OTTR Otter Tail Corporation

 

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.

 

 

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, 201 7
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 line 1			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 line 1			50.0	%			53,225				--				(434	)			52,791
Big Stone South –Ellendale 345 kV line 1			50.0	%			--				89,980				--				89,980
December 31, 201 6
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 line 1			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 line 1			50.0	%			--				45,050				--				45,050
Big Stone South –Ellendale 345 kV line 1			50.0	%			--				49,160				--				49,160

¹ Midcontinent 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.

 

 

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.

 

 

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.

 

U se 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)		201 7				201 6
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.

 

 

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:

 

Dec ember 3 1 , 201 7   (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)		201 7				201 6
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.

 

 

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

 

(in thousands)		Gross Balance December 31, 201 6				Accumulated Impairments				Balance (net of impairments) December 31, 201 6				Adjustments to Goodwill in 201 7				Balance (net of impairments) December 31, 201 7
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:

 

 

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)		201 7				201 6
Noncash Investing Activities:
Transactions Related to Capital Additions not Settled in Cash		$	13,887			$	13,533

 

(in thousands)		201 7				201 6				201 5
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

 

 

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 th e 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.

 

 

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 2017 - 07 were $5.6 million in 2017 and $5.1 million in 2016.