Media contact:

Stephanie Hoff, Director of Corporate Communications, (218) 739-8535 or (218) 205-6179

Investor contact:

Loren Hanson, Manager of Investor Relations, (218) 739-8481 or (800) 664-1259

●

Consolidated operating revenues increased to $919.5 million in 2019 compared to $916.4 million in 2018.

●

Consolidated net income increased 5.5% to $86.8 million.

●

Diluted earnings per share increased $0.11 or 5.3%.

●

The corporation’s board of directors increased the quarterly common stock dividend to $0.37 per share, an indicated annual dividend rate of $1.48 per share and a 5.7% increase from $1.40 per share in 2019. The dividend is payable on March 10, 2020 to shareholders of record on February 14, 2020.

●

The corporation expects 2020 diluted earnings per share to be in a range of $2.22 to $2.37.

●

A $23.1 million decrease in cash used for working capital items mainly due to significant changes in inventories, accounts payable and accounts receivable between the periods.

○

Inventory balances decreased by $8.4 million during 2019 compared to an increase of $18.2 million in 2018. This change is due to decreases in raw material costs, primarily steel, from 2018 to 2019 and lower sales volumes in the Plastics segment during 2019 compared to sales levels in 2018.

The level of increases in accounts receivable declined by $6.7 million from 2018 to 2019, primarily due to higher raw material costs reflected in customer billings in 2018 when compared with 2019. Our average collection period on a consolidated basis remained steady at approximately 31 days.

○

The reductions in cash used for inventories and accounts receivable between the years were partially offset by a $15.2 million reduction in cash from an increase in accounts payable and other current liabilities in 2018 compared with essentially no change in these items in 2019. The primary reason for the increase in accounts payable and other current liabilities in 2018 was due to the recording of refunds for the TCJA and interim rate refunds in North Dakota and South Dakota.

●

An $11.2 million increase from changes in regulatory asset and liability balances related to fuel cost and Minnesota environmental cost recovery riders included in changes in deferred debits and other assets and changes in noncurrent liabilities and deferred credits.

●

A $4.5 million increase in net income.

●

A $3.4 million increase in depreciation and amortization expense.

●

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

●

A $2.5 million increase in discretionary contributions to the corporation’s funded pension plan in 2019.

2019

2018

Heating Degree Days

115.6%

111.0%

Cooling Degree Days

85.0%

123.5%

2019 vs Normal

2018 vs Normal

2019 vs 2018

Effect on Diluted Earnings Per Share

$ 0.078

$ 0.073

$ 0.005

●

A $10.4 million increase in transmission cost recovery revenues due to recent investments in transmission infrastructure and transmission costs not currently recovered in base rates.

●

A $2.4 million increase in Minnesota Renewable Resource Adjustment (RRA) rider revenues due to increased cost recovery requirements resulting from the expiration of federal production tax credits (PTCs) in November 2018 on a company-owned wind farm.

●

A $2.3 million increase in retail revenue related to the recovery of fuel and purchased power costs incurred to serve retail customers.

●

A $1.9 million increase in retail revenue in South Dakota due to the reversal of a tax refund provision in connection with OTP's 2018 South Dakota rate case settlement agreement.

●

A $1.4 million increase in average electric prices mainly related to interim and final rate increases in South Dakota.

●

A $0.9 million increase in revenue related to the establishment of a generation cost recovery rider in North Dakota in 2019 to provide for a return on funds invested in Astoria Station during its construction phase.

●

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

●

A $0.3 million increase in revenue mainly driven by a 4.9% increase in heating degree days in 2019 partially offset by a 30.9% decrease in cooling degree days between the years.

●

A $3.3 million decrease in external service costs at Big Stone Plant primarily related to its fall 2018 maintenance outage.

●

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

●

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

●

A $0.7 million reduction in employee benefits mainly related to decreased health insurance costs.

●

A $0.5 million decrease in expense related to an increase in overhead cost capitalization due to increased capital spending in 2019.

●

A $0.4 million decrease in pollution control expenses resulting from decreases in generation at both Coyote Station and Hoot Lake Plant during their 2019 maintenance outages.

●

A $2.4 million increase in external service costs related to Coyote Station's 2019 extended maintenance outage.

●

A $1.4 million increase in MISO transmission services expenses due to an increase in third-party multi-value projects in 2019.

●

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

●

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

●

No contribution being made to the Otter Tail Corporation Foundation in 2019 as compared to a $2.0 million contribution commitment made at the end of 2018.

●

A $1.1 million non-taxable increase in corporate-owned life insurance cash surrender value.

●

A $1.2 million reduction in costs from an increase in corporate costs allocated to our operating companies, increased earnings from our captive insurance company, a decrease in post-retirement benefit non-service costs and other expense items.

●

A $2.7 million increase in employee benefit and incentive compensation costs largely due to increased health insurance costs.

●

A $0.8 million increase in interest expense reflecting higher average corporate short-term debt outstanding between the years.

●

Electric segment net income increased $2.6 million between quarters.

●

Retail revenues increased $1.1 million due to:

○

A $2.6 million increase in Minnesota Transmission Cost Recovery rider revenues due to recent investments in transmission infrastructure and transmission costs not currently recovered in base rates.

○

A $0.6 million increase in revenue related to the recovery of increased CIP expenditures and increased CIP incentive revenues in the fourth quarter of 2019 compared with the fourth quarter of 2018.

○

A $0.5 million increase in Minnesota RRA rider revenues due to increased cost recovery requirements resulting from the expiration of federal PTCs in November 2018 on a company-owned wind farm.

○

A $0.3 million increase in revenue mainly driven by a 0.7% increase in heating degree days quarter over quarter.

○

A $0.3 million increase in revenue related to the establishment of a generation cost recovery rider in North Dakota in 2019 to provide for a return on funds invested in Astoria Station during its construction phase.

○

A $3.2 million decrease in revenue related to the recovery of decreased fuel and purchased power costs driven by an increase in purchased power in the fourth quarter of 2018 to provide replacement power during a 9-week scheduled fall maintenance outage at Big Stone Plant.

●

Transmission services revenues decreased $4.6 million mainly due to a $3.2 million decrease associated with reductions in capital spending and collections through the MISO tariff. Otter Tail Power Company also recorded an additional $1.4 million estimated refund obligation due to a November 21, 2019 FERC ruling related to the methodology used to determine the ROE component of transmission rates under the MISO Tariff. This amount is based mainly on a reduced ROE from 10.82% to 10.38% for the period from September 28, 2016 through December 31, 2019. The reduced ROE is based on a newly established 9.88% ROE plus the 50-point Regional Transmission Organization adder granted by FERC on January 5, 2015. The FERC ruling is subject to rehearing requests.

●

Wholesale electric revenues decreased $0.4 million despite a 4.1% increase in wholesale kwh sales due to a 35.6% decrease in wholesale electric prices.

●

Other miscellaneous electric revenues increased by $0.3 million.

●

Production fuel costs decreased $1.4 million as a result of a 4.1% decrease in kwhs generated at our fuel-burning plants and a 5.3% decrease in the cost-per-kwh generated. The decreased cost-per-kwh generated is a function of increased generation at Big Stone Plant, our lowest fuel-cost plant, combined with decreased generation from our higher fuel-cost plants, on a cost-per-kwh basis.

●

The cost of purchased power to serve retail customers decreased $5.4 million due to a 5.1% decrease in kwhs purchased and a 19.6% decrease in the cost-per-kwh purchased. The decrease in kwhs purchased is related to the increased availability of Big Stone Plant for the entire fourth quarter of 2019 compared to being down for scheduled maintenance for the first five weeks of fourth quarter 2018.

●

Electric operating and maintenance expense decreased $5.0 million including:

○

The reversal of a $2.7 million regulatory asset in the fourth quarter of 2018 related to deferred recovery of a tax-reform-related income tax adjustment due to updates of various state regulatory proceedings.

○

A $2.5 million decrease in Big Stone Plant contracted maintenance and material expenses primarily related to its 2018 fall maintenance outage.

○

A $1.0 million decrease in other plant materials and operating supplies and other various expense categories.

○

A $0.7 million increase in MISO transmission service costs.

○

A $0.5 million increase in conservation program spending.

●

Depreciation and amortization expense increased $1.3 million due to recent capital additions including the Big Stone South–Ellendale 345kV transmission line energized in February 2019, the new customer information system put in service in 2019 and other recent transmission plant upgrades. Also, recent decreases in estimated salvage values for electrical transformers has resulted in increased depreciation rates and expense for those assets.

●

Electric segment property taxes decreased $0.4 million.

●

Income tax expense in the Electric segment increased $5.2 million due to a $7.8 million increase in Electric segment income before income taxes and the 2018 reduction in income tax expense due to the reversal of a $2.7 million charge to income tax expense recorded in the third quarter of 2018 related to deferred recovery of an income tax adjustment under tax reform due to various state regulatory proceedings.

2019 EPS by

2020 EPS Guidance

Low

High

 Electric

$1.48

$1.67

$1.70

 Manufacturing

$0.32

$0.31

$0.35

 Plastics

$0.51

$0.43

$0.47

 Corporate

($0.14)

($0.19)

($0.15)

Total

$2.17

$2.22

$2.37

 Return on Equity

11.6%

11.0%

11.7%

●

We expect our Electric segment to provide approximately 75% of our consolidated earnings in 2020 with an increase over 2019 segment net income based on:

○

Capital spending on the Merricourt and Astoria Station rate base projects of $178 million and $81 million, respectively, in 2020. The Merricourt project has rider recovery mechanisms in place in Minnesota and South Dakota and in process for approval in North Dakota. The Astoria Station project has rider recovery mechanisms in place in South Dakota and North Dakota. This project earns AFUDC in Minnesota, is expected to be recovered through a rate case in Minnesota and has already been approved in our integrated resource plan.

○

Increased revenues related to $22 million in anticipated capital spending for self-funded generator interconnection agreements.

○

No planned generation plant outages for 2020. Plant outage costs totaled $3.1 million in 2019.

○

Normal weather in 2020. Weather favorably impacted 2019 earnings by $0.08 per share compared to normal.

○

Increased expenses caused in large part by a decrease in the discount rate used for the pension plan and a lower rate used for our long-term rate of return. The discount rate for 2020 is 3.47% compared with 4.50% for 2019. For each 25-basis-point decline in the discount rate, pension expense increases approximately $1,041,000. The assumed long-term rate of return for 2020 is 6.88% compared with 7.25% in 2019. Each 25-basis-point decline in this rate equates to approximately $734,000 in increased pension expense.

○

Higher depreciation and property tax expense due to large capital projects being put into service.

○

Increased interest costs associated with a full year’s interest expense on the $100 million of senior unsecured notes that were issued in October 2019 and interest on the $35 million and $40 million of senior unsecured notes expected to be issued in February and August of 2020, respectively.

●

We expect net income from our Manufacturing segment to be flat compared with 2019 based on:

○

Slightly lower earnings at BTD due to an expected decline in sales driven mostly by lower sales volumes in the recreational vehicle markets. Scrap revenues are expected to decline slightly as well based on lower sales volumes with scrap prices staying flat between the years.

○

An increase in earnings from T.O. Plastics mainly driven by year-over-year sales growth in horticulture, life science and industrial markets.

○

Backlog for the manufacturing companies of approximately $179 million for 2020 compared with $211 million one year ago. Raw material price deflation is driving backlog down by $19 million and the remaining $13 million decrease in backlog is volume driven.

●

We expect 2020 net income from our Plastics segment to be lower than 2019 based on lower expected operating margins in 2020. This is due to an expected decline in sale prices of pipe and flat year-over-year resin prices, partially offset by slightly higher sales volumes in 2020 compared to 2019.

●

Corporate costs, net of tax, are expected to be higher in 2020 compared with 2019 primarily driven by higher short-term borrowing costs at the corporate level and higher income tax expense, partially offset by lower employee benefit and health care costs.

●

Federal and state environmental regulation could require us to incur substantial capital expenditures and increased operating costs.

●

Weather impacts, including normal seasonal fluctuation of weather, as well as extreme weather events that could be associated with climate change, could adversely affect our results of operations.

●

Volatile financial markets and changes in our debt ratings could restrict our ability to access capital and increase borrowing costs and pension plan and postretirement health care expenses.

●

Any significant impairment of our goodwill would cause a decrease in our asset values and a reduction in our net operating income.

●

The inability of our subsidiaries to provide sufficient earnings and cash flows to allow us to meet our financial obligations and debt covenants and pay dividends to our shareholders could have an adverse effect on the Company.

●

We rely on our information systems to conduct our business, and failure to protect these systems against security breaches or cyber-attacks could adversely affect our business and results of operations. Additionally, if these systems fail or become unavailable for any significant period, our business could be harmed.

●

Economic conditions could negatively impact our businesses.

●

If we are unable to achieve the organic growth we expect, our financial performance may be adversely affected.

●

Our plans to grow our businesses through capital projects, including infrastructure and new technology additions, or to grow or realign our businesses through acquisitions or dispositions may not be successful, which could result in poor financial performance.

●

We may, from time to time, sell assets to provide capital to fund investments in our electric utility business or for other corporate purposes, which could result in the recognition of a loss on the sale of any assets sold and other potential liabilities. The sale of any of our businesses also exposes us to additional risks associated with indemnification obligations under the applicable sales agreements and any related disputes.

●

Significant warranty claims and remediation costs in excess of amounts normally reserved for such items could adversely affect our results of operations and financial condition.

●

We are subject to risks associated with energy markets.

●

Changes in tax laws, as well as judgments and estimates used in the determination of tax-related asset and liability amounts, could materially adversely affect our business, financial condition, results of operations and prospects.

●

Four of our operating companies have single customers that provide a significant portion of the individual operating company’s and the business segment’s revenue. The loss of, or significant reduction in revenue from, any one of these customers would have a significant negative financial impact on the operating company and its business segment and could have a significant negative financial impact on the Company.

●

The inability to attract and retain a qualified workforce including, but not limited to, executive officers, key employees and employees with specialized skills could have an adverse effect on our operations.

●

We may experience fluctuations in revenues and expenses related to our electric operations, which may cause our financial results to fluctuate and could impair our ability to make distributions to shareholders or scheduled payments on our debt obligations, or to meet covenants under our borrowing agreements.

●

Actions by the regulators of our electric operations could result in rate reductions, lower revenues and earnings or delays in recovering capital expenditures.

●

Our electric operations are subject to an extensive legal and regulatory framework under federal and state laws as well as regulations imposed by other organizations that may have a negative impact on our business and results of operations.

●

Our electric transmission and generation facilities could be vulnerable to cyber and physical attack that could impair our ability to provide electrical service to our customers or disrupt the U.S. bulk power system.

●

Our electric generating facilities are subject to operational risks that could result in early closure, unscheduled plant outages, unanticipated operation and maintenance expenses and increased power purchase costs.

●

Regulation of generating plant emissions could affect our operating costs and the costs of supplying electricity to our customers and the economic viability of continued operation of certain of our steam-powered electric plants.

●

The long-range planning required for transmission and generation projects creates risks of increased costs and lower returns on investment when the project is finally completed.

●

Competition from foreign and domestic manufacturers, the price and availability of raw materials, trade policy and tariffs affecting prices and markets for raw material and manufactured products, prices and supply of scrap or recyclable material and general economic conditions could affect the revenues and earnings of our manufacturing businesses.

●

Economic conditions in the industries in which our customers operate can have an adverse impact on our results of operations and cash flows.

●

Our business and operating results may be adversely affected if we are not able to maintain our manufacturing, engineering and technological expertise.

●

Our manufacturing, painting and coating operations are subject to environmental, health and safety laws and regulations that could result in liabilities to us.

●

Our plastics operations are highly dependent on a limited number of vendors for PVC resin and a limited supply of PVC resin. The loss of a key vendor, or any interruption or delay in the supply of PVC resin, could result in reduced sales or increased costs for our plastics business.

●

We compete against many other manufacturers of PVC pipe and manufacturers of alternative products. Customers may not distinguish our products from those of our competitors.

●

Changes in PVC resin prices can negatively affect our plastics business.

Otter Tail Corporation

Consolidated Statements of Income

in thousands, except share and per share amounts

(not audited)

Otter Tail Corporation

Consolidated Balance Sheets

Assets

in thousands

(not audited)

Otter Tail Corporation

Consolidated Balance Sheets

Liabilities and Equity

in thousands

(not audited)

Otter Tail Corporation

Consolidated Statements of Cash Flows

in thousands

(not audited)