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 MARCH 31, 1999
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:
May 3, 1999 - 11,920,667 Common Shares ($5 par value)
OTTER TAIL POWER COMPANY
------------------------
INDEX
-----
Part I. Financial Information Page No.
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1999 (Unaudited)
and December 31, 1998 2 & 3
Consolidated Statements of Income - Three Months
Ended March 31, 1999 and 1998 (Unaudited) 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1999 and 1998 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
Part I. Financial Information
------------------------------
Item 1. Financial Statements
--------------------
<TABLE>
Otter Tail Power Company
Consolidated Balance Sheets
-Assets-
March 31, December 31,
1999 1998
--------- ---------
(Unaudited)
(Thousands of dollars)
<S> <C> <C>
Plant:
Electric plant in service $ 767,214 $ 770,887
Subsidiary companies 89,781 89,094
-------- --------
Total 856,995 859,981
Less accumulated depreciation and amortization 372,449 370,290
-------- --------
484,546 489,691
Construction work in progress 12,147 10,495
-------- --------
Net plant 496,693 500,186
-------- --------
Investments 22,933 20,612
-------- --------
Intangibles -- net 20,691 21,176
-------- --------
Other assets 5,004 3,968
-------- --------
Current assets:
Cash and cash equivalents 19,264 3,919
Accounts receivable:
Trade - net 39,112 40,029
Other 5,467 8,065
Materials and supplies:
Fuel 3,555 3,418
Inventory, materials and operating supplies 27,805 23,138
Deferred income taxes 2,878 2,730
Accrued utility revenues 9,049 11,179
Other 6,030 6,310
-------- --------
Total current assets 113,160 98,788
-------- --------
Deferred debits:
Unamortized debt expense and reacquisition premiums 3,611 3,737
Regulatory assets 3,646 3,774
Other 2,182 3,371
-------- --------
Total deferred debits 9,439 10,882
-------- --------
Total $ 667,920 $ 655,612
======== ========
See accompanying notes to consolidated financial statements
</TABLE>
<TABLE>
Otter Tail Power Company
Consolidated Balance Sheets
-Liabilities-
March 31, December 31,
1999 1998
-------- --------
(Unaudited)
(Thousands of dollars)
<S> <C> <C> <C>
Capitalization
Common shares, par value $5 per share - authorized
25,000,000 shares; outstanding 1999 -- 11,917,021
and 1998 -- 11,879,504 shares $ 59,585 $ 59,398
Premium on common shares 41,162 39,919
Retained earnings 128,238 125,462
Accumulated other comprehensive income 388 297
------- -------
Total 229,373 225,076
Cumulative preferred shares - authorized 1,500,000
shares without par value; outstanding 1999
and 1998, 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 180,950 181,046
------- -------
Total capitalization 449,154 444,953
------- -------
Current liabilities
Short-term debt - 824
Sinking fund requirements and current maturities 13,567 5,794
Accounts payable 30,282 32,411
Accrued salaries and wages 3,030 3,946
Federal and state income taxes accrued 6,442 2,192
Other taxes accrued 11,906 11,119
Interest accrued 2,139 3,120
Other 3,909 3,826
------- -------
Total current liabilities 71,275 63,232
------- -------
Noncurrent liabilities 24,270 22,842
------- -------
Deferred credits
Accumulated deferred income taxes 90,747 90,964
Accumulated deferred investment tax credit 17,187 17,481
Regulatory liabilities 11,502 11,692
Other 3,785 4,448
------- -------
Total deferred credits 123,221 124,585
------- -------
Total $ 667,920 $ 655,612
======= =======
See accompanying notes to consolidated financial statements
</TABLE>
<TABLE>
Otter Tail Power Company
Consolidated Statements of Income
(Unaudited)
Three months ended
March 31,
1999 1998
-------- --------
(in thousands, except share
and per share amounts)
<S> <C> <C>
Operating revenues
Electric $ 62,719 $ 56,546
Manufacturing 18,595 18,131
Health services 17,515 15,299
Other business operations 12,510 6,933
------- -------
Total operating revenues 111,339 96,909
Operating expenses
Production fuel 9,764 8,868
Purchased power 11,892 8,257
Other electric operation and maintenance expenses 17,751 18,970
Special charges - 9,522
Cost of goods sold 36,712 28,606
Other nonelectric expenses 8,424 7,767
Depreciation and amortization 6,240 6,488
Property taxes 2,855 2,873
------- -------
Total operating expenses 93,638 91,351
Operating income
Electric 15,036 5,068
Manufacturing 974 1,265
Health services 1,906 2,127
Other business operations (215) (2,902)
------- -------
Total operating income 17,701 5,558
Other income and deductions - net 342 442
Interest charges 3,619 3,949
------- -------
Income before income taxes 14,424 2,051
Income taxes 5,175 112
------- -------
Income before cumulative effect of change in accounting principle 9,249 1,939
Cumulative effect of change in accounting principle - net-of-tax - 3,819
------- -------
Net income 9,249 5,758
Preferred dividend requirements 590 590
------- -------
Earnings available for common shares $ 8,659 $ 5,168
======= ========
Basic and diluted earnings per average common share:
Before cumulative effect of change in accounting principle $ 0.73 $ 0.12
Cumulative effect of change in accounting principle - 0.32
------- -------
Basic and diluted earnings per average common share - net $ 0.73 $ 0.44
======= ========
Average number of common shares outstanding 11,889,907 11,740,465
Dividends per common share $0.495 $0.480
See accompanying notes to consolidated financial statements
</TABLE>
<TABLE>
Otter Tail Power Company
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31
1999 1998
-------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 9,249 $ 5,758
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 8,855 9,018
Deferred investment tax credit - net (294) (294)
Deferred income taxes (490) (4,463)
Change in deferred debits and other assets 303 213
Change in noncurrent liabilities and deferred credits 764 605
Allowance for equity (other) funds used during constructio (33) (29)
(Gains)/Losses from investments and disposal of noncurrent (36) 195
Voluntary early retirement program charges - 6,305
Cumulative effect of change in accounting principle - (3,819)
Asset impairment losses - 3,217
Cash provided by (used for) current assets & current liabilities:
Change in receivables, materials and supplies (1,259) (1,707)
Change in other current assets 2,380 (1,299)
Change in payables and other current liabilities (2,173) (4,587)
Change in interest and income taxes payable 3,268 2,665
-------- -------
Net cash provided by operating activities 20,534 11,778
Cash flows from investing activities:
Gross capital expenditures (4,910) (3,592)
Proceeds from disposal of noncurrent assets 206 1,078
Change in other investments (2,264) (408)
-------- -------
Net cash used in investing activities (6,968) (2,922)
Cash flows from financing activities:
Change in short-term debt - net (824) (2,100)
Proceeds from issuance of common stock 1,430 1,292
Proceeds from issuance of long-term debt 8,866 6,853
Payments for debt and common stock issuance expense - (81)
Payments for retirement of long-term debt (1,220) (3,946)
Dividends paid (6,473) (6,222)
--------- --------
Net cash provided by (used in) financing activities 1,779 (4,204)
Net change in cash and cash equivalents 15,345 4,652
Cash and cash equivalents at beginning of year 3,919 5,301
-------- -------
Cash and cash equivalents at March 31 $ 19,264 $ 9,953
======== =======
Supplemental cash flow information
Cash paid for interest and income taxes:
Interest (net of amount capitalized) $ 4,348 $ 4,691
Income taxes $ 1,696 $ 1,193
See accompanying notes to consolidated financial statements
</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 1999 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, 1998, 1997, and 1996 included in the Company's
1998 Annual Report to the Securities and Exchange Commission on Form 10-K.
Because of seasonal and other factors, the earnings for the three-month
period ended March 31, 1999, should not be taken as an indication of
earnings for all or any part of the balance of the year.
Common shares and earnings per share
- ------------------------------------
On February 23, 1999, the Company granted options that would allow the
purchase of 219,000 shares of common stock to eligible employees under the
Company's 1999 Stock Incentive Plan (the "Plan") approved by shareholders
on April 12, 1999. A total of 1,300,000 shares of the Company's common
stock are available for granting of awards under the Plan. The exercise
price of the stock options is equal to the fair market value per share at
the date of the grant. The options vest over a four-year period at the
rate of 25% per year and will expire ten years after the date of the grant.
The Company accounts for the Plan under Accounting Principles Board
Opinion No. 25, which does not require recording of compensation expense.
The common stock options were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average closing price of the common stock.
The Company issued 37,517 and 34,520 common shares in the first quarters of
1999 and 1998, respectively, under its Automatic Dividend Reinvestment and
Share Purchase Plan. Starting in June 1999, the Company intends to purchase
the common shares needed for this plan from the open market instead of
issuing new shares.
On April 12, 1999 the shareholders approved the Company's 1999 Employee
Stock Purchase Plan ("Purchase Plan"). The Purchase Plan allows eligible
employees to purchase the Company's common stock at 85% of the lower market
price at either the beginning or the end of each six-month purchase period.
A total of 200,000 shares of the Company's common stock are available for
purchase by employees under the Purchase Plan.
Comprehensive Income
- --------------------
Elements of comprehensive income for the three month period ended March 31,
1999, include net income of $9,249,000 and other comprehensive income of
$91,000 (net of $64,000 in deferred taxes) related to the recognition of
$155,000 in unrealized gains on "available-for-sale" securities held by a
Company subsidiary. Elements of comprehensive income for the three month
period ended March 31, 1998, include net income of $5,758,000 and other
comprehensive income of $148,000 (net of $105,000 in deferred taxes)
related to the recognition of $253,000 in unrealized gains on "available-
for-sale" securities held by a Company subsidiary.
Segment Information
- -------------------
The Company's business operations, which are based mainly in Minnesota,
North Dakota and South Dakota, are broken down into four segments based
upon products and services. Electric operations include the electric
utility only. Manufacturing operations includes production of agricultural
equipment, plastic pipe, automobile and truck frame-straightening equipment
and accessories, and fabricated metal parts. Health services operations
consists of businesses involved in the sale, service, rental, refurbishing
and operations of medical imaging equipment and the sale of related supplies
and accessories to various medical institutions located primarily in the
Midwestern United States. Other business operations consists of businesses
diversified in such areas as electrical and telephone construction
contracting, entertainment, energy services, natural gas marketing, waste
incinerating, and telecommunications. The Company evaluates the performance
of its business segments and allocates resources to them based on earnings
contribution and return on investment.
Operating Income
----------------
Three months ended
March 31,
(in thousands) 1999 1998
- ------------------------------------------------
Electric $15,036 $ 5,068
Manufacturing 974 1,265
Health Services 1,906 2,127
Other Business Operations (215) (2,902)
------- -------
Total $17,701 $ 5,558
======= =======
Identifiable Assets
-------------------
As of As of
March 31, December 31,
(in thousands) 1999 1998
- ------------------------------------------------
Electric $530,706 $525,226
Manufacturing 49,455 41,579
Health Services 35,391 36,241
Other Business Operations 52,368 52,566
-------- --------
Total $667,920 $655,612
======== ========
Substantially all sales and long-lived assets of the Company are within the
United States.
Reclassifications
- -------------------
Certain prior year amounts have been reclassified to conform to 1999
presentation. Such reclassification had no impact on net income or
shareholders' equity.
Special charges
- ---------------
In January 1998 the Company announced a voluntary early retirement program
for all nonunion electric 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 cash costs of the
program will be funded through the Company's pension plan. The Company
recorded, during the first quarter of 1998, 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.
In March 1998 the Company recorded a noncash accounting charge related to
the impairment of its Quadrant Co. waste incineration plant. The impaired
assets include buildings, machinery and equipment used to burn waste. The
$2,500,000 ($1,500,000 net-of-tax or $0.13 per share) 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 three months ended March 31, 1998.
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 from sales of electricity in Minnesota and South Dakota from
meter-reading dates to energy-delivery dates, resulting in the recognition
of estimated unbilled revenue 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 1993 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 first quarter net income by $3,819,000 (net of income taxes
of $2,545,000) or $0.32 per share.
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, the Company's ability to identify and address all year
2000 issues and other factors discussed under "Factors affecting future
earnings" on pages 22-25 of the Company's 1998 Annual Report to
Shareholders, which is incorporated by reference in the Company's Form 10-K
for the fiscal year ended December 31, 1998. 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 $20.5 million as shown on the
Consolidated Statement of Cash Flows for the three months ended March 31,
1999 allowed the Company to pay dividends, finance its capital expenditures
and contribute to the increase in cash and cash equivalents. At March 31,
1999, the Company and its subsidiaries had $27.3 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
1999-2003 consolidated capital expenditures. Additional short-term or
long-term financing will be required in the period 1999-2003 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.
The $3.5 million decrease in net plant is due to the normal increase in
accumulated depreciation offset by an increase in transmission construction
projects. Investments increased $2.3 million as a result of increased
investment at the Company's subsidiaries. The decrease in other accounts
receivable of $2.6 million is mainly due to the timing of payments for the
operation of Big Stone Plant and Coyote Station from the joint owners. The
$4.7 million increase in inventory, materials and operating supplies
reflects increases at the Company's health services and manufacturing
companies due to increased sales. The $2.1 million decrease in accrued
utility revenues reflects the reduction in unbilled revenues due to the
seasonal change in weather.
The combined increase in common shares, par value and premium on common
shares of $1.4 million is due to the issuance of 37,517 shares of common
stock under the Company's Automatic Dividend Reinvestment and Share
Purchase Plan. The increase of $7.8 million in sinking fund requirements
and current maturities reflects a normal seasonal increase in credit line
usage at the Company's manufacturing and construction subsidiaries. Accrued
salaries and wages decreased as a result of the payment of 1998 accrued
employee incentives. The increase in federal and state income taxes accrued
is related to the timing of estimated quarterly tax payments due in
December and April. The decrease in interest accrued is due to the timing
of interest payments on the Company's First Mortgage Bonds, the majority of
which are due in the first and third quarters of the year.
Material Changes in Results of Operations
- -----------------------------------------
Electric Operations
Three months ended
March 31, Percentage
(in thousands) 1999 1998 Change
------ ------ ----------
Operating Revenues $62,719 $56,546 10.9
Production fuel 9,764 8,868 10.1
Purchased power 11,892 8,257 44.0
Other operation and maintenance expense 17,751 18,970 (6.4)
Special charges - 7,022 -
Depreciation and amortization 5,423 5,501 (1.4)
Property taxes 2,853 2,860 (0.2)
------ ------ ------
Operating income $15,036 $ 5,068 196.7
------ ------ ------
The increase in electric operating revenues for the quarter ended March 31,
1999, as compared to the same period in 1998, is due to an $819,000 (1.6%)
increase in retail revenue combined with a $5.7 million (131%) increase in
revenues from power pool sales offset by a $358,000 (18%) decrease in other
electric revenue. The increase in retail revenue is the result of an
increase in cost-of-energy revenues and an increase in the conservation
improvement surcharge revenues offset by a 2.9% decrease in retail kwh
sales. The recovery of fuel and purchased power costs through the cost-of-
energy adjustment mechanism in retail rates lags two to four months behind
the incurrance of those costs which gave rise to the increase in cost-of-
energy revenues for the first quarter. The increase in power pool sales is
related to an increase in energy available for sale and increased power
marketing sales efforts. Decreases in demand-side management financial
incentives and decreased electrical contract work done for other utilities
are the primary reasons for the decrease in other electric revenue. The
North Dakota Public Service Commission ("NDPSC") has recently completed an
audit of the Company's electric operations in North Dakota. In the past,
these audits have at times resulted in settlement agreements adjusting rate
levels. While the Company has begun preliminary discussions with the NDPSC
staff regarding the audit, it is too early to predict whether any rate
adjustment will be made.
Production fuel expenses increased in the three months ended March 31,
1999, as compared to the three months ended March 31, 1998, as a direct
result of a 12.7% increase in kwh generated. The cost of purchased power
increased as a result of a 131% increase in the cost of purchased power for
resale commensurate with the increase in revenue from power pool sales,
partially offset by a 34% decrease in the cost of purchased power for
system use for the three months ended March 31, 1999. The reduction in
purchased power for system use was due to greater plant availability during
a time of below normal retail electric sales.
The decrease in other electric operation and maintenance expenses for the
quarter ended March 31, 1999, as compared to the same period in 1998, is
primarily related to a reduction in expenses due to the early retirement
program in 1998.
The special charges recorded under electric operations in the first quarter
of 1998 represents two items: (1) a noncash charge of $6,305,000 associated
with a voluntary early retirement program offered by the Company and, (2)
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 7 for further information including the net-of-tax and
earnings per share impact of these charges.)
Manufacturing Operations
Three months ended
March 31, Percentage
(in thousands) 1999 1998 change
------ ------ ----------
Operating revenues $18,595 $18,131 2.6
Cost of goods sold 14,474 14,043 3.1
Operating expenses 3,147 2,823 11.5
------ ------ ----------
Operating income $ 974 $ 1,265 (23.0)
------ ------ ----------
Three of the Company's seven manufacturing subsidiaries had increased sales
for the three months ended March 31, 1999, as compared to the three months
ended March 31, 1998. However, increases in operating expenses combined
with decreased revenue from the remaining manufacturing subsidiaries
resulted in a $291,000 decrease in manufacturing operating income.
Health Services Operations
Three months ended
March 31, Percentage
(in thousands) 1999 1998 change
------ ------ ----------
Operating revenues $17,515 $15,299 14.5
Cost of goods sold 13,536 11,257 20.2
Operating expenses 2,073 1,915 8.3
------ ------ ----------
Operating income $ 1,906 $ 2,127 (10.4)
------ ------ ----------
In order to more properly reflect the costs of delivering services to the
health services customers, a reclassification was made from operating
expenses to cost of goods sold during the first quarter of 1999. The
reclassifications consisted of depreciation, repairs and maintenance and
lease rental costs. The reclassifications were also made to 1998 results
to conform to the 1999 presentation.
The increase in operating revenues for the quarter ended March 31, 1999 as
compared to the same quarter in 1998, reflects overall increases in sales
volumes and an increase in the number of medical imaging scans performed
offset by a decrease in the average fee per scan. Cost of goods sold and
operating expenses increased for the three months ended March 31, 1999 as
compared to the same period in 1998, as a result of the increased sale
volumes combined with increases in the costs of repair and maintenance on
equipment used to serve customers. These increased operating costs offset
the increase in revenues and resulted in a $221,000 decrease in health
services operating income.
Other Business Operations
Three months ended
March 31, Percentage
(in thousands) 1999 1998 change
------ ------ ----------
Operating revenues $12,510 $ 6,933 80.4
Cost of goods sold 8,702 3,306 163.2
Special charges - 2,500 -
Operating expenses 4,023 4,029 (0.1)
------ ------ ----------
Operating income (loss) $ (215) $(2,902) 92.6
------ ------ ----------
There are two primary reasons for the increases in operating revenues and
cost of goods sold for the quarter ended March 31, 1999 as compared to the
same quarter in 1998: (1) larger volume of work completed at the Company's
construction subsidiaries and (2) the PAM Natural Gas acquisition in the
second quarter of 1998. The special charges recorded during the first
quarter of 1998 represent an impairment loss associated with the Quadrant
Co. waste incineration plant. (See "Special charges" in notes to financial
statements on page 7 for further information including the net-of-tax and
earnings per share impact of these charges.). Excluding the Quadrant Co.
impairment loss, this business segment would have shown an increase of
$187,000 (47%) in operating income for the quarter ended March 31, 1999 as
compared to the quarter ended March 31, 1998.
Interest Charges and Income Taxes
The 8% decrease in interest charges is due to a reduction in outstanding
debt for the three months ended March 31, 1999, as compared to the same
period in 1998. The increase in income taxes for the quarter ended March
31, 1999, as compared to the quarter ended March 31, 1998 is a direct
result of the increase in income before taxes for the same comparable
periods.
Year 2000 Readiness Disclosure
Many computer software systems, as well as certain hardware and equipment
containing date-sensitive data, were structured to utilize a two-digit year
field meaning that they may not be able to properly recognized dates in the
year 2000. The Company recognizes that the year 2000 occurrence puts all of
its electronic systems on all platforms at risk. Application systems,
information technology systems and technology that includes embedded
systems are being reviewed, in order, from highly critical to less
critical. These systems include the Company's financial software,
customer-information system, energy-management system, power plant control
systems, manufacturing processes and diagnostic medical imaging equipment.
In order to address the year 2000 issue from a total business perspective,
the Company is working with its major vendors, customers, banks, regulatory
and government agencies, and utility alliances.
In order to improve business information systems, the Company's operating
businesses began replacing major financial computer systems in 1996. The
electric utility has replaced its major in-house developed financial
computer systems with financial applications from Oracle Corporation, while
at the same time, replacing the hardware on which these applications
reside. Because of the recent implementation, these systems should require
minimal remediation efforts. The costs of replacing these major financial
computer systems are not included in the cost estimates discussed below.
The Company's plan to resolve the year 2000 issues involves three phases:
inventory, assessment and remediation/testing. The inventory phase was
completed in December 1998 for the electric utility and as of March 31,
1999 is 99% complete for the other companies. The assessment phase was
completed in February 1999 for the electric utility and is 94% complete for
the other companies as of March 31, 1999. As of March 31, 1999, remediation
and testing is 83% complete for the electric utility and 69% complete for
the other companies. The Company is on schedule to complete remediation
and testing by June 1, 1999 for the electric utility and June 30, 1999 for
the other companies.
In addition, the Company's operating businesses are communicating with
critical external parties in order to determine the extent of vulnerability
to such parties' failure to resolve their own year 2000 issues. The
subsidiary companies have completed 92% of their third party assessments
and expect to have the remaining work completed by May 1999. The Company is
developing plans to alter business relationships in the event certain third
parties fail to become year 2000 compliant. There can be no guarantee that
the third parties of business importance to the Company will successfully
reprogram or replace and test all of their own computer hardware, software,
and process control systems in a timely manner. While the failure of a
single third party to achieve year 2000 readiness should not have a
material adverse effect on the Company's financial results or operations,
the failure of several key third parties could have such an effect.
The electric utility industry is unique in its dependence upon a complex
network of interrelated systems of the power pool grid in order to support
and maintain reliable, efficient operations. The Company's year 2000
readiness effort is linked to the readiness efforts of other utilities, as
well as those of major customers whose loads support the integrity of the
power pool grid. The Company is coordinating its year 2000 effort with
that of the Mid-Continent Area Power Pool and with plans established by the
North America Electric Reliability Council ("NERC") under the direction of
the U. S. Department of Energy. The Company did successfully participate
in the April 9, 1999 NERC drill to simulate loss of multiple voice and data
communications systems. The Company also plans to participate in the
September 1999 NERC drill. The goal of this drill is to simulate as
realistically as is practical the implementation of administrative,
operating, communications and contingency response plans for the year 2000
transition. While the Company is supporting these cooperative efforts, it
cannot guarantee the successful implementation of solutions of third
parties. A failure of a system within the power pool grid could have a
material impact on the Company and its customers.
The costs of the Company's year 2000 readiness effort are being funded with
cash flows from operations. These costs are not expected to be
substantially different from the normal, ongoing costs that are incurred
for systems development, implementation and maintenance due in part to the
use of internal resources and the deferral of other projects. Total
expenditures related to inventory, assessment, remediation, testing,
conversion, replacement and upgrading of system applications are expected
to range from $975,000 to $1,350,000 for 1997 to 2000. Expenditures
incurred through March 31, 1999 are estimated at $500,000. The Company
does not track year 2000 costs in a separate account.
The Company's medical subsidiary owns diagnostic imaging equipment which
has computer software that is vulnerable to year 2000 issues. While the
medical subsidiary will negotiate to have its vendors pay the costs to
solve the year 2000 issues, there can be no assurances the vendors will
absorb the costs. In the event the vendors do not pay all or some portion
of the costs, the medical subsidiary would have to absorb the majority of
the costs. These costs are included in the estimates shown above.
As part of its normal business practice, the Company maintains emergency
backup and recovery procedures to be followed in the event of failure of a
business-critical system. These procedures were expanded to include
specific procedures for potential year 2000 issues. The business critical
processes contingency plans were approved in April of 1999. The Company's
electrical system contingency plan uses templates provided by the NERC.
This plan includes meeting with large customers to determine their
operating plans during critical dates. The Company also has plans to
provide for additional staffing at critical locations to respond to any
year 2000 situations that might arise. Contact is ongoing with neighboring
utilities to coordinate contingency plans, operating plans, and the year
2000 backup communications drill.
At this time, the Company believes its worst case scenario is that key
customers could experience significant reductions in their power needs due
to their own year 2000 issues. Although the Company does not believe that
this scenario is likely to occur, the Company expects that such a scenario
would not have a material adverse affect on the Company's consolidated
financial position. The Company believes a more probable worst case
scenario is a temporary disruption of service to its electric customers,
including the effect of cascading disruptions caused by other entities
whose electrical systems are connected to the Company's. The Company has
assessed the risk of this scenario, and believes that contingency plans
would mitigate the long-term effect of such a scenario. In the event that
a temporary disruption in service does occur, the Company does not expect
that it would have a material adverse effect on its consolidated financial
position.
While the Company believes it will be able to resolve its year 2000 issues
in a timely manner, if it is unable to complete the required changes to
existing critical systems, or if those with whom the Company conducts
business are unsuccessful in implementing timely solutions, the year 2000
issue could have a material adverse effect upon the Company's consolidated
results of operations.
The costs of the project and the completion dates are based on management's
best estimates, which were derived from assumptions of future events
including the availability of resources, third party modification plans,
and other factors. There can be no guarantee that these estimates will be
achieved and actual results could vary due to uncertainties.
The forward looking statements contained in this section under the heading
"Year 2000 Readiness Disclosure" should be read in conjunction with the
Company's disclosure above under the heading "Forward Looking Information-
Safe Harbor Statement Under the Private Securities Litigation Reform Act of
1995."
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company does not have material market risk exposure related to foreign
currency exchange rate risk, commodity price risk or interest rate risk.
PART II. OTHER INFORMATION
--------------------------
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
March 31, 1999.
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: John Erickson
-------------------------
John Erickson
Vice President, Finance
(Chief Financial Officer/Authorized Officer)
Dated: May 14, 1999
------------
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This schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of March 31, 1999, and the Consolidated
Statement of Income for the three months ended March 31, 1999, and is
qualified in its entirety by reference to such financial statements.
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