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Section 1: 10-K/A (FORM 10-K/A)

ottr20171231_10k.htm
 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K/A

 

Amendment No. 1

 

(Mark One)

 

(X)

Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

    For the fiscal year ended December 31, 2017

          

 

(  )

Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

    For the transition period from _______to_______

 

Commission File Number 0-53713

 

OTTER TAIL CORPORATION

(Exact name of registrant as specified in its charter)

 

MINNESOTA 27-0383995
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
215 SOUTH CASCADE STREET, BOX 496, FERGUS FALLS, MINNESOTA 56538-0496
(Address of principal executive offices) (Zip Code)

 

Registrant's telephone number, including area code: 866-410-8780

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Name of each exchange on which registered
COMMON SHARES, par value $5.00 per share The NASDAQ Stock Market LLC

     

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  ☑     No  ☐

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐    No ☑

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☑     No  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ☑     No  ☐

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer Accelerated Filer ☐       
Non-Accelerated Filer Smaller Reporting Company ☐
(Do not check if a smaller reporting company) Emerging Growth Company ☐

 

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ☐ No ☑

 

The aggregate market value of common stock held by non-affiliates, computed by reference to the last sales price on June 30, 2017 was $1,500,154,049.

 

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date: 39,626,594 Common Shares ($5 par value) as of February 8, 2018.

 

Documents Incorporated by Reference:

No documents are incorporated by reference into this Amendment No. 1 on Form 10-K/A. Certain information required by Part III of the Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on February 20, 2018, has been incorporated by reference from the Proxy Statement for the 2018 Annual Meeting.

 

 

 

 

EXPLANATORY NOTE

 

This Amendment No. 1 on Form 10-K/A (this “Amendment”) amends Otter Tail Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017, which was originally filed with the Securities and Exchange Commission (the “Commission”) on February 20, 2018 (the “Original Filing”). Otter Tail Corporation is filing this Amendment for the sole purpose of inserting the conformed signature of our independent registered public accounting firm on their Report of Independent Registered Public Accounting Firm with respect to the audited financial statements included in the Original Filing which was inadvertently omitted. Accordingly, Item 8 of Part II of the Original Filing is being amended hereby solely to reflect this conformed signature. In addition, as required by Rule 12b-15 of the Securities Exchange Act of 1934, as amended, new certifications by our principal executive officer and principal financial officer are included herein as exhibits to this Amendment. Accordingly, Item 15 of Part IV of the Original Filing is being amended hereby solely to reflect the filing of these new exhibits. 

 

This Amendment does not make any other changes to the Original Filing and does not reflect events occurring after the Original Filing or modify or update any of the information contained therein in any way other than as expressly described in this Amendment.

 

 

 

 

Item 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Shareholders and Board of Directors of

Otter Tail Corporation

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated balance sheets and statements of capitalization of Otter Tail Corporation and subsidiaries (the "Company") as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, common shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Otter Tail Corporation and subsidiaries as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

 

Basis for Opinions

 

The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report Regarding Internal Controls Over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ Deloitte & Touche LLP

 

Minneapolis, Minnesota

 

February 20, 2018

 

We have served as the Company’s auditor since 1944.

 

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Otter Tail Corporation

 

Consolidated Balance Sheets, December 31

 

(in thousands)

 

2017

   

2016

 
                 

Assets

               
                 

Current Assets

               

Cash and Cash Equivalents

  $ 16,216     $ --  

Accounts Receivable:

               

    Trade (less allowance for doubtful accounts of $1,094 for 2017 and $1,246 for 2016)

    68,466       68,242  

    Other

    7,761       5,850  

Inventories

    88,034       83,740  

Unbilled Revenues

    22,427       20,080  

Income Taxes Receivable

    1,181       662  

Regulatory Assets

    22,551       21,297  

Other

    12,491       8,144  

    Total Current Assets

    239,127       208,015  
                 

Investments

    8,629       8,417  

Other Assets

    36,006       34,104  

Goodwill

    37,572       37,572  

Other Intangibles–Net

    13,765       14,958  

Regulatory Assets

    129,576       132,094  
                 

Plant

               

Electric Plant in Service

    1,981,018       1,860,357  

Nonelectric Operations

    216,937       211,826  

Construction Work in Progress

    141,067       153,261  

    Total Gross Plant

    2,339,022       2,225,444  

Less Accumulated Depreciation and Amortization

    799,419       748,219  

    Net Plant

    1,539,603       1,477,225  
                 

      Total Assets

  $ 2,004,278     $ 1,912,385  

 

See accompanying notes to consolidated financial statements.

 

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Otter Tail Corporation

 

Consolidated Balance Sheets, December 31

 

(in thousands, except share data)

 

2017

   

2016

 
                 

Liabilities and Equity

               
                 

Current Liabilities

               

Short-Term Debt

  $ 112,371     $ 42,883  

Current Maturities of Long-Term Debt

    186       33,201  

Accounts Payable

    84,185       89,350  

Accrued Salaries and Wages

    21,534       17,497  

Accrued Taxes

    16,808       16,000  

Regulatory Liabilities

    9,688       3,294  

Other Accrued Liabilities

    11,389       12,083  

Liabilities of Discontinued Operations

    492       1,363  

Total Current Liabilities

    256,653       215,671  
                 

Pensions Benefit Liability

    109,708       97,627  

Other Postretirement Benefits Liability

    69,774       62,571  

Other Noncurrent Liabilities

    22,769       21,706  
                 

Commitments and Contingencies (note 8)

               
                 

Deferred Credits

               

Deferred Income Taxes

    100,501       226,591  

Deferred Tax Credits

    21,379       22,849  

Regulatory Liabilities

    232,893       82,433  

Other

    3,329       7,492  

Total Deferred Credits

    358,102       339,365  
                 

Capitalization (page 67)

               

Long-Term Debt—Net

    490,380       505,341  
                 

Cumulative Preferred Shares – Authorized 1,500,000 Shares Without Par Value; Outstanding – None

    --       --  
                 

Cumulative Preference Shares – Authorized 1,000,000 Shares Without Par Value; Outstanding – None

    --       --  
                 

Common Shares, Par Value $5 Per Share–Authorized, 50,000,000 Shares;    Outstanding, 2017—39,557,491 Shares; 2016—39,348,136 Shares

    197,787       196,741  

Premium on Common Shares

    343,450       337,684  

Retained Earnings

    161,286       139,479  

Accumulated Other Comprehensive Loss

    (5,631 )     (3,800 )

Total Common Equity

    696,892       670,104  
                 

Total Capitalization

    1,187,272       1,175,445  
                 

Total Liabilities and Equity

  $ 2,004,278     $ 1,912,385  

 

See accompanying notes to consolidated financial statements.

 

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Otter Tail Corporation

 

Consolidated Statements of IncomeFor the Years Ended December 31

 

(in thousands, except per-share amounts)

 

2017

   

2016

   

2015

 
                         

Operating Revenues

                       

Electric

  $ 434,506     $ 427,349     $ 407,039  

Product Sales

    414,844       376,190       372,765  

Total Operating Revenues

    849,350       803,539       779,804  
                         

Operating Expenses

                       

Production Fuel – Electric

    59,690       54,792       42,744  

Purchased Power – Electric System Use

    64,807       63,226       78,150  

Electric Operation and Maintenance Expenses

    151,319       151,225       140,768  

Cost of Products Sold (depreciation included below)

    316,562       295,222       295,032  

Other Nonelectric Expenses

    43,240       40,264       40,021  

Depreciation and Amortization

    72,545       73,445       60,363  

Property Taxes – Electric

    15,053       14,266       13,512  

Total Operating Expenses

    723,216       692,440       670,590  
                         

Operating Income

    126,134       111,099       109,214  
                         

Interest Charges

    29,604       31,886       31,160  

Other Income

    2,632       2,905       2,177  

Income Before Income Taxes – Continuing Operations

    99,162       82,118       80,231  

Income Tax Expense – Continuing Operations

    27,043       20,081       21,642  

Net Income from Continuing Operations

    72,119       62,037       58,589  

Discontinued Operations

                       

Income (Loss) – net of Income Tax Expense (Benefit) of $213 in 2017, $138 in 2016, and ($1,539) in 2015

    320       284       (5,404 )

Impairment Loss – net of Income Tax (Benefit) of $0 in 2015

    --       --       (1,000 )

Gain on Disposition – net of Income Tax Expense of $4,530 in 2015

    --       --       7,160  

Net Income from Discontinued Operations

    320       284       756  

Total Net Income

  $ 72,439     $ 62,321     $ 59,345  
                         

Average Number of Common Shares Outstanding–Basic

    39,457       38,546       37,495  

Average Number of Common Shares Outstanding–Diluted

    39,748       38,731       37,668  
                         

Basic Earnings Per Common Share:

                       

Continuing Operations

  $ 1.83     $ 1.61     $ 1.56  

Discontinued Operations

  $ 0.01     $ 0.01     $ 0.02  
    $ 1.84     $ 1.62     $ 1.58  

Diluted Earnings Per Common Share:

                       

Continuing Operations

  $ 1.81     $ 1.60     $ 1.56  

Discontinued Operations

  $ 0.01     $ 0.01     $ 0.02  
    $ 1.82     $ 1.61     $ 1.58  

Dividends Declared Per Common Share

  $ 1.28     $ 1.25     $ 1.23  

 

See accompanying notes to consolidated financial statements.

 

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Otter Tail Corporation

 

Consolidated Statements of Comprehensive IncomeFor the Years Ended December 31

 

(in thousands)

 

2017

   

2016

   

2015

 

Net Income

  $ 72,439     $ 62,321     $ 59,345  

Other Comprehensive Income (Loss):

                       

Unrealized Loss on Available-for-Sale Securities:

                       

Reversal of Previously Recognized Gains Realized on Sale of Investments and Included in Other Income During Period

    (15 )     (3 )     (3 )

Gains (Losses) Arising During Period

    115       (14 )     (49 )

Income Tax (Expense) Benefit

    (35 )     6       18  

Change in Unrealized Losses on Available-for-Sale Securities – net-of-tax

    65       (11 )     (34 )

Pension and Postretirement Benefit Plans:

                       

Actuarial (Losses) Gains Net of Regulatory Allocation Adjustment

    (3,791 )     (445 )     510  

Amortization of Unrecognized Postretirement Benefit Costs (note 10)

    629       628       821  

Income Tax Benefit (Expense)

    1,266       (74 )     (532 )

Pension and Postretirement Benefit Plans – net-of-tax

    (1,896 )     109       799  

Total Other Comprehensive Income (Loss)

    (1,831 )     98       765  

Total Comprehensive Income

  $ 70,608     $ 62,419     $ 60,110  

 

See accompanying notes to consolidated financial statements.

 

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Otter Tail Corporation

 

Consolidated Statements of Common Shareholders Equity

 

(in thousands, except common shares outstanding)

 

Common

Shares

Outstanding

   

Par Value,

Common

Shares

   

Premium on

Common

Shares

   

Retained

Earnings

   

Accumulated

Other

Comprehensive

Income/(Loss) 

 

Total

Common

Equity

 

Balance, December 31, 2014

    37,218,053     $ 186,090     $ 278,436     $ 112,903     $ (4,663 )

(a)

  $ 572,766  

Common Stock Issuances, Net of Expenses

    690,485       3,453       14,715                         18,168  

Common Stock Retirements

    (51,352 )     (257 )     (1,339 )                       (1,596 )

Net Income

                            59,345                 59,345  

Other Comprehensive Income

                                    765         765  

Tax Benefit – Stock Compensation

                    82                         82  

Employee Stock Incentive Plan Expense

                    1,716                         1,716  

Common Dividends ($1.23 per share)

                            (46,223 )               (46,223 )

Balance, December 31, 2015

    37,857,186     $ 189,286     $ 293,610     $ 126,025     $ (3,898 )

(a)

  $ 605,023  

Common Stock Issuances, Net of Expenses

    1,494,618       7,473       38,490                         45,963  

Common Stock Retirements

    (3,668 )     (18 )     (86 )                       (104 )

Net Income

                            62,321                 62,321  

Other Comprehensive Income

                                    98         98  

Employee Stock Incentive Plan Expense

                    3,178                         3,178  

ASU 2016-09 Adoption

                    2,492       (623 )               1,869  

Common Dividends ($1.25 per share)

                            (48,244 )               (48,244 )

Balance, December 31, 2016

    39,348,136     $ 196,741     $ 337,684     $ 139,479     $ (3,800 )

(a)

  $ 670,104  

Common Stock Issuances, Net of Expenses

    257,059       1,285       3,684                         4,969  

Common Stock Retirements

    (47,704 )     (239 )     (1,560 )                       (1,799 )

Net Income

                            72,439                 72,439  

Other Comprehensive Income

                                    (1,831 )       (1,831 )

Employee Stock Incentive Plan Expense

                    3,642                         3,642  

Common Dividends ($1.28 per share)

                            (50,632 )               (50,632 )

Balance, December 31, 2017

    39,557,491     $ 197,787     $ 343,450     $ 161,286     $ (5,631 )

(a)

  $ 696,892  

 

(a) Accumulated Other Comprehensive Loss on December 31 is comprised of the following:

 

(in thousands)

 

2017

   

2016

   

2015

 

Unrealized Gain (Loss) on Marketable Equity Securities:

                       

Before Tax

  $ 71     $ (29 )   $ (12 )

Tax Effect

    (25 )     10       4  

Unrealized Gain (Loss) on Marketable Equity Securities – net-of-tax

    46       (19 )     (8 )

Unamortized Actuarial Losses and Prior Service Costs Related to Pension and Postretirement Benefits:

                       

Before Tax

    (9,462 )     (6,300 )     (6,484 )

Tax Effect

    3,785       2,519       2,594  

Unamortized Actuarial Losses and Prior Service Costs Related to Pension and Postretirement Benefits – net-of-tax

    (5,677 )     (3,781 )     (3,890 )

Accumulated Other Comprehensive Loss:

                       

Before Tax

    (9,391 )     (6,329 )     (6,496 )

Tax Effect

    3,760       2,529       2,598  

Net Accumulated Other Comprehensive Loss

  $ (5,631 )   $ (3,800 )   $ (3,898 )

 

See accompanying notes to consolidated financial statements.

     

 

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Otter Tail Corporation

 

Consolidated Statements of Cash FlowsFor the Years Ended December 31

 

(in thousands)

 

2017

   

2016

   

2015

 

Cash Flows from Operating Activities

                       

Net Income

  $ 72,439     $ 62,321     $ 59,345  

Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

                       

Net Gain from Sale of Discontinued Operations

    --       --       (7,160 )

Net (Income) Loss from Discontinued Operations

    (320 )     (284 )     6,404  

Depreciation and Amortization

    72,545       73,445       60,363  

Deferred Tax Credits

    (1,470 )     (1,657 )     (1,878 )

Deferred Income Taxes

    24,001       19,124       26,027  

Change in Deferred Debits and Other Assets

    (2,173 )     (10,090 )     11,407  

Discretionary Contribution to Pension Fund

    --       (10,000 )     (10,000 )

Change in Noncurrent Liabilities and Deferred Credits

    19,257       14,685       20,524  

Allowance for Equity/Other Funds Used During Construction

    (986 )     (857 )     (1,303 )

Change in Derivatives Net of Regulatory Deferral

    --       --       (14,736 )

Stock Compensation Expense – Equity Awards

    3,642       3,178       1,716  

Other—Net

    10       7       (80 )

Cash (Used for) Provided by Current Assets and Current Liabilities:

                       

Change in Receivables

    (2,135 )     (944 )     (1,746 )

Change in Inventories

    (4,294 )     1,874       1,960  

Change in Other Current Assets

    (3,060 )     (2,541 )     (210 )

Change in Payables and Other Current Liabilities

    (2,667 )     11,941       (15,150 )

Change in Interest Payable and Income Taxes Receivable/Payable

    (1,186 )     3,339       (3,943 )

Net Cash Provided by Continuing Operations

    173,603       163,541       131,540  

Net Cash Used in Discontinued Operations

    (26 )     (155 )     (14,000 )

Net Cash Provided by Operating Activities

    173,577       163,386       117,540  

Cash Flows from Investing Activities

                       

Capital Expenditures

    (132,913 )     (161,259 )     (160,084 )

Proceeds from Disposal of Noncurrent Assets

    4,491       4,837       3,590  

Acquisition Purchase Price Cash Received (Paid)

    --       1,500       (30,806 )

Cash Used for Investments and Other Assets

    (4,168 )     (4,402 )     (6,302 )

Net Cash Used in Investing Activities – Continuing Operations

    (132,590 )     (159,324 )     (193,602 )

Net Proceeds from Sale of Discontinued Operations

    --       --       39,401  

Net Cash Used in Investing Activities – Discontinued Operations

    --       --       (1,769 )

Net Cash Used in Investing Activities

    (132,590 )     (159,324 )     (155,970 )

Cash Flows from Financing Activities

                       

Change in Checks Written in Excess of Cash

    2,434       (3,363 )     2,857  

Net Short-Term Borrowings (Repayments)

    69,488       (37,789 )     69,818  

Proceeds from Issuance of Common Stock – net of Issuance Expenses

    4,349       43,873       13,782  

Payments for Retirement of Capital Stock

    (1,799 )     (104 )     (1,596 )

Proceeds from Issuance of Long-Term Debt

    --       130,000       --  

Short-Term and Long-Term Debt Issuance Expenses

    (380 )     (888 )     (312 )

Payments for Retirement of Long-Term Debt

    (48,231 )     (87,547 )     (212 )

Dividends Paid and Other Distributions

    (50,632 )     (48,244 )     (46,223 )

Net Cash (Used in) Provided by Financing Activities – Continuing Operations

    (24,771 )     (4,062 )     38,114  

Net Cash Provided by Financing Activities – Discontinued Operations

    --       --       316  

Net Cash (Used in) Provided by Financing Activities

    (24,771 )     (4,062 )     38,430  

Net Change in Cash and Cash Equivalents

    16,216       --       --  

Cash and Cash Equivalents at Beginning of Period

    --       --       --  

Cash and Cash Equivalents at End of Period

  $ 16,216     $ --     $ --  

 

See accompanying notes to consolidated financial statements.

 

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Otter Tail Corporation

 

Consolidated Statements of Capitalization, December 31

 

(in thousands, except share data)

 

2017

   

2016

 

Short-Term Debt

               

Otter Tail Corporation Credit Agreement

  $ --     $ --  

Otter Tail Power Company Credit Agreement

    112,371       42,883  

Total Short-Term Debt

  $ 112,371     $ 42,883  
                 

Long-Term Debt

               

Obligations of Otter Tail Corporation

               

Term Loan, LIBOR plus 0.90%, due February 5, 2018

  $ --     $ 15,000  

3.55% Guaranteed Senior Notes, due December 15, 2026

    80,000       80,000  

North Dakota Development Note, 3.95%, due April 1, 2018

    27       106  

Partnership in Assisting Community Expansion (PACE) Note, 2.54%, due March 18, 2021

    684       836  

Total – Otter Tail Corporation

    80,711       95,942  

Less: Current Maturities--net of Unamortized Debt Issuance Costs

    186       231  

Unamortized Long-Term Debt Issuance Costs

    461       539  

Total Otter Tail Corporation Long-Term Debt net of Unamortized Debt Issuance Costs

    80,064       95,172  
                 

Obligations of Otter Tail Power Company

               

Senior Unsecured Notes 5.95%, Series A, due August 20, 2017

    --       33,000  

Senior Unsecured Notes 4.63%, due December 1, 2021

    140,000       140,000  

Senior Unsecured Notes 6.15%, Series B, due August 20, 2022

    30,000       30,000  

Senior Unsecured Notes 6.37%, Series C, due August 20, 2027

    42,000       42,000  

Senior Unsecured Notes 4.68%, Series A, due February 27, 2029

    60,000       60,000  

Senior Unsecured Notes 6.47%, Series D, due August 20, 2037

    50,000       50,000  

Senior Unsecured Notes 5.47%, Series B, due February 27, 2044

    90,000       90,000  

Total – Otter Tail Power Company

    412,000       445,000  

Less: Current Maturities--net of Unamortized Debt Issuance Costs

    --       32,970  

Unamortized Long-Term Debt Issuance Costs

    1,684       1,861  

Total Otter Tail Power Company Long-Term Debt net of Unamortized Debt Issuance Costs

    410,316       410,169  
                 

Total Consolidated Long-Term Debt

    492,711       540,942  

Less: Current Maturities--net of Unamortized Debt Issuance Costs

    186       33,201  

Unamortized Long-Term Debt Issuance Costs

    2,145       2,400  

Total Consolidated Long-Term Debt net of Unamortized Debt Issuance Costs

    490,380       505,341  

Cumulative Preferred Shares—Without Par Value, Authorized 1,500,000 Shares; Outstanding: None

               

Cumulative Preference Shares–Without Par Value, Authorized 1,000,000 Shares; Outstanding: None

               

Total Common Shareholders’ Equity

    696,892       670,104  

Total Capitalization

  $ 1,187,272     $ 1,175,445  

 

See accompanying notes to consolidated financial statements.

 

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Otter Tail Corporation

Notes to Consolidated Financial Statements

For the years ended December 31, 2017, 2016 and 2015

 

 

1. Summary of Significant Accounting Policies

 

Principles of Consolidation

The consolidated financial statements of Otter Tail Corporation and its wholly owned subsidiaries (the Company) include the accounts of the following segments: Electric, Manufacturing and Plastics. See note 2 to consolidated financial statements for further descriptions of the Company’s business segments. All intercompany balances and transactions have been eliminated in consolidation except profits on sales to the regulated electric utility company from nonregulated affiliates, which is in accordance with the requirements of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 980, Regulated Operations (ASC 980).

 

Regulation and ASC 980

The Company’s regulated electric utility company, Otter Tail Power Company (OTP), accounts for the financial effects of regulation in accordance with ASC 980. This standard allows for the recording of a regulatory asset or liability for costs and revenues that will be collected or refunded through the ratemaking process in the future. In accordance with regulatory treatment, OTP defers utility debt redemption premiums and amortizes such costs over the original life of the reacquired bonds. See note 4 to consolidated financial statements for further discussion.

 

OTP is subject to various state and federal agency regulations. The accounting policies followed by this business are subject to the Uniform System of Accounts of the Federal Energy Regulatory Commission (FERC). These accounting policies differ in some respects from those used by the Company’s nonelectric businesses.

 

Plant, Retirements and Depreciation

Utility plant is stated at original cost. The cost of additions includes contracted work, direct labor and materials, allocable overheads and allowance for funds used during construction. The amount of interest capitalized on electric utility plant was $741,000 in 2017, $495,000 in 2016 and $723,000 in 2015. The cost of depreciable units of property retired less salvage is charged to accumulated depreciation. Removal costs, when incurred, are charged against the accumulated reserve for estimated removal costs, a regulatory liability. Maintenance, repairs and replacement of minor items of property are charged to operating expenses. The provisions for utility depreciation for financial reporting purposes are made on the straight-line method based on the estimated remaining service lives of the properties (5 to 82 years). Such provisions as a percent of the average balance of depreciable electric utility property were 2.74% in 2017, 2.88% in 2016 and 2.61% in 2015. Gains or losses on group asset dispositions are taken to the accumulated provision for depreciation reserve and impact current and future depreciation rates.

 

Property and equipment of nonelectric operations are carried at historical cost or at fair value if acquired in a business combination, and are depreciated on a straight-line basis over the assets’ estimated useful lives (3 to 40 years). The cost of additions includes contracted work, direct labor and materials, allocable overheads and capitalized interest. No interest was capitalized on nonelectric plant in 2017, 2016 or 2015. Maintenance and repairs are expensed as incurred. Gains or losses on asset dispositions are included in the determination of operating income.

 

Recoverability of Long-Lived Assets

The Company reviews its long-lived assets whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable. The Company determines potential impairment by comparing the carrying amount of the assets with net cash flows expected to be provided by operating activities of the business or related assets. If the sum of the expected future net cash flows is less than the carrying amount of the assets, the Company would recognize an impairment loss. Such an impairment loss would be measured as the amount by which the carrying amount exceeds the fair value of the asset, where fair value is based on the discounted cash flows expected to be generated by the asset.

 

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Jointly Owned Facilities

OTP is a joint owner in two coal-fired steam-powered electric generation plants: Big Stone Plant near Big Stone City, South Dakota and Coyote Station near Beulah, North Dakota. OTP is also a joint owner, with other regional utilities, in four major in-service transmission lines and one additional major transmission line under construction. The following table provides OTP’s ownership percentages and amounts included in the Company’s December 31, 2017 and 2016 consolidated balance sheets for OTP’s share of jointly owned assets in each of these jointly owned facilities:

 

Jointly Owned Facilities (dollars in thousands)

 

OTP

Ownership

Percentage

   

Electric Plant

in Service

   

Construction

Work in

Progress

   

Accumulated

Depreciation

   

Net Plant

 

December 31, 2017

                                       

Big Stone Plant

    53.9 %   $ 329,942     $ 1,074     $ (74,165 )   $ 256,851  

Coyote Station

    35.0 %     177,721       158       (103,944 )     73,935  

Fargo-Monticello 345 kV line

    14.2 %     78,192       --       (4,667 )     73,525  

Brookings-Southeast Twin Cities 345 kV line1

    4.8 %     26,269       --       (1,293 )     24,976  

Bemidji-Grand Rapids 230 kV line

    14.8 %     16,331       --       (1,753 )     14,578  

Big Stone South–Brookings 345 kV line1

    50.0 %     53,225       --       (434 )     52,791  

Big Stone South–Ellendale 345 kV line1

    50.0 %     --       89,980       --       89,980  

December 31, 2016

                                       

Big Stone Plant

    53.9 %   $ 328,809     $ 23     $ (65,665 )   $ 263,167  

Coyote Station

    35.0 %     176,315       113       (101,499 )     74,929  

Fargo-Monticello 345 kV line

    14.2 %     78,298       --       (3,511 )     74,787  

Brookings-Southeast Twin Cities 345 kV line1

    4.8 %     26,406       --       (924 )     25,482  

Bemidji-Grand Rapids 230 kV line

    14.8 %     16,331       --       (1,573 )     14,758  

Big Stone South–Brookings 345 kV line1

    50.0 %     --       45,050       --       45,050  

Big Stone South–Ellendale 345 kV line1

    50.0 %     --       49,160       --       49,160  

1Midcontinent Independent System Operator, Inc. (MISO) Multi-Value Project (MVP) designation provides for a return on invested funds while under construction under the MISO Open Access Transmission, Energy and Operating Reserve Markets Tariff (MISO Tariff).

 

The Company’s share of direct revenue and expenses of the jointly owned facilities is included in operating revenue and expenses in the consolidated statements of income.

 

Coyote Station Lignite Supply Agreement – Variable Interest Entity—In October 2012 the Coyote Station owners, including OTP, entered into a lignite sales agreement (LSA) with Coyote Creek Mining Company, L.L.C. (CCMC), a subsidiary of The North American Coal Corporation, for the purchase of lignite coal to meet the coal supply requirements of Coyote Station for the period beginning in May 2016 and ending in December 2040. The price per ton paid by the Coyote Station owners under the LSA reflects the cost of production, along with an agreed profit and capital charge. CCMC was formed for the purpose of mining coal to meet the coal fuel supply requirements of Coyote Station from May 2016 through December 2040 and, based on the terms of the LSA, is considered a variable interest entity (VIE) due to the transfer of all operating and economic risk to the Coyote Station owners, as the agreement is structured so that the price of the coal would cover all costs of operations as well as future reclamation costs. The Coyote Station owners are also providing a guarantee of the value of the assets of CCMC as they would be required to buy certain assets at book value should they terminate the contract prior to the end of the contract term and are providing a guarantee of the value of the equity of CCMC in that they are required to buy the entity at the end of the contract term at equity value. Under current accounting standards, the primary beneficiary of a VIE is required to include the assets, liabilities, results of operations and cash flows of the VIE in its consolidated financial statements. No single owner of Coyote Station owns a majority interest in Coyote Station and none, individually, has the power to direct the activities that most significantly impact CCMC. Therefore, none of the owners individually, including OTP, is considered a primary beneficiary of the VIE and the Company is not required to include CCMC in its consolidated financial statements.

 

If the LSA terminates prior to the expiration of its term or the production period terminates prior to December 31, 2040 and the Coyote Station owners purchase all of the outstanding membership interests of CCMC as required by the LSA, the owners will satisfy, or (if permitted by CCMC’s applicable lender) assume, all of CCMC’s obligations owed to CCMC’s lenders under its loans and leases. The Coyote Station owners have limited rights to assign their rights and obligations under the LSA without the consent of CCMC’s lenders during any period in which CCMC’s obligations to its lenders remain outstanding. In the event the contract is terminated because regulations or legislation render the burning of coal cost prohibitive and the assets worthless, OTP’s maximum exposure to loss as a result of its involvement with CCMC as of December 31, 2017 could be as high as $57.1 million, OTP’s 35% share of unrecovered costs.

 

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Income Taxes

Comprehensive interperiod income tax allocation is used for substantially all book and tax temporary differences. Deferred income taxes arise for all temporary differences between the book and tax basis of assets and liabilities. Deferred taxes are recorded using the tax rates scheduled by tax law to be in effect in the periods when the temporary differences reverse. The Company amortizes investment tax credits over the estimated lives of related property. The Company records income taxes in accordance with ASC Topic 740, Income Taxes, and has recognized in its consolidated financial statements the tax effects of all tax positions that are “more-likely-than-not” to be sustained on audit based solely on the technical merits of those positions as of the balance sheet date. The term “more-likely-than-not” means a likelihood of more than 50%. The Company classifies interest and penalties on tax uncertainties as components of the provision for income taxes. See note 13 to consolidated financial statements regarding the Company’s accounting for uncertain tax positions.

 

The Company also is required to assess the realizability of its deferred tax assets, taking into consideration the Company’s forecast of future taxable income, the reversal of other existing temporary differences, available net operating loss carryforwards and available tax planning strategies that could be implemented to realize the deferred tax assets. Based on this assessment, management must evaluate the need for, and amount of, valuation allowances against the Company’s deferred tax assets. To the extent facts and circumstances change in the future, adjustments to the valuation allowance may be required.

 

On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (TCJA) was signed into law. The major impacts of the changes included in the TCJA are discussed in note 13 to consolidated financial statements.

 

Revenue Recognition

Due to the diverse business operations of the Company, revenue recognition depends on the product produced and sold or service performed. The Company recognizes revenue when the earnings process is complete, evidenced by an agreement with the customer, there has been delivery and acceptance, the price is fixed or determinable and collectability is reasonably assured. In cases where significant obligations remain after delivery, revenue recognition is deferred until such obligations are fulfilled. Provisions for sales returns are recorded at the time of the sale based on historical information and current trends.

 

For the Company’s operating companies recognizing revenue on certain products when shipped, those operating companies have no further obligation to provide services related to such product. The shipping terms used in these instances are FOB shipping point. The majority of the revenues recorded by the companies in the Manufacturing and Plastics segments are recorded when products are shipped.

 

Customer electricity use is metered and bills are rendered monthly. Revenue is accrued for electricity consumed but not yet billed. Rate schedules applicable to substantially all customers include a fuel clause adjustment, under which the rates are adjusted to reflect changes in average cost of fuels and purchased power, and a surcharge for recovery of conservation-related expenses. Revenue is recognized for fuel and purchased power costs incurred in excess of amounts recovered in base rates but not yet billed through the fuel clause adjustment, for conservation program incentives and bonuses earned but not yet billed and for renewable resource, transmission-related and environmental incurred costs and investment returns approved for recovery through riders.

 

Revenues on wholesale electricity sales from Company-owned generating units are recognized when energy is delivered. For shared use of transmission facilities with certain regional transmission cooperatives, revenues are estimated. Bills are rendered based on anticipated usage and settlements are made later based on actual usage. Estimated revenues may be adjusted prior to settlement, or at the time of settlement, to reflect actual usage.

 

Under ASC Topic 815, Derivatives and Hedging, OTP accounts for forward energy contracts as derivatives subject to mark-to-market accounting unless those contracts meet the definition of a capacity contract or are not subject to unplanned netting, then OTP accounts for the contracts under the normal purchases and sales exception to mark-to-market accounting.

 

Warranty Reserves

Certain products sold by the Company’s manufacturing and plastics companies carry product warranties for one year after the shipment date. These companies’ standard product warranty terms generally include post-sales support and repairs or replacement of a product at no additional charge for a specified period of time. While these companies engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of their component suppliers, they base their estimated warranty obligations on warranty terms, ongoing product failure rates, repair costs, product call rates, average cost per call, and current period product shipments. The Company’s manufacturing and plastics companies have not incurred any significant warranty costs over the last three fiscal years.

 

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Shipping and Handling Costs

The Company includes revenues received for shipping and handling in operating revenues. Expenses paid for shipping and handling are recorded as part of cost of goods sold.

 

Use of Estimates

The Company uses estimates based on the best information available in recording transactions and balances resulting from business operations. As better information becomes available (or actual amounts are known), the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates.

 

Cash Equivalents

The Company considers all highly liquid debt instruments purchased with maturity of 90 days or less to be cash equivalents.

 

Investments

The following table provides a breakdown of the Company’s investments at December 31:

 

(in thousands)

 

2017

   

2016

 

Cost Method:

               

Economic Development Loan Pools

  $ 45     $ 54  

Other

    115       115  

Equity Method Partnerships

    24       23  

Marketable Debt Securities Classified as Available-for-Sale

    7,160       8,225  

Marketable Equity Securities Classified as Available-for-Sale

    1,285       --  

Total Investments

  $ 8,629     $ 8,417  

 

The Company’s marketable securities classified as available-for-sale are held for insurance purposes and are reflected at their fair values on December 31, 2017. See further discussion below.

 

Agreements Subject to Legally Enforceable Netting Arrangements

OTP has certain derivative contracts that are designated as normal purchases and carried at historical cost in the accompanying balance sheet. Individual counterparty exposures for these contracts can be offset according to legally enforceable netting arrangements. The Company does not offset assets and liabilities under legally enforceable netting arrangements on the face of its consolidated balance sheet.

 

Fair Value Measurements

The Company follows ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820), for recurring fair value measurements. ASC 820 provides a single definition of fair value, requires enhanced disclosures about assets and liabilities measured at fair value and establishes a hierarchal framework for disclosing the observability of the inputs utilized in measuring assets and liabilities at fair value. The three levels defined by the hierarchy and examples of each level are as follows:

 

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices, such as equities listed by the New York Stock Exchange and commodity derivative contracts listed on the New York Mercantile Exchange .

 

Level 2 – Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reported date. The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, such as treasury securities with pricing interpolated from recent trades of similar securities, or priced with models using highly observable inputs, such as commodity options priced using observable forward prices and volatilities.

 

Level 3 – Significant inputs to pricing have little or no observability as of the reporting date. The types of assets and liabilities included in Level 3 are those with inputs requiring significant management judgment or estimation and may include complex and subjective models and forecasts.

 

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The following tables present, for each of the hierarchy levels, the Company’s assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2017 and December 31, 2016:

 

December 31, 2017 (in thousands)

 

Level 1

   

Level 2

   

Level 3

 

Assets:

                       

Investments:

                       

Equity Funds – Held by Captive Insurance Company

  $ 1,285                  

Corporate Debt Securities – Held by Captive Insurance Company

          $ 5,373          

Government-Backed and Government-Sponsored Enterprises’ Debt Securities – Held by Captive Insurance Company

            1,787          

Other Assets:

                       

Money Market and Mutual Funds – Nonqualified Retirement Savings Plan

    823                  

Total Assets

  $ 2,108     $ 7,160          

 

December 31, 2016 (in thousands)

 

Level 1

   

Level 2

   

Level 3

 

Assets:

                       

Investments:

                       

Corporate Debt Securities – Held by Captive Insurance Company

          $ 5,280          

Government-Backed and Government-Sponsored Enterprises’ Debt Securities – Held by Captive Insurance Company

            2,945          

Other Assets:

                       

Money Market and Mutual Funds – Nonqualified Retirement Savings Plan

  $ 849                  

Total Assets

  $ 849     $ 8,225          

 

The valuation techniques and inputs used for the Level 2 fair value measurements in the table above are as follows:

 

Government-Backed and Government-Sponsored Enterprises’ and Corporate Debt Securities Held by the Company’s Captive Insurance Company – Fair values are determined on the basis of valuations provided by a third-party pricing service which utilizes industry accepted valuation models and observable market inputs to determine valuation. Some valuations or model inputs used by the pricing service may be based on broker quotes.

 

Inventories

Electric segment inventories are reported at average cost. The Manufacturing and Plastics segments’ inventories are stated at the lower of average cost or market. Inventories consist of the following at December 31:

 

(in thousands)

 

2017

   

2016

 

Finished Goods

  $ 26,605     $ 27,755  

Work in Process

    14,222       11,754  

Raw Material, Fuel and Supplies

    47,207       44,231  

Total Inventories

  $ 88,034     $ 83,740  

 

Goodwill and Other Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with the requirements of ASC Topic 350, Intangibles—Goodwill and Other, measuring its goodwill for impairment annually in the fourth quarter, and more often when events indicate the assets may be impaired. The Company does qualitative assessments of its reporting units with recorded goodwill to determine if it is more likely than not that the fair value of the reporting unit exceeds its book value. The Company also does quantitative assessments of its reporting units with recorded goodwill to determine the fair value of the reporting unit.

 

In the first quarter of 2015, Foley recorded a $1.0 million goodwill impairment charge based on adjustments to the carrying value of Foley. The first quarter 2015 goodwill impairment loss is reflected in the results of discontinued operations. See note 15 to consolidated financial statements.

 

On September 1, 2015 BTD Manufacturing, Inc. (BTD), acquired the assets of Impulse Manufacturing, Inc. (Impulse) of Dawsonville, Georgia. The acquired business operates under the name BTD-Georgia. Based on the preliminary purchase price allocation, the difference in the fair value of assets acquired and the price paid for Impulse resulted in an initial estimate of acquired goodwill of $8.2 million. A final determination of the purchase price was agreed to in June 2016 resulting in a $2.2 million reduction in acquired goodwill in June 2016.

 

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The following tables summarize changes to goodwill by business segment during 2017 and 2016:

 

 

(in thousands)

 

Gross Balance

December 31, 2016

   

Accumulated

Impairments

   

Balance (net of

impairments)

December 31, 201

   

Adjustments to

Goodwill in

2017

   

Balance (net of

impairments)

December 31, 201

 

Manufacturing

  $ 18,270     $ --     $ 18,270     $ --     $ 18,270  

Plastics

    19,302       --       19,302       --       19,302  

Total

  $ 37,572     $ --     $ 37,572     $ --     $ 37,572  

 

 

(in thousands)

 

Gross Balance

December 31, 2015

   

Accumulated

Impairments

   

Balance (net of

impairments)

December 31, 2015

   

Adjustments to

Goodwill in

2016

   

Balance (net of

impairments)

December 31, 2016

 

Manufacturing

  $ 20,430     $ --     $ 20,430     $ (2,160 )   $ 18,270  

Plastics

    19,302       --       19,302       --       19,302  

Total

  $ 39,732     $ --     $ 39,732     $ (2,160 )   $ 37,572  

 

Intangible assets with finite lives are amortized over their estimated useful lives and reviewed for impairment in accordance with requirements under ASC Topic 360-10-35, Property, Plant, and Equipment—Overall—Subsequent Measurement. In 2017 the Company capitalized $154,000 in implementation costs for new financial reporting consolidation software included in other amortizable intangible assets. In September 2017 the Company initiated use of the software and began amortizing the implementation costs.

 

The following table summarizes the components of the Company’s intangible assets at December 31, 2017 and December 31, 2016:

 

December 31, 2017 (in thousands)

 

Gross Carrying

Amount

   

Accumulated

Amortization

   

Net Carrying

Amount

   

Remaining

Amortization

Periods (months)

 

Amortizable Intangible Assets:

                                 

Customer Relationships

  $ 22,491     $ 8,994     $ 13,497     24 - 212  

Covenant not to Compete

    590       459       131       8    

Other

    154       17       137       32    

Total

  $ 23,235     $ 9,470     $ 13,765            

December 31, 2016 (in thousands)

                                 

Amortizable Intangible Assets:

                                 

Customer Relationships

  $ 22,491     $ 7,861     $ 14,630     36 - 224  

Covenant not to Compete

    590       262       328       20    

Total

  $ 23,081     $ 8,123     $ 14,958            

 

The amortization expense for these intangible assets was:

 

(in thousands)

 

2017

   

2016

   

2015

 

Amortization Expense – Intangible Assets

  $ 1,347     $ 1,436     $ 1,127  

 

The estimated annual amortization expense for these intangible assets for the next five years is:

 

(in thousands)

 

2018

   

2019

   

2020

   

2021

   

2022

 

Estimated Amortization Expense – Intangible Assets

  $ 1,315     $ 1,184     $ 1,133     $ 1,099     $ 1,099  

 

Supplemental Disclosures of Cash Flow Information

 

   

As of December 31,

 

(in thousands)

 

2017

   

2016

 

Noncash Investing Activities:

               

Transactions Related to Capital Additions not Settled in Cash

  $ 13,887     $ 13,533  

 

(in thousands)

 

2017

   

2016

   

2015

 

Cash Paid (Received) During the Year for:

                       

Interest (net of amount capitalized)

  $ 29,791     $ 31,269     $ 30,512  

Income Taxes

  $ 5,064     $ (1,291 )   $ 7,322  

 

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New Accounting Standards Adopted

 

Accounting Standards Update (ASU) 2015-11—In July 2015 the Financial Accounting Standards Board (FASB) issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory, which requires that inventories be measured at the lower of cost or net realizable value instead of the lower of cost or market value. Net realizable value is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The standards update was effective prospectively for fiscal years and interim periods beginning after December 15, 2016. The Company adopted the updates in ASU 2015-11 in the first quarter of 2017. The adoption of the updated standard did not have a material impact on the Company’s consolidated financial statements as market and net realizable value were substantially the same for the inventories of its manufacturing companies.

 

New Accounting Standards Pending Adoption

 

ASU 2014-09—In May 2014 the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASC 606). ASC 606 is a comprehensive, principles-based accounting standard which amends current revenue recognition guidance with the objective of improving revenue recognition requirements by providing a single comprehensive model to determine the measurement of revenue and the timing of revenue recognition. ASC 606 also requires expanded disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

 

Amendments to the ASC in ASU 2014-09, as amended, are effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. Application methods permitted are: (1) full retrospective, (2) retrospective using one or more practical expedients and (3) retrospective with the cumulative effect of initial application recognized at the date of initial application. As of December 31, 2017 the Company had reviewed its revenue streams and contracts and determined areas where the amendments in ASU 2014-09 are applicable and has developed controls for new processes that will be required to track and report revenues where the timing of revenue recognition may change under ASU 2014-09. Based on review of the Company’s revenue streams, the Company has not identified any contracts where the timing of revenue recognition will change as a result of the adoption of the updates in ASU 2016-09. The Company will adopt the updates in ASU 2014-09 on a modified retrospective basis on January 1, 2018, the date of initial application, but will not be recording a cumulative effect adjustment to retained earnings on application of the updates because the adoption of the updates in ASU 606 have no material impact on the timing of revenue recognition for the Company or its subsidiaries. Adoption of ASU 2014-09 will result in additional disclosures related to the nature, timing and certainty of revenues and any contract assets or liabilities that may be required to be reported under the updated standard.

 

The Company will report adjustments to Alternative Revenue Program (ARP) revenues at OTP as a separate line item within revenue on the face of the Company’s consolidated statements of income. The ARP revenue adjustments are recorded on the basis of recoverable costs incurred and returns earned under rate riders and are not considered revenue from contracts with customers.

 

ASU 2016-02—In February 2016 the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). ASU 2016-02 is a comprehensive amendment of the ASC, creating Topic 842, which will supersede the current requirements under ASC Topic 840 on leases and require the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of key information about leasing arrangements. Topic 842 affects any entity that enters into a lease, with some specified scope exemptions. The main difference between previous Generally Accepted Accounting Principles in the United States (GAAP) and Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous GAAP. Topic 842 retains a distinction between finance leases and operating leases. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the previous guidance. Topic 842 also requires qualitative and specific quantitative disclosures by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The amendments in ASU 2016-02 are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in ASU 2016-02 is permitted. The Company has developed a list of all current leases outstanding and continues to review ASU 2016-02, identifying key impacts to its businesses to determine areas where the amendments in ASU 2016-02 will be applicable and is evaluating transition options. The Company does not currently plan to apply the amendments in ASU 2016-02 to its consolidated financial statements prior to 2019.

 

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ASU 2017-04—In January 2017 the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. In computing the implied fair value of goodwill under Step 2, an entity has to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the amendments in ASU 2017-04, an entity will perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity will recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized will not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity will consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

 

The amendments in ASU 2017-04 modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 2 from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment. The amendments in ASU 2017-04 are effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.

 

ASU 2017-07—In March 2017 the FASB issued ASU No. 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (ASU 2017-07), which is intended to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. ASC Topic 715, Compensation—Retirement Benefits (ASC 715), does not prescribe where the amount of net benefit cost should be presented in an employer’s income statement and does not require entities to disclose by line item the amount of net benefit cost that is included in the income statement or capitalized in assets. The amendments in ASU 2017-07 require that an employer report the service cost component of periodic benefit costs in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost as defined in ASC 715 are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The amendments in ASU 2017-07 also allow only the service cost component to be eligible for capitalization when applicable (for example, as a cost of internally manufactured inventory or a self-constructed asset). The amendments in ASU 2017-07 are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The amendments will be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit cost in assets.

 

The majority of the Company’s benefit costs to which the amendments in ASU 2017-07 apply are related to benefit plans in place at OTP, the Company’s regulated provider of electric utility services. The amendments in ASU 2017-07 deviate significantly from current prescribed ratemaking and regulatory accounting treatment of postretirement benefit costs, which require the capitalization of a portion of all the components of net periodic benefit costs be included in rate base additions and provide for rate recovery of the non-capitalized portion of all of the components of net periodic pension costs as recoverable operating expenses. The Company has assessed the impact adoption of the amendments in ASU 2017-07 will have on its consolidated financial statements, financial position and results of operations and OTP has determined the regulatory assets to be established in order to reflect the effect of the required regulatory accounting treatment of the non-service cost components that cannot be capitalized to plant in service under the ASU 2017-07 amendments to GAAP. The non-service cost components of the affected net periodic benefit costs will be reported below the operating income line on the Company’s consolidated income statements upon adoption of the amendments in ASU 2017-07.

 

The Company does not plan to adopt the updates in ASU 2017-07 prior to the first quarter of 2018, the required effective period for application of the updates by the Company. The Company’s non-service cost components of net periodic post-retirement benefit costs that were capitalized to plant in service in 2017 that would have been recorded as regulatory assets if the amendments in ASU 2017-07 were applicable in 2017 were $0.8 million. The Company’s non-service costs components of net periodic postretirement benefit costs included in operating expense that will be included in other income and deductions on adoption of ASU