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 Otter Tail Power Company (OTP) forward energy contracts, marked-to-market and realized gains and losses are recognized on a net basis in revenue in accordance with the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 815, Derivatives and Hedging. 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.

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:

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.

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 $2.9 million in the three months ended June 30, 2012 and $0 in the three months ended June 30, 2013, and $8.7 million in the six months ended June 30, 2012 and $0.5 million in the six months ended June 30, 2013.

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 sold by the Company carry one to fifteen year warranties. Although the Company engages 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 balance as of December 31, 2012 and June 30, 2013 relates entirely to products that were produced by the Company’s manufacturers of wind towers and waterfront equipment prior to the Company selling the assets of these companies and is included in liabilities of discontinued operations. See note 17 to consolidated financial statements.

The Company follows ASC 820, Fair Value Measurements and Disclosures, 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 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.

June 30, 2013 (in thousands)	Level 1		Level 2		Level 3
Assets:
Current Assets – Other:
Forward Energy Contracts	$	--	$	--	$	1,180
Forward Gasoline Purchase Contracts				94
Money Market and Mutual Funds - Nonqualified Retirement Savings Plan		110
Investments:
Corporate Debt Securities – Held by Captive Insurance Company				7,617
U.S. Government Debt Securities – Held by Captive Insurance Company				1,278
Other Assets:
Money Market and Mutual Funds - Nonqualified Retirement Savings Plan		183
Equity Securities - Nonqualified Retirement Savings Plan		130
Total Assets	$	423	$	8,989	$	1,180
Liabilities:
Derivative Liabilities - Forward Energy Contracts	$	--	$	--	$	13,294
Total Liabilities	$	--	$	--	$	13,294

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

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 June 30, 2013 and December 31, 2012, are based on prices indexed to observable prices at an active trading hub. The range for Level 3 forward electric inputs was $18.00 to $50.00 per megawatt-hour. The weighted average price was $37.30 per megawatt-hour.

In the table above, $436,000 of the fair value of the Level 3 forward energy contracts in a derivative asset position and $12,591,000 of the fair value of the Level 3 forward energy contracts in a derivative liability position as of June 30, 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 three or six month periods ended June 30, 2013 and 2012.

The remaining $744,000 of the fair value of the Level 3 forward energy contracts in a derivative asset position and $703,000 of the fair value of the Level 3 forward energy contracts in a derivative liability position as of June 30, 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. The related forward energy purchase and sales contracts are 100% offsetting in terms of volumes, delivery periods and delivery points. These contracts are scheduled for settlement in July and August of 2013. 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.

	Six Months Ended
	June 30,
(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		3,776			2,861
Changes in Fair Value of Contracts Entered into in Prior Periods		1,851			(5,046	)
Cumulative Fair Value Adjustments of Contracts Entered into in Prior Years at End of Period		(12,155	)		(18,069	)
Net Increase in Value of Open Contracts Entered into in Current Period		41			--
Forward Energy Contracts - Net Derivative Liability Fair Values End of Period	$	(12,114	)	$	(18,069	)

June 30, 2013 (in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Amortization Periods
Amortizable Intangible Assets:
Customer Relationships	$	16,811	$	4,510	$	12,301	15 – 25 years
Other Intangible Assets Including Contracts		825		410		415	5 – 30 years
Total	$	17,636	$	4,920	$	12,716
Indefinite-Lived Intangible Assets:
Trade Name	$	1,100		--	$	1,100

December 31, 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

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, have 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.

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 June 30, 2013 and its maximum exposure to loss as a result of its involvement with CCMC as of June 30, 2013 totaled $9.4 million.

The Company’s consolidated income statement and consolidated statement of cash flows for the three and six month periods ended June 30, 2012 reflect the reclassifications of the operating results and cash flows of discontinued operations as a result of the completion of the sale of the assets of the Company’s wind tower manufacturer and discontinuance of wind tower production activities in November 2012 and the sale of the assets of the Company’s waterfront equipment manufacturer on February 8, 2013. The reclassification had no impact on the Company’s total consolidated net income or cash flows for the three or six months ended June 30, 2012.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities, 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, 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.

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.

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 June 30, 2013 and in note 12 to the consolidated financial statements.