SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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:
November 1, 2000 - 23,852,102 Common Shares ($5 par value)
OTTER TAIL POWER COMPANY
------------------------
INDEX
-----
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2000 (Unaudited)
and December 31, 1999 2 & 3
Consolidated Statements of Income - Three and Nine Months
Ended September 30, 2000 and 1999 (Unaudited) 4
Consolidated Statements of Cash Flows - Nine Months
Ended September 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 9-16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
PART I. FINANCIAL INFORMATION
------------------------------
Item 1. FINANCIAL STATEMENTS
--------------------
<TABLE>
OTTER TAIL POWER COMPANY
CONSOLIDATED BALANCE SHEETS
-ASSETS-
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(Unaudited)
(Thousands of dollars)
<S> <C> <C>
PLANT:
Electric plant in service $ 789,681 $ 779,037
Diversified operations 115,927 99,558
--------- ---------
TOTAL 905,608 878,595
Less accumulated depreciation and amortization 405,140 386,618
--------- ---------
500,468 491,977
Construction work in progress 13,469 10,979
--------- ---------
NET PLANT 513,937 502,956
--------- ---------
INVESTMENTS 18,356 19,502
--------- ---------
INTANGIBLES -- NET 44,744 23,311
--------- ---------
OTHER ASSETS 8,565 6,141
--------- ---------
CURRENT ASSETS:
Cash and cash equivalents 4,796 24,762
Accounts receivable:
Trade - net 61,461 40,685
Other 5,210 5,616
Inventory, fuel, materials and operating supplies 39,322 30,137
Deferred income taxes 3,034 3,123
Accrued utility revenues 6,966 9,923
Other 7,170 5,690
--------- ---------
TOTAL CURRENT ASSETS 127,959 119,936
--------- ---------
DEFERRED DEBITS:
Unamortized debt expense and reacquisition premiums 2,902 3,251
Regulatory assets 3,990 4,111
Other 1,148 1,580
--------- ---------
TOTAL DEFERRED DEBITS 8,040 8,942
--------- ---------
TOTAL $ 721,601 $ 680,788
========= =========
See accompanying notes to consolidated financial statements
- 2 -
</TABLE>
<TABLE>
OTTER TAIL POWER COMPANY
CONSOLIDATED BALANCE SHEETS
-LIABILITIES-
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(Unaudited)
(Thousands of dollars)
<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 137,019 126,744
---------- -----------
TOTAL 256,043 245,693
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 - net 187,251 176,437
---------- -----------
TOTAL CAPITALIZATION 476,794 455,630
---------- -----------
CURRENT LIABILITIES
Short-term debt 15,562 -
Sinking fund requirements and current maturities 8,287 5,948
Accounts payable 44,041 39,343
Accrued salaries and wages 8,759 6,197
Federal and state income taxes accrued 6,025 8,153
Other taxes accrued 8,706 10,818
Interest accrued 2,285 3,266
Other 3,287 3,589
---------- -----------
TOTAL CURRENT LIABILITIES 96,952 77,314
---------- -----------
NONCURRENT LIABILITIES 28,363 26,514
---------- -----------
DEFERRED CREDITS
Accumulated deferred income taxes 86,905 87,972
Accumulated deferred investment tax credit 15,431 16,295
Regulatory liabilities 10,845 11,359
Other 6,311 5,704
---------- -----------
TOTAL DEFERRED CREDITS 119,492 121,330
---------- -----------
TOTAL $ 721,601 $ 680,788
========== ===========
See accompanying notes to consolidated financial statements
-3-
</TABLE>
<TABLE>
OTTER TAIL POWER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
------------ ------------ ------------ ------------
(in thousands, except share and per share amounts)
<S> <C> <C> <C> <C>
OPERATING REVENUES
Electric $ 65,514 $ 60,860 $ 185,259 $ 178,811
Plastics 19,787 10,682 71,390 24,230
Health services 16,649 15,279 48,330 49,112
Manufacturing 20,036 15,568 50,559 46,453
Other business operations 21,648 21,230 56,580 48,895
----------- ----------- ----------- ----------
Total operating revenues 143,634 123,619 412,118 347,501
OPERATING EXPENSES
Production fuel 9,691 8,930 27,272 28,181
Purchased power 15,750 12,889 42,361 36,254
Other electric operation and maintenance expenses 19,471 19,182 53,896 53,975
Cost of goods sold 56,145 43,579 159,931 122,155
Other nonelectric expenses 13,743 11,000 43,425 28,438
Depreciation and amortization 7,030 6,326 20,651 18,835
Property taxes 2,610 2,852 7,888 8,510
----------- ----------- ----------- ----------
Total operating expenses 124,440 104,758 355,424 296,348
OPERATING INCOME
Electric 12,392 11,581 37,191 35,603
Plastics 1,453 1,520 10,271 2,862
Health services 1,758 567 5,217 4,099
Manufacturing 1,460 1,047 3,085 3,210
Other business operations 2,131 4,146 930 5,379
----------- ----------- ----------- ----------
19,194 18,861 56,694 51,153
OTHER INCOME AND DEDUCTIONS - NET 358 651 1,565 1,323
INTEREST CHARGES 4,265 3,722 12,509 11,069
----------- ----------- ----------- ----------
INCOME BEFORE INCOME TAXES 15,287 15,790 45,750 41,407
INCOME TAXES 4,685 5,410 15,571 14,632
----------- ----------- ----------- ----------
NET INCOME 10,602 10,380 30,179 26,775
Preferred dividend requirements 470 579 1,409 1,758
----------- ----------- ----------- -----------
EARNINGS AVAILABLE FOR COMMON SHARES $ 10,132 $ 9,801 $ 28,770 $ 25,017
=========== =========== =========== ===========
Basic earnings per common share: $ 0.42 $ 0.41 $ 1.21 $ 1.05
Diluted earnings per common share: $ 0.42 $ 0.41 $ 1.20 $ 1.05
Average number of common shares outstanding - basic 23,849,974 23,849,753 23,849,974 23,824,920
Average number of common shares outstanding - diluted 23,923,312 23,892,506 23,897,705 23,844,824
Dividends per common share $0.255 $0.2475 $0.765 $0.7425
See accompanying notes to consolidated financial statements
-4-
</TABLE>
<TABLE>
OTTER TAIL POWER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
2000 1999
---------- --------
(Thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 30,179 $ 26,775
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 27,597 26,608
Deferred investment tax credit - net (864) (870)
Deferred income taxes (1,372) (1,910)
Change in deferred debits and other assets (1,744) 687
Change in noncurrent liabilities and deferred credits 2,455 2,829
Allowance for equity (other) funds used during construction (262) (38)
(Gains)/Losses from investments and disposal of noncurrent assets 492 (38)
Cash provided by (used for) current assets & current liabilities:
Change in receivables, materials and supplies (22,431) 284
Change in other current assets 3,322 5,641
Change in payables and other current liabilities 1,822 1,754
Change in interest and income taxes payable (3,109) 2,923
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 36,085 64,645
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (32,826) (26,170)
Proceeds from disposal of noncurrent assets 1,383 1,099
Purchase of businesses, net of cash acquired (34,194) (16,000)
Change in other investments 854 (813)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (64,783) (41,884)
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in short-term debt - net 15,562 (824)
Proceeds from issuance of common stock - 1,719
Proceeds from issuance of long-term debt 18,905 13,752
Payments for retirement of long-term debt (5,832) (3,840)
Redemption of preferred stock - (5,331)
Dividends paid (19,903) (19,448)
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 8,732 (13,972)
NET CHANGE IN CASH AND CASH EQUIVALENTS (19,966) 8,789
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 24,762 3,919
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,796 $ 12,708
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes:
Interest (net of amount capitalized) $ 11,488 $ 11,309
Income taxes $ 19,971 $ 13,601
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 consolidated financial
statements and notes thereto should be read in conjunction with the
consolidated 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-
and nine-month periods ended September 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 ratably over a four-year period. 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 September 30, 2000 a total of
794,212 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 Company issued 89,238 common shares for the nine months ended
September 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) 53,630
common shares were purchased from the open market during 2000. 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.
Basic earnings per common share are calculated by dividing earnings
available for common shares by the average number of common shares
outstanding during the year. Diluted earnings per common share are
calculated by adjusting outstanding shares, assuming conversion of all
potentially dilutive stock options using the treasury stock method.
Comprehensive Income
--------------------
Net income of $10.6 million and $30.2 million was the only element of
comprehensive income for the three and nine months ended September 30,
2000, respectively.
Elements of comprehensive income for the three-month period ended
September 30, 1999, include net income of $10.4 million along with a
$610,000 (net of $401,000 in deferred taxes) reduction in accumulated
other comprehensive income related to the reversal of previously
recorded unrealized gains on "available-for-sale" securities which
were sold during the third quarter of 1999. Comprehensive income for
the nine-month period ended September 30, 1999, includes net income of
$26.8 million along with a $297,000 (net of $210,000 in deferred
taxes) reduction in accumulated other comprehensive income related to
the reversal of previously recorded unrealized gains on "available-
for-sale" securities which were sold during the third quarter of 1999.
Arbitration Settlement
----------------------
During the second quarter of 2000, the Minnesota, South Dakota and
North Dakota utility regulatory agencies approved the accounting
treatment of 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 include the
electric utility only and are 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 are 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 Nine months ended
September 30, September 30,
-------------------- --------------------
(in thousands) 2000 1999 2000 1999
--------------------------------------------------------------------------
Electric $ 12,392 $ 11,581 $ 37,191 $ 35,603
Plastics 1,453 1,520 10,271 2,862
Health Services 1,758 567 5,217 4,099
Manufacturing 1,460 1,047 3,085 3,210
Other Business Operations 2,131 4,146 930 5,379
-------- -------- -------- --------
Total $ 19,194 $ 18,861 $ 56,694 $ 51,153
======== ======== ======== ========
Identifiable Assets
-------------------
As of As of
September 30, December 31,
(in thousands) 2000 1999
-------------------------------------------------------------
Electric $ 520,828 $ 524,012
Plastics 56,759 15,979
Health Services 32,729 29,542
Manufacturing 44,474 30,853
Other Business Operations 66,811 80,402
--------- ---------
Total $ 721,601 $ 680,788
========= =========
Substantially all sales and long-lived assets of the Company are
within the United States.
Intangible assets
-----------------
The majority of the Company's intangible assets consist of goodwill,
net of amortization, associated with the acquisition of subsidiaries.
The Company periodically evaluates the recovery of intangible assets.
Due to changing market conditions the Company is currently evaluating
the assets of a subsidiary acquired by Otter Tail Energy Services in
1998. The net amount of goodwill related to this acquisition as of
September 30, 2000 was $1.9 million. Should the review indicate that
a portion of the goodwill is not recoverable, the Company's carrying
value of the goodwill would be reduced.
Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to 2000
presentation. Such reclassification had no impact on net income,
shareholders' equity or cash flows provided from operations.
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.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities". In
June 2000, the FASB issued SFAS No. 138, which amends certain
provisions of SFAS 133 to clarify four areas causing difficulties in
implementation. The amendment included expanding the normal purchase
and sale exemption for contracts. The Company will adopt SFAS 133 and
the corresponding amendments under SFAS 138 on January 1, 2001 and is
currently determining the impact of SFAS 133. The implementation team
is in the process of inventorying potential derivatives and addressing
other SFAS 133 issues. It appears that most potential derivatives
would qualify as normal purchase and sale contracts. All necessary
documentation will be completed by the implementation date. Although
all of the steps to implement SFAS 133 have not yet been completed,
the Company does not expect a material impact on consolidated results
of operations and financial position. This statement should have no
impact on consolidated cash flows.
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 $36.1 million as shown on the
Consolidated Statement of Cash Flows for the nine months ended
September 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 $28.6 million for the nine
months ended September 30, 2000 as compared to the nine months ended
September 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 $22.9 million increase in net cash used in investing activities was
due to the acquisitions. Net cash provided by financing activities
increased by $22.7 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
September 30, 2000, $43.4 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 $16.4 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. Goodwill associated with the
acquisitions during 2000 is the reason for the $21.4 million increase
in intangibles. The $2.4 million increase in other assets reflects a
growing pension asset related to the recognition of net periodic
pension credits under Statement of Financial Accountant Standard No.
87 - Employers' Accounting for Pensions (SFAS 87). Increased sales in
the plastic, manufacturing and electric segments led to most of the
$20.8 million increase in trade accounts receivable. The $9.2
million increase in inventory, fuel, materials and operating supplies
primarily reflects an increase in inventory within the plastics and
manufacturing segments due to increases in raw material prices and
predicted sales volumes. The $3.0 million decrease in accrued utility
revenues reflects the reduction in unbilled utility revenues due to
the seasonal change in weather.
The $13.2 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 $15.6 million increase in short-term debt. The acquisition
of Vinyltech is the primary reason for the $4.7 million increase in
accounts payable. The accrual of employee benefits and incentives led
to the $2.6 million increase in accrued salaries and wages. The $2.1
million decreases in both federal and state income taxes accrued and
other taxes accrued are the result of the timing of tax payments.
MATERIAL CHANGES IN RESULTS OF OPERATIONS
-----------------------------------------
Comparison of the Quarters Ended September 30, 2000 and 1999
------------------------------------------------------------
Consolidated Results
--------------------
The Company recorded diluted earnings per share of $0.42 for the
quarter ended September 30, 2000 as compared to diluted earnings per
share of $0.41 for the quarter ended September 30, 1999. Total
operating revenues were $143.6 million for the quarter ended
September 30, 2000, up $20.0 million from $123.6 million recorded
for the quarter ended September 30, 1999. Operating income increased
$333,000 from $18.9 million reported for the third quarter of 1999 to
$19.2 million for the third quarter of 2000. The favorable third quarter
results can be primarily attributed to strong results in the health
services and electric segments offset by decreased operating income
from other business operations.
Electric Operations
-------------------
Three months ended
September 30,
-------------------- Percentage
(in thousands) 2000 1999 Change
-----------------------------------------------------------------------------
Operating revenues $ 65,514 $ 60,860 7.6
Production fuel 9,691 8,930 8.5
Purchased power 15,750 12,889 22.2
Other operation and maintenance expenses 19,471 19,182 1.5
Depreciation and amortization 5,600 5,427 3.2
Property taxes 2,610 2,851 (8.5)
-------- -------- -----
Operating income $ 12,392 $ 11,581 7.0
======== ======== =====
The increase in electric operating revenues for the three months ended
September 30, 2000, as compared to the same period in 1999, is due to
a $2.8 million (17.1%) increase in revenues from power pool sales, a
$1.1 million (108.6%) increase in other electric revenue and a
$747,000 (1.7%) increase in retail revenue.
The increase in revenues from power pool sales resulted from a 66%
increase in kilowatt-hours (kwh) sold offset by a 33% decrease in
revenue per kwh sold. Gross margins from power pool sales increased
2.7% for the third quarter of 2000 as compared to the third quarter of
1999. As a result of higher availability and increased generation
from the Company's steam plants, the Company was able to increase the
gross margins from power pool sales despite milder weather and less
volatile sales prices in the MAPP area during the summer of 2000.
The increase in other electric revenue primarily reflects an increase
in MAPP transmission service revenues resulting from the recording of a
$530,000 FERC-ordered refund of certain transmission service charges in
July 1999.
The increase in retail revenue is primarily the result of a 1.7%
increase in revenue per kwh sold. Kwh sold to retail customers were
essentially the same between the quarters. Increases in kwh sales to
residential and small commercial customers offset a decrease in kwh
sales to industrial customers and also resulted in the slight increase
in revenue per kwh sold as compared to the prior year's quarter, offset
by the refund of fuel costs as part of the arbitration settlement
discussed above in the notes to consolidated financial statements.
Production fuel expenses increased in the three months ended September 30,
2000, as compared to the three months ended September 30, 1999, as
a result of a 16.4% increase in kwh generated at the Company's steam
plants, combined with a 4.9% increase in fuel cost per kwh generated,
offset by a reduction in fuel costs due to the arbitration settlement.
The cost of purchased power increased due to a 24.2% increase in kwh
purchased offset slightly by a 1.6% decrease in cost per kwh
purchased.
Due to continued favorable investment results from the electric
utility's funded pension plan, the Company recognized during the third
quarter of 2000 a credit to expense of approximately $1.1 million for
net periodic pension cost under SFAS 87. This credit to expense
partially offset the increases in other electric operation and
maintenance expenses related to increased labor costs.
Plastics Operations
-------------------
Three months ended
September 30,
------------------- Percentage
(in thousands) 2000 1999 Change
----------------------------------------------------------
Operating revenues $ 19,787 $ 10,682 85.2
Cost of goods sold 16,422 8,169 101.0
Operating expenses 1,912 993 92.5
-------- -------- ------
Operating income $ 1,453 $ 1,520 (4.4)
======== ======== ======
The acquisition of Vinyltech on January 1, 2000 is the primary driver
behind the increases in operating revenues, cost of goods sold, and
operating expenses for the three months ended September 30, 2000 as
compared to the same period in 1999. Operating revenues increased as
a result of an increase in pounds of PVC pipe sold combined with an
increase in average sales price per pound.
During the third quarter of 2000, the plastics operations experienced
a general slowing of the economy and a reduction of both resin and
pipe prices which resulted in a decrease in demand and gross margins
compared to the first half of the year. The Company also believes
the reduction in short-term demand is due in part to our distributors
reluctance to purchase pipe for inventory while pipe prices are
declining.
Health Services Operations
--------------------------
Three months ended
September 30,
------------------- Percentage
(in thousands) 2000 1999 Change
----------------------------------------------------------
Operating revenues $ 16,649 $ 15,279 9.0
Cost of goods sold 12,432 12,631 (1.6)
Operating expenses 2,459 2,081 18.2
-------- -------- -------
Operating income $ 1,758 $ 567 210.1
======== ======== =======
Health services operating revenues increased due to a 20.0% increase in
the number of scans performed, combined with a 1.8% increase in average
fee per scan during the quarter ended September 30, 2000 as compared to
the same quarter in 1999. Operating revenues related to the sale and
servicing of diagnostic medical imaging equipment declined 4.4%. Cost
of goods sold declined as a result of the reduction in equipment sales
and services offset by increased costs due to more scans. Operating
expenses increased as a result of the increase in sales volume and
reflects the acquisition of PXE on June 1, 2000.
Manufacturing Operations
------------------------
Three months ended
September 30,
------------------- Percentage
(in thousands) 2000 1999 Change
----------------------------------------------------------
Operating revenues $ 20,036 $ 15,568 28.7
Cost of goods sold 15,413 11,461 34.5
Operating expenses 3,163 3,060 3.4
-------- -------- ------
Operating income $ 1,460 $ 1,047 39.4
======== ======== ======
Operating revenues for the manufacturing operations increased at all
four of the manufacturing subsidiaries for the quarter ended
September 30, 2000, as compared to the same quarter in 1999, due in
part to sales volume increases. The increases in cost of goods sold
and operating expenses reflect the cost increases resulting from
higher sales volumes.
Other Business Operations
-------------------------
Three months ended
September 30,
------------------- Percentage
(in thousands) 2000 1999 Change
----------------------------------------------------------
Operating revenues $ 21,648 $ 21,230 2.0
Cost of goods sold 11,878 11,318 4.9
Operating expenses 7,639 5,766 32.5
-------- -------- ------
Operating income $ 2,131 $ 4,146 (48.6)
======== ======== ======
Increased operating revenues from the transportation and energy
services subsidiaries offset the decreases in operating revenues from
the construction and telecommunication subsidiaries and the lost
revenues from the radio stations which were sold in October, 1999. The
increase in cost of goods sold reflects increased sales volumes at the
energy services subsidiary offset by decreases at the construction
subsidiaries. Increased operating expenses at the transportation
subsidiary offset by the absence of operating expenses from the radio
stations were the main causes of the increase in operating expenses.
The increases in operating revenues and expenses from the
transportation subsidiary are a result of the acquisition that
occurred September 1, 1999. The increase in expenses is also due to
the significant increase in fuel costs during 2000 as compared to
1999. The increases in revenues and costs of goods sold for the
energy services subsidiary is due to increased sales from its lighting
division. The decrease in revenues from the telecommunication
subsidiary reflects the gain from the sale of certain investments
during the third quarter of 1999. The decrease in operating revenues
and cost of goods sold for the construction subsidiaries reflects the
lower volumes of contracted work between the periods.
Interest Charges and Income Taxes
---------------------------------
The $543,000 (14.6%) 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 decrease in income taxes of $725,000 (13.4%) for the
quarter ended September 30, 2000, as compared to the quarter ended
September 30, 1999 is largely due to lower income before taxes for the
same comparable periods.
Comparison of the Nine Months Ended September 30, 2000 and 1999
---------------------------------------------------------------
Consolidated Results
--------------------
The Company recorded diluted earnings per share of $1.20 for the nine
months ended September 30, 2000 as compared to diluted earnings per
share of $1.05 for the nine months ended September 30, 1999. Total
operating revenues were $412.1 million for the nine months ended
September 30, 2000, up $64.6 million from the $347.5 million recorded
for the nine months ended September 30, 1999. Operating income
increased $5.5 million from $51.2 million for the first nine months of
1999 to $56.7 million for the comparable period of 2000. Increased
earnings from plastic operations, primarily due to the Company's January
2000 acquisition of Vinyltech, along with an increase in gross margins
from health services and power pool sales in electric operations, more
than offset the reduction in the operating income from manufacturing
and other business operations segments.
Electric Operations
-------------------
Nine months ended
September 30,
-------------------- Percentage
(in thousands) 2000 1999 Change
-----------------------------------------------------------------------------
Operating revenues $ 185,259 $ 178,811 3.6
Production fuel 27,272 28,181 (3.2)
Purchased power 42,361 36,254 16.8
Other operation and maintenance expenses 53,896 53,975 (.1)
Depreciation and amortization 16,652 16,291 2.2
Property taxes 7,887 8,507 (7.3)
--------- --------- -----
Operating income $ 37,191 $ 35,603 4.5
========= ========= =====
The increase in electric operating revenues for the nine months ended
September 30, 2000, as compared to the same period in 1999, is due to
a $2.5 million (6.2%) increase in revenues from power pool sales, a
$2.3 million (1.7%) increase in retail revenue, and a $1.7 million
(38.3%) increase in other electric revenue.
The increase in revenues from power pool sales resulted from a 9.0%
increase in kwh sold offset by a 2.5% decrease in revenue per kwh
sold. Gross margins from power pool sales increased 19.6% for the
nine months ended September 30, 2000 as compared to the same period in
1999. Although weather was milder and there was less price volatility
in the MAPP area during 2000 as compared to 1999, the Company was able
to increase the gross margins from power pool sales by increasing our
marketing activities in the wholesale power market.
An increase of 1.8% in retail kwh sales led to the increase in retail
revenues. Revenue per kwh sold was essentially the same for the
comparable nine-month periods. The increases in retail kwh sales came
from the small commercial and industrial category.
The $1.7 million increase in other electric revenue reflects an
increase in MAPP transmission services revenues resulting from the
recording of a FERC-ordered refund of certain transmission service
charges in July 1999, combined with an increase in contract work done
during 2000 for other utilities and revenue recorded related to the
arbitration settlement discussed above in the notes to consolidated
financial statements.
Despite a 6.0% increase in fuel cost per kwh produced, production fuel
expenses decreased due to a 2.7% reduction in generation at the
Company's plants related to maintenance outages early in the year and
the effect of recording the arbitration settlement.
The cost of purchased power increased $6.1 million as a result of a
13.1% increase in the volume of electricity purchased combined with a
3.3% increase in the cost per kwh purchased. The increase in
purchased power was to supplement Company generation during
maintenance outages in the first half of 2000.
During the first nine months of 2000 other electric operation and
maintenance expenses reflect a credit of approximately $3.0 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
-------------------
Nine months ended
September 30,
------------------- Percentage
(in thousands) 2000 1999 Change
----------------------------------------------------------
Operating revenues $ 71,390 $ 24,230 194.6
Cost of goods sold 54,457 18,648 192.0
Operating expenses 6,662 2,720 144.9
-------- -------- -------
Operating income $ 10,271 $ 2,862 258.9
======== ======== =======
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 nine months ended
September 30, 2000 as compared to the same period in 1999. Strong
demand within the PVC pipe industry during the first half of the year
also led to increased pipe sales at the Company's other pipe
subsidiary. The average sales price per pound of pipe between the
periods increased 43.9%.
Health Services Operations
--------------------------
Nine months ended
September 30,
------------------- Percentage
(in thousands) 2000 1999 Change
----------------------------------------------------------
Operating revenues $ 48,330 $ 49,112 (1.6)
Cost of goods sold 36,448 38,892 (6.3)
Operating expenses 6,665 6,121 8.9
-------- -------- ------
Operating income $ 5,217 $ 4,099 27.3
======== ======== ======
Operating revenues and cost of goods sold decreased for the nine months
ended September 30, 2000 as compared to the nine months ended September 30,
1999 due to the decline in equipment installations between the periods.
Offsetting the decline in equipment installations was a 10.2% 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 increased 1.1% between the two periods. Operating expenses increased
as a result of the increase in sales volume and reflects the acquisition of
PXE on June 1, 2000.
Manufacturing Operations
------------------------
Nine months ended
September 30,
------------------- Percentage
(in thousands) 2000 1999 Change
----------------------------------------------------------
Operating revenues $ 50,559 $ 46,453 8.8
Cost of goods sold 38,882 35,121 10.7
Operating expenses 8,592 8,122 5.8
-------- -------- -----
Operating income $ 3,085 $ 3,210 (3.9)
======== ======== =====
The depressed agricultural economy is responsible for the overall
decline in manufacturing operating income for the nine months ended
September 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 decline in operating income from the
agricultural equipment manufacturing subsidiary. 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
-------------------------
Nine months ended
September 30,
------------------- Percentage
(in thousands) 2000 1999 Change
------------------------------------------------------------
Operating revenues $ 56,580 $ 48,895 15.7
Cost of goods sold 30,144 29,494 2.2
Operating expenses 25,506 14,022 81.9
-------- -------- -------
Operating income $ 930 $ 5,379 (82.7)
Increased operating revenues from the transportation and energy
services subsidiaries offset the decreases in operating revenues from
the construction and telecommunication subsidiaries and the lost
revenues from the radio stations which were sold in October 1999. The
majority of the revenue increase for the nine months ended September 30,
2000, as compared to the nine months ended September 30, 1999, is the
result of 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 offset by the absence of expenses
from the radio stations.
Interest Charges and Income Taxes
---------------------------------
The $1.4 million (13.0%) 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 $939,000 (6.4%) for the
nine months ended September 30, 2000, as compared to the nine months
ended September 30, 1999 is primarily due to the $4.3 million (10.5%)
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 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
September 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: November 14, 2000
-----------------
