4. 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 980-605-25 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, 2016						Remaining Recovery/
(in thousands)	Current		Long-Term		Total		Refund Period
Regulatory Assets:
Prior Service Costs and Actuarial Losses on Pensions and Other Postretirement Benefits¹	$	7,439	$	94,671	$	102,110	see below
Deferred Marked-to-Market Losses¹		4,063		7,483		11,546	51 months
Conservation Improvement Program Costs and Incentives²		4,286		3,079		7,365	24 months
Accumulated ARO Accretion/Depreciation Adjustment¹		—		6,031		6,031	asset lives
Big Stone II Unrecovered Project Costs – Minnesota¹		619		2,444		3,063	55 months
North Dakota Renewable Resource Rider Accrued Revenues²		1,608		826		2,434	18 months
Debt Reacquisition Premiums¹		349		1,278		1,627	192 months
Deferred Income Taxes¹		—		1,157		1,157	asset lives
Minnesota Deferred Rate Case Expenses Subject to Recovery¹		748		—		748	12 months
Big Stone II Unrecovered Project Costs – South Dakota²		101		567		668	80 months
North Dakota Transmission Cost Recovery Rider Accrued Revenues²		—		544		544	27 months
MISO Schedule 26/26A Transmission Cost Recovery Rider True-up²		474		43		517	27 months
South Dakota Transmission Cost Recovery Rider Accrued Revenues²		225		—		225	12 months
Minnesota Renewable Resource Rider Accrued Revenues²		46		—		46	12 months
Total Regulatory Assets	$	19,958	$	118,123	$	138,081
Regulatory Liabilities:
Accumulated Reserve for Estimated Removal Costs – Net of Salvage	$	—	$	77,603		77,603	asset lives
Refundable Fuel Clause Adjustment Revenues		2,301		—		2,301	12 months
North Dakota Transmission Cost Recovery Rider Accrued Refund		638		758		1,396	24 months
Minnesota Transmission Cost Recovery Rider Accrued Refund		1,356		—		1,356	12 months
Revenue for Rate Case Expenses Subject to Refund – Minnesota		712		385		1,097	19 months
Deferred Income Taxes		—		918		918	asset lives
Minnesota Environmental Cost Recovery Rider Accrued Refund		370		—		370	12 months
South Dakota Environmental Cost Recovery Rider Accrued Refund		296		—		296	12 months
North Dakota Environmental Cost Recovery Rider Accrued Refund		256		—		256	12 months
Other		5		91		96	207 months
MISO Schedule 26/26A Transmission Cost Recovery Rider True-up		—		80		80	27 months
Total Regulatory Liabilities	$	5,934	$	79,835	$	85,769
Net Regulatory Asset Position	$	14,024	$	38,288	$	52,312

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, 2015						Remaining Recovery/
(in thousands)	Current		Long-Term		Total		Refund Period
Regulatory Assets:
Prior Service Costs and Actuarial Losses on Pensions and Other Postretirement Benefits¹	$	7,439	$	99,293	$	106,732	see below
Deferred Marked-to-Market Losses¹		4,063		10,530		14,593	60 months
Conservation Improvement Program Costs and Incentives²		4,411		4,266		8,677	18 months
Accumulated ARO Accretion/Depreciation Adjustment¹		—		5,672		5,672	asset lives
Big Stone II Unrecovered Project Costs – Minnesota¹		942		2,620		3,562	84 months
Debt Reacquisition Premiums¹		351		1,539		1,890	201 months
Deferred Income Taxes¹		—		1,455		1,455	asset lives
North Dakota Renewable Resource Rider Accrued Revenues²		—		1,266		1,266	15 months
MISO Schedule 26/26A Transmission Cost Recovery Rider True-up²		698		355		1,053	24 months
Big Stone II Unrecovered Project Costs – South Dakota²		100		643		743	89 months
Minnesota Transmission Cost Recovery Rider Accrued Revenues²		576		—		576	12 months
Minnesota Deferred Rate Case Expenses Subject to Recovery¹		291		—		291	12 months
Minnesota Renewable Resource Rider Accrued Revenues²		—		68		68	see below
South Dakota Transmission Cost Recovery Rider Accrued Revenues²		33		—		33	12 months
Total Regulatory Assets	$	18,904	$	127,707	$	146,611
Regulatory Liabilities:
Accumulated Reserve for Estimated Removal Costs – Net of Salvage	$	—	$	74,948	$	74,948	asset lives
Refundable Fuel Clause Adjustment Revenues		1,834		—		1,834	12 months
Revenue for Rate Case Expenses Subject to Refund – Minnesota		—		1,279		1,279	see below
Deferred Income Taxes		—		1,110		1,110	asset lives
Minnesota Environmental Cost Recovery Rider Accrued Refund		777		—		777	12 months
North Dakota Environmental Cost Recovery Rider Accrued Refund		321		—		321	12 months
South Dakota Environmental Cost Recovery Rider Accrued Refund		185		—		185	12 months
North Dakota Transmission Cost Recovery Rider Accrued Refund		132		—		132	12 months
Deferred Gain on Sale of Utility Property – Minnesota Portion		5		95		100	216 months
North Dakota Renewable Resource Rider Accrued Refund		68		—		68	12 months
Total Regulatory Liabilities	$	3,322	$	77,432	$	80,754
Net Regulatory Asset Position	$	15,582	$	50,275	$	65,857

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 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.

All Deferred Marked-to-Market Losses recorded as of September 30, 2016 relate to forward purchases of energy scheduled for delivery through December 2020.

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

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.

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 September 30, 2016.

Debt Reacquisition Premiums are being recovered from OTP customers over the remaining original lives of the reacquired debt issues, the longest of which is 192 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 24-month period beginning with the establishment of interim rates in April 2016.

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.

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 September 30, 2016.

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 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 September 30, 2016.

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 18-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 September 30, 2016.

The Minnesota Transmission Cost Recovery Rider Accrued Refund relates to amounts collected for qualifying transmission system facilities and operating costs incurred to serve Minnesota customers that are refundable to Minnesota customers as of September 30, 2016.

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 24-month period beginning with the establishment of interim rates in April 2016.

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 September 30, 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 September 30, 2016.

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 September 30, 2016.

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.