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OTTR > SEC Filings for OTTR > Form 10-Q on 10-May-2013All Recent SEC Filings

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Form 10-Q for OTTER TAIL CORP


10-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

Following is an analysis of our operating results by business segment for the three months ended March 31, 2013 and 2012, followed by a discussion of changes in our consolidated financial position during the three months ended March 31, 2013 and our business outlook for the remainder of 2013.

Comparison of the Three Months Ended March 31, 2013 and 2012

Consolidated operating revenues were $218.0 million for the three months ended March 31, 2013 compared with $219.9 million for the three months ended March 31, 2012. Operating income was $27.2 million for the three months ended March 31, 2013 compared with $18.3 million for the three months ended March 31, 2012. The Company recorded diluted earnings per share from continuing operations of $0.41 for the three months ended March 31, 2013 compared to $0.28 for the three months ended March 31, 2012 and total diluted earnings per share of $0.41 for the three months ended March 31, 2013 compared to $0.20 for the three months ended March 31, 2012.

Amounts presented in the segment tables that follow for operating revenues, cost of goods sold and other nonelectric operating expenses for the three month periods ended March 31, 2013 and 2012 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:

   Intersegment Eliminations (in thousands)    March 31, 2013       March 31, 2012
   Operating Revenues:
    Electric                                  $             34     $             35
    Nonelectric                                             13                    4
   Cost of Goods Sold                                       13                   11
   Other Nonelectric Expenses                               34                   28



                                    Electric

                                             Three Months Ended
                                                  March 31,                             %
(in thousands)                                2013          2012        Change        Change
Retail Sales Revenues                      $   92,323     $ 81,422     $ 10,901          13.4
Wholesale Revenues - Company Generation         1,633        2,079         (446 )       (21.5 )
Net Revenue - Energy Trading Activity             345          412          (67 )       (16.3 )
Other Revenues                                  6,709        6,090          619          10.2
Total Operating Revenues                   $  101,010     $ 90,003     $ 11,007          12.2
Production Fuel                                17,953       15,424        2,529          16.4
Purchased Power - System Use                   16,639       14,158        2,481          17.5
Other Operation and Maintenance Expenses       32,447       30,013        2,434           8.1
Asset Impairment Charge                            --          432         (432 )      (100.0 )
Depreciation and Amortization                  10,631       10,400          231           2.2
Property Taxes                                  2,916        2,617          299          11.4
Operating Income                           $   20,424     $ 16,959     $  3,465          20.4



                                     Three Months Ended
                                          March 31,                                %
     Electric kwh Sales (in
     thousands)                         2013            2012      Change        Change
     Retail kilowatt-hour
     (kwh) Sales                   1,310,312       1,204,605       105,707           8.8
     Wholesale kwh Sales -
     Company Generation               64,345          95,391       (31,046 )       (32.5 )
     Wholesale kwh Sales -
     Purchased Power Resold           13,789           6,400         7,389         115.5


The $10.9 million increase in retail sales revenues reflects the following:
? a $6.6 million increase in revenue related to an 8.8% increase in retail kilowatt-hour (kwh) sales resulting from colder weather in the first quarter of 2013 compared with the first quarter of 2012, as evidenced by a 33.8% increase in heating-degree days between the quarters,

? a $3.6 million increase in revenue related to higher fuel and purchased power prices, in part due to increased market demand for electricity caused by the colder winter and in part due to having to use higher cost generation sources and power purchases to meet the increased demand,

a $0.5 million increase in Transmission Cost Recovery Rider revenues in ? Minnesota as a result of increased investment in transmission assets, and

? a $0.2 million increase in Renewable Resource Cost Recovery Rider revenue in North Dakota.

Wholesale electric revenues from company-owned generation decreased $0.4 million, despite a 16.4% increase in wholesale electric prices, mainly as a result of a 32.5% decrease in wholesale kwh sales as a greater proportion of available generation was used to serve retail load.

Other electric operating revenues increased $0.6 million as a result of:
? a $1.3 million increase in Midwest Independent Transmission System Operator (MISO) Schedules 26 and 26A transmission tariff revenue, driven in part by returns on and recovery of CapX2020 and MISO-designated MVP investment costs and operating expenses,

offset by:
? a $0.7 million reduction in MISO Schedule 1 transmission tariff revenue related to a tariff change that went into effect on August 28, 2012.

Fuel costs increased $2.5 million as a result of an 11.4% increase in kwhs generated from Otter Tail Power Company (OTP) steam-powered and combustion turbine generators, combined with a 4.5% increase in the cost of fuel per kwh generated. Generation levels increased in response to higher demand due to more seasonal weather in the first quarter of 2013 compared to the first quarter of 2012. The average cost of fuel per kwh of generation increased, in part, because OTP's Coyote Station was shut down for generator repairs during the first seven weeks of 2013.

The cost of purchased power for retail sales increased $2.5 million as a result of a 14.9% increase in kwhs purchased, combined with a 2.3% increase in the cost per kwh purchased. The increase in kwhs purchased was driven by increased demand due to the colder weather in 2013.

Electric operating and maintenance expenses increased $2.4 million mainly due to the following:
? a $1.1 million increase in MISO Schedules 26 and 26A transmission service charges related to increasing investments in regional CapX2020 and MISO-designated Multi-Value Projects (MVPs),

? a $0.9 million increase in labor and benefit expenses related to increases in pension and retirement health benefit costs resulting from reductions in the discount rates related to projected benefit obligations, and

? a $0.3 million Minnesota Pollution Control Agency annual operations fee paid in the first quarter of 2013 (this annual fee was paid in the second quarter in 2012).

Otter Tail Energy Services Company (OTESCO) recorded a $0.4 million asset impairment charge related to wind farm development rights at its Sheridan Ridge and Stutsman County sites in North Dakota in the first quarter of 2012 as a potential sale of the rights did not occur as expected. OTESCO reported no activity in the first quarter of 2013.

The $0.3 million increase in property tax expense is due to recent investments in transmission and distribution property, mainly in Minnesota.


                                 Manufacturing

                                        Three Months Ended
                                             March 31,                            %
      (in thousands)                     2013          2012        Change      Change
      Operating Revenues              $   53,166     $ 59,434     $ (6,268 )     (10.5 )
      Cost of Goods Sold                  39,326       44,667       (5,341 )     (12.0 )
      Operating Expenses                   4,498        5,046         (548 )     (10.9 )
      Depreciation and Amortization        2,993        3,018          (25 )      (0.8 )
      Operating Income                $    6,349     $  6,703     $   (354 )      (5.3 )

The decrease in revenues in our Manufacturing segment relates to the following:

? Revenues at BTD Manufacturing, Inc. (BTD), our metal parts stamping and fabrication company, decreased $6.2 million as a result of lower sales volume mainly due to reduced demand from customers in end markets serving the construction, energy and lawn and garden equipment industries.

? Revenues at T.O. Plastics, Inc. (T.O. Plastics), our manufacturer of thermoformed plastic and horticultural products, decreased by $0.1 million over the first quarter of 2012.

The decrease in cost of goods sold in our Manufacturing segment relates to the following:

? Cost of goods sold at BTD decreased $4.8 million as a result of reductions in direct labor and material costs related to decreased sales volume.

? Cost of goods sold at T.O. Plastics decreased $0.5 million as a result of favorable raw material pricing and continuing productivity improvements.

The decrease in operating expenses in our Manufacturing segment is mainly due to the following:

? Operating expenses at BTD increased $0.6 million due to a decrease in compensation related to the reduction in sales.

? Operating expenses at T.O. Plastics were flat between the quarters.


                                  Construction

                                        Three Months Ended
                                             March 31,                             %
      (in thousands)                     2013          2012        Change       Change
      Operating Revenues              $   26,425     $ 35,617     $  (9,192 )     (25.8 )
      Cost of Goods Sold                  24,276       38,693       (14,417 )     (37.3 )
      Operating Expenses                   3,386        3,280           106        3.2
      Depreciation and Amortization          462          434            28         6.5
      Operating Loss                  $   (1,699 )   $ (6,790 )   $   5,091        75.0

The decrease in revenues in our Construction segment relates to the following:

? Revenues at Foley Company (Foley), a mechanical and prime contractor on industrial projects, decreased $5.3 million, mainly as a result of a reduction in work volume between the quarters as several large projects were near completion in 2012.

? Revenues at Aevenia, Inc. (Aevenia), our electrical design and construction services company, decreased $3.9 million between the quarters as a result of a decrease in construction activity due, in part, to a harsher winter in 2013 delaying the start of many construction projects relative to the early start to construction that was facilitated by extremely mild weather in the first quarter of 2012. Aevenia's first quarter 2012 revenues also included $1.3 million from Moorhead Electric, Inc., an Aevenia subsidiary that was sold in October 2012.

The decrease in cost of goods sold in our Construction segment relates to the following:

? Cost of goods sold at Foley decreased $11.2 million as a result of the reduction in work volume and a $6.0 million reduction in cost overruns between the quarters on major projects nearing completion during the quarters.

? Cost of goods sold at Aevenia decreased $3.2 million between the quarters as a result of a decrease in construction activity due, in part, to a harsher winter in 2013 delaying the start of many construction projects relative to the early start to construction that was facilitated by extremely mild weather in the first quarter of 2012.

                                    Plastics

                                        Three Months Ended
                                             March 31,                           %
      (in thousands)                     2013          2012       Change      Change
      Operating Revenues              $   37,400     $ 34,875     $ 2,525        7.2
      Cost of Goods Sold                  28,473       26,947       1,526        5.7
      Operating Expenses                   1,436        1,363          73         5.4
      Depreciation and Amortization          774          813         (39 )      (4.8 )
      Operating Income                $    6,717     $  5,752     $   965        16.8

The increase in Plastics segment revenue is the result of a 6.7% increase in pounds of polyvinyl chloride (PVC) pipe sold, combined with a 0.5% increase in the price per pound of pipe sold. Sales volume increased as construction and housing markets improved in the South Central and Southwest regions of the United States. Sales volume increases in these regions were partially offset by lower sales in the North Central United States due to a harsher winter in this region in 2013. The increase in costs of goods sold was mostly due to the increase in pounds of pipe sold, but was partially offset by a 1.0% decrease in the cost per pound of pipe related to a slight decrease in PVC resin prices.


                                   Corporate

Corporate includes items such as corporate staff and overhead costs, the results
of our captive insurance company and other items excluded from the measurement
of operating segment performance. Corporate is not an operating segment. Rather
it is added to operating segment totals to reconcile to totals on our
consolidated statements of income.

                                       Three Months Ended
                                            March 31,                             %
     (in thousands)                     2013          2012        Change       Change
     Operating Expenses              $    4,492      $ 4,241     $    251         5.9
     Depreciation and Amortization           60          128          (68 )      (53.1 )

Corporate operating expense increases totaling $1.1 million in labor and benefit costs related to staffing additions to support the manufacturing and infrastructure platforms and stock incentive award accruals resulting from the strong performance of our common stock price as measured against the stock performances of our peer group of companies in the Edison Electric Institute Index in the first quarter of 2013, were offset by decreases of $0.7 million in professional and contracted services expenses and $0.1 million in other corporate expenses.

Interest Charges

The $1.6 million decrease in interest charges in the first three months of 2013 compared with the first three months of 2012, is mostly due to the July 2012 early redemption of the corporation's $50 million, 8.89% senior unsecured note, which resulted in a $1.1 million decrease in interest charges between quarters. Short-term debt interest decreased $0.3 million as a result of a reduction in the average balance of short-term debt outstanding between the quarters along with reduced rates and fees on our line of credit facilities. A $0.1 million increase in capitalized interest expense at OTP also contributed to the decrease in interest charges.

                      Income Taxes - Continuing Operations

Income taxes - continuing operations increased $5.4 million in the first quarter
of 2013 compared with the first quarter of 2012.
The following table provides a reconciliation of income tax expense calculated
at the Company's net composite federal and state statutory rate on income from
continuing operations before income taxes and income tax expense for continuing
operations reported on the Company's consolidated statements of income for the
three month periods ended March 31, 2013 and 2012:

                                                                  Three Months Ended March 31,
(in thousands)                                                     2013                  2012
Income Before Income Taxes - Continuing Operations             $      21,120         $      10,643
Tax Computed at Company's Net Composite Federal and State
Statutory Rate (39%)                                                   8,237                 4,151
Increases (Decreases) in Tax from:
Federal Production Tax Credits (PTCs)                                 (1,589 )              (1,987 )
Reversal of Accrued Interest on Removal of Cost
Capitalization Audit Issue                                                --                  (676 )
Corporate Owned Life Insurance                                          (302 )                (372 )
North Dakota Wind Tax Credit Amortization - Net of Federal
Taxes                                                                   (223 )                (222 )
Medicare Part D Subsidy                                                   (4 )                (197 )
Employee Stock Ownership Plan Dividend Deduction                        (190 )                (190 )
Other Items - Net                                                        (43 )                 (39 )
Income Tax Expense - Continuing Operations                     $       5,886         $         468
Effective Income Tax Rate - Continuing Operations                       27.9 %                 4.4 %

Federal PTCs are recognized as wind energy is generated based on a per kwh rate prescribed in applicable federal statutes. North Dakota wind energy credits are based on dollars invested in qualifying facilities and are being recognized on a straight-line basis over 25 years.


Discontinued Operations

On February 8, 2013 we closed on the sale of substantially all the assets of ShoreMaster, Inc. (ShoreMaster) for approximately $13.0 million in cash plus a future working capital true up of approximately $2.3 million expected to be received within 180 days of closing. In the first quarter of 2013, we paid approximately $0.8 million in expenses related to the sale of ShoreMaster and we also paid a $1.7 million working capital settlement to the purchaser of DMS Health Technologies, Inc. (DMS), which was sold on February 29, 2012. On November 30, 2012 we completed the sale of the assets of DMI Industries, Inc. (DMI). The financial position of ShoreMaster and DMI and the results of operations and cash flows of ShoreMaster, DMI and DMS are reported as discontinued operations in our consolidated financial statements. Following are summary presentations of the results of discontinued operations for the three month periods ended March 31, 2013 and 2012:

                                                    For the Three Months Ended
                                                             March 31,
   (in thousands)                                    2013                2012
   Operating Revenues                            $      2,009       $       74,051
   Operating Expenses                                   2,707               73,445
   Operating (Loss) Income                               (698 )                606
   Interest Charges                                        --                  169
   Other Income                                           412                  133
   Income Tax (Benefit) Expense                          (205 )                413
   Net (Loss) Income from Operations                      (81 )                157
   Gain (Loss) on Disposition Before Taxes                216               (3,223 )
   Income Tax Expense (Benefit) on Disposition              6                 (134 )
   Net Gain (Loss) on Disposition                         210               (3,089 )
   Net Income (Loss)                             $        129       $       (2,932 )

FINANCIAL POSITION

The following table presents the status of our lines of credit as of March 31,
2013 and December 31, 2012:

                                                    In Use on       Restricted due to       Available on       Available on
                                                    March 31,          Outstanding           March 31,         December 31,
(in thousands)                     Line Limit         2013          Letters of Credit           2013               2012
Otter Tail Corporation Credit
Agreement                         $    150,000     $        --     $               733     $      149,267     $      149,267
OTP Credit Agreement                   170,000           1,271                   3,264            165,465            166,811
Total                             $    320,000     $     1,271     $             3,997     $      314,732     $      316,078

On March 31, 2013 our construction subsidiary, Foley, had $64,000 outstanding in short-term borrowings related to construction activity.

We believe we have the necessary liquidity to effectively conduct business operations for an extended period if needed. Our balance sheet is strong and we are in compliance with our debt covenants. Financial flexibility is provided by operating cash flows, unused lines of credit, strong financial coverages, investment grade credit ratings and alternative financing arrangements such as leasing.

We believe our financial condition is strong and our cash, other liquid assets, operating cash flows, existing lines of credit, access to capital markets and borrowing ability because of investment-grade credit ratings, when taken together, provide adequate resources to fund ongoing operating requirements and future capital expenditures related to expansion of existing businesses and development of new projects. On May 11, 2012 we filed a shelf registration statement with the Securities and Exchange Commission under which we may offer for sale, from time to time, either separately or together in any combination, equity, debt or other securities described in the shelf registration statement. On May 14, 2012, we entered into a Distribution Agreement (the Agreement) with J.P. Morgan Securities (JPMS) under which we may offer and sell our common shares from time to time through JPMS, as our distribution agent, up to an aggregate sales price of $75 million.


Equity or debt financing will be required in the period 2013 through 2017 given the expansion plans related to our Electric segment to fund construction of new rate base investments, in the event we decide to reduce borrowings under our lines of credit or refund or retire early any of our presently outstanding debt, to complete acquisitions or for other corporate purposes. Also, our operating cash flow and access to capital markets can be impacted by macroeconomic factors outside our control. In addition, our borrowing costs can be impacted by changing interest rates on short-term and long-term debt and ratings assigned to us by independent rating agencies, which in part are based on certain credit measures such as interest coverage and leverage ratios.

Our common stock dividend payments have exceeded our net (losses) income in each of the last five years. The determination of the amount of future cash dividends to be declared and paid will depend on, among other things, our financial condition, improvement in earnings per share to levels in excess of the indicated annual dividend per share of $1.19, cash flows from operations, the level of our capital expenditures and our future business prospects. As a result of certain statutory limitations or regulatory or financing agreements, restrictions could occur on the amount of distributions allowed to be made by our subsidiaries. See note 8 to consolidated financial statement for more information. The decision to declare a quarterly dividend is reviewed quarterly by the Board of Directors.

Cash provided by operating activities from continuing operations was $10.2 million for the three months ended March 31, 2013 compared with $9.0 million for the three months ended March 31, 2012. Cash provided by operating activities from continuing operations reflects an $8.1 million increase in net income from continuing operations offset by a $5.3 million increase in cash used for working capital items mainly due to a decrease in accounts payable and other current liabilities in the first quarter of 2013 compared to the first quarter of 2012, mostly due to the change in annual bonuses paid between the periods.

Net cash used in investing activities of continuing operations was $23.5 million for the three months ended March 31, 2013 compared to $35.6 million for the three months ended March 31, 2012 due to a $12.4 million decrease in cash used for capital expenditures at the electric utility between the quarters. Although the level of construction activity at OTP was similar between the quarters, OTP's $33.3 million in capital expenditures in the first quarter of 2012 included a $14.0 million reduction in construction-related accounts payable. Net proceeds from the sale of discontinued operations of $10.5 million in the first quarter of 2013 reflect $12.2 million in net proceeds from the sale of the assets of ShoreMaster less a $1.7 million working capital settlement paid to the buyer of DMS, which we sold in the first quarter of 2012. Net proceeds from the sale of discontinued operations of $24.4 million in the first quarter of 2012, which were used to pay down short-term borrowings and for other corporate purposes, reflect proceeds, net of selling costs, of $24.1 million from the sale of DMS and $0.3 million from the January 2012 sale of the assets of Aviva Sports, Inc., a wholly owned subsidiary of ShoreMaster. Net cash used in investing activities of discontinued operations of $11.9 million in the first quarter of 2012 reflects cash used by DMS to purchase assets held under operating leases.

Net cash used in financing activities of continuing operations of $8.6 million reflects $2.5 million in proceeds from short term borrowings and the issuance of common stock offset by $11.3 million in common and preferred stock dividend payments. On March 1, 2013 OTP used proceeds from a $40.9 million unsecured term loan to fund the redemption of all $25.1 million of the then outstanding 4.65% Grant County, South Dakota Pollution Control Refunding Revenue Bonds and 4.85% Mercer County, North Dakota Pollution Control Refunding Revenue Bonds, and to pay off an intercompany note to us that mirrored our $15.5 million in outstanding cumulative preferred shares, which were also redeemed on March 1, 2013.

CAPITAL REQUIREMENTS

2013-2017 Capital Expenditures
We plan to invest in generation and transmission projects for the Electric segment that are expected to positively impact our earnings and returns on capital. In addition to the Big Stone Plant air quality control system project, current Electric segment projects include investment in three MISO-determined MVP transmission projects, one of which is a CapX2020 project, and investment in one other CapX2020 transmission project.

We have revised our consolidated capital expenditures expectation for 2013 from the range of $200 million to $210 million anticipated in our initial capital budget to a range of $165 million to $175 million. In the first quarter of 2013 Otter Tail Power Company revised downward its estimates of its share of capital expenditures required for the construction of a new air quality control system at Big Stone Plant from $265 million to $218 million as a result of a reduction . . .

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