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 JUNE 30, 1998
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:
August 1, 1998 - 11,811,071 Common Shares ($5 par value)
OTTER TAIL POWER COMPANY
------------------------
INDEX
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Part I. Financial Information Page No.
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1998 (Unaudited)
and December 31, 1997 2 & 3
Consolidated Statements of Income - Three and Six Months
Ended June 30, 1998 and 1997 (Unaudited) 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 1998 and 1997 (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 8-12
Part II. Other Information
Item 2. Change in Securities 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 13
<TABLE>
<CAPTION>
Part I. Financial Information
------------------------------
Item 1. Financial Statements
- ----------------------------
Otter Tail Power Company
Consolidated Balance Sheets
-Assets-
June 30, December 31,
1998 1997
------ ------
(Unaudited)
(Thousands of dollars)
<S> <C> <C>
Plant:
Electric plant in service $762,416 $758,551
Subsidiary companies 84,143 89,716
-------- --------
Total 846,559 848,267
Less accumulated depreciation and amortization 358,220 350,647
-------- --------
488,339 497,620
Construction work in progress 12,261 12,146
-------- --------
Net plant 500,600 509,766
-------- --------
Investments 21,166 20,048
-------- --------
Intangibles -- net 22,067 20,911
-------- --------
Other assets 3,906 5,932
-------- --------
Current assets:
Cash and cash equivalents 3,966 5,301
Temporary cash investments - -
Accounts receivable:
Trade - net 36,986 33,304
Other 5,122 6,796
Materials and supplies:
Fuel 3,178 3,425
Inventory, materials and operating supplies 26,506 24,160
Deferred income taxes 2,267 4,738
Accrued utility revenues 8,288 4,271
Other 8,017 3,795
-------- --------
Total current assets 94,330 85,790
-------- --------
Deferred debits:
Unamortized debt expense and reacquisition premiums 3,975 4,187
Regulatory assets 5,908 5,060
Other 3,036 3,747
-------- --------
Total deferred debits 12,919 12,994
-------- --------
Total $654,988 $655,441
======== ========
See accompanying notes to consolidated financial statements
</TABLE>
- 2 -
<TABLE>
<CAPTION>
Otter Tail Power Company
Consolidated Balance Sheets
-Liabilities-
June 30, December 31,
1998 1997
------ ------
(Unaudited)
(Thousands of dollars)
<S> <C> <C>
Capitalization
Common shares, par value $5 per share - authorized
25,000,000 shares; outstanding 1998 -- 11,807,917;
and 1997 -- 11,731,078 shares $ 59,039 $ 58,655
Premium on common shares 37,568 35,196
Retained earnings 117,252 115,942
Accumulated other comprehensive income 479 363
-------- --------
Total 214,338 210,156
Cumulative preferred shares - authorized 1,500,000
shares without par value; outstanding 1998
and 1997, 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 186,076 189,973
-------- --------
Total capitalization 439,245 438,960
-------- --------
Current liabilities
Short-term debt 4,300 2,100
Sinking fund requirements and current maturities 16,944 12,324
Accounts payable 27,790 28,427
Accrued salaries and wages 2,769 3,835
Federal and state income taxes accrued 740 2,572
Other taxes accrued 8,252 11,122
Interest accrued 3,218 3,339
Other 3,173 2,980
-------- --------
Total current liabilities 67,186 66,699
-------- --------
Noncurrent liabilities 22,808 17,805
-------- --------
Deferred credits
Accumulated deferred income taxes 92,713 97,583
Accumulated deferred investment tax credit 18,078 18,666
Regulatory liabilities 11,740 12,121
Other 3,218 3,607
-------- --------
Total deferred credits 125,749 131,977
-------- --------
Total $654,988 $655,441
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
-3-
<TABLE>
<CAPTION>
Otter Tail Power Company
Consolidated Statements of Income
(Unaudited)
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
------ ------ ------ ------
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C>
Operating revenues
Electric $ 53,078 $ 45,426 $ 109,624 $ 103,826
Manufacturing 24,674 20,482 42,805 35,185
Health services 17,773 15,019 33,072 30,409
Other business operations 11,421 10,169 18,354 15,965
---------- ---------- ---------- ----------
Total operating revenues 106,946 91,096 203,855 185,385
Operating expenses
Production fuel 9,311 6,630 18,179 14,622
Purchased power 8,730 5,668 16,987 13,041
Other electric operation and maintenance expenses 17,318 18,663 36,288 35,208
Special charges - - 9,522 -
Cost of goods sold 34,463 31,006 58,679 53,471
Other nonelectric expenses 13,316 10,498 25,473 21,238
Depreciation and amortization 6,353 6,349 12,841 12,684
Property taxes 2,770 2,485 5,643 5,583
---------- ---------- ---------- ----------
Total operating expenses 92,261 81,299 183,612 155,847
Operating income
Electric 9,455 6,637 14,523 24,689
Manufacturing 2,858 2,124 4,123 3,563
Health services 1,672 225 3,799 1,497
Other business operations 700 811 (2,202) (211)
---------- ---------- ---------- ----------
Total operating income 14,685 9,797 20,243 29,538
Other income and deductions - net 1,265 1,703 1,707 2,825
Interest charges 4,098 4,596 8,047 9,138
---------- ---------- ---------- ----------
Income before income taxes 11,852 6,904 13,903 23,225
Income taxes 3,837 1,511 3,949 7,142
---------- ---------- ---------- ----------
Income before cumulative effect of
change in accounting principle 8,015 5,393 9,954 16,083
Cumulative effect of change in
accounting principle - net-of-tax - - 3,819 -
---------- ---------- ---------- ----------
Net income 8,015 5,393 13,773 16,083
Preferred dividend requirements 589 590 1,179 1,179
---------- ---------- ---------- ----------
Earnings available for common shares $ 7,426 $ 4,803 $ 12,594 $ 14,904
Basic and diluted earnings per average common share:
Before cumulative effect of
change in accounting principle $ 0.63 $ 0.41 $ 0.75 $ 1.29
Cumulative effect of change in
accounting principle - - 0.32 -
---------- ---------- ---------- ----------
Basic and diluted earnings
per average common share - net $ 0.63 $ 0.41 $ 1.07 $ 1.29
========== ========== ========== ==========
Average number of common shares outstanding 11,777,247 11,620,738 11,758,856 11,595,030
Dividends per common share $0.480 $0.465 $0.960 $0.930
</TABLE>
See accompanying notes to consolidated financial statements
-4-
<TABLE>
<CAPTION>
Otter Tail Power Company
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
June 30,
1998 1997
------ ------
(Thousands of dollars)
<S> <C> <C>
Cash flows from operating activities:
Net income $13,773 $16,083
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 17,802 19,895
Deferred investment tax credit - net (588) (588)
Deferred income taxes (3,739) (1,523)
Change in deferred debits and other assets (367) (337)
Change in noncurrent liabilities and deferred credits 865 (595)
Allowance for equity (other) funds used during construction (61) -
(Gains)/Losses from investments and disposal of noncurrent assets 315 (1,620)
Voluntary early retirement program charges 6,305 -
Asset impairment losses 3,217 -
Cash provided by (used for) current assets & current liabilities:
Change in receivables, materials and supplies (3,012) (3,025)
Change in other current assets (8,174) 1,265
Change in payables and other current liabilities (6,324) (3,330)
Change in interest and income taxes payable (1,954) (706)
------- -------
Net cash provided by operating activities 18,058 25,519
Cash flows from investing activities:
Gross capital expenditures (11,026) (22,108)
Proceeds from disposal of noncurrent assets 1,359 909
Purchase of businesses, net of cash acquired (1,354) -
Purchases of marketable securities - (5)
Proceeds from sales of marketable securities - 313
Change in other investments (1,372) (1,131)
------- -------
Net cash used in investing activities (12,393) (22,022)
Cash flows from financing activities:
Change in short-term debt - net 2,200 2,600
Proceeds from issuance of common stock 2,756 3,578
Proceeds from issuance of long-term debt 5,722 40,866
Payments for debt and common stock issuance expense (81) -
Payments for retirement of long-term debt (5,135) (37,477)
Dividends paid (12,462) (12,230)
------- -------
Net cash used in financing activities (7,000) (2,663)
Net change in cash and cash equivalents (1,335) 834
Cash and cash equivalents at beginning of year 5,301 2,094
------- -------
Cash and cash equivalents at June 30 $ 3,966 $ 2,928
======= =======
Supplemental cash flow information
Cash paid for interest and income taxes:
Interest (net of amount capitalized) $ 7,695 $ 8,710
Income taxes $12,566 $ 9,984
</TABLE>
See accompanying notes to consolidated financial statements
- 5 -
OTTER TAIL POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Otter Tail Power Company (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 1998 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, 1997, 1996, and 1995
included in the Company's 1997 Annual Report to the Securities and Exchange
Commission on Form 10-K. Because of seasonal and other factors, special
charge items and the cumulative effect of a change in accounting principle
related to the initial recording of unbilled revenue for the states of
Minnesota and South Dakota, the earnings for the three-month and six-month
periods ended June 30, 1998, should not be taken as an indication of
earnings for all or any part of the balance of the year.
Special charges
- ---------------
In January 1998 the Company announced a voluntary early retirement program
for all nonunion employees age 55 and over. The offer of early retirement
was accepted by 55 of 67 eligible employees during the enrollment period
that ended March 23, 1998. Most of the costs of the program will be funded
through the Company's pension plan. The Company recorded a noncash charge to
operating expenses of $6,305,000 ($3,783,000 net-of-tax or $0.32 per share)
for special termination benefits and the recognition of previously
unrecognized prior service costs related to pension and postretirement
benefits. As a result of the reduction in the number of utility employees
through this program, the electric utility company will experience a
reduction in payroll costs in 1998 and future years.
In March 1998, the Company recorded a noncash accounting charge related to
the impairment of its Quadrant Co. ("Quadrant") waste incineration plant.
The impaired assets include buildings, machinery and equipment used to burn
waste. The revised carrying value of this group of assets was calculated on
the basis of discounted estimated future cash flows and resulted in a pre-
tax noncash charge of $2,500,000 ($1,500,000 net-of-tax or $0.13 per share).
The recognition of this impairment is in accordance with the provisions of
Statement of Financial Accounting Standards No. 121 - Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
The $2,500,000 impairment loss is included in operating expenses under the
caption of special charges and in operating income from other business
operations on the Company's Statement of Income for the six months ended
June 30, 1998. In early July 1998, Quadrant's waste incinerators were shut
down because they were not in compliance with Minnesota Pollution Control
Agency ("MPCA") particulate emissions regulations. Quadrant is cooperating
with the MPCA to resolve the issue. The MPCA has informed Quadrant they are
drafting a stipulation agreement to resolve the various claimed regulatory
violations, which may include a nonconformance penalty. Quadrant and the
Company are unable to determine the amount of any potential liabilities at
this time.
In the first quarter of 1998, as a result of an unfavorable court decision
related to the construction of a rail spur intended to serve Big Stone
Plant, the Company wrote off $717,000 ($430,000 net-of-tax or $0.04 per
share) in project related costs.
Cumulative effect of change in accounting principle
- ---------------------------------------------------
In the first quarter of 1998, the Company changed its method of revenue
recognition in the States of Minnesota and South Dakota from meter reading
dates to energy delivery dates, resulting in the accrual of estimated
unbilled revenue from sales of electricity through the end of the accounting
period. This change results in better matching of revenues and expenses and
is consistent with predominant industry practice. The change is also
consistent with the way the Company has been recording electric revenue from
its North Dakota customers since 1995 under an order from the North Dakota
Public Service Commission. The cumulative effect of recording Minnesota and
South Dakota unbilled revenue as of January 1, 1998, increased 1998 net
income by $3,819,000 (net of income taxes of $2,545,000) or $0.32 per share.
If the Company had been recording Minnesota and South Dakota unbilled
revenue in previous accounting periods, its reported electric revenue for
the second quarter of 1997 would have been reduced by $679,000 and its
reported net income would have been reduced by $407,000 or $0.035 per share.
Also, the Company's reported electric revenue for the six months ended June
30, 1997 would have been reduced by $2,592,000 and its reported net income
would have been reduced by $1,555,000 or $0.134 per share.
Comprehensive income
- --------------------
Comprehensive income for the three-month period ended June 30, 1998,
includes net income of $8,015,000 along with a reduction in accumulated
other comprehensive income of $33,000 (net of $23,000 in deferred taxes)
related to a $56,000 reduction in the market value of securities held as
"available-for-sale". Comprehensive income for the six month period ended
June 30, 1998, includes net income of $13,773,000 and other comprehensive
income of $116,000 (net of $81,000 in deferred taxes) related to the
recognition of an additional $197,000 in unrealized gains on "available-for-
sale" securities held by a Company subsidiary.
Net income of $5,393,000 is the only element of comprehensive income for the
three month period ended June 30, 1997. Elements of comprehensive income
for the six month period ended June 30, 1997, include net income of
$16,083,000 along with a $359,000 reduction in accumulated other
comprehensive income related to the reversal of previously recorded
unrealized gains on "available-for-sale" securities which were sold or
reclassified in the first quarter of 1997.
Common shares
- -------------
The Company issued 42,319 common shares in the second quarter of 1998 and
76,839 common shares for the six months ended June 30, 1998 under its
Automatic Dividend Reinvestment and Share Purchase Plan. During 1997, the
Company issued 39,878 common shares for the three months ended June 30, 1997
and 80,933 common shares for the six months ended June 30, 1997 under its
Automatic Dividend Reinvestment and Share Purchase Plan.
Acquisitions
- ------------
On May 1, 1998, the Company acquired PAM Natural Gas, Inc. ("PAM"), for
approximately $1.8 million in stock purchased on the open market and an earn
out amount to be paid over seven years contingent upon the achievement of
certain financial results. PAM is a Sioux Falls, South Dakota based
marketer of natural gas to commercial and institutional customers in Iowa,
South Dakota, North Dakota and Minnesota. Upon acquisition PAM's name was
changed to Otter Tail Energy Management, Inc.
Rate Matters
- ------------
On July 1, 1998, the Company increased its Conservation Improvement Project
Rider surcharge to all Minnesota customers from 1.75% to 2.75% based upon
approval by the Minnesota Public Utilities Commission ("MPUC"). The
conservation-related costs being recovered through the surcharge and in base
rates include Conservation Improvement Program expenditures, carrying costs
on costs incurred in excess of costs currently being recovered, lost margins
on avoided kilowatt-hour sales, and bonus incentives related to energy
savings. The Minnesota Department of Public Service ("DPS") has recommended
to the MPUC that the awarding of lost margin recovery and bonus incentives
to regulated utilities be discontinued. The MPUC has opened a docket to
review this issue. The Company has filed comments urging the MPUC to
continue to allow the lost margin recovery and bonus incentives. For the
six months ended June 30, 1998, the Company has recorded $750,000 for lost
margin recovery and incentives.
Contingency
- -----------
The University of Minnesota ("University") has notified the Company that it
intends to seek contribution for expenditures made by the University for the
remediation of soil contaminated by polychlorinated biphenyls ("PCBs") at
the Rosemount Research Center Superfund site, which is owned by the
University. The Minnesota Pollution Control Agency and the University assert
that some of the Company's used electrical equipment was a source of
contamination at the site. While the precise amount of PCBs sent to the
site by the Company is subject to interpretation, it is clear that the
Company sent PCB material to the site and that it is a generator of
materials sent to the site. Although the Company's allocation of Superfund
responsibility has not yet been determined, of the $13 to $15 million
expended by the University on remedial activities, the University claims the
Company's allocation could be between 9% to 28%. However based upon
preliminary discussions that commenced in July 1998 with the parties, the
Company believes it can reach a negotiated settlement of less than $500,000.
No formal action has been taken to establish the Company's allocation and
negotiations continue between the University and the responsible parties.
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, governmental
and regulatory action, the competitive environment, economic factors,
weather conditions, and other factors discussed under "Factors affecting
future earnings" on pages 28-30 of the Company's 1997 Annual Report to
Shareholders, which is incorporated by reference in the Company's Form 10-K
for the fiscal year ended December 31, 1997. 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 $18,058,000 as shown on the
Consolidated Statement of Cash Flows for the six months ended June 30, 1998,
combined with cash provided by the issuances of $2,200,000 in short-term
debt, $2,756,000 in common stock and $5,722,000 of long-term debt along with
funds on hand of $5,301,000 at December 31, 1997, allowed the Company to pay
dividends, finance its capital expenditures, retire long-term debt, and
acquire an additional business. The Company's initiative to reduce capital
expenditures is reflected in the $11,082,000 reduction in this category in
the first six months of 1998, as compared to the same period in 1997. At
June 30, 1998, the Company and its subsidiaries had $44.2 million 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
1998-2002 consolidated capital expenditures.
Additional short-term or long-term financing will be required in the period
1998-2002 in connection with the maturity of First Mortgage Bonds and other
long-term debt and 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.
Although the Company continues to make capital investments to improve and
enhance system reliability and customer service, the small increases in
electric plant in service and construction work in progress reflect the
Company's ongoing initiative to reduce capital expenditures. The decrease in
subsidiary companies plant is mainly due to the $7.2 million ($2.25 million
net of accumulated depreciation) impairment write-down of the Quadrant Co.
waste incineration plant. Other changes in subsidiary companies plant
include capital additions of $2.5 million in the manufacturing segment and
$1.195 million in the other business operations segment and a net decrease
in equipment of $2.1 million in the health services segment.
The $2 million decrease in other assets reflects a $2.5 million reduction in
net pension assets related to the Company's voluntary early retirement
program. The increase in intangibles-net is a result of the PAM acquisition.
The $3.7 million increase in trade accounts receivable reflects increases in
power pool sales at the end of June and increased sales in the manufacturing
segment. The decrease in other accounts receivable of $1.7 million is
mainly due to the timing of payments for the operation of Big Stone Plant
from the Plant's joint owners and the timing of advance payments to the
Coyote Plant operators. The $2.3 million increase in inventory, materials
and operating supplies reflects a build up at the Company's construction and
manufacturing subsidiaries in preparation for the summer construction season
and to accommodate increased sales. The $2.5 million decrease in deferred
income taxes and the $4.0 million increase in accrued utility revenues are
related to the recording of Minnesota and South Dakota unbilled revenues
which was initiated in January, 1998. The increase in other current assets
of $4.2 million reflects an increase in costs in excess of billings at one
of the Company's manufacturing subsidiaries on two major pieces of equipment
scheduled for installation and billing in August, 1998. The write-off of
$717,000 in costs related to the Big Stone Plant rail spur project is
reflected in the reduction in other deferred debits.
The combined increase in common shares, par value and premium on common
shares of $2.8 million is due to the issuance of 76,839 shares of common
stock under the Company's Automatic Dividend Reinvestment and Share Purchase
Plan. The increase in sinking fund requirements and current maturities
reflects a normal seasonal increase in credit line usage at the Company's
manufacturing subsidiaries. Accrued salaries and wages decreased primarily
as a result of the payment of 1997 accrued employee incentives and the
reduction in accrued benefits to voluntary early retirement program
participants. The decrease in federal and state taxes accrued is related to
the timing of estimated tax payments due in April and June. The decrease in
other taxes accrued is a result of the timing of property tax payments due
in the second quarter, most of which are paid to the State of Minnesota.
The increase in noncurrent liabilities of $5.0 million is primarily due to
the recognition of special termination benefits and unrecognized prior
service costs related to pension and postretirement benefits as a result of
the Company's voluntary early retirement program. The $4.9 million decrease
in accumulated deferred income taxes is mainly due to the $6.3 million
expense accrual for the Company's voluntary early retirement program and the
reversal of $1.0 million in deferred taxes related to the Quadrant Co. waste
incineration plant.
Material Changes in Results of Operations
- -----------------------------------------
The 16.8% increase in electric operating revenue for the quarter ended June
30, 1998, as compared to the same period in 1997, is primarily due to a 518%
increase in power pool revenues. Power pool kwh sales increased 396% and
revenue per power pool kwh sold increased 25%. The increase in power pool
sales was the result of increased demand due to other utilities plant
shutdowns and hot weather, which the Company was able to take advantage of
because of the high availability of the Company's generating plants in the
second quarter of 1998.
The 5.6% increase in electric operating revenues for the six months ended
June 30, 1998, as compared to the same period in 1997, is due to a 200%
increase in power pool sales, combined with a 41% increase in other electric
revenue, offset by a 5.2% decrease in retail revenue. Power pool kwh sales
increased 142% and revenue per power pool kwh sold increased 24%. The
increase in the power pool sales is related to an increase in energy
available for sale, along with an increase in demand. During the first six
months of 1997, the Company had less energy to market as a result of delayed
coal shipments caused by blizzards and the shutdown of Coyote Plant for a
lengthy scheduled major overhaul. Increases in wheeling revenues,
Midcontinent Area Power pool transmission service charges, Minnesota
conservation improvement program incentives and integrated transmission
system deficiency payments contributed to the increase in other electric
revenue. The decrease in retail revenue was caused by a 2.9% decline in
retail kwh sales primarily as a result of significantly milder weather.
Heating degree-days were down 21.5% for the six months ended June 30, 1998
as compared to the same period in 1997. Revenue per retail kwh decreased
2.3%. This decrease was due primarily to a reduction in cost of energy
revenues, which were $2,372,000 lower than 1997 as a result of the Company
having to purchase replacement power during the overhaul shut down of Big
Stone Plant in November 1996. The recovery of fuel and purchase power costs
through the cost-of-energy adjustment mechanism in retail electric rates
lags two to four months beyond the actual incurrance of those costs
resulting in higher cost-of-energy revenue recovery in the first quarter of
1997.
Production fuel expenses increased 40.4% in the three months ended June 30,
1998, as compared to the three months ended June 30, 1997, as a result of a
48% increase in mwhs generated at the Company's steam plants, combined with
a 4.8% reduction in fuel costs per kwh generated. Production fuel expenses
increased 24.3% for the six month period ended June 30, 1998 as compared to
the same period in 1997, as a result of a 28.6% increase in mwhs generated
combined with a 4.2% reduction in fuel costs per kwh generated. The
shutdown of the Coyote Plant from March 27, 1997 until June 6, 1997 was the
primary reason for the increase in mwh generated at the steam plants in 1998
for both the three and six-month periods. Also, in 1998, purchased power
expenses increased by 54% and 30.3% for the three and six month periods as
compared to the prior year as a result of increased power pool sales.
Other electric operation and maintenance expenses for the quarter ended June
30, 1998, as compared to the same period in 1997, decreased 7.2%. For the
six-month period ended June 30, 1998 as compared to prior year, other
electric operation and maintenance expenses increased 3.1%. The 1997
expenses reflect maintenance costs related to the Coyote plant overhaul.
The 1998 reduction in Coyote maintenance expense was offset by a 3.5%
average general wage increase, a decrease in labor capitalization related to
a decrease in construction activity, and a change in accounting related to
the capitalization of indirect administrative and general (A&G) expenses,
which has been discontinued as of January 1, 1998, in response to industry
deregulation.
The $9,522,000 in special charges, recorded in the first quarter of 1998,
represents three items: (1) a noncash charge of $6,305,000 associated with a
voluntary early retirement program offered by the Company, (2) a $2,500,000
impairment loss associated with the Quadrant Co. waste incineration plant,
and (3) the write-off of $717,000 in accumulated costs related to a rail
spur project at Big Stone Plant. (See "Special charges" in notes to
financial statements on page 6 for further information including the net-of-
tax and earnings per share impact of these charges.)
The breakdown of cost of goods sold and other nonelectric expenses by
business segments other than electric are as follows:
Three months ended June 30
Cost of goods sold Other nonelectric expenses
------------------ --------------------------
1998 1997 1998 1997
------ ------ ------ ------
(in thousands)
Manufacturing $18,313 $15,869 $ 3,375 $ 2,339
Health services 9,875 9,523 6,074 5,140
Other business operations 6,275 5,614 3,867 3,019
------- ------- ------- -------
Total $34,463 $31,006 $13,316 $10,498
======= ======= ======= =======
Six months ended June 30
Cost of goods sold Other nonelectric expenses
------------------ --------------------------
1998 1997 1998 1997
------ ------ ------ ------
(in thousands)
Manufacturing $32,356 $26,821 $ 6,070 $ 4,503
Health services 16,742 17,829 12,263 10,819
Other business operations 9,581 8,821 7,140 5,916
------- ------- ------- -------
Total $58,679 $53,471 $25,473 $21,238
======= ======= ======= =======
Operating income for the manufacturing segment increased 34.6% and 15.7% for
the three and six-month periods ended June 30, 1998 as compared to the prior
year. The increases in manufacturing operating revenue of 20.5% and 21.7%
for the three and six month periods ended June 30, 1998 as compared to the
same periods in 1997 are mainly due to increased revenues recorded on
increased sales volumes at four of the Company's six manufacturing
subsidiaries. Increases in manufactured cost of goods sold are directly
related to the increases in the sales. The increase in manufacturing other
nonelectric expenses is due to increased sales volumes, increased incentive
compensation and increased marketing expenditures.
Reclassifications of $764,000 and $1,090,000 from health services other
nonelectric expenses to health services cost of goods sold were made for the
three and six month periods ended June 30, 1997, respectively, related to
the medical imaging services company acquired in April 1996 in order to
report these costs and expenses in a manner consistent with previously
acquired medical imaging services companies.
Health services operating revenues increased for the three and six month
periods ended June 30, 1998 as compared to the same period in 1997 as a
result of increased medical imaging equipment being sold and an increase in
medical imaging services delivered. The slight increase in health services
cost of goods sold for the three months ended June 30, 1998 is a result of
the increase in medical equipment sold. The decrease for the six months
ended in health services cost of goods sold as compared to the same period
in 1997, is related to inventory cost adjustments during the six months
ended June 30, 1997. The increase in health services other nonelectric
expenses for the three and six month periods ended June 30, 1998 is related
to the increase in medical imaging services delivered and the higher volume
of medical imaging equipment sales as compared to the same periods in 1997.
In other business operations, the increase in operating revenues and cost of
goods sold for the three and six month periods ended June 30, 1998, were
primarily a result of the PAM acquisition. Other nonelectric expenses
increased for the three months as a result of the PAM acquisition and
increases in selling and administrative expense for the media businesses.
The increase in other nonelectric expenses for the six months ended June 30,
1998 primarily related to the Quadrant impairment loss. An increase in other
business operations operating income of $509,000, exclusive of the Quadrant
Co. impairment loss, for the six months ended June 30, 1998 as compared to
the same period in the prior year, is due to better profitability on
projects at the Company's construction subsidiaries.
The decrease in other income and deductions - net for the quarter and six
months ended June 30, 1998, as compared to the quarter and six months ended
June 30, 1997, is related to the sale and reclassification of investments
held by the Company's telecommunications subsidiary in 1997 and the
recognition of $880,000 in compensation for the abandonment of certain
microwave frequencies in 1997.
The decrease in interest charges for the three and six-month periods ended
June 30, 1998, as compared to the same periods in 1997, is primarily a
result of the reduction of debt related to a $16 million sale/leaseback
transaction entered into by Mid-States' medical imaging services subsidiary
in November 1997 and the Mid-States' refinancing of various subsidiary fixed
and variable interest rate debt with $22.5 million in 7.8% fixed rate debt
in November 1997.
The increase in income taxes for the three months ended June 30, 1998, and
the decrease for the six months ended June 30, 1998 as compared to the three
and six month periods ended June 30, 1997, primarily relate to the increase
and decrease in income before taxes for the same comparable periods.
PART II. OTHER INFORMATION
--------------------------
Item 2. Changes in Securities
---------------------
On June 5, 1998, the Company sold 48,180 shares of common stock,
acquired in the open market, in connection with the acquisition of PAM
Natural Gas, Inc. The sale of such shares did not involve a public
offering and therefore was exempt from registration pursuant to
section 4(2) of the Securities Act of 1933, as amended.
Item 3. Legal Proceedings
-----------------
Patricia C. Reimel v. John C. MacFarlane, et al, and Otter Tail Power
Company
On June 23, 1998 the United States District Court for the District of
Minnesota granted the Company's motion for summary judgment and
dismissed the plaintiff's claim without prejudice. This suit was filed
on July 1, 1997, in United States District Court for the District of
Minnesota by Pactricia C. Reimel, individually and derivatively as a
shareholder of the Company. The suit named 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
related to the Company's Shareholder Rights Plan, which was adopted by
the Company's Board of Directors in January 1997. Claims for relief
included modification or elimination of the Company's Shareholder
Rights Plan, as well as damages in an unspecified amount. The
District Court found that plaintiff's suit was procedurally
inappropriate because the plaintiff had failed to make a demand on the
Board of Directors of the Company prior to seeking to resolve the
alleged claims through litigation.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
The annual meeting of Shareholders of the Company was held on April
13, 1998, for the purpose of electing three nominees to the Board of
Directors with terms expiring in 2001 and approving the appointment of
auditors. Proxies for the meeting were solicited pursuant to Section
14(a) of the Securities Exchange Act of 1934, as amended, and there
was no solicitation in opposition to management's solicitations. All
nominees for directors as listed in the proxy statement were elected.
The voting results were as follows:
Shares Shares Voted
Election of Directors Voted For Withheld Authority
--------------------- --------- ------------------
Dayle Dietz 10,189,529 174,285
Arvid R. Liebe 10,207,310 156,504
John C. MacFarlane 10,211,472 152,342
Shares Shares Shares
Approval of Auditors Voted For Voted Against Voted Abstain
-------------------- --------- ------------- -------------
Deloitte & Touche LLP 10,121,270 91,792 150,752
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a) Exhibits:
27 Financial Data Schedule
b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter ended
June 30, 1998.
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: August 13, 1998
---------------
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This schedule contains summary financial information extracted from the
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