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Interest payments are subject to cash credits which may result in a lower effective interest rate. Corporate cost included in nonservice cost components of postretirement benefits. Costs subject to recovery without a rate of return. 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Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

           EXCHANGE ACT OF 1934

For the quarterly period ended

September 30, 2020

 

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 filerAccelerated 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:

 

October 31, 2020 41,064,051 Common Shares ($5 par value)

 

 

 

 

 

OTTER TAIL CORPORATION

 

INDEX

 

Part I. Financial Information

Page No.

   

Item 1.

Financial Statements

 
     
 

Consolidated Balance Sheets – September 30, 2020 and December 31, 2019 (not audited)

2 & 3

     
 

Consolidated Statements of Income – Three and Nine Months Ended September 30, 2020 and 2019 (not audited)

4

     
 

Consolidated Statements of Comprehensive Income – Three and Nine Months Ended September 30, 2020 and 2019 (not audited)

5

     
 

Consolidated Statements of Common Shareholders’ Equity – Three and Nine Months Ended September 30, 2020 and 2019 (not audited)

6

     
 

Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2020 and 2019 (not audited)

7

     
 

Condensed Notes to Consolidated Financial Statements (not audited)

8-33

     

Item 2.

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

34-52

     

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

52

     

Item 4.

Controls and Procedures

52

     

Part II. Other Information

 
     

Item 1.

Legal Proceedings

53

     

Item 1A.

Risk Factors 

53

     

Item 6.

Exhibits

54

     

Signatures

54

 

 

1

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Otter Tail Corporation

Consolidated Balance Sheets

(not audited)

 

(in thousands)

 

September 30,

2020

  

December 31,

2019

 
         

Assets

        
         

Current Assets

        

Cash and Cash Equivalents

 $44,904  $21,199 

Accounts Receivable:

        

Trade—Net

  100,423   77,947 

Other

  6,322   8,773 

Inventories

  81,871   97,851 

Unbilled Receivables

  16,409   20,911 

Income Taxes Receivable

  -   1,487 

Regulatory Assets

  17,435   21,650 

Other

  7,552   5,042 

Total Current Assets

  274,916   254,860 
         

Investments

  10,791   9,894 

Other Assets

  42,316   40,196 

Goodwill

  37,572   37,572 

Other IntangiblesNet

  10,419   11,290 

Regulatory Assets

  145,977   144,138 
         

Right of Use Assets - Operating Leases

  19,713   21,851 
         

Plant

        

Electric Plant in Service

  2,221,785   2,212,884 

Nonelectric Operations

  256,480   247,356 

Construction Work in Progress

  454,128   185,238 

Total Gross Plant

  2,932,393   2,645,478 

Less Accumulated Depreciation and Amortization

  939,590   891,684 

Net Plant

  1,992,803   1,753,794 
         

Total Assets

 $2,534,507  $2,273,595 

 

See accompanying condensed notes to consolidated financial statements.

 

2

 

Otter Tail Corporation

Consolidated Balance Sheets

(not audited)

 

(in thousands, except share data)

 

September 30,

2020

  

December 31,

2019

 
         

Liabilities and Equity

        
         

Current Liabilities

        

Short-Term Debt

 $48,600  $6,000 

Current Maturities of Long-Term Debt

  215   183 

Accounts Payable

  189,327   120,775 

Accrued Salaries and Wages

  20,933   22,730 

Accrued Taxes

  14,283   17,525 

Regulatory Liabilities

  12,870   7,480 

Current Operating Lease Liabilities

  4,581   4,136 

Other Accrued Liabilities

  8,927   10,912 

Total Current Liabilities

  299,736   189,741 
         

Pensions Benefit Liability

  86,101   98,970 

Other Postretirement Benefits Liability

  72,508   71,437 

Long-Term Operating Lease Liabilities

  15,778   18,193 

Other Noncurrent Liabilities

  35,146   30,833 
         

Commitments and Contingencies (note 9)

          
         

Deferred Credits

        

Deferred Income Taxes

  152,448   131,941 

Deferred Tax Credits

  17,640   18,626 

Regulatory Liabilities

  236,892   239,906 

Other

  1,914   2,885 

Total Deferred Credits

  408,894   393,358 
         

Capitalization

        

Long-Term Debt—Net

  764,274   689,581 
         

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, 2020—41,052,165 Shares; 2019—40,157,591 Shares

  205,261   200,788 

Premium on Common Shares

  398,301   364,790 

Retained Earnings

  254,468   222,341 

Accumulated Other Comprehensive Loss

  (5,960)  (6,437)

Total Common Equity

  852,070   781,482 

Total Capitalization

  1,616,344   1,471,063 

Total Liabilities and Equity

 $2,534,507  $2,273,595 

 

See accompanying condensed notes to consolidated financial statements.

 

3

 

 

Otter Tail Corporation

Consolidated Statements of Income

(not audited)

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 

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

 

2020

  

2019

  

2020

  

2019

 

Operating Revenues

                

Electric:

                

Revenues from Contracts with Customers

 $112,435  $115,285  $330,313  $346,291 

Changes in Accrued Revenues under Alternative Revenue Programs

  2,778   (921)  2,900   (1,601)

Total Electric Revenues

  115,213   114,364   333,213   344,690 

Product Sales from Contracts with Customers

  120,542   114,288   330,045   359,137 

Total Operating Revenues

  235,755   228,652   663,258   703,827 

Operating Expenses

                

Production Fuel – Electric

  11,554   18,331   34,077   45,547 

Purchased Power – Electric System Use

  13,428   13,163   45,940   54,748 

Electric Operation and Maintenance Expenses

  32,845   35,869   106,639   114,107 

Cost of Products Sold (depreciation included below)

  86,856   88,747   246,567   277,325 

Other Nonelectric Expenses

  13,615   11,665   36,277   38,404 

Depreciation and Amortization

  20,395   19,657   61,230   58,229 

Property Taxes – Electric

  4,333   3,965   12,601   11,824 

Total Operating Expenses

  183,026   191,397   543,331   600,184 

Operating Income

  52,729   37,255   119,927   103,643 

Interest Charges

  8,568   7,539   25,353   23,190 

Nonservice Cost Components of Postretirement Benefits

  842   1,055   2,581   3,165 

Other Income

  1,712   1,020   3,733   3,114 

Income Before Income Taxes

  45,031   29,681   95,726   80,402 

Income Tax Expense

  9,097   4,936   18,543   13,907 

Net Income

  35,934  $24,745   77,183  $66,495 
                 

Average Number of Common Shares Outstanding – Basic

  40,913,972   39,714,672   40,548,133   39,694,677 

Average Number of Common Shares Outstanding – Diluted

  41,077,689   39,946,739   40,732,928   39,922,580 
                 

Basic Earnings Per Common Share

 $0.88  $0.62  $1.90  $1.68 
                 

Diluted Earnings Per Common Share

 $0.87  $0.62  $1.89  $1.67 

 

See accompanying condensed notes to consolidated financial statements.

 

4

 

 

Otter Tail Corporation

Consolidated Statements of Comprehensive Income

(not audited)

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 

(in thousands)

 

2020

  

2019

  

2020

  

2019

 

Net Income

 $35,934  $24,745  $77,183  $66,495 

Other Comprehensive Income:

                

Unrealized Gains on Available-for-Sale Securities:

                

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

  (21)  (1)  13   (5)

Unrealized (Losses) Gains Arising During Period

  (13)  30   205   187 

Income Tax Savings (Expense)

  7   (6)  (46)  (38)

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

  (27)  23   172   144 

Pension and Postretirement Benefit Plans:

                

Amortization of Unrecognized Postretirement Benefit Lossesand Costs (note 11)

  138   130   413   389 

Income Tax Expense

  (36)  (34)  (108)  (101)

Pension and Postretirement Benefit Plans – net-of-tax

  102   96   305   288 

Total Other Comprehensive Income

  75   119   477   432 

Total Comprehensive Income

 $36,009  $24,864  $77,660  $66,927 

 

See accompanying condensed notes to consolidated financial statements.

 

5

 

 

Otter Tail Corporation

Consolidated Statements of Common Shareholders’ Equity

For the Three- and Nine-Month Periods Ended September 30, 2020 and 2019

(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, June 30, 2020

  40,848,828  $204,244  $390,141  $233,705  $(6,035) $822,055 

Common Stock Issuances, Net of Expenses

  203,337   1,017   6,885           7,902 

Net Income

              35,934       35,934 

Other Comprehensive Income

                  75   75 

Employee Stock Incentive Plan Expense

          1,275           1,275 

Common Dividends ($0.37 per share)

              (15,171)      (15,171)

Balance, September 30, 2020

  41,052,165  $205,261  $398,301  $254,468  $(5,960) $852,070 
                         

Balance, June 30, 2019

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

Common Stock Issuances, Net of Expenses

  375   1   (37)          (36)

Net Income

              24,745       24,745 

Other Comprehensive Income

                  119   119 

Employee Stock Incentive Plan Expense

          1,301           1,301 

Common Dividends ($0.35 per share)

              (13,929)      (13,929)

Balance, September 30, 2019

  39,755,277  $198,776  $346,294  $215,931  $(4,496) $756,505 
                         

Balance, December 31, 2019

  40,157,591  $200,788  $364,790  $222,341  $(6,437) $781,482 

Common Stock Issuances, Net of Expenses

  932,791   4,664   30,107           34,771 

Common Stock Retirements

  (38,217)  (191)  (1,878)          (2,069)

Net Income

              77,183       77,183 

Other Comprehensive Income

                  477   477 

Employee Stock Incentive Plan Expense

          5,282           5,282 

Common Dividends ($1.11 per share)

              (45,056)      (45,056)

Balance, September 30, 2020

  41,052,165  $205,261  $398,301  $254,468  $(5,960) $852,070 
                         

Balance, December 31, 2018

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

Common Stock Issuances, Net of Expenses

  145,617   728   (747)          (19)

Common Stock Retirements

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

Net Income

              66,495       66,495 

Other Comprehensive Income

                  432   432 

ASU 2018-02 2017 TCJA Stranded Tax Transfer

              784   (784)  - 

Employee Stock Incentive Plan Expense

          5,245           5,245 

Common Dividends ($1.05 per share)

              (41,781)      (41,781)

Balance, September 30, 2019

  39,755,277  $198,776  $346,294  $215,931  $(4,496) $756,505 

 

6

 

 

Otter Tail Corporation

Consolidated Statements of Cash Flows

(not audited)

 

  

Nine Months Ended

September 30,

 

(in thousands)

 

2020

  

2019

 

Operating Activities

        

Net Income

 $77,183  $66,495 

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

        

Depreciation and Amortization

  61,230   58,229 

Deferred Tax Credits

  (986)  (1,011)

Deferred Income Taxes

  20,353   3,487 

Change in Deferred Debits and Other Assets

  3,439   7,142 

Discretionary Contribution to Pension Plan

  (11,200)  (22,500)

Change in Noncurrent Liabilities and Deferred Credits

  3,237   10,344 

Allowance for Equity/Other Funds Used During Construction

  (3,104)  (1,602)

Stock Compensation Expense

  5,282   5,245 

Other—Net

  (176)  312 

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

        

Change in Receivables

  (20,025)  (16,213)

Change in Inventories

  15,980   9,218 

Change in Other Current Assets

  2,023   2,974 

Change in Payables and Other Current Liabilities

  (12,063)  (20,744)

Change in Interest and Income Taxes Receivable/Payable

  103   3,773 

Net Cash Provided by Operating Activities

  141,276   105,149 

Investing Activities

        

Capital Expenditures

  (220,630)  (149,695)

Proceeds from Disposal of Noncurrent Assets

  4,617   4,111 

Cash Used for Investments and Other Assets

  (6,372)  (5,546)

Net Cash Used in Investing Activities

  (222,385)  (151,130)

Financing Activities

        

Change in Checks Written in Excess of Cash

  90   383 

Net Short-Term Borrowings

  42,600   90,398 

Proceeds from Issuance of Common Stock

  35,219   - 

Common Stock Issuance Expenses

  (465)  (35)

Payments for Shares Withheld for Employee Tax Obligations

  (2,069)  (2,730)

Proceeds from Issuance of Long-Term Debt

  75,000   - 

Short-Term and Long-Term Debt Issuance Expenses

  (369)  (66)

Payments for Retirement of Long-Term Debt

  (136)  (128)

Dividends Paid

  (45,056)  (41,781)

Net Cash Provided by Financing Activities

  104,814   46,041 

Net Change in Cash and Cash Equivalents

  23,705   60 

Cash and Cash Equivalents at Beginning of Period

  21,199   861 

Cash and Cash Equivalents at End of Period

 $44,904  $921 

 

See accompanying condensed notes to consolidated financial statements.

   

 

7

 

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, 2019. Because of the coronavirus (COVID-19) pandemic, the seasonality of our businesses and other factors, the earnings for the three and nine months ended September 30, 2020 should not be taken as an indication of earnings for all or any part of the balance of the year.

 

 

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) Topic 606, Revenue from Contracts with Customers (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.

 

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), Energy Intensive Trade Exposed and Conservation Improvement Program (CIP) riders.

 

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

 

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

 

8

 

OTP accrues ARP revenue based on 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 nine-month periods ended September 30, 2020 and 2019.

 

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 products. 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.

 

See operating revenue table in note 2 for a disaggregation of the Company’s revenues by business segment for the three- and nine-month periods ended September 30, 2020 and 2019.

 

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.

 

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.

 

9

 

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 September 30, 2020 and December 31, 2019:

 

September 30, 2020 (in thousands)

 

Level 1

  

Level 2

 

Level 3

Assets:

         

Investments:

         

Equity Funds – Held by Captive Insurance Company

 $1,665      

Corporate Debt Securities – Held by Captive Insurance Company

     $2,887  

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

      6,131  

Other Assets:

         

Money Market and Mutual Funds –Retirement Plans

  1,582      

Total Assets

 $3,247  $9,018  

 

December 31, 2019 (in thousands)

 

Level 1

  

Level 2

 

Level 3

Assets:

         

Investments:

         

Equity Funds – Held by Captive Insurance Company

 $1,586      

Corporate Debt Securities – Held by Captive Insurance Company

     $2,124  

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

      6,060  

Other Assets:

         

Money Market and Mutual Funds –Retirement Plans

  2,363      

Total Assets

 $3,949  $8,184  

 

The level 2 fair values for Government-Backed and Government-Sponsored Enterprises’ and Corporate Debt Securities Held by the Company’s Captive Insurance Company 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.

 

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 required to buy certain assets of CCMC 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 because the Coyote Station owners are required to buy the membership interests of CCMC at the end of the contract term at equity value. No single owner of Coyote Station owns a majority interest in Coyote Station or 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, 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 prior to the end of the term due to certain events, OTP’s maximum exposure to additional costs, as a result of its involvement with CCMC, and potential impairment loss if recovery of those costs is denied by regulatory authorities, could be as high as approximately $50 million, OTP’s 35% share of CCMC’s unrecovered costs as of September 30, 2020.

 

10

 

Inventories

Inventories, valued at the lower of cost or net realizable value, consist of the following:

 

  

September 30,

  

December 31,

 

(in thousands)

 

2020

  

2019

 

Finished Goods

 $18,901  $31,863 

Work in Process

  14,480   16,508 

Raw Material, Fuel and Supplies

  48,490   49,480 

Total Inventories

 $81,871  $97,851 

 

Intangible Assets

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.

 

The following table summarizes the components of the Company’s intangible assets at September 30, 2020 and December 31, 2019:

 

September 30, 2020 (in thousands)

 

Gross Carrying

Amount

  

Accumulated

Amortization

  

Net Carrying

Amount

  

Remaining

Amortization

Periods (months)

 

Amortizable Intangible Assets:

               

Customer Relationships

 $22,491  $12,095  $10,396  79-179 

Other

  26   3   23  216 

Total

 $22,517  $12,098  $10,419    

 

December 31, 2019 (in thousands)

 

Gross Carrying

Amount

  

Accumulated

Amortization

  

Net Carrying

Amount

  

Remaining

Amortization

Periods (months)

 

Amortizable Intangible Assets:

               

Customer Relationships

 $22,491  $11,259  $11,232  88-188 

Other

  179   121   58  8-45 

Total

 $22,670  $11,380  $11,290    

 

The amortization expense for these intangible assets was:

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 

(in thousands)

 

2020

  

2019

  

2020

  

2019

 

Amortization Expense – Intangible Assets

 $284  $296  $871  $888 

 

The estimated annual amortization expense for these intangible assets for the next 51 months is:

 

(in thousands)

 

2020

  

2021

  

2022

  

2023

  

2024

 

Estimated Amortization Expense – Intangible Assets

 $275  $1,100  $1,100  $1,100  $1,100 

 

Supplemental Disclosures of Cash Flow Information

 

  

As of September 30,

 

(in thousands)

 

2020

  

2019

 

Noncash Investing Activities:

        

Transactions Related to Capital Additions not Settled in Cash

 $112,314  $15,893 

 

11

 

New Accounting Standards Adopted

 

ASU 2016-13—In June 2016 the FASB issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments—Credit Losses (Topic 326) (ASC 326), which changes how entities account for credit losses on receivables and certain other assets effective for interim and annual periods beginning on or after December 31, 2019. The guidance requires use of a current expected credit loss model, which may result in earlier recognition of credit losses than under previous accounting standards. The Company adopted ASC