SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-368
OTTER TAIL POWER COMPANY
(Exact name of registrant as specified in its charter)
Minnesota 41-0462685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
215 South Cascade Street, Box 496, Fergus Falls, Minnesota 56538-0496
(Address of principal executive offices) (Zip Code)
218-739-8200
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
October 31, 1997 - 11,695,903 Common Shares ($5 par value)
OTTER TAIL POWER COMPANY
------------------------
INDEX
-----
Part I. Financial Information Page No.
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 1997
and December 31, 1996 (Unaudited) 2 & 3
Consolidated Statements of Income - Three and Nine Months
Ended September 30, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1997 and 1996 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6, 7 & 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8, 9, 10 & 11
Part II. Other Information
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 12
<TABLE>
<CAPTION>
Part I. Financial Information
------------------------------
Item 1. Financial Statements
--------------------
Otter Tail Power Company
Consolidated Balance Sheets
(Unaudited)
-Assets-
September 30, December 31,
1997 1996
------ ------
(Restated)
(Thousands of dollars)
<S> <C> <C>
Plant:
Electric plant in service $752,657 $742,065
Subsidiary companies 109,689 94,701
-------- --------
Total 862,346 836,766
Less accumulated depreciation and amortization 350,138 327,855
-------- --------
512,208 508,911
Construction work in progress 15,007 11,470
-------- --------
Net plant 527,215 520,381
-------- --------
Investments 20,284 19,880
-------- --------
Intangibles -- net 21,356 21,954
-------- --------
Other assets 6,096 6,553
-------- --------
Current assets:
Cash and cash equivalents 6,010 2,094
Temporary cash investments -- --
Accounts receivable:
Trade - net 37,751 32,603
Other 5,150 5,021
Materials and supplies:
Fuel 3,205 3,220
Inventory, materials and operating supplies 24,879 24,247
Deferred income taxes 4,887 4,550
Accrued utility revenues 2,839 5,349
Other 5,437 4,524
-------- --------
Total current assets 90,158 81,608
-------- --------
Deferred debits:
Unamortized debt expense and reacquisition premiums 3,930 4,270
Regulatory assets 5,732 5,866
Other 4,004 3,655
-------- --------
Total deferred debits 13,666 13,791
-------- --------
Total $678,775 $664,167
======== ========
See accompanying notes to consolidated financial statements
- 2 -
</TABLE>
<TABLE>
<CAPTION>
Otter Tail Power Company
Consolidated Balance Sheets
(Unaudited)
-Liabilities-
September 30, December 31,
1997 1996
------ ------
(Restated)
(Thousands of dollars)
<S> <C> <C>
Capitalization:
Common shares, par value $5 per share - authorized
25,000,000 shares; outstanding 1997 -- 11,692,307;
and 1996 -- 11,372,298 shares $ 58,462 $ 56,861
Premium on common shares 34,036 30,683
Retained earnings 113,981 106,589
-------- --------
Total 206,479 194,133
Cumulative preferred shares - authorized 1,500,000
shares without par value; outstanding 1997
and 1996, 388,311 shares
Subject to mandatory redemption 18,000 18,000
Other 20,831 20,831
Cumulative preference shares - authorized 1,000,000
shares without par value; outstanding - none -- --
Long-term debt 162,687 160,704
-------- --------
Total capitalization 407,997 393,668
-------- --------
Current liabilities:
Short-term debt 29,100 25,600
Sinking fund requirements and current maturities 43,905 42,218
Accounts payable 27,252 27,260
Accrued salaries and wages 3,341 3,847
Federal and state income taxes accrued 1,768 2,031
Other taxes accrued 10,172 12,048
Interest accrued 2,053 3,622
Other 3,121 2,822
-------- --------
Total current liabilities 120,712 119,448
-------- --------
Noncurrent liabilities 16,992 16,688
-------- --------
Deferred credits:
Accumulated deferred income taxes 98,250 98,498
Accumulated deferred investment tax credit 18,970 19,818
Regulatory liabilities 12,712 13,283
Other 3,142 2,764
-------- --------
Total deferred credits 133,074 134,363
-------- --------
Total $678,775 $664,167
======== ========
See accompanying notes to consolidated financial statements
- 3 -
</TABLE>
<TABLE>
<CAPTION>
Otter Tail Power Company
Consolidated Statements of Income
(Unaudited)
Three months ended Nine months ended
September 30 September 30
1997 1996 1997 1996
------ ------ ------ ------
(Restated) (Restated)
(Thousands of dollars) (Thousands of dollars)
<S> <C> <C> <C> <C>
Operating revenues:
Electric $ 47,418 $ 45,261 $151,244 $147,079
Health services 17,868 16,527 48,277 43,598
Manufacturing 22,088 17,407 57,273 51,133
Other business operations 14,484 15,722 30,449 34,833
-------- -------- -------- --------
Total operating revenues 101,858 94,917 287,243 276,643
Operating expenses:
Production fuel 7,900 6,031 22,522 21,632
Purchased power 4,543 6,513 17,584 19,010
Other electric operation and maintenance expenses 18,115 16,774 53,323 49,254
Cost of goods sold 35,232 31,501 87,613 84,589
Other nonelectric expenses 13,155 12,671 35,483 32,045
Depreciation and amortization 6,380 5,769 19,064 16,986
Property taxes 2,780 2,864 8,363 8,863
-------- -------- -------- --------
Total operating expenses 88,105 82,150 243,952 232,379
Operating income:
Electric 8,747 8,099 33,436 33,545
Health services 1,095 1,490 2,592 3,156
Manufacturing 2,857 1,893 6,420 6,048
Other business operations 1,054 1,285 843 1,515
-------- -------- -------- --------
Total operating income 13,753 12,767 43,291 44,264
Other income and deductions - net 2,572 189 5,397 1,101
Interest charges 4,729 4,308 13,867 12,007
-------- -------- -------- --------
Income before income taxes 11,596 8,648 34,821 33,358
Income taxes 3,811 1,946 10,953 10,261
-------- -------- -------- --------
Net income 7,785 6,702 23,868 23,097
Preferred dividend requirements 590 590 1,769 1,769
-------- -------- -------- --------
Earnings available for common shares $ 7,195 $ 6,112 $ 22,099 $ 21,328
======== ======== ======== ========
Earnings per average common share $0.62 $0.54 $1.90 $1.88
======== ======== ======== ========
Average number of common shares outstanding 11,660,523 11,337,782 11,616,274 11,337,782
Dividends per common share $0.465 $0.45 $1.395 $1.35
See accompanying notes to consolidated financial statements
- 4 -
</TABLE>
<TABLE>
<CAPTION>
Otter Tail Power Company
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
September 30,
1997 1996
-------- --------
(Restated)
(Thousands of dollars)
Cash flows from operating activities:
<S> <C> <C>
Net income $ 23,867 $ 23,097
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 29,937 25,599
Deferred investment tax credit - net (882) (882)
Deferred income taxes (2,331) (2,609)
Change in deferred debits and other assets 491 4,578
Change in noncurrent liabilities and deferred credits 682 831
Allowance for equity (other) funds used during construction -- (225)
(Gains)/Losses from investments and disposal of noncurrent assets (1,445) 496
Cash provided by (used for) current assets & current liabilities:
Change in receivables, materials and supplies (5,632) 3,905
Change in other current assets 1,603 (970)
Change in payables and other current liabilities (1,587) (2,341)
Change in interest and income taxes payable (1,831) (1,797)
-------- --------
Net cash provided by operating activities 42,872 49,682
Cash flows from investing activities:
Gross capital expenditures (33,849) (50,662)
Proceeds from disposal of noncurrent assets 3,664 4,136
Purchase of businesses, net of cash acquired -- (7,859)
Change in temporary cash investments -- 2,161
Purchases of marketable securities (5) --
Proceeds from sales of marketable securities 786 --
Change in other investments (578) (8,741)
-------- --------
Net cash used in investing activities (29,982) (60,965)
Cash flows from financing activities:
Change in short-term debt - net 3,500 20,350
Proceeds from issuance of common stock 4,969 --
Proceeds from issuance of long-term debt 72,597 90,930
Payments for retirement of long-term debt (71,801) (81,957)
Dividends paid (18,239) (17,254)
-------- --------
Net cash (used in) provided by financing activities (8,974) 12,069
Net change in cash and cash equivalents 3,916 786
Cash and cash equivalents at beginning of year 2,094 2,419
-------- --------
Cash and cash equivalents at September 30 $ 6,010 $ 3,205
Supplemental cash flow information
Cash paid for interest and income taxes:
Interest (net of amount capitalized) $ 15,096 $ 13,254
Income taxes $ 14,439 $ 14,494
See accompanying notes to consolidated financial statements
- 5 -
</TABLE>
OTTER TAIL POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company, in its opinion, has included all adjustments (including normal
recurring accruals) necessary for a fair presentation of the results of
operations for the periods. The financial statements for 1997 are subject
to adjustment at the end of the year when they will be audited by
independent accountants. The financial statements and notes thereto should
be read in conjunction with the financial statements and notes for the
years ended December 31, 1996, 1995, and 1994 included in the Company's
1996 Annual Report to the Securities and Exchange Commission on Form 10-K.
Because of seasonal and other factors, the earnings for the three-month and
nine-month periods ended September 30, 1997, should not be taken as an
indication of earnings for all or any part of the balance of the year.
On January 2, 1997, the Company's telecommunications subsidiary, North
Central Utilities, Inc., acquired all of the outstanding common stock of
The Peoples Telephone Co. of Bigfork (Peoples) in exchange for 163,758
newly issued shares of the Company's common stock and $209,000 in cash in a
pooling of interests transaction. The acquisition has no significant pro
forma effect on the Company's balance sheet, operating revenues, net
income, or earnings per share for 1996. Therefore, the 1996 financial
statements included in this report have not been restated to reflect the
effect of the pooling. The following table shows the effect of the pooling
on the equity section of the Company's balance sheet on January 2, 1997:
Common Premium
Shares on Common Retained Total
Outstanding Par Shares Earnings Equity
----------- ------- ------- -------- --------
(dollars in thousands)
Otter Tail Power Company 11,372,298 $56,861 $30,683 $106,589 $194,133
Peoples 21 2,121 2,142
Shares Issued 163,758 819 819
Adjustments for:
Par value of new shares (21) (798) (819)
Cash paid for Peoples shares (209) (209)
---------- ------- ------- -------- --------
Combined 11,536,056 $57,680 $29,676 $108,710 $196,066
========== ======= ======= ======== ========
The net amount of cash used of ($209,000) and cash acquired of $36,000 in
the pooling is included in the Company's Statement of Cash Flows for the
nine months ended September 30, 1997, under "Proceeds from issuance of
common stock."
On June 30, 1997, the Company's subsidiary, Mid-States Development, Inc.,
acquired all of the outstanding common stock of Chassis Liner Corporation
(Chassis Liner) in exchange for 157,646 newly issued shares of the
Company's common stock. Chassis Liner is a manufacturer of auto and truck
frame straightening equipment with facilities in Alexandria and Lucan,
Minnesota. The acquisition has been accounted for as a pooling of
interests. Because the acquisition has a significant pro forma effect on
1996 results, the Company's prior period consolidated financial statements
presented herein have been restated to include Chassis Liner.
The impact of Chassis Liner on the Company's consolidated statements of
income and cash flows for the periods ending September 30, 1996, is
presented in the table below:
Otter Tail
Otter Tail Power
Power Chassis Company
(in thousands) Company Liner Combined
- --------------------------------------------------------------------------
For the three months ended September 30, 1996:
Revenue $ 92,866 $ 2,051 $ 94,917
Operating Income $ 12,273 $ 494 $ 12,767
Net income $ 6,207 $ 495 $ 6,702
For the nine months ended September 30, 1996:
Revenue $270,844 $ 5,799 $276,643
Operating Income $ 43,397 $ 867 $ 44,264
Net income $ 22,219 $ 878 $ 23,097
For the nine months ended September 30, 1996:
Net cash provided by operating activities $ 49,034 $ 648 $ 49,682
Net cash used in investing activities (60,916) (49) (60,965)
Net cash provided by (used in)
financing activities 12,492 (423) 12,069
-------- ------- --------
Net change in cash and cash equivalents 610 176 786
Cash and cash equivalents
at beginning of 1996 1,867 552 2,419
-------- ------- --------
Cash and cash equivalents
at September 30, 1996 $ 2,477 $ 728 $ 3,205
Prior to the acquisition, Chassis Liner was an S Corporation and,
consequently, was not subject to federal or state income taxes. The pro
forma income tax provision for Chassis Liner that would have been reported
by the Company as an additional provision to its historical tax expense had
Chassis Liner not been an S Corporation prior to the acquisition is
$198,000 and $351,000 for the three and nine month periods ended September
30, 1996, respectively, and $366,000 for the nine month period ended
September 30, 1997, based on a tax rate of 40%.
Additional common stock issuances in the first nine months of 1997 include
123,060 shares issued under the Company's Automatic Dividend Reinvestment
and Share Purchase Plan (the Plan), 30,561 shares issued to the Company's
leveraged employee stock ownership plan and 2,630 shares issued as a bonus
to a consultant. Of the 123,060 shares issued in 1997 under the Plan,
4,707 shares were issued in conjunction with a program initiated in July of
1997 whereby customers of the electric utility can purchase shares of the
Company's common stock by remitting additional funds with their monthly
electric service bill payments.
In 1997, Quadrant Co. (Quadrant) began processing solid waste for three
Minnesota counties under the terms of a new waste incineration agreement.
Since operating under the new agreement, Quadrant has experienced a
reduction in revenue of approximately fifty percent, as compared to 1996.
However, Quadrant's cash flows from operations for the first nine months of
1997 were positive. The Company intends to continue operating the Quadrant
plant as long as positive cash flows can be maintained.
Forward Looking Information - Safe Harbor Statement
Under the Private Securities Litigation Reform Act of 1995
- ----------------------------------------------------------
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "Act"), the Company has filed cautionary
statements identifying important factors that could cause the Company's
actual results to differ materially from those discussed in forward-looking
statements made by or on behalf of the Company. When used in this Form 10-Q
and in future filings by the Company with the Securities and Exchange
Commission, in the Company's press releases and in oral statements, words
such as "may", "will", "expect", "anticipate", "continue", "estimate",
"project", "believes" or similar expressions are intended to identify
forward-looking statements within the meaning of the Act. Factors that
might cause such differences include, but are not limited to, the factors
discussed under "Factors affecting future earnings" on pages 30-32 of the
Company's 1996 Annual Report to Shareholders, which is incorporated by
reference in the Company's Form 10-K for the fiscal year ended December 31,
1996. These factors are in addition to any other cautionary statements,
written or oral, which may be made or referred to in connection with any
such forward-looking statement or contained in any subsequent filings by
the Company with the Securities and Exchange Commission.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Material Changes in Financial Position
- --------------------------------------
Cash provided by operating activities of $42,872,000 as shown on the
Consolidated Statement of Cash Flows for the nine months ended September
30, 1997, combined with funds on hand of $2,094,000 at December 31, 1996,
allowed the Company to pay dividends and finance the majority of its
capital expenditures in the first nine months of 1997. Additional cash
provided by the issuance of $3,500,000 in short-term debt and $4,969,000 in
common stock provided the funds used to finance the remainder of the
capital expenditures in the first nine months of 1997. The Company's
initiative to reduce capital expenditures has resulted in a $16.8 million
reduction in this category over the first nine months of 1997, as compared
to the same period in 1996. At September 30, 1997, the Company had
$22,421,000 available in unused lines of credit which could be used to
supplement cash needs. The Company estimates that funds internally
generated, combined with funds on hand, will be sufficient to meet all
sinking fund payments for First Mortgage Bonds in the next five years and
to provide for its estimated 1997-2001 consolidated capital project
expenditures.
Additional short-term or long-term financing will be required in the period
1997-2001 in connection with the maturity of First Mortgage Bonds and a
long-term lease obligation ($21,000,000), in the event the Company decides
to refund or retire early any of its presently outstanding debt or
cumulative preferred shares, or for other corporate purposes.
In the second quarter of 1997, Standard and Poor's reaffirmed its AA-
rating of the Company's senior debt, however, it revised its ratings
outlook on the Company from stable to negative sighting growth in the level
of nonutility earnings relative to overall Company earnings as a reason for
the revision. Also in the second quarter of 1997, Moody's Investors
Service reaffirmed its Aa3 rating of the Company's First Mortgage Bonds and
Duff and Phelps reaffirmed its AA rating, while Fitch Investors Service
downgraded its rating from AA to AA-.
Subsequent to September 30, 1997, the Company's subsidiary, Mid-States
Development, Inc. (Mid-States), borrowed $22,500,000 under a term note for
10 years with a fixed interest rate of 7.8%. The proceeds will be loaned
to various subsidiaries of Mid-States to be used to repay certain variable
and fixed-rate debt. Mid-States also secured a new line of credit of
$17,500,000, which it intends to use to finance its subsidiaries' working
capital needs; interest on the borrowings will be based on LIBOR plus 1.75%
(7.6% at October 15, 1997). The note and credit line borrowings are secured
by a pledge of the common stock of the companies owned by Mid-States.
Subsequent to September 30, 1997, Mid-States' medical imaging services
subsidiary entered into a sale/leaseback transaction whereby $17,000,000 of
diagnostic medical equipment was sold and leased back under two operating
leases. The leases have terms of three and four years with annual lease
payments of approximately $700,000 and $3,760,000, respectively. This
transaction will result in a reduction in fixed assets and debt and transfer
technology risk in this equipment to the lessor.
The increases in electric plant in service and construction work in
progress are due to new construction and capital expenditures at the
electric utility, mainly in the production, transmission and general plant
areas including the Company's share of capital expenditures at the Coyote
Plant for boiler retubing, and approximately $2.3 million for the
replacement of facilities damaged in the April 1997 storm. The
acquisition of Peoples provided $7.1 million of the increase in subsidiary
companies plant. Capital additions of $3.8 million in the manufacturing
segment, along with additions of approximately $4.1 million at the other
subsidiaries accounted for the remaining increase in subsidiary companies
plant.
The increase in trade receivables reflects a $6.6 million increase in
receivables in the manufacturing segment coinciding with an increase in the
level of sales in this segment. The increase in trade receivables in the
manufacturing segment was partially offset by a $1.3 million seasonal
decline in trade receivables at the electric utility. The decrease in
accrued utility revenues is reflective of a normal seasonal decline in the
use of electricity in the Company's service area in the latter part of
September compared to December. The increase in other current assets is
due to an increase in prepaid expenses in the health services and
manufacturing segments.
The combined increase in common shares, par value and premium on common
shares of $4,954,000 is mainly due to the issuance of the 156,251 shares of
common stock under the Company's stock plans as described in the notes to
consolidated financial statements. The increase in long-term debt is due
to the acquisition of Peoples. The increase in short-term debt is related
to the timing of bond interest payments and estimated income tax payments
totaling $8.5 million in August and September of 1997. Accrued salaries
and wages decreased as a result of the payment of 1996 accrued employee
incentives. The decrease in other taxes accrued is partly due to the timing
of property tax payments in Minnesota, North Dakota and South Dakota, 85%
of which are due within the first nine months of the year following
accrual. Part of the decrease in other taxes accrued is due to an
adjustment to Minnesota property taxes accrued related to a reduction in
statutory class rates for commercial and industrial property and reduced
valuations of utility property. The decrease in interest accrued is due to
the timing of bond interest payments, the majority of which are due in the
first and third quarters of the calendar year.
Material Changes in Results of Operations
- -----------------------------------------
The 4.8% increase in electric operating revenue for the quarter ended
September 30, 1997, as compared to the same period in 1996, is due to
increases of 3.6% in retail revenue and 54.7% in other electric revenue.
The 2.8% increase in electric operating revenue for the nine months ended
September 30, 1997, as compared to the nine months ended September 30,
1996, is due to increases of 3.2% in retail revenue and 45.2% in other
electric revenue offset by a 21% decrease in revenue from power pool sales.
The increases in retail revenue for the three and nine month periods ended
September 30, 1997, as compared to the same periods in 1996, are mainly due
to increases in kwh sales to industrial customers and increases in cost-of-
energy revenue related to recovery of the costs of power purchased for sale
to retail customers in the first six months of 1997. The increases in
other electric revenue reflect the recognition of Minnesota Conservation
Improvement Program (CIP) lost margins recovery approved by the Minnesota
Public Utilities Commission (MNPUC) in the second quarter of 1997.
Increases in transmission service charge revenue and electric property
rental income also contributed to the increases in other electric revenue.
The decrease in revenue from power pool sales for the nine month period
ended September 30, 1997, as compared to the same period in 1996, is the
result of the Company having less energy to market as a result of delayed
coal shipments caused by the blizzards of 1997 and to the shutdown of the
Coyote Plant for its first scheduled major overhaul in three years that
lasted from March 27, 1997, until June 6, 1997.
The net reduction in production fuel and purchased power expenses for the
nine months ended September 30, 1997, as compared to the nine months ended
September 30, 1996, is commensurate with the reduction in power pool sales
for the comparable periods. The primary contributors to the increases in
other electric operation and maintenance expenses for the three and nine
month periods ended September 30, 1997, as compared to the three and nine
month periods ended September 30, 1996, are the overhaul of the Coyote
Plant in the second quarter of 1997, and increased expenditures for outside
and contracted services.
The breakdown of cost of goods sold and other nonelectric expenses by
business segments other than electric are as follows:
Three months ended September 30
Cost of goods sold Other nonelectric expenses
------------------ --------------------------
1997 1996 1997 1996
------ ------ ------ ------
(in thousands)
Health services $10,418 $ 8,428 $ 6,177 $ 6,462
Manufacturing 15,963 12,720 3,169 2,636
Other business operations 8,851 10,353 3,809 3,573
------- ------- ------- -------
Total $35,232 $31,501 $13,155 $12,671
======= ======= ======= =======
Nine months ended September 30
Cost of goods sold Other nonelectric expenses
------------------ --------------------------
1997 1996 1997 1996
------ ------ ------ ------
(in thousands)
Health services $27,157 $24,158 $18,086 $15,861
Manufacturing 42,784 37,426 7,672 7,246
Other business operations 17,672 23,005 9,725 8,938
------- ------- ------- -------
Total $87,613 $84,589 $35,483 $32,045
======= ======= ======= =======
Reclassifications of $2,233,000 and $4,102,000 in health services cost of
goods sold to health services other nonelectric expenses were made for the
three and nine month periods ended September 30, 1996, respectively,
related to the medical imaging services companies acquired in 1996 in order
to report these costs and expenses in a manner consistent with previously
acquired medical imaging services companies.
The increase in health services operating revenue of 8.1% for the three
months ended September 30, 1997, as compared to the same period in 1996, is
due to increased sales of medical imaging services. The increases in cost
of goods sold in the health services segment for the three and nine month
periods ended September 30, 1997, as compared to the same periods in 1996,
are due to valuation adjustments related to refurbished and trade-in
equipment and increased costs associated with long-term customer service
contracts. The 10.7% increase in health services operating revenue and the
increase in other nonelectric expenses for the nine month period ended
September 30, 1997, as compared to the same period a year ago, is due to
the acquisitions of Radiographic Supply in February 1996, and Northern
Medical Imaging in April 1996.
The increases in manufacturing operating revenue of 26.9% and 12.0% for the
three and nine month periods ended September 30, 1997, as compared to the
three and nine month periods ended September 30, 1996, reflect increased
sales at five of the Company's six manufacturing subsidiaries. One of the
manufacturing subsidiaries showed an increase in third quarter operating
revenues but a decrease in year-to-date operating revenues in 1997, as
compared to 1996, due to the delayed shipment of finished goods to a major
customer of this subsidiary in order to accommodate that customer's
delivery and production schedule. This manufacturing company maintained
its production schedule in order to optimize the use of its plant capacity.
Manufacturing cost of goods sold increased in the three and nine month
periods ended September 30, 1997, as compared to the same periods in 1996,
in conjunction with the increased sales over the same comparable periods
and also as a result of increased prices for resins used in the manufacture
of PVC pipe. The increases in manufacturing revenues more than offset the
increases in manufacturing cost of goods sold and other nonelectric
expenses resulting in increases in manufacturing operating income for both
the three and nine month periods ended September 30, 1997, as compared to
the same periods in 1996.
The decreases in other business operations revenue for the quarter and nine
months ended September 30, 1997, as compared to the quarter and nine months
ended September 30, 1996, are due to a decline in revenue and reductions in
material cost pass through billings at the Company's construction
subsidiaries, offset slightly by increases in media and telecommunications
revenue due to the acquisition of several radio stations in 1996, and the
acquisition of Peoples in January of 1997. The decreases in construction
activity and material cost pass through billings are the main factors
contributing to the decreases in cost of goods sold from other business
operations for the comparable periods. Other nonelectric expenses for other
business operations increased for the three and nine month periods ended
September 30, 1997, as compared to the same periods a year ago, as a result
of the radio stations and Peoples acquisitions.
The increases in depreciation and amortization expense for the three and
nine month periods ended September 30, 1997, as compared to the same
periods in 1996, are related to electric utility property additions
including upgrades made to Big Stone Plant in 1996, accelerated
depreciation at Quadrant , and the acquisition of Peoples in 1997.
The decrease in property taxes for the nine month period ended September
30, 1997, as compared to the same period in 1996, is due to reductions in
Minnesota property taxes accrued as a result of legislative action
affecting Minnesota commercial and industrial property class rates for
1997, and lower assessed values on Minnesota utility property.
A gain on the sale of a Direct Broadcast Satellite franchise, in which the
Company's telecommunications subsidiary, Midwest Information Systems, Inc.,
held a one-third ownership interest, accounted for $1.8 million of the
increase in other income and deductions - net for the quarter and nine
months ended September 30, 1997, as compared to the quarter and nine months
ended September 30, 1996. Realized gains on sales of investments of
$141,000 and increases in miscellaneous nonoperating income of $442,000
also contributed to the increases in other income and deductions - net for
same comparable periods. The remainder of the increase in other income and
deductions - net for the nine months ended September 30, 1997, as compared
to the nine months ended September 30, 1996, reflects the recognition of
$610,000 in realized gains on the sale of marketable securities, the
recognition of $880,000 in compensation for the abandonment of certain
microwave frequencies licensed to the Company, and an increase in revenue
recognition of $405,000 related to Minnesota CIP financial incentives.
The increases in interest charges for the three and nine month periods
ended September 30, 1997, as compared to the three and nine month periods
ended September 30, 1996, are directly related to the increased level of
short-term debt at the parent company and an increase in the average level
of long-term debt and current maturities at the subsidiary companies for
the comparable periods.
Increases in income taxes for the three and nine month periods ended
September 30, 1997, as compared to the three and nine month periods ended
September 30, 1996, are mainly due to increases in income before income
taxes for the same comparable periods. However, income before income taxes
for the third quarter of 1996 includes Chassis Liner's third quarter net
income of $495,000 which was not subject to income tax. Also, income taxes
for the third quarter of 1996 reflects reductions related to deferred tax
adjustments.
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
-----------------
Patricia C. Reimel v. John C. MacFarlane, et al, and Otter Tail Power
Company
- ---------------------------------------------------------------------
This suit was filed on July 1, 1997 in United States District Court
for the District of Minnesota by Patricia C. Reimel, individually and
derivatively as a shareholder of the Company. The suit names as
defendants the Company, each member of the Company's Board of
Directors and certain executive officers of the Company. The
allegations made by the plaintiff relate to the Company's Shareholder
Rights Plan, which was adopted by the Company's Board of Directors in
January 1997. Claims for relief include modification or elimination
of the Company's Shareholder Rights Plan, as well as damages in an
unspecified amount. The Company believes the suit is procedurally
inappropriate and has requested that the Court dismiss the suit
because the plaintiff failed to make a demand on the Board of
Directors of the Company prior to seeking to resolve the alleged
claims through litigation.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a) Exhibits:
27 Financial Data Schedule
27.1 Restated Financial Data Schedules
The acquisition of Chassis Liner on June 30, 1997, was accounted
for under the pooling of interests method. Accordingly, the
Company's 1996 interim and year end, and 1997 first quarter
consolidated financial statements previously filed with the
Securities and Exchange Commission on Forms 10-Q and 10-K for
the corresponding periods have been restated to include Chassis
Liner. Exhibit 27.1 contains restated summary financial
information extracted from the restated consolidated financial
statements for the affected periods.
b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter ended
September 30, 1997.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OTTER TAIL POWER COMPANY
By: Jeff Legge
---------------------
Jeff Legge
Controller
(Chief Accounting Officer/Authorized Officer)
Dated: November 7, 1997
----------------
<TABLE> <S> <C>
<S> <C>
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of September 30, 1997, and the Consoidated
Statement of Income for the nine months ended September 30, 1997, and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 456,926
<OTHER-PROPERTY-AND-INVEST> 118,025
<TOTAL-CURRENT-ASSETS> 90,158
<TOTAL-DEFERRED-CHARGES> 13,666
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 678,775
<COMMON> 58,462
<CAPITAL-SURPLUS-PAID-IN> 34,036
<RETAINED-EARNINGS> 113,981
<TOTAL-COMMON-STOCKHOLDERS-EQ> 206,479
18,000
20,831
<LONG-TERM-DEBT-NET> 162,687
<SHORT-TERM-NOTES> 4,400
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 24,700
<LONG-TERM-DEBT-CURRENT-PORT> 43,905
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 197,773
<TOT-CAPITALIZATION-AND-LIAB> 678,775
<GROSS-OPERATING-REVENUE> 287,243
<INCOME-TAX-EXPENSE> 10,953
<OTHER-OPERATING-EXPENSES> 243,952
<TOTAL-OPERATING-EXPENSES> 254,905
<OPERATING-INCOME-LOSS> 32,338
<OTHER-INCOME-NET> 5,397
<INCOME-BEFORE-INTEREST-EXPEN> 37,735
<TOTAL-INTEREST-EXPENSE> 13,867
<NET-INCOME> 23,868
1,769
<EARNINGS-AVAILABLE-FOR-COMM> 22,099
<COMMON-STOCK-DIVIDENDS> 16,058
<TOTAL-INTEREST-ON-BONDS> 12,679
<CASH-FLOW-OPERATIONS> 42,872
<EPS-PRIMARY> 1.90
<EPS-DILUTED> 1.90
</TABLE>
<TABLE> <S> <C>
<S> <C>
<ARTICLE> UT
<LEGEND>
Restated summary financial information extracted from the restated Consoli-
dated Balance Sheets as of 3-31-96, 6-30-96, 9-30-96, 12-31-96, and 3-31-97,
and the restated Consolidated Statements of Income for the 3, 6, 9, 12, and
3-month periods ended 3-31-96, 6-30-96, 9-30-96, 12-31-96, and 3-31-97, re-
spectively. <FN>
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
DEC-31-1997
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
MAR-31-1997
<BOOK-VALUE> PER-BOOK PER-BOOK PER-BOOK PER-BOOK
PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 440,439 447,250 449,718 452,155
453,025
<OTHER-PROPERTY-AND-INVEST> 81,655 102,480 111,351 116,613
120,910
<TOTAL-CURRENT-ASSETS> 84,655 85,810 80,774 81,608
86,170
<TOTAL-DEFERRED-CHARGES> 12,069 11,514 11,428 13,791
12,633
<OTHER-ASSETS> 0 0 0 0
0
<TOTAL-ASSETS> 618,828 647,054 653,271 664,167
672,738
<COMMON> 56,689 56,689 56,689 56,861
58,052
<CAPITAL-SURPLUS-PAID-IN> 29,747 29,747 29,747 30,683
31,788
<RETAINED-EARNINGS> 102,925 103,417 104,268 106,589
112,915
<TOTAL-COMMON-STOCKHOLDERS-EQ> 189,361 189,853 190,704 194,133
202,755
18,000 18,000 18,000 18,000
18,000
20,831 20,831 20,831 20,831
20,831
<LONG-TERM-DEBT-NET> 170,676 181,750 187,606 160,704
164,862
<SHORT-TERM-NOTES> 0 2,450 4,650 7,200
800
<LONG-TERM-NOTES-PAYABLE> 0 0 0 0
0
<COMMERCIAL-PAPER-OBLIGATIONS> 0 10,300 15,700 18,400
16,400
<LONG-TERM-DEBT-CURRENT-PORT> 19,716 24,868 18,597 42,219
48,076
0 0 0 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0 0 0 0
0
<LEASES-CURRENT> 0 0 0 0
0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 200,244 199,002 197,183 202,680
201,014
<TOT-CAPITALIZATION-AND-LIAB> 618,828 647,054 653,271 664,167
672,738
<GROSS-OPERATING-REVENUE> 90,210 181,726 276,643 369,440
94,289
<INCOME-TAX-EXPENSE> 5,595 8,315 10,262 14,040
5,631
<OTHER-OPERATING-EXPENSES> 71,254 150,229 232,379 310,133
74,548
<TOTAL-OPERATING-EXPENSES> 76,849 158,544 242,641 324,173
80,179
<OPERATING-INCOME-LOSS> 13,361 23,182 34,002 45,267
14,110
<OTHER-INCOME-NET> 495 912 1,101 2,412
1,122
<INCOME-BEFORE-INTEREST-EXPEN> 13,856 24,094 35,103 47,679
15,232
<TOTAL-INTEREST-EXPENSE> 3,698 7,699 12,006 16,675
4,542
<NET-INCOME> 10,158 16,395 23,097 31,004
10,690
590 1,179 1,179 2,358
589
<EARNINGS-AVAILABLE-FOR-COMM> 9,568 15,216 21,918 28,646
10,101
<COMMON-STOCK-DIVIDENDS> 5,031 10,062 15,093 20,124
5,309
<TOTAL-INTEREST-ON-BONDS> 3,675 7,635 11,774 16,026
4,187
<CASH-FLOW-OPERATIONS> 14,602 26,322 49,682 68,448
16,080
<EPS-PRIMARY> 0.84 1.34 1.88 2.53
0.87
<EPS-DILUTED> 0.84 1.34 1.88 2.53
0.87
<FN> On June 30, 1997, the Company's subsidiary, Mid-States Development, Inc.
acquired Chassis Liner Corporation (Chassis Liner). The acquisition has been
accounted for as a pooling of interests. Accordingly the Company's 1996 interim
and year end, and 1997 first quarter financial statements have been restated to
include Chassis Liner. The summary financial information included in this
exhibit reflect those restatements. The Company has not provided restated
financial information prior to 1996 because the impact of Chassis Liner on
those periods was determined to be immaterial and of insignificant value to
warrant restatement.
</TABLE>
