reduced inventory levels given the uncertainty of the potential impact of
COVID-19. Sales volumes recovered and gross profit margins increased in the
third and fourth quarters of 2020, and have continued to increase in 2021, due
to increased demand and concerns of supply disruptions.
The impact of COVID-19 and the resulting macroeconomic conditions on our
business and financial results began to ease in the first quarter of 2021 and
continued to do so through the second quarter of 2021. However, uncertainty
remains regarding the magnitude and duration of the pandemic and resulting
financial effects. Increased infection rates and any future responses to
mitigate the spread of the virus 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
Supply shortages of steel and resin, two key material inputs to our
Manufacturing and Plastics segments, respectively, have impacted our operating
results in 2021. Steel supply shortages have arisen primarily due to steel mill
capacity reductions in 2020 in response to lower steel demand due to COVID-19.
Resin shortages arose as a result of production plant shutdowns due to
abnormally low temperatures and ice storms in the Gulf Coast region of the
United States in the first quarter of 2021. Production and availability of steel
and resin have begun to improve as steel mill and resin production facilities
increase their capacities, but we anticipate supply constraints to persist
through 2021. These supply shortages have led to significantly increased prices
for steel and resin and limited our production capabilities.
The increase in steel prices has led to increased sale prices for our products
at BTD, our metal fabrication business within our Manufacturing segment, as we
pass along material cost increases to our customers. In addition, limited steel
availability has led to increased complexity in managing our business, including
our production schedules, and increased costs. We anticipate increased steel
prices will continue throughout the remainder of 2021 but begin to subside in
2022.
The increase in resin prices, along with low pipe inventories and robust
domestic and global demand, have led to rapidly increased sales prices for PVC
pipe within our Plastics segment. The increase in sale prices for PVC pipe has
outpaced the increase in resin cost increases, leading to expanding gross profit
margins and a significant increase in net earnings in our Plastics segment. We
anticipate these market dynamics will continue throughout the remainder of 2021
but begin to subside in 2022. Accordingly, we do not anticipate Plastics segment
earnings in 2022 to remain at current levels given the unique market dynamics
present this year.
The marketplace dynamics impacting both our Manufacturing and Plastics segments
are fluid and subject to change which may impact our operating results
prospectively.

                                                                            

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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.
Intersegment transactions were not material in 2021 or 2020 and amounted to less
than $0.1 million of operating revenues and operating expenses for each period.
CONSOLIDATED RESULTS
The following table summarizes consolidated operating results for the three
months ended June 30, 2021 and 2020:
(in thousands)                                             2021               2020          $ change              % change

Operating Revenues                                 $ 285,608          $ 192,756          $ 92,852                  48.2  %
Operating Expenses                                   225,786            164,847            60,939                  37.0
Operating Income                                      59,822             27,909            31,913                 114.3
Interest Charges                                       9,555              8,662               893                  10.3
Nonservice Cost Components of Postretirement
Benefits                                                 624                868              (244)                (28.1)
Other Income                                             734              2,410            (1,676)                (69.5)
Income Before Income Taxes                            50,377             20,789            29,588                 142.3
Income Tax Expense                                     8,308              3,808             4,500                 118.2
Net Income                                         $  42,069          $  16,981          $ 25,088                 147.7  %


Operating Revenues increased $92.9 million primarily due to rising PVC pipe
prices and increased sales volumes within our Plastics segment and increased
volumes and material cost, leading to increased sales prices, in our
Manufacturing segment. Retail, transmission services and wholesale revenues
within our Electric segment also contributed to higher operating revenues in the
second 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 $60.9 million primarily due to increased costs of
products sold in our Manufacturing and Plastics segments due to increased raw
material costs and higher sales volumes. Operating expenses in our Electric
segment increased primarily due to higher depreciation and amortization expense
arising from our recent rate base investments and higher operating and
maintenance expenses. See our segment disclosures below for additional
discussion of items impacting operating expenses.
Interest Charges increased $0.9 million due to interest expense from our $40.0
million long-term debt issuance in August 2020, a higher level of short-term
borrowings outstanding in 2021 compared to 2020 and a decrease in capitalized
interest in 2021 following the completion and placement in-service of Astoria
Station in the first quarter of 2021.
Other Income decreased $1.7 million primarily due to lower earned equity AFUDC
due to the completion and placement in-service of Astoria Station in the first
quarter of 2021. During the construction of Astoria Station we earned AFUDC in
our Minnesota jurisdiction. Also contributing to the decrease in other income
was lower market-based gains on our corporate-owned life insurance policies and
other investments in the second quarter of 2021 compared to the same period of
2020.
Income Tax Expense increased $4.5 million primarily due to increased income
before income taxes. Our effective tax rate was 16.5% in the second quarter of
2021 and 18.3% in the second quarter of 2020. The decrease in our effective tax
rate was driven by PTCs earned in the second quarter of 2021 from our Merricourt
wind farm, which was placed in service in the fourth quarter of 2020, partially
offset by other permanent differences. See   Note 8   to our consolidated
financial statements included in this report on Form 10-Q for additional
information regarding factors impacting our effective tax rate in 2021 and 2020.
                                                                            

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ELECTRIC SEGMENT RESULTS
The following table summarizes Electric segment operating results for the three
months ended June 30, 2021 and 2020:
(in thousands)                                               2021                 2020          $ change              % change

Retail Revenues                                    $    88,987          $    85,553          $  3,434                   4.0  %
Transmission Services Revenues                          11,840                9,673             2,167                  22.4
Wholesale Revenues                                       3,260                  765             2,495                 326.1
Other Electric Revenues                                  2,068                2,162               (94)                 (4.3)
Total Operating Revenue                                106,155               98,153             8,002                   8.2
Production Fuel                                         12,164                8,788             3,376                  38.4
Purchased Power                                         11,135               13,682            (2,547)                (18.6)
Operating and Maintenance Expenses                      36,729               33,179             3,550                  10.7
Depreciation and Amortization                           18,153               15,740             2,413                  15.3
Property Taxes                                           4,342                4,168               174                   4.2
Operating Income                                   $    23,632          $    22,596          $  1,036                   4.6  %

                                                             2021                 2020            change              % change

Electric kilowatt-hour (kwh) Sales (in thousands)
Retail kwh Sales                                     1,086,631            1,033,053            53,578                   5.2  %
Wholesale kwh Sales - Company Generation               104,151               42,140            62,011                 147.2
Heating Degree Days                                        533                  635              (102)                (16.1)
Cooling Degree Days                                        237                  170                67                  39.4


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 and cooling degree days as a percent
of normal for the three months ended June 30, 2021 and 2020.
                           2021         2020

Heating Degree Days    101.1  %     122.1  %
Cooling Degree Days    206.1  %     156.0  %


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 2021 and 2020, and
between years.
                                        2021 vs      2021 vs       2020 vs
                                        Normal         2020        Normal

Effect on Diluted Earnings Per Share $ 0.03 $ - $ 0.03

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Retail Revenues increased $3.4 million primarily due to the following:
•A $1.5 million increase in new retail revenues from an interim rate increase in
Minnesota, net of estimated refunds, effective January 1, 2021 in connection
with our rate case filed in November 2020.
•A $1.5 million increase in retail revenue from commercial and industrial
customers primarily due to increased demand as volumes improve from 2020, which
was negatively impacted by COVID-19.
•A $1.4 million increase in revenues primarily related to the recovery of
Merricourt and Astoria Station project costs and operating expenses.
•Recovery of increased conservation improvement program expenditures as well as
increased transmission rider revenues.
These increases in revenue were partially offset by a $2.1 million decrease in
fuel recovery revenues largely due to credits provided to customers from
increased margins on wholesale sales.
Transmission Services Revenues increased $2.2 million primarily due to higher
transmission volume from increased electrical demand as well as increased
generator interconnection revenues.
Wholesale Revenues increased $2.5 million as a result of a 147.2% increase in
wholesale sales volumes and a 72.4% increase in wholesale prices driven by high
market demand for wholesale energy.
Production Fuel costs increased $3.4 million mainly as a result of a 42.0%
increase in kwhs generated from our fuel-burning plants due to higher demand and
favorable prices for energy in wholesale markets.
Purchased Power costs to serve retail customers decreased $2.5 million primarily
due to a 15.7% decrease in the volume of purchased power as our recent capacity
additions provide additional generation resources to serve customer demand.
Operating and Maintenance Expense increased $3.6 million mainly due to:
•$1.4 million of Merricourt and Astoria Station operating and maintenance
expenses incurred in the second quarter of 2021 as these facilities are now
commercially operational.
•A $0.8 million increase in transmission tariff expenses.
•Other additional expenses including an increase in conservation improvement
program expenditures, which are recovered through retail rates, increased
vegetative maintenance expenses and plant maintenance expenses.
These expense increases were partially offset by, among other items, lower bad
debt expense due to improving customer collections as the economic impact of
COVID-19 has eased.
Depreciation and Amortization expense increased $2.4 million primarily due to
Merricourt and Astoria Station being placed in service in the fourth quarter of
2020 and the first quarter of 2021, respectively.
MANUFACTURING SEGMENT RESULTS
The following table summarizes Manufacturing segment operating results for the
three months ended June 30, 2021 and 2020:
(in thousands)                         2021          2020      $ change      % change

Operating Revenues               $ 84,284      $ 45,948      $ 38,336         83.4  %
Cost of Products Sold              62,725        36,087        26,638         73.8
Other Operating Expenses            9,735         5,499         4,236         77.0
Depreciation and Amortization       3,844         3,739           105          2.8
Operating Income                 $  7,980      $    623      $  7,357             n/m


Operating Revenues increased $38.3 million primarily from increased sales
volumes at BTD. BTD experienced a 52.4% increase in sales volumes and $12.0
million increase in material costs, which are passed through to customers
through increased sales prices. Sales volumes in the second quarter of 2020 were
negatively impacted by COVID-19 as customers implemented temporary plant
shutdowns due to the pandemic. Sales volumes in the second quarter of 2021 have
rebounded as customer demand across all end markets has been robust. The
increase in material costs are largely the result of historically high steel
prices due to supply shortages as steel mill capacity rebounds from COVID-19
related capacity reductions in 2020. We anticipate steel prices will remain
elevated for the remainder of 2021. Also contributing to the improved financial
performance was an increase in scrap revenues primarily due to increased scrap
metal prices but also higher volumes, and improved gross profit margins
resulting from an increase in production volumes. Increased horticultural
product sales at T.O. Plastics in 2021, driven by increasing customer demand,
also contributed to increased operating revenues in 2021 as compared to 2020.
Cost of Products Sold increased $26.6 million primarily due to increased volumes
and higher material, labor and freight costs at BTD. The increase in material
cost is largely driven by increased steel prices as mentioned above. The
increase in sales volumes and production activity in 2021 has led to improved
gross profit margins despite the higher labor and freight costs due to increased
leveraging of fixed production costs. Increased sales volumes and production
activity at T.O. Plastics also contributed to the increase in cost of products
sold in 2021.
Other Operating Expenses increased $4.2 million in the second quarter of 2021
compared to 2020. Other operating expenses in the second quarter of 2020 were
reduced by approximately $2.3 million as a result of initiatives taken to reduce
operating costs to mitigate the impact of declining sales volumes from the
effects of COVID-19. Other operating expenses in 2021 were impacted by increased
incentive based compensation resulting from the improvement in segment financial
results, and an increase in costs necessary to meet the increase in business
volumes.
                                                                            

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PLASTICS SEGMENT RESULTS
The following table summarizes Plastics segment operating results for the three
months ended June 30, 2021 and 2020:
(in thousands)                         2021          2020     $ change      % change

Operating Revenues               $ 95,169      $ 48,679      $ 46,490         95.5  %
Cost of Products Sold              59,853        37,747        22,106         58.6
Other Operating Expenses            3,674         2,970           704         23.7
Depreciation and Amortization       1,112           872           240         27.5
Operating Income                 $ 30,530      $  7,090      $ 23,440        330.6  %


Operating Revenues increased $46.5 million due to a 73.9% increase in the price
per pound of PVC pipe sold and a 12.4% increase in sales volumes. Sales prices
of PVC pipe have rapidly escalated primarily due to continued PVC resin supply
constraints as resin production facilities recover from plant shutdowns in the
first quarter of 2021. The undersupply of resin has led to limited pipe
inventories across the country. In addition, significant global demand for PVC
resin has also impacted domestic selling prices. We anticipate sales prices will
remain elevated through the end of 2021 as resin suppliers work to fulfill
purchase allotments and pipe manufacturers replenish depleted inventories while
customer demand remains strong. Sales volumes in the second quarter of 2020 were
negatively impacted by COVID-19 as distributors reduced inventory levels due to
the uncertainty over the impact of the pandemic.
Cost of Products Sold increased $22.1 million primarily due to increased PVC
resin costs as described above. The 12.4% increase in sales volumes in 2021 also
contributed to the increase in cost of products sold.
Other Operating Expenses increased $0.7 million primarily as a result of
increased incentive based compensation cost directly related to increased
segment profitability.
CORPORATE COSTS
The following table summarizes Corporate operating results for the three months
ended June 30, 2021 and 2020:
(in thousands)                        2021         2020       $ change      % change

Other Operating Expenses         $ 2,260      $ 2,315      $     (55)        (2.4) %
Depreciation and Amortization         60           85            (25)       (29.4)
Operating Loss                   $ 2,320      $ 2,400      $     (80)        (3.3) %

RESULTS OF OPERATIONS - YEAR TO DATE



Intersegment transactions were not material in 2021 or 2020 and amounted to less
than $0.1 million of operating revenues and operating expenses for each period.
CONSOLIDATED RESULTS
The following table summarizes consolidated operating results for the six months
ended June 30, 2021 and 2020:
(in thousands)                                             2021               2020           $ change              % change

Operating Revenues                                 $ 547,318          $ 427,503          $ 119,815                  28.0  %
Operating Expenses                                   443,297            360,305             82,992                  23.0
Operating Income                                     104,021             67,198             36,823                  54.8
Interest Charges                                      18,953             16,785              2,168                  12.9
Nonservice Cost Components of Postretirement
Benefits                                               1,006              1,739               (733)                (42.2)
Other Income                                           1,892              2,021               (129)                 (6.4)
Income Before Income Taxes                            85,954             50,695             35,259                  69.6
Income Tax Expense                                    13,556              9,446              4,110                  43.5
Net Income                                         $  72,398          $  41,249          $  31,149                  75.5  %


Operating Revenues increased $119.8 million primarily due to higher PVC pipe
prices and sales volumes within our Plastics segment and increased volumes and
material costs, leading to higher sales prices, in our Manufacturing segment.
Retail, transmission services and wholesale revenue with our Electric segment
also contributed to the higher operating revenues in 2021. See our segment
disclosures below for additional discussion of items impacting operating
revenues.
Operating Expenses increased $83.0 million in 2021 primarily due to increased
costs of products sold in our Plastics and Manufacturing segments due to higher
raw material costs and sales volumes. Operating expenses in our Electric segment
increased primarily from higher operating and maintenance and depreciation and
amortization expenses, in each case largely the result of our recent rate base
investments and the associated operating costs of such investments. See our
segment disclosures below for additional discussion of items impacting operating
expenses.
                                                                            

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Interest Charges increased $2.2 million in 2021 due to a debt issuance in our
Electric segment in the third quarter of 2020, increased outstanding borrowings
under our short-term debt arrangements, both of which were largely used to
finance rate base investments in our Electric segment, and a decrease in
capitalized interest in 2021 due to the completion and placement in service of
Astoria Station in the first quarter of 2021.
Nonservice Cost Components of Postretirement Benefits decreased $0.7 million in
2021 due to a change in how prescription drug coverage is provided to retirees
and the impact of nonservice costs from a decrease in the discount rate from
2020 to 2021.
Other Income decreased $0.1 million in 2021 due to a $1.6 million decrease in
earned equity AFUDC due primarily to the completion and placement in service of
Astoria Station in the first quarter of 2021, but largely offset by increases in
the values of corporate-owned life insurance policies and other investments in
2021 compared to 2020.
Income Tax Expense increased $4.1 million in 2021 primarily due to increased
income before income taxes. Our effective tax rate was 15.8% in 2021 and 18.6%
in 2020 with the decrease primarily driven by PTCs earned in 2021 from our
Merricourt wind farm, which was placed in service in the fourth quarter of 2020.
See   Note     8   to our consolidated financial statements included in the
report on Form 10-Q for additional information regarding factors impacting our
effective tax rate.
ELECTRIC SEGMENT RESULTS
The following table summarizes Electric segment operating results for the six
months ended June 30, 2021 and 2020:
(in thousands)                                              2021                2020          $ change              % change

Retail Revenues                                    $  194,693          $  192,156          $  2,537                   1.3  %
Transmission Services Revenues                         23,785              20,514             3,271                  15.9
Wholesale Revenues                                      7,767               1,641             6,126                 373.3
Other Electric Revenues                                 3,610               3,718              (108)                 (2.9)
Total Operating Revenue                               229,855             218,029            11,826                   5.4
Production Fuel                                        26,878              22,523             4,355                  19.3
Purchased Power                                        30,395              32,512            (2,117)                 (6.5)
Operating and Maintenance Expenses                     78,150              73,794             4,356                   5.9
Depreciation and Amortization                          35,461              31,416             4,045                  12.9
Property Taxes                                          8,662               8,268               394                   4.8
Operating Income                                   $   50,309          $   49,516          $    793                   1.6  %

Electric kilowatt-hour (kwh) Sales (in thousands)
Retail kwh Sales                                    2,435,150           2,462,963           (27,813)                 (1.1) %
Wholesale kwh Sales - Company Generation              184,574              81,064           103,510                 127.7
Heating Degree Days                                     3,611               3,907              (296)                 (7.6)
Cooling Degree Days                                       237                 170                67                  39.4


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 and cooling degree days as a percent
of normal for the six months ended June 30, 2021 and 2020.
                           2021         2020

Heating Degree Days     91.0  %      99.1  %
Cooling Degree Days    206.1  %     156.0  %


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 2021 and 2020, and
between years.
                                        2021 vs       2021 vs      2020 vs
                                         Normal        2020        Normal

Effect on Diluted Earnings Per Share $ - $ (0.01) $ 0.01



Retail Revenues increased $2.5 million primarily due to the following:
•A $3.7 million increase in new retail revenues from an interim rate increase in
Minnesota, net of estimated refunds, effective January 1, 2021 in connection
with our rate case filed in November 2020.
•A $3.0 million increase in rider revenues primarily related to the recovery of
Merricourt operating expenses and Astoria Station project costs.
•A $1.5 million increase in rider revenue for the recovery of increased
conservation improvement program spending.
                                                                            

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These increases in revenue were partially offset by the following:
•A $3.5 million decrease in fuel recovery revenues largely due to credits
provided to customers from increased margins on wholesale sales.
•A $2.2 million decrease in retail revenues from lower demand, including a $0.7
million impact from milder weather in 2021 compared with 2020. Retail sales
volumes were lower in the first quarter of 2021 as compared to the first quarter
of 2020 due to the ongoing impacts of COVID-19.
Transmission Services Revenues increased $3.3 million primarily due to increased
transmission volume from increasing electrical demand as well as increased
generator interconnection revenues.
Wholesale Revenues increased $6.1 million as a result of a 127.7% increase in
wholesale sales volumes and a 107.9% increase in wholesale electric prices,
primarily driven by high market demand and availability constraints during
February of 2021, which drove up spot market prices for electricity.
Production Fuel costs increased $4.4 million primarily as a result of a 25.4%
increase in kwhs generated from our fuel-burning plants due to higher demand and
favorable prices for energy in wholesale markets.
Purchased Power costs to serve retail customers decreased $2.1 million mainly
due to a 17.5% decrease in the volume of purchased power as our recent capacity
additions provide additional generation resources to serve customer demand.
Operating and Maintenance Expense increased $4.4 million, which was primarily
the result of:
•$2.6 million of Merricourt and Astoria Station operating and maintenance
expenses incurred in 2021 as these facilities are now commercially operational.
•A $1.5 million increase in conservation improvement program expenditures, which
are recovered through retail rates.
•Other additional costs including a $1.0 million increase in transmission tariff
expenses and increased compensation and insurance costs.
These expense increases were partially offset by, among other items, lower bad
debt expense due to improving customer collections as the economic impact of
COVID-19 has eased.
Depreciation and Amortization expense increased $4.0 million primarily due to
Merricourt and Astoria Station being placed in service in the fourth quarter of
2020 and in February 2021, respectively.
MANUFACTURING SEGMENT RESULTS
The following table summarizes Manufacturing segment operating results for the
six months ended June 30, 2021 and 2020:
(in thousands)                          2021           2020      $ change      % change

Operating Revenues               $ 160,107      $ 114,427      $ 45,680         39.9  %
Cost of Products Sold              119,036         86,701        32,335         37.3
Other Operating Expenses            17,946         12,777         5,169         40.5
Depreciation and Amortization        7,601          7,485           116          1.5
Operating Income                 $  15,524      $   7,464      $  8,060        108.0  %


Operating Revenues increased $45.7 million primarily due to higher revenues at
BTD, which was largely driven by a 21.7% increase in sales volumes and a $16.4
million increase in material costs, which are passed through to customers
through increased sales prices. Sales volumes in the second quarter of 2021 were
impacted by strong end market demand in most markets served after recovering
from significantly lower volumes in the second quarter of 2020 due to the
effects of the COVID-19 pandemic. The increase in material costs is largely the
result of historically high steel prices due to supply shortages as steel mill
capacity rebounds from capacity reductions in 2020. An increase in horticultural
product sales at T.O. Plastics in 2021, driven by increasing customer demand,
has also contributed to increased operating revenues in 2021.
Cost of Products Sold increased $32.3 million primarily due to increased volumes
and higher material, labor and freight costs at BTD. The increase in material
cost is largely the result of high steel prices as mentioned above. Gross profit
margins have improved in 2021, despite the higher labor and freight costs, as
higher production activities have resulted in greater leveraging of fixed
production costs. Increased sales volumes and production activity at T.O.
Plastics has also contributed to the increase in cost of products sold in 2021.
Other Operating Expenses increased $5.2 million in 2021 compared to 2020. Other
operating expenses in 2020 were reduced by $2.5 million as a result of
initiatives taken to reduce costs in an effort to mitigate the impact of
declining sales volumes from the effects of COVID-19. Other operating expenses
in 2021 were impacted by increased incentive based compensation arising from the
improvement in financial results, and an increase in costs necessary to support
the increase in business volumes.
                                                                            

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PLASTICS SEGMENT RESULTS
The following table summarizes Plastics segment operating results for the six
months ended June 30, 2021 and 2020:
(in thousands)                          2021          2020     $ change      % change

Operating Revenues               $ 157,356      $ 95,076      $ 62,280         65.5  %
Cost of Products Sold              105,519        73,017        32,502         44.5
Other Operating Expenses             6,619         5,740           879         15.3
Depreciation and Amortization        2,102         1,762           340         19.3
Operating Income                 $  43,116      $ 14,557      $ 28,559        196.2  %


Operating Revenues increased $62.3 million due to a 54.8% increase in the price
per pound of PVC pipe sold and a 6.9% increase in sales volumes. As discussed
above, sale prices have rapidly increased in 2021 principally due to PVC resin
supply constraints following production plant shutdowns and feedstock shortages
arising from abnormally low temperatures and ice storms in the Gulf Coast region
of the United States in February 2021. Resin supply shortages have led to
limited pipe inventories across the country. Increased global demand for PVC
resin has also contributed to rising domestic prices. Sales volumes in the
second quarter of 2020 were negatively impacted by COVID-19 as distributors
reduced inventory levels due to the uncertainty over the impact of the pandemic.
Cost of Products Sold increased $32.5 million primarily due to increased PVC
resin costs as described above. The 6.9% increase in sales volumes in 2021 also
contributed to the increase in cost of products sold.
Other Operating Expenses increased $0.9 million largely due to increased
incentive based compensation costs resulting from increased segment operating
results.
CORPORATE COSTS
The following table summarizes Corporate operating results for the six months
ended June 30, 2021 and 2020:
(in thousands)                        2021         2020       $ change      % change

Other Operating Expenses         $ 4,797      $ 4,167      $     630         15.1  %
Depreciation and Amortization        131          172            (41)       (23.8)
Operating Loss                   $ 4,928      $ 4,339      $     589         13.6  %

Other Operating Expenses increased $0.6 million primarily due to increased incentive based compensation cost as a result of increased consolidated earnings. REGULATORY RATE MATTERS



The following provides a summary of general rate case filings and rate rider
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 under general 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 has 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 in
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
deferred 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 requested
net annual revenue increase from its initial request of $14.5 million to
$8.2 million, primarily due to a reduction in operating costs from amounts
included in its November 2020 filing. The cost reductions include, among other
items, 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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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

RRR       2019                  MN             Approved             06/21/19       $         12.5              01/01/20       Includes return on Merricourt
                                                                                                                              construction costs.
TCR       2018                  MN             Approved             05/07/20                 10.3              01/21/20       See below for additional details.
                                                                                                                              Includes recovery of new
EUIC      2021                  MN             Requested            06/07/21                  1.3              01/01/22       infrastructure costs, including
                                                                                                                              advanced metering, outage management
                                                                                                                              and demand response systems.
RRR       2021                  ND             Approved             03/07/21                    11.8           04/01/21       Includes return on Merricourt
                                                                                                                              construction costs.
GCR       2020                  ND             Approved             06/10/20                  6.2              07/01/20       Includes return on Astoria Station
                                                                                                                              construction costs.
RRR       2020                  ND             Approved             03/18/20                  5.8              04/01/20       Includes return on Merricourt
                                                                                                                              construction costs.
TCR       2020                  ND             Approved             08/31/20                  5.6              01/21/20       Includes recovery of new transmission
                                                                                                                              assets.
TCR       2021                  ND             Approved             11/18/20                     5.6           01/01/21       Includes recovery of eight new
                                                                                                                              transmission projects.
                                                                                                                              Includes recovery of Astoria Station,
GCR       2021                  ND             Approved             03/01/21                     5.2           07/01/21       net of

anticipated savings associated

                                                                                                                              with the retirement of Hoot Lake
                                                                                                                              Plant.
TCR       2020                  SD             Approved             01/29/20                     2.3           03/02/20       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.
PIR       2020                  SD             Approved             05/31/20                     1.6           09/01/20       Includes return on Merricourt and
                                                                                                                              Astoria Station construction costs.


Minnesota TCR. On May 1, 2017, the MPUC ordered OTP to include in the TCR rider
retail rate base the Minnesota jurisdictional share of OTP's investments in
certain transmission assets and all revenues received from other utilities under
MISO's tariffed rates as a credit in its TCR revenue requirement calculations.
The order had the effect of diverting interstate wholesale revenues that have
been approved by the FERC to offset the FERC-approved expenses, effectively
reducing OTP's recovery of FERC-approved expense levels.
On August 18, 2017, OTP filed an appeal of the MPUC order with the Minnesota
Court of Appeals to contest the portion of the order requiring OTP to
jurisdictionally allocate costs of the FERC transmission projects in the TCR
rider. On June 11, 2018, the Minnesota Court of Appeals reversed the MPUC's
order. On July 11, 2018, the MPUC filed a petition for review of the decision to
the Minnesota Supreme Court, which granted review of the appellate court
decision. The Minnesota Supreme Court issued its opinion on April 22, 2020,
concluding the MPUC lacked authority to amend an existing TCR rider approved
under Minnesota state law to include the costs and revenues associated with
these transmission projects and affirming the decision of the Minnesota Court of
Appeals.
On October 22, 2020, the MPUC approved OTP's request for a Minnesota TCR rider
update with the exclusion of these transmission projects. In addition, the MPUC
approved the inclusion of three new projects previously requested in the
Minnesota TCR rider eligibility petition. Updated rates went into effect in
January 2021. With this decision, one-half of the projected TCR rider tracker
balance at December 2020 of $13.4 million will be included in the 2021 TCR rider
annual revenue requirement, with the remainder included in the next annual
update. The annual updates provide for recovery of approximately $2.6 million in
MISO revenues credits to Minnesota customers through the TCR rider prior to
September 30, 2020. As a result, OTP recognized additional rider revenue of $2.6
million during the third quarter of 2020.
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 business operations and fund our
capital expenditure plans. Our liquidity, including our operating cash flows and
access to capital markets, can be impacted by macroeconomic factors outside of
our control, such as those which may be caused by COVID-19. In addition, our
liquidity could be impacted by non-compliance with covenants under our various
debt instruments. As of June 30, 2021, we were in compliance with all debt
covenants (see the Financial Covenants section under Capital Resources below).
The following table presents the status of our lines of credit as of June 30,
2021 and December 31, 2020:
                                                                                      2021                                    2020
                                                                      Amount            Letters              Amount              Amount
(in thousands)                              Line Limit           Outstanding          of Credit           Available           Available
OTC Credit Agreement                     $  170,000          $     59,245          $       -          $  110,755          $  104,834
OTP Credit Agreement                        170,000                68,712             12,671              88,617             140,068
Total                                    $  340,000          $    127,957          $  12,671          $  199,372          $  244,902


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
                                                                            

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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 six months ended
June 30, 2021 and 2020:
(in thousands)                                     2021          2020

Net Cash Provided by Operating Activities $ 68,574 $ 73,901



Net Cash Provided by Operating Activities decreased $5.3 million for the six
months ended June 30, 2021 compared to the six months ended June 30, 2020. An
increase in net income in 2021 was more than offset by an increase in working
capital requirements. Our level of working capital was impacted by increased
accounts receivables within our Manufacturing and Plastics segments due to
strong sales volumes and significantly increased sales prices in 2021 and higher
inventory levels within our Manufacturing segment due to higher production
volumes and increased material costs in 2021, but partially offset by increased
accounts payable due to higher production volumes and increased costs in our
Manufacturing and Plastics segments in 2021. We made a discretionary
contribution to our pension plan of $10.0 million in the six months ended June
30, 2021 compared to a contribution of $11.2 million in 2020.
(in thousands)                                  2021           2020

Net Cash Used in Investing Activities $ 76,403 $ 121,005



Net Cash Used in Investing Activities decreased $44.6 million for the six months
ended June 30, 2021 compared to the six months ended June 30, 2020. The decrease
is primarily the result of lower capital investment within our Electric segment
as capital spending on our large generation assets, Merricourt and Astoria
Station, were largely completed in the fourth quarter of 2020.
(in thousands)                                    2021          2020

Net Cash Provided by Financing Activities $ 8,146 $ 65,417



Net Cash Provided by Financing Activities decreased $57.3 million for the six
months ended June 30, 2021 compared to the six months ended June 30, 2020,
primarily as a result of a decrease in financing needs given the lower level of
capital spending in our Electric segment in 2021 compared to 2020. Financing
activities in the six months ended June 30, 2021 included a net borrowing
increase of $47.0 million under our line of credit facilities and dividend
payments of $32.4 million ($0.78 per share).
Financing activities in the six months ended June 30, 2020 included proceeds of
$35.0 million from the issuance of long-term debt, a net borrowing increase of
$35.2 million under our line of credit facilities and $26.9 million in proceeds
raised from the issuance of common stock, net of issuance costs. We paid
dividends of $29.9 million ($0.74 per share) in the six months ended June 30,
2020.
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. Our 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 financial condition. 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, 2020 for our
capital expenditure plan for the five year period from 2021 through 2025.
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, 2020 are included
in 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,
2020. There were no material changes in our contractual obligations outside of
the ordinary course of our business during the six months ended June 30, 2021.
COMMON STOCK DIVIDENDS
We paid dividends to our common stockholders totaling $32.4 million, or $0.78
per share, in the first six months of 2021. 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 report on Form 10-Q for additional
information. The decision to declare a dividend is reviewed quarterly by our
Board of Directors.
                                                                            

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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. Equity or debt financing will be
required in the period 2021 through 2025 to support our capital investments,
primarily within our Electric segment to fund construction of new rate base and
transmission investments. In addition, we may issue equity or debt financing to
opportunistically reduce borrowings under our lines of credit, to satisfy or
early retire our outstanding long-term debt, or to finance potential acquisition
opportunities or for other corporate purposes.
REGISTRATION STATEMENTS
On May 3, 2021, we filed two registration statements with the SEC. The first
statement, a shelf registration, allows us to offer for sale, from time to time,
either separately or together in any combination, equity, debt or other
securities described in the registration statement. The second registration
statement allows for the issuance of up to 1,500,000 common shares under our
Automatic Dividend Reinvestment and Share Purchase Plan, which provides our
common shareholders, retail customers of OTP and other interested investors a
method of purchasing our common shares by reinvesting their dividends and/or
making optional cash investments. Shares purchased under the plan may be new
issue common shares or common shares purchased on the open market. Both
registration statements expire in May 2024.
SHORT-TERM DEBT
Otter Tail Corporation and Otter Tail Power Company are each party to a credit
agreement (the OTC Credit Agreement and OTP Credit Agreement, respectively)
which provide for unsecured revolving lines of credit. The following is a
summary of key provisions and borrowing information as of and for the six months
ended June 30, 2021:
                                                                       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 June 30, 2021

                                                               -               12,671
Amount Outstanding as of June 30, 2021                                 59,245               68,712

Average Amount Outstanding During the Six Months Ended June 30, 2021

                                                                   67,335               49,017

Maximum Amount Outstanding During the Six Months Ended June 30, 2021

                                                                   79,718               72,471
Interest Rate as of June 30, 2021                                         1.6   %              1.3   %
                                                                      October 31,          October 31,
Maturity Date                                                                2024                 2024

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



  Note 6   to our consolidated financial statements included in this report on
Form 10-Q includes additional information regarding these instruments.
LONG-TERM DEBT
At June 30, 2021, 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 2021 to 2050.
On June 10, 2021, OTP entered into a Note Purchase Agreement pursuant to which
OTP agreed to issue, in a private placement transaction, $230 million aggregate
principal amount of OTP's senior unsecured notes. The funding of the notes will
occur in two issuances, $140.0 million in November 2021 and $90.0 million in May
2022. The issuance of the notes is subject to the satisfaction of certain
customary conditions to closing. We intend to use the proceeds of the notes to
refinance existing long-term indebtedness, including long-term debt instruments
with outstanding principal balances of $140 million and $30.0 million, which
mature in December 2021 and August 2022, respectively, and for general corporate
purposes.
  Note 6   to our consolidated financial statements included in this report on
Form 10-Q includes additional information regarding these instruments.
Financial Covenants
Certain of our short- and long-debt agreements require Otter Tail Corporation
and OTP to maintain certain financial covenants. As of June 30, 2021, we were in
compliance with these financial covenants as further described below:
Otter Tail Corporation 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 June 30, 2021, our Interest-Bearing Debt to Total
Capitalization was 0.49 to 1.00, our Interest and Dividend Coverage Ratio was
5.35 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 June 30, 2021, OTP's
Interest-Bearing Debt to Total Capitalization was 0.48 to 1.00, its Interest and
Dividend Coverage Ratio was 3.44 to 1.00 and it had no Priority Indebtedness
outstanding.
                                                                            

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OFF-BALANCE-SHEET ARRANGEMENTS


As of June 30, 2021 we have outstanding letters of credit totaling $16.4
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. 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.
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, 2020 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 Form
10-K.

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