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| OTTR > SEC Filings for OTTR > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
Three Months Ended Three Months Ended
(in thousands) September 30, 2008 September 30, 2007
Operating Revenues:
Electric $ 62 $ 58
Nonelectric 492 427
Cost of Goods Sold 535 425
Other Nonelectric Expenses 19 60
Electric
Three Months Ended
September 30, %
(in thousands) 2008 2007 Change Change
Retail Sales Revenues $ 64,539 $ 59,896 $ 4,643 7.8
Wholesale Revenues 9,876 6,779 3,097 45.7
Net Marked-to-Market Gain (Loss) 65 (751 ) 816 108.7
Other Revenues 8,403 6,186 2,217 35.8
Total Operating Revenues $ 82,883 $ 72,110 $ 10,773 14.9
Production Fuel 18,732 16,994 1,738 10.2
Purchased Power - System Use 10,456 6,499 3,957 60.9
Other Operation and Maintenance Expenses 33,091 27,212 5,879 21.6
Depreciation and Amortization 7,864 6,581 1,283 19.5
Property Taxes 2,227 2,538 (311 ) (12.3 )
Operating Income $ 10,513 $ 12,286 $ (1,773 ) (14.4 )
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The increase in retail revenues reflects $4.0 million in Minnesota and North Dakota Renewable Resource Cost Recovery Rider revenue recorded in the third quarter of 2008. The electric utility billed and accrued $3.1 million in Minnesota Renewable Resource Cost Recovery Rider revenue for recovery of the Minnesota portion of the electric
utility's renewable energy expenses and investment costs going back to
January 1, 2008 as a result of the Minnesota Public Utilities Commission's
(MPUC) August 2008 approval of the electric utility's request for a Renewable
Resource Cost Recovery Rider. North Dakota Renewable Resource Cost Recovery
Rider revenues billed and accrued in the third quarter of 2008 totaled
$0.9 million. The North Dakota Public Service Commission (NDPSC) approved the
electric utility's request for a Renewable Resource Cost Recovery Rider in
May 2008. The increase in retail revenues also includes $0.9 million
attributable to an increase in Minnesota retail electric rates of approximately
2.9%, which was approved by the MPUC. These increases in retail revenues were
partially offset by a decrease in revenues related to a 3.2% decrease in retail
kilowatt-hour (kwh) sales resulting from a 17.3% reduction in cooling degree
days between the quarters as the region experienced a milder summer in 2008
compared with summer 2007.
Wholesale electric revenues from company-owned generation were $9.1 million for
the quarter ended September 30, 2008 compared with $5.7 million for the quarter
ended September 30, 2007 as a result of a 37.7% increase in wholesale kwh sales
combined with a 16.2% increase in the price per kwh sold. A decrease in kwhs
generated to serve retail customers resulted in more generation being available
to meet wholesale market demands. Plant availability, demand, load distribution
and economic dispatch across the entire Midwest Independent Transmission System
Operator (MISO) region are all factors that drive wholesale prices of
electricity. Net gains from energy trading contracts settled decreased by
$1.0 million in the third quarter of 2008 compared with the third quarter of
2007. Trading volumes were down only 1.8% but profit margins on trades decreased
59% between the quarters. Net revenue from the purchase and sale of Financial
Transmission Rights increased $0.7 million between the quarters.
The $0.8 million reduction in net marked-to-market losses on forward energy
contracts reflects third quarter 2007 reductions of marked-to-market gains
recognized on open forward energy contracts in the first half of 2007.
Construction work completed for other entities on regional wind power projects
contributed $2.6 million to the increase in other electric revenues in the third
quarter of 2008 compared with the third quarter of 2007. Revenues from the sale
of steam to an ethanol plant near Big Stone Plant decreased $0.4 million between
the quarters as a result of the ethanol plant being shut down for maintenance in
September 2008.
Production fuel costs increased 10.2% despite a 6.5% decrease in kwhs generated
as a result of a 17.8% increase in the cost of fuel per kwh generated.
Generation for retail sales decreased 9.4% while generation used for wholesale
electric sales increased 37.7% between the quarters. The increase in fuel costs
per kwh is related to higher prices for natural gas and fuel oil used to
generate electricity and higher diesel fuel prices which result in increased
costs to operate coal mines and to transport coal by rail. Approximately 90% of
the fuel cost increases associated with generation to serve retail electric
customers is subject to recovery through the Fuel Clause Adjustment
(FCA) component of retail rates. The electric utility's 27 wind turbines at the
Langdon Wind Energy Center provided 3.0% of total kwh generation in the third
quarter of 2008.
The increase in purchased power - system use is due to a 39.2% increase in kwhs
purchased combined with a 15.6% increase in the cost per kwh purchased. The
increase in the cost per kwh of purchased power reflects a general increase in
fuel and purchased power costs across the Mid-Continent Area Power Pool region
as a result of higher fuel prices in the third quarter of 2008 compared with the
third quarter of 2007.
The increase in other operating and maintenance expenses between the quarters
includes: (1) a $2.3 million increase in costs related to contracted
construction work completed for other entities on regional wind projects,
(2) the recognition of $1.5 million in expenses recoverable through the
Minnesota Resource Cost Recovery Rider that had been deferred in the first six
months of 2008 pending approval of the rider in the third quarter of 2008, (3)
$1.4 million in increased wage and benefit expenses, and (4) a $0.3 million
increase in software licensing expenses.
Depreciation expenses increased as a result of recent capital additions,
including 27 new wind turbines at the Langdon Wind Energy Center.
Plastics
Three Months Ended
September 30, %
(in thousands) 2008 2007 Change Change
Operating Revenues $ 36,690 $ 36,975 $ (285 ) (0.8 )
Cost of Goods Sold 32,189 31,909 280 0.9
Operating Expenses 672 1,782 (1,110 ) (62.3 )
Depreciation and Amortization 733 769 (36 ) (4.7 )
Operating Income $ 3,096 $ 2,515 $ 581 23.1
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Operating revenues for the plastics segment decreased as result of a 10.9%
decrease in pounds of pipe sold, mostly offset by an 11.4% increase in the price
per pound of pipe sold. The increase in cost of goods sold reflects a 15.6%
increase in resin prices per pound of pipe sold. The decrease in operating
expenses reflects a decrease in bonus incentives directly related to decreased
sales and profits in the nine months ended September 30, 2008 compared with the
nine months ended September 30, 2007.
Manufacturing
Three Months Ended
September 30, %
(in thousands) 2008 2007 Change Change
Operating Revenues $ 127,778 $ 95,330 $ 32,448 34.0
Cost of Goods Sold 105,965 75,236 30,729 40.8
Operating Expenses 12,725 8,800 3,925 44.6
Plant Closure Costs 883 - 883 -
Depreciation and Amortization 5,146 3,341 1,805 54.0
Operating Income $ 3,059 $ 7,953 $ (4,894 ) (61.5 )
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The increase in revenues in our manufacturing segment relates to the following:
• Revenues at DMI Industries, Inc. (DMI) increased $17.0 million as a result
of increases in production and sales activity, including first-year
production from its new plant in Oklahoma.
• Revenues at BTD Manufacturing, Inc. (BTD) increased $12.7 million, including $6.7 million from Miller Welding & Iron Works, Inc. (Miller Welding), acquired in May 2008. BTD's revenue increased $4.0 million as a result of increased product sales to existing customers and $2.0 million as a result of increased prices mainly related to higher raw material costs.
• Revenues at T.O. Plastics, Inc. (T.O. Plastics) increased $1.6 million as a result of increased sales of horticultural products.
• Revenues at ShoreMaster, Inc. (ShoreMaster) increased $1.2 million as a result of a $3.3 million increase in commercial sales, including revenue earned on a large marina project in Costa Rica in the third quarter of 2008, partially offset by a $2.1 million increase in dealer sales incentive discounts.
The increase in cost of goods sold in our manufacturing segment relates to the
following:
• DMI's cost of goods sold increased $17.2 million as a result of increases in
production and sales activity, including first-year operations at its new
plant in Oklahoma. DMI experienced a reduction in gross profit margins
between the quarters mainly due to a slow start up of its Oklahoma plant
where the levels of labor and overhead spending have been higher than
expected and production has not reached levels necessary to cover these
costs. Included in cost of goods sold for the three months ended
September 30, 2008 are costs of $1.5 million associated with start-up
inefficiencies at the Oklahoma plant. Higher freight costs and steel
surcharges have also resulted in increased material costs. Increased gross
profits in West Fargo were offset by higher costs for overhead items like
rentals and shop supplies.
• Cost of goods sold at BTD increased $8.6 million, mainly in the categories of material and labor costs, as a result of increased sales volumes and higher material prices. Miller Welding accounted for $4.9 million of the $8.6 million increase in cost of goods sold, including $0.3 million in fair valuation write-ups of acquired inventory that was sold in the third quarter of 2008. Under business combination accounting rules, acquired inventory is written up to fair value.
• Cost of goods sold at T.O. Plastics increased $1.5 million, mainly in material costs related to increased sales of horticultural products.
• Cost of goods sold at ShoreMaster increased $3.5 million as a result of increased material costs related to commercial projects, including costs incurred on a large marina project in Costa Rica in the third quarter of 2008 scheduled for completion in December 2008.
The increase in operating expenses in our manufacturing segment is due to the
following:
• Operating expenses at DMI increased $2.0 million, mainly for labor, benefit
and contracted services, including expenses related to operation of its new
plant in Oklahoma which began construction in the third quarter of 2007 and
went into operation in January 2008.
• BTD's operating expenses increased $1.9 million as a result of increases in labor and benefit expenses and software maintenance costs. Third quarter 2008 operating expenses at Miller Welding, acquired in May 2008, were $0.4 million.
• T.O. Plastics operating expenses increased $0.1 million between the quarters.
• ShoreMaster's operating expenses decreased $0.1 million between the quarters, excluding the $0.9 million in plant closure costs incurred in the third quarter of 2008.
The $0.9 million in plant closure costs in the third quarter of 2008 is mainly
losses and expenses related to the shutdown and sale of ShoreMaster's production
facility in California following the completion of a major marina project in the
state.
Depreciation and amortization expense increased mainly as a result of capital
additions at DMI and the May 2008 acquisition of Miller Welding.
Health Services
Three Months Ended
September 30, %
(in thousands) 2008 2007 Change Change
Operating Revenues $ 31,139 $ 31,360 $ (221 ) (0.7 )
Cost of Goods Sold 24,779 24,193 586 2.4
Operating Expenses 4,726 5,816 (1,090 ) (18.7 )
Depreciation and Amortization 1,020 1,003 17 1.7
Operating Income $ 614 $ 348 $ 266 76.4
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Revenues from scanning and other related services were down $0.1 million as the imaging side of the business continued to be affected by less than optimal utilization of certain imaging assets. Revenues from equipment sales and servicing were also down $0.1 million between the quarters. The increase in cost of goods sold is mainly due to increases in repair and maintenance and other equipment operating costs on the imaging side of the business. The decrease in operating expenses includes a $0.6 million gain on the sale of a portable imaging business in Wisconsin in the third quarter of 2008 and a $0.4 million decrease in sales and marketing expenses between the quarters.
Food Ingredient Processing
Three Months Ended
September 30, %
(in thousands) 2008 2007 Change Change
Operating Revenues $ 15,333 $ 15,714 $ (381 ) (2.4 )
Cost of Goods Sold 15,380 11,926 3,454 29.0
Operating Expenses 540 792 (252 ) (31.8 )
Depreciation and Amortization 1,057 1,017 40 3.9
Operating (Loss) Income $ (1,644 ) $ 1,979 $ (3,623 ) (183.1 )
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The decrease in revenues in the food ingredient processing segment is due to a 4.8% decrease in pounds of product sold, partially offset by a 2.5% increase in the price per pound of product sold. Lower production caused by potato supply shortages at the end of the 2007 crop and a late harvest of the 2008 crop increased overhead costs per unit of sales. These supply constraints, combined with energy costs rising at rates faster than could be passed through to customers, increased costs and lowered profits on products sold in the third quarter of 2008. The decrease in operating expenses reflects a decrease in bonus incentives directly related to decreased sales and gross margins in 2008 compared with 2007. The increase in depreciation and amortization expense between the quarters is due to recent capital additions.
Other Business Operations
Three Months Ended
September 30, %
(in thousands) 2008 2007 Change Change
Operating Revenues $ 59,650 $ 51,231 $ 8,419 16.4
Cost of Goods Sold 36,221 37,029 (808 ) (2.2 )
Operating Expenses 15,194 11,108 4,086 36.8
Depreciation and Amortization 609 512 97 18.9
Operating Income $ 7,626 $ 2,582 $ 5,044 195.4
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The increase in revenues in the other business operations segment relates to the
following:
• Revenues at Foley Company increased $7.0 million due to higher backlog going
into 2008 resulting in an increase in volume of jobs in progress.
• Revenues at Midwest Construction Services, Inc. (MCS) decreased $3.2 million as a result of a reduction in jobs in progress between the quarters. In the third quarter of 2007, MCS was working on three major wind farm projects compared with two major projects in the third quarter of 2008.
• Revenues at E.W. Wylie Corporation (Wylie) increased $4.6 million as a result of the impact of increased fuel costs on shipping rates, but also as a result of a 2.4% increase in combined miles driven by company-owned and owner-operated trucks and higher revenues from heavy-haul services introduced in the fourth quarter of 2007 and the transport of wind towers starting in 2008. Miles driven by company-owned trucks increased 20.3% as a result of the addition of heavy haul and wind tower transport services. Miles driven by owner-operated trucks decreased 31.6% between the quarters.
The increase in cost of goods sold in the other business operations segment
relates to the following:
• Foley Company's cost of goods sold increased $6.2 million, including
increases of $2.3 million in subcontractor costs, $2.0 million in material
costs and $1.8 million in labor and benefit costs as a result of increased
construction activity and jobs in progress.
• Cost of goods sold at MCS decreased $7.0 million due to decreases in material and subcontractor costs directly related to MCS having fewer jobs in progress between the quarters.
The increase in operating expenses in the other business operations segment is
due to the following:
• Wylie's operating expenses increased $3.3 million between the quarters. Fuel
costs increased $2.6 million as a result of higher diesel fuel prices and an
increase in miles driven by company-owned trucks. Labor and benefit costs
increased by $0.5 million and equipment rental costs increased by
$0.3 million due to the addition of heavy-haul services in the fourth
quarter of 2007. Subcontractor expenses decreased $0.2 million as a result
of the decrease in miles driven by owner-operated trucks.
• MCS's operating expenses increased $0.5 million between the quarters due to increases in salary and benefit expenses.
• Foley Company's operating expenses increased $0.3 million between the quarters mostly due to increased salary and benefit costs.
Depreciation expense increases are the result of recent capital additions at all three companies.
Three Months Ended
September 30, %
(in thousands) 2008 2007 Change Change
Operating Expenses $ 3,384 $ 1,973 $ 1,411 71.5
Depreciation and Amortization 134 143 (9 ) (6.3 )
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The change in corporate operating expenses includes increases in stock-based
compensation, benefit expenses, software licensing and maintenance expenses and
increases in outside professional service costs related to the formation of a
holding company.
Comparison of the Nine Months Ended September 30, 2008 and 2007
Consolidated operating revenues were $976.8 million for the nine months ended
September 30, 2008 compared with $909.2 million for the nine months ended
September 30, 2007. Operating income was $47.1 million for the nine months ended
September 30, 2008 compared with $76.6 million for the nine months ended
September 30, 2007. The Company recorded diluted earnings per share of $0.69 for
the nine months ended September 30, 2008 compared to $1.31 for the nine months
ended September 30, 2007.
Amounts presented in the segment tables that follow for operating revenues, cost
of goods sold and other nonelectric operating expenses for the nine-month
periods ended September 30, 2008 and 2007 will not agree with amounts presented
in the consolidated statements of income due to the elimination of intersegment
transactions. The amounts of intersegment eliminations by income statement line
item are listed below:
Nine Months Ended Nine Months Ended
(in thousands) September 30, 2008 September 30, 2007
Operating Revenues:
Electric $ 235 $ 259
Nonelectric 1,676 1,214
Cost of Goods Sold 1,600 1,187
Other Nonelectric Expenses 311 286
Electric
Nine Months Ended
September 30, %
(in thousands) 2008 2007 Change Change
Retail Sales Revenues $ 209,228 $ 196,573 $ 12,655 6.4
Wholesale Revenues 19,681 17,687 1,994 11.3
Net Marked-to-Market Gain 2,284 2,647 (363 ) (13.7 )
Other Revenues 17,946 15,755 2,191 13.9
Total Operating Revenues $ 249,139 $ 232,662 $ 16,477 7.1
Production Fuel 53,444 47,496 5,948 12.5
Purchased Power - System Use 39,598 43,531 (3,933 ) (9.0 )
Other Operation and Maintenance Expenses 87,591 80,738 6,853 8.5
Depreciation and Amortization 23,378 19,501 3,877 19.9
Property Taxes 7,414 7,591 (177 ) (2.3 )
Operating Income $ 37,714 $ 33,805 $ 3,909 11.6
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The increase in retail revenues reflects $5.5 million in Minnesota and North Dakota Renewable Resource Cost Recovery Rider revenue. In the third quarter of 2008, the electric utility billed and accrued $3.1 million in Minnesota Renewable Resource Cost Recovery Rider revenue for recovery of the Minnesota portion of the electric utility's renewable energy expenses and investment costs going back to January 1, 2008 as a result of the MPUC's August 2008 approval of the electric utility's request for a Renewable Resource Cost Recovery Rider. The increase in retail revenues also includes $2.6 million attributable to an increase in Minnesota retail electric rates of approximately 2.9%, which was approved by the MPUC. The remaining $4.6 million increase in retail revenues was due to a 2.8% increase in retail kwh sales resulting from colder weather in the first six months of 2008, when heating degree days were 11.4% higher than in the first six months of 2007.
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