2010 Stewardship Report

About our 2010 Stewardship Report This is Otter Tail Power Company’s third biennial stewardship report. We selected the content of this report based on the environmental, social, economic, and other standard disclosures outlined in the Global Reporting Initiative (GRI) Sustainability Reporting Guidelines for electric utilities. The GRI Guidelines provide a voluntary reporting framework used around the world to communicate meaningful information about issues that impact reporting organizations and their stakeholders.

As in our previous reports (2006 and 2008), our reporting boundary includes the areas of our business on which Otter Tail Power Company, and no other subsidiary of Otter Tail Corporation, has direct impact or on which we have significant influence. We are reporting 2010 information throughout this report, unless we indicate otherwise due to data availability. At the end of this report you’ll find the GRI index that shows what we reported in relationship to the guidelines.

Cover: Jamie Lehman, Lead Lineman, left Brad Torgerson, Foreman, Delivery Engineering, right

Table of contents About our 2010 Stewardship Report Confirmation of self-declared GRI Application Level B Letter from the president

Inside cover 1 2

Getting to know us

Mission and values 3 Operations 3

Generation mix 5

Transmission and distribution 8 Environmental stewardship

Monitoring climate-change legislation 9

Focusing on air quality 10

Developing wind energy 11

Partnering in product reuse 12

Using water resources responsibly 13

Respecting wildlife habitat 13

Addressing spills, fines, and sanctions 14

Making environmental protection expenditures and investments 14

Monitoring regulatory proposals 14

Planning for the future 17

Prompting energy efficiency and demand-side management 18 Project spotlight: Farm Rescue and Otter Tail Power Company—

The power of meshing missions 23 Social stewardship

Open involvement 25

Preparedness planning 26 Reliability 27

Manageable rates 28

Customer satisfaction 31

Community commitment 32

Employee commitment 33

Employee health and safety 35

Employee training 37

Future workforce investment 38 Project spotlight: Industrial Contractors Inc.

Buying local, getting world-class service 39 Economic stewardship

Direct economic value 41

Local sourcing opportunities 41

Charitable contributions 42

Economic development 43

Indirect economic value 43 Global Reporting Initiative Index 44

Independent consultant confirms self-declared Global Reporting Initiative Application Level B Burns & McDonnell Engineering Inc. (Burns & McDonnell) was retainined by Otter Tail Power Company to provide a third-party check of Otter Tail Power Company’s selfdeclared Application Level B of the 2010 Stewardship Report. The Otter Tail Power Company 2010 Stewardship Report was prepared by the company’s report team and approved by the company’s management, who retain responsibility for its content.

The objective of the third-party check process was to provide Otter Tail Power Company’s stakeholders an independent opinion regarding the compliance of the 2010 Stewardship Report with the requirements of the GRI G3 Guidelines for selfdeclared Application Level B reporting requirements.

Burns & McDonnell’s third-party check included two rounds of review that focused on the content, structure, and presentation of the report against the GRI G3 guidelines.

When needed, Burns & McDonnell provided additional guidance to Otter Tail Power Company to enhance conformity of the report to the GRI G3 guidelines. A final review of the report was conducted once the report was near completion to verify that the GRI guidelines were accurately represented throughout the report and within the GRI index included in the report.

Burns & McDonnell has observed reasonable coverage of the minimum requirements for an Application Level B. As a result, our third-party check confirms the self-declared Application Level B for the Otter Tail Power Company’s 2010 Stewardship Report.

Sincerely,

Candice Derks-Wood Sustainability Specialist Burns & McDonnell 9400 Ward Parkway Kansas City, Missouri 64114

1 Confirmation of GRI application Level B

A letter from Chuck MacFarlane, President and CEO, Otter Tail Power Company Two years have passed since Otter Tail Power Company concluded its first century of service. That’s quite a milestone! I’ve thought often about the early years and the challenges our founders faced—and how those challenges compare with the ones we experience a hundred years later.

The electric industry was little more than two decades old in 1909 when our founders began generating power from a small hydroelectric station on the Otter Tail River in west central Minnesota. Water resources were part of the public domain and available for beneficial use with little government regulation. A handshake sealed permission to string power lines across private property. Our managers were entrepreneurs. Our employees were machinists, farmers, blacksmiths, and roughnecks who climbed poles with little regard for adversity. They made nuts-and-bolts decisions daily about how best to get electricity to the customer. And in those days electricity did little more than light the home and provide power for washing clothes a few hours on Mondays.

I’m sure they didn’t have a formal mission statement then, but I suspect if pressed they would have acknowledged that providing reliable electric service as economically as possible was their calling. That hasn’t changed.

What has changed and is, in part, the reason for this stewardship report is the demand, expectations, and regulation placed on electric companies such as ours.

For instance, the handshake agreement is now a multipage (or multivolume) legal document. The beneficial use of natural resources now requires years-long studies, complex permit applications, confusing and often contradictory regulations, and detailed reporting. And countless societal, environmental, economic, and legal issues and requirements now accompany and complicate that century-old mission.

Each day the decisions and actions of my nearly 800 coworkers must demonstrate an overriding commitment to our principal stakeholders—customers, shareholders, employees, and our communities. As you read this report, I hope you will appreciate how we are responsibly addressing issues such as air and water quality, transmission facility permitting and siting, and generation planning while, at the same time, maintaining that commitment to our stakeholders. I believe this report truly reflects our strong sense of accountability as we enter a new century of service.

Chuck MacFarlane President and CEO Otter Tail Power Company

Letter from the president 2

Chuck MacFarlane, President and CEO

Getting to know us Incorporated in 1907 and producing its first kilowatt in 1909, Otter Tail Power Company celebrated its 100th anniversary of service in 2009. This 2010 Stewardship Report marks one of our first steps into a new century of service.

Our mission To produce and deliver electricity as reliably, economically, and environmentally responsibly as possible to the balanced benefit of customers, shareholders, and employees and to improve the quality of life in the areas in which we do business.

Our values

Integrity. Safety. Customer focus. Resourcefulness. Community.

Operations Our parent: Otter Tail Corporation In the late 1980s, faced with limited growth opportunities in our electric utility operations, Otter Tail Power Company implemented a diversification strategy designed to help provide shareholders with dependable long-term earnings growth.

In 1989 we formed Mid-States Development (later named Varistar) to own and oversee the diversified businesses. In 2001 we changed the corporate name to Otter Tail Corporation, and since then Otter Tail Power Company has been its utility operation.

Otter Tail Corporation platforms and subsidiary companies

On July 1, 2009, Otter Tail Corporation restructured as a holding company, a change that was business as usual for shareholders, customers, and employees. In the restructuring, the newly formed Otter Tail Corporation became the parent company of the nonelectric businesses and of Otter Tail Power Company, which continues to operate the regulated utility business. This legal structure now mirrors our operating structure. Otter Tail Power Company is a separate legal entity and can access capital directly on its own behalf. Prior to the 2005 repeal of the Public Utility Holding Company Act of 1935, forming a holding company was not practical because of restrictions placed on multistate public utilities and those owning nonutility businesses. For further explanation visit www.ottertail.com/corporate_governance/ governance.cfm.

This report’s parameters include the areas of our business that Otter Tail Power Company directly impacts or significantly influences. To learn more about Otter Tail Corporation visit www.ottertail.com. For shareholder information visit www.ottertail.com/investors.

Code of conduct Through the years Otter Tail Power Company and Otter Tail Corporation have built a reputation for excellence. Otter Tail Corporation and its subsidiary companies believe integrity must guide all workplace relationships. Each entity is committed to ethical behavior and expects directors, officers, and employees to share that commitment.

Otter Tail Corporation requires employees to comply fully with its code of conduct, which is distributed to all employees and posted online at www.ottertail.com. The corporation’s internal audit department confirms distribution of the code of conduct each year.

3 Getting to know us

Otter Tail Power Company employees We’re a team that serves customers who depend on us for electricity that is always available when they want it and need it. We operate power plants, build and maintain electric lines, troubleshoot service issues, and provide the support services needed to keep our company running smoothly.

Total employees

Minnesota

792

499 196 97

North Dakota

South Dakota

Recognized for communication

(includes temporary and part-time, includes plant partners’ employee shares)

Our customers We provide electricity and energy services to more than 129,000 customer homes and businesses. That means we serve about 250,000 people. They live in 422 communities and in rural areas stretching across 50,000 square miles of western Minnesota, eastern North Dakota, and northeastern South Dakota.

Total customers

Customer classifications

Residential 99,488

129,256

Large commercial 1,887

Minnesota

60,584

North Dakota

57,004

South Dakota

11,668

Seasonal cottages 2,309

Farms 2,753

Commercial 21,809

Street lighting 395

Other public authorities 615

Headquartered in Fergus Falls, Minnesota, we have customer service centers in each of the three states we serve.

Minnesota

Fergus Falls, Bemidji,

Crookston, and Morris

North Dakota

South Dakota

Devils Lake, Garrison, Milbank Jamestown, Oakes, Rugby, and Wahpeton

Getting to know us 4

We value each opportunity to share information about our activities and policies with our employees and customers.

In 2010 our 2009 On for generations 100th anniversary commemorative publication won an Award for Publication Excellence (APEX) from Virginia-based Communication Concepts, Inc., as did a video about our 100th anniversary pay-it-forward project at the Anne Carlsen Center in Jamestown, North Dakota.

Generation mix In June 2010 we filed our seventh integrated resource plan (IRP) with the Minnesota Public Utilities Commission (MPUC). It identifies the most cost-effective combination of resources for meeting our customers’ needs for reliable electric service during the next 15 years. To develop our IRP , we evaluate available electric generation resources and select a plan based on affordability, reliability, achievability, and environmental responsibility.

We continue to make existing generating facilities as efficient and economical as possible. But because existing resources alone cannot meet our customers’ future energy needs, our proposed IRP provides a mix of additional resources.

The MPUC is scheduled to decide in 2011 whether to approve our IRP or a modified plan. While this filing is required only in Minnesota, we develop a strategy for our system as a whole and provide copies of the plan to the North Dakota and South Dakota regulatory commissions as well.

Planned resource additions 2011-2025 planned resource 2011-2025 additions New conservation - 55 MW New demand-side management - 15 MW New wind resources - 50 MW New gas-fired plants - 213 MW

2010 resource mix 2010 resource mix This graph represents the various fuel sources (owned and purchased) that Otter Tail Power Company uses to serve its customers. Purchases from known fuel sources are reflected in their associated categories such as hydro, wind, etc. For example, the 3.38 percent hydro portion of our resource mix reflects approximately 0.6 percent from owned generation and approximately 2.78 percent from purchases. All other purchases are reflected in the “Purchases from unknown fuel sources” category.

Coal 69.38% Natural gas 0.17% Wind 13.56% Hydro 3.38% Purchases from unknown fuel sources 13.51%

Generation resources Langdon Wind Energy Center

Coyote Station

Luverne Wind Farm Jamestown combustion turbine

Ashtabula Wind Energy Center

Wahpeton

Big Stone Plant

SOUTH D A K O TA

Lake Preston combustion turbine

Fergus Falls Hoot Lake Plant

M I N N E S O TA

NORTH D A K O TA

Solway combustion turbine

Otter Tail Power Company owns part or all of the generation resources shown on the map above. Our hydroelectric plants are shown on the map on page 6.

5

Getting to know us

Coal-fired power plants We operate three coal-fired power plants that produce about 69 percent of the electrical energy our customers consume.

Big Stone Plant

Coyote Station

Hoot Lake Plant

Location: Big Stone City, South Dakota

Location: Beulah, North Dakota

Location: Fergus Falls, Minnesota

Age: On line since 1975

Age: On line since 1981

Capacity: 475 megawatts

Capacity: 427 megawatts

Age: Unit 2 on line in 1959, Unit 3 on line in 1964

Fuel source: Subbituminous coal

Fuel source: Lignite Ownership: 35% Otter Tail Power Company, 30% Northern Municipal Power Agency, 25% Montana-Dakota Utilities Co., 10% NorthWestern Energy

Ownership: 53.9% Otter Tail Power Company, 23.4% NorthWestern Energy, 22.7% Montana-Dakota Utilities Co.

Capacity: 144 megawatts Fuel source: Subbituminous coal Ownership: 100% Otter Tail Power Company

All capacity ratings listed in this report are installed capacity ratings according to the Midwest Independent Transmission System Operator, Inc.

Hydroelectric plants Otter Tail Power Company owns six small hydroelectric plants in Minnesota and purchases generation from other hydro resources to account for about 3.4 percent of the company’s electrical energy. The Bemidji hydro plant, on line in 1907, is .2 MW on the Mississippi River while the other hydro plants are on the Otter Tail River near Fergus Falls as illustrated below.

Willow Creek

Rush Lake

Taplin Gorge (Taplin Gorge) .5 MW, on line 1925

Wright (Central Dam) .5 MW, on line 1922

Otter Tail Lake

Hoot Lake Wright Lake

Pisgah .7 MW, on line 1918

Hoot Lake .8 MW, on line 1914 Dayton Hollow 1 MW, on line 1909

Getting to know us 6

Wind power As of 2010, about 13.56 percent of Otter Tail Power Company’s electrical energy comes from emission-free wind power as shown below.

We own or purchase power from wind farms in North Dakota, South Dakota, and Minnesota with most in North Dakota. Our 183 megawatts of installed wind energy capacity is on target with our latest approved resource plan, which originally was filed in 2005. We amended it in 2006 and 2008, and the Minnesota Public Utilities Commission approved it in 2009. In 2010 we filed a new resource plan that calls for 50 MW of additional wind power by 2012. That plan has not been approved yet.

Each of our company’s 33 turbines at the Luverne Wind Farm sits 260 feet above ground and can produce 1.5 MW of electricity.

space between chart and heads

Minnesota

North Dakota

3.5 MW (purchased)

North Dakota Wind II (Edgeley)

21.0 MW (purchased)

Langdon Wind Energy Center

40.5 MW (owned) 19.5 MW (purchased

Ashtabula Wind Energy Center

48.0 MW (owned)

Luverne Wind Farm

49.5 MW (owned)

South Dakota

.09 MW (purchased)

Getting to know us 6

Renewable energy compliance In 2009 the U.S. Department of Energy recognized us as having the fourth highest proportion of wind energy penetration among the nation’s electric utilities.

We are well positioned to comply with the Minnesota renewable energy standard, which requires 25 percent of retail sales to be from renewable resources by 2025 and includes a stepped implementation of 12 percent by 2012. North Dakota and South Dakota have renewable energy objectives of 10 percent by 2015. We are adding these renewable resources within the economic parameters of our 2011-2025 IRP . With the current renewable resources plus 50 MW planned for as early as 2012, we likely will not need additional resources to comply with the renewable energy standard or objectives until sometime after 2024.

Combustion turbines Combustion turbines produce less than 1 percent of our company’s electrical energy.

Often called peaking plants, these compact units generate power only during peak energy-use periods when our primary power plants cannot meet our customers’ demand.

Solway, Minnesota

Jamestown, North Dakota

Lake Preston, South Dakota

Generating capacity – 41.9 MW

Generating capacity – 44.1 MW

Generating capacity – 22.1 MW

Operates on natural gas or fuel oil

Operates on fuel oil

Operates on fuel oil

Generating capacities are listed according to Midwest Independent Transmission System Operator, Inc., ratings and change monthly.

7

Getting to know us

Transmission and distribution Demand for electricity is increasing nationwide, and our service area is no exception.

We invest in transmission upgrades and new construction to meet growing demand and to maintain our system’s reliability.

Miles in operation

2008 2010 Transmission lines

345 kv 47.8 47.8

230 kv 405.0 417.1

115 kv 821.5 862.4

69 kv 212.0 212.3

41.6 kv 3,801.0 3,768.8

Distribution lines

24 kv and smaller 5,224.0 5,228.1

2011 proposed additions 28 miles CapX2020 Fargo Phase 1* 0 Approximately 16 miles Buffalo, ND – Casselton, ND 0 0 Determined by customer needs

kv = kilovolt *Otter Tail Power Company owns 13 percent of the CapX2020 Fargo Phase 1 line.

CapX2020 CapX2020 is an effort of 11 transmission-owning utilities in Minnesota and the surrounding region to expand the electric transmission grid to ensure continued reliable and affordable service. Otter Tail Power Company is participating in three of the four Group 1 projects (the projects in blue text below) and is the lead utility for the Bemidji-Grand Rapids 230-kv line project.

Survey crews marked environmentally and culturally sensitive areas before clearing the 125-foot right-of-way in the Chippewa National Forest for the Bemidji-Grand Rapids project, which complies with numerous mitigation measures outlined in its permits to protect these resources.

CapX2020 projects will create the ability to interconnect renewable and other generation to the transmission system. Studies have demonstrated more than 1,500 MW of new transfer capability for locations that have high potential for renewable generation development. We expect that further studies will show additional capability.

Group 1 projects Fargo Phase 1 St. Cloud-Monticello 345-kv line Fargo Phase 2 Fargo-St. Cloud 345-kv line

Miles Peak Jobs (approx.) construction year created* 28

2011

1,408

210

2013

1,408

Bemidji-Grand Rapids 230-kv line 70 2012 507 Brookings County-Hampton 345-kv line 240 Hampton-Rochester-LaCrosse 345-kv line

125

2013 2013-2014

4,492 1,107

* Construction jobs and an equivalent number of indirect and induced jobs

Bemidji-Grand Rapids 230-kv line In October 2010 the Minnesota Public Utilities Commission (MPUC) unanimously granted a route permit for the CapX2020 230-kv transmission line between the Wilton Substation near Bemidji and the Boswell Substation near Grand Rapids in northern Minnesota. With the route permit and other local, state, and federal permits received, and owners’ agreements signed by the end of 2010, project representatives began easement acquisition discussions and began clearing the 125-foot-wide right-of-way.

Otter Tail Power Company, the project lead, is preparing to begin line construction in July. The line should be completed by the end of 2012. Our company will own 20 percent of the 70-mile line. Minnkota Power Cooperative and Xcel Energy will own 31 percent and 26 percent, respectively. Great River Energy and Minnesota Power also own portions of this line. Visit www.capx2020.com to follow progress of the BemidjiGrand Rapids project and the other CapX2020 projects.

Getting to know us 8

Bemidji-Grand Rapids right-of-way clearing began in the winter, providing logs to local mills when their supplies were short. The mills used the various species of wood for lumber, paper, and pulp.

Environmental stewardship Our employees, known for their work ethic, honesty, and respect for the area’s natural resources, call our service area home as do many Otter Tail Corporation shareholders. Because a wholesome environment is essential to a satisfying quality of life, we place respect for the environment at the forefront of our operations.

We want our communities and their surroundings to have clean air, land, and water resources. We want them to support wildlife, wildflowers, game fish, and rural parks. Consequently, Otter Tail Power Company’s Environmental Services Department ensures that we comply with all environmental laws.

Monitoring climate-change legislation We monitor and evaluate the possible adoption of national, regional, and state climate-change and greenhouse gas legislation or regulations that would affect electric utilities. Although in previous sessions of Congress bills have been introduced that would compel reductions in carbon dioxide (CO2) emissions, we currently do not have federal greenhouse gas reduction requirements. We believe it’s unlikely that Congress will adopt a mandatory federal CO2 emissions-reduction program in this biennium.

Our position We serve our customers with reliable and economical electricity produced in an environmentally responsible way. We maintain electricity supply vital to the region’s economic well-being and the nation’s security. To do that and be successful in reducing CO2 emissions will require our company, our industry, and state and federal policymakers to make an aggressive and sustained commitment to deploying a full suite of policy and technology options including: • An intensified national commitment to energy efficiency, including advanced efficiency technologies and new regulatory and business models.

• Accelerated development and cost-effective deployment of renewable energy resources.

• Advanced clean-coal technologies.

• Continued development of carbon-capture technologies and storage for all types of fossil-fueled generation.

CO2 regulation, such as cap and trade or carbon tax, has the potential to significantly increase our customers’ energy bills. We encourage legislative measures that help protect our customers from significant cost increases. Equitable CO2 reduction by all sectors of the economy and by all industrialized nations is important because our customers must be able to fairly compete locally, nationally, and internationally.

9 Environmental stewardship

Focusing on air quality Because no legislation requiring CO2 reductions has been passed, our priority is to cost-effectively plan so that future CO2 emissions are no more than the 2002‑2004 average level by 2020. Our measure for this goal is based on owned, or internal, emissions.

The chart at right shows our company’s CO2 emissions since 2000.

CO2 intensity trend We are committed to undertaking projects that increase our plant efficiency and that add renewable energy to our resource mix. These efforts reduce Otter Tail Power Company’s CO2 intensity (pounds of CO2 per megawatt-hour generated). As shown in the chart at right, between 1990 and 2010 we decreased our overall system average CO2 intensity by almost 17 percent.

CO2 tons from owned fossil fuel generation 2002 - 2004 average: 4,523,000 tons

5,000,000

self-imposed cap

4,000,000 3,000,000

2,000,000 1,000,000 0 2000

2001

2002 2003

2004 2005

2006

2009

2007 2008

2010

Plains CO2 Reduction Partnership (PCOR) Otter Tail Power Company CO2 intensity trend 2500 CO2 intensity, lb/Mwh

We have participated in carbon sequestration research through the Plains CO2 Reduction (PCOR) Partnership facilited by the University of North Dakota’s Energy and Environmental Research Center. The PCOR Partnership is a collaborative effort of approximately 100 public and private sector stakeholders working toward a better understanding of the technical and economic feasibility of capturing and storing anthropogenic CO2 emissions from stationary sources in central North America. The partnership has begun developing two commercial-scale CO2 sequestration projects that each will inject about one million tons of CO2 per year into suitable geological formations. The tests are designed to demonstrate the potential to store CO2 safely, permanently, and economically for centuries.

2453 2459

SO2 and NOX emission control Our coal-fired power plants are becoming cleaner and more efficient, as shown by this graph of historical SO2 and NOX intensity. In addition, Otter Tail Power Company and the other Big Stone Plant owners have proposed a new air-quality control system (AQCS) to be installed in 2016. The proposed AQCS would further reduce SO2 and NOX emission intensity. See page 17 for more information about the AQCS.

2525

2446

2306

2444 2149

2045

1500 1000 500 0

1990

1995

2000 Year

Otter Tail Power Company fossil fuel plant average

2005

2010

Overall system average

Only Otter Tail Power Company-owned resources and long-term contracted energy purchases from known sources are included in this chart.

SO2 and NOX emission intensity trends from owned fossil fuel generation Emission Intensity lb/MWh

Our emission rate has been lower than the average partnership’s emission rate for each reporting year. Our self-determined annual SF6 emission goal is less than 2 percent of system capacity through 2012. We met this goal in 2010 by having an SF6 emission rate of 0.2 percent.

2319

2000

SF6 Emission Reduction Partnership We continue our membership in the Environmental Protection Agency’s SF6 (sulfur hexafluoride) Emission Reduction Partnership for Electric Power Systems program. The partnership targets reducing emissions of SF6, a potent greenhouse gas used as an insulator in electrical transmission and distribution equipment.

2553

20 19.0 18 16

17.7

14 12 10

9.9

10.1 8.4 8.6

8

7.8 7.8

6

8.4 6.6 4.6

4

2.9

2 0

1990

1995

2000 2005 Year SO2

Environmental stewardship 10

NOX

2010

2016

Projections with Big Stone AQCS

Developing wind energy Renewable energy certificates A renewable energy certificate (REC) represents one megawatthour of electricity produced from a renewable resource such as wind. The multi-state Midwest Renewable Energy Tracking System (MRETS) tracks RECs. MRETS was approved by the Minnesota Public Utilities Commission in 2007. Its participants include Illinois, Iowa, Manitoba, Minnesota, Montana, North Dakota, Ohio, South Dakota, and Wisconsin.

We choose generating resources that are low cost and environmentally responsible and that satisfy our customers’ growing needs. We’re strengthening that balance as we integrate wind energy resources into our generation mix.

While wind is a good environmental choice, ours also has been the right choice for long-term cost. Wind is part of our least-cost resource plan, because of Otter Tail Power Company’s geography.

1. North Dakota, South Dakota, and western Minnesota have the nation’s premier wind resource, allowing our wind farms to convert wind energy into electricity more effectively than the national average.

2. We have been able to interconnect wind energy to the electric grid where transmission capacity is available.

We have taken advantage of economies of scale by co-owning portions of larger wind farms and used significant tax credits to offset our tax obligations.

Adding wind-generated resources has been good for our communities too, producing welcomed property taxes and increased income for landowners.

Green-e certification for renewable energy certificates Green-e Energy is a leading certification program for voluntary renewable energy products in the United States. Five of our wind resources are Green-e certified, and the accompanying RECs are eligible for sale in the voluntary national Green-e Energy markets. We sell RECs that we’ve earned that are above what we need for state compliance into the Green-e voluntary national market, and we pass the benefits of those sales back to our customers.

“Green-e certified retail products avoided more than 9.4 million metric tons of CO2 emissions that would have been produced by an equivalent amount of average system power. On behalf of consumers buying renewable energy products certified

by Green-e Energy, the program requires that certified Renewable Energy Certificate products, utility green pricing programs, and competitive electricity products undergo an independent annual audit to demonstrate compliance with Green-e Energy’s rigorous consumer protection and environmental standards. Green-e Energy requires that sellers of certified renewable energy products provide full and accurate information to their customers, deliver the renewable energy they promise, and source from renewable energy generators that meet Green-e Energy’s resource eligibility requirements, developed by stakeholders over the past 13 years.”

- Center for Resource Solutions, Green-e Energy program administrator

TailWinds Learn more about TailWinds by visiting www.otpco.com/ProductsServices/ Tailwinds.asp.

Since 2002 our TailWinds program has been available to commercial and residential customers who are interested in supporting an even greater level of company investment in renewable energy technologies. TailWinds allows our customers to purchase wind-generated electricity in 100-kwh blocks. In 2010, 644 customers were enrolled and purchased 229,400 kilowatt-hours of electricity through the program.

Participating customers pay a little extra for their electric service to cover the incremental cost of renewable energy.

Recognizing challenges Wind power poses new challenges to electric utilities, especially in dispatching electric generating units to reliably meet consumer demand. Intermittent resources such as wind are variable and present uncertainties regarding how much energy or capacity can be available during various times of day or during periods of high demand. In spite of these challenges wind is part of our least-cost resource plan.

11 Environmental stewardship

Partnering in product reuse Whenever possible Otter Tail Power Company facilitates the reuse of fly ash, flue gas desulfurization (FGD) product, boiler slag, and bottom ash—the products of coal combustion.

Hoot Lake Plant In 2004 Hoot Lake Plant received the first Case Specific Beneficial Use Determination (CSBUD), allowing agricultural reuse of fly ash in Minnesota. The demand for reusing ash to stabilize soils in feedlots, grain-storage pads, and farm roads continues to increase. The plant’s fly ash also is used in the North Dakota oil fields. The plant produced 12,419 tons of fly ash and 5,320 tons of bottom ash in 2010. Of these totals, 5,651 tons of fly ash was beneficially reused (45.5 percent of the fly ash generated) and 10 tons of bottom ash was beneficially reused (0.2 percent of the bottom ash generated). The remainder of the fly ash and bottom ash (6,768 tons and 5,310 tons, respectively) was placed in the plant’s permitted on-site ash disposal area.

Big Stone Plant In 2010 Big Stone Plant produced 34,064 tons of fly ash and 79,482 tons of boiler slag. The plant, which also is in an agricultural area, distributed 20,171 tons (59.2 percent) of its fly ash in 2010 for agricultural reuse, and 51,152 tons of its boiler slag (64.4 percent) was beneficially reused. The remainder of the fly ash and boiler slag (13,892 tons and 28,329 tons, respectively) were placed in Big Stone Plant’s permitted on-site ash disposal area.

Coyote Station Coyote Station produced 235,172 tons of flue gas desulfurization (FGD) product and 77,439 tons of boiler slag in 2010. Of these totals, 53,316 tons of boiler slag (or 68.8 percent) was beneficially reused. All of the FGD product and the remainder of the boiler slag (24,123 tons) were placed in Coyote Station’s permitted on-site disposal areas.

Environmental stewardship 12

Using water resources responsibly Steam generation requires access to a large volume of water. Our plants fully comply with regulations governing the use of regional water resources as set forth in our water permits. We take great care to ensure that we do not negatively impact the rights of other users. That policy has served us well and has helped ensure a balance between environmental and economic interests.

Coyote Station Coyote Station appropriates water from the Missouri River under a permit issued by the North Dakota State Water Commission.

Hoot Lake Plant staff established and maintains canoe portage and trail facilities along the Otter Tail River from the plant upstream to Friberg Dam. Employees cleared brush and weeds, placed granite ballast to prevent riverbank erosion, and identified the trail and portages with signs.

During the summer they mow the trail between the upper and lower portages. At the portage landing near the plant, steps are built into the riverbank for exiting and entering the river channel.

River users can check on safe water levels and access other information and a map of the Otter Tail River water trail at this web site: http://files.dnr.state.mn.us/maps/ canoe_routes/otter_tail.pdf.

Coyote Station uses a cooling tower to meet its cooling needs. A small portion of the water appropriated for cooling tower operation is discharged to the Missouri River under a permit approved by the North Dakota Department of Health. The remaining plant wastewater is recycled and used in other plant processes. Most of the water lost is through evaporation.

In 2010 Coyote Station appropriated 5,288 acre-feet from the Missouri River and discharged 362 acre-feet. Fewer than 5,000 acre-feet of water were consumed in the cooling process.

Big Stone Plant Big Stone Plant is permitted by the South Dakota Department of Environment and Natural Resources (DENR) to withdraw water from Big Stone Lake. The permit also includes restrictions that limit water withdrawals when Big Stone Lake is below prescribed levels and restricts most withdrawals to times of high water flows. During 2010 Big Stone Plant withdrew 3,371 acre-feet of water from Big Stone Lake.

Water discharges from Big Stone Plant are treated and eventually recycled back into the plant and to the adjacent ethanol plant. This unique cooling water design allows the facility to have no heated or process water discharges into any natural surface water bodies.

Hoot Lake Plant At Hoot Lake Plant the Minnesota Pollution Control Agency (MPCA) oversees waterquality programs and discharge regulations. The Minnesota Department of Natural Resources administers water-supply appropriations.

Water for the plant is taken from nearby Wright Lake and is classified as either “consumptive” (not returned to the watershed) or “nonconsumptive” (returned to the watershed). Nonconsumptive water is returned to the Otter Tail River under the plant’s water discharge permit, while consumptive water is consumed within the plant. During 2010 nonconsumptive use totaled 79,126 acre-feet of water and consumptive use totaled 1.3 acre-feet.

Respecting wildlife habitat We support stewardship of the area’s natural resources and wildlife habitat. For instance, approximately 825 acres of Big Stone Plant property is managed through an agreement with the South Dakota Department of Game, Fish, and Parks (GFP). GFP beneficially manages the property by planting trees, maintaining food plots, growing native grasses, and controlling noxious weeds so wildlife can flourish. Public entry points provide access to the entire property so people can view nature and enjoy excellent hunting opportunities.

Some additional Big Stone Plant acreage is enrolled in GFP’s Walk-In Program, which allows free hunting to foot traffic only. In addition, Big Stone Plant financially supports area organizations such as Ducks Unlimited, Pheasants Forever, and the National Wild Turkey Federation.

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Environmental stewardship

Addressing spills, fines, and sanctions Despite our commitment to sound environmental stewardship, rare mistakes occur.

When they do, we correct them as quickly as possible.

Spills Otter Tail Power Company had one spill during 2009 and one during 2010 that required notice to the National Response Center. The 2009 spill occurred at our Hoot Lake Plant when approximately five gallons of turbine lube oil entered the Otter Tail River due to a problem with an oil conditioner. Booms were spread across the river to recover as much oil as possible. Subsequently, Hoot Lake Plant has taken steps to prevent future oil releases.

The 2010 spill occurred at our Bemidji Hydro Plant when approximately 15 gallons of hydraulic oil was released to the Mississippi River. Here again, we have taken steps to prevent future spills to a body of water by installing secondary containment.

Fines and sanctions In 2009 we made two separate payments for environmental infractions. The first resulted from an EPA inspection of our Wahpeton, North Dakota, Central Stores facility, during which the EPA noted that we had left an unlabeled drum of PCB-containing materials in a temporary storage location for more than 30 days. The EPA levied two infractions and issued a Notice of Violation with a $1,644 penalty. Corrective measures have been implemented at the facility.

The second was disclosed in the 2008 Stewardship Report regarding an eroding liner at the Hoot Lake Plant coal pile runoff/wash-water collection pond. In addition to the liner erosion, the MPCA reviewed files related to the site National Pollutant Discharge Elimination System permit and discovered deficiencies mainly regarding recordkeeping, equipment maintenance, and security of a discharge point. The MPCA issued an Administrative Penalty Order for a total of $4,548 in 2009 for the deficiencies and pond liner tear. Of that total, $1,320 was deemed forgivable for corrective actions taken, resulting in a final payment of $3,228 to the MPCA. Since then we have corrected all deficiencies. We replaced the pond’s liner in 2009.

Otter Tail Power Company has had no other fines levied for environmental infractions since these two instances in 2009.

Making environmental protection expenditures and investments For the five years ending December 31, 2010, we invested approximately $15.6 million in environmental control facilities. The 2011 construction budget includes approximately $5.6 million for environmental equipment for existing facilities.

Monitoring regulatory proposals We are paying particular attention to four rules being developed by the Environmental Protection Agency because regulatory uncertainty impacts so much of our planning and operations. These rules involve cooling water intake structures, hazardous air pollutants, the interstate transport (or movement) of sulfur dioxide and nitrogen oxides, and coal ash regulation.

Cooling water intake structures Regulatory background The EPA is revising its cooling water intake structure (CWIS) rule under the Clean Water Act for existing steam-electric power plants. The rule requires that the location, design, construction, and capacity of a CWIS reflect the best technology available for minimizing adverse environmental impact. Adverse impact results from withdrawing cooling water containing aquatic organisms and subsequent impingement of larger organisms on the intake structure or the entrainment of smaller organisms within the plant cooling water system.

Environmental stewardship 14

We replaced Hoot Lake Plant’s washwater collection pond liner in 2009.

The EPA signed the proposed rule March 28, 2011. We expect that the EPA will issue a final rule in mid-2012.

Otter Tail Power Company impact The CWIS rulemaking will affect Otter Tail Power Company’s Hoot Lake Plant because it employs once-through cooling, whereby water is gravity fed from Wright Lake to the plant condensers for cooling and condensing steam and then returned through a discharge canal to the Otter Tail River. Hoot Lake Plant’s cooling towers are operated only during low river flows or high water temperatures to maintain compliance with the plant’s water discharge permit.

Hoot Lake Plant has completed two extensive studies to document the impact of the once-through cooling water system on fish in Wright Lake. The first study was conducted in 1976, the second in 2005. Following the 2005 study the company made a recommendation to the Minnesota Pollution Control Agency for follow-up impingement monitoring. The recommendation will be reviewed for applicability following the EPA’s final CWIS rulemaking.

Challenges The proposed rule creates challenges because it sets rigid impingement mortality standards with no opportunity to seek alternative standards, whether based on cost-benefit analysis, infeasibility, or any other factors. This is in contrast to the entrainment mortality standards that give state permits writers the flexibility to conduct site-by-site assessment.

We don’t know what the final CWIS rule will require, but we’ll submit comments urging that the rule for existing facilities be applied on a site-by-site basis, recognizing technology constraints and the need for possible modifications at each site.

Extensive scientific literature on cooling water intake effects demonstrates that environmental impacts differ widely from site to site and that no generic approach can account for the wide natural variability in aquatic communities. Moreover, the rule should allow consideration of the cost and energy implications of selected technologies compared with their expected environmental benefits.

Hazardous air pollutants Regulatory background In 2005 the EPA finalized the Clean Air Mercury Rule to reduce coal-fired power plant emissions. That rule would have created a market-based cap-and-trade program.

However, in 2008 the rule was vacated, and the EPA was directed to regulate mercury and other utility-generated hazardous air pollutants (HAPs) using maximum achievable control technology (MACT) standards. MACT standards require covered sources to meet specific emissions limits that are based on the emissions levels already achieved by the best-performing similar facilities.

According to a consent decree, the EPA signed a proposed rule on March 16, 2011.

The EPA is obligated to publicize final MACT standards by November 2011.

Otter Tail Power Company impact In late 2009 the EPA issued to electric utilities an Information Collection Request (ICR) to obtain fuel and emission data to support a MACT rulemaking. Part of the ICR required approximately 500 generation units to conduct specialized stack testing to determine levels of certain HAPs present in the flue gas. For Otter Tail Power Company, both Big Stone Plant and Hoot Lake Plant Unit 2 were selected for stack testing. The extensive data-collection and testing program was completed in September 2010.

At this printing, we are evaluating the proposed rule. It appears, however, the MACT rule will require mercury reductions at all four of our coal-fired units and particulate matter reductions at Hoot Lake Plant. To prepare for the possibility of mercury reduction requirments, we have participated as a financial sponsor of several mercury15

Environmental stewardship

control demonstration projects. In June 2010 we hosted a short-term mercurycontrol demonstration project at Hoot Lake Plant Unit 2. The Energy & Environmental Research Center (EERC) performed testing of additive/sorbent technology and performed gas sampling to determine the achieved levels of mercury removal.

Challenges The EPA is faced with a number of significant decisions as it finalizes appropriate MACT standards. We will follow the rulemaking closely and will support standards that require reasonable reductions based on a thorough review of the ICR data.

Transport Rule for sulfur dioxide and nitrogen oxides Regulatory background The Clean Air Act requires the EPA to address interstate transport of air pollution.

Consequently, in July 2010 the EPA proposed the Transport Rule, which would require 31 eastern states and the District of Columbia to reduce power plant sulfur dioxide (SO2) and nitrogen oxides (NOX) emissions. The EPA’s preferred approach would be to set an emissions budget for each plant and allow limited interstate trading among power plants (i.e., a cap-and-trade program).

The proposed Transport Rule would require emission reductions to take effect in 2012 with additional SO2 reductions required for some of the affected states in 2014.

According to EPA estimates, compared with 2005 levels, the rule would reduce power plant SO2 and NOX emissions by 71 percent and 52 percent, respectively.

Otter Tail Power Company impact The proposed Transport Rule region includes Minnesota but not South Dakota or North Dakota. Thus, Hoot Lake Plant is our only covered facility. Based on the EPA’s projected emissions allocations, Hoot Lake Plant appears to be in a strong position to comply with the rule simply by operating within its current emissions budget. In recent years Hoot Lake Plant has reduced its NOX emissions by installing low-NOX burners during outages and burns low-sulfur subbituminous coal to limit SO2 emissions.

Challenges We support the EPA’s preferred approach even though, as a new regulatory program that affects only part of our generation fleet, it will create special challenges. Because the rule is not yet finalized, we are uncertain if the EPA will make any significant changes to allowance allocations or deviate from its preferred cap-and-trade approach.

Coal ash regulation Regulatory background The EPA published in the Federal Register on June 21, 2010, two alternative proposals to regulate coal ash produced by electric utility generators. Each of the alternatives promotes national regulatory consistency and addresses the perceived shortcomings of current state regulations. The first alternative would regulate coal ash as a new “special waste” under the Hazardous Waste rules of Subtitle C of the Resource Conservation and Recovery Act (RCRA). The second would regulate coal ash as a non-hazardous waste under Subtitle D of the RCRA with individual state oversight.

Otter Tail Power Company impact Our company facilitates the reuse of products of coal combustion including fly ash, flue gas desulfurization product, boiler slag, and bottom ash as noted on page 12 of this report. We disagree with the proposed Subtitle C alternative, and we submitted comments to the EPA to that effect. We are concerned that beneficial reuse could be eliminated due to the stigma of ash being classified as a hazardous waste.

Challenges The EPA has conducted more than 20 years of study and previously issued two reports to Congress regarding coal combustion products. These reports conclude that these products do not exhibit hazardous waste characteristics and are properly managed under state waste regulations.

Environmental stewardship 16

The 2010 short-term mercury-control demonstration project at Hoot Lake Plant involved injecting an additive into the boiler while simultaneously injecting a sorbent upstream of the air heater.

Planning for the future We are serious about our environmental stewardship responsibility and acknowledge the debate over environmental issues. Our energy resource plan ensures a balance between respect for the environment and cost-effective electricity.

In 2005 we decided to participate in Big Stone II, which was a 500-600 MW coalfired power plant proposed to be built adjacent to the existing Big Stone Plant in South Dakota. Regulatory authorities and our company agreed Big Stone II was a necessary and prudent least-cost project. The project also would have improved the environmental profile of the existing Big Stone Plant. By the fall of 2009, however, a combination of factors had changed causing Otter Tail Power Company to withdraw: • Legislative and regulatory uncertainty surrounding federal energy and climatechange policy, including the Environmental Protection Agency’s 2009 indication that it intended to regulate CO2 under the existing Clean Air Act • Significant changes to energy price forecasts that were expected to result in changes to our resource plan and resource adequacy requirements • Unprecedented, difficult financial market conditions and cost-recovery risks that made raising the large amount of necessary capital unreasonably costly • The risk that we could be required to either increase our share of the plant or participate in a smaller and less economic project if additional participants did not join the project

Big Stone Plant air-quality control system

SO2 and NOX emission intensity before and after installation of the AQCS

In 2005 the EPA issued the Regional Haze Best Available Retrofit Technology (BART) Regulations and Guidelines. Among other requirements, the guidelines require emission controls for specified industrial facilities that might emit air pollutants that could reduce visibility in 156 Class I areas across the nation. The Class I areas typically are national parks, and wilderness areas. The South Dakota Department of Environment and Natural Resources has concluded that Big Stone Plant may reduce visibility in the Class I areas of the Boundary Waters Canoe Area and Voyageurs National Park. Consequently, EPA has required the State of South Dakota to submit an implementation plan that details how Big Stone Plant will reduce its emissions and comply with the BART guidelines.

In September 2010 the South Dakota Board of Minerals and Environment approved rules implementing the South Dakota Regional Haze State Implementation Plan (SIP).

The rules and the South Dakota SIP will require Big Stone Plant to install and operate a new BART-compliant air-quality control system (AQCS) to reduce particulate matter, SO2, and NOX emissions. The new AQCS must be operational within five years of the EPA’s approval of the South Dakota SIP. We project that compliance with the new rule and the Regional Haze SIP might be required as early as 2016.

We expect the AQCS project to cost about $500 million. That’s an expensive project.

Nevertheless, every model we ran for our integrated resource plan selected the addition of the project as part of our low-cost plan rather than removing Big Stone Plant from our resource mix, as would be required if the AQCS were not added.

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Environmental stewardship

Promoting energy efficiency and demand-side management We believe that an electric utility should share its employees’ expertise with its customers and communities. We strive to offer customers proven energy-efficient technology options, rate information to help them calculate their operating costs, and energy-conservation options that best suit their personal goals and needs.

Energy-conservation programs We are pursuing aggressive energy-conservation goals and in 2010 offered a portfolio of conservation programs in the three states we serve.

Minnesota Conservation Improvement Program Our Minnesota Conservation Improvement Program (CIP) offers customers the opportunity to save energy and money in a challenging economy. And the benefits extend to all customers through deferred utility infrastructure investments.

We designed our 2010 CIP programs to comply with The Next Generation Energy Act of 2007. The Act sets an aggressive statewide energy conservation goal of 1.5 percent of average annual Minnesota utility retail sales but sets a minimum amount of savings for utility plans at 1 percent. We introduced new programs and focused additional resources on implementing the Minnesota CIP programs to achieve this goal.

During 2010 we invested more than $5 million on CIP and returned more than $29 million in lifetime benefits to customers. Energy savings reached a record-setting 33.1 million annual kilowatt-hours (kwh) of energy and a demand savings of 5.8 MW. For the year, that is 1.58 percent of our annual retail sales. At a lifetime cost of less than 1.5 cents per kwh conserved, our energy-efficiency programs continue to be a cost-effective resource for customers.

In addition to designing programs to meet conservation goals, we are working to ensure that savings estimates are both measurable and verifiable to meet stringent state program requirements. While 2010 savings results have not been approved yet, we highlight a few Minnesota programs on the following pages.

Energy-efficient lighting installations Our commercial lighting program was among our most successful 2010 conservation programs. More than 430 participants installed systems that are expected to save 11.3 million kwh annually during the life of the technology.

In addition to those savings, our residential Change a light, change the world program resulted in the sale of 16,329 compact fluorescent lightbulbs (CFLs) and LED lighting strings and is estimated to save more than a million kwh annually over the life of the bulbs. We partner with local retailers in rebating Energy Star-qualified CFLs and LED holiday lights.

Environmental stewardship 18

River cleanup a joint effort Otter Tail Power Company employees are active in service clubs and chambers of commerce. They serve as elected officials, join volunteer fire departments, participate in youth organizations, and provide leadership for community-based programs and events.

In 2010, for the second year, Otter Tail Power Company Senior Financial Analyst Tom Weiss, who’s also the Scoutmaster of Boy Scout Troop 304 in Fergus Falls, and his Scout troop organized an Otter Tail River cleanup as a joint effort of our company and the Scouts.

Together company volunteers and Scouts removed litter and knocked down noxious weeds along both sides of the riverbank in about a three-block area of downtown Fergus Falls.

Heat pump rebates This program encourages customers to replace their inefficient electric resistance heating and cooling systems with air-source or geothermal heat pumps. The project, which saved nearly 3.5 million kwh in energy sales for the year, is designed to reduce both winter and summer peak demands as well as overall energy use. Approximately 243 residential and 294 commercial high-efficiency Energy Star-rated equipment installations qualified for rebates.

Energy-efficient equipment grants Our grant program taps the conservation and efficiency potential of commercial and industrial operations by partially funding cost-effective energy-conservation projects.

We make customized grant awards based on our analysis of the calculated benefits to be derived from proposals developed and submitted by customers. During 2010 we provided 24 custom grants to customers for industrial and manufacturing installations of energy-efficient process improvements with a total projected savings of nearly 2.7 million kwh of energy and 560 kw of demand.

Our analysis of customers’ motors and other electric equipment demonstrates that customers save significantly by using energy-efficient variable-speed drives and motors.

Adjustable-speed drive rebates The common induction motor is widely used in virtually every manufacturing plant and office building. The single most potent source of energy savings in induction motor systems lies in the controls that govern the motor’s operation. Adjustable-speed drives (ASDs) are one method of modifying or controlling motor behavior and thereby improving drive system performance and efficiency. Adjustable-speed drives can match the speed of an AC motor to the requirements of a fluctuating load, such as a pump.

During 2010, 209 ASDs were installed with projected savings of 5.2 million kwh of energy and 650 kw of demand.

Plan Review Our Plan Review project encourages building owners, architects, and design engineers to incorporate energy-efficiency into new building construction. Experts review proposed preliminary building plans and specifications and offer customers incentives for energy-efficient improvements. During 2010 we completed nine plan reviews resulting in 3 million kwh of energy savings.

Appliance recycling Initially offered in 2009, our appliance recycling program delivered 368 rebates during 2010 to customers who turned in old, inefficient, working refrigerators and freezers.

19 Environmental stewardship

Bill Analyzer Because information drives behavior and behavioral changes produce energy savings, our Bill Analyzer tool helps residential customers investigate all aspects of their energy use through online modules and calculators that are part of the tool, helping them find ways to save.

Study results show that the average household saved 296 kwh during the year. During 2010, 2,204 Minnesota customers used Bill Analyzer. For more information or to use Bill Analyzer go to www.otpco.com/YourElectricAccount/BillAnalyzer.asp.

House Therapy for low-income customers Through the House Therapy program, low-income electric heating customers have access to weatherization services, such as weather stripping and insulation, as well as compact fluorescent lightbulbs, controlled water heating, and refrigerator and freezer replacement. The program, offered through a partnership with Minnesota Community Action Agencies, provided services to 251 homes.

Community Energy Challenge Throughout 2010 we continued to work communitywide in Rothsay, Minnesota, to educate citizens about energy efficiency and to offer a variety of rebate programs for energy-saving applications. We focused particularly on the public school with students leading the effort. A highlight for the core group of student leaders was their appearance before the Minnesota Senate Energy, Utilities, Technology, and Communications Committee to inform committee members about the energyconservation work in Rothsay.

From 2009 through early 2011 Rothsay, Minnesota, our Community Energy Challenge participant, had achieved metered kilowatt-hour savings of approximately 3 percent. Rothsay is on track to save more than 19 percent.

From 2009 through early 2011 Rothsay achieved metered kilowatt-hour savings of approximately 3 percent. When all technology improvements and behavioral change intiatives have been in place for a full year, and when results are adjusted for changes in weather and normally occurring growth, Rothsay is on track to save more than 19 percent.

Campus Energy Challenge Administration, staff, and students at the University of Minnesota, Crookston, have worked together in the Campus Energy Challenge to reduce energy use on campus 15 percent by 2015. At the end of 2010 the university, had reduced metered kilowatthour use by 8 percent. Most of the savings achieved in the first year were the result of investments in adjustable-speed drives on campus heating, ventilating, and airconditioning system fan motors, automated building control systems, efficient lighting upgrades, and operational changes made by maintenance and custodial staff.

ReDirect, an energy-efficiency program designed for educational institutions, was used to encourage other behavioral changes among students, faculty, and staff.

They worked with an engineering firm to set targets for energy-use reduction and, as those targets were met, campus administration redirected 90 percent of the savings back to the tenants and building operators. To have a full year of savings estimates from operational and behavioral changes, the ReDirect portion of the challenge was extended into 2011.

When all technology improvements and behavioral change intiatives have been in place for a full year, and when results are adjusted for changes in weather and normally occurring growth, the campus is on track to save about 17 percent of its prior electric use.

Environmental stewardship   20

In 2010 the University of Minnesota, Crookston, our Campus Energy Challenge participant, achieved metered kilowatt-hour savings of approximately 8 percent. The campus is on track to save about 17 percent of its prior electric use.

2011 - 2013 Minnesota CIP plan filed and approved As required by the Minnesota Public Utilities Commission (MPUC), in 2010 Otter Tail Power Company filed a required triennial Conservation Improvement Program plan for 2011 through 2013. This plan further ramps up energy-efficiency goals for 2011 to 1.32 percent of retail sales mandated by the Next Generation Act of 2007. The Minnesota Department of Commerce, Division of Energy Resources, granted preliminary appproval to the triennial plan during November 2010, and we began implementation in January 2011.

Energy efficiency as a component of our Minnesota integrated resource plan Because the MPUC recognizes energy efficiency as a resource in planning to meet future energy needs, CIP has taken a prominent role in our 2010 integrated resource plan (IRP), which calls for 55 MW of new conservation and 15 MW of new summerseason demand-response capacity. See page 5 for more information about our IRP filing.

South Dakota Energy Efficiency Plan In 2010 we filed for, and the South Dakota Public Utilities Commission approved, the continuation of and budget increase for our energy-efficiency program. We will file our 2010 results with the state in May 2011. During 2010 our South Dakota Energy Efficiency Plan (EEP) achieved approximately 2.47 million kwh of energy savings and nearly 2.2 MW of demand savings at an approximate total cost of $243,000. EEP includes the following, among other programs: • Commercial lighting, motor, and grant programs • Business and residential rebates on Energy Star-qualified air-source or geothermal heat pumps • Residential summer air-conditioning cycling in exchange for a monthly bill credit • Residential demand-control rebates

North Dakota conservation program Through funding from the American Recovery and Reinvestment Act (ARRA) and the State of North Dakota, we are participating with other utilities to offer a rebate program for energy-efficient electric technologies. The program made $679,000 in program funds available to Otter Tail Power Company customers during 2010 and 2011 and includes incentives for the following technologies: Through 2010 we paid $167,400 in rebate funds to customers who participated in the North Dakota energy-efficient electric technologies rebate program.

The remainder of the allotted funds will be expended in 2011. The program is expected to provide 7.7 million kwh of energy and 3,139 kw of demand savings overall.

• Thermal-storage rebates for brick storage units when installed with a new Energy Star-qualified air-source heat pump • Air-source heat pump rebates on qualified Energy Star units • Geothermal heat pump rebates for qualified closed-loop systems • Commercial lighting rebates for qualified lighting system retrofits

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Environmental stewardship

Demand response programs Customer participation in our demand response programs makes our company unique among utilities. An unmatched one-third of our customers partner with us in load management, which allows a portion of their electrical load to be curtailed during highdemand periods.

In 2010, in partnership with other utilities, we accredited with MISO a portion of our load-control capacity to make it available on a limited basis during MISO system peaks. The amount accredited varies monthly from 85 MW during the winter months of December through February; 25 MW in the shoulder months of March, April, October, and November; and 5 MW during the summer months of May through September. Accrediting a portion of the demand resources is a step to further enhance regional transmission reliability.

Our 2011-2025 integrated resource plan calls for demand-side management resources to increase annually through 2025 to reach approximately 15 MW of additional summer season coincident peak-load-reduction capability and 90 MW of additional winter season peak-load-reduction capability.

In 2010 we connected an additional 21.7 MW of controlled heating, cooling, and water-heating load. Participating customers save on their heating and cooling bills with rates that are much lower than the price of standard electric service.

Environmental stewardship 22

Since 1992 we’ve helped our customers conserve 427 MW of cumulative demand and more than 2 million cumulative megawatt-hours (MWH) of electricity. That is roughly equivalent to the amount of electricity that 180,000 average homes would use in a year and represents 157 percent of the annual energy sales of our entire residential customer base.

Project spotlight

Farm Rescue and Otter Tail Power Company

The power of meshing missions “We realized that by supporting Farm Rescue we were helping families and the whole business of agriculture in a way no other organization could help us do.”

Mark Helland, Vice President, Customer Service

23 Project spotlight

On April 10, 2009, Chuck Atyeo had quadruple bypass surgery. Life-threatening blood clots put him back in the hospital 18 days later. Calving season was winding down on his Clear Lake, South Dakota, farm and planting was yet to be done. Atyeo’s son, Nathan, didn’t know how he could finish all the work. That’s when a friend suggested that the Atyeos apply to Farm Rescue for help.

Farm Rescue is a nonprofit organization that plants and harvests crops free of charge for family farmers who have suffered major illnesses, injuries, or natural disasters.

Since 2006 Farm Rescue has helped 131 farm families in North Dakota, South Dakota, western Minnesota, and eastern Montana.

Farmers provide their own seed, fertilizer, and fuel. Volunteers—more than 500 in the past four years—operate equipment, raise money, and promote Farm Rescue.

Hundreds of individuals, and more than 150 sponsors, donate money to the cause.

Otter Tail Power Company has been a sponsor since 2008.

Compatible missions “Part of our mission is to improve the quality of life in the areas where we do business,” said Mark Helland, Otter Tail Power Company’s vice president of customer service. “Farm Rescue’s mission is to help family farmers bridge crises so they have opportunities to continue viable operations.

“We realized that by supporting Farm Rescue we were helping families and the whole business of agriculture in a way no other organization could help us do,” said Helland

Farm rescue roots Bill Gross, president and founder of Farm Rescue, agrees that Otter Tail Power Company and Farm Rescue make a great team. “The geographical area and demographics that we both serve make for a great partnership to improve the quality of life for families that have experienced an unexpected crisis,” Gross said.

Gross is a UPS pilot who grew up on a farm near Cleveland, North Dakota. He lives in Seattle but still owns his family’s farm. The idea for Farm Rescue came from conversations with fellow pilots during long international flights. Gross often talked about how devastating injury or illness can be to farmers and said that when he retired he’d like to become a Good Samaritan on a John Deere tractor. When a friend suggested Gross could begin helping farmers right away by enlisting other volunteers and seeking sponsors and donors, Farm Rescue was born.

Gross often is among the volunteers running Farm Rescue equipment and was part of the crew that rolled onto the Atyeo farm in May 2009. “It’s sort of awesome when they show up with their campers and the big tractor with flags flying on it,” Chuck Atyeo said. “It’s really neat to know that somebody who could be enjoying their vacation shows up at your place and puts your crop in for you. After I’ve retired, it would be fun to do this for someone else.”

Stopping only when forced by wet conditions, Gross and volunteer Smokey Wright drove an air seeder around the clock. Within a day and a half they planted 300 acres of soybeans. The Farm Rescue crew also included a pastor and his wife from Kentucky and a plumber from Minnesota. They helped wherever they were needed.

“It’s really neat to know that somebody who could be enjoying their vacation shows up at your place and puts your crop in for you. After I’ve retired, it would be fun to do this for someone else.”

Chuck Atyeo, Clear Lake farmer

Project spotlight 24

Chuck Atyeo (center) and son Nathan (right) work with a farm rescue representative to organize spring planting.

Social stewardship One element of Otter Tail Power Company’s mission is to improve the quality of life in the areas in which we do business. To that end, we work to have open, honest, timely communication with customers, regulators, employees, shareholders, and others.

We engage in our communities to strengthen the viability of our region. We place reliability, cost-effectiveness, and environmental responsibility at the forefront. We are active in the processes that shape utility industry changes. And we have fair business practices that comply with regulatory and legislative policy.

Open involvement In 2010 we held public meetings related to the following projects: • Bemidji-Grand Rapids 230-kv transmission line • Fargo-St. Cloud 345-kv transmission line • St. Cloud-Monticello 345-kv transmission line • Big Stone Area Transmission project • Minnesota rate case We continue to work with regulatory agencies on the local, state, and federal levels to obtain required project approvals. And, through agency and public meetings, the project teams make a concerted effort to implement processes that are as transparent as possible. We hope that one-on-one relationships and communications with our customers and local governing officials help to simplify processes and encourage customer participation.

Customer information Energy conservation is a cornerstone message in our television, radio, print, bill insert, and online communications. Our advertising campaigns during 2010 included One small habit, which encouraged customers to turn off lights and equipment when not in use, and Power down, which encouraged customers to be sure TVs, game systems, and other peripherals are turned off when they’re not in use.

To help ensure safe and reliable electric service, we provide customers with information about using electricity wisely. Our web sites (www.otpco.com, www.ConservingElectricity.com, and www.EnergyChallengeIsOn.com), advertising, bill inserts, and targeted news releases emphasize safe, efficient energy use. Our goal is to ensure that our customers have convenient access to this information.

We also use these methods to inform customers about rate options, available financing and rebates, and the services they can obtain from our customer service centers.

Regulatory commissions in the three states we serve require that we share certain information about rates and/or rate changes with our customers through bill inserts, advertisements, or special mailings. Those pieces are included in our communication plan, and we work closely with the commissions to ensure that we meet their expectations. In 2010, as in previous years, we complied with all regulatory notification requirements.

25 Social stewardship

Of course, throughout all communication with us, customers can be assured that their private information is kept confidential. Otter Tail Power Company has a privacy plan that complies with national “Red Flags” rules, and we train employees about these policies regularly.

Preparedness planning Otter Tail Power Company has several situation-specific documents that provide a systematic approach to managing crises without causing major disruption to normal activities. These documents, some of which are outlined below, are general guidelines we supplement with employee education and training.

Emergency-response guidelines Each employee has a copy of our company’s emergency-response guidelines, which we provide to help ensure employee safety and reduce property damage should an emergency or disaster occur. Emergency procedures covered in the guidelines include medical, fire, tornado, workplace violence, elevator escape, building evacuation, bomb threat, and suspicious mail and objects. Our Safety Services Department periodically reviews the emergency-response guidelines.

Crisis-management plan Our crisis-management plan is a thorough, step-by-step checklist that includes a firsthour response plan, key contacts, and situation-specific procedures for major crises.

This plan is reviewed annually by the executive team, area managers, plant managers, attorneys, Otter Tail Corporation, and representatives from our Public Relations, Safety Services, System Operations, Regulatory Services, Environmental Services, and Delivery Engineering Departments.

Cyber security and critical infrastructure protection plan In 2008 the Federal Energy Regulatory Commission approved the North American Electric Reliability Corporation Critical Infrastructure Protection Standards. These standards require specific assessment, identification, and protection of facilities, systems, and equipment that, if compromised, could affect the reliability or operability of the bulk power system.

In February 2010 the Midwest Reliability Organization (MRO) completed reviews of Otter Tail Power Company related to: 1. Critical Infrastructure Protection Standards.

2. Reliability operating standards.

The MRO identified no violations during the Critical Infrastructure Protection Standards spot check. Auditors identified one potential violation in operating reliability standards related to protection relaying and maintenance. This issue is now working its way through the enforcement process.

System restoration plans In the spring and fall of each year, Otter Tail Power Company and its neighboring utilities run drills based on their system restoration plans. The purpose is to practice restoring an electrical system—including generation and transmission—that has gone black. By understanding system behavior and having shared and practiced procedures in place, Otter Tail Power Company and neighboring utilities help ensure continued system reliability for the region.

Because reliability is one of our main concerns, we also maintain a backup control center, which would allow us to work with neighboring utilities if our primary control center were to become unusable.

Social stewardship 26

Tornadoes on June 17, 2010, destroyed 24 structures on our company’s 115-kv transmission line along Minnesota State Highway 29 near Henning, north toward Parkers Prairie. We restored service to all but eight customers within minutes.

Preparedness plans

Information Technology Business Continuity Plan and Disaster Recovery Plan

Our company’s various preparedness plans incorporate recommendations and compliance measures from:

These plans provide process guidelines for reestablishing essential business services during the first days and weeks of a disaster that would impact computer and networking systems, software and applications, and communications systems. The documents outline a logical sequence of steps for us to consider in reestablishing a business system and include key contacts and vendors.

• Federal Emergency Management Administration (FEMA) • Midwest Independent Transmission System Operator, Inc. (MISO) • North American Electric Reliability Council (NERC) • Federal Energy Regulatory Commission (FERC) • Other key agencies

Reliability We work hard to minimize the frequency and duration of service interruptions. As part of a long-term reliability strategy, we perform critical analyses of our transmission and distribution systems to identify our greatest needs. We track our response to interruptions using four reliability performance indicators. In 2010, however, frequent and severe storms led our company to exceed three of these targets. Here are our 2009 and 2010 system reliability results as recorded by our interruption monitoring system.

System Average Interruption Frequency Index (SAIFI)—The number of interruptions lasting five minutes or more that an average customer experienced during the year.

SAIFI Goal

2009 2010 < 1.30 < 1.20

Actual 1.09 1.5 Customer Average Interruption Duration Index (CAIDI)—The average length of time that a customer was without service during an interruption.

CAIDI 2009 2010 Goal < 57 min. < 58.3 Actual 56.9 min.

57

System Average Interruption Duration Index (SAIDI)—The average minutes of sustained interruption per customer during a year.

SAIDI 2009 2010 Goal < 74 min. < 70 Actual 62.1 min.

84.8

Momentary Average Interruption Frequency Index (MAIFI)—The number of interruptions lasting less than five minutes that an average customer experienced during the year.

MAIFI Goal

2009 2010 < 10 < 7.5

Actual 6.2 8.5

Vegetation management We prune and remove trees on a five-year systemwide cycle, thereby reducing vegetation- and animal-related outages. In 2010 we spent $675,000 on vegetation management for our transmission system alone.

27 Social stewardship

Manageable rates Keeping our existing low-cost baseload plants available and generating electricity is critical to maintaining manageable rates for our customers.

2010 availability of our baseload generation sources Plant

Average 2010 availability

Comments

Big Stone Plant 94.3%

Big Stone had 100 percent availability for seven months of the year. Net generation in January and February set all-time monthly records.

Coyote Station 90.6%

Coyote set all-time records in 2010 for lowest station service and lowest net plant heat rate, along with having the second-highest year ever for net generation.

Hoot Lake Plant Unit 2

Unit 2 had 100 percent availability for six months of the year.

95.9%

Hoot Lake Plant Unit 3 97.7%

Unit 3 had 100 percent availability for seven months of the year with five consecutive months from January through May.

Rising costs Maintaining a reliable electrical system requires the ability to access financial markets to finance rising costs associated with system repairs and upgrades.

Costs for crucial commodities are on the rise nationwide, yet electricity remains a value.

Percentage of increase 1983 - 2010 Consumer Price Index and Otter Tail Power Company (revenue per kilowatt-hour based on residential customer class average)

140% 120% 100% 80% 60% 40% 20% 0% -20% Consumer Price Index

Otter Tail Power Company

Social stewardshipâ&#x20AC;&#x192;â&#x20AC;&#x192;â&#x20AC;&#x192;28

Countering cost increases To offset significant cost increases we have been controlling our expenses while optimizing plant efficiencies, improving and expanding our load-management system, emphasizing conservation, managing the size of our employee force, and taking steps to reduce employee benefit cost increases.

The following maps show how Otter Tail Power Company’s typical electric bills compare with other utilities in the states we serve and with utilities nationwide.

Average residentialelectricity electricity rates by state Average residential rates by state (cents (cents per per kilowatt-hour) kilowatt-hour)

No data

Hawaii

7.59 to 8.50 8.51 to 9.50 9.51 to 11.50

Otter Tail Power Company’s average dual-fuel rate is less than half our average rate.

11.51 to 14.00 14.01 to 16.00 16.01 to 26.03

Otter Tail Power Company’s average residential rate per kwh is 7.64¢ in ND, 8.23¢ in SD, and 7.84¢ in MN. The national average residential rate is 11.74¢.

Average commercial electricity rates by state Average commercial electricity rates by state (centsper perkilowatt-hour) kilowatt-hour) (cents

No data

Hawaii

6.47 to 7.5 7.51 to 8.5 8.51 to 9.5 9.51 to 10.5 10.51 to 14.5 14.51 to 23.94

Otter Tail Power Company’s average dual-fuel rate is less than half our average rate.

Otter Tail Power Company’s average commercial rate per kwh is 7.87¢ in ND, 8.16¢ in SD, and 7.98¢ in MN. The national average commercial rate is 9.97¢ per kwh.

Reflects average utility rates for 12 months ending July 31, 2010. Source: EEI Typical Bills & Average Rates Report, Summer 2010.

29 Social stewardship

Rate projections Electric companies continue to improve efficiency and work closely with regulators to contain costs and to keep electricity prices as low as possible. While we can make cuts and delay projects for a period of time without jeopardizing reliability and customer satisfaction, that’s not a sustainable option. Rising electricity costs are inevitable.

To meet our customers’ expectations for reliable electric service we must continue to maintain and upgrade our system. For example, in 2009 we added the Luverne Wind Farm, a cost-effective 49.5 MW resource. Otter Tail Power Company’s ability to finance necessary investments depends on: • Prudent financial planning.

• Strong credit ratings.

• Manageable interest rates.

• Adequate cost recovery.

To more closely align our rates with our costs of providing reliable service, we expect our overall average rates (including all customer classes) to increase by 5 percent annually between 2010 and 2020, more in some years, less in others. For example, customers likely can expect as much as a 20 percent overall increase when mandated environmental projects are placed in service.

We filed a rate case in Minnesota on April 2, 2010, and in South Dakota on August 20, 2010.

The Minnesota Public Utilities Commission issued an oral decision March 25, 2011, granting a revenue increase of about 3.75 percent and an 8.6 percent overall rate of return. Requests for reconsideration, that had not been filed at the time this report was printed, could change final rates, which we expect to go into effect late in 2011.

The South Dakota Public Utilities Commission issued a decision order April 19, 2011, granting an overall increase of about 2.32 percent. The PUC also approved an 8.5 percent overall rate of return, which is higher than the previous rate of return of 8.34 percent.

Future rate increases will be intermittent and likely will vary based on the customer’s specific electric service rate or rates. We anticipate filing a rate case in North Dakota within the next couple of years.

Factors that cause customers’ electric service statements to change Rate cases or other regulatory agency-approved adjustments can cause our rates to change.

• Adjustments (riders) for transmission, environmental upgrades, or renewable resource projects benefit customers by reducing the overall cost of financing a project. That’s because riders allow for more timely cost recovery than rate cases and are trued up annually.

• Rate cases, while more expensive than the rider method, are appropriate when overall costs are increasing or when cost increases are related to a large investment not covered by riders.

Encouraging customers to save Concurrent with our efficiency measures, cost containment, and other efforts to keep electricity prices as low as possible, we encourage customers to take advantage of our bill-management programs and incentives.

Social stewardship 30

Customer satisfaction Relationship survey Since 2004 we’ve engaged the American Customer Satisfaction Index (ACSI) research program to conduct an independent random survey among our residential customers, regardless of whether the customers have contacted our company. ACSI asks them about all aspects of their service relationship. ACSI compares Otter Tail Power Company’s customer satisfaction ratings with those of the top 29 investor-owned electric and natural gas utilities in the country which, combined, serve more than 75 percent of the nation’s residential customers.

Our average relationship score for 2010 is 84 points, which makes us once again equal to the top-rated utility and meets our company’s goal of being in ACSI’s top five rated utilities.

ACSI relationship survey results

Quarter 2 2010

Quarter 4 2010

Otter Tail Power Company

84

84

Highest-rated investor-owned utility in the comparison group

81

84

Industry average

75

75

Lowest-rated investor-owned utility

67

65

Numbers are on a scale of 0 - 100

Transaction survey We conduct transaction surveys with customers who have contacted our company within a defined period of time. The surveys measure transaction-specific customer satisfaction. While cost-containment measures caused us to suspend our 2010 general transaction survey, if the budget allows, we hope to conduct another in 2011.

Meanwhile, our voice of the customer (VOC) program, which we launched in 2007, has allowed us to continue gathering transaction data in the absence of our traditional spring and fall surveys. We conduct VOC research right after a customer has called us.

This gives us real-time information about how we’re meeting customer expectations.

Participating customers use their telephones to access a nine-point scale where one represents extremely dissatisfied and nine represents extremely satisfied. To help improve customer satisfaction, customers rating us three or lower are asked if they would like a company representative to follow up with them.

Our VOC program measures customers’ overall satisfaction with Otter Tail Power Company, our customer service phone center, our reliability, and our value. Customers also can share specific details about the customer service representatives who assisted them. Another measurement we gain from the VOC research addresses firstcall resolution. Our third-party survey vendor benchmarks our VOC results against all their business partners, as well as against a utility-only category. We rank high against both of those benchmarks.

31 Social stewardship

Community commitment Public safety Helping keep customers and the public safe always has been paramount to Otter Tail Power Company. Our Safety Services Department staff, field personnel, and power plant employees give electrical safety presentations for schools, fire departments, and other organizations throughout our service area. These presentations educate the public about the hazards of electricity and about proper electrical safety measures.

We also distribute several public service notices related to electrical safety throughout the year to raise awareness. 2010 messages included: • Portable electric space heater safety.

• Call before you dig reminder.

• National Electrical Safety Month (May).

• Harvest safety.

• Indoor fire safety.

• Ditch-burning precautions.

• Hunting near electric facilities safety.

• Wintertime safety.

• Holiday safety.

Contributions and volunteer work We volunteer our time and skills to make our communities better places in which to live. Our employees volunteered for a wide range of nonprofit organizations and charitable causes in 2010. They served on boards of directors, organized volunteer projects, and made financial contributions.

The Power of Two matching gifts program Otter Tail Power Company’s The Power of Two program furthers this volunteer spirit.

Employees who contribute a minimum of 24 hours of personal volunteer time within the year to a nonprofit organization are eligible for a $100 donation to that organization. Each employee is eligible for one donation to one organization each year.

In 2011 Otter Tail Power Company contributed $7,500 to 47 different organizations on behalf of our employees for their 2010 service.

Community Connections giving program While we provide financial support to a broad array of activities and organizations, we focus our resources on the rural communities we serve. Please read page 42 in the “Economic stewardship” section of this report to learn more about this giving program.

Social stewardship 32

Employee commitment We encourage workforce diversity, offer our employees competitive compensation and benefits, promote a safe work environment, and challenge employees to excel.

Our Human Resources Department administers a compensation and benefits program that helps us attract and retain a quality workforce to provide our customers with reliable and economical service. We endorse our Affirmative Action and Equal Employment Opportunity Policy. And we provide an open channel of communication to our employees. For our bargaining unit employees (51 percent of our workforce), a grievance process is defined within our Collective Bargaining Agreements.

Our 792 employees in Minnesota, North Dakota, and South Dakota expect and deserve a safe workplace where they are challenged, rewarded, and respected.

Company leadership helps to ensure that we provide that. Upon retirement, the average employee has approximately 33 years of service.

Our workplace diversity We are an equal opportunity employer with policies and practices that are nondiscriminatory. Our Human Resources Department ensures that we comply with all United States laws regarding labor practices. By respecting and valuing diversity among our employees and all those with whom we do business, we hold every employee accountable for ensuring a workplace free of discrimination and harassment.

Employee compensation and benefits To retain a skilled workforce through competitive benefits, we routinely benchmark our compensation policy. The table below highlights a cross section of jobs within Otter Tail Power Company.

The Sakakawea Chapter of Pheasants Forever, No. 335, would like to thank Otter Tail Power Company for its continued support for our environmental and habitat programs through your generous grant. We are pleased to report the grant enabled our chapter to assist a growing number of people in their wildlife projects, planting more than 5,000 trees this spring in cooperation with two Soil Conservation Districts and the U.S. Army Corps of Engineers. Again, thank you.

Tony Jacobson, President, Sakakawea Pheasants Forever, Chapter 335

Position

Annual salary

Entry-level plant operator

$45,000

Control room operator

$60,000 - $78,000

Electrical technician

$45,000 - $64,000

Welder

$58,000 - $66,000

Coal handler

$50,000 - $52,000

Starting customer service representative

$28,000

Starting customer service manager

$55,000

Entry-level engineer

$55,000

Entry-level apprentice lineman

$41,000 - $46,000

Journeyman lineman

$51,000 - $59,000

Lead lineman

$61,000 - $68,000

* Since this letter was written the Chapter has helped to plant 9,000 trees, making it a leading small Chapter in South Dakota.

33 Social stewardship

In addition to vacation, paid holidays, and sick leave, we offer our employees the following benefits: • 401(k) retirement savings plan and/or pension plan • Employee Stock Ownership Plan (ESOP) • Health plan • Dental plan • Group and supplemental life insurance • Personal Accidental Death and Dismemberment insurance • Flexible benefit plan • Long-term disability plan • Group legal plan • Employee interest-free financing plan (for electric appliances and technologies) • Employee allowances for electric heating systems • Matching gift program for higher education • Employee assistance program • Employee adoption assistance • Scholarship program for dependent children of qualifying employees • Special travel accident insurance • Stock purchase plan

Tuition reimbursement Employees receive reimbursement for 80 percent of tuition and book costs for company-related accredited coursework. If considerable travel is required to attend a course, the company will pay 50 percent of mileage costs. Sixteen employees took advantage of the opportunity in 2010.

Performance evaluations Otter Tail Power Company requires managers and supervisors to evaluate their employees’ performance annually. Specifically, these evaluations include goal setting, recognizing employee strengths, and plans for employee development.

Service Representative Gene Lindblom (left) and Network Engineering Supervisor Todd Strube reviewed the mobile data technology.

The system facilitates faster and more accurate communications between service representatives and office personnel, reduces travel time, decreases miles driven and fuel costs, improves productivity, and increases customer satisfaction.

Social stewardship 34

Employee health and safety

Minnesota Safety Council Board of Directors Chairman Ron Hanson (left) and Minnesota Department of Labor and Industry Commissioner Steve Sviggum (right) recognized Otter Tail Power Company employees for their commitment to safety as they presented the Award of Honor to Safety Training/Security Coordinator Herman Tysdal (left) and Safety Services Manager Ryan Smith (holding the plaque).

Our comprehensive safety program is based on the premise that the safety of our employees is of utmost importance. We employ capable personnel and provide comprehensive training that enables them to provide optimal service. We provide safe working conditions, extensive safety training, and appropriate protective equipment.

We inspect and upgrade equipment and continue to upgrade work methods. And we investigate accidents to determine causes and preventive measures. With these principles and practices, we make safety a commitment on every job site and a focus for every employee.

Throughout our history safety has been one of our top priorities. In fact, we established a formal safety department in 1949—one of the nation’s first among electric utilities. Otter Tail Power Company received the Award of Honor at the 2010 Minnesota Safety Council Annual Conference for exceptional workplace safety performance in 2009. We were the only electric utility so honored. We received this award in 2005, 2007, and 2008 as well; in 2004 and 2006 we received the Outstanding Achievement Award. Our plant operators in North Dakota and South Dakota have received similar honors for.

We are proud of our safety tradition, which has shown and continues to yield a lower accident and injury rate than our industry peers. This tradition of safety is demonstrated by Coyote Station, where employees worked more than 1.7 million hours without a lost-workday event.

Safety performance comparisons

Otter Tail Power Company Industry

2010 goal 2010 actual average 2009 Lost-time injury rate

0.35 or below

0.48

1.26

OSHA recordable injury rate

2.85 or below

2.76

2.62

5

42

Preventable vehicle accidents

13 or fewer

OSHA standard recordable injury calculation: Total number of cases x 200,000 ÷ total number of hours worked

8

Historical safety comparisons (OSHA recordable injury rate)

7 6 5 Industry average

4

Otter Tail Power Company

3 2 1 0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: EEI 10-year Injury Data for similar industry. Latest industry information available is through 2009.

35

Social stewardship

Safety rule book Otter Tail Power Company’s safety program and rule book are jointly approved by our management and representatives of our bargaining employees. The rule book covers health and safety topics developed by a management-union committee. Among the rule book topics are: •

Bloodborne pathogens exposure control plan.

•

Working on or near energized equipment sites.

•

Hazard communications.

•

Confined space.

•

Forklifts, cranes, and hoisting equipment.

•

Lineman practices.

•

Switching, tagging, and grounding.

Best Operating Practices Committee The Best Operating Practices Committee was formed to improve cross-departmental company communication related to operations, equipment, and training. This committee assists decision makers by providing research on procedures, policies, equipment, and regulations to support decisions and is composed of ten employees from various areas of our company.

Power plant emergency program Safety is a priority at all of our facilities, particularly at generating plants where the potential for injury is heightened. Upon being hired, all company power plant workers receive intensive safety training, which is followed by annual refresher sessions.

All power plant employees hold first aid and CPR certifications. In addition, each power plant has an emergency response team composed of 12 volunteers who provide monthly training to their coworkers on hazardous material handling, fire fighting, emergency medical technician/advanced first aid, high-angle rescue, and confinedspace rescue. Each emergency response team also is available to contractors working on the site.

Field safety Employees working in the field participate in monthly safety meetings, daily tailgate sessions, and other training opportunities to discuss safe work practices.

Approximately 400 employees companywide are certified in CPR and first aid.

Social stewardship 36

Employee training Companywide online safety training Our safety culture extends to all employees. We use an online training program to allow employees to complete their required annual training as their schedules allow.

Employees are enrolled in safety and human resources-related classes based on job classification and are asked to complete all training modules assigned to them in a calendar year. The table below lists the human resources-related classes that we require.

2010 online human resource training classes

Classes Discrimination-free workplace

Number of employees who completed the class 295

Number of employees required to complete the class 300

Percentage completed 98.3%

Drug- and alcohol-free workplace

773

786

98.3%

Hiring and lawful termination

110

116

94.8%

Sexual harassment for employees

743

759

97.9%

Sexual harassment for managers

110

116

94.8%

8

8

100%

Violence in the workplace Ethics

773

786 98.3%

In 2010, 787 employees enrolled in 10,220 classes; employees completed 10,076 classes, or 98.6 percent. The following table lists the 2010 average hours of online training completed per employee by classification.

Classification

Total training hours

Number of employees

Average hours per employee

Central Stores personnel (warehouse)

110

23

4.8

Technicians/electricians

279

51

5.5

Linemen/service representatives

762

188

4.1

Maintenance personnel

260

37

7.0

Office/clerical personnel

826

256

3.2

Operations personnel

500

106

4.7

Supervisors/managers

408

111

3.7

100

15

6.7

3,249

787

4.1

Yard operations (plants) Totals

37â&#x20AC;&#x192;â&#x20AC;&#x192;â&#x20AC;&#x192;Social stewardship

Future workforce investment We typically have a low employee turnover rate compared with other industries. The 2010 employee turnover rate was 5.3 percent including retirements. The rate is less than 2 percent if we exclude retirements.

Employee turnover in 2010 Reason

Number of employees

Retirement 27 Resignation 15 Total

42

We expect approximately 40 percent of our workforce to retire in the next ten years taking precious skills and expertise with them. We are addressing the projected labor shortage by developing recruitment materials and supplying them to educational institutions and other sources of qualified workers. For example, we distribute VisionQuest, our interactive career-guide DVD, to area high school and college career services offices. It features overviews of jobs in customer service, engineering, and plant and field operations.

We also emphasize and support scholarship programs, job fair appearances, ties to post-secondary programs, internships, speaking engagements, and internal succession planning.

Employee family scholarships Our company scholarship program helps employees’ children pay tuition and fees for full-time undergraduate study at accredited post-secondary institutions. An independent organization grants 13 scholarships and honorariums yearly to applicants who meet financial-need and academic criteria.

Social stewardship 38

In December 2009 President Obama signed the Federal Appropriations Bill, Title III. Through the Department of Education, it allocated $650,000 to Lake Area Technical Institute (LATI) in Watertown, South Dakota, for equipment for its medical/fire rescue and energy programs. LATI’s Energy Technology and Energy Operations programs received $500,000 of the allocation to purchase equipment for training students in the increasingly vital field of energy production. Broad industry, community, and state government support made this allocation possible. At the heart of that support is the dedication of LATI board members such as Big Stone Plant Manager Jeff Endrizzi, author of one of many letters advocating this effort.

Project spotlight

Industrial Contractors, Inc.

Buying local, getting world-class service “We can count on Industrial Contractors to be here at a moment’s notice when we need their help to get the plant back on line as soon as possible.”

Jan Rudolf, Coyote Station Manager

39

Project spotlight

Our customers count on us to make the lights go on when they flip a switch. “And we can count on Industrial Contractors to be here at a moment’s notice when we need their help to get the plant back on line as soon as possible,” said Jan Rudolf, Coyote Station Manager.

A good fit Headquartered in Bismarck, North Dakota, Industrial Contractors, Inc., (ICI) is a subsidiary of the API Group, a family of independent companies offering fire safety, industrial, and specialty construction products and services. With a workforce that fluctuates between 100 and 900 to accommodate peak boiler repair seasons, ICI provides boilermaker, pipe fitter, millwright, electrical, and other services to electric generating plants across the Midwest.

Otter Tail Power Company contracts with ICI to provide expertise and the extra people needed during scheduled plant outages, as well as for emergency repairs such as tube leaks. As a Coyote Station owner and its operating agent, Otter Tail Power Company contracted with ICI for nearly 9,000 hours of labor at a cost of more than $700,000 in 2010. We also have contracted with ICI for a large planned outage at Big Stone Plant in 2011.

Multiple benefits with ICI “We use ICI because of their skilled craftsmanship, focus on safety, quick response times, and accuracy on billing and timekeeping,” said Rudolf. “We also enjoy knowing that, because it’s a local vendor, some of the money we pay ICI is circulated back into communities we serve through its payroll and local purchases.”

According to Jude Reilly, ICI Manager of Marketing and Business Development, many of their employees grew up in the area or have chosen to live here because of the quality of life our region provides. “Our dedicated employees make it possible to anticipate and be prepared to meet our customers’ needs regardless of whether it’s a big or small project,” said Reilly. “What we appreciate about Otter Tail Power Company is the thorough work they do to lay out the project’s scope before and during our preplanning meetings. The attention to detail enhances ICI’s ability to provide highquality service.”

Advanced preparation is crucial for dealing with an unplanned plant outage. “By the time the boiler has cooled enough to work on it, I can be sure someone from ICI will have responded to our call, and we’ll have an agreed-upon plan for getting the work done. It’s almost like having a backup maintenance department. And that’s truly valuable,” said Rudolf.

“What we appreciate about Otter Tail Power Company is the thorough work they do to lay out the project’s scope before and during our preplanning meetings. The attention to detail enhances ICI’s ability to provide high-quality service.”

Jude Reilly, ICI Manager of Marketing and Business Developement

Project spotlight 40

As Coyote Station operating agent, Otter Tail Power Company focuses on safe and reliable generation of electricity.

Industrial Contractors helps us keep the turbine clean and well maintained, which is an important contributing factor to our successful safety and reliability record.

Economic stewardship We are a small electric utility providing exceptional electric service. We measure our success by monitoring key performance indicators such as safety, service, reliability, customer satisfaction, and financial responsibility. We understand our role as sole provider of electricity to our customers. And we have industrious employees helping to build the economic strength and viability of the communities we serve. By means of business planning, risk mitigation, cost containment, and cost-effective operations we provide competitive rates that are structured and suited for the residential and business customers we serve. As noted on page 3, our mission is to produce and deliver electricity as reliably, economically, and environmentally responsibly as possibleâ&#x20AC;Śand to improve the quality of life in the areas in which we do business.

Direct economic value Otter Tail Power Company continued its role as a progressive corporate citizen by making the following economic impact in 2010.

Property taxes paid to local jurisdictions

$

Wages paid and benefits to utility employees

$ 83,690,000

9,364,000

Dividends paid to shareholders*

$ 43,466,000

Interest paid

$ 18,327,000

Amount paid to suppliers and vendors

$508,173,000

Total direct economic value generated in 2010

$663,020,000

*Visit Otter Tail Corporationâ&#x20AC;&#x2122;s site (www.ottertail.com) for more investor information.

Local sourcing opportunities We positively impact the communities we serve by using local vendors when appropriate. The table below details our 2010 expenditures with vendors in our tristate service area.

Amounts paid to tristate vendors in 2010 Minnesota

Percent of total

$114,726,000 22.58%

South Dakota

$8,302,000

1.63%

North Dakota

$86,008,000

16.92%

Total for local vendors

$209,036,000

41.13%

Total payments to all vendors

$508,173,000

41

Economic stewardship

Charitable contributions Our company provides financial support to a broad range of activities and organizations as shown in the 2010 charitable contributions chart below. As a company we focus our resources on the rural communities we serve.

Community Connections Through our Community Connections giving program we donate to the following priority areas: • Education • Workforce development • Health and human services • Arts and culture • Community enhancement • Environmental stewardship Collaborative efforts and initiatives that fit more than one of our company’s areas of emphasis receive greater consideration for funding.

Employee and other contributions Not only does our company support our communities, but our employees choose to contribute as well. Through several campaigns held throughout the year, we are helping to make our communities better places to work and to live.

For example, Otter Tail Power Company matches cash donations made by employees or retirees to colleges, universities, technical schools, or local tax-deductible community scholarship funds. The minimum contribution is $50, with a $1,000 maximum per person. In 2010, 35 employees and/or retirees participated in our Matching Gift Program for Higher Education.

The table below provides an overview of our 2010 total charitable contributions.

Community Connections donations $381,000 Customer Service Center and other donations $211,900 United Way Campaign $45,600

Employee contributions $30,600

Company contributions $15,000 Matching Gift Program $28,200

Employee contributions $14,100

Company contributions $14,100 Children’s Miracle Network $11,900

Employee contributions $8,900

Company contributions $3,000 Total 2010 charitable contributions

$678,600

I would like to thank Otter Tail Power Company and its employees for their generous donations to Sanford Health (MeritCare Hospital) in Fargo. [In September] my daughter gave birth to our first grandchild. From the start Ariah had problems with her breathing and was taken immediately to NICU… As we were gathered around our little one, all hooked up to wires, hoses, etc., we were happy as a family knowing things will get better. As I looked around our little pod at all the equipment that was monitoring and sustaining everything little Ariah was doing, I noticed a plaque on the wall. Here on a star were the words, “The generous support of Otter Tail Power Company and Otter Tail Power Company employees has made this room possible.” I nudged my wife and pointed to the star. She, in turn, pointed it out to my daughter who had been up for about 40 hours with minimal sleep, was dead tired, and hurting for her newborn baby. Amber saw the star, and it put a smile on her very weary and sad face. Here in the hospital our outside family of Otter Tail was reaching out to us.

Rick Antoine, Safety Director E. W. Wylie Corporation (Otter Tail Corporation subsidiary)

Economic stewardship 42

Economic development Protecting and improving the quality of life in our communities—especially our smaller towns—means helping them to remain vibrant, attractive places to live and do business. Throughout our 100-year history we’ve used various tools to accomplish this. Since 1989 our economic development consultants, grants, and loan pools have helped create 19,572 jobs and save 4,171 jobs.

Otter Tail Power Company serves 422 communities in a 50,000-squaremile service area that’s roughly the size of Wisconsin. Most of our customers live in uncrowded rural communities in western Minnesota, eastern north Dakota, and northeastern South Dakota, including this family in Rothsay, Minnesota.

As we enter a new century of service, changes in the regulatory environment and the economies of our service territory require us to modify our economic development programs. We will continue to be involved in the economic development efforts of our communities but less through grants and more through dedicated employees who live and volunteer in the communities we serve. Our employees realize that the successes of their communities and our company are tied together.

The greatest impact Otter Tail Power Company has on attracting and retaining businesses in our communities comes from providing reliable electric service at affordable rates. The investments we make to carry out that mission have a significant direct and indirect economic value.

Indirect economic value During 2010 we engaged in construction and replacement projects that added almost $20 million to our existing plant in service. These projects consisted of transmission line upgrades and various equipment replacement projects. The table below details the economic impact of those projects.

Total indirect economic impact 2010 capital additions to plant in service

$ 19,959,000

Labor spending on construction and replacements

$ 26,267,000

Rents

$

1,027,000

2010 economic development spending

$

606,000

$ 47,859,000

Transmission cost allocation As part of our effort to contain customers’ costs, we monitor and seek to help shape energy-related legislation and regulation. One example of this is our involvement in transmission cost allocation development.

In December 2010 the Federal Energy Regulatory Commission approved a filing from the Midwest Independent Transmission System Operator, Inc., (MISO) to permanently change the cost allocation for transmission upgrades required to reliably interconnect with new generator interconnection projects. Otter Tail Power Company and other stakeholders urged the MISO to make the filing because, under the original MISO rule, generator interconnection customers, such as wind power developers with new projects, were required to pay only half the cost of any transmission upgrades made necessary by the new connection. If a project required a new substation or power line, for example, the utility and the wind power developer would have shared the cost evenly.

The original cost allocation method would have disproportionately assigned costs to Otter Tail Power Company’s customers merely because of our geographical proximity to wind resources. We estimated that the original rule could have driven up our customers’ monthly bills by 18 percent to 30 percent if only about 20 percent of the proposed projects were constructed.

43

Economic stewardship

Otter Tail Power Company 2010 Stewardship Report GRI-G3 Index (EU = pilot electric utility disclosures and indicators)

Page number or location

Disclosures, strategy, and analysis 1.1 Statement from key executive officer 1.2 Description of key sustainability impacts, risks, and opportunities

2 Full report

Organizational profile disclosures 2.1 Name of the organization Cover 2.2 Primary services 3-8 2.3 Operational structure 3 2.4 Location of headquarters 4 2.5 Locations of all operations 3-8 2.6 Nature of ownership and legal form 3 2.7 Markets served 4 2.8 Organization demographics 4 2.9 Significant company changes during the reporting period 3 2.10 Awards 4, 35

Organizational profile disclosures specific to electric utilities

EU1 Installed capacity (MW) by source and regulatory regime 5-7

EU3 Number of residential, industrial, commercial customer accounts 4

EU4 Length of transmission and distribution lines (miles), by voltage 8

Disclosures, report parameters 3.1 Reporting period Cover 3.2 Date of previous report Inside cover 3.3 Reporting cycle parameters Inside cover 3.4 Company contacts for questions Back cover 3.5 Process for defining report content Inside cover 3.6 Report boundaries Inside cover, 5-8 3.7 Limitations on the scope of the boundary Inside cover, 5-8 3.8 Basis for reporting on JV’s, subsidiaries, leased or outsourced operations Inside cover, 5-8 3.9 Data measurement techniques Full report 3.10 Explanation of restatements of information provided NA 3.11 Significant changes in report scope/boundary/measurement since last reporting period Inside cover 3.12 Identification of standard disclosures in the report 44-45 3.13 Policy and practice of seeking external assurance of the report 1, 25

Disclosures, governance, commitments, and engagement 4.1 Governance structure of the organization 3, http://www.ottertail.com/corporate_governance/governance.cfm 4.2 Indication of highest officer 2, http://www.ottertail.com/corporate_governance/governance.cfm 4.3 Information about the unitary board http://www.ottertail.com/corporate_governance/governance.cfm 4.4 Mechanisms shareholders use to provide guidance http://www.ottertail.com/corporate_governance/governance.cfm 4.5 Compensation and performance standards for governance body http://www.ottertail.com/corporate_governance/governance.cfm 4.6 Processes to avoid conflicts of interest among governance body http://www.ottertail.com/corporate_governance/governance.cfm 4.7 Determining qualifications for governance body http://www.ottertail.com/corporate_governance/governance.cfm 4.8 Mission, values, codes of conduct, etc. statements 3 4.9 Procedures for adherences to compliance Full report 4.10 Process for evaluation of governance body http://www.ottertail.com/corporate_governance/governance.cfm 4.11 Risk management 26-30 4.12 Externally developed initiatives endorsed by the organization 9-22 4.13 Association memberships (beyond routine dues, participation) 10

including but not limited to: Energy and Environment of Research Centers (EERC); Center for Air Toxic Metals; EERC Coal Ash Resources Research Consortium; Association of Energy Services

Professionals; Lignite Energy Council; Electric Power Research Institute; Midwest Independent Transmission System Operator, Inc.; Mid-Continent Area Power Pool; North Central Electric

Association; North Central Electrical League; American Wind Energy Association; Global Energy Decisions, Inc.; North American Electric Reliability Council; Edison Electric Institute; Esource;

Chartwell, Inc. 4.14 Stakeholder groups engaged 2 4.15 Basis for selecting stakeholders for engagement 25-38 4 .16 Frequency and type of stakeholder engagement 25-38, 41-42 4.17 Stakeholder issues Full report Disclosures on Management Approach (DMA) (mission statements for each indicator category) EC Discuss management approach to performance, market presence, indirect economic impacts, as they relate to

overall management policies, goals, and performance 3-4, 41-43 EN Discuss management approach to overall environmental metrics such as materials, energy, water, emissions,

compliance, and transport as they relate to specific goals, policy, and performance 9-22 LA Discuss management approach to employment, labor/management relations, health and safety, training and education,

and diversity and equal opportunity as they relate to overall management policies, goals, and performance 33-38

Global Reporting Initiative Index 44

(EU = pilot electric utility disclosures and indicators)

Page number or location

HR Discuss management approach to non-discrimination, collective bargaining, abolition of child labor, prevention

of forced labor, complaints and grievance practices, and security practices as they relate to overall management

policies, goals, and performance SO Discuss management approach to community, corruption, public policy, anticompetitive behavior, and

compliance as they relate to overall management policies, goals, and performance PR Discuss management approach to customer health and safety, service labeling, marketing communications,

and customer privacy as they as they relate to overall management policies, goals, and performance Performance indicators G3 Economic performance indicators EC1 Direct economic value generated and distributed EC5 Range of ratios of standard entry-level wages compared with local wages EC6 Spending on locally based suppliers EC8 Impact of investments and services provided for public benefit EC9 Significant indirect economic impacts

Economic performance indicators and disclosures specific to electric utilities

EU6 Availability and reliability - 5-10-year approach

EU7 Demand-side management programs G3 Environmental performance indicators EN5 Energy saved due to conservation and improvements EN6 Initiatives to provide energy-efficient or renewable products and services EN13 Habitats protected or restored EN18(U) Initiatives to reduce greenhouse gas emissions and reductions achieved EN23 Total number and volume of significant spills EN30 Environmental protection expenditures and investments G3 Labor performance indicators LA1(U) Total workforce (employee type, contract, and region) LA3 Employee benefits LA4(U) Percentage of employees covered by collective bargaining agreements LA6 Percentage of workforce represented in formal joint-management worker health and safety committees LA7(U) Rates of injury, lost days, absenteeism, fatalities, etc.

LA10 Average hours of training per employee per year by employee category LA11 Programs for skills management and lifelong learning

Labor performance indicators specific to electric utilities

EU14 Processes to ensure retention and renewal of skilled workforce

G3 Human rights performance indicators HR3 Employee training

G3 Society performance indicators SO1(U) Nature, scope, and effectiveness of any programs and practices that assess and manage the

impacts of operations on communities SO3 Percentage of employees trained in organizationâ&#x20AC;&#x2122;s anticorruption policies

Society performance indicators specific to electric utilities

EU19 Participatory decision-making processes with stakeholders (+outcomes)

EU21 Contingency planning, disaster/emergency management plan, recovery plan

G3 Product responsibility performance indicators PR3 Required product and service information required by procedures PR5 Practices to ensure customer satisfaction

Product responsibility specific to electric utilities

EU23 Programs to improve access to electricity services

EU28 Power outage frequency (SAIFI)

EU29 Average power outage duration (SAIDI)

EU30 Average plant availability factor by energy source and regulatory regime

33, 35-37 25-32 18-20, 25-31

41 33 41 41-42 42 27-28 18-22

18-22 18-22 13, 14, 17 9-12, 18-22 14 14-17

4, 33 33-34 33 35-37 35 37 33-37 33-38

37

25-38, 41-43 3, 37 25 26-27

25 25-31 8, 26-32 27 27 28

Terms not defined within the report Kilowatt (kw) 1,000 watts; a measure of the rate of electricity generation or consumption.

Kilowatt-hour (kwh) 1 kilowatt acting over a period of 1 hour.

The primary difference betweeen a kilowatt and a kilowatt-hour is that kilowatt measures capacity and kilowatt-hour measures the actual amount of electricity used over a certain period of time.

Megawatt (MW) 1,000 kilowatts or 1,000,000 watts.

Megawatt-hour (MWH) 1 megawatt acting over a period of 1 hour.

45

Global Reporting Initiative Index

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Contact information: www.otpco.com www.ConservingElectricity.com www.EnergyChallengeIsOn.com Idea Center 800-493-3299 Customer Service 800-257-4044 215 South Cascade Street Fergus Falls, MN 56537 Media inquiries: Cris Kling Director, Public Relations 218-739-8297

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