Summary of Significant Accounting Policies (Policies) | 12 Months Ended |
Dec. 31, 2013 |
Accounting Policies [Abstract] | ' |
Principles of Consolidation | ' |
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, Plastics and Construction. See note 2 to the 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 | ' |
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 for further discussion. |
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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 | ' |
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 $1,002,000 in 2013, $656,000 in 2012 and $628,000 in 2011. 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 service lives of the properties (5 to 70 years). Such provisions as a percent of the average balance of depreciable electric utility property were 2.96% in 2013, 2.98% in 2012 and 2.94% in 2011. Gains or losses on group asset dispositions are taken to the accumulated provision for depreciation reserve and impact current and future depreciation rates. |
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Property and equipment of nonelectric operations are carried at historical cost or at the then-current replacement cost if acquired in a business combination accounted for under the purchase method of accounting, 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 2013, 2012 or 2011. Maintenance and repairs are expensed as incurred. Gains or losses on asset dispositions are included in the determination of operating income. |
Jointly Owned Facilities | ' |
Jointly Owned Facilities |
The consolidated balance sheets include OTP’s ownership interests in the assets and liabilities of Big Stone Plant (53.9%) and Coyote Station (35.0%). The following amounts are included in the Company’s December 31, 2013 and 2012 consolidated balance sheets: |
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(in thousands) | | 2013 | | | 2012 | | | | | | | | | | | | | |
Big Stone Plant: | | | | | | | | | | | | | | | | | | |
Electric Plant in Service | | $ | 142,780 | | | $ | 141,221 | | | | | | | | | | | | | |
Construction Work in Progress | | | 94,913 | | | | 22,335 | | | | | | | | | | | | | |
Accumulated Depreciation | | | (83,005 | ) | | | (80,588 | ) | | | | | | | | | | | | |
Net Plant | | $ | 154,688 | | | $ | 82,968 | | | | | | | | | | | | | |
Coyote Station: | | | | | | | | | | | | | | | | | | | | |
Electric Plant in Service | | $ | 162,095 | | | $ | 160,617 | | | | | | | | | | | | | |
Construction Work in Progress | | | 303 | | | | 578 | | | | | | | | | | | | | |
Accumulated Depreciation | | | (96,907 | ) | | | (93,564 | ) | | | | | | | | | | | | |
Net Plant | | $ | 65,491 | | | $ | 67,631 | | | | | | | | | | | | | |
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OTP is a joint owner, with other regional utilities, in three Capacity Expansion 2020 (CapX2020) transmission lines with the following ownership interests: 14.8% in the Bemidji-Grand Rapids 230 kV line, 13.3% in the Fargo-Monticello 345 kV line, 4.9% in the Brookings-Southeast Twin Cities Multi-Value Project (MVP) 345 kV line, 50.0% in the Big Stone South to Brookings MVP 345 kV line and 49.2% in the Big Stone South to Ellendale MVP 345 kV line. The following amounts for the jointly-owned transmission facilities are included in the Company’s December 31, 2013 and 2012 consolidated balance sheets: |
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(in thousands) | | 2013 | | | 2012 | | | | | | | | | | | | | |
Electric Plant in Service | | $ | 26,337 | | | $ | 25,852 | | | | | | | | | | | | | |
Construction Work in Progress | | | 71,205 | | | | 30,171 | | | | | | | | | | | | | |
Accumulated Depreciation | | | (837 | ) | | | (483 | ) | | | | | | | | | | | | |
Net Plant | | $ | 96,705 | | | $ | 55,540 | | | | | | | | | | | | | |
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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 | ' |
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 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 to be paid by the Coyote Station owners under the LSA will reflect the cost of production, along with an agreed profit and capital charge. CCMC was formed for the purpose of mining lignite 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 the 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. Therefore, CCMC is not required to be consolidated in the Company’s consolidated financial statements. |
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Under the LSA, all development period costs of the Coyote Creek coal mine incurred during the development period will be recovered from the Coyote Station owners over the full term of the production period, which commences with the first delivery of coal to Coyote Station, scheduled for May 2016, by being included in the cost of production. The development fee and the capital charge incurred during the development period will be recovered from the Coyote Station owners over the first 52 months of the production period by being included in the cost of production during those months. OTP’s 35% share of development period costs, development fees and capital charges incurred by CCMC through December 31, 2013 is $10.2 million. 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, 2013 could be as high as $10.2 million. |
Recoverability of Long-Lived Assets | ' |
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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In the fourth quarter of 2011, IMD, Inc. (IMD), the Company’s former wind tower manufacturer, recorded a $3.1 million asset impairment charge on its plant in Fort Erie, Ontario. IMD idled this plant in the fourth quarter of 2011, as the plant had completed all of its then current tower orders. |
In June 2012, the Company entered into a nonbinding letter of interest with Trinity Industries, Inc. (Trinity) to sell the fixed assets of IMD for $20 million, with the Company retaining IMD’s net working capital—approximately $66 million on June 30, 2012. On September 6, 2012 the Company entered into definitive agreements with Trinity to sell the fixed assets of IMD for $20 million. The agreed on price for the fixed assets was an indicator of the fair value of the assets under level 2 of the ASC fair value hierarchy and an indication of a decrease in the market value of the assets being sold, which were significantly impacted by a decline in market conditions in the wind energy industry. IMD had no tower orders for 2013 due to the expected expiration, at the end of 2012, of the Federal Production Tax Credit (PTC) for investments in renewable energy resources. These factors resulted in IMD recording a fair value adjustment of its long-lived assets to the indicated market price of $20 million and an asset impairment charge of $45.6 million ($27.5 million net-of-tax benefits), or $0.76 per share, in June 2012 broken down as follows: |
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(in thousands) | | | | | | | | | | | | | | | | | | | |
Long-Lived Assets (net of accumulated depreciation) | | $ | 45,285 | | | | | | | | | | | | | | | | | |
Goodwill | | | 288 | | | | | | | | | | | | | | | | | |
Total Asset Impairment Charges | | $ | 45,573 | | | | | | | | | | | | | | | | | |
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The sale of the Fort Erie fixed assets closed on September 6, 2012, the West Fargo transaction closed on October 31, 2012 and the Tulsa transaction closed on November 30, 2012. |
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Otter Tail Energy Services Company (OTESCO) recorded asset impairment charges of $0.4 million in 2012 and $0.5 million in 2011 related to wind farm development rights at its Sheridan Ridge and Stutsman County sites in North Dakota based on the fair value of these assets declining to $0 as of March 31, 2012. |
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On February 8, 2013 the Company sold substantially all of the assets of Shrco, Inc. (Shrco), the Company’s former waterfront equipment manufacturer, subject to certain closing conditions. The Company recorded a $7.7 million ($4.6 million net-of-tax benefits), or $0.13 per share, asset impairment charge in December 2012 based on the indicated market value of Shrco’s assets broken down as follows: |
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(in thousands) | | | | | | | | | | | | | | | | | | | |
Long-Lived Assets (net of accumulated depreciation) | | $ | 5,859 | | | | | | | | | | | | | | | | | |
Inventory | | | 782 | | | | | | | | | | | | | | | | | |
Accrued Selling Costs | | | 1,106 | | | | | | | | | | | | | | | | | |
Total Impairment Charges | | $ | 7,747 | | | | | | | | | | | | | | | | | |
Income Taxes | ' |
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 15 to the consolidated financial statements regarding the Company’s accounting for uncertain tax positions. |
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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. |
Revisions to Presentation | ' |
Revisions to Presentation |
Beginning with the Company’s 2013 Annual Report on Form 10-K, the Company is reporting revenues and costs related to the sale of products by its manufacturing and plastic pipe companies separately from the revenues and costs of its construction companies on the face of its consolidated statements of income. Its nonelectric revenues and cost of goods sold for the years 2012 and 2011 were revised in a similar manner to be consistent with, and comparable to, the presentation of revenues and costs for 2013. The change in presentation of 2012 and 2011 nonelectric revenues and cost of goods sold had no effect on the Company’s reported consolidated revenues, costs, operating income or net income for 2012 or 2011. |
Revenue Recognition | ' |
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, and the price is fixed or determinable. In cases where significant obligations remain after delivery, revenue recognition is deferred until such obligations are fulfilled. Provisions for sales returns and warranty costs are recorded at the time of the sale based on historical information and current trends. In the case of derivative instruments, such as OTP’s forward energy contracts, marked-to-market and realized gains and losses are recognized on a net basis in revenue in accordance with ASC Topic 815, Derivatives and Hedging (ASC 815). Gains and losses on forward energy contracts subject to regulatory treatment, if any, are deferred and recognized on a net basis in revenue in the period realized. |
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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. |
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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. |
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Revenues on wholesale electricity sales from Company-owned generating units are recognized when energy is delivered. |
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OTP’s unrealized gains and losses on forward energy contracts that do not meet the definition of capacity contracts are marked to market and reflected on a net basis in electric revenue on the Company’s consolidated statement of income. Under ASC 815, OTP’s forward energy contracts that do not meet the definition of a capacity contract and are subject to unplanned netting do not qualify for the normal purchase and sales exception from mark-to-market accounting. See note 5 for further discussion. |
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Manufacturing operating revenues are recorded when products are shipped. |
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The companies in the Construction segment enter into fixed-price construction contracts. Revenues under these contracts are recognized on a percentage-of-completion basis. The method used to determine the progress of completion is based on the ratio of costs incurred to total estimated costs on construction projects. Following are the percentages of the Company’s consolidated revenues recorded under the percentage-of-completion method: |
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| | 2013 | | | 2012 | | | 2011 | | | | | | | | | |
Percentage-of-Completion Revenues | | | 16.70% | | | | 17.00% | | | | 21.40% | | | | | | | | | |
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The following table summarizes costs incurred and billings and estimated earnings recognized on uncompleted contracts: |
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| | December 31, | | | December 31, | | | | | | | | | | | | | |
(in thousands) | | 2013 | | | 2012 | | | | | | | | | | | | | |
Costs Incurred on Uncompleted Contracts | | $ | 361,487 | | | $ | 307,085 | | | | | | | | | | | | | |
Less Billings to Date | | | (377,608 | ) | | | (321,388 | ) | | | | | | | | | | | | |
Plus Estimated Earnings Recognized | | | 6,477 | | | | 1,762 | | | | | | | | | | | | | |
Net Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts | | $ | (9,644 | ) | | $ | (12,541 | ) | | | | | | | | | | | | |
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The following costs and estimated earnings in excess of billings and billings in excess of costs and estimated earnings are included in the Company’s consolidated balance sheets: |
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| | December 31, | | | December 31, | | | | | | | | | | | | | |
(in thousands) | | 2013 | | | 2012 | | | | | | | | | | | | | |
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts | | $ | 4,063 | | | $ | 3,663 | | | | | | | | | | | | | |
Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts | | | (13,707 | ) | | | (16,204 | ) | | | | | | | | | | | | |
Net Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts | | $ | (9,644 | ) | | $ | (12,541 | ) | | | | | | | | | | | | |
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The Company has a standard quarterly estimate at completion process in which management reviews the progress and performance of the Company’s contracts accounted for under percentage-of-completion accounting. As part of this process, management reviews include, but are not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities, and the related changes in estimates of revenues and costs. The risks and opportunities include management’s judgment about the ability and cost to achieve the schedule, technical requirements and other contract requirements. Management must make assumptions regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the contract, and performance by subcontractors, among other variables. Based on this analysis, any adjustments to net sales, costs of sales, and the related impact to operating income are recorded as necessary in the period they become known. These adjustments may result from positive program performance and an increase in operating profit during the performance of individual contracts if management determines it will be successful in mitigating risks surrounding the technical, schedule, and cost aspects of those contracts or realizing related opportunities. Likewise, these adjustments may result in a decrease in operating profit if management determines it will not be successful in mitigating these risks or realizing related opportunities. Changes in estimates of net sales, costs of sales, and the related impact to operating income are recognized using a cumulative catch-up, which recognizes, in the current period, the cumulative effect of the changes on current and prior periods based on a contract’s percent complete. A significant change in one or more of these estimates could affect the profitability of one or more of the Company’s contracts. If a loss is indicated at a point in time during a contract, a projected loss for the entire contract is estimated and recognized. |
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In 2012, Foley Company (Foley) experienced cost overruns in excess of estimated costs on several large projects. All of these projects were substantially completed as of December 31, 2012. Estimated costs on certain projects in excess of previous period estimates resulted in pretax charges of $0.6 million in 2013 compared with $14.9 million in 2012 and $7.0 million in 2011. |
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Plastics operating revenues are recorded when the product is shipped. |
Warranty Reserves | ' |
Warranty Reserves |
The Company establishes reserves for estimated product warranty costs at the time revenue is recognized based on historical warranty experience and additionally for any known product warranty issues. Certain products previously sold by the Company carried one to fifteen year warranties. Although the Company engaged in extensive product quality programs and processes, the Company’s warranty obligations have been and may in the future be affected by product failure rates, repair or field replacement costs and additional development costs incurred in correcting product failures. The warranty reserve balances as of December 31, 2013 and December 31, 2012 relate entirely to products that were produced by IMD and Shrco prior to the Company selling the assets of these companies and are included in liabilities of discontinued operations. See note 17 to consolidated financial statements. |
Retainage | ' |
Retainage |
Accounts Receivable include the following amounts, billed under contracts by the Company’s construction subsidiaries, that have been retained by customers pending project completion: |
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| | December 31, | | | December 31, | | | | | | | | | | | | | |
(in thousands) | | 2013 | | | 2012 | | | | | | | | | | | | | |
Accounts Receivable Retained by Customers | | $ | 7,125 | 1 | | $ | 12,227 | | | | | | | | | | | | | |
1 Includes $89,000 related to one project with an expected completion date beyond December 31, 2014. | | | | | | | | | | | | | |
Shipping and Handling Costs | ' |
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 | ' |
Use of Estimates |
The Company uses estimates based on the best information available in recording transactions and balances resulting from business operations. Estimates are used for such items as depreciable lives, asset impairment evaluations, tax provisions, collectability of trade accounts receivable, self-insurance programs, unbilled electric revenues, accrued renewable resource, transmission and environmental cost recovery rider revenues, valuations of forward energy contracts, percentage-of-completion, warranty reserves and actuarially determined benefits costs and liabilities. 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 | ' |
Cash Equivalents |
The Company considers all highly liquid debt instruments purchased with maturity of 90 days or less to be cash equivalents. |
Investments | ' |
Investments |
The following table provides a breakdown of the Company’s investments at December 31, 2013 and 2012: |
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| | December 31, | | | December 31, | | | | | | | | | | | | | |
(in thousands) | | 2013 | | | 2012 | | | | | | | | | | | | | |
Cost Method: | | | | | | | | | | | | | | | | | | |
Portion of IPH Sales Proceeds Held in Escrow Account1 | | $ | -- | | | $ | 1,500 | | | | | | | | | | | | | |
Economic Development Loan Pools | | | 219 | | | | 255 | | | | | | | | | | | | | |
Other | | | 158 | | | | 174 | | | | | | | | | | | | | |
Equity Method: | | | | | | | | | | | | | | | | | | | | |
Affordable Housing and Other Partnerships | | | 43 | | | | 117 | | | | | | | | | | | | | |
Marketable Securities Classified as Available-for-Sale | | | 8,942 | | | | 8,925 | | | | | | | | | | | | | |
Total Investments | | $ | 9,362 | | | $ | 10,971 | | | | | | | | | | | | | |
Less: IPH Escrow Funds Reported under Other Current Assets1 | | | -- | | | | (1,500 | ) | | | | | | | | | | | | |
Investments | | $ | 9,362 | | | $ | 9,471 | | | | | | | | | | | | | |
1$1.5 million accessible within one year is classified and reported under other current assets. | | | | | | | | | | | | | |
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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, 2013. See further discussion below and under note 13. |
Fair Value Measurements | ' |
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: |
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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 (NYMEX). |
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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. |
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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, 2013 and December 31, 2012: |
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December 31, 2013 (in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | |
Current Assets – Other: | | | | | | | | | | | | | | | | | |
Forward Energy Contracts | | $ | -- | | | $ | -- | | | $ | 338 | | | | | | | | | |
Forward Gasoline Purchase Contracts | | | | | | | 62 | | | | | | | | | | | | | |
Money Market and Mutual Funds - Nonqualified Retirement Savings Plan | | | 110 | | | | | | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | | | | | | |
Corporate Debt Securities – Held by Captive Insurance Company | | | | | | | 7,671 | | | | | | | | | | | | | |
U.S. Government Debt Securities – Held by Captive Insurance Company | | | | | | | 1,271 | | | | | | | | | | | | | |
Other Assets: | | | | | | | | | | | | | | | | | | | | |
Money Market and Mutual Funds - Nonqualified Retirement Savings Plan | | | 866 | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 976 | | | $ | 9,004 | | | $ | 338 | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Derivative Liabilities - Forward Energy Contracts | | $ | -- | | | $ | 103 | | | $ | 11,679 | | | | | | | | | |
Total Liabilities | | $ | -- | | | $ | 103 | | | $ | 11,679 | | | | | | | | | |
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December 31, 2012 (in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | |
Current Assets – Other: | | | | | | | | | | | | | | | | | |
Forward Energy Contracts | | $ | -- | | | $ | 292 | | | $ | 210 | | | | | | | | | |
Forward Gasoline Purchase Contracts | | | | | | | 136 | | | | | | | | | | | | | |
Money Market Fund - Escrow Account IPH Sale | | | 1,500 | | | | | | | | | | | | | | | | | |
Money Market and Mutual Funds - Nonqualified Retirement Savings Plan | | | 110 | | | | | | | | | | | | | | | | | |
Investments: | | | | | | | | | | | | | | | | | | | | |
Corporate Debt Securities – Held by Captive Insurance Company | | | | | | | 7,620 | | | | | | | | | | | | | |
U.S. Government Debt Securities – Held by Captive Insurance Company | | | | | | | 1,305 | | | | | | | | | | | | | |
Other Assets: | | | | | | | | | | | | | | | | | | | | |
Money Market and Mutual Funds - Nonqualified Retirement Savings Plan | | | 357 | | | | | | | | | | | | | | | | | |
Equity Securities - Nonqualified Retirement Savings Plan | | | 125 | | | | | | | | | | | | | | | | | |
Total Assets | | $ | 2,092 | | | $ | 9,353 | | | $ | 210 | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | | | | | |
Derivative Liabilities - Forward Energy Contracts | | $ | -- | | | $ | 242 | | | $ | 17,992 | | | | | | | | | |
Total Liabilities | | $ | -- | | | $ | 242 | | | $ | 17,992 | | | | | | | | | |
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The valuation techniques and inputs used for the Level 2 fair value measurements in the table above are as follows: |
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Forward Energy Contracts – Prices used for the fair valuation of these forward purchases and sales of electricity, which have illiquid trading points, are indexed to a price at an active market. |
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Forward Gasoline Purchase Contracts – These contracts are priced based on NYMEX quoted prices for Reformulated Blendstock for Oxygenate Blending (RBOB) Gasoline contracts. Prices used for the fair valuation of these contracts are based on NYMEX daily reporting date quoted prices for RBOB contracts with the same settlement periods. |
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Corporate and U.S. Government 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. |
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Fair values for OTP’s forward energy contracts with delivery points that are not at an active trading hub included in Level 3 of the fair value hierarchy in the table above as of December 31, 2013 and December 31, 2012, are based on prices indexed to observable prices at an active trading hub. The Level 3 forward electric price inputs ranged from $6.95 per megawatt-hour under the active trading hub price to $3.11 per megawatt-hour over the active trading hub price. The weighted average price was $34.00 per megawatt-hour. |
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In the table above, $117,000 of the fair value of the Level 3 forward energy contracts in a derivative asset position and $11,679,000 of the fair value of the Level 3 forward energy contracts in a derivative liability position as of December 31, 2013 are related to power purchase contracts where OTP intends to take or has taken physical delivery of the energy under the contract. When OTP takes physical delivery of the energy purchased under these contracts the costs incurred are subject to recovery in base rates and through fuel clause adjustments. Any derivative assets or liabilities and related gains or losses recorded as a result of the fair valuation of these power purchase contracts will not be realized and are 100% offset by regulatory liabilities and assets related to fuel clause adjustment treatment of purchased power costs. Therefore, the net impact of any recorded fair valuation gains or losses related to these contracts on the Company’s consolidated net income is $0 and the net income impact of any future fair valuation adjustments of these contracts will be $0. When energy is delivered under these contracts, they will be settled at the original contract price and any fair valuation gains or losses and related derivative assets or liabilities recorded over the life of the contracts will be reversed along with any offsetting regulatory liabilities or assets. Because of regulatory accounting treatment, any price volatility related to the fair valuation of these contracts had no impact on the Company’s reported consolidated net income for the years ended December 31, 2013 and 2012. |
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The remaining $221,000 of the fair value of the Level 3 forward energy contracts in a derivative asset position and $103,000 of the fair value of the Level 2 forward energy contracts in a derivative liability position as of December 31, 2013 are related to financial contracts that will not be settled by physical delivery of electricity but will be settled financially by the counterparty to the contract paying or receiving the difference between the contract price and the market price at the hour of scheduled delivery. Although the related forward energy purchase and sales contracts are 100% offsetting in terms of volumes and delivery periods, the purchase contracts and offsetting sales contracts do not have the same delivery points. Therefore, the net derivative gain related to these contracts of $118,000 as of December 31, 2013 is subject to change in subsequent reporting periods or on settlement. These contracts are scheduled for settlement in January and February of 2014. Any fluctuation in the factors used in the fair valuation of these contracts would not result in a significant change to the net fair value of the contracts. |
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The following table presents changes in Level 3 forward energy contract derivative asset and liability fair valuations for the twelve-month periods ended December 31, 2013 and 2012: |
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(in thousands) | | 2013 | | | 2012 | | | | | | | | | | | | | |
Forward Energy Contracts - Fair Values Beginning of Period | | $ | (17,782 | ) | | $ | -- | | | | | | | | | | | | | |
Transfers into Level 3 from Level 2 | | | -- | | | | (15,884 | ) | | | | | | | | | | | | |
Less: Amounts Reversed on Settlement of Contracts Entered into in Prior Periods | | | 7,943 | | | | 5,135 | | | | | | | | | | | | | |
Changes in Fair Value of Contracts Entered into in Prior Periods | | | (640 | ) | | | (4,001 | ) | | | | | | | | | | | | |
Cumulative Fair Value Adjustments of Contracts Entered into in Prior Years at End of Period | | | (10,479 | ) | | | (14,750 | ) | | | | | | | | | | | | |
Net Decrease in Value of Open Contracts Entered into in Current Period | | | (862 | ) | | | (3,032 | ) | | | | | | | | | | | | |
Forward Energy Contracts - Net Derivative Liability Fair Values End of Period | | $ | (11,341 | ) | | $ | (17,782 | ) | | | | | | | | | | | | |
Inventories | ' |
Inventories |
The Electric segment inventories are reported at average cost. All other segments’ inventories are stated at the lower of cost (first-in, first-out) or market. Inventories consist of the following: |
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| | December 31, | | | December 31, | | | | | | | | | | | | | |
(in thousands) | | 2013 | | | 2012 | | | | | | | | | | | | | |
Finished Goods | | $ | 20,649 | | | $ | 21,893 | | | | | | | | | | | | | |
Work in Process | | | 9,942 | | | | 8,800 | | | | | | | | | | | | | |
Raw Material, Fuel and Supplies | | | 42,090 | | | | 38,643 | | | | | | | | | | | | | |
Total Inventories | | $ | 72,681 | | | $ | 69,336 | | | | | | | | | | | | | |
Goodwill and Other Intangible Assets | ' |
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 and indefinite-lived intangible assets 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. |
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In the fourth quarter of 2012 the Company sold Moorhead Electric, Inc. (MEI), a subsidiary company that provided electrical contracting services. In connection with this sale, the Company disposed of $147,000 in goodwill associated with the purchase of MEI in 1992. |
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The following tables summarize changes to goodwill by business segment during 2013 and 2012: |
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| | Gross Balance | | | Accumulated | | | Balance (net of | | | Adjustments | | | Balance (net of | |
(in thousands) | December 31, | Impairments | impairments) | to Goodwill | impairments) |
| 2012 | | December 31, | in 2013 | December 31, |
| | | 2012 | | 2013 |
Manufacturing | | $ | 12,186 | | | $ | -- | | | $ | 12,186 | | | $ | -- | | | $ | 12,186 | |
Construction | | | 7,483 | | | | -- | | | | 7,483 | | | | -- | | | | 7,483 | |
Plastics | | | 19,302 | | | | -- | | | | 19,302 | | | | -- | | | | 19,302 | |
Total | | $ | 38,971 | | | $ | -- | | | $ | 38,971 | | | $ | -- | | | $ | 38,971 | |
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| | Gross Balance | | | Accumulated | | | Balance (net of | | | Adjustments | | | Balance (net of | |
(in thousands) | December 31, | Impairments | impairments) | to Goodwill | impairments) |
| 2011 | | December 31, | in 2012 | December 31, |
| | | 2011 | | 2012 |
Electric | | $ | 240 | | | $ | (240 | ) | | $ | -- | | | $ | -- | | | $ | -- | |
Manufacturing | | | 24,445 | | | | (12,259 | ) | | | 12,186 | | | | -- | | | | 12,186 | |
Construction | | | 7,630 | | | | -- | | | | 7,630 | | | | (147 | ) | | | 7,483 | |
Plastics | | | 19,302 | | | | -- | | | | 19,302 | | | | -- | | | | 19,302 | |
Total | | $ | 51,617 | | | $ | (12,499 | ) | | $ | 39,118 | | | $ | (147 | ) | | $ | 38,971 | |
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Intangible assets with finite lives are amortized over their estimated useful lives and reviewed for impairment in accordance with requirements under ASC 360-10-35, Property, Plant, and Equipment—Overall—Subsequent Measurement. The following table summarizes the components of the Company’s intangible assets at December 31: |
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2013 (in thousands) | | Gross Carrying | | | Accumulated Amortization | | | Net Carrying | | Amortization | | | | | | | |
Amount | Amount | Periods | | | | | | | |
Amortizable Intangible Assets: | | | | | | | | | | | | | | | | | |
Customer Relationships | | $ | 16,811 | | | $ | 4,935 | | | $ | 11,876 | | 15 – 25 years | | | | | | | |
Other Intangible Assets Including Contracts | | | 825 | | | | 473 | | | | 352 | | 5 – 30 years | | | | | | | |
Total | | $ | 17,636 | | | $ | 5,408 | | | $ | 12,228 | | | | | | | | | |
Indefinite-Lived Intangible Assets: | | | | | | | | | | | | | | | | | | | | |
Trade Name | | $ | 1,100 | | | | -- | | | $ | 1,100 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
2012 (in thousands) | | | | | | | | | | | | | | | | | | | | |
Amortizable Intangible Assets: | | | | | | | | | | | | | | | | | | | | |
Customer Relationships | | $ | 16,811 | | | $ | 4,085 | | | $ | 12,726 | | 15 – 25 years | | | | | | | |
Other Intangible Assets Including Contracts | | | 1,092 | | | | 613 | | | | 479 | | 5 – 30 years | | | | | | | |
Total | | $ | 17,903 | | | $ | 4,698 | | | $ | 13,205 | | | | | | | | | |
Indefinite-Lived Intangible Assets: | | | | | | | | | | | | | | | | | | | | |
Trade Name | | $ | 1,100 | | | | -- | | | $ | 1,100 | | | | | | | | | |
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The amortization expense for these intangible assets was: |
|
(in thousands) | | 2013 | | | 2012 | | | 2011 | | | | | | | | | |
Amortization Expense – Intangible Assets | | $ | 977 | | | $ | 981 | | | $ | 956 | | | | | | | | | |
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The estimated annual amortization expense for these intangible assets for the next five years is: |
|
(in thousands) | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | |
Estimated Amortization Expense – Intangible Assets | | $ | 977 | | | $ | 977 | | | $ | 945 | | | $ | 849 | | | $ | 849 | |
Supplemental Disclosures of Cash Flow Information | ' |
Supplemental Disclosures of Cash Flow Information |
| | | | | | | | | | | | | | | |
| | As of December 31, | | | | | | | | | | | | | |
(in thousands) | | 2013 | | | 2012 | | | | | | | | | | | | | |
Noncash Investing Activities: | | | | | | | | | | | | | | | | | | |
Accounts Payable Outstanding Related to Capital Additions1 | | $ | 22,951 | | | $ | 9,967 | | | | | | | | | | | | | |
Accounts Receivable Outstanding Related to Joint Plant Owner’s Share of Capital Additions2 | | $ | 3,264 | | | $ | -- | | | | | | | | | | | | | |
1Amounts are included in cash used for capital expenditures in subsequent periods when payables are settled. | | | | | | | | | | | | | |
2Amounts are deducted from cash used for capital expenditures in subsequent periods when cash is received. | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
(in thousands) | | 2013 | | | 2012 | | | 2011 | | | | | | | | | |
Cash Paid (Received) During the Year for: | | | | | | | | | | | | | | | | | |
Interest (net of amount capitalized) | | $ | 26,789 | | | $ | 30,741 | | | $ | 34,434 | | | | | | | | | |
Income Tax Refunds | | $ | (453 | ) | | $ | (353 | ) | | $ | -257 | | | | | | | | | |
New Accounting Standards | ' |
New Accounting Standards |
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Accounting Standards Update (ASU) 2011-11 and 2013-01 |
In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (ASU 2011-11), which requires disclosures regarding netting arrangements in agreements underlying derivatives, certain financial instruments and related collateral amounts, and the extent to which an entity’s financial statement presentation policies related to netting arrangements impact amounts recorded to the financial statements. In January 2013, the FASB issued ASU 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (ASU 2013-01), to clarify which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11. The amendments in ASU 2013-01 apply to derivatives accounted for in accordance with ASC 815 and clarify that only derivatives accounted for in accordance with ASC 815 are within the scope of the disclosure requirements. These disclosure requirements do not affect the presentation of amounts in the consolidated balance sheets. ASU 2013-01 is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. |
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The Company implemented the disclosure guidance January 1, 2013. While certain of the Company’s offsetting derivative asset and liability positions related to forward energy contracts with the same counterparty are subject to legally enforceable netting arrangements, the Company does not present its derivative assets and liabilities subject to legally enforceable netting arrangements, or any related payables or receivables, on a net basis on the face of its consolidated balance sheet. The Company has added disclosures and a table in note 5 to the consolidated financial statements indicating the amounts of its derivative forward energy contracts presented at fair value in accordance with ASC 815 that are subject to legally enforceable netting arrangements. |
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ASU 2013-02 |
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income, which requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under accounting principles generally accepted in the United States of America (U.S. GAAP) to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, entities are required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail on these amounts. This ASU is effective for reporting periods beginning after December 15, 2012. Additional information required by this update is included on the face of the Company’s consolidated statement of comprehensive income for the period ending December 31, 2013. The amounts of accumulated other comprehensive losses associated with the Company’s pension and other post-retirement benefit programs that are being amortized and recognized as operating expenses and the income statement line item affected by the expense are disclosed in note 12 to the consolidated financial statements. |