Regulatory Assets and Liabilities

As a regulated

entity, OTP accounts for the financial effects of regulation in accordance with ASC Topic

980,

Regulated Operations

(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

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:

	June 30 , 2017						Remaining Recovery/ Refund Period
(in thousands)	Current		Long-Term		Total		(months)
Regulatory Assets:
Prior Service Costs and Actuarial Losses on Pensions and Other Postretirement Benefits 1	$	6,444	$	105,045	$	111,489	see below
Conservation Improvement Program Costs and Incentives 2		3,185		6,705		9,890	27
Deferred Marked-to-Market Losses 1		4,063		4,436		8,499	4 2
Accumulated ARO Accretion/Depreciation Adjustment 1		--		6,400		6,400	asset lives
Big Stone II Unrecovered Project Costs – Minnesota 1		699		1,762		2,461	46
Debt Reacquisition Premiums 1		277		1,087		1,364	183
Deferred Income Taxes 1		--		1,026		1,026	asset lives
Minnesota Deferred Rate Case Expenses Subject to Recovery 1		725		--		725	10
North Dakota Renewable Resource Rider Accrued Revenues 2		331		294		625	21
Big Stone II Unrecovered Project Costs – South Dakota 2		100		492		592	7 1
MISO Schedule 26/26A Transmission Cost Recovery Rider True-up 2		170		232		402	30
North Dakota Transmission Cost Recovery Rider Accrued Revenues 2		284		--		284	6
Minnesota Transmission Cost Recovery Rider Accrued Revenues 2		180		--		180	1 2
South Dakota Transmission Cost Recovery Rider Accrued Revenues 2		71		--		71	6
Minnesota Renewable Resource Rider Accrued Revenues 2		11		--		11	3
Total Regulatory Assets	$	16,540	$	127,479	$	144,019
Regulatory Liabilities:
Accumulated Reserve for Estimated Removal Costs – Net of Salvage	$	--	$	82,158	$	82,158	asset lives
North Dakota Transmission Cost Recovery Rider Accrued Refund		929		498		1,427	18
Deferred Income Taxes		--		753		753	asset lives
Minnesota Environmental Cost Recovery Rider Accrued Refund		645		--		645	12
Revenue for Rate Case Expenses Subject to Refund – Minnesota		563		--		563	10
Re fundable Fuel Clause Adjustment Revenues		509		--		509	12
South Dakota Environmental Cost Recovery Rider Accrued Refund		332		--		332	12
Nort h Dakota Environmental Cost Recovery Rider Accrued Refund		167		--		167	12
Sout h Dakota Transmission Cost Recovery Rider Accrued Refund		151		--		151	12
MISO Schedule 26/26A Transmission Cost Recovery Rider True-up		66		66		132	18
Other		6		86		92	198
Total Regulatory Liabilities	$	3,368	$	83,561	$	86,929
Net Regulatory Asset Position	$	13,172	$	43,918	$	57,090

Costs subject to recovery without a rate of return.

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

	December 31, 2016						Remaining Recovery/ Refund Period
(in thousands)	Current		Long-Term		Total		(months)
Regulatory Assets:
Prior Service Costs and Actuarial Losses on Pensions and Other Postretirement Benefits 1	$	6,443	$	108,267	$	114,710	see below
Conservation Improvement Program Costs and Incentives 2		4,836		5,158		9,994	21
Deferred Marked-to-Market Losses 1		4,063		6,467		10,530	48
Accumulated ARO Accretion/Depreciation Adjustment 1		--		6,153		6,153	asset lives
Big Stone II Unrecovered Project Costs – Minnesota 1		778		2,087		2,865	52
Recoverable Fuel and Purchased Power Costs 1		1,798		--		1,798	12
Debt Reacquisition Premiums 1		325		1,214		1,539	189
Deferred Income Taxes 1		--		1,014		1,014	asset lives
Minnesota Deferred Rate Case Expenses Subject to Recovery 1		1,082		--		1,082	12
North Dakota Renewable Resource Rider Accrued Revenues 2		1,319		482		1,801	15
Big Stone II Unrecovered Project Costs – South Dakota 2		100		543		643	77
MISO Schedule 26/26A Transmission Cost Recovery Rider True-up 2		333		--		333	12
North Dakota Transmission Cost Recovery Rider Accrued Revenues 2		--		568		568	24
South Dakota Transmission Cost Recovery Rider Accrued Revenues 2		73		141		214	14
North Dakota Environmental Cost Recovery Rider Accrued Revenues 2		113		--		113	12
Minnesota Renewable Resource Rider Accrued Revenues 2		34		--		34	9
Total Regulatory Assets	$	21,297	$	132,094	$	153,391
Regulatory Liabilities:
Accumulated Reserve for Estimated Removal Costs – Net of Salvage	$	--	$	80,404	$	80,404	asset lives
North Dakota Transmission Cost Recovery Rider Accrued Refund		1,381		782		2,163	24
Deferred Income Taxes		--		818		818	asset lives
Minnesota Environmental Cost Recovery Rider Accrued Refund		139		--		139	12
Revenue for Rate Case Expenses Subject to Refund – Minnesota		711		208		919	16
Minnesota Transmission Cost Recovery Rider Accrued Refund		757		--		757	12
South Dakota Environmental Cost Recovery Rider Accrued Refund		285		--		285	12
MISO Schedule 26/26A Transmission Cost Recovery Rider True-up		--		132		132	24
Other		21		89		110	204
Total Regulatory Liabilities	$	3,294	$	82,433	$	85,727
Net Regulatory Asset Position	$	18,003	$	49,661	$	67,664

Costs subject to recovery without a rate of return.

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

The regulatory asset related to prior service costs and actuarial losses on pensions and other postretirement benefits represents benefit costs and actuarial losses subject to recovery through rates as they are expensed over the remaining service lives of active employees included in the plans. These unrecognized benefit costs and actuarial losses 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 based on their probable recovery in future retail electric rates.

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

All Deferred Marked-to-Market Losses recorded as of

June 30, 2017

relate to forward purchases of energy scheduled for delivery through

December 2020.

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

Big Stone II 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.

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

months.

The regulatory assets and liabilities related to Deferred Income Taxes result from changes in statutory tax rates accounted for in accordance with ASC Topic

740,

Income Taxes

Minnesota Deferred Rate Case Expenses Subject to Recovery relate to costs incurred in conjunction with OTP

’s

2016

rate case in Minnesota currently being recovered over a

-month period beginning with the establishment of interim rates in

April 2016.

North Dakota Renewable Resource Rider Accrued Revenues relate to qualifying renewable resource costs incurred to serve North Dakota customers that have

not

been billed to North Dakota customers as of

June 30, 2017.

Big Stone II 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.

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.

The North Dakota Transmission

Cost Recovery Rider Accrued Revenues relate to revenues earned on qualifying transmission system facilities that have

not

been billed to North Dakota customers as of

June 30, 2017.

The

Minnesota Transmission Cost Recovery Rider Accrued Revenues relate to revenues earned on qualifying transmission system facilities that have

not

been billed to Minnesota customers as of

June 30, 2017.

The South Dakota Transmission

Cost Recovery Rider Accrued Revenues relate to revenues earned on qualifying transmission system facilities that have

not

been billed to South Dakota customers as of

June 30, 2017.

Minnesota Renewable Resource Rider Accrued Revenues relate to revenues earned on qualifying renewable resource costs incurred to serve Minnesota customers that have

not

been billed to Minnesota customers. On

April 4, 2013

the MPUC approved OTP

’s request to set the rider rate to

zero

effective

May 1, 2013

and authorized that any unrecovered balance be retained as a regulatory asset to be recovered over an

-month period beginning with the establishment of interim rates in

April 2016.

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 are refundable to North Dakota customers as of

June 30, 2017.

The Minnesota Environmental Cost Recovery Rider Accrued Refund relates to amounts collected on the Minnesota share of OTP

’s investment in the Big Stone Plant AQCS project

that are refundable to Minnesota customers as of

June 30, 2017.

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, which are subject to refund over a

-month period beginning with the establishment of interim rates in

April 2016.

The South Dakota Environmental Cost Recovery Rider Accrued Refund relates to amounts collected on the South Dakota share of OTP

’s investments in the Big Stone Plant AQCS and Hoot Lake Plant MATS projects that are refundable to South Dakota customers as of

June 30, 2017.

The

North Dakota Environmental Cost Recovery Rider Accrued Refund relates to amounts collected on the North Dakota share of OTP’s investments in the Big Stone Plant AQCS and Hoot Lake Plant MATS projects that are refundable to North Dakota customers as of

June 30, 2017.

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 are refundable to South Dakota customers as of

June 30, 2017.

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

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.