Page 1

Perspective


About this report This is Otter Tail Power Company’s fifth biennial stewardship report. We are reporting 2014 information throughout this report, unless we indicate otherwise due to data availability. We selected its content 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 worldwide to communicate meaningful information about issues that impact reporting organizations and their stakeholders. As in our four previous biennial reports, our reporting parameters include the business areas on which Otter Tail Power Company, and no other subsidiary of Otter Tail Corporation, has direct impact or significant influence. At the end of this report you’ll find the GRI index that shows what we reported relative to the guidelines.

On the cover: Eric Peters, Apprentice Lineman, Fergus Falls Area Basket Crew, conducts routine maintenance on a 230-kv transmission line between Oakes and Foreman in North Dakota.


Table of contents About this report

Inside cover

Confirmation of self-declared GRI Application Level B

2

Letter from the president

3

Getting to know us

Mission and values Operations Generation mix Transmission and distribution

5 5 7 10

Environmental stewardship

Our commitment to air quality

13

Illustrating our efficiency improvements and emission reductions

14

Using water resources responsibly

15

Protecting wildlife

16

Addressing spills, fines, and sanctions

16

Monitoring regulatory proposals

17

Promoting energy efficiency

21

Social stewardship

Open involvement

25

Customer information

25

Preparedness planning

26

Reliability

27

Customer satisfaction

28

Community commitment

29

Employee commitment

30

Employee health and safety

32

Employee training

34

Future workforce investment

35

Economic stewardship

Charitable contributions

37

Economic development

38

Direct economic value

38

Local sourcing opportunities

38

Indirect economic value

38

Manageable rates

39

Load management

40

New Customer Information System

40

Global Reporting Initiative Index

41


Independent consultant confirms self-declared Global Reporting Initiative Application Level B Burns & McDonnell Engineering Inc. (Burns & McDonnell) was retained by Otter Tail Power Company to provide a third-party check of Otter Tail Power Company’s Stewardship Report. This report was prepared by Otter Tail Power Company’s report team and approved by the company’s management, who retain responsibility for its content. The objective of our third-party check process was to provide Otter Tail Power Company’s stakeholders an independent opinion regarding the compliance of the Stewardship Report with the requirements of the GRI G3 Guidelines and Electric Utility Sector Supplement for a self-declared Application Level B. Burns & McDonnell’s third-party check included review of content, structure, and presentation of the reported data. When needed, Burns & McDonnell provided additional guidance to Otter Tail Power Company to enhance conformity of the report to the GRI G3 Guidelines and Sector Supplement. Burns & McDonnell prepared a GRI index to document the inclusion of the declared content and for use in the Stewardship Report. Burns & McDonnell believes that the data generated for this report is reproducible using the applicable GRI principles and guidance of the GRI G3 Guidelines and Sector Supplement. Furthermore, Burns & McDonnell has observed reasonable coverage of the minimum standard-disclosure requirements and confirms Otter Tail Power Company’s Stewardship Report complies with Application Level B of the GRI G3 Guidelines and Sector Supplement. Sincerely,

Candice Derks, GRI Certified Project Manager, Environmental Group Burns & McDonnell Engineering Co. Inc.

2


A letter from President Tim Rogelstad

Welcome to our Stewardship Report titled Perspective. Our company’s centuryplus success stems largely from our hometown understanding of the people and places we serve. That understanding gives us the perspective we need to be nimble, often uniquely innovative, in the ways in which we meet diverse stakeholders’ needs. As you read, you’ll learn about our core values, the principles that guide our decisions: integrity, safety, customer focus, resourcefulness, and community. Our commitment to doing the right thing strengthens us and our ability to be there for more than 130,000 customers who depend on us for safe, reliable, and affordable service while balancing environmental concerns. Customers kindly accept our ongoing invitations to share feedback and insights, which we use as guidance in addressing matters as diverse as customer service, environmental commitment, workplace planning and operations, and community involvement. I’m confident you’ll appreciate the way that our perspective—our understanding of those who depend on us—has translated into our meeting the responsibilities entrusted to us.

Timothy J. Rogelstad President Otter Tail Power Company

3


We became an operating utility in

1909

We provide electricity and energy services to more than

130,000

homes and businesses

Our service area stretches across

70,000 square miles

of western Minnesota, eastern North Dakota, and northeastern South Dakota


Getting to know us Our company is named after the Otter Tail River, which provided our first source of electricity when we became an operating utility in 1909. Hundreds of years ago the Ojibwe noted that a large sandspit follows the contour of the shoreline of a lake where the river flows into it. Because they thought this sandspit resembled the tail of an otter, the Native Americans named the lake Nigagwanoe, Otter Tail. By doing so, they also named a river, a village, a township, a county, and a power company.

Mission and values

otpco.com

Our mission is 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. We accomplish our mission by making decisions based on our five core values: 1. Integrity: We conduct business responsibly and honestly. 2. Safety: We provide safe workplaces and require safe work practices. 3. Customer focus: We provide reliable electricity and timely, courteous customer service. 4. Resourcefulness: We draw on the ingenuity and expertise of various resources to create strategic, balanced plans. 5. Community: We improve the quality of life in the areas in which we do business.

Operations

ottertail.com

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 provide shareholders with dependable long-term earnings growth. In 1989 we formed Mid-States Development, later named Varistar, to own and oversee the new diversified businesses. In 2001, to better recognize our new enterprises while preserving our well-established brand, we changed the corporate name to Otter Tail Corporation. In 2009 Otter Tail Corporation restructured as a holding company, a business-asusual change for shareholders, customers, and employees. In the restructuring, Otter Tail Corporation became the parent company of Otter Tail Power Company, which operates the regulated utility business, and Varistar, which holds our diversified businesses. This legal structure mirrors historical and ongoing operating structure. Otter Tail Corporation’s objective is to derive 75 percent to 85 percent of earnings from Otter Tail Power Company and between 15 percent and 25 percent from its diversified businesses. This is consistent with the corporation’s strategy to optimize its portfolio of companies, reduce risk, and create a more predictable earnings stream to support the dividend and future growth.

ELECTRIC

VARISTAR—MANUFACTURING PLASTICS

This report’s parameters include only the business areas that Otter Tail Power Company directly impacts or significantly influences.

Getting to know us

5


otpco.com/leaders

New leadership Chuck MacFarlane, who had been Otter Tail Power Company’s President since 2003 and Chief Executive Officer since 2007, assumed a new role as President and Chief Operating Officer of Otter Tail Corporation in April 2014. In April 2015 he became the corporation’s President and Chief Executive Officer. Tim Rogelstad replaced MacFarlane as Otter Tail Power Company’s President in 2014. He had been our company’s Vice President, Asset Management, in charge of delivery planning, delivery maintenance, delivery engineering, system operations, and project management. He’s been with our company since 1989. MacFarlane said that he chose Rogelstad because of his education, experience, accomplishments, and strong understanding of, and dedication to, Otter Tail Power Company.

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

Minnesota

North Dakota

South Dakota

786

452

214

120

(Includes temporary and part-time employees and our plant partners’ employee shares)

Contractors

Minnesota

North Dakota

South Dakota

766

181

326

259

(includes purchase order suppliers)

Our customers Our company’s 2012 Stewardship Report titled Connected earned a Grand Award in APEX 2014, which is a competition for communications professionals. Of the nearly 2,100 entries, the judges selected 100 Grand Award winners. The judges commented that the report was practical, well designed, and invitingly written.

We provide electricity and energy services to more than 130,000 homes and businesses. That means we serve more than a quarter million people. They live in 422 communities and in rural areas stretching across 70,000 square miles of western Minnesota, eastern North Dakota, and northeastern South Dakota. Total customers

Minnesota

North Dakota

South Dakota

130,489

60,809

58,116

11,564

Customer classifications Residential

Seasonal

Farm

Commercial

100,614

2,157

2,813

22,018

Large commercial

Streetlighting

Other public authorities

1,898

401

588

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

6

Getting to know us


Generation mix

otpco.com/generation

We balance resources to provide our customers with reliable, affordable, environmentally responsible energy.

Integrated Resource Plan In December 2014 we received an order from the Minnesota Public Utilities Commission (MPUC) approving our 2014-2028 integrated resource plan (IRP) with modifications. The IRP grants the authority to add approximately 200 megawatts (MW) of natural gas capacity, up to 300 MW of wind additions, and approximately 28 MW of solar additions. 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 the IRP, we evaluate available electric generation resources and select a plan based on reliability, affordability, 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, the IRP provides a mix of additional resources. 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.

Hoot Lake Plant retirement and planned replacement In 2012 the MPUC ordered us to complete a baseload diversification study with focus on evaluating retirement and repower options for our aging Hoot Lake Plant. Our study results showed that the lowest-cost option would be to add equipment to comply with Mercury and Air Toxics Standards by 2015 and subsequently retire the plant in 2021. That was our recommendation, and the MPUC approved it. We plan to replace Hoot Lake Plant with a new 200-MW natural gas facility within our service area.

2014 energy resource mix 22.37% Market purchases 57.18% Coal 18.94% Wind

1.06% Hydro 0.45% Natural gas

2001 energy resource mix

Generation resources CANADA

Service area

80.67% Coal

Langdon Wind Energy Center Rugby Devils Lake

Crookston

Garrison Coyote Station

SOUTH D A KOTA

Jamestown combustion turbine

Oakes

Bemidji

Ashtabula Wind Energy Center

Wahpeton

Big Stone Plant

Milbank

Lake Preston combustion turbine

Fergus Falls Hoot Lake Plant

Morris

M I N N E S OTA

NORTH D A KOTA

Luverne Wind Farm Jamestown

Solway combustion turbine

Headquarters Coal-fired plant Combustion turbine Wind power Customer Service Center

See map on page 9 for hydro plant locations.

9.31% Market purchases 7.02% Hydro

3.00% Fuel oil, biomass, solid waste

These graphs represent the various fuel sources (owned and purchased) used to serve our customers. Our energy resource mix has changed significantly since 2001. Today we rely more on renewable energy as a primary fuel source. Purchases from known fuel sources are reflected in their associated categories such as hydro, wind, etc. For example, the 18.94 percent wind portion of our 2014 resource mix reflects approximately 10.67 percent from owned generation and approximately 8.27 percent from purchases. All other purchases are reflected in the “Market purchases” category.

Getting to know us

7


Coal-fired plants We operate three coal-fired plants that produce about 57 percent of the electrical energy our customers consume. Big Stone Plant

Coyote Station

Hoot Lake Plant

Location

Big Stone City, SD

Beulah, ND

Fergus Falls, MN

Age

On line since 1975

On line since 1981

Unit 2 online since 1959 Unit 3 online since 1964

Capacity

475 MW

427 MW

138 MW

2013-2014 average net energy output

2,644,734 MWH

2,674,724 MWH

695,360 MWH

2013-2014 average availability

91.5%

83.28%

82.46%

Fuel source

Subbituminous

Lignite

Subbituminous

Ownership

53.9% Otter Tail Power Company

35% Otter Tail Power Company

100% Otter Tail Power Company

23.4% NorthWestern Energy

30% Northern Municipal Power 22.7% Montana-Dakota Agency Utilities Co. 25% Montana-Dakota Utilities Co. 10% NorthWestern Energy Capacities listed are Net Dependable Capacity value according to Midcontinent Independent System Operator, Inc.

Wind power We own or purchase more than 248 MW of installed capacity, or about 19 percent of our retail sales, from wind farms in North Dakota, Minnesota, and South Dakota. Our most recently approved integrated resource plan allows adding up to 300 MW of cost-effective wind-generated electricity in the 2017 to 2021 timeframe. Minnesota

North Dakota

South Dakota

4.0 MW (purchased)

3.2 MW (purchased)

0.1 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) Ashtabula III Wind Energy Center 62.4 MW (purchased)

TailWinds 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 wind energy technologies. In 2014 the 474 customers who were enrolled in TailWinds purchased 182,600 kilowatt-hours of wind-generated electricity each month in 100-kwh blocks.

8

Getting to know us


Hydropower We own six small hydroelectric plants in Minnesota that account for about 1 percent of our retail sales. The Bemidji hydro plant, on the Mississippi River, has a nameplate rating of .7 MW. The other hydro plants are on the Otter Tail River near Fergus Falls as illustrated below. Willow Creek

Rush Lake

Friberg (Taplin Gorge) .6 MW

Otter Tail Lake

Wright (Central Dam) .4 MW

Hoot Lake Wright Lake

Pisgah

Hoot Lake

.5 MW

1 MW Dayton Hollow 1 MW

Combustion turbines Combustion turbines produce less than 1 percent of our company’s electricity. Because they operate with more expensive fuels, these compact power plants generate electricity only when prices for purchasing power on the energy market are high, typically during periods of high demand or system emergencies. Solway, Minnesota

Jamestown, North Dakota

Lake Preston, South Dakota

Capacity

43.1 MW

41.5 MW

19.7 MW

2013-2014 average net energy output

42,582 MWH

674 MWH

360 MWH

Fuel source

Natural gas or fuel oil

Fuel oil

Fuel oil

Capacities listed are Net Dependable Capacity value according to Midcontinent Independent System Operator, Inc.

Solar power and renewable energy standards In 2013 Minnesota legislators enacted a solar energy standard that requires investor-owned utilities to supply 1.5 percent of their Minnesota retail electric sales with solar energy by 2020. Our IRP calls for 28 MW of installed solar generation, which is enough to comply with this standard. We’ll meet most of the standard with a utility-scale solar installation. As required, we expect to meet at least 10 percent of the 1.5 percent with solar photovoltaic installations that are 20 kw or smaller. Minnesota also has a renewable energy standard that requires 25 percent of retail sales be generated from renewable resources by 2025 with stepped implementation of 17 percent by 2016 and 20 percent by 2020. North Dakota and South Dakota have renewable energy objectives of 10 percent by 2015. With resources already in service and the planned resources included in our IRP, we expect to have renewable energy in excess of these standards.

Getting to know us

9


Transmission and distribution

We invest in transmission upgrades and new construction to meet our customers’ needs and to maintain our system’s reliability. Miles in operation

Otter Tail Power Company was one of four finalists in the United States Member category for the 2014 Edison Award, the electric industry’s highest honor, for completing the Bemidji-to-Grand Rapids 230-kv transmission line with particular attention to the environment. The Edison Award review panel selected our company, as well as Xcel Energy, Minnkota Power Cooperative, Great River Energy, and Minnesota Power, the other partners in this CapX2020 project. The Edison Award ultimately went to Westar Energy, headquartered in Topeka, Kansas, for creating and implementing an artificial wetland to treat flue gas desulfurization wastewater.

Watch our entry video: youtube.com/OtterTailPowerCo

10

Getting to know us

2014

2015 proposed additions

76.5

311.0

230 kv*

487.5

485.8

115 kv

875.5

69 kv

212.3

209.3

41.6 kv

3,764.5

3,753.1

5,244.9

5,753.0

Distribution lines 24 kv and below kv = kilovolt

CapX2020.com

2012

Transmission lines 345 kv*

862.4

223.6

Determined by customer needs

*Mileage includes Otter Tail Power Company joint ownership in CapX2020 transmission projects.

CapX2020 CapX2020 is an effort of 11 transmission-owning utilities in Minnesota and the surrounding region to: Expand the electric transmission grid. Ensure continued reliable and affordable service. Enable renewable and other generation sources to connect to the system. We’ve been involved with four of the five CapX2020 projects, highlighted below in blue. We were the lead developer for the Bemidji-to-Grand Rapids 230-kv line. Miles (Approx.)

Peak construction year

Phase 1 (energized 2011)

28

2011

Phase 2 (energized 2014)

78

2014

Phase 3 (energized 2015)

135

2015

70

2012

Brookings County-to-Hampton 345-kv line (energized 2015)

250

2012-2015

Hampton-to-Rochester-to-LaCrosse 345-kv line

150

2013-2015

70

2015-2017

Project Fargo-to-St. Cloud 345-kv line

Bemidji-to-Grand Rapids 230-kv line (energized 2012)

Big Stone South-to-Brookings County 345-kv line


Multivalue projects We’ve been involved with three Midcontinent Independent System Operator, Inc., (MISO) multivalue projects (MVPs), including the Brookings County-to-Hampton 345-kv line that was energized in 2015 and the two projects highlighted below. MISO defines MVPs as transmission projects that have regional benefits and are part of a regional transmission plan. Along with MISO, regulatory commissions in the states we serve deem these projects necessary because they: Improve reliability of the electrical system. Increase system capacity to address growth in demand for electricity. Support public policy by enabling renewable energy to be integrated into the system. Boost regional economies by creating construction and operation jobs and by supporting local businesses. Big Stone South-to-Ellendale 345-kv line The Big Stone South-to-Ellendale project is a 345-kv transmission line that will extend 160 to 170 miles from the Big Stone South Substation near Big Stone City, South Dakota, to the Ellendale Substation near Ellendale, North Dakota. Our company and Montana-Dakota Utilities Co. own this project that’s estimated to cost $293 million to $370 million. As the lead developer, we anticipate the following project timeline. 2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

Planning Environmental review and permitting Engineering and right-of-way procurement Construction In service

Big Stone South-to-Brookings County 345-kv line The Big Stone South-to-Brookings County project is a 345-kv transmission line that will extend 70 miles from the Big Stone South Substation near Big Stone City to the Brookings County Substation near Brookings in South Dakota. Xcel Energy is the lead developer and is managing construction of this project that’s estimated to cost about $225 million. We anticipate the following timeline. 2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Planning Environmental review and permitting Engineering and right-of-way procurement Construction In service

BSSETransmissionLine.com

Other transmission projects • We relocated a transmission line near Green Valley, Minnesota, to accommodate the CapX2020 Brookings County-to-Hampton 345-kv transmission line. • Crews worked on expanding the Oakes 230-kv substation and building a new 8.75-mile 41.6-kv transmission line to improve reliability and serve growth in the Oakes, North Dakota, area. Both projects are scheduled for completion in 2015. • We installed equipment to improve voltage regulation at our Jamestown 345-kv substation as part of the CapX2020 Fargo-toMonticello 345-kv transmission line project. • Our crews completed Phase I of a North American Electric Reliability Corporation compliance requirement by installing guy-strain insulators, raising existing structures, and building new structures on seven sections of 230-kv transmission line totaling 180 miles. We expect to complete Phase II by October 2016. Getting to know us

11


Since 2007 we’ve invested more than

$300 million in wind energy When the Big Stone Plant AQCS is complete we expect a

90 percent decrease in SO2 and NOX emissions and a more than

80 percent decrease in mercury emission We distributed

With average savings

CFLs and LEDs through our lighting program

of kwh per customer, our Minnesota Conservation Improvement Program far outpaced other utilities

111,329

12

598


Environmental stewardship

Known for their work ethic, honesty, and regard for this area’s natural resources, our employees call our service area home, as do many Otter Tail Corporation shareholders. And 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, fish, and local parks. Those are some of the reasons why our Environmental Services Department ensures that we comply with all environmental laws.

Our commitment to air quality

Our company has a long-standing commitment to reduce air emissions. Since 1985 we’ve invested approximately $293 million in environmental-control upgrades and efficiency improvements at our fossil fuel plants. By 2020 we project that we’ll invest another $67 million to comply with U.S. Environmental Protection Agency (EPA) regulations. Since 2007 we’ve invested more than $300 million in wind energy, a zero-emission resource that further reduces our emission intensities systemwide.

Big Stone Plant air-quality control system A groundbreaking ceremony in April 2013 launched a three-year $384 million project at Big Stone Plant to install a new air-quality control system (AQCS) to comply with EPA and state requirements. Otter Tail Power Company owns 53.9 percent of the plant, so our share of the investment is approximately $207 million. We plan to have the system operational in mid-2015, almost two years ahead of the spring 2017 compliance deadline. After the project is complete, we expect a 90 percent decrease in sulfur dioxide (SO2) and nitrogen oxides (NOX) emissions and a more than 80 percent decrease in mercury emission.

BigStonePlantAQCS.com Just how big is the AQCS project? To help put the magnitude of this project into perspective, the information below provides some construction numbers from March 18, 2013, to July 18, 2014. • Reinforcement steel placed: 160,000 pounds • Concrete installed: 11,500 cubic yards • Structural steel erected: 5,000 tons • Loads of material: 1,080 semi-trucks • Largest crane lift (to date): 426,000 pounds In April 2015 the project’s total labor hours reached more than two million—with only one lost-time accident. That’s pretty incredible for a project of this scale.

13


Illustrating our efficiency improvements and emission reductions

Net plant heat rate trend* 12,000

4,500

11,500

4,000

11,000 NPHR (Btu/kwh)

3,000

10,000

2,500

9,500

2,000

9,000

1,500

8,500 8,000

1,000

7,500

500

7,000

1985

1990

1995

2000 2005 Year System average NPHR

2010

2014

Generation (gwh)

3,500

10,500

0

2021

Net plant heat rate

Net generation

30,000

27

27,000

24

24,000

21

21,000

18

18,000

15

15,000

12

12,000

9

9,000

6

6,000

0

Tons

Emissions intensity lb/MWH

Sulfur dioxide emissions trend* 30

3 1990

1995

2000 2005 Year System average intensity

2010

2014

2021

0

Tons

18,000

11

16,500

10

15,000

9

13,500

8

12,000

7

10,500

6

9,000

5

7,500

4

6,000

3

4,500

2

3,000

1

Sulfur dioxide Tons

Emissions intensity lb/MWH

Nitrogen oxides emissions trend* 12

1,500

0

1985

1990

1995

2000 2005 Year System average intensity

2010

2014

2021

0

Tons

5.0

2,850

4.5

2,700

4.0

2,550

3.5

2,400

3.0

2,250

2.5

2,100

2.0

1,950

1.5

1,800

1.0

1,650

0.5

1,500

1985

1990

1995

2000 2005 Year System average intensity

2010

2014

2021

Tons

*System average includes all owned generation sources plus long-term wind power-purchase agreements. These charts are based on the assumptions the Big Stone Plant AQCS will be completed by 2016 and Hoot Lake Plant will be replaced with 211 MW of single-cycle natural gas generation in 2021.

0.0

Since 1985 our tons of sulfur dioxide (SO2) emissions and our SO2 emissions intensity have declined significantly. Total emissions have decreased by 53 percent, and emissions intensity has decreased by 71 percent. Fuel switches from lignite to low-sulfur subbituminous coal at Hoot Lake Plant and Big Stone Plant contributed to the trend along with other plant efficiency projects. Also, the Coyote Station scrubber removed 60 percent of the SO2 in the exhaust gases during 2014. Completion of the new AQCS at Big Stone Plant and replacing Hoot Lake Plant with natural gas generation will lead to fewer SO2 emissions.

Nitrogen oxides

Tons (millions)

Emissions intensity lb/MWH

Carbon dioxide emissions trend* 3,000

Improving power plant efficiency reduces emissions because it takes less fuel to produce the same amount of energy. Net plant heat rate (NPHR), most commonly expressed as Btu/kwh, represents a measure of the amount of energy it takes to produce one kilowatt-hour of electricity. Our change from burning lignite to subbituminous coal at Hoot Lake Plant in 1988 and at Big Stone Plant in 1995 contributed to our NPHR improvement. Subbituminous coal has higher heat content than lignite, so it takes less subbituminous coal to produce an equivalent amount of energy. From 1985 to 2014 we have improved our system average NPHR by more than 26 percent, from 11,588 Btu/kwh to 8,490 Btu/kwh. That average includes owned generation sources and long-term wind power-purchase agreements. We’ve achieved these efficiency improvements in the midst of an almost 60 percent increase in generation from 2,450 gigawatt-hours (gwh) in 1985 to 3,902 gwh in 2014.

3,000 1985

The graphs in this section illustrate our past, present, and future commitment to reducing emissions and improving our power-production efficiency. The graphs reflect the total production rate of our system, which includes all of our fossil fuel plants and renewable energy resources. Emissions data are presented both in terms of emissions intensity (pounds of substance emitted per megawatt-hour of electricity produced) and tons emitted.

Hoot Lake Plant reduced its nitrogen oxides (NOX) emissions by approximately 60 percent by installing low-NOX burners and a separated over-fire air (SOFA) system for Unit 3 in 2006 and Unit 2 in 2008. This led to a clear improvement in our NOX emissions intensity when combined with a new SOFA system at Big Stone Plant in 1997. The AQCS project at Big Stone Plant, planned installation of a SOFA system at Coyote Station by mid-2018, and replacing Hoot Lake Plant with natural gas generation will further enhance these improvements.

Carbon dioxide Our efforts to increase plant efficiency and our early renewable energy additions have reduced our carbon dioxide (CO2) intensity. Between 1985 and 2014 we decreased our overall system average CO2 emissions intensity 30 percent. We plan to reduce it further by replacing Hoot Lake Plant with natural gas generation in the 2020 timeframe.

Mercury For information about mercury reductions, see page 18. 14

Environmental stewardship


Using water resources responsibly Steam generation requires access to large volumes 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. The plant 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 2014 Coyote Station appropriated 4,422 acre-feet of water from the Missouri River and discharged 370 acre-feet. Heated water is vital for oil extraction in western North Dakota. An independent company, Central Dakota Water Works (CDWW), obtained its own waterappropriations permit from the North Dakota State Water Commission, and Coyote Station uses a water transfer station built in 2012 to fill trucks with water heated by waste heat from our generation process. Coyote Station provided almost 50 million gallons of heated water to CDWW in 2014.

Big Stone Plant Big Stone Plant withdraws water from Big Stone Lake under a permit granted by the South Dakota Department of Environment and Natural Resources (DENR). The permit includes restrictions that limit water withdrawals when the lake is below prescribed levels. During 2014 we withdrew 2,752 acre-feet of water from Big Stone Lake. Water used at Big Stone Plant is treated and eventually recycled back into the plant and to an adjacent ethanol plant. This unique cooling-water design allows the plant to not discharge heated water or process water into any natural body of surface water.

Hoot Lake Plant The Minnesota Pollution Control Agency (MPCA) oversees water-quality programs and discharge regulations at Hoot Lake Plant. The Minnesota Department of Natural Resources administers water appropriations. Water for the plant comes from nearby Wright Lake and is classified as either consumptive or nonconsumptive. 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 2014 nonconsumptive use totaled 53,683 acre-feet of water, and consumptive use totaled 1.29 acre-feet.

National Pollutant Discharge Elimination System permits National Pollutant Discharge Elimination System (NPDES) permits cover the return of public waters to their watersheds. The states where we do business issue the required NPDES permits. In 2012 we submitted a permit application for Hoot Lake Plant’s industrial waste water and storm water. We expect to receive the renewed permit in 2015. In 2013 Coyote Station’s Industrial Wastewater Permit and Big Stone Plant’s General Storm Water Permit were renewed. In 2014 our company’s General Office Summertime Cooling General Water Permit was renewed. Industrial use of public waters is essential to our operations, and compliance with our permits is critical.

Environmental stewardship

15


Protecting wildlife

Hoot Lake Plant wood duck nesting boxes We relocated an ash site near Hoot Lake Plant and restored the area as a flood plain along the Otter Tail River. As part of the restoration project, we worked with the Minnesota Department of Natural Resources to provide suitable spawning and nesting habitat. The Fergus Falls Fish and Game Club provided new wood duck nesting boxes, which we installed along the river to improve the wood duck population.

Osprey nesting platforms About ten years ago a breeding pair of ospreys, large raptors with wingspans of more than 60 inches, began constructing a nest on an electrical pole near Big Stone Plant. To keep these rare birds safe and away from energized lines, employees erected a nesting platform, which has been used for several years. In July 2013 a second pair of ospreys began nesting on an electrical pole near the first nesting platform. So, employees erected another nesting platform. In 2014 ospreys used both nesting platforms. Because ospreys typically return to the area where they were hatched to start their own families, Big Stone Plant employees are looking forward to continuing to watch these beautiful birds.

Addressing spills, fines, and sanctions

Despite our commitment to sound environmental stewardship, rare mistakes and uncontrollable events occur. When they do, we correct them as quickly as possible.

Spills On October 25, 2013, the leachate collection tank at Hoot Lake Plant overflowed, and approximately 718 gallons of coal ash leachate overtopped a containment dike. Some of the leachate absorbed into the surrounding ground, and some made its way into the Otter Tail River. We reported the overflow to the Minnesota Pollution Control Agency (MPCA), took immediate corrective actions, and implemented changes at the plant to prevent similar occurrences. In 2013 and 2014 equipment failures caused minor oil spills. The two most significant spills involved a failed hydraulic oil line on a backhoe and a ruptured diesel fuel line. We promptly report and clean spills.

Fines and sanctions We paid a $2,050 fine to the MPCA in response to the leachate overflow described above. No other fines have been assessed to our company for environmental infractions.

16

Environmental stewardship


Monitoring regulatory proposals

Coal-fired plants are subject to a multitude of regulations that the EPA either has promulgated recently or is in the process of revising. The exact impact of these rules is difficult to predict because challengers typically question through court action whether the EPA is adhering to key restrictions and obligations. The outcome of these challenges notwithstanding, regulatory uncertainty will continue to impact our planning and operations. We are paying particular attention to the following rules that the EPA is developing or has recently developed.

Coal Combustion Residuals Rule Regulatory background In June 2010 the EPA proposed regulating coal combustion residuals (CCR) as either hazardous or nonhazardous waste. In December 2014 the EPA signed a final rule categorizing CCR as nonhazardous waste under Subtitle D of the Resource Conservation and Recovery Act (RCRA). The new rule is self-implementing, which means the rule relies on citizen and state involvement with no federal enforcement. Highlights of the rule include: Establishing a web page with information about the design, operation, environmental monitoring, and corrective actions required at CCR landfills and surface impoundments. Installing additional environmental monitoring equipment, such as groundwater monitoring wells. Evaluating previously unpermitted sites to ensure their conformance with the new rule. Designing landfill and surface impoundment liners and capping systems to one national standard. Closing unlined surface impoundments if groundwater monitoring indicates a statistically significant increase of chemical concentrations above the background levels for the unit. Even though the EPA has chosen to regulate CCR under Subtitle D, it reserves the right to regulate the material under Subtitle C as more data becomes available. We’ve begun taking the necessary steps to maintain compliance with this new rule and will continue following the EPA’s rule-making process. Otter Tail Power Company impact We’ll evaluate our CCR units, both landfills and surface impoundments, to ensure conformance with the new rule. We’ll develop a new web page that will allow the public to quickly access information about the design, operation, maintenance, and environmental monitoring of our CCR units. Additional environmental monitoring will be required at several sites. As we expand landfills or ponds, we’ll incorporate national standards in their designs.

Challenges The EPA’s withholding of the final classification of CCR is our most significant challenge. The EPA still may propose more stringent and expensive disposal options. Additional challenges include determining applicability of potential CCR units in conformance with the new rule, assessing environmental monitoring systems, installing additional monitoring equipment, and establishing a public web page.

Environmental stewardship

17


Hazardous air pollutants

lbs/gwh

Pounds

Mercury emissions trend

0.10 300 Regulatory background 0.09 270 The 1990 Amendments to the 0.08 240 Clean Air Act required the EPA to 0.07 210 study the effects of emissions 0.06 180 0.05 150 of hazardous air pollutants 0.04 120 from power plants. Following 0.03 90 almost two decades of study 0.02 60 and litigation, the EPA proposed 0.01 30 air toxics standards that reflect 0.00 0 2000 2005 2010 2014 2021 Year the application of the maximum System average intensity Pounds achievable control technology System average average includes generation sources plus long-term wind power-purchase System includesallallowned owned generation sources plus long-term wind agreements. This chart is based on the assumptions the Big Stone Plant AQCS will be for all coal- and oil-fired electric power-purchase agreements. ThisPlant chartwillisbe based on the the completed by 2016 and Hoot Lake replaced withassumptions 211 MW of single-cycle natural generation 2021.will be completed by 2016 and Hoot Lake Plant will be PlantinAQCS generating units. The EPA signed BiggasStone replaced with 211 MW of single-cycle natural gas generation in 2021. a final rulemaking termed the Mercury and Air Toxics Standards (MATS) rule in December 2011. The MATS rule sets standards for mercury and other air toxics that units must attain by monitoring and meeting a 30-day rolling average, quarterly testing, or adhering to work practice standards. Power plants had until April 16, 2015, to comply, although the Clean Air Act does provide that sources may be granted up to one additional year for compliance if such time is necessary for installing controls.

Otter Tail Power Company impact Our units will meet the requirements by installing the AQCS at Big Stone Plant, upgrading the electrostatic precipitators at Hoot Lake Plant, and adding mercury emission-control equipment at all coal-fired plants. Big Stone Plant was granted up to an additional year to comply to align the installation of the MATS control equipment with the AQCS project. Emissions monitoring equipment and/or stack testing also will be necessary to verify compliance with the standards. The graph above shows the anticipated decrease in our mercury emissions after complying with MATS. Challenges Although the rule presents several new complexities and costs, we’re prepared to meet the rule’s compliance deadline.

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 2011 the EPA issued a rule termed the Cross-State Air Pollution Rule (CSAPR) to reduce SO2 and NOX in 23 states, including Minnesota. After having been reviewed in proceedings at the D.C. Circuit Court and the Supreme Court, the rule applies in 2015 and requires units to manage a new set of SO2 and NOX emission allowances (i.e., a cap-and-trade program). Otter Tail Power Company impact Because the CSAPR region only includes Minnesota, Hoot Lake Plant and the Solway combustion turbine are our only facilities to which the rule applies. Based on the emission allowances that the EPA has allocated, we’ll need to purchase allowances for Hoot Lake Plant. Challenges Allowance purchases will result in additional costs for our customers.

18

Environmental stewardship


Regional haze Regulatory background The EPA promulgated the Regional Haze Rule in 1999 to address visibility impairment in Class I areas. Class I areas include 156 national parks and wilderness areas, such as the Boundary Waters Canoe Area and Voyageur’s National Park in Minnesota. States have submitted plans detailing their strategies to reduce haze and setting reasonable progress toward the goal of no man-made visibility impairment in Class I areas by 2064. Otter Tail Power Company impact The Regional Haze Rule includes a provision that sources built between August 7, 1962, and August 7, 1977, found to contribute to visibility impairment in Class I areas must install best-available retrofit technology (BART). Big Stone Plant and Hoot Lake Plant Unit 3 were built within this timeframe. Air-dispersion modeling determined Hoot Lake Plant Unit 3 did not significantly contribute to visibility impairment and thus is not subject to BART. However, modeling for Big Stone Plant indicated that its emissions reasonably contribute to visibility impairment in Minnesota, North Dakota, South Dakota, and Michigan. The new Big Stone Plant AQCS will address this impairment. Although not subject to BART, Coyote Station is required to make NOX reductions as part of North Dakota’s need to achieve 2018 reasonable progress goals. Separated over-fire air controls (SOFA) will allow Coyote Station to achieve necessary NOX reductions. Challenges States must revise their regional-haze plans by July 31, 2018, and every ten years thereafter. These revisions may impose additional emissions reductions over time. Because these reductions are determined on a case-by-case basis and require EPA approval, it’s difficult to predict the stringency and timing of future controls.

Carbon dioxide regulations Regulatory background In September 2013 the EPA announced proposed standards under Section 111(b) of the Clean Air Act to limit carbon dioxide emissions from new power plants. In June 2014 the EPA announced a proposed rule under Section 111(d) of the Clean Air Act to regulate carbon dioxide emissions from existing power plants. The 111(d) rule, often termed the Clean Power Plan (CPP), imposes varying CO2 emissions intensity limits on each state. Otter Tail Power Company impact We’re concerned about some of the technical missteps in the proposed CPP. We believe the Clean Air Act assigns states the lawful authority to establish 111(d) standards of performance and unit-specific emission-reduction targets, but not state-specific targets. By failing to allow the states this authority, the proposed CPP results in proposed state targets that often misapply key baselines and require emission-reduction strategies that don’t work under current industry and regulatory constructs.

In 2013 we conducted a largescale drill to test the Pisgah Dam Emergency Action Plan (EAP). During the drill, responders reacted to a preplanned scenario in which a call to the 911 dispatch center reported the dam failing and a fisherman being swept downstream. The fire department search-andrescue crew located a dummy hidden downstream and brought it to safety. Police, ambulance, and other emergency personnel also were deployed in this mock emergency. The drill also included simulations of a traffic accident, traffic rerouting, and closing of Interstate 94. The drill is a requirement of the Federal Energy Regulatory Commission because of the dam’s downstream proximity to a wastewater treatment facility, Interstate 94, and homes. According to hydrological and geological studies, however, an overtopping or failure of the dam would have little or no impact on downstream homes. All parties found the drill beneficial, and the EAP was revised as a result.

Our most significant concerns pertain to the proposed CPP’s impact on South Dakota and Big Stone Plant. The EPA’s proposed redispatching methodology between Big Stone Plant and natural gas generation isn’t technically feasible in South Dakota. And the EPA should not overlook the significant investment being made by the Big Stone Plant co-owners to comply with other EPA rules.

Environmental stewardship

19


Challenges We submitted extensive comments on November 24, 2014, requesting the EPA to address the technical missteps in the proposed CPP. The EPA is evaluating more than 2 million submitted comments and expects to finalize the rule during the summer of 2015. We look forward to a final rule that addresses our concerns.

Cooling water intake structures Regulatory background In May 2014 the EPA signed the final 316(b) rule for cooling water intake structures (CWIS). The rule requires that the location, design, construction, and capacity of a CWIS reflect the best technology available (BTA) 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. The rule only applies to facilities with National Pollutant Discharge Elimination System (NPDES) water discharge permits. Thus, Hoot Lake Plant and Coyote Station will be subject to the rule. Our Put your paper to better use campaign encouraged customers to enroll in ePay, our free electronic billing program. In return for each new customer enrollment, we made a $3 donation to an area nonprofit organization. In 2014 we donated $14,800 to the nonprofits listed below as a result of new customer enrollments. • March through June: The International Music Camp in North Dakota

Learn more about our donation: youtube.com/OtterTailPowerCo • July through September: Farm Rescue, headquartered in Jamestown, North Dakota, to help area farmers who need emergency assistance with planting, haying, or harvesting due to health or hardship issues • October through December: The National Wild Turkey Federation in South Dakota for wildlife habitat We wrapped up the campaign in early 2015 with a donation to the North Country Food Bank, headquartered in Crookston, Minnesota, to support area food shelves.

20

Environmental stewardship

Otter Tail Power Company impact Under the rule, all regulated facilities will need to comply with one of several BTA alternatives for reducing mortality of aquatic organisms due to impingement and entrainment. To comply, Coyote Station will use the closed-cycle cooling option, and Hoot Lake Plant plans to use the de minimus option. With the de minimus option, facilities with very low levels of impingement aren’t required to employ any additional impingement controls. State permitting authorities ultimately will determine the compliance option most appropriate on a site-specific basis. States also will decide site-specific BTA for entrainment. Closed-cycle cooling is considered a possible BTA for reductions in entrainment mortality. Regardless of which BTA option a facility chooses for compliance, all facilities with NPDES permits must submit numerous studies with their next permit renewal application to support the determination of site-specific BTA. Challenges Each impingement compliance alternative comes with its own set of sampling and monitoring requirements. As a facility with closed-cycle cooling, Coyote Station likely will need to monitor only intake, makeup, and blowdown flows on a daily basis as well as cycles of concentration of its cooling towers. Requirements for Hoot Lake Plant are less clear. If the State of Minnesota agrees to the de minimus option, Hoot Lake Plant may not need to do anything further to demonstrate compliance. Compliance deadlines Compliance deadlines are largely dependent on NPDES permit renewal dates. In general, the rule requires that we submit an application during the next renewal cycle for permits that expire more than 45 months after the final rule becomes effective, which is around July 2018. Coyote’s current permit expires in March 2018, so it’s eligible for an alternate compliance timeline at the discretion of the State of North Dakota. If North Dakota doesn’t grant us an alternate timeline, we may need to submit all studies by September 2017. Hoot Lake Plant’s NPDES permit expired in 2012 and has been in renewal status for the last three years, so it’s unclear when we’re required to submit its permit application studies.


Promoting energy efficiency

We believe that an electric utility should share employee expertise with its customers and communities. We offer customers proven energy-efficient technology options, rate information to help them calculate their operating costs, and energyefficiency programs to meet customers’ goals and needs. We continue to pursue aggressive energy-conservation goals and in 2014 again offered a portfolio of conservation programs in Minnesota and South Dakota.

Minnesota Conservation Improvement Program Our Minnesota Conservation Improvement Program (CIP) offers customers the opportunity to save energy and money. Benefits extend to all customers through deferred utility infrastructure investments and less energy consumed. We designed our 2014 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. We introduced new programs and focused additional resources on implementing the CIP programs to achieve this goal. During 2014 we invested more than $5.18 million in CIP and returned more than $31.2 million in lifetime benefits to customers. Savings reached an estimated 33.8 million annual kilowatt-hours (kwh) of energy and more than 10.5 MW of demand. For the year, that is 1.62 percent of our annual retail sales. At a lifetime cost of less than 2 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’re working to ensure that savings estimates are measurable and verifiable to meet stringent state program requirements. While 2014 savings results had not yet been approved when this report went to press, we highlight a few of the more than 30 Minnesota programs offered in our CIP portfolio. Energy-efficient lighting Our commercial lighting retrofit program continues as one of our most successful commercial energy-efficiency programs. In 2014 more than 582 participants installed systems that are expected to save approximately 8.09 million kwh annually during the life of the technology. In new-construction lighting applications, 128 participants saved 2.17 million kwh by selecting high-efficiency lighting options. With our Be Bright program, we partner with local retailers to offer our residential customers point-of-sale rebates on Energy Star-qualified compact fluorescent lightbulbs (CFLs) and LED lighting. As part of a new program, we donated CFLs to local nonprofit organizations, including schools, community theaters, and fire departments, to sell to our residential customers in targeted communities. The organizations retained 100 percent of the proceeds. Together, our Be Bright and nonprofit fundraising programs resulted in distributing 111,329 CFLs and LEDs that we estimate will save more than 4.38 million kwh annually during the life of the bulbs. Heat pump rebates Rebates encourage customers to replace their less efficient heating and cooling systems with air-source or geothermal heat pumps. The program, which saved nearly 2.2 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 139 residential and 59 commercial high-efficiency and Energy Star-rated equipment installations qualified for rebates. Environmental stewardship

21


Energy-efficient equipment grants Our Custom Grant Program taps the conservation and efficiency potential of commercial and industrial operations by partially funding cost-effective energyconservation projects. We make customized grant awards based on our analysis of the projected energy-saving benefits to be derived from proposals developed and submitted by customers. During 2014 we provided 37 custom grants to customers for industrial and manufacturing installations of energy-efficient process improvements with a total projected savings of about 2 million kwh of energy and 466 kw of demand. Motor and adjustable-speed drive rebates Motors can account for up to 75 percent of the total electricity costs in industrial plants and up to 50 percent of electricity costs in commercial buildings. Replacing used or burned-out standard-efficiency motors with energy-efficient motors reduces energy use and operating costs. One method to manage motor operation is installing adjustable-speed drives (ASDs) that improve system performance and energy efficiency. During 2014 our customers installed and received rebates for 161 efficient new, replacement, or retrofit motors and 150 ASDs with projected savings of 6.2 million kwh of energy and 1,054 kw of demand.

Barrel O’Fun®, a division of KLN Family Brands, participated in our Industrial Process Efficiency program. After benchmarking internal energy-management practices, an engineering study identified ten energy-saving projects. The first project implemented was upgrading the facility’s lighting to LED technology. The company expects the upgrade to reduce its annual energy costs by $27,000 and expects a return on investment in less than two years.

Industrial Process Efficiency We’re now offering an Industrial Process Efficiency program to help our largest customers identify opportunities to reduce their energy use. We work with these customers to benchmark their energy-management practices, identify efficiency improvements through an engineering study, and provide rebates and incentives for implementing efficiency measures. The potential energy savings of this program are significant with just 1.3 percent of our customers using nearly half of the retail energy we sell.

CoolSavings Residential customers who enroll in CoolSavings earn a $7-a-month bill credit June through September in exchange for permitting us to cycle their central air conditioners 15 minutes on and 15 minutes off during peak periods. We offer this program to residential customers across our service area because of its combined energy savings and summer-season load-management benefits. During 2014, 111 of our Minnesota customers, including 39 units for commercial customers, were enrolled. We’ve expanded the commercial option to other parts of our Minnesota service area to increase participation. Across the three states we serve, approximately 1,366 customers are enrolled. Appliance Recycling Our Appliance Recycling program encourages customers to recycle working but inefficient refrigerators and freezers to receive a $50 rebate. Providing this service across our large, wide-spreading service area was a challenge met by our service provider, Appliance Recycling Centers of America. By working with a service provider that also serves other utilities, we’ve been able to maintain cost-effectiveness. In 2014 the program recycled and rebated 449 appliances. House Therapy Our House Therapy program continues to offer income-qualified customers compact fluorescent lightbulbs, controlled water heating, and refrigerator and freezer replacement. Customers with electricity as their primary heat source are eligible for home weatherization services, including weather stripping and insulation. Offered through a partnership with Minnesota Community Action Agencies, this program served 34 homes in 2014.

22

Environmental stewardship


Student energy kits We worked with Great Plains Natural Gas and Lake Region Electric Cooperative on a program to distribute 500 energy kits to middle school students. The kits contained CFL and LED bulbs, engine block heater timers, faucet aerators, and low-flow showerheads, as well as information about these products and installation instructions. After the students took the kits home, we asked them to complete and return a survey about their installations. The classes with the highest percentage of returned surveys won a pizza party. Through this program, the three participating utilities overall saved more than 500,000 kwh, and our customers saved about 337,657 kwh and 24.5 kw of demand. Energy Feedback Personalized energy-use information drives behavior, and behavioral changes produce energy savings. Built on those facts, our Energy Feedback program delivers energy-use information to customers by mail through Opower Home Energy Reports and online through the AclaraŽ Home Energy Analyzer tool. The program is a successful and significant part of our residential portfolio of conservation programs. Approximately 31,000 residential customers were selected for inclusion in the Home Energy Report program. Throughout 2014 each household received up to seven reports that outlined how its energy use compared with similar homes in the area. Customers may opt out if the information doesn’t interest them, but about 1 percent have done so. Customer savings averaged 162 kwh per household. Home Energy Analyzer is an online service that customers opt to use. It incorporates bill history and calculator tools that help customers find personalized ways to save. In 2014, 2,829 Minnesota customers saved an average of 692 kwh per household. Overall savings with these two Energy Feedback programs totaled almost 7.6 million kwh in 2014.

Energy efficiency is a component of our IRP Because the Minnesota PUC recognizes energy efficiency as a resource in planning to meet future energy needs, our Minnesota CIP supports our 2014-2028 integrated resource plan (IRP). Approved in October 2014, our IRP calls for 55 MW of new conservation and 15 MW of new summer-season demandresponse capacity through 2028. See page 7 for more information about our IRP.

South Dakota Energy Efficiency Plan Our South Dakota residential and business customers continue to require less electricity because of energy-efficient technologies available to them through our Energy Efficiency Plan (EEP). This conservation plan encourages businesses to install energy-efficient lighting, motors and drives, air-source and geothermal heat pumps, and custom efficiency improvements. The program encourages our residential customers to take advantage of our CoolSavings air-conditioning control program and offers incentives for installing energy-efficient lighting and air-source and geothermal heat pumps.

Our company won the E Source 2014 Demand-Side Management (DSM) Achievement Award for the most energy savings per customer for an electric utility. With average savings of 598 kwh per customer, our Minnesota CIP savings far outpaced other studied utilities, which averaged 255 kwh per customer. Senior Market Planning Specialist Brenda Sandahl (right) accepted the award on behalf of our company from Rachel Reiss Buckley, E Source DSM services director.

Preliminary results for 2014 show that we invested $351,483, returning more than $7.2 million in lifetime benefits for customers. Customer energy savings reached 3.38 million kwh, which was 121 percent of our 2014 EEP goal.

North Dakota energy conservation We continue to offer demand-response programs and incentives to our North Dakota customers. North Dakota regulators have not approved an energyefficiency program.

Environmental stewardship

23


We established a formal safety department in

1949

one of the nation’s first among electric utilities Approximately

400

employees companywide are certified in CPR and first aid

24

Our customers were satisfied with their contact experience, rating us

9.1

on a 10-point scale


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 and 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

We continue to work with regulatory agencies on the local, state, and federal levels to obtain required project approvals. Through agency and public meetings, project teams make a unified effort to implement processes that are transparent. We hope that one-on-one relationships and communication with our customers and local governing officials help to simplify processes and encourage customer participation. For example, in 2014 interested stakeholders participated in public meetings related to the following projects: Fargo-to-St. Cloud 345-kv transmission line. Big Stone South-to-Brookings County 345-kv transmission line. Big Stone South-to-Ellendale 345-kv transmission line.

Customer information

To help ensure safe and reliable electric service, we provide customers with information about using electricity wisely. Our websites otpco.com and conservingelectricity.com, advertising, bill inserts, and 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. Our conservation and demand-response programs are cornerstone messages in our advertising. Our 2014 campaigns included: CoolSavings, which encouraged customers to allow us to cycle their air conditioners to help manage summer’s high energy-use periods. More than Ever, which encouraged our business customers to make energysaving improvements by taking advantage of our many rebates and programs. Attic Survivor, which encouraged customers to keep heat where it belongs through insulation and weatherization. Regulatory commissions in the three states we serve require that we share certain information about rates and rate changes with our customers through bill inserts, advertisements, or special mailings. We work closely with the commissions to ensure that we meet their expectations. In 2014, as in previous years, we complied with all regulatory notification requirements. Of course, throughout all communication with us, customers can be assured that their private information is kept confidential. We have a privacy plan that complies with national Red Flags rules, and we regularly train employees about this plan.

Social stewardship

25


Preparedness planning

Our 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. Our company’s various preparedness plans incorporate recommendations and compliance measures from: Federal Emergency Management Administration (FEMA). Nine Fergus Falls firefighters, six of whom have Otter Tail Power Company connections, received Life Saving Awards for their rescue of a couple who became stranded in the Otter Tail River after driving off I-94. Pictured, left to right front, are Craig Hebert, husband of FERC/ RTO Policy Advisor Stacie Hebert; Controller Jeff Legge; Tyler Ice, husband of Financial Reporting Analyst Gina Ice; Principal Area Engineer Jeff McKeever; and Len Taylor. Left to right back are Tony Neville, husband of Project Accounting Lead Darla Neville; Luke Draxten, son of Resource Planning Manager Brian Draxten; Dean Anderson; and Michael Bare. This photo is representative of the many Otter Tail Power Company employees who serve on local fire departments or other emergency response units throughout our service area.

Midcontinent Independent System Operator, Inc. (MISO). North American Electric Reliability Corporation (NERC). Federal Energy Regulatory Commission (FERC). Other key agencies.

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

Crisis-management plan Our crisis-management plan is a thorough, step-by-step checklist that includes a first-hour 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.

System-restoration plans In the spring and fall of each year we and our neighboring utilities run drills based on our respective system-restoration plans. The purpose is to exercise the procedures and processes required to restore the bulk electric system from a blackout condition. By understanding system behavior and having jointly developed and proven procedures in place, Otter Tail Power Company and neighboring utilities help ensure continued system reliability for the region. Because reliability is one of our primary 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.

Enterprise Incident Response Plan Our Enterprise Incident Response Plan is an organized approach to address and manage the aftermath of an incident that may range from a system failure to a cybersecurity attack or a physical security breach. It defines what constitutes an incident and provides a process to follow in a way that limits damage and reduces recovery time and costs.

26


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 areas requiring proactive maintenance. Here are our 2013 and 2014 storm-normalized 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

2013

2014

Goal

< 1.4

< 1.33

Actual

1.27

1.24

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

2013

2014

< 57.14 minutes

< 60 minutes

78.6 minutes

59.93 minutes

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

2013

2014

Goal

< 80 minutes

< 80 minutes

Actual

99.7 minutes

74.2 minutes

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 Actual

2013

2014

<8

<7

6.07

6.37

Cybersecurity Compromises to cybersecurity pose a serious threat to the reliable operation of the bulk power system. To mitigate risk, the Federal Energy Regulatory Commission approved Version 5 of the Critical Infrastructure Protection Cybersecurity Standards (CIP Version 5) in late 2013. To comply with these standards, we’re securing software tools, identifying impacted facilities, and drafting supporting policies. CIP Version 5 requires us to categorize our cyber assets as high, medium, and low impact. Our high- and medium-impact cyber assets need to be in compliance by April 1, 2016, and the low-impact assets must be in compliance when the final CIP Version 5 standards become enforceable on April 1, 2017.

Vegetation management We prune and remove trees on a five-year systemwide cycle, thereby reducing vegetation- and animal-related outages. In 2014 we spent about $1.52 million on vegetation management for our transmission system and about $1.78 million for our distribution system.

Asset Replacement Plan We’re developing a proactive Asset Replacement Plan for our critical assets to improve system reliability, reduce the median age of our assets, and establish adequate funding for the plan to be successful. These critical assets include substation transformers and voltage regulators, circuit breakers, poles, and underground cable. Social stewardship

27


Customer satisfaction Relationship survey

Since 2004 we’ve engaged the American Customer Satisfaction Index (ACSI) research program to conduct an independent survey among random residential customers. ACSI asks them about all aspects of their service relationships with our company and compares our customer satisfaction ratings with those of the largest energy utilities in the country which, combined, serve more than 75 percent of the nation’s residential customers. We added a few components to our 2014 survey to expand customer feedback, including website satisfaction questions, email surveys in addition to the traditional phone surveys, and a separate survey for our business customers. Our overall relationship satisfaction score among residential customers for 2014 was 85 points out of 100. This was 4 points higher than the highest-rated electric or dual electric/gas investor-owned utility (IOU) and meets our company’s goal of being in ACSI’s top-five-rated utilities. We scored high in every key driver that ACSI measures, including satisfaction, meeting customer expectations, quality, perceived value, customer loyalty, reliability, and service restoration. The overall satisfaction score for our website was 79, which was 4 points higher than the Energy Utilities score of 75, equal to other IOUs, and slightly higher than the National Website Index score of 78.2. Our website loyalty score of 86 compared favorably with other consumer industry scores. 2014 ACSI Relationship Survey results Otter Tail Power Company

85

Highest-rated electric or dual electric/gas IOU in the comparison group

81

Industry average

75

Lowest-rated electric or dual electric/gas IOU

69

Numbers are on a scale of 0 - 100

Our overall relationship satisfaction score from our business customers is 83 points out of 100. Although ACSI doesn’t have a national benchmark for business customers, as they do for residential, this research will provide us a broader view of all customers’ satisfaction.

Transaction survey We conduct transaction surveys with customers who have contacted our company within a defined period of time. The survey measures transaction-specific customer satisfaction and issue resolution. The survey targets all customer contacts— phone, web, mail, in-person visits, and after-hours calls—and measures the specific aspects of service provided. In 2014 our customers were satisfied with their contact experiences, rating us 9.1 on a 10-point scale. 2014 Transaction Survey results Overall contact experience satisfaction (10-pt scale) - Mean

9.1

Overall Customer Service Representative handling satisfaction (10-pt scale) - Mean

9.3

Concern resolved (Yes)

91%

First-contact resolution (resolved in first contact) Overall quality of service (scores 4 and 5 on a 5-pt scale)

82% 91.1%

Results from both surveys indicate strong customer satisfaction. We can apply our knowledge of how customers feel about the service we provide to ensure that they continue to have positive experiences with our company. 28

Social stewardship


Community commitment Public safety

Helping keep customers and the public safe always has been paramount to our 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. 2014 messages included: Portable electric space heater safety. Ground fault circuit interrupter testing. Call Before You Dig reminder. Summer storm preparation. Electrical safety and flooding. Harvest safety. Hunting safely near electrical facilities. Holiday safety. Winter storm preparation.

Contributions and volunteer work We volunteer our time and skills to make our communities better places to live. Our employees volunteered for a wide range of nonprofit organizations and charitable causes in 2014. They served on boards of directors, organized volunteer projects, and made financial contributions. Power of Two matching gifts program Our Power of Two program furthers this volunteer spirit. Each employee who contributes a minimum of 24 hours of personal volunteer time within the year to a single nonprofit organization is eligible for a $100 donation to that organization. Otter Tail Power Company contributed $5,500 to 41 different organizations in 2014 on behalf of our employees. 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 37 in the “Economic stewardship” section of this report to learn more about this giving program.

Our company, along with 12 other Minnesota utilities, launched “Slam the Scam” to raise customer awareness about scams aimed at utility customers. The coalition encourages customers who think they are being targeted by a scammer to simply end the conversation and “slam” down the phone if it just doesn’t feel right.

Social stewardship

29


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, engage, and retain a quality workforce to provide our customers with reliable and economical service. We endorse our Affirmative Action and Equal Employment Opportunity Plans. And we provide open channels of communication with our employees. For our bargaining unit employees (51 percent of our workforce), a grievance process is defined within our Collective Bargaining Agreements. Our 786 employees in Minnesota, North Dakota, and South Dakota expect and deserve a safe workplace where they are challenged, rewarded, and respected. Company leadership works to ensure this. Upon retirement, the average employee has approximately 32 years of service.

Our workplace diversity We are an Equal Opportunity Employer with policies and practices that are nondiscriminatory. Our Human Resources Department works to ensure that we comply with all laws regarding labor practices and that we have an inclusive work environment where talented people thrive. We respect and value diversity among our employees and all those with whom we do business, and we hold every employee accountable for guaranteeing a workplace free of discrimination and harassment. Otter Tail Women Networking and Integrating Talent In 2012 women in executive and management positions formed Otter Tail Women Networking and Integrating Talents (OWN IT). In 2014 the group launched an informal speaking series titled Connect, through which the group invites other women in our company to discuss leadership, gender equality, and work-life balance with successful women from outside of our company. Additional sessions are scheduled for 2015. The group plans to continue working with the Human Resources Department and executive team on new initiatives as part of our company’s talent development program.

Employee compensation and benefits To help retain a skilled workforce through competitive benefits, we routinely benchmark our compensation policy. The table below highlights a cross section of jobs within our company. Position

30

Social stewardship

Annual salary

Entry-level Plant Operator

$60,000 – $70,000

Control Room Operator

$76,000 – $84,000

Electrical Technician

$57,000 – $77,000

Welder

$65,000 – $70,000

Yard/Equipment Operator

$60,000 – $67,000

Starting Customer Service Representative

$31,000

Starting Customer Service Manager

$60,000

Entry-level Engineer

$60,000

Entry-level Apprentice Lineman

$53,000 – $67,000

Journeyman Lineman

$67,000 – $75,000

Lead Lineman

$76,000 – $81,000


In addition to vacation, paid holidays, and sick leave, we offer our employees the following benefits: Benefit 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 Health Savings Account Flexible benefit plan Long-term disability plan Employee Assistance Program Employee self-improvement Adoption assistance Travel accident insurance Stock purchase plan Safety eyeglasses plan Safety shoes Fire-retardent clothing allowance

Full-time

x x x x x x x x x x x x x x x** x** x**

Part-time

x x x*

x* x* x x* x x x x x** x** x**

* Eligibility based on hours worked requirement ** Eligibility based on exposure

Tuition reimbursement Employees receive reimbursement for 80 percent of tuition and book costs for company-related accredited coursework. In 2014, 11 employees took advantage of this opportunity.

Performance evaluations Our company requires managers and supervisors to evaluate their employeesâ&#x20AC;&#x2122; performance annually. Specifically, these evaluations include setting goals, recognizing employee strengths, and planning for employee development.

Employee communication Our goal is to deliver timely and easy-to-understand communication to both external and internal audiences. To measure our internal success, we contract with an independent firm every other year to survey employees about company communications. In 2014, 83 percent of respondents agreed that they know about and understand our goals, objectives, plans, and directions. This is a statistically significant improvement from 2012 when 80 percent of respondents agreed.

Human Resources and Safety Director Pete Wasberg received the Torch & Shield Award, the highest honor bestowed by the University of Minnesota Crookston and the Northwest Research and Outreach Center. Since 1966 the U of M Crookston has recognized organizations and individuals who have provided leadership and aided its development with this award. Wasberg serves on the College Advisory and Advancement Board for the U of M Crookston. He has served on the UMC Teambackers Board of Directors, the Enactus Advisory Board, chancellor search committees, and the Valley Technology Park Board of Directors. Wasberg was Area Manager in Crookston before moving to Fergus Falls in 2004. Pictured left to right: Albert Sims, head, Northwest Research and Outreach Center; Fred Wood, chancellor, University of Minnesota Crookston; Wasberg; and Corby Kemmer, director, Development & Alumni Relations.

Social stewardship

31


2014 safety awards February Coyote Station received the Occupational Safety Merit Award from the North Dakota Safety Council, the Safety Achievement Award for a 50 percent decrease in the incident rate from the prior year, and the Commendation for Safety Award for reaching 2 million labor hours without a lost-time accident. May Our company as a whole, Hoot Lake Plant, and Coyote Station received Meritorious Achievement Awards from the Minnesota Safety Council for progress in implementing a comprehensive safety program. Coyote Station received the Lignite Energy Council’s Distinguished Safety Award for having an OSHA rate equal to or less than the national average. Continued on page 33 sidebar

Employee health and safety

We have a comprehensive safety program because the safety of our employees is of utmost importance. We provide safe working conditions, extensive safety training, and appropriate protective equipment. We inspect and upgrade equipment and continue to upgrade work methods. We investigate accidents to determine causes and preventive measures. And we encourage managers to begin meetings with a safety reminder. With these principles and practices, we make safety a commitment on every job site and a focus for every employee. We established a formal safety department in 1949—one of the nation’s first among electric utilities. We consistently have received awards from safety councils in the states we serve for exceptional workplace safety performance. These awards represent the achievements of all employees across all three states. We are proud of our safety tradition, which continues to yield a lower accident and injury rate than our industry peers. Safety performance comparisons Otter Tail Power Company

EEI peer

2014 goal

2014 actual

2013 average

Lost-time injury rate

0.25 or below

0.25

0.79

OSHA recordable injury rate

2.3 or below

2.28

4.06

Preventable vehicle accident rate

2.5 or below

2.6

4.88

OSHA standard recordable injury calculation: Total number of cases x 200,000 ÷ total number of hours worked Preventable vehicle accident rate calculation: Total number of accidents x 1,000,000 ÷ total number of miles driven

Safety rule book Management and representatives of our bargaining employees work together on our safety program and rule book. The rule book covers health and safety topics developed by a management-union committee. Among the rule book topics are: Blood-borne pathogens exposure control plan. Working on or near energized equipment. Hazard communications. Confined space. Forklifts, cranes, and hoisting equipment. Linemen practices. Switching, tagging, and grounding. Historical safety comparisons 8 7

OSHA Rate

6

(OSHA recordable injury rate)

Otter Tail Power Company EEI peer

5 4 3 2 1 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Source: Edison Electric Institute (EEI) 10-year Injury Data for similar industry. Latest industry information available is through 2013.

32

Social stewardship


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

October Big Stone Plant received the South Dakota Governor’s Workplace Safety Award for its 2011-2013 recordable injury and DART (days away, restricted, or transferred) record.

Facilities Security Team Our Facility Security Team researches physical security policies and procedures, identifies possible security threats, recommends improvements to company leaders, and guides implementation.

Power plant emergency program Safety is a priority at all of our facilities, particularly at generating plants where the potential for injury is heightened. When hired, all company power plant workers receive intensive safety training, which is followed by refresher sessions. All power plant employees hold first aid and CPR certifications. In addition, Big Stone Plant and Coyote Station have emergency response teams composed of volunteers who provide monthly training to their coworkers on hazardous material handling, firefighting, emergency medical technician/advanced first aid, high-angle rescue, and confined-space rescue. These emergency response teams also are available to contractors working on the respective plant sites.

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.

Liberty Mutual Safety Climate Survey We worked with Liberty Mutual Insurance to survey employees about their perceptions of our company’s commitment to safety. One key takeaway from the survey results is that the statements below received the highest percentage of agreement from respondents. Top management of this company tries to continually improve safety levels in each department. Top management of this company provides workers with a lot of information on safety issues. My direct supervisor makes sure we receive all the equipment needed to do the job safely. My direct supervisor makes sure we follow all the safety rules (not just the most important ones).

Annual Safety Roundtable

The Big Stone Plant air-quality control system project received two industrial safety awards. A bronze Zero Injury Safety Award (ZISA) went to the contractor (Graycor Industrial Constructors Inc.), owner (Otter Tail Power Company), and labor (Eastern South Dakota Building Trades Council) for 236,222 hours worked without injury in 2013. A certificate of merit for 50,172 hours worked without injury went to Graycor as contractor, AmQuip Crane Rental LLC as subcontractor, Otter Tail Power Company as the customer, and Operating Engineers local Union 49 as the labor organization. Established in 2000 by the National Maintenance Agreements Policy Committee, Inc. (NMAPC), ZISA is recognized nationwide as union construction and maintenance’s premier award for industrial safety.

We hold an Annual Safety Roundtable for about 100 Safety Committee members to discuss ways to improve safety. Internal and external speakers address safetyrelated topics. We expect employees who attend the Safety Roundtables to share the information they learn with other employees and work groups.

Social stewardship

33


Employee training

Companywide online safety and employment law training We use an online training program to allow employees to complete their assigned annual training modules as their schedules allow during the calendar year. Employees are enrolled in safety- and human resources-related classes based on job classifications. The table below lists the safety and employment law classes that we require. 2014 online safety and employment law training

Class

Number of Number of employees who employees required completed classes to complete class

Percentage completed

Discrimination-free workplace

769

775

99%

Drug- and alcohol-free workplace

769

775

99%

Ethics

769

775

99%

Hiring and lawful termination

107

109

98%

Sexual harassment for employees

666

670

99%

Sexual harassment for managers

107

109

98%

Violence in the workplace

206

210

98%

Computer security

770

775

99%

FERC Standards of Conduct

765

775

99%

Actual completion rates may be higher. Most incomplete classes are due to employees changing positions and no longer being required to complete the classes.

Hoot Lake Plant partnered with the Minnesota Department of Natural Resources (DNR) to establish a new canoe and recreational tubing portage on the Otter Tail River. Due to its natural bends, a turbulent stretch of the river had been a challenge for recreational users near Hoot Lake Plant. At times of high water, whitewater conditions exist. In September 2014 the team constructed a new portage and added more signage to make the stretch easier to navigate for those who don’t want the thrill of whitewater action.

In 2014, 772 employees enrolled in 12,884 classes; employees completed 12,776 classes, or 99 percent. The following table lists the 2014 average hours of online training completed per employee by classification. Classification Professional

Total training hours

Number of employees

Average hours per employee

719

157

4.6

2,208

393

5.6

Manager

438

109

4.0

Office/Clerical

450

94

4.8

Craftworker

Operative

36

7

5.1

Technical

29

6

4.8

Serviceworker

33

4

8.3

Laborer

22

2

11

Leadership training Developing highly capable employees is key to the long-term success of an organization. Our Leading the Enterprise, Leading Leaders, Leading Others, and Leading Self development programs are designed to build a common understanding of our company’s culture, strategy, and processes among all of our employees. In 2014 and early 2015, executives, managers, and supervisors completed either the Leading the Enterprise, Leading Leaders, or Leading Others programs. In 2015 we’ll roll out the Leading Self program to all employees.

34

Social stewardship


Future workforce investment

We typically have a low employee turnover rate compared with other industries. The 2014 employee turnover rate was 6.7 percent including retirements. The rate was 2.9 percent excluding retirements. 2014 employee turnover Reason                         

Number of employees

Retirement                             

30

Nonretirement attrition                            

23

Total                                  

53

We expect approximately 40 percent of our workforce to retire in the next ten years, taking precious skills and expertise with them. We continue to address this projected labor shortage in our internal succession planning process and by working with current employees to improve efficiencies. In addition, we develop and supply recruitment materials to educational institutions and other sources of qualified workers. For example, we distribute Powerful Possibilities, our career guide, 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 support scholarship programs and internships, participate in job fairs, and accept speaking engagements. We have ties to post-secondary programs and employee involvement in multiple advisory committees at area institutions of higher learning, including: Mitchell Technical Institute. South Dakota State University. Lakes Area Technical Institute. Minnesota State Community and Technical College—Fergus Falls and Wadena campuses. North Dakota State College of Science. North Dakota State University. University of North Dakota. University of Minnesota—Crookston and Morris campuses. Bismarck State College.

Social stewardship

35


Since 1989 our economic development consultants, grants, and loan pools have helped create about

21,000 jobs and save about 4,400 jobs An unmatched

1/3 of our customers

partner with us in load management Total 2014 charitable contributions:

+$600,800

36


Economic stewardship We’re 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 5, our mission is 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.

Charitable contributions

Our company provides financial support to a broad range of activities and organizations as shown in the 2014 charitable contributions chart below. 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

Our company granted eight $1,500 awards to qualifying organizations in our service area for purchasing automated external defibrillators (AEDs), for a total donation of $12,000. The AEDs are to be placed in the community where they are accessible to most people. Our company provided the funding for this life-saving equipment, and the recipients purchased, placed, and maintain the AEDs and provide CPR and AED training for their volunteers. The AED award recipients chosen by their Customer Service Centers in 2014 were:

Arts and culture

• Crookston Police Department

Community enhancement

• Greater Bemidji, Inc.

Environmental stewardship

• Immanuel Lutheran Church, Audubon

Collaborative efforts and initiatives that fit more than one of our company’s priority areas 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. The table below provides an overview of our 2014 charitable contributions. Community connections donations

$377,660

Customer Service Center and other donations

$176,603

United Way Campaign

• City of McClusky Community Hall • City of Marion • Drayton Public School • City of Castlewood

$39,000

Employee contributions

$24,000

Company contributions

$15,000

Children’s Miracle Network

$7,565

Employee contributions

$4,565

Company contributions

$3,000

Total 2014 charitable contributions

• Head of the Red Youth Activities Association, Wahpeton

$600,828

Economic stewardship

37


Economic development

Protecting and improving the quality of life in our communities means helping them remain vibrant, attractive places to live and do business. Throughout our history weâ&#x20AC;&#x2122;ve used various tools to accomplish this. Since 1989 our economic development consultants, grants, and loan pools have helped create about 21,000 jobs and save about 4,400 jobs. Our employees realize that the successes of their communities and our company are connected. Weâ&#x20AC;&#x2122;ll continue to work with companies looking to locate or expand in our service area through economic-development assistance that involves financial strategies and other needed advice. Rates Analyst Tino Harris (right) received the United Way of Otter Tail Countyâ&#x20AC;&#x2122;s Community Heroes Award in the Individual Category from United Way Executive Assistant Meghana Anderson. Harris has coordinated our employee campaign for five years. In 2014 the number of employees who contributed increased by 13 percent, and total employee giving increased by $2,347 to help fund programs to improve lives in Otter Tail County.

The greatest impact we have 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 significant direct and indirect economic value.

Among the Top Corporate Awards, our company received a Certificate of Appreciation for its contribution of $15,088, as did Otter Tail Corporation for its contribution of $4,363, to the 2014 campaign for helping change lives and build a stronger community. Among the Top Employee Campaigns, our company received a Certificate of Appreciation for employee contributions that totaled $23,640, as did Otter Tail Corporation for total employee contributions of $8,726.

Local sourcing opportunities

Direct economic value

We continued our role as a corporate citizen by making the following economic impact in 2014. Property taxes paid to local jurisdictions Wages and benefits paid to utility employees Common dividends paid to shareholders Interest paid Amount paid to suppliers and vendors 2014 total direct economic value generated

We positively impact the communities we serve by using local vendors when appropriate. The table below details our 2014 expenditures with vendors in our tri-state service area. Amounts paid to tri-state vendors in 2014 Percentage of total Minnesota

$174,918,000

37%

North Dakota

$107,014,000

22%

South Dakota

$9,272,000

2%

Total for local vendors

$291,204,000

61%

2014 total payments to all vendors

$474,364,000

Indirect economic value

During 2014 we engaged in construction and replacement projects as well as ongoing maintenance and operations support that created more than $166 million in indirect economic value. These projects include transmission line upgrades, airquality control equipment, and various other replacement projects. The table below details the economic impact of those projects. Labor spending on construction New or replacement construction property Capital additions to utility plant Labor spending on maintenance Rents Economic development spending 2014 total indirect economic value generated

38

Economic stewardship

$12,606,000 $90,830,000 $35,408,000 $23,254,000 $474,364,000 $636,462,000

$14,221,000 $136,253,000 $150,474,000 $14,223,000 $1,119,000 $224,000 $166,040,000


Manageable rates

otpco.com/MyRates

Cost projections

Weâ&#x20AC;&#x2122;re taking proactive steps to keep the price our customers pay for electricity as economical as possible. New technologies and infrastructure investments, which cost less than other options to produce and move low-cost electricity, will help to keep the price our customers pay among the lowest in the region. And our programs, some of which are mentioned on pages 21-23, can help customers use electricity wisely and save even more. While weâ&#x20AC;&#x2122;ve selected low-cost options to meet customer needs, they still come with a price. Since 2010 weâ&#x20AC;&#x2122;ve been encouraging customers to plan for an overall average bill increase of about 5 percent a year through 2020. We now anticipate that all customers averaged together will see a bill increase of about 3 to 4 percent a year from 2010 through 2020. The increases will vary by state, year, and size. For example, in 2014 customers saw an overall average price increase of about 5 percent.

Rate comparisons The following chart show how our average electric rates compare with other utilities in the states we serve and nationwide. 2014 average rate comparisons (cents per kwh) Residential

Commercial

Industrial

North Dakota state average

8.91

8.81

7.28

Otter Tail Power Company

8.05

8.15

6.82

Minnesota state average

11.78

9.21

6.70

Otter Tail Power Company South Dakota state average Otter Tail Power Company United States average Otter Tail Power Company total system

8.86

8.63

6.29

10.36

9.32

6.44

8.34

8.13

6.13

12.56

10.71

7.10

8.43

8.37

6.47

Source: Typical Bills and Average Rates Report, Edison Electric Institute, Summer 2014.

Commodity costs Maintaining a reliable electrical system requires the ability to access financial markets to finance increasing costs associated with system repairs and updates. Costs for crucial commodities are on the rise nationwide, yet our company has worked to ensure that the electricity we provide remains a value to the homes and businesses we serve. Percentage of increase 1983-2014

Consumer Price Index and Otter Tail Power Company (Revenue per kilowatt-hour based on residential customer class average) 160% 140% 120% 100% 80% Consumer Price Index Otter Tail Power Company

60% 40% 20% 0%

19

83 19 85 19 87 19 89 19 91 19 93 19 95 19 97 19 99 20 01 20 03 20 05 20 07 20 19 20 11 20 13 20 14

-20%

Economic stewardship

39


Load management

Customer participation in our direct load-control rates makes our company unique among utilities. An unmatched one-third of our customers partner with us in load management, allowing us to curtail a portion of their electrical load during periods of high demand, high energy prices, or system maintenance. Participating customers save on their heating and cooling bills with rates that are less than our standard electric price. We accredited with MISO a portion of our direct load-control capacity, making it available on a limited basis during MISO system peaks. The amount accredited varies monthly and is set as 90 MW in January, February, and December; 55 MW in March, April, and November; 25 MW in October; 18 MW in July, August, and September; and 15 MW in May. Accrediting a portion of the demand resources is a step to further enhance regional transmission reliability. Our 2014-2028 IRP calls for demand-side management resources to increase annually through 2028 to reach approximately 15 MW of additional summer-season peak-load-reduction capability. To achieve this, we connected an additional 11 MW of controlled winter-season load and 2.2 MW of controlled summer-season load.

New Customer Information System

Our Customer Information System (CIS) performs billing, processes payments, and manages customer account information such as account balances, payment programs, and participation in demand-side management (load control). We are researching newer systems that are capable of billing increasingly complex rates, providing better workflow, integrating more easily with other systems, and ultimately offering more electronic options to our customers. Weâ&#x20AC;&#x2122;ll select a CIS vendor in the first half of 2015 with the aid of a consultant. If given approval to proceed with implementation from the Otter Tail Corporation Board of Directors, weâ&#x20AC;&#x2122;ll work with the selected vendor to reach a targeted in-service date roughly 2.5 years after implementation begins.

40

Economic stewardship


Otter Tail Power Company Stewardship Report GRI-G3 Index (EU = 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

3 Full report

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

Cover 5-11 5-6, www.ottertail.com/investors 5-6 5-11 5-6, www.otpco.com/leaders 5-6 5-6 About this report, 5-6, 7-9 Addressed throughout

Organizational profile disclosures specific to electric utilities EU1 Installed capacity (MW) by source and regulatory regime EU3 Number of residential, industrial, commercial customer accounts EU4 Length of transmission and distribution lines (miles), by voltage Disclosures, report parameters 3.1 Reporting period 3.2 Date of previous report 3.3 Reporting cycle parameters 3.4 Company contacts for questions 3.5 Process for defining report content 3.6 Report boundaries 3.7 Limitations on the scope of the boundary 3.8 Basis for reporting on JVâ&#x20AC;&#x2122;s, subsidiaries, leased or outsourced operations 3.9 Data measurement techniques 3.10 Explanation of restatements of information provided 3.11 Significant changes in report scope/boundary/measurement since last reporting period 3.12 Identification of standard disclosures in the report 3.13 Policy and practice of seeking external assurance of the report Disclosures, governance, commitments, and engagement 4.1 Governance structure of the organization 4.2 Indication of highest officer* 4.3 Information about the unitary board 4.4 Mechanisms shareholders use to provide guidance 4.5 Compensation and performance standards for governance body 4.6 Processes to avoid conflicts of interest among governance body 4.7 Determining qualifications for governance body 4.8 Mission, values, codes of conduct, etc. statements 4.9 Procedures for adherences to compliance 4.10 Process for evaluation of governance body 4.11 Risk management 4.12 Externally developed initiatives endorsed by the organization 4.13 Association memberships (beyond routine dues, participation) 4.14 Stakeholder groups engaged 4.15 Basis for selecting stakeholders for engagement 4 .16 Frequency and type of stakeholder engagement 4.17 Stakeholder issues

7-9 5-6 9-11

Cover, About this report About this report About this report Back cover About this report About this report, 5-6 About this report, 5-6 About this report, 5-6 Addressed throughout NA NA 41-42 2

5-6, www.ottertail.com/governance.cfm 3 www.ottertail.com/governance.cfm www.ottertail.com/governance.cfm www.ottertail.com/governance.cfm www.ottertail.com/governance.cfm www.ottertail.com/governance.cfm 5, www.ottertail.com/governance.cfm www.ottertail.com/governance.cfm www.ottertail.com/governance.cfm 7-11, 13-23, 26-27, 29, 32-33 7-11, 21-23, 25, 29, 30-31 7-11, 21-23, 25, 29, 30-31 Addressed throughout Addressed throughout 25-35, 37-40 Addressed throughout

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 37-40, www.ottertail.com/investors.cfm 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 7-9, 13-23, 40 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 30-31

Global reporting initiative index

41


(EU = electric utility disclosures and indicators) HR SO PR

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 Discuss management approach to community, corruption, public policy, anticompetitive behavior, and compliance as they relate to overall management policies, goals, and performance 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

Page number or location

30-31 25-27, 29, 37-39 21-23, 25-28, 39

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

38, www.otertail.com/investors.cfm 30-31 38 13-23, 38, www.ottertail.com/investors.cfm 38

Economic performance indicators and disclosures specific to electric utilities EU6 Availability and reliability - 5-10-year approach EU7 Demand-side management programs

27, 39 40

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

14, 21-23, 40 7-11, 40 16 14 16 13-23

G3 Labor performance indicators LA1(U) Total employee workforce and total contractor workforce 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

5-6 30-31 30-31 32-33 32-33 34 30-34 30-35

34

37-38 34 Addressed throughout 26-27

25-27 25, 28 10-11, 25-29, 39 27 27 8-9

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. Gigawatt (gw) 1,000 megawatts or 1,000,000 kilowatts or 1,000,000,000 watts. Gigawatt-hour (gwh) 1 gigawatt acting over a period of 1 hour.

42

Global reporting initiative index


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Contact information • Customer Service 800-257-4044 • Idea Center 800-493-3299 • Media inquiries 218-739-8297 • Headquarters 218-739-8200 215 South Cascade Street Fergus Falls, MN 56537

5/15

2014 Stewardship Report  

This is our fifth biennial stewardship report. We are reporting 2014 information throughout this report, unless we indicate otherwise due to...