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OTTR > SEC Filings for OTTR > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for OTTER TAIL CORP

Form 10-Q for OTTER TAIL CORP


12-Nov-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 nine month periods ended September 30, 2013 and 2012, followed by a discussion of changes in our consolidated financial position during the nine months ended September 30, 2013 and our business outlook for the remainder of 2013.

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

Consolidated operating revenues were $229.8 million for the three months ended September 30, 2013 compared with
$215.3 million for the three months ended September 30, 2012. Operating income was $25.1 million for the three months ended September 30, 2013 compared with $24.4 million for the three months ended September 30, 2012. The Company recorded diluted earnings per share from continuing operations of $0.41 for the three months ended September 30, 2013 compared with $0.13 for the three months ended September 30, 2012 and total diluted earnings per share of $0.42 for the three months ended September 30, 2013 compared to $0.05 for the three months ended September 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 September 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)                      September 30, 2013       September 30, 2012
     Operating Revenues:
      Electric                       $                 8     $                 14
      Nonelectric                                     (2 )                     --
     Cost of Goods Sold                                1                       31
     Other Nonelectric Expenses                        5                      (17 )

                                    Electric

                                                   Three Months Ended
                                                      September 30,                             %
(in thousands)                                    2013           2012          Change         Change
Retail Sales Revenues                           $  72,758     $    74,622     $  (1,864 )        (2.5 )
Wholesale Revenues - Company Generation             5,182           5,347          (165 )        (3.1 )
Net Revenue - Energy Trading Activity                 353             241           112          46.5
Other Revenues                                      7,990           8,354          (364 )        (4.4 )
Total Operating Revenues                        $  86,283     $    88,564     $  (2,281 )        (2.6 )
Production Fuel                                    18,785          20,622        (1,837 )        (8.9 )
Purchased Power - System Use                        8,691           8,138           553           6.8
Other Operation and Maintenance Expenses           30,626          28,717         1,909           6.6
Depreciation and Amortization                      10,787          10,504           283           2.7
Property Taxes                                      3,163           2,833           330          11.6
Operating Income                                $  14,231     $    17,750     $  (3,519 )       (19.8 )
Electric kwh Sales (in thousands)
 Retail kilowatt-hour (kwh) Sales                 982,887       1,002,921       (20,034 )        (2.0 )
 Wholesale kwh Sales - Company Generation         158,486         170,589       (12,103 )        (7.1 )
 Wholesale kwh Sales - Purchased Power Resold      81,609          15,202        66,407         436.8
Heating Degree Days                                   186             262           (76 )       (29.0 )
Cooling Degree Days                                   421             497           (76 )       (15.3 )

The $1.9 million decrease in retail sales revenues reflects the following:

? a $1.1 million decrease in Fuel Clause Adjustment (FCA) revenues and fuel and purchased power costs recovered in base rates as a result of a 7.3% reduction in fuel costs per kwh generated at Otter Tail Power Company's (OTP) steam-powered and combustion turbine generators in combination with a 2.0% decrease in retail kwh sales,

? a $1.0 million decrease in revenues related to the 2.0% decrease in retail kwh sales due, in part, to milder weather as evidenced by a decrease in both heating and cooling degree days of 29.0% and 15.3%, respectively, between the quarters, and

? a $1.0 million decrease in various environmental, renewable, regulatory and conservation cost recovery related revenues driven by commensurate increases in other revenues or reductions in costs that are components of these alternative revenue recovery mechanisms,

offset by:

? a $1.2 million increase in Transmission Cost Recovery Rider revenues resulting from increased investment in transmission lines.

Wholesale electric revenues from company-owned generation decreased $0.2 million as a result of a 7.1% decrease in wholesale kwh sales, partially offset by a 4.3% increase in wholesale electric prices driven, in part, by an increase in natural gas prices.

Other electric operating revenues decreased $0.4 million mainly as a result of a reduction in revenues from electric construction work completed for other regional utilities.

Fuel costs decreased $1.8 million as a result of a 7.3% decrease in the cost of fuel per kwh generated combined with a 1.7% decrease in kwhs generated from OTP's steam-powered and combustion turbine generators. The decrease in the average cost of fuel per kwh of generation reflects a 10.8% decrease in the cost of fuel per kwh generated at OTP's Big Stone Plant and a 5.0% decrease in the cost of fuel per kwh generated at OTP's Hoot Lake Plant as a result of reductions in contracted coal prices.

The cost of purchased power for retail sales increased $0.6 million as a result of an 8.3% increase in kwhs purchased, partially offset by a 1.4% decrease in the cost per kwh purchased. The increase in kwhs purchased made up for a decrease in kwhs generated from company-owned plants to serve retail customers.

Electric operating and maintenance expenses increased $1.9 million mainly due to the following:

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

? a $0.9 million increase in general and administrative expenses, mostly related to a $0.7 million increase in corporate costs allocated to the Electric segment due, in part, to changes in allocation factors resulting from the corporation's recent divestitures.

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
                                           September 30,                         %
      (in thousands)                     2013          2012       Change      Change
      Operating Revenues              $   49,323     $ 46,618     $ 2,705        5.8
      Cost of Goods Sold                  37,197       35,493       1,704        4.8
      Operating Expenses                   4,463        3,935         528        13.4
      Depreciation and Amortization        2,755        3,118        (363 )     (11.6 )
      Operating Income                $    4,908     $  4,072     $   836       20.5

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

? Revenues at BTD Manufacturing, Inc. (BTD), our metal parts stamping and fabrication company, increased $2.3 million as a result of higher sales volume due to increased demand from customers in end markets serving the recreational equipment and agricultural industries.

? Revenues at T.O. Plastics, Inc. (T.O. Plastics), our manufacturer of thermoformed plastic and horticultural products, increased by $0.4 million as a result of increases in product sales and tooling revenues.

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

? Cost of goods sold at BTD increased $1.8 million, mainly as a result of increases in labor and material costs related to an increase in sales volume.

? Cost of goods sold at T.O. Plastics decreased $0.1 million as a result of reductions in conversion costs due to productivity improvements.

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

? Operating expenses at BTD increased $0.3 million due to a 2012 reduction in incentive compensation.

? Operating expenses at T.O. Plastics increased $0.2 million due to increases in labor and employee recruitment costs.

Depreciation expense decreased as a result of certain assets, mainly equipment, at BTD's Illinois plant being fully depreciated early in 2013.

                                  Construction

                                        Three Months Ended
                                           September 30,                         %
      (in thousands)                     2013          2012       Change      Change
      Operating Revenues              $   47,509     $ 37,931     $ 9,578        25.3
      Cost of Goods Sold                  40,998       36,184       4,814        13.3
      Operating Expenses                   2,847        3,105        (258 )      (8.3 )
      Depreciation and Amortization          560          550          10         1.8
      Operating Income (Loss)         $    3,104     $ (1,908 )   $ 5,012       262.7

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

? Revenues at Foley Company (Foley), a mechanical and prime contractor on industrial projects, increased $15.6 million as a result of the recognition of more revenue in the third quarter of 2013 on several large projects initiated in 2012.

? Revenues at Aevenia, Inc. (Aevenia), our electrical design and construction services company, decreased $6.0 million as a result of a strategic reduction in the volume of telecommunications jobs pursued in 2013 and a delay in securing and initiating new substation construction. Also, Aevenia's third quarter 2012 results included revenues of $1.7 million from Moorhead Electric, Inc. (MEI), an Aevenia subsidiary that was sold in October 2012.

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

? Cost of goods sold at Foley increased $10.2 million reflecting a combination of increased costs related to the increase in work volume in the third quarter of 2013 partially offset by a reduction in cost overruns incurred on certain large projects under construction in 2012.

? Cost of goods sold at Aevenia decreased $5.4 million in direct relation to the reduction in sales revenue and as a result of the sale of MEI in October 2012. MEI's cost of goods sold totaled $0.9 million in the third quarter of 2012.

Aevenia's operating expenses decreased $0.2 million in the third quarter of 2013 compared to the third quarter of 2012 as a result of decreased labor costs and the sale of MEI in October 2012.

                                    Plastics

                                        Three Months Ended
                                           September 30,                          %
      (in thousands)                     2013          2012        Change      Change
      Operating Revenues              $   46,659     $ 42,217     $  4,442       10.5
      Cost of Goods Sold                  37,281       31,506        5,775       18.3
      Operating Expenses                   2,585        2,869         (284 )      (9.9 )
      Depreciation and Amortization          887          764          123        16.1
      Operating Income                $    5,906     $  7,078     $ (1,172 )     (16.6 )

The increase in Plastics segment revenue is the result of a 12.1% increase in pounds of polyvinyl chloride (PVC) pipe sold, partially offset by a 1.4% 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 and construction activity increased in the North Central United States as favorable weather allowed contractors to make up for a slow start due to a colder and wetter spring in 2013. The increase in costs of goods sold was due to the increase in pounds of pipe sold and a 5.5% increase in the cost per pound of PVC pipe sold related to higher PVC resin costs driven by high global demand and an increase in the cost of ethylene, a key ingredient in the production of PVC resin. The reduction in operating expenses reflects a reduction in incentive compensation related to the decrease in profit margins between the quarters. The increase in depreciation and amortization expense is related to equipment replacement costs incurred in 2013 at our Arizona plant.

                                   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
                                          September 30,                           %
     (in thousands)                     2013          2012        Change       Change
     Operating Expenses              $    2,967      $ 2,498     $    469        18.8
     Depreciation and Amortization           50          121          (71 )      (58.7 )

The increase in Corporate operating expense reflects increases in employee benefit expenses and higher insurance costs totaling $0.7 million, which were partially offset by the allocation of a portion of the increased costs to the Electric segment.

Interest Charges

An increase in capitalized interest expense at OTP related to OTP's increasing investment in the Big Stone Plant Air Quality Control System (AQCS) project contributed $0.5 million to the $1.3 million decrease in interest charges between the quarters. Interest on Otter Tail Corporation's line of credit borrowings were $0.4 million in the third quarter of 2012 compared to $0 in the third quarter of 2013. The early redemption, on July 13, 2012, of our $50 million, 8.89% senior unsecured note, resulted in a $0.2 million decrease in interest charges between quarters. Interest charges also decreased by $0.2 million as a result of 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 used 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.

Loss on Early Retirement of Debt

On July 13, 2012 we prepaid in full our outstanding $50 million, 8.89% Senior Unsecured Note due November 30, 2017 (the Cascade Note). The price to prepay the Cascade Note was $63,031,000, which included the principal amount of the Cascade Note plus accrued interest of $531,000 and a negotiated prepayment premium of $12,500,000. On repayment, $606,000 in unamortized debt expense related to the Cascade Note was immediately recognized as expense along with the $12,500,000 negotiated prepayment premium. The $13,106,000 ($7,864,000 net-of-tax) loss on early retirement of debt had a negative impact on third quarter 2012 diluted earnings per share of $0.22.

Other Income

Other income increased $0.7 million in the three months ended September 30, 2013 compared with the three months ended September 30, 2012 due to an increase in allowance for equity funds used during construction (AFUDC) related to costs incurred in the construction of the new air quality control system (AQCS) at OTP's Big Stone Plant.

                      Income Taxes - Continuing Operations

Income taxes - continuing operations increased $5.9 million in the third quarter
of 2013 compared with the third 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
September 30, 2013 and 2012:

                                                                 Three Months Ended September 30,
(in thousands)                                                      2013                  2012
Income Before Income Taxes - Continuing Operations             $        19,959       $         4,016
Tax Computed at Company's Net Composite Federal and State
Statutory Rate (39%)                                                     7,784                 1,566
Increases (Decreases) in Tax from:
Federal Production Tax Credits (PTCs)                                   (1,162 )              (1,239 )
Research and Development Tax Credits from 2012                            (520 )                  --
Corporate Owned Life Insurance                                            (227 )                (118 )
North Dakota Wind Tax Credit Amortization - Net of Federal
Taxes                                                                     (212 )                (297 )
Employee Stock Ownership Plan Dividend Deduction                          (190 )                (190 )
Medicare Part D Subsidy                                                     --                  (196 )
Other Items - Net                                                         (340 )                (311 )
Income Tax Expense (Benefit) - Continuing Operations           $         5,133       $          (785 )
Effective Income Tax Rate - Continuing Operations                         25.7 %               (19.5 )%

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. The research and development tax credits were recorded at BTD in conjunction with the filing of our 2012 extended federal tax return. The Research and Development Tax Credit expired at the end of 2011 and had not been extended as of December 31, 2012. The American Taxpayer Relief Act of 2012, signed into law on January 2, 2013, extended the credits retroactively through the end of 2013.

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 September 30, 2013 and 2012:

                                             For the Three Months Ended
                                                    September 30,
           (in thousands)                    2013                2012
           Operating Revenues             $        --       $        61,827
           Operating Expenses                    (452 )              64,866
            Operating Income (Loss)               452                (3,039 )
           Other (Deductions) Income             (101 )                  36
           Income Tax Expense (Benefit)            39                   (75 )
             Net Income (Loss)            $       312       $        (2,928 )

Comparison of the Nine Months Ended September 30, 2013 and 2012

Consolidated operating revenues were $660.1 million for the nine months ended September 30, 2013 compared with $646.6 million for the nine months ended September 30, 2012. Operating income was $68.2 million for the nine months ended September 30, 2013 compared with $57.9 million for the nine months ended September 30, 2012. The Company recorded diluted earnings per share from continuing operations of $1.02 for the nine months ended September 30, 2013 compared to $0.59 for the nine months ended September 30, 2012 and total diluted earnings per share of $1.04 for the nine months ended September 30, 2013 compared to ($0.24) for the nine months ended September 30, 2012.

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, 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)      September 30, 2013      September 30, 2012
Operating Revenues:
 Electric                                     $                66     $                72
 Nonelectric                                                    8                       6
Cost of Goods Sold                                             15                      51
Other Nonelectric Expenses                                     59                      27



                                    Electric

                                                     Nine Months Ended
                                                       September 30,                               %
(in thousands)                                     2013            2012          Change         Change
Retail Sales Revenues                           $   237,344     $   224,763     $  12,581            5.6
Wholesale Revenues - Company Generation              10,247           9,454           793            8.4
Net Revenue - Energy Trading Activity                 1,294           1,214            80            6.6
Other Revenues                                       21,270          22,099          (829 )         (3.8 )
Total Operating Revenues                        $   270,155     $   257,530     $  12,625            4.9
Production Fuel                                      52,341          48,501         3,840            7.9
Purchased Power - System Use                         36,575          34,624         1,951            5.6
Other Operation and Maintenance Expenses             98,878          91,137         7,741            8.5
Asset Impairment Charge                                  --             432          (432 )       (100.0 )
Depreciation and Amortization                        32,090          31,351           739            2.4
Property Taxes                                        9,088           8,120           968           11.9
Operating Income                                $    41,183     $    43,365     $  (2,182 )         (5.0 )
Electric kwh Sales (in thousands)
 Retail kwh Sales                                 3,255,205       3,115,055       140,150            4.5
 Wholesale kwh Sales - Company Generation           333,743         337,344        (3,601 )         (1.1 )
 Wholesale kwh Sales - Purchased Power Resold       131,463          80,234        51,229           63.8
Heating Degree Days                                   6,191           4,521         1,670           36.9
Cooling Degree Days                                     539             654          (115 )        (17.6 )

The $12.6 million increase in retail sales revenues reflects the following:

? a $5.7 million increase in retail revenue related to increases in FCA revenues and fuel and purchased power costs recovered in base rates driven by increased kwh generation to meet higher retail kwh sales demand and higher prices for purchased power,

? a $3.9 million increase in revenues related to a 4.5% increase in retail kwh sales resulting from significantly colder weather in 2013 compared to 2012 as evidenced by a 36.9% increase in heating-degree days between the periods, and

? a $3.4 million increase in Transmission Cost Recovery Rider revenues resulting from increased investment in transmission lines,

offset by:

? a $0.3 million reduction in Minnesota and North Dakota renewable rider revenues.

Wholesale electric revenues from company-owned generation increased $0.8 million as a result of a 9.6% increase in wholesale electric prices driven by higher natural gas prices and increased market demand due to more seasonal weather in the first nine months of 2013 compared to milder weather in the first nine months of 2012.

Other electric operating revenues decreased $0.8 million as a result of:

? a $1.6 million reduction in estimated revenue from shared use of transmission facilities with other regional transmission providers, and

? a $0.4 million reduction in revenues from electric construction work completed for other regional utilities,

offset by:

? a $0.6 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, and

? a $0.6 million increase in MISO tariff revenue related to increasing investments in regional transmission projects, mainly CapX2020 projects.

Fuel costs increased $3.8 million due to an 11.7% 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 nine months of 2013 compared to the first nine months of 2012. The increase in fuel costs related to the increase in kwhs generated was partially offset by a 3.4% decrease in the cost of fuel per kwh generated.

The cost of purchased power for retail sales increased $2.0 million as a result of a 7.2% increase in the cost per kwh purchased. The increase in purchased power prices was driven by rising natural gas prices and an increase in demand due to more seasonal weather in the first nine months of 2013 compared to milder weather in the first nine months of 2012.

Electric operating and maintenance expenses increased $7.7 million mainly due to the following:

? a $3.1 million increase in MISO transmission tariff charges related to increasing investments in regional CapX2020 and MISO-designated MVPs,

? a $2.7 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 and a reduction in capitalized labor in 2013 compared with 2012,

? 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 allocation factors resulting from the corporation's recent divestitures and an increase in accrued performance incentives,

. . .

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