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OTTR > SEC Filings for OTTR > Form 10-Q on 9-Aug-2013All Recent SEC Filings

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Form 10-Q for OTTER TAIL CORP


9-Aug-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 and six month periods ended June 30, 2013 and 2012, followed by a discussion of changes in our consolidated financial position during the six months ended June 30, 2013 and our business outlook for the remainder of 2013.

Comparison of the Three Months Ended June 30, 2013 and 2012

Consolidated operating revenues were $212.4 million for the three months ended June 30, 2013 compared with $211.4 million for the three months ended June 30, 2012. Operating income was $15.8 million for the three months ended June 30, 2013 compared with $15.2 million for the three months ended June 30, 2012. The Company recorded diluted earnings per share from continuing operations of $0.21 for the three months ended June 30, 2013 compared to $0.19 for the three months ended June 30, 2012 and total diluted earnings per share of $0.21 for the three months ended June 30, 2013 compared to ($0.48) for the three months ended June 30, 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 June 30, 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)    June 30, 2013       June 30, 2012
    Operating Revenues:
    Electric                                   $            24     $            23
    Nonelectric                                             (3 )                 2
    Cost of Goods Sold                                       1                   9
    Other Nonelectric Expenses                              20                  16



                                    Electric

                                              Three Months Ended
                                                   June 30,                              %
 (in thousands)                                2013          2012        Change       Change
 Retail Sales Revenues                      $   72,263     $ 68,719     $  3,544          5.2
 Wholesale Revenues - Company Generation         3,432        2,028        1,404         69.2
 Net Revenue - Energy Trading Activity             596          561           35          6.2
 Other Revenues                                  6,571        7,655       (1,084 )      (14.2 )
 Total Operating Revenues                   $   82,862     $ 78,963     $  3,899          4.9
 Production Fuel                                15,603       12,455        3,148         25.3
 Purchased Power - System Use                   11,245       12,328       (1,083 )       (8.8 )
 Other Operation and Maintenance Expenses       35,805       32,407        3,398         10.5
 Depreciation and Amortization                  10,672       10,447          225          2.2
 Property Taxes                                  3,009        2,670          339         12.7
 Operating Income                           $    6,528     $  8,656     $ (2,128 )      (24.6 )



                                                 Three Months Ended
                                                      June 30,                               %
Electric kwh Sales (in thousands)                   2013          2012      Change        Change
Retail kilowatt-hour (kwh) Sales                 962,006       907,529        54,477           6.0
Wholesale kwh Sales - Company Generation         110,912        71,364        39,548          55.4
Wholesale kwh Sales - Purchased Power Resold      36,065        58,632       (22,567 )       (38.5 )

The $3.5 million increase in retail sales revenues reflects the following:
? a $1.7 million increase in Transmission Cost Recovery Rider revenues as a result of increased investment in transmission assets,

? a $1.1 million increase in revenue related to a 6.0% increase in retail kwh sales resulting, in part, from colder spring weather in 2013 compared with 2012, as heating-degree days were up 70.3% between the quarters, and

? a $0.9 million increase in revenue related to the recovery of increased fuel and purchased power costs driven by increased kwh generation to meet higher retail kwh sales demand and by higher purchased power prices, tempered by lower prices for fuel per kwh generated and a reduction in kwhs purchased,

offset by:
? a $0.2 million decrease in Renewable Resource Cost Recovery Rider revenue in Minnesota.

Wholesale electric revenues from company-owned generation increased $1.4 million as a result of a 55.4% increase in wholesale kwh sales combined with an 8.9% increase in wholesale electric prices driven by increased market demand due, in part, to the colder spring in 2013. Otter Tail Power Company (OTP) also had more generation resources available to meet wholesale demand in the second quarter of 2013.

Other electric operating revenues decreased $1.1 million as a result of:
? a $0.9 million reduction in estimated revenue from shared use of transmission facilities with another regional transmission provider under an integrated transmission service agreement, and

? a $0.3 million decrease in Midcontinent Independent System Operator, Inc. (MISO) transmission tariff revenues due to implementation of a revised and lower tariff in October 2012,

offset by:
? a $0.2 million increase in revenue from steam sales to an ethanol producer adjacent to the Big Stone Plant site, due to the customer burning less natural gas to meet its steam requirements in 2013 in response to higher natural gas prices.

Fuel costs increased $3.1 million as a result of a 35.3% increase in kwhs generated from OTP's steam-powered and combustion turbine generators, partially offset by a 7.4% decrease in the cost of fuel per kwh generated. Generation levels increased as a result of greater plant availability and in response to higher demand due to colder weather in the second quarter of 2013 compared with the second quarter of 2012. The average cost of fuel per kwh of generation decreased mainly as a result of a 17.8% decrease in the cost of fuel per kwh generated at OTP's Big Stone Plant combined with a 14.0% increase in kwhs generated at that plant and a 75.6% increase in kwhs generated at Coyote Station, OTP's lowest fuel-cost plant, which was shut down for seven weeks of scheduled maintenance in the second quarter of 2012.

The cost of purchased power for retail sales decreased $1.1 million as a result of a 23.7% decrease in kwhs purchased, partially offset by a 19.5% increase in the cost per kwh purchased. The decrease in kwhs purchased was directly related to an increase in the availability of owned generation to serve retail load.

Electric operating and maintenance expenses increased $3.4 million mainly due to the following:
? a $1.3 million increase in general and administrative expenses, mostly related to an increase in corporate costs allocated to the Electric segment due, in part, to changes in corporate cost allocation factors resulting from the corporation's recent divestitures,

? a $1.2 million increase in labor and benefit expenses, mainly due to increases in pension and retirement health benefit costs resulting from reductions in discount rates related to projected benefit obligations,

? a $1.0 million increase in MISO transmission tariff charges related to increasing investments in regional CapX2020 and MISO-designated Multi-Value (MVP) transmission projects, and

? a $0.7 million discount recorded on the Minnesota jurisdictional share of abandoned Big Stone II project transmission assets that were transferred from construction work in progress (CWIP) to a regulatory asset account for future recovery as the initial investment was deemed prudent but potential future uses for the assets did not materialize,

offset by:
? a $0.8 million reduction in external service costs, which were higher in the second quarter of 2012 as a result of the seven-week scheduled maintenance outage at Coyote Station.

The $0.3 million increase in property tax expense is related to higher property value assessments in Minnesota and South Dakota.

                                 Manufacturing

                                        Three Months Ended
                                             June 30,                             %
      (in thousands)                     2013          2012        Change      Change
      Operating Revenues              $   49,793     $ 53,039     $ (3,246 )      (6.1 )
      Cost of Goods Sold                  37,447       40,186       (2,739 )      (6.8 )
      Operating Expenses                   5,321        4,773          548        11.5
      Depreciation and Amortization        2,793        3,064         (271 )      (8.8 )
      Operating Income                $    4,232     $  5,016     $   (784 )     (15.6 )

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 $3.0 million as a result of lower sales volume mainly due to reduced demand from customers in end markets serving the construction and energy industries.

? Revenues at T.O. Plastics, Inc. (T.O. Plastics), our manufacturer of thermoformed plastic and horticultural products, decreased by $0.2 million as a result of a decrease in sales of packaging products.

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

? Cost of goods sold at BTD decreased $2.6 million, mainly as a result of reductions in material costs related to decreased sales volume.

? Cost of goods sold at T.O. Plastics decreased $0.2 million as a result of reductions in raw material and direct labor costs and also due to continuing productivity improvements.

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

? Operating expenses at BTD increased $0.6 million between the quarters.

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

                                  Construction

                                        Three Months Ended
                                             June 30,                             %
      (in thousands)                     2013          2012        Change      Change
      Operating Revenues              $   34,994     $ 37,934     $ (2,940 )      (7.8 )
      Cost of Goods Sold                  31,601       36,992       (5,391 )     (14.6 )
      Operating Expenses                   2,748        3,030         (282 )      (9.3 )
      Depreciation and Amortization          496          470           26         5.5
      Operating Income (Loss)         $      149     $ (2,558 )   $  2,707       105.8

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, increased $0.6 million between the quarters as a result of earning higher margins on contracts in progress in the second quarter of 2013 compared with the second quarter of 2012.

? Revenues at Aevenia, Inc. (Aevenia), our electrical design and construction services company, decreased $3.5 million due, in part, to a colder and wetter spring in 2013 that delayed the start of many construction projects relative to the early start to construction that was facilitated by extremely mild weather in the second quarter of 2012. Aevenia's second quarter 2012 results also included revenues of $2.1 million from Moorhead Electric, Inc. (MEI), 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 $3.3 million between the quarters, which is mainly reflective of cost overruns incurred on certain large projects under construction in 2012.

? Cost of goods sold at Aevenia decreased $2.1 million between the quarters, mainly as a result of the sale of MEI in October 2012. MEI's cost of goods sold totaled $1.8 million in the second quarter of 2012.

Aevenia's operating expenses decreased $0.2 million in the second quarter of 2013 compared to the second quarter of 2012 as a result of the sale of MEI.

                                    Plastics

                                        Three Months Ended
                                             June 30,                            %
      (in thousands)                     2013          2012       Change      Change
      Operating Revenues              $   44,761     $ 41,490     $ 3,271        7.9
      Cost of Goods Sold                  34,890       31,257       3,633       11.6
      Operating Expenses                   2,241        2,328         (87 )      (3.7 )
      Depreciation and Amortization          822          785          37         4.7
      Operating Income                $    6,808     $  7,120     $  (312 )      (4.4 )

The increase in Plastics segment revenue is the result of a 10.2% increase in pounds of polyvinyl chloride (PVC) pipe sold, partially offset by a 2.1% decrease in the price per pound of pipe sold. Sales volume increased as construction and housing markets continued to improve 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 colder and wetter spring in 2013. The increase in costs of goods sold was mostly due to the increase in pounds of pipe sold, but was also due to a 1.3% increase in the cost per pound of PVC pipe sold related to higher raw material costs.

                                   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
                                             June 30,                             %
      (in thousands)                     2013          2012       Change       Change
      Operating Expenses              $    1,886      $ 2,864     $  (978 )      (34.1 )
      Depreciation and Amortization           52          124         (72 )      (58.1 )

The decrease in Corporate operating expense between the quarters includes a $0.7 million decrease in insurance costs and a $1.0 million increase in Corporate expenses allocated to our Electric segment, offset by a $0.8 million increase in benefit costs related to 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.

Interest Charges

The $1.6 million decrease in interest charges in the second quarter of 2013 compared with the second quarter of 2012, includes $1.1 million related to the early redemption, in July 2012, of our $50 million, 8.89% senior unsecured note and $0.2 million related to OTP's debt refinancing on March 1, 2013, when it borrowed $40.9 million under an unsecured term loan due June 1, 2014, bearing interest at LIBOR plus 0.875% and utilized a portion of the proceeds to redeem its $25.1 million in outstanding 4.65% Grant County, South Dakota Pollution Control Refunding Revenue Bonds and 4.85% Mercer County, North Dakota Pollution Control Refunding Revenue Bonds. Interest charges also decreased as a result of a $6.1 million decrease in average short-term debt outstanding between the quarters.

                      Income Taxes - Continuing Operations

Income taxes - continuing operations increased $1.6 million in the second
quarter of 2013 compared with the second 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 June 30, 2013 and 2012:

                                                                   Three Months Ended June 30,
(in thousands)                                                     2013                  2012
Income Before Income Taxes - Continuing Operations             $       9,598         $       7,418
Tax Computed at Company's Net Composite Federal and State
Statutory Rate (39%)                                                   3,743                 2,893
Increases (Decreases) in Tax from:
Federal Production Tax Credits (PTCs)                                 (1,841 )              (1,831 )
Deferred Tax Asset Reduction due to Tax Rate Decrease in
North Dakota                                                             365                    --
North Dakota Wind Tax Credit Amortization - Net of Federal
Taxes                                                                   (216 )                (149 )
Employee Stock Ownership Plan Dividend Deduction                        (188 )                (191 )
Corporate Owned Life Insurance                                           (92 )                 (13 )
Medicare Part D Subsidy                                                    4                  (194 )
Other Items - Net                                                        319                     2
Income Tax Expense - Continuing Operations                     $       2,094         $         517
Effective Income Tax Rate - Continuing Operations                       21.8 %                 7.0 %

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 completed the sale of substantially all the assets of our waterfront equipment business for approximately $13.0 million in cash and received a working capital true up of approximately $2.4 million in June 2013. On November 30, 2012 we completed the sale of the assets of our wind tower manufacturing business. On February 29, 2012 we sold DMS Health Technologies, Inc. (DMS) and in 2011 we sold E.W. Wylie Corporation (Wylie), our trucking business. The financial position of our waterfront equipment and wind tower manufacturing companies and the results of operations and cash flows of our waterfront equipment and wind tower manufacturing companies, DMS and Wylie 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 June 30, 2013 and 2012:

                                               For the Three Months Ended
                                                        June 30,
        (in thousands)                         2013                2012
        Operating Revenues                  $        7       $         72,308
        Operating Expenses                        (161 )               65,650
        Asset Impairment Charge                     --                 45,573
        Operating Income (Loss)                    168                (38,915 )
        Interest Charges                            --                      5
        Other Income                               160                     97
        Income Tax Expense (Benefit)               131                (15,021 )
        Net Income (Loss) from Operations          197                (23,802 )
        Loss on Disposition Before Taxes            --                   (490 )
        Income Tax Benefit on Disposition           --                    (35 )
        Net Loss on Disposition                     --                   (455 )
        Net Income (Loss)                   $      197       $        (24,257 )

Comparison of the Six Months Ended June 30, 2013 and 2012

Consolidated operating revenues were $430.3 million for the six months ended June 30, 2013 compared with $431.3 million for the six months ended June 30, 2012. Operating income was $43.0 million for the six months ended June 30, 2013 compared with $33.5 million for the six months ended June 30, 2012. The Company recorded diluted earnings per share from continuing operations of $0.61 for the six months ended June 30, 2013 compared to $0.46 for the six months ended June 30, 2012 and total diluted earnings per share of $0.62 for the six months ended June 30, 2013 compared to ($0.29) for the six months ended June 30, 2012.

Amounts presented in the segment tables that follow for operating revenues, cost of goods sold and other nonelectric operating expenses for the six month periods ended June 30, 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)    June 30, 2013       June 30, 2012
    Operating Revenues:
    Electric                                   $            58     $            57
    Nonelectric                                             10                   7
    Cost of Goods Sold                                      14                  20
    Other Nonelectric Expenses                              54                  44

                                    Electric

                                              Six Months Ended
                                                  June 30,                              %
(in thousands)                               2013          2012         Change        Change
Retail Sales Revenues                      $ 164,586     $ 150,141     $ 14,445           9.6
Wholesale Revenues - Company Generation        5,065         4,107          958          23.3
Net Revenue - Energy Trading Activity            941           973          (32 )        (3.3 )
Other Revenues                                13,280        13,745         (465 )        (3.4 )
Total Operating Revenues                   $ 183,872     $ 168,966     $ 14,906           8.8
Production Fuel                               33,556        27,879        5,677          20.4
Purchased Power - System Use                  27,884        26,486        1,398           5.3
Other Operation and Maintenance Expenses      68,252        62,420        5,832           9.3
Asset Impairment Charge                           --           432         (432 )      (100.0 )
Depreciation and Amortization                 21,303        20,847          456           2.2
Property Taxes                                 5,925         5,287          638          12.1
Operating Income                           $  26,952     $  25,615     $  1,337           5.2



                                                    Six Months Ended
                                                        June 30,                                 %
Electric kwh Sales (in thousands)                     2013            2012      Change        Change
Retail kwh Sales                                 2,272,318       2,112,134       160,184           7.6
Wholesale kwh Sales - Company Generation           175,257         166,755         8,502           5.1
Wholesale kwh Sales - Purchased Power Resold        49,854          65,032       (15,178 )       (23.3 )

The $14.4 million increase in retail sales revenues reflects the following:
? a $6.8 million increase in revenue related to the recovery of increased fuel and purchased power costs driven by increased kwh generation to meet higher retail kwh sales demand and by higher purchased power prices, tempered by a 3.6% reduction in kwhs purchased,

? a $5.0 million increase in revenue related to a 7.6% increase in retail kwh sales resulting from significantly colder weather in the first six months of 2013 compared with the first six months of 2012, as evidenced by a 41.0% increase in heating-degree days between the periods,

? a $2.2 million increase in Transmission Cost Recovery Rider revenues as a result of increased investment in transmission assets, and

? $0.4 million in revenue related to deferred recovery of amounts invested in plant for environmental improvements.

Wholesale electric revenues from company-owned generation increased $1.0 million as a result of a 5.1% increase in wholesale kwh sales combined with a 17.3% increase in wholesale electric prices driven by increased market demand due, in part, to the colder spring in 2013.

Other electric operating revenues decreased $0.5 million as a result of:
? a $0.9 million reduction in estimated revenue from shared use of transmission facilities with other regional transmission providers,

offset by:
? a $0.4 million increase in revenue from steam sales to an ethanol producer adjacent to OTP's Big Stone Plant site, due to the customer burning less natural gas to meet its steam requirements in 2013 in response to rising natural gas prices.

Fuel costs increased $5.7 million due to a 21.5% increase in kwhs generated from OTP's steam-powered and combustion turbine generators as a result of greater plant availability in 2013 and higher system demand driven by more seasonal weather in the first six months of 2013 compared to the first six months of 2012. The increase in fuel costs related to the increase in kwhs generated was slightly offset by a 0.9% decrease in the cost of fuel per kwh generated.

The cost of purchased power for retail sales increased $1.4 million as a result of a 9.2% increase in the cost per kwh purchased offset by a 3.6% decrease in kwhs purchased. The increase in purchased power prices was driven by an increase in demand due to more seasonal weather in the first six months of 2013 compared to milder weather in the first six months of 2012.

Electric operating and maintenance expenses increased $5.8 million mainly due to the following:
? a $2.1 million increase in MISO transmission tariff charges related to increasing investments in regional CapX2020 and MISO-designated MVPs,

? a $2.0 million increase in labor and benefit expenses due to increases in pension and retirement health benefit costs resulting from reductions in discount rates related to projected benefit obligations, wage increases, a reduction in capitalized labor in 2013 compared with 2012 and an increase in accrued performance incentives,

? a $1.8 million increase in general and administrative expenses, mostly related to an increase in corporate costs allocated to the Electric segment due, in part, to changes in corporate cost allocation factors resulting from the corporation's recent divestitures, and

? a $0.7 million discount on OTP's investment in the Minnesota jurisdictional share of abandoned transmission plant that was transferred from CWIP to a regulatory asset account for future recovery, as the initial investment was deemed prudent but potential future uses for the assets did not materialize,

offset by:
? a $0.9 million reduction in external service, material and operating supply costs, which were higher in 2012 primarily as a result of the seven-week scheduled maintenance outage at Coyote Station.

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 ceased operations . . .

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