Regulatory Assets and Liabilities

We prepare our financial statements in accordance with the provisions of ASC 980, as discussed in Note 2 - Significant Accounting Policies. Pursuant to this guidance, certain expenses and credits, normally reflected in income as incurred, are deferred and recognized when included in rates and recovered from or refunded to the customers. Regulatory assets and liabilities are recorded based on management's assessment that it is probable that a cost will be recovered or that an obligation has been incurred. Accordingly, we have recorded the following major classifications of regulatory assets and liabilities that will be recognized in expenses and revenues in future periods when the matching revenues are collected or refunded. Of these regulatory assets and liabilities, energy supply costs are the only items earning a rate of return. The remaining regulatory items have corresponding assets and liabilities that will be paid for or refunded in future periods. Because these costs are recovered as paid, they do not earn a return. We have specific orders to cover approximately 98% of our regulatory assets and 96% of our regulatory liabilities.



	Note Reference	Remaining Amortization Period	December 31,
			2011			2010
			(in thousands)
Pension	13	Undetermined	$	128,844		$	94,500
Postretirement benefits	13	Undetermined	6,434			9,104
Competitive transition charges		1 Year	1,380			7,359
Distribution infrastructure projects	16	6 Years	4,883			—
Environmental clean-up	18	Various	16,998			15,438
Supply costs		1 Year	11,168			8,491
Energy supply derivatives	6	1 Year	20,312			29,721
Income taxes	10	Plant Lives	124,967			71,374
Deferred financing costs		Various	15,413			16,882
Other	—	Various	27,305			29,465
Total regulatory assets			$	357,704		$	282,334
Removal cost	4	Various	$	251,262		$	237,831
Gas storage sales		28 Years	11,672			12,092
Supply costs		1 Year	18,214			15,065
DGGS interim rates (subject to refund)	16	1 Year	10,984			—
Environmental clean-up		1 Year	1,645		1,645	467
State & local taxes & fees		1 Year	2,528			805
Other		Various	2,866			2,046
Total regulatory liabilities			$	299,171		$	268,306

Pension and Postretirement Benefits

We recognize the unfunded portion of plan benefit obligations in the Consolidated Balance Sheets, which is remeasured at each year end, with a corresponding adjustment to regulatory assets/liabilities as the costs associated with these plans are recovered in rates. The portion of the regulatory asset related to our Montana pension plan will amortize as cash funding amounts exceed accrual expense under GAAP. The SDPUC allows recovery of pension costs on an accrual basis. The MPSC allows recovery of postretirement benefit costs on an accrual basis.

Natural Gas Competitive Transition Charges

Natural gas transition bonds were issued in 1998 to recover stranded costs of production assets and related regulatory assets and provide a lower cost to utility customers, as the cost of debt was less than the cost of capital. The MPSC authorized the securitization of these assets and approved the recovery of the competitive transition charges in rates over a 15-year period. The regulatory asset relating to competitive transition charges amortizes proportionately with the principal payments on the natural gas transition bonds.

Montana Distribution System Infrastructure Project (DSIP)

In March 2011, we requested and received MPSC approval of an accounting order to defer certain incremental operating and maintenance expenses. The accounting order allows us to defer up to $16.9 million of expenses incurred during 2011 and 2012 as a regulatory asset and amortize these expenses associated with the phase-in portion of the DSIP over five years beginning in 2013. See Note 16 - Regulatory Matters, for further information regarding this item.

Supply Costs

The MPSC, SDPUC and NPSC have authorized the use of electric and natural gas supply cost trackers, as applicable, which enable us to track actual supply costs and either recover the under collection or refund the over collection to our customers. Accordingly, we have recorded a regulatory asset and liability to reflect the future recovery of under collections and refunding of over collections through the ratemaking process. We earn interest on the electric and natural gas supply costs of 7.92%, in Montana; 10.60% and 7.79%, respectively, in South Dakota; and 8.49% for natural gas in Nebraska. These same rates are paid to our customers in the event of a refund.

DGGS Interim Rates

We have deferred revenue associated with DGGS as final rates have not been determined. See Note 16 - Regulatory Matters, for further information regarding this item.

Environmental clean-up

Environmental clean-up costs are the estimated costs of investigating and cleaning up contaminated sites we own. We discuss the specific sites and clean-up requirements further in Note 18 - Commitments and Contingencies. Environmental clean-up costs are typically recoverable in customer rates when they are actually incurred. We record changes in the regulatory asset consistent with changes in our environmental liabilities. When cost projections become known and measurable we coordinate with the appropriate regulatory authority to determine a recovery period.

Income Taxes

Tax assets primarily reflect the effects of plant related temporary differences such as flow-through of depreciation, repairs related deductions, removal costs, capitalized interest and contributions in aid of construction that we will recover or refund in future rates. We amortize these amounts as temporary differences reverse.

Deferred Financing Costs

Consistent with our historical regulatory treatment, a regulatory asset has been established to reflect the remaining deferred financing costs on long-term debt that has been replaced through the issuance of new debt. These amounts are amortized over the life of the new debt.

State & Local Taxes & Fees (Montana Property Tax Tracker)

Under Montana law, we are allowed to track the increases in the actual level of state and local taxes and fees and recover these amounts. The MPSC has authorized recovery of approximately 60% of the estimated increase in our local taxes and fees (primarily property taxes) as compared to the related amount included in rates during our last general rate case.

Removal Cost

The anticipated costs of removing assets upon retirement are provided for over the life of those assets as a component of depreciation expense. Our depreciation method, including cost of removal, is established by the respective regulatory commissions. Therefore, consistent with this regulated treatment, we reflect this accrual of removal costs for our regulated assets by increasing our regulatory liability. See Note 4 - Asset Retirement Obligations, for further information regarding this item.

Gas Storage Sales

A regulatory liability was established in 2000 and 2001 based on gains on cushion gas sales in Montana. This gain is being flowed to customers over a period that matches the depreciable life of surface facilities that were added to maintain deliverability from the field after the withdrawal of the gas. This regulatory liability is a reduction of rate base.