Note 4 - Regulatory Assets and Liabilities

9 Months Ended

Sep. 30, 2020

Notes to Financial Statements

Schedule of Regulatory Assets and Liabilities [Text Block]

4. Regulatory Assets and Liabilities

As a regulated entity, OTP accounts for the financial effects of regulation in accordance with ASC 980. This accounting standard allows for the recording of a regulatory asset or liability for costs that will be collected or refunded in the future as required under regulation. Additionally, ASC 980-605-25 provides for the recognition of revenues authorized for recovery outside of a general rate case under alternative revenue programs which provide for recovery of costs and incentives or returns on investment in such items as transmission infrastructure, renewable energy resources or conservation initiatives. The following tables indicate the amount of regulatory assets and liabilities recorded on the Company’s consolidated balance sheets:

	September 30, 2020								Remaining Recovery/
(in thousands)	Current		Long-Term			Total				Refund Period (months)
Regulatory Assets:
Prior Service Costs and Actuarial Losses on Pensions and Other Postretirement Benefits1	$	9,018	$	122,765		$	131,783		see below
Minnesota Transmission Cost Recovery Rider Accrued Revenues2		3,676		6,126			9,802			27
Accumulated Asset Retirement Obligation (ARO) Accretion/Depreciation Adjustment1		-		8,481			8,481		asset lives
Conservation Improvement Program Costs and Incentives2		1,040		2,094			3,134			24
Nonservice Costs Components of Postretirement Benefits Capitalized for Ratemaking Purposes and Subject to Deferred Recovery1		-		2,149			2,149		asset lives
MISO Schedule 26/26A Transmission Cost Recovery Rider True-ups1		1,234		559			1,793			27
Unrecovered Project Costs – Minnesota1		401		1,092			1,493			21
Minnesota Renewable Resource Rider Accrued Revenues2		1,203		-			1,203			12
Unrecovered Project Costs – North Dakota1		-		856			856			21
Minnesota SPP Transmission Cost Recovery Tracker1		-		759			759		see below
Debt Reacquisition Premiums1		204		379			583			144
Unrecovered Project Costs – South Dakota1		144		357			501			24
South Dakota Deferred Rate Case Expenses Subject to Recovery1		137		143			280			25
North Dakota Deferred Rate Case Expenses Subject to Recovery1		122		152			274			27
Deferred Marked-to-Market Losses1		186		-			186			3
North Dakota Generation Cost Recovery Rider Accrued Revenue2		66		-			66			9
Deferred Lease Expenses1		-		65			65			56
Minnesota Environmental Cost Recovery Rider Accrued Revenues2		4		-			4			12
Total Regulatory Assets	$	17,435	$	145,977		$	163,412
Regulatory Liabilities:
Deferred Income Taxes	$	-	$	136,630		$	136,630		asset lives
Accumulated Reserve for Estimated Removal Costs – Net of Salvage		-		99,617			99,617		asset lives
Refundable Fuel Clause Adjustment Revenues		9,208		-			9,208			12
North Dakota Transmission Cost Recovery Rider Accrued Refund		1,233		-			1,233			3
South Dakota Phase-In Rate Plan Rider Accrued Refund		1,090		-			1,090			11
Revenue for Rate Case Expenses Subject to Refund – Minnesota		-		577			577		see below
Prior Service Costs and Actuarial Gains on Postretirement Benefits		471		-			471			12
North Dakota Renewable Resource Recovery Rider Accrued Refund		444		-			444			6
South Dakota Transmission Cost Recovery Rider Accrued Refund		232		-			232			5
Minnesota Energy Intensive Trade Exposed Rider Accrued Refund		186		-			186			12
Other		6		68			74			159
Total Regulatory Liabilities	$	12,870	$	236,892		$	249,762
Net Regulatory Asset/(Liability) Position	$	4,565	$	(90,915	)	$	(86,350	)

¹Costs subject to recovery without a rate of return.

²Amount eligible for recovery under an alternative revenue program which includes an incentive or rate of return.

	December 31, 2019								Remaining Recovery/
(in thousands)	Current		Long-Term			Total			Refund Period (months)
Regulatory Assets:
Prior Service Costs and Actuarial Losses on Pensions and Other Postretirement Benefits1	$	9,090	$	129,102		$	138,192		see below
Minnesota Transmission Cost Recovery Rider Accrued Revenues2		4,208		-			4,208			12
Accumulated Asset Retirement Obligation (ARO) Accretion/Depreciation Adjustment1		-		7,772			7,772		asset lives
Conservation Improvement Program Costs and Incentives2		4,024		2,844			6,868			21
Nonservice Costs Components of Postretirement Benefits Capitalized for Ratemaking Purposes and Subject to Deferred Recovery1		-		1,681			1,681		asset lives
MISO Schedule 26/26A Transmission Cost Recovery Rider True-ups1		2,033		968			3,001			24
Unrecovered Project Costs – Minnesota1		715		225			940			16
Minnesota Renewable Resource Rider Accrued Revenues2		131		-			131			12
Minnesota SPP Transmission Cost Recovery Tracker1		-		202			202		see below
Debt Reacquisition Premiums1		201		548			749			153
Unrecovered Project Costs – South Dakota1		144		253			397			33
South Dakota Deferred Rate Case Expenses Subject to Recovery1		138		245			383			34
North Dakota Deferred Rate Case Expenses Subject to Recovery1		122		244			366			36
Deferred Marked-to-Market Losses1		743		-			743			12
Deferred Lease Expenses1		-		54			54			39
Minnesota Environmental Cost Recovery Rider Accrued Revenues2		4		-			4			12
South Dakota Transmission Cost Recovery Rider Accrued Revenues2		97		-			97			2
Total Regulatory Assets	$	21,650	$	144,138		$	165,788
Regulatory Liabilities:
Deferred Income Taxes	$	-	$	141,707		$	141,707		asset lives
Accumulated Reserve for Estimated Removal Costs – Net of Salvage		-		97,726			97,726		asset lives
Refundable Fuel Clause Adjustment Revenues		3,982		-			3,982			12
North Dakota Transmission Cost Recovery Rider Accrued Refund		700		-			700			12
South Dakota Phase-In Rate Plan Rider Accrued Refund		355		-			355			9
Revenue for Rate Case Expenses Subject to Refund – Minnesota		-		401			401		see below
Prior Service Costs and Actuarial Gains on Postretirement Benefits		471		-			471			12
North Dakota Renewable Resource Recovery Rider Accrued Refund		1,515		-			1,515			12
Minnesota Energy Intensive Trade Exposed Rider Accrued Refund		164		-			164			12
North Dakota Generation Cost Recovery Rider Accrued Refund		287		-			287			6
Other		6		72			78			168
Total Regulatory Liabilities	$	7,480	$	239,906		$	247,386
Net Regulatory Asset/(Liability) Position	$	14,170	$	(95,768	)	$	(81,598	)

¹Costs subject to recovery without a rate of return.

²Amount eligible for recovery under an alternative revenue program which includes an incentive or rate of return.

The regulatory asset and liability related to prior service costs and actuarial losses on pensions and other postretirement benefits represents benefit costs and actuarial losses and gains subject to recovery or refund through rates as they are expensed. These unrecognized benefit costs and actuarial losses and gains are required to be recognized as components of Accumulated Other Comprehensive Income in equity under ASC Topic 715, Compensation—Retirement Benefits, but are eligible for treatment as regulatory assets or liabilities based on their probable inclusion in future retail electric rates.

The Minnesota Transmission Cost Recovery Rider Accrued Revenues relate to revenues earned on qualifying transmission system facilities and operating costs incurred to serve Minnesota customers that were recoverable from Minnesota customers as of the balance sheet date.

The Accumulated ARO Accretion/Depreciation Adjustment will accrete and be amortized over the lives of property with asset retirement obligations.

Conservation Improvement Program Costs and Incentives represent mandated conservation expenditures and incentives recoverable through retail electric rates.

The Nonservice Costs Components of Postretirement Benefits Capitalized for Ratemaking Purposes and Subject to Deferred Recovery are employee benefit-related costs that are required to be capitalized for ratemaking purposes and are recovered over the depreciable lives of the assets to which the related labor costs were applied.

MISO Schedule 26/26A Transmission Cost Recovery Rider True-ups relate to the over/under collection of revenue based on comparison of the expected versus actual construction on eligible projects in the period. The true-ups also include the state jurisdictional portion of MISO Schedule 26/26A for regional transmission cost recovery that was included in the calculation of the state transmission riders and subsequently adjusted to reflect actual billing amounts in the schedule.

Unrecovered Project Costs – Minnesota are the Minnesota share of generation and transmission plant-related costs incurred by OTP related to its participation in the abandoned Big Stone II project and excess unrecovered depreciation expense for Hoot Lake Plant and OTP’s hydroelectric plants related to acceleration of their remaining depreciable lives.

The Minnesota Renewable Resource Recovery Rider Accrued Revenues relate to revenues earned on qualifying renewable resource costs incurred to serve Minnesota customers that were recoverable from Minnesota customers as of the balance sheet date.

Unrecovered Project Costs – North Dakota are the North Dakota share of excess unrecovered depreciation expense for Hoot Lake Plant and OTP’s hydroelectric plants related to acceleration of their remaining depreciable lives.

The Minnesota SPP Transmission Cost Recovery Tracker regulatory asset relates to costs incurred to serve Minnesota customers that are subject to recovery but that had not been billed to Minnesota customers as of the balance sheet date.

Debt Reacquisition Premiums are being recovered from OTP customers over the remaining original lives of the reacquired debt issues, the longest of which is 147 months.

Unrecovered Project Costs – South Dakota are the South Dakota share of generation and transmission plant-related costs incurred by OTP related to its participation in the abandoned Big Stone II project and excess unrecovered depreciation expense for Hoot Lake Plant and OTP’s hydroelectric plants related to acceleration of their remaining depreciable lives.

South Dakota Deferred Rate Case Expenses Subject to Recovery relate to costs incurred in conjunction with OTP’s most recent rate case in South Dakota and are currently being recovered beginning with the establishment of interim rates in October 2018.

North Dakota Deferred Rate Case Expenses Subject to Recovery relate to costs incurred in conjunction with OTP’s most recent rate case in North Dakota currently being recovered beginning with the establishment of interim rates in January 2018.

All Deferred Marked-to-Market Losses recorded as of the balance sheet date relate to forward purchases of energy scheduled for delivery through December 2020.

The North Dakota Generation Cost Recovery Rider Accrued Revenues relate to revenues earned under the rider on recoverable costs incurred for the North Dakota share of OTP’s investment in Astoria Station, a natural gas-fired combustion turbine generation facility under construction near Astoria, South Dakota. The balance represents amounts subject to recovery from North Dakota customers that had not been billed to North Dakota customers as of the balance sheet date.

Deferred Lease Expenses: Under ASC 842 accounting rules for leases with scheduled escalating payments, rent expense is required to be recognized on a straight-line basis over the life of the lease based on the sum of those payments. Rate-regulated entities are generally only allowed to recover the amount of actual cash payments on leases and FERC accounting rules require that rent expense be recognized on the basis of cash payments. The balance in the deferred lease expense regulatory asset account represents operating lease right of use asset cumulative amortization and interest costs in excess of cumulative lease payments that are subject to recovery in future periods under regulatory accounting treatment as cash payments are rendered.

The Minnesota Environmental Cost Recovery Rider Accrued Revenues relate to revenues earned on the Minnesota share of OTP’s investment in the Big Stone Plant AQCS project that were recoverable from Minnesota customers as of the balance sheet date.

The South Dakota Transmission Cost Recovery Rider Accrued Revenues relate to revenues earned on qualifying transmission system facilities and operating costs incurred to serve South Dakota customers that were recoverable from South Dakota customers as of the balance sheet date.

The regulatory liability related to Deferred Income Taxes results from changes in statutory tax rates accounted for in accordance with ASC Topic 740, Income Taxes.

The Accumulated Reserve for Estimated Removal Costs – Net of Salvage is reduced as actual removal costs, net of salvage revenues, are incurred.

The North Dakota Transmission Cost Recovery Rider Accrued Refund relates to amounts collected for qualifying transmission system facilities and operating costs incurred to serve North Dakota customers that were refundable to North Dakota customers as of the balance sheet date.

The South Dakota Phase-In Rate Plan Rider Accrued Refund relates to amounts collected for actual and forecasted costs for Astoria Station, Merricourt, and additional load growth that were refundable to South Dakota customers as of the balance sheet date.

Revenue for Rate Case Expenses Subject to Refund – Minnesota relates to revenues collected under general rates to recover costs related to prior rate case proceedings in excess of the actual costs incurred.

The North Dakota Renewable Resource Recovery Rider Accrued Refund relates to amounts collected for qualifying renewable resource costs incurred to serve North Dakota customers that were refundable to North Dakota customers as of the balance sheet date.

The South Dakota Transmission Cost Recovery Rider Accrued Refund relates to amounts collected for qualifying transmission system facilities and operating costs incurred to serve South Dakota customers that were refundable to South Dakota customers as of the balance sheet date.

The Minnesota Energy Intensive Trade Exposed Rider Accrued Refund relates to over-collected amounts from Minnesota retail customers for fuel and purchased power costs reductions provided to customers in energy intensive trade exposed industries that were subject to refund to Minnesota customers as of the balance sheet date.

The North Dakota Generation Cost Recovery Rider Accrued Refund relates to revenues collected under the rider in excess of returns allowed on recoverable costs incurred for the North Dakota share of OTP’s investment in Astoria Station, a natural gas-fired combustion turbine generation facility under construction near Astoria, South Dakota. The balance represents amounts subject to refund to North Dakota customers that had been billed to North Dakota customers as of the balance sheet date.

If for any reason OTP ceases to meet the criteria for application of guidance under ASC 980 for all or part of its operations, the regulatory assets and liabilities that no longer meet such criteria would be removed from the consolidated balance sheet and included in the consolidated statement of income as an expense or income item in the period in which the application of guidance under ASC 980 ceases.