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Section 1: 10-Q (FORM 10-Q)

ottr20190630_10q.htm
000001466593falseOtter Tail Corpfalse--12-31Q22019falsefalsetruefalseno201.501.25Corporate cost included in nonservice cost components of postretirement benefits.Costs subject to recovery without a rate of return.Amortization of prior service costs and net actuarial losses from other comprehensive income are included in nonservice cost components of postretirement benefits.Allocation of Costs: Costs included in OTP capital expenditures $ 79 $ 89 $ 170 $ 167 Service costs included in electric operation and maintenance expenses 235 283 458 577 Service costs included in other nonelectric expenses 8 9 15 19 Nonservice costs capitalized as regulatory assets 288 251 621 468 Nonservice costs included in nonservice cost components of postretirement benefits 885 818 1,725 1,668 Includes MNCIP costs recovered in base rates. Allocation of Costs: Service costs included in electric operation and maintenance expenses $ 26 $ 25 $ 52 $ 50 Service costs included in other nonelectric expenses 78 75 157 150 Nonservice costs included in nonservice cost components of postretirement benefits 558 644 1,115 1,289 Amount eligible for recovery under an alternative revenue program which includes an incentive or rate of return.Allocation of Costs: Costs included in OTP capital expenditures $ 336 $ 379 $ 726 $ 707 Service costs included in electric operation and maintenance expenses 1,004 1,195 1,954 2,442 Service costs included in other nonelectric expenses 33 40 66 80 Nonservice costs capitalized as regulatory assets (130 ) (24 ) (280 ) (45 ) Nonservice costs included in nonservice cost components of postretirement benefits (399 ) (77 ) (778 ) (161 )1,500,0001,500,00000001,000,0001,000,00000005550,000,00050,000,00039,754,90239,664,8840.350.3350.700.672510333.55Dec. 15, 20264.63Dec. 01, 20216.15Aug. 20, 20226.37Aug. 20, 20274.68Feb. 27, 20296.47Aug. 20, 20375.47Feb. 27, 20444.07February 7, 20482.54March 18, 20213.55Dec. 15, 20264.63Dec. 01, 20216.15Aug. 20, 20226.37Aug. 20, 20274.68Feb. 27, 20296.47Aug. 20, 20375.47Feb. 27, 20444.07February 7, 20482.54March 18, 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Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

[ X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

          EXCHANGE ACT OF 1934

For the quarterly period ended

June 30, 2019

 

OR

 

[   ]    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

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

215 South Cascade Street, Box 496, Fergus Falls, Minnesota    

56538-0496

(Address of principal executive offices)

(Zip Code)

 

866-410-8780

(Registrant's telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, par value $5.00 per share

OTTR

The Nasdaq Stock Market LLC

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑       No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth 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.:

 

Large accelerated filer Accelerated filer ☐  
     
Non-accelerated filer ☐    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 by Rule 12b-2 of the Exchange Act).

Yes ☐    No ☑

 

Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date:

 

July 31, 2019 39,755,277 Common Shares ($5 par value)

 

 

Table of Contents

 

 

OTTER TAIL CORPORATION

 

INDEX

 

Part I. Financial Information

Page No.

   

Item 1.

Financial Statements

 
     
 

Consolidated Balance Sheets – June 30, 2019 and December 31, 2018 (not audited)

2 & 3

     
 

Consolidated Statements of Income – Three and Six Months Ended June 30, 2019 and 2018 (not audited)

4

     
 

Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2019 and 2018 (not audited)

5

     
 

Consolidated Statements of Common Shareholders’ Equity – Three and Six Months Ended June 30, 2019 and 2018 (not audited)

6

     
 

Consolidated Statements of Cash Flows – Six Months Ended June 30, 2019 and 2018 (not audited)

7

     
 

Condensed Notes to Consolidated Financial Statements (not audited)

8-36

     

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

37-53

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

54

     

Item 4.

Controls and Procedures

54

     

Part II. Other Information

 
     

Item 1.

Legal Proceedings

54

     

Item 1A.

Risk Factors 

54

     

Item 6.

Exhibits

55

     

Signatures

55

 

1

Table of Contents

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.  Financial Statements

 

Otter Tail Corporation

Consolidated Balance Sheets

(not audited)

 

(in thousands)

 

June 30,

2019

   

December 31,

2018

 
                 

Assets

               
                 

Current Assets

               

Cash and Cash Equivalents

  $ 982     $ 861  

Accounts Receivable:

               

Trade—Net

    105,407       75,144  

Other

    9,956       9,741  

Inventories

    105,860       106,270  

Unbilled Receivables

    18,349       23,626  

Income Taxes Receivable

    -       2,439  

Regulatory Assets

    14,501       17,225  

Other

    8,511       6,114  

Total Current Assets

    263,566       241,420  
                 

Investments

    9,683       8,961  

Other Assets

    39,002       35,759  

Goodwill

    37,572       37,572  

Other IntangiblesNet

    11,858       12,450  

Regulatory Assets

    131,692       135,257  
                 

Right of Use Assets - Operating Leases

    19,473       -  
                 

Plant

               

Electric Plant in Service

    2,170,259       2,019,721  

Nonelectric Operations

    234,245       228,120  

Construction Work in Progress

    73,069       181,626  

Total Gross Plant

    2,477,573       2,429,467  

Less Accumulated Depreciation and Amortization

    875,475       848,369  

Net Plant

    1,602,098       1,581,098  
                 

Total Assets

  $ 2,114,944     $ 2,052,517  

 

See accompanying condensed notes to consolidated financial statements.

 

2

Table of Contents

 

Otter Tail Corporation

Consolidated Balance Sheets

(not audited)

 

(in thousands, except share data)

 

June 30,

2019

   

December 31,

2018

 
                 

Liabilities and Equity

               
                 

Current Liabilities

               

Short-Term Debt

  $ 36,602     $ 18,599  

Current Maturities of Long-Term Debt

    177       172  

Accounts Payable

    111,848       96,291  

Accrued Salaries and Wages

    18,034       24,857  

Accrued Federal and State Income Taxes

    3,732       -  

Other Accrued Taxes

    11,753       17,287  

Regulatory Liabilities

    8,959       738  

Current Operating Lease Liabilities

    3,784       -  

Other Accrued Liabilities

    11,260       12,149  

Total Current Liabilities

    206,149       170,093  

Pensions Benefit Liability

    88,030       98,358  

Other Postretirement Benefits Liability

    73,080       71,561  

Long-Term Operating Lease Liabilities

    16,084       -  

Other Noncurrent Liabilities

    28,859       24,326  
                 

Commitments and Contingencies (note 9)

               
                 

Deferred Credits

               

Deferred Income Taxes

    122,035       120,976  

Deferred Tax Credits

    19,300       19,974  

Regulatory Liabilities

    224,655       226,469  

Other

    2,384       1,895  

Total Deferred Credits

    368,374       369,314  

Capitalization

               

Long-Term Debt—Net

    590,063       590,002  

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, 2019—39,754,902 Shares; 2018—39,664,884 Shares

    198,775       198,324  

Premium on Common Shares

    345,030       344,250  

Retained Earnings

    205,115       190,433  

Accumulated Other Comprehensive Loss

    (4,615 )     (4,144 )

Total Common Equity

    744,305       728,863  

Total Capitalization

    1,334,368       1,318,865  

Total Liabilities and Equity

  $ 2,114,944     $ 2,052,517  

 

See accompanying condensed notes to consolidated financial statements.

 

3

Table of Contents

 

 

Otter Tail Corporation

Consolidated Statements of Income

(not audited)

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 

(in thousands, except share and per-share amounts)

 

2019

   

2018

   

2019

   

2018

 

Operating Revenues

                               

Electric:

                               

Revenues from Contracts with Customers

  $ 101,861     $ 105,284     $ 231,006     $ 229,109  

Changes in Accrued Revenues under Alternative Revenue Programs

    369       (1,565 )     (680 )     (2,440 )

Total Electric Revenues

    102,230       103,719       230,326       226,669  

Product Sales under Contracts with Customers

    126,973       122,629       244,849       240,945  

Total Operating Revenues

    229,203       226,348       475,175       467,614  

Operating Expenses

                               

Production Fuel – Electric

    8,296       15,888       27,216       34,594  

Purchased Power – Electric System Use

    19,633       14,402       41,585       35,995  

Electric Operation and Maintenance Expenses

    39,856       37,741       78,238       77,216  

Cost of Products Sold (depreciation included below)

    97,996       93,545       188,578       182,330  

Other Nonelectric Expenses

    13,262       12,649       26,739       25,143  

Depreciation and Amortization

    19,441       18,745       38,572       37,508  

Property Taxes – Electric

    3,900       3,273       7,859       7,108  

Total Operating Expenses

    202,384       196,243       408,787       399,894  

Operating Income

    26,819       30,105       66,388       67,720  

Interest Charges

    7,825       7,676       15,651       15,048  

Nonservice Cost Components of Postretirement Benefits

    1,075       1,386       2,110       2,803  

Other Income

    850       707       2,094       1,890  

Income Before Income Taxes

    18,769       21,750       50,721       51,759  

Income Tax Expense

    3,343       3,054       8,971       6,848  

Net Income

    15,426       18,696       41,750       44,911  

Average Number of Common Shares OutstandingBasic

    39,712,036       39,605,717       39,684,679       39,578,296  

Average Number of Common Shares OutstandingDiluted

    39,917,831       39,879,069       39,910,499       39,871,376  

Basic Earnings Per Common Share

  $ 0.39     $ 0.47     $ 1.05     $ 1.13  

Diluted Earnings Per Common Share

  $ 0.39     $ 0.47     $ 1.05     $ 1.13  

 

See accompanying condensed notes to consolidated financial statements.

 

4

Table of Contents

 

 

Otter Tail Corporation

Consolidated Statements of Comprehensive Income

(not audited)

 

   

Three Months Ended

June 30,

   

Six Months Ended

June 30,

 

(in thousands)

 

2019

   

2018

   

2019

   

2018

 

Net Income

  $ 15,426     $ 18,696     $ 41,750     $ 44,911  

Other Comprehensive Income (Loss):

                               

Unrealized Gain (Loss) on Available-for-Sale Securities:

                               

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

    (4 )     -       (4 )     (110 )

Unrealized Gains (Losses) Arising During Period

    66       (13 )     157       (79 )

Income Tax (Expense) Benefit

    (13 )     3       (32 )     40  

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

    49       (10 )     121       (149 )

Pension and Postretirement Benefit Plans:

                               

Amortization of Unrecognized Postretirement Benefit Losses and Costs (note 11)

    129       233       259       460  

Income Tax Expense

    (33 )     (61 )     (67 )     (120 )

Adjustment to Income Tax Expense Related to 2017 Tax Cuts and Jobs Act

    -       -       -       (531 )

Pension and Postretirement Benefit Plans – net-of-tax

    96       172       192       (191 )

Total Other Comprehensive Income (Loss)

    145       162       313       (340 )

Total Comprehensive Income

  $ 15,571     $ 18,858     $ 42,063     $ 44,571  

 

See accompanying condensed notes to consolidated financial statements.

 

5

Table of Contents

 

 

Otter Tail Corporation

Consolidated Statements of Common Shareholders’ Equity

For the Three- and Six-Month Periods Ended June 30, 2019 and 2018

(not audited)

(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, March 31, 2019

    39,729,708     $ 198,649     $ 342,991     $ 203,619     $ (4,760 )   $ 740,499  

Common Stock Issuances, Net of Expenses

    25,194       126       (109 )                     17  

Net Income

                            15,426               15,426  

Other Comprehensive Income

                                    145       145  

Employee Stock Incentive Plan Expense

                    2,148                       2,148  

Common Dividends ($0.35 per share)

                            (13,930 )             (13,930 )

Balance, June 30, 2019

    39,754,902     $ 198,775     $ 345,030     $ 205,115     $ (4,615 )   $ 744,305  
                                                 

Balance, March 31, 2018

    39,626,594     $ 198,133     $ 341,841     $ 174,209     $ (6,133 )   $ 708,050  

Common Stock Issuances, Net of Expenses

    25,778       129       (222 )                     (93 )

Common Stock Retirements

    (936 )     (5 )     (36 )                     (41 )

Net Income

                            18,696               18,696  

Other Comprehensive Loss

                                    162       162  

Employee Stock Incentive Plan Expense

                    1,107                       1,107  

Common Dividends ($0.335 per share)

                            (13,300 )             (13,300 )

Balance, June 30, 2018

    39,651,436     $ 198,257     $ 342,690     $ 179,605     $ (5,971 )   $ 714,581  
                                                 

Balance, December 31, 2018

    39,664,884     $ 198,324     $ 344,250     $ 190,433     $ (4,144 )   $ 728,863  

Common Stock Issuances, Net of Expenses

    145,242       727       (710 )                     17  

Common Stock Retirements

    (55,224 )     (276 )     (2,454 )                     (2,730 )

Net Income

                            41,750               41,750  

Other Comprehensive Income

                                    313       313  

ASU 2018-02 2017 TCJA Stranded Tax Transfer

                            784       (784 )     -  

Employee Stock Incentive Plan Expense

                    3,944                       3,944  

Common Dividends ($0.70 per share)

                            (27,852 )             (27,852 )

Balance, June 30, 2019

    39,754,902     $ 198,775     $ 345,030     $ 205,115     $ (4,615 )   $ 744,305  
                                                 

Balance, December 31, 2017

    39,557,491     $ 197,787     $ 343,450     $ 161,286     $ (5,631 )   $ 696,892  

Common Stock Issuances, Net of Expenses

    153,376       767       (860 )                     (93 )

Common Stock Retirements

    (59,431 )     (297 )     (2,153 )                     (2,450 )

Net Income

                            44,911               44,911  

Other Comprehensive Loss

                                    (340 )     (340 )

Employee Stock Incentive Plan Expense

                    2,253                       2,253  

Common Dividends ($0.67 per share)

                            (26,592 )             (26,592 )

Balance, June 30, 2018

    39,651,436     $ 198,257     $ 342,690     $ 179,605     $ (5,971 )   $ 714,581  

 

6

Table of Contents

 

 

Otter Tail Corporation

Consolidated Statements of Cash Flows

(not audited)

 

   

Six Months Ended

June 30,

 

(in thousands)

 

2019

   

2018

 

Cash Flows from Operating Activities

               

Net Income

  $ 41,750     $ 44,911  

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

               

Depreciation and Amortization

    38,572       37,508  

Deferred Tax Credits

    (674 )     (703 )

Deferred Income Taxes

    960       2,076  

Change in Deferred Debits and Other Assets

    3,884       10,309  

Discretionary Contribution to Pension Plan

    (10,000 )     (20,000 )

Change in Noncurrent Liabilities and Deferred Credits

    11,942       (759 )

Allowance for Equity/Other Funds Used During Construction

    (688 )     (1,060 )

Stock Compensation Expense—Equity Awards

    3,944       2,253  

Other—Net

    276       (193 )

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

               

Change in Receivables

    (30,478 )     (25,677 )

Change in Inventories

    410       (2,401 )

Change in Other Current Assets

    2,870       2,428  

Change in Payables and Other Current Liabilities

    222       1,233  

Change in Interest and Income Taxes Receivable/Payable

    6,297       3,470  

Net Cash Provided by Operating Activities

    69,287       53,395  

Cash Flows from Investing Activities

               

Capital Expenditures

    (54,012 )     (49,094 )

Net Proceeds from Disposal of Noncurrent Assets

    3,405       1,477  

Cash Used for Investments and Other Assets

    (4,776 )     (2,102 )

Net Cash Used in Investing Activities

    (55,383 )     (49,719 )

Cash Flows from Financing Activities

               

Change in Checks Written in Excess of Cash

    (1,120 )     2,236  

Net Short-Term Borrowings (Repayments)

    18,003       (91,394 )

Common Stock Issuance Expenses

    -       (108 )

Payments for Retirement of Capital Stock

    (2,730 )     (2,450 )

Proceeds from Issuance of Long-Term Debt

    -       100,000  

Short-Term and Long-Term Debt Issuance Expenses

    -       (441 )

Payments for Retirement of Long-Term Debt

    (84 )     (107 )

Dividends Paid

    (27,852 )     (26,592 )

Net Cash Used in Financing Activities

    (13,783 )     (18,856 )

Net Change in Cash and Cash Equivalents

    121       (15,180 )

Cash and Cash Equivalents at Beginning of Period

    861       16,216  

Cash and Cash Equivalents at End of Period

  $ 982     $ 1,036  

 

See accompanying condensed notes to consolidated financial statements.

 

7

Table of Contents

 

OTTER TAIL CORPORATION

 

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(not audited)

 

In the opinion of management, Otter Tail Corporation (the Company) has included all adjustments (including normal recurring accruals) necessary for a fair presentation of the consolidated financial statements for the periods presented. The consolidated financial statements and condensed notes thereto should be read in conjunction with the consolidated financial statements and notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Because of seasonal and other factors, the earnings for the three- and six-months ended June 30, 2019 should not be taken as an indication of earnings for all or any part of the balance of the year.

 

The following condensed notes are numbered to correspond to numbers of the notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

 

 

1. Summary of Significant Accounting Policies

 

Revenue Recognition

Due to the diverse business operations of the Company, recognition of revenue from contracts with customers depends on the product produced and sold or service performed. The Company recognizes revenue from contracts with customers at prices that are fixed or determinable as evidenced by an agreement with the customer, when the Company has met its performance obligation under the contract and it is probable that the Company will collect the amount to which it is entitled in exchange for the goods or services transferred or to be transferred to the customer. Depending on the product produced and sold or service performed and the terms of the agreement with the customer, the Company recognizes revenue either over time, in the case of delivery or transmission of electricity or related services or the production and storage of certain custom-made products, or at a point in time for the delivery of standardized products and other products made to the customer’s specifications where the terms of the contract require transfer of the completed product. Provisions for sales returns, early payment terms discounts, volume-based variable pricing incentives and warranty costs are recorded as reductions to revenue at the time revenue is recognized based on customer history, historical information and current trends.

 

In addition to recognizing revenue from contracts with customers under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASC 606), the Company also records adjustments to Electric segment revenues for amounts subject to future collection under alternative revenue programs (ARPs) as defined in ASC Topic 980, Regulated Operations (ASC 980). The ARP revenue adjustments are recorded on the basis of recoverable costs incurred and returns earned under rate riders on a separate line on the face of the Company’s consolidated statements of income as they do not meet the criteria to be classified as revenue from contracts with customers.

 

Electric Segment Revenues—In the Electric segment, the Company recognizes revenue in two categories: (1) revenues from contracts with customers and (2) adjustments to revenues for amounts collectible under ARPs.

 

Most Electric segment revenues are earned from the generation, transmission and sale of electricity to retail customers at rates approved by regulatory commissions in the states where Otter Tail Power Company (OTP) provides service. OTP also earns revenue from the transmission of electricity for others over the transmission assets it owns separately, or jointly with other transmission service providers, under rate tariffs established by the independent transmission system operator and approved by the Federal Energy Regulatory Commission (FERC). A third source of revenue for OTP comes from the generation and sale of electricity to wholesale customers at contract or market rates. Revenues from all these sources meet the criteria to be classified as revenue from contracts with customers and are recognized over time as energy is delivered or transmitted. Revenue is recognized based on the metered quantity of electricity delivered or transmitted at the applicable rates. For electricity delivered and consumed after a meter is read but prior to the end of the reporting period, OTP records revenue and an unbilled receivable based on estimates of the kilowatt-hours (kwh) of energy delivered to the customer.

 

ARPs provide for adjustments to rates outside of a general rate case proceeding, usually as a surcharge applied to future billings typically through the use of rate riders subject to periodic adjustments, to encourage or incentivize investments in certain areas such as conservation, renewable energy, pollution reduction or control, improved infrastructure of the transmission grid or other programs that provide benefits to the general public under public policy, laws or regulations. ARP riders generally provide for the recovery of specified costs and investments and include an incentive component to provide the regulated utility with a return on amounts invested.

 

8

 

OTP has recovered costs and earned incentives or returns on investments subject to recovery under several ARP rate riders, including:

 

 

In Minnesota: Transmission Cost Recovery (TCR), Environmental Cost Recovery (ECR), Renewable Resource Adjustment (RRA) and Conservation Improvement Program riders.

 

In North Dakota: TCR, ECR, RRA and Generation Cost Recovery (GCR) riders.

 

In South Dakota: TCR, ECR and Energy Efficiency Plan (conservation) riders.

 

OTP accrues ARP revenue on the basis of costs incurred, investments made and returns on those investments that qualify for recovery through established riders. Amounts billed under riders in effect at the time of the billing are included in revenues from contracts with customers net of amounts billed that are subject to refund through future rider adjustments. Amounts accrued and subject to recovery through future rider rate updates and adjustments are reported as changes in accrued revenues under ARPs on a separate line in the revenue section of the Company’s consolidated statement of income. See table in note 3 for total revenues billed and accrued under ARP riders for the three- and six-month periods ended June 30, 2019 and 2018.

 

Manufacturing Segment Revenues—Companies in the Manufacturing segment, BTD Manufacturing, Inc. (BTD) and T.O. Plastics, Inc. (T.O. Plastics), earn revenue predominantly from the production and delivery of custom-made or standardized parts to customers across several industries. BTD also earns revenue from the production and sale of tools and dies to other manufacturers. For the production and delivery of standardized products and other products made to customer specifications where the terms of the contract require transfer of the completed product, the operating company has met its performance obligation and recognizes revenue at the point in time when the product is shipped. For revenue recognized on products when shipped, the operating companies have no further obligation to provide services related to such products. The shipping terms used in these instances are FOB shipping point.

 

Plastics Segment Revenues—Companies in our Plastics segment earn revenue predominantly from the sale and delivery of standardized polyvinyl chloride (PVC) pipe products produced at their manufacturing facilities. Revenue from the sale of these products is recognized at the point in time when the product is shipped based on prices agreed to in a purchase order. For revenue recognized on shipped products, there is no further obligation to provide services related to such product. The shipping terms used in these instances are FOB shipping point. The Plastics segment has one customer for which it produces and stores a product made to the customer’s specifications and design under a build and hold agreement. For sales to this customer, the operating company recognizes revenue as the custom-made product is produced, adjusting the amount of revenue for volume rebate variable pricing considerations the operating company expects the customer will earn and applicable early payment discounts the company expects the customer will take. Ownership of the pipe transfers to the customer prior to delivery and the operating company is paid a negotiated fee for storage of the pipe. Revenue for storage of the pipe is also recognized over time as the pipe is stored.

 

See operating revenue table in note 2 for a disaggregation of the Company’s revenues by business segment for the three- and six-month periods ended June 30, 2019 and 2018.

 

Agreements Subject to Legally Enforceable Netting Arrangements

OTP has certain derivative contracts that are designated as normal purchases. 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 hierarchical 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.

 

9

 

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.

 

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 June 30, 2019 and December 31, 2018:

 

June 30, 2019 (in thousands)

 

Level 1

   

Level 2

   

Level 3

 

Assets:

                       

Investments:

                       

Equity Funds – Held by Captive Insurance Company

  $ 1,483                  

Corporate Debt Securities – Held by Captive Insurance Company

          $ 3,368          

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

            4,701          

Other Assets:

                       

Money Market and Mutual Funds – Nonqualified Retirement Savings Plan

    1,311                  

Total Assets

  $ 2,794     $ 8,069          

 

December 31, 2018 (in thousands)

 

Level 1

   

Level 2

   

Level 3

 

Assets:

                       

Investments:

                       

Equity Funds – Held by Captive Insurance Company

  $ 1,294                  

Corporate Debt Securities – Held by Captive Insurance Company

          $ 5,898          

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

            1,586          

Other Assets:

                       

Money Market and Mutual Funds – Nonqualified Retirement Savings Plan

    838                  

Total Assets

  $ 2,132     $