Significant Accounting Policies (Policies)

6 Months Ended

Jun. 30, 2017

Revenue Recognition, Policy [Policy Text Block]

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 and warranty costs are recorded at the time of the sale based on historical information and current trends. 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.

For the Company

’s operating companies recognizing revenue on certain products when shipped, those operating companies have

further obligation to provide services related to such products. The shipping terms used in these instances are FOB shipping point.

Agreements Subject to Legally Enforceable Netting Arrangements [Policy Text Block]

Agreements Subject 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 of Financial Instruments, Policy [Policy Text Block]

Fair Value Measurements

The Company follows

Accounting Standards Codification (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

– 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

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 (NYMEX).

Level

– 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

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

– Significant inputs to pricing have little or

observability as of the reporting date. The types of assets and liabilities included in Level

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

June 30, 2017

and

December 31, 2016:

June 30 , 201 7 (in thousands)	Level 1		Level 2		Level 3
Assets:
Investments:
Equity Funds – Held by Captive Insurance Company	$	879
Corporate Debt Securities – Held by Captive Insurance Company			$	4,991
Government -Backed and Government-Sponsored Enterprises ’ Debt Securities – Held by Captive Insurance Company				2,099
Other Assets:
Money Market and Mutual Funds – Nonqualified Retirement Savings Plan		781
Total Assets	$	1,660	$	7,090

December 31, 201 6 (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

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.

Consolidation, Variable Interest Entity, Policy [Policy Text Block]

Coyote Station Lignite Supply Agreement

– Variable Interest Entity

—In

October 2012

the Coyote Station owners, including Otter Tail Power Company (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.

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

June 30, 2017

could be as high as

$58.9

million, OTP’s

35%

share of unrecovered costs.

Inventory, Policy [Policy Text Block]

Inventories

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

	June 30 ,		December 31,
(in thousands)	201 7		201 6
Finished Goods	$	24,646	$	27,755
Work in Process		13,977		11,754
Raw Material, Fuel and Supplies		48,644		44,231
Total Inventories	$	87,267	$	83,740

Goodwill and Intangible Assets, Goodwill, Policy [Policy Text Block]

Goodwill and Other Intangible Assets

An assessment of the carrying amounts of goodwill of the Company

’s operating units as of

December 31, 2016

indicated the fair values are substantially in excess of their respective book values and

not

impaired.

The following table

indicates there were

changes to goodwill by business segment during the

first

six

months of

2017:

(in thousands)	Gross Balance December 31, 2016		Accumulated Impairments		Balance (net of impairments) December 31, 2016		Adjustments to Goodwill in 201 7		Balance (net of impairments) June 30, 2017
Manufacturing	$	18,270	$	--	$	18,270	$	--	$	18,270
Plastics		19,302		--		19,302		--		19,302
Total	$	37,572	$	--	$	37,572	$	--	$	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

35,

Property, Plant, and Equipment—Overall—Subsequent Measurement

The following table summarizes the components of the Company

’s intangible assets at

June 30, 2017

and

December

31,

2016:

June 30 , 2017 (in thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Remaining Amortization Periods (months)
Amortizable Intangible Assets:
Customer Relationships	$	22,491	$	8,427	$	14,064	30	-	218
Covenant not to Compete		590		361		229		14
Other		98		--		98		36
Total	$	23,179	$	8,788	$	14,391

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:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
(in thousands)	201 7		201 6		201 7		201 6
Amortization Expense – Intangible Assets	$	333	$	398	$	665	$	755

The estimated annual amortization expense for these intangible assets for the next

five

years is:

(in thousands)		2017				2018				2019				2020				2021
Estimated Amortization Expense – Intangible Assets		$	1,330			$	1,264			$	1,133			$	1,099			$	1,099

Cash Flow Supplemental [Policy Text Block]

Supplemental Disclosures of Cash Flow Information

	As of June 30,
(in thousands)	201 7		201 6
Noncash Investing Activities:
Transactions Related to Capital Additions not Settled in Cash	$	16,312	$	17,837

New Accounting Pronouncements, Policy [Policy Text Block]

New Accounting Standards

Adopted

Accounting Standards Update (

ASU

)

2015

—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

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.

Schedule of Prospective Adoption of New Accounting Pronouncements [Policy Text Block]

New Accounting Standards

Pending

Adopt

ion

ASU

2014

—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, but

not

any earlier than

January 1, 2017.

Application methods permitted are: (

) full retrospective, (

) retrospective using

one

or more practical expedients and (

) retrospective with the cumulative effect of initial application recognized at the date of initial

application. The Company does

not

plan to adopt the updated guidance prior to

January 1, 2018.

As of

June 30, 2017

the Company has reviewed its revenue streams and contracts to determine areas where the amendments in ASU

2014

will be applicable and has evaluated transition options. Based on review of the Company’s revenue streams, the Company does

not

anticipate a significant change in the levels or timing of revenue recognition over an annual or interim period as a result of the adoption of ASU

2014

09.

Based on these observations, the Company expects to adopt the updates in ASU

2014

retrospectively with the cumulative effect of initial application on retained earnings and other balance sheet accounts recognized on

January 1, 2018,

the date of initial application. Adoption of ASU

2014

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.

ASU

2016

—In

February 2016

the FASB issued ASU

No.

2016

02,

Leases (Topic

842

)

(ASU

2016

). ASU

2016

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

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

is permitted. The Company is currently reviewing ASU

2016

02,

developing a list of all current leases outstanding and identifying key impacts to its businesses to determine areas where the amendments in ASU

2016

will be applicable and evaluating transition options. The Company does

not

currently plan to apply the amendments in ASU

2016

to its consolidated financial statements prior to

2019.

ASU

2017

—In

January 2017

the FASB issued ASU

No.

2017

04,

Intangibles—Goodwill and Other (Topic

350

): Simplifying the Test for Goodwill Impairment

(ASU

2017

), which

simplifies how an entity is required to test goodwill for impairment by eliminating Step

from the goodwill impairment test. Step

measured 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

an entity had 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

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

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

from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment. The amendments in ASU

2017

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

—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

), 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

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

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

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 in assets.

The majority of the Company

’s benefit costs to which the amendments in ASU

2017

apply are related to benefit plans in place at OTP, the Company’s regulated provider of electric utility services. The amendments in ASU

2017

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 currently is assessing the impact adoption of the amendments in ASU

2017

may

have on its consolidated financial statements, financial position and results of operations and is determining what adjustments and regulatory assets, if any,

may

need to be established in order to reflect the effect of the required regulatory accounting treatment of the affected net periodic benefit costs. At a minimum, the Company anticipates the non-service cost components of the affected net periodic benefit costs will be reported below the operating income line on its consolidated income statements upon adoption of the amendments in ASU

2017

07.

The Company does

not

plan to adopt the updates in ASU

2017

prior to the

first

quarter of

2018,

the required effective period for application of the updates by the Company.