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, 2000
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, 2000 - 23,849,974 Common Shares ($5 par value)
OTTER TAIL POWER COMPANY
------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 2000 (Unaudited)
and December 31, 1999 2 & 3
Consolidated Statements of Income - Three and Six Months
Ended June 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2000 and 1999 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9-15
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 16
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. FINANCIAL STATEMENTS
--------------------
<TABLE>
OTTER TAIL POWER COMPANY
CONSOLIDATED BALANCE SHEETS
-ASSETS-
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
(Unaudited)
(Thousands of dollars)
<S> <C> <C>
PLANT:
Electric plant in service $ 784,116 $ 779,037
Diversified operations 112,249 99,558
--------- ---------
TOTAL 896,365 878,595
Less accumulated depreciation and amortization 400,088 386,618
--------- ---------
496,277 491,977
Construction work in progress 15,422 10,979
--------- ---------
NET PLANT 511,699 502,956
--------- ---------
INVESTMENTS 18,181 19,502
--------- ---------
INTANGIBLES -- NET 45,647 23,311
--------- ---------
OTHER ASSETS 7,611 6,141
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents 11,071 24,762
Accounts receivable:
Trade - net 61,192 40,685
Other 4,562 5,616
Materials and supplies:
Fuel 3,429 3,808
Inventory, materials and operating supplies 33,783 26,329
Deferred income taxes 3,084 3,123
Accrued utility revenues 7,077 9,923
Other 8,647 5,690
--------- ---------
TOTAL CURRENT ASSETS 132,845 119,936
--------- ---------
DEFERRED DEBITS:
Unamortized debt expense and reacquisition premiums 3,019 3,251
Regulatory assets 4,030 4,111
Other 533 1,580
--------- ---------
TOTAL DEFERRED DEBITS 7,582 8,942
--------- ---------
TOTAL $ 723,565 $ 680,788
========= =========
See accompanying notes to consolidated financial statements
- 2 -
</TABLE>
<TABLE>
OTTER TAIL POWER COMPANY
CONSOLIDATED BALANCE SHEETS
-LIABILITIES-
JUNE 30, DECEMBER 31,
2000 1999
--------- ------------
(Unaudited)
(Thousands of dollars)
<S> <C> <S> <C> <S><C> <C> <C>
CAPITALIZATION
Common shares, par value $5 per share
authorized 50,000,000 shares;
outstanding 2000 and 1999 -- 23,849,974 $119,250 $119,250
Premium on common shares - -
Unearned compensation (226) (301)
Retained earnings 133,136 126,744
Accumulated other comprehensive income - -
-------- --------
TOTAL 252,160 245,693
Cumulative preferred shares
authorized 1,500,000 shares without par value;
outstanding 2000 and 1999 -- 335,000 shares
Subject to mandatory redemption 18,000 18,000
Other 15,500 15,500
Cumulative preference shares - authorized 1,000,000
shares without par value; outstanding - none - -
Long-term debt 188,875 176,437
-------- --------
TOTAL CAPITALIZATION 474,535 455,630
-------- --------
CURRENT LIABILITIES
Short-term debt 21,137 -
Sinking fund requirements and current maturities 8,508 5,948
Accounts payable 42,485 39,343
Accrued salaries and wages 5,547 6,197
Federal and state income taxes accrued 9,375 8,153
Other taxes accrued 8,206 10,818
Interest accrued 3,220 3,266
Other 3,921 3,589
-------- --------
TOTAL CURRENT LIABILITIES 102,399 77,314
-------- --------
NONCURRENT LIABILITIES 26,796 26,514
-------- --------
DEFERRED CREDITS
Accumulated deferred income taxes 87,302 87,972
Accumulated deferred investment tax credit 15,719 16,295
Regulatory liabilities 11,011 11,359
Other 5,803 5,704
-------- --------
TOTAL DEFERRED CREDITS 119,835 121,330
-------- --------
TOTAL $723,565 $680,788
======== ========
See accompanying notes to consolidated financial statements
-3-
</TABLE>
<TABLE>
OTTER TAIL POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Electric $ 58,443 $ 55,232 $ 119,745 $ 117,951
Plastics 25,240 8,393 51,603 13,548
Health services 15,036 16,211 31,681 33,833
Manufacturing 16,583 17,300 30,523 30,885
Other business operations 18,427 15,261 34,932 27,665
---------- ---------- ---------- ----------
Total operating revenues 133,729 112,397 268,484 223,882
OPERATING EXPENSES
Production fuel 9,160 9,487 17,581 19,251
Purchased power 12,690 11,473 26,611 23,365
Other electric operation and maintenance expenses 17,170 17,042 34,425 34,793
Cost of goods sold 52,033 41,864 103,786 78,576
Other nonelectric expenses 15,493 8,855 29,682 17,438
Depreciation and amortization 6,816 6,269 13,621 12,509
Property taxes 2,638 2,803 5,278 5,658
---------- ---------- ---------- ----------
Total operating expenses 116,000 97,793 230,984 191,590
OPERATING INCOME
Electric 11,256 8,986 24,799 24,022
Plastics 4,068 1,073 8,818 1,342
Health services 2,411 1,519 3,459 3,532
Manufacturing 951 1,371 1,625 2,163
Other business operations (957) 1,655 (1,201) 1,233
---------- ---------- ---------- ----------
17,729 14,604 37,500 32,292
OTHER INCOME AND DEDUCTIONS - NET 523 317 1,207 672
INTEREST CHARGES 4,289 3,728 8,244 7,347
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 13,963 11,193 30,463 25,617
INCOME TAXES 4,803 4,047 10,886 9,222
---------- ---------- ---------- ----------
NET INCOME 9,160 7,146 19,577 16,395
Preferred dividend requirements 469 589 939 1,179
---------- ---------- ---------- ----------
EARNINGS AVAILABLE FOR COMMON SHARES $ 8,691 $ 6,557 $ 18,638 $ 15,216
========== ========== ========== ==========
Basic and diluted earnings per average common share: $ 0.36 $ 0.28 $ 0.78 $ 0.64
========== ========== ========== ==========
Average number of common shares outstanding 23,849,974 23,845,192 23,849,974 23,812,504
Dividends per common share $0.255 $0.2475 $0.510 $0.495
See accompanying notes to consolidated financial statements
-4-
</TABLE>
<TABLE>
OTTER TAIL POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
SIX MONTHS ENDED
JUNE 30,
2000 1999
--------- ---------
(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $19,577 $16,395
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 18,834 17,719
Deferred investment tax credit - net (576) (582)
Deferred income taxes (899) (1,762)
Change in deferred debits and other assets (380) 536
Change in noncurrent liabilities and deferred credits 381 1,911
Allowance for equity (other) funds used during construction (189) (29)
(Gains)/Losses from investments and disposal of noncurrent assets 252 36
Cash provided by (used for) current assets & current liabilities:
Change in receivables, materials and supplies (19,385) 50
Change in other current assets 1,716 3,715
Change in payables and other current liabilities (2,812) (5,225)
Change in interest and income taxes payable 1,177 4,411
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 17,696 37,175
CASH FLOWS FROM INVESTING ACTIVITIES:
Gross capital expenditures (22,318) (14,400)
Proceeds from disposal of noncurrent assets 924 314
Purchase of businesses, net of cash acquired (34,120) -
Change in other investments 1,230 (4,438)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (54,284) (18,524)
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in short-term debt - net 21,137 (824)
Proceeds from issuance of common stock - 1,710
Proceeds from issuance of long-term debt 18,802 6,576
Payments for retirement of long-term debt (3,858) (2,416)
Dividends paid (13,184) (12,965)
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 22,897 (7,919)
NET CHANGE IN CASH AND CASH EQUIVALENTS (13,691) 10,732
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,762 3,919
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $11,071 $14,651
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes:
Interest (net of amount capitalized) $ 7,823 $ 6,867
Income taxes $11,164 $ 7,153
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
2000 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, 1999, 1998, and
1997 included in the Company's 1999 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 six-month periods ended
June 30, 2000, 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 April 10, 2000 the Board of Directors granted 344,000 stock options
to executives and key management employees and 16,000 stock options to
outside directors under the 1999 Stock Incentive Plan (Incentive
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 granted
to outside directors are exercisable immediately, and all other
options vest over a four-year period at a rate of 25% per year. The
options expire ten years after the date of the grant. In addition
11,116 shares of restricted stock were issued under the Incentive Plan
during the quarter ended March 31, 2000. As of June 30, 2000 a total
of 795,484 options were outstanding and a total of 13,414 shares of
restricted stock had been issued under the Incentive Plan. A total of
2,600,000 shares of the Company's common stock are available for
granting of awards under the Incentive Plan. The Company accounts for
the Incentive Plan under Accounting Principles Board Opinion No. 25.
The effect of outstanding stock options on the computation of diluted
earnings per share was immaterial for the quarter and six-months ended
June 30, 2000 and 1999.
The Company issued 14,204 common shares in the second quarter of 1999
and 89,238 common shares for the six months ended June 30, 1999 under
its Automatic Dividend Reinvestment and Share Purchase Plan. The
Company currently purchases the common shares needed for this plan
from the open market instead of issuing new shares.
Under the 1999 Employee Stock Purchase Plan (Purchase Plan) 24,080
common shares were purchased from the open market during January 2000
to complete the first purchase period. The purchase price per share
paid by the participants was $15.96. The average price paid by the
Company to purchase these shares was $19.36. The Purchase Plan allows
eligible participants to purchase the Company's common shares at 85%
of the lower market price at either the beginning or the end of each
six-month purchase period. A total of 400,000 shares of the Company's
common stock are available for purchase by participants under the
Purchase Plan.
Comprehensive Income
--------------------
Net income of $9,160,000 and $19,577,000 was the only element of
comprehensive income for the three and six-months ended June 30, 2000,
respectively.
Elements of comprehensive income for the three-month period ended June
30, 1999, include net income of $7,146,000 and other comprehensive
income of $222,000 (net of $157,000 in deferred taxes) related to the
recognition of $379,000 in unrealized gains on "available-for-sale"
securities held by a Company subsidiary. Comprehensive income for the
six-month period ended June 30, 1999, includes net income of
$16,395,000 and other comprehensive income of $313,000 (net of
$191,000 in deferred taxes) related to the recognition of $504,000 in
unrealized gains on "available-for-sale" securities held by a Company
subsidiary.
Arbitration Settlement
----------------------
During the second quarter of 2000, the Minnesota, South Dakota and
North Dakota utility regulatory agencies approved the accounting
treatment of the settlement proceeds related to the Knife River coal
contract arbitration. The settlement proceeds of $3.2 million
(including interest) had been recorded as a liability on the balance
sheet since 1999 pending regulatory approval. The approval allowed
the Company to recover arbitration costs of $1.0 million that had been
previously expensed and to recognize as income $308,000 of fuel cost
savings applicable to wholesale power pool sales. The remaining $1.9
million represents a reduction of fuel costs that are being returned
to the Company's electric retail customers through the cost of energy
adjustment clause from May 2000 through October 2000.
Segment Information and Acquisitions
------------------------------------
Effective January 1, 2000, the Company acquired the assets and
operations of Vinyltech Corporation (Vinyltech) located in Phoenix,
Arizona. Vinyltech is a manufacturer of polyvinyl chloride (PVC) pipe
and produces approximately 90 million pounds of pipe annually. Annual
revenues for 1999 were approximately $41 million. Effective June 1,
2000, the Company acquired the assets and operations of Portable X-Ray
& EKG, Inc. (PXE) located in Minneapolis, Minnesota. PXE is a
provider of mobile x-ray, EKG, ultrasound and echocardiogram services
primarily to patients in long term care facilities in the
Minneapolis/St. Paul market. Its 1999 annual revenues were
approximately $2.8 million. These acquisitions were accounted for
using the purchase method of accounting. The excess of the purchase
price over the net assets acquired of approximately $24 million is
being amortized over 15 years.
The Company's business operations are broken down into five segments
based on products and services. Electric operations includes the
electric utility only and is based in Minnesota, North Dakota, and
South Dakota. Plastics operations consists of businesses involved in
the production of PVC pipe in the Upper Midwest and Southwest regions
of the United States. Health services operations consists of
businesses involved in the sale, service, rental, refurbishing and
operation of medical imaging equipment and the sale of related
supplies and accessories to various medical institutions located in 20
states. Manufacturing operations is made up of businesses involved in
the production of agricultural equipment, frame-straightening
equipment and accessories for the auto body shop industry, contract
machining, and metal parts stamping and fabrication located primarily
in the Upper Midwest. Other business operations consists of businesses
diversified in such areas as electrical and telephone construction
contracting, transportation, telecommunications, energy services,
natural gas marketing and corporate administrative and general
expenses that are not allocated to other segments. The electrical and
telephone construction contracting companies, and energy services and
natural gas marketing business operate primarily in the Upper Midwest.
The telecommunications companies operate in central and northeast
Minnesota and the transportation company operates in 48 states and 6
Canadian provinces. The Company evaluates the performance of its
business segments and allocates resources to them based on earnings
contribution and return on total invested capital.
Operating Income
----------------
Three months ended Six months ended
June 30 June 30
------------------ ----------------
(in thousands) 2000 1999 2000 1999
---------------------------------------------------------------------
Electric $ 11,256 $ 8,986 $ 24,799 $ 24,022
Plastics 4,068 1,073 8,818 1,342
Health Services 2,411 1,519 3,459 3,532
Manufacturing 951 1,371 1,625 2,163
Other Business Operations (957) 1,655 (1,201) 1,233
-------- -------- -------- --------
Total $ 17,729 $ 14,604 $ 37,500 $ 32,292
======== ======== ======== ========
Identifiable Assets
-------------------
As of As of
June 30, December 31,
(in thousands) 2000 1999
------------------------------------------------------
Electric $ 523,151 $ 524,012
Plastics 61,113 15,979
Health Services 33,216 29,542
Manufacturing 41,169 30,853
Other Business Operations 64,916 80,402
--------- ---------
Total $ 723,565 $ 680,788
========= =========
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 2000
presentation. Such reclassification had no impact on net income or
shareholders' equity.
New Accounting Standard
-----------------------
In December 1999, the Securities and Exchange Commission (SEC) issued
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in
Financial Statements." SAB 101 summarized the SEC's view in applying
generally accepted accounting principles to selected revenue
recognition issues. The Company is required to apply SAB 101 in the
fourth quarter of 2000 retroactively to the first quarter of 2000. The
Company continues to review SAB 101 and at this time does not expect
the adoption of SAB 101 to have any effect on its financial position or
results of operations.
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 Company's
ongoing involvement in diversification efforts, the timing and scope
of deregulation and open competition, growth of electric revenues,
changes in the economy of the Upper Midwest, governmental and
regulatory action, fuel and purchased power costs, environmental
issues, weather conditions, and other factors discussed under "Factors
affecting future earnings" on pages 24-25 of the Company's 1999 Annual
Report to Shareholders, which is incorporated by reference in the
Company's Form 10-K for the fiscal year ended December 31, 1999.
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 $17.7 million as shown on the
Consolidated Statement of Cash Flows for the six months ended June 30,
2000, combined with cash on hand of $24.8 million as of December 31,
1999 allowed the Company to pay dividends, finance its capital
expenditures and partially fund acquisitions. Net cash provided by
operating activities decreased $19.5 million for the six months ended
June 30, 2000 as compared to the six months ended June 30, 1999. This
decrease reflects the increase in accounts receivable due to increased
sales, primarily within the plastics and electric segments, and changes
in other working capital items. Most of the $35.8 million increase in
net cash used in investing activities was due to the acquisitions.
Net cash provided by financing activities increased by $30.8 million
as a result of increased line of credit borrowings and debt to finance
acquisitions. The Company and its subsidiaries have bank lines of
credit totaling $59.0 million. As of June 30, 2000, $37.8 million was
available in unused lines of credit, which could be used to supplement
cash needs.
The Company estimates that funds internally generated net of
forecasted dividend payments, combined with funds on hand, will be
sufficient to meet sinking fund payments on First Mortgage Bonds and
preferred stock redemption requirements in the next five years and to
provide for its estimated 2000-2004 consolidated capital expenditures.
Additional short-term or long-term financing will be required in the
period 2000-2004 in connection with the maturity of long-term debt, in
the event the Company decides to refund or retire early any of its
presently outstanding debt or cumulative preferred shares, to fund
additional acquisitions, or for other corporate purposes.
Diversified operations plant increased $12.7 million as a result of
the acquisitions, purchases of tractors and trailers by the
transportation company and increased investments in plant at the
manufacturing and plastics companies. The $4.4 million increase in
construction work in progress reflects the normal seasonal increase in
work in progress at the electric utility. Goodwill associated with the
acquisitions during 2000 is the reason for the $22.3 million increase
in intangibles. Increased sales in the plastic, manufacturing and
electric segments led to most of the $20.5 million increase in trade
accounts receivable. The $7.5 million increase in inventory, materials
and operating supplies is due to the build up of inventory within the
manufacturing and plastics segments to meet increased sales offset by
a decrease in the inventory within the health services segment. The
$2.8 million decrease in accrued utility revenues reflects the
reduction in unbilled utility revenues due to the seasonal change in
weather. The timing of prepaid expenses in the manufacturing segment
combined with an increase in prepaid expenses due to acquisitions led
to a majority of the $3.0 million increase in other current assets.
The $15.0 million increase in long-term debt, sinking fund
requirements and current maturities primarily reflects the financing
for acquisitions. Normal seasonal increases in credit line usage at
the Company's plastics, manufacturing and construction subsidiaries
led to the $21.1 million increase in short-term debt. The $2.6 million
decrease in other taxes accrued is the result of the timing of
property tax payments due in the second quarter, most of which are
paid to the State of Minnesota.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
-----------------------------------------
Comparison of the Quarters Ended June 30, 2000 and 1999
-------------------------------------------------------
Consolidated Results
--------------------
The Company recorded earnings per share of $0.36 for the quarter ended
June 30, 2000 as compared to earnings per share of $0.28 for the
quarter ended June 30, 1999. Total operating revenues were $133.7
million for the quarter ended June 30, 2000, up $21.3 million from the
$112.4 million recorded for the quarter ended June 30, 1999.
Operating income increased $3.1 million from $14.6 million reported
for the second quarter of 1999 to $17.7 million for the second quarter
of 2000. The favorable second quarter results can be primarily
attributed to strong results in the electric and plastics segments.
Electric Operations
-------------------
Three months
ended
June 30,
--------------- Percentage
(in thousands) 2000 1999 change
--------------------------------------------------------------------
Operating revenues $58,443 $55,232 5.8
Production fuel 9,160 9,487 (3.4)
Purchased power 12,690 11,473 10.6
Other operation and maintenance expenses 17,170 17,042 .8
Depreciation and amortization 5,530 5,442 1.6
Property taxes 2,637 2,802 (5.9)
------- ------- ------
Operating income $11,256 $ 8,986 25.3
======= ======= ======
The increase in electric operating revenues for the quarter ended June
30, 2000, as compared to the same period in 1999, is due to a $1.8
million (4.5%) increase in retail revenue, an $882,000 (6.8%) increase
in revenues from power pool sales and a $486,000 (27.0%) increase in
other electric revenue.
The increase in retail revenue is primarily the result of a 3.6%
increase in retail kwh sales combined with a 1.0% increase in revenue
per kwh sold. Small commercial and industrial customers reflected the
greatest increase in retail kwh sales for the quarter. The slight
increase in revenue per kwh sold is due to an increase in cost-of-
energy revenues as compared to the prior year's quarter offset by the
partial refund of fuel costs as part of the arbitration settlement as
discussed above in the notes to consolidated financial statements. 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 second quarter.
The increase in revenues from power pool sales resulted from an 8.8%
increase in revenue per kwh sold offset by a 4.9% decrease in kwh sold.
Gross margins on power pool sales were 28.8% for the second quarter of
2000 as compared to 18.8% during 1999. The gross margin on power pool
sales contributed $4.0 million to operating income for the quarter
ended June 30, 2000 as compared to $2.4 million for the quarter ended
June 30, 1999. The increase in other electric revenue primarily relates
to the arbitration settlement.
Production fuel expenses decreased in the three months ended June 30,
2000, as compared to the three months ended June 30, 1999, primarily
due to the arbitration settlement. The cost of purchased power
increased due to a $1.9 million increase in the cost of purchased
power for system use offset by a $661,000 decrease in the cost of
purchased power for resale. Generation at the Company's steam
generating plants declined 3.7% in the second quarter of 2000 as
compared to 1999, due to scheduled overhauls at two of the steam
generating plants.
Due to continued favorable investment results from the electric
utility's funded pension plan, the Company recognized during the
second quarter of 2000 a credit to expense of approximately $1.1
million for net periodic pension cost under Statement of Financial
Accounting Standard No. 87 - Employers' Accounting for Pensions. In
addition a credit of $1.0 million was recorded to other operation and
maintenance expenses as part of the arbitration settlement that
recovered previously recorded arbitration expenses. These credits to
expense partially offset the increases in other electric operation and
maintenance expenses primarily due to increased labor costs and plant
maintenance expenses related to the scheduled overhauls.
Plastics Operations
-------------------
Three months ended
June 30
----------------------- Percentage
(in thousands) 2000 1999 change
------------------------------------------------------------
Operating revenues $ 25,240 $ 8,393 200.7
Cost of goods sold 18,740 6,281 198.4
Operating expenses 2,432 1,039 134.1
-------- -------- ---------
Operating income $ 4,068 $ 1,073 279.1
======== ======== =========
The increases in operating revenues, cost of goods sold, operating
expenses and operating income are primarily due to the added volume
associated with the acquisition of Vinyltech on January 1, 2000. The
increase in operating revenue also reflects a 52.5% increase in
average sales price per pound of pipe and an increase in pounds of
pipe sold at the Company's other PVC pipe plant.
Health Services Operations
--------------------------
Three months ended
June 30,
----------------------- Percentage
(in thousands) 2000 1999 change
------------------------------------------------------------
Operating revenues $ 15,036 $ 16,211 (7.2)
Cost of goods sold 10,638 12,725 (16.4)
Operating expenses 1,987 1,967 1.0
-------- -------- ---------
Operating income $ 2,411 $ 1,519 58.7
======== ======== =========
The primary reason for the decrease in Health Services operating
revenues and cost of goods sold for the quarter ended June 30, 2000 as
compared to the same quarter in 1999, was the decline in equipment
installations between the periods combined with a 7.2% decrease in the
number of imaging scans performed this quarter as compared to the
previous year's quarter. The average fee per scan remained basically
unchanged between the periods.
Manufacturing Operations
------------------------
Three months ended
June 30,
----------------------- Percentage
(in thousands) 2000 1999 change
------------------------------------------------------------
Operating revenues $ 16,583 $ 17,300 (4.1)
Cost of goods sold 13,020 13,383 (2.7)
Operating expenses 2,612 2,546 2.6
-------- -------- ---------
Operating income $ 951 $ 1,371 (30.6)
======== ======== =========
The decrease in operating revenues was primarily caused by one of the
Company's manufacturing subsidiaries due to the depressed agricultural
economy. The decrease in operating revenues at this subsidiary was
partially offset by increases at the other manufacturing subsidiaries.
Cost of goods sold did not decrease proportionally to operating
revenues due to tightening margins at the metal parts stamping
companies.
Other Business Operations
-------------------------
Three months ended
June 30,
----------------------- Percentage
(in thousands) 2000 1999 change
------------------------------------------------------------
Operating revenues $ 18,427 $ 15,261 20.7
Cost of goods sold 9,635 9,475 1.7
Operating expenses 9,749 4,131 136.0
-------- -------- ---------
Operating (loss ) $ (957) $ 1,655 --
======== ======== =========
The primary reason for the increase in Other Business operating
revenues for the quarter ended June 30, 2000, as compared to the same
quarter in 1999, is the acquisition of a transportation company in
September 1999. The increase in operating expenses is due to the
acquisition of the transportation company and an increase in
unallocated corporate administrative and general expenses. Offsetting
these revenue and expense increases is the absence of the operations
in 2000 related to the radio stations, which were sold in October 1999
and a decrease in operating income from the Company's construction
subsidiaries due to lower volumes of contract work between the
quarters.
Other Income and Deductions, Interest Charges, and Income Taxes
---------------------------------------------------------------
For the three months ended June 30, 2000, as compared to the same
period in 1999, the majority of the $206,000 (65.0%) increase in other
income and deductions is due to the awarding of Minnesota Conservation
Improvement Program (CIP) financial incentives. The $561,000 (15.0%)
increase in interest charges is due to an increase in long-term debt,
higher average borrowing levels under the line of credit and higher
interest rates on the line of credit between the periods. The increase
in income taxes of $756,000 (18.7%) for the quarter ended June 30,
2000, as compared to the quarter ended June 30, 1999 is primarily due
to the $2.8 million (24.7%) increase in income before taxes for the
same comparable periods.
Comparison of the Six Months Ended June 30, 2000 and 1999
---------------------------------------------------------
Consolidated Results
--------------------
The Company recorded earnings per share of $0.78 for the six months
ended June 30, 2000 as compared to earnings per share of $0.64 for the
six months ended June 30, 1999. Total operating revenues were $268.5
million for the six months ended June 30, 2000, up $44.6 million from
the $223.9 million recorded for the six months ended June 30, 1999.
Operating income increased $5.2 million from $32.3 million for the
first half of 1999 to $37.5 million for the first half of 2000.
Increased demand in the PVC pipe industry combined with the Company's
January acquisition of Vinyltech more than offset the reduction in the
operating income for manufacturing, health services and other business
operations segments.
Electric Operations
-------------------
Six months ended
June 30,
--------------------- Percentage
(in thousands) 2000 1999 change
----------------------------------------------------------------------
Operating revenues $119,745 $117,951 1.5
Production fuel 17,581 19,251 (8.7)
Purchased power 26,611 23,365 13.9
Other operation and maintenance 34,425 34,793 (1.1)
expenses
Depreciation and amortization 11,052 10,864 1.7
Property taxes 5,277 5,656 (6.7)
-------- -------- -------
Operating income $ 24,799 $ 24,022 3.2
======== ======== =======
The increase in electric operating revenues for the six months ended
June 30, 2000, as compared to the same period in 1999, is due to a
$1.5 million (1.7%) increase in retail revenue combined with a
$586,000 (17.3%) increase in other electric revenue offset by a
decrease of $344,000 (1.5%) in revenues from power pool sales.
A 2.8% increase in retail kwh sales reduced by the partial refund of
fuel costs as part of the arbitration settlement led to the increase
in retail revenues. The increases in retail kwh sales came from the
small commercial and industrial category. The increase in other
electric revenue relates to the arbitration settlement combined with
an increase in contract work done for other utilities.
The decrease in revenues from power pool sales is due to a 9.3%
decrease in kwh sold partially offset by an 8.6% increase in revenue
per kwh sold. Even though the quantity of power pool sales was lower
for the six months ended June 30, 2000 compared to the same period in
1999, the gross margins on power pool sales increased from 15.2% to
23%. The increase in the gross margins was due to the increase in
revenue per kwh sold combined with a reduction in cost of power sold.
The gross margins on power pool sales contributed $5.2 million to
operating income for the six months ended June 30, 2000 as compared to
$3.5 million for the six months ended June 30, 1999.
Production fuel expenses decreased during the six months ended June
30, 2000, as compared to the same period in the prior year, primarily
due to an 11.0% reduction in generation at the Company's plants due to
maintenance outages. The cost of purchased power increased due to a
$5.3 million increase in the cost of purchased power for system use
offset by a $2.1 million decrease in the cost of purchased power for
resale. The increase in purchased power for system use was to
supplement the decrease in Company generation.
During the first six months of 2000 other electric operation and
maintenance expenses reflect a credit of approximately $2.2 million
for net periodic pension cost. In addition other electric operation
and maintenance expenses reflects a credit of $1.0 million as part of
the arbitration settlement that recovered previously recorded
arbitration expenses. These credits to expense offset increases in
other electric operation and maintenance expenses, primarily increased
labor costs and plant maintenance costs due to scheduled overhauls.
Plastics Operations
-------------------
Six months ended
June 30
------------------------- Percentage
(in thousands) 2000 1999 change
------------------------------------------------------------
Operating revenues $ 51,603 $ 13,548 280.9
Cost of goods sold 38,035 10,478 263.0
Operating expenses 4,750 1,728 174.9
-------- -------- ---------
Operating income $ 8,818 $ 1,342 557.1
======== ======== =========
The acquisition of Vinyltech on January 1, 2000 is the primary driver
behind the increases in operating revenues, cost of goods sold,
operating expenses and operating income for the six months ended June
30, 2000 as compared to the same period in 1999. Strong demand within
the PVC pipe industry also led to increased pipe sales at the
Company's other pipe subsidiary. The average sales price per pound of
pipe between the periods also increased 53.8%.
Health Services Operations
--------------------------
Six months ended
June 30,
------------------------ Percentage
(in thousands) 2000 1999 change
------------------------------------------------------------
Operating revenues $ 31,681 $ 33,833 (6.4)
Cost of goods sold 24,016 26,261 (8.5)
Operating expenses 4,206 4,040 4.1
-------- -------- ---------
Operating income $ 3,459 $ 3,532 (2.1)
======== ======== =========
Operating revenues and cost of goods sold decreased for the six months
ended June 30, 2000 as compared to the six months ended June 30, 1999
due to the decline in equipment installations between the periods.
Offsetting slightly the decline in equipment installations was a 5.4%
increase in the number of imaging scans performed. The increase in the
number of scans completed is due to the addition of more routes. The
average fee per scan remained consistent between the two periods.
Manufacturing Operations
------------------------
Six months ended
June 30,
------------------------ Percentage
(in thousands) 2000 1999 change
------------------------------------------------------------
Operating revenues $ 30,523 $ 30,885 (1.2)
Cost of goods sold 23,469 23,660 (0.8)
Operating expenses 5,429 5,062 7.3
-------- -------- ---------
Operating income $ 1,625 $ 2,163 (24.9)
======== ======== =========
The depressed agricultural economy is responsible for the overall
decline in manufacturing operating income for the six months ended
June 30, 2000 as compared to the same period in the prior year.
Increased operating income for the manufacturing subsidiaries involved
in metal stamping and the production of products for the auto body
industry helped to offset the overall decline in operating income.
Volume increases in sales are responsible for the increase in
operating income at the metal stamping subsidiary and an increase in
the average sales price per unit in the product produced for the auto
body industry led to the increase in operating income for that
subsidiary.
Other Business Operations
-------------------------
Six months ended
June 30,
----------------------- Percentage
(in thousands) 2000 1999 change
------------------------------------------------------------
Operating revenues $ 34,932 $ 27,665 26.3
Cost of goods sold 18,266 18,177 0.5
Operating expenses 17,867 8,255 116.4
-------- -------- ---------
Operating (loss) income $ (1,201) $ 1,233 --
======== ======== =========
The primary reason for the increase in Other Business operating
revenues for the six months ended June 30, 2000, as compared to the
six months ended June 30, 1999, is the acquisition of a transportation
company in September 1999. The increase in operating expense is due
to the acquisition of the transportation company and an increase in
unallocated corporate administrative and general expenses. Partially
offsetting these revenue and expense increases is the absence of
operations in 2000 related to the radio stations, which were sold in
October 1999.
Other Income and Deductions, Interest Charges, and Income Taxes
---------------------------------------------------------------
For the six months ended June 30, 2000, as compared to the same period
in 1999, other income and deductions increased $535,000 (79.6%) as a
result of increased investment income and the awarding of CIP
financial incentives. The $897,000 (12.2%) increase in interest
charges is due to an increase in long-term debt, higher average
borrowing levels under the line of credit and higher interest rates on
the line of credit between the periods. The increase in income taxes
of $1.7 million (18.0%) for the six months ended June 30, 2000, as
compared to the six months ended June 30, 1999 is primarily due to the
$4.8 million (18.9%) increase in income before taxes for the same
comparable periods.
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 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
The annual meeting of Shareholders of the Company was held on
April 10, 2000, for the purpose of electing three nominees to the
Board of Directors with terms expiring in 2003 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
--------------------- --------- ------------------
Thomas M. Brown 9,783,729 117,790
Maynard D. Helgaas 9,794,408 107,111
Robert N. Spolum 9,801,348 100,171
Shares Shares Shares
Approval of Auditors Voted For Voted Against Voted Abstain
-------------------- --------- ------------- -------------
Deloitte & Touche LLP 9,732,657 65,375 103,487
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
a) Exhibits:
10 Deferred Compensation Plan for Directors, as amended and
restated, June 21, 2000.
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, 2000.
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: /S/John Erickson
--------------------------------
John Erickson
Executive Vice President, Chief Financial Officer, and Treasurer
(Chief Financial Officer/Authorized Officer)
Dated: August 11, 2000
---------------
