Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
OTTR > SEC Filings for OTTR > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for OTTER TAIL CORP

Form 10-K for OTTER TAIL CORP


3-Mar-2014

Annual Report


Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Otter Tail Corporation and its subsidiaries form a diverse group of businesses with operations classified into four segments: Electric, Manufacturing, Plastics and Construction. Our primary financial goals are to maximize earnings and cash flows and to allocate capital profitably toward growth opportunities that will increase shareholder value. Meeting these objectives enables us to preserve and enhance our financial capability by maintaining desired capitalization ratios and a strong interest coverage position and preserving investment grade credit ratings on outstanding securities, which, in the form of lower interest rates, benefits both our customers and shareholders.

Our strategy is to continue to grow our largest business, the regulated electric utility, which will lower our overall risk, create a more predictable earnings stream, improve our credit quality and preserve our ability to fund the dividend. Over time, we expect the electric utility business will provide approximately 75% to 85% of our overall earnings. We expect our manufacturing and infrastructure businesses will provide 15% to 25% of our earnings, and will continue to be a fundamental part of our strategy.

Reliable utility performance along with rate base investment opportunities over the next five years will provide us with a strong base of revenues, earnings and cash flows. We also look to our manufacturing and infrastructure companies to provide organic growth as well. Organic, internal growth comes from new products and services, market expansion and increased efficiencies. We expect much of our growth in these businesses in the next few years will come from utilizing expanded plant capacity from capital investments made in previous years. We will also evaluate opportunities to allocate capital to potential acquisitions in our Manufacturing segment. We are a committed long-term owner and therefore we do not acquire companies in pursuit of short-term gains. However, we will divest operating companies that no longer fit into our strategy and risk profile over the long term.

We have worked to realign our portfolio of businesses and refocus our capital investment in the electric utility. Over the last three years we sold several businesses in execution of our announced strategy. In 2011 we sold Idaho Pacific Holdings, Inc. (IPH), our Food Ingredient Processing segment business, and E.W. Wylie Corporation (Wylie), our trucking company which was included in our Wind Energy segment. In January 2012 we sold the assets of Aviva Sports, Inc. (Aviva), a recreational equipment manufacturer and wholly owned subsidiary of Shrco, Inc. (Shrco), our former waterfront equipment manufacturer. In February 2012 we sold DMS Health Technologies, Inc. (DMS), our Health Services segment business. In November 2012 we completed the sale of the assets of IMD, Inc. (IMD), our former wind tower manufacturer, and we exited the wind tower manufacturing business. On February 8, 2013 we sold substantially all of the assets of Shrco.

In evaluating our portfolio of operating companies, we look for the following characteristics:

? a threshold level of net earnings and a return on invested capital in excess of our weighted average cost of capital,

? a strategic differentiation from competitors and a sustainable cost advantage,

? a stable or growing industry,

? an ability to quickly adapt to changing economic cycles, and

? a strong management team committed to operational excellence.

Major growth strategies and initiatives in our future include:

? Planned capital budget expenditures of up to $769 million for the years 2014 through 2018, of which $657 million are for capital projects at Otter Tail Power Company (OTP), including $131 million for OTP's share of a new air quality control system at Big Stone Plant and $304 million for anticipated expansion of transmission capacity including $243 million for Midcontinent Independent System Operator, Inc. (MISO) designated Multi-Value Projects (MVPs) and $26 million for Capacity Expansion 2020 (CapX2020) transmission projects ($7 million for the Brookings to Southeast Twin Cities CapX2020 MVP project is included with the $243 million for MVP projects). The remainder of the OTP 2014-2018 anticipated capital expenditures is for asset replacements, additions and improvements across OTP's generation, transmission, distribution and general plant. See "Capital Requirements" section for further discussion.

? Utilization of existing and potentially expanded plant capacity from capital investments made in our manufacturing and infrastructure businesses.

? Continued investigation and evaluation of organic growth opportunities and evaluation of opportunities to allocate capital to potential acquisitions in our Manufacturing segment.

In 2013:

? Our net cash from continuing and discontinued operations was $147.8 million.

? Our Construction segment recorded net income of $1.3 million compared with a net loss of $7.7 million in 2012. Net income from Foley Company (Foley), our mechanical and prime contractor on industrial projects was $0.5 million compared to a net loss in 2012 of $10.0 million as a result of cost overruns on several large jobs which were substantially complete by the end of 2012.

? Our Manufacturing segment net income increased 7.3% to $11.5 million from $10.7 million in 2012.

? Our Electric segment net income of $38.2 million decreased slightly from $38.3 million in 2012.

? Our Plastics segment net income decreased 2.2% to $13.8 million from $14.1 million in 2012.

The following table summarizes our consolidated results of operations for the years ended December 31:

       (in thousands)                                    2013          2012
       Operating Revenues:
       Electric                                        $ 373,459     $ 350,679
       Manufacturing and Infrastructure                  519,854       508,560
       Total Operating Revenues                        $ 893,313     $ 859,239
       Net Income (Loss) From Continuing Operations:
       Electric                                        $  38,236     $  38,341
       Manufacturing and Infrastructure                   26,576        17,100
       Corporate                                         (14,638 )     (16,473 )
       Total Net Income From Continuing Operations:    $  50,174     $  38,968

Revenue increases in our Electric, Plastics and Construction segments were partially offset by a decrease in revenues from our Manufacturing segment, resulting in a 4.0% increase in consolidated revenues in 2013 compared with 2012. Revenues from our Electric segment increased $22.8 million reflecting: (1) a $20.2 million increase in retail revenue as a result of a 5.8% increase in retail kilowatt-hour (kwh) sales due mainly to colder weather in 2013 evidenced by a 37% increase in heating degree days between the years, and (2) a $1.9 million increase in wholesale revenues from excess generation as a result of a 15.9% increase in prices received on wholesale energy sales. Revenues from our Plastics segment increased $14.4 million as a result of a 12.0% increase in pounds of polyvinyl chloride (PVC) pipe sold partially offset by lower PVC pipe prices. Revenues from our Construction segment increased $0.8 million as a $16.5 million increase in revenue at Foley was mostly offset by a $15.7 million decrease in revenues at Aevenia, Inc. (Aevenia) our electrical design and construction services company, $5.4 million of which relates to Aevenia's sale of Moorhead Electric in October of 2012. Revenues from our Manufacturing segment decreased $4.0 million as a result of the discontinued production of a major packaging product for a customer who took production in-house and lower sales volume due to reduced demand from customers in end markets serving the construction and energy industries.

The following table sets forth actual 2013 consolidated diluted earnings per share results from continuing operations against the last forecast we provided for 2013 on a GAAP basis, and also shows the effect on a non-GAAP basis of the November 2013 early retirement of $47.7 million of our previously outstanding $100 million 9.000% Notes due December 15, 2016.

                                                         2013     2012
               2013 Earnings Per Share                 Earnings Earnings
           Guidance Range December 2, 2013               Per      Per
                                         Low    High    Share    Share
Electric                                $1.02   $1.04   $1.05    $1.06
Manufacturing                           $0.30   $0.33   $0.32    $0.29
Plastics                                $0.35   $0.37   $0.38    $0.39
Construction                            $0.03   $0.05   $0.04   ($0.21)
Corporate - Recurring Costs            ($0.32) ($0.29) ($0.25)  ($0.22)
Subtotal - Non-GAAP Basis1              $1.38   $1.50   $1.54    $1.31
Corporate - Loss on Debt
Extinguishment                         ($0.17) ($0.17) ($0.17)  ($0.22)
Corporate - Interest on Debt Related
to Discontinued Operations                                      ($0.04)
 Total - Continuing Operations - GAAP
Basis                                   $1.21   $1.33   $1.37    $1.05

1In November 2013 we retired early $47.7 million of our previously outstanding $100 million 9.000% Notes due December 15, 2016 from available cash. In July 2012 we retired early our $50 million, 8.89% Senior Unsecured Note due November 30, 2017 from proceeds generated in connection with the divestiture of IMD. Generally Accepted Accounting Principles require that in order for debt retirement premiums and related interest expense to be reported as discontinued operations, a company must be required by the lender to repay the related debt as a result of the disposition. Although we were not legally obligated to repay the aforementioned $50 million note, management believes it is appropriate to associate the 2012 debt prepayment premium and interest expense with its discontinued operations to provide a better indication of future earnings. Management understands that there are material limitations on the use of Non-GAAP measures. Non-GAAP measures are not substitutes for GAAP measures for the purpose of analyzing financial performance. Non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with, generally accepted accounting principles and may be different from Non-GAAP measures used by other companies. In addition, Non-GAAP measures are not based on any comprehensive set of accounting rules or principles. This information should not be construed as an alternative to the reported results, which have been determined in accordance with GAAP.

Following is a more detailed analysis of our operating results by business segment for the years ended December 31, 2013, 2012 and 2011, followed by a discussion of our financial position at the end of 2013 and our outlook for 2014.

RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes. See note 2 to our consolidated financial statements for a complete description of our lines of business, locations of operations and principal products and services.

Intersegment Eliminations-Amounts presented in the following segment tables for 2013, 2012 and 2011 operating revenues, cost of goods sold and other nonelectric operating expenses 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)   2013      2012      2011
           Operating Revenues:
            Electric                                  $  81     $  86     $  94
            Nonelectric                                  10        14       249
           Cost of Goods Sold                            20        68       122
           Other Nonelectric Expenses                    71        32       221

                                    ELECTRIC

The following table summarizes the results of operations for our Electric
segment for the years ended December 31:

                                                      %                                %
(in thousands)                       2013           change            2012           change            2011
Retail Sales Revenues             $   328,758              7       $   308,530              1       $   304,181
Wholesale Revenues - Company
Generation                             14,846             15            12,951            (11 )          14,518
Net Revenue - Energy Trading
Activity                                1,615             13             1,426            (39 )           2,319
Other Revenues                         28,321              2            27,858             28            21,709
Total Operating Revenues          $   373,540              6       $   350,765              2       $   342,727
Production Fuel                        71,248              7            66,284             (4 )          69,017
Purchased Power - System Use           52,006              6            49,184             13            43,451
Other Operation and Maintenance
Expenses                              133,395             10           121,069              4           115,863
Asset Impairment                           --             --               432             (8 )             470
Depreciation and Amortization          43,125              3            42,051              4            40,283
Property Taxes                         11,311              6            10,720              5            10,190
Operating Income                  $    62,455              2       $    61,025             (4 )     $    63,453

Electric kwh Sales (in
thousands)
Retail kwh Sales                    4,487,541              6         4,240,789             (1 )       4,291,637
Wholesale kwh Sales - Company
Generation                            471,474             (1 )         476,637             (7 )         510,978
Wholesale kwh Sales - Purchased
Power Resold                          172,404             95            88,637            (28 )         122,430
Heating Degree Days                     7,366             37             5,377            (15 )           6,318
Cooling Degree Days                       516            (20 )             641             20               534

2013 compared with 2012
Retail sales revenues increased by $20.2 million as a result of:

? a $6.6 million increase in revenues due to significantly colder weather in 2013 compared to 2012, which drove a 5.8% increase in retail kwh sales,

? a $7.0 million increase in retail revenue related to increases in fuel clause adjustment revenues and fuel and purchased power costs recovered in base rates, which was driven by increased kwh generation to meet higher retail demand and higher prices for purchased power,

? a $2.8 million increase in transmission cost recovery rider revenues resulting from increased investment in transmission lines,

? a $2.3 million increase in environmental cost recovery revenues related to earning a return in North Dakota on funds invested in the construction of a new air quality control system at Big Stone Plant, and

? a $1.5 million increase in conservation improvement program recovered costs and incentives earned as a result of the effectiveness of OTP's programs.

Wholesale electric revenues from company-owned generation increased $1.9 million, despite a 1.1% decline in wholesale kwh sales, due to a 15.9% increase in the average price per wholesale kwh sold, which was driven by higher natural gas prices and increased demand resulting from colder weather in 2013.

Net revenue from energy trading activities, including net mark-to-market gains on forward energy contracts, increased $0.2 million mainly as a result of an increase in unrealized mark-to-market gains on open energy contracts scheduled to settle in January and February of 2014.

Other electric operating revenues increased $0.5 million reflecting a $2.6 million increase in MISO tariff revenues related to increasing investments in regional transmission projects, mainly CapX2020 projects, offset by a $2.2 million reduction in revenue from shared use of transmission facilities with other regional transmission providers. For shared use of transmission facilities with certain regional transmission cooperatives, revenues are estimated. Bills are rendered based on anticipated usage and settlements are made later based on actual usage. Estimated revenues may be adjusted prior to settlement, or at the time of settlement, to reflect actual usage.

The $5.0 million increase in production fuel costs resulted from a 10.8% increase in kwhs generated from OTP's steam-powered and combustion turbine generators, partially offset by a 3.0% reduction in the cost of fuel per kwh generated. The increase in kwh generation was facilitated by improved availability of all of OTP's steam-powered generation units in 2013. The increase in generation was dedicated entirely to serving increased demand from OTP's retail customers driven by colder weather in 2013. The cost of purchased power to serve retail customers increased $2.8 million, despite a 2.1% decrease in kwhs purchased, due to an 8.0% increase in costs per kwh purchased driven by increased demand and higher fuel prices for natural-gas fired generation.

Electric operating and maintenance expenses increased $12.3 million as a result of the following:

? a $4.0 million increase in MISO transmission tariff charges related to increasing investments in regional CapX2020 and MISO-designated MVP transmission projects,

? a $2.9 million increase in corporate costs allocated to OTP due, in part, to changes in allocation factors resulting from the corporation's recent divestitures,

? a $2.5 million increase in labor and benefit expenses due to increases in salaries and wages, a reduction in capitalized labor in 2013 compared with 2012 and an increase in pension benefit costs resulting from a reduction in the discount rate related to projected benefit obligations,

? a $0.8 million increase in transportation costs related to higher gasoline prices and a reduction in capitalized transportation expenses in 2013,

? a $0.7 million discount on OTP's investment in abandoned transmission plant that was transferred in 2013 from construction work in progress to a regulatory asset account for future recovery,

? a $0.4 million increase in conservation improvement program costs, and

? $1.0 million total increased expenditures for insurance, outside services, vegetative maintenance, power plant water supply and bad debt expense in 2013.

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 and did not record any operating revenues, expenses or net income in 2013.

The $1.1 million increase in depreciation expense is mainly related to CapX2020 transmission lines being placed in service in 2013.

Property taxes increased $0.6 million due to higher property value assessments in Minnesota and South Dakota.

2012 compared with 2011
Retail sales revenues increased by $4.3 million as a result of:

? a $2.6 million increase in transmission cost recovery revenues as a result of increased investment in transmission assets,

? a $1.8 million interim rate refund recorded in 2011 related to amounts collected under interim rates in Minnesota in 2010,

? a $1.5 million increase in revenue mainly related to rate design changes implemented in Minnesota in October 2011 on finalization of OTP's 2010 general rate case, and

? a $0.9 million increase in retail revenue related to the recovery of increased fuel and purchased power costs,

offset by:

? a $2.3 million decrease in revenues related to a 1.2% reduction in retail kwh sales between the periods due to a reduction in heating-degree days resulting from significantly milder weather in the first half of 2012 compared to the first half of 2011, partially offset by an increase in cooling-degree days in the summer of 2012 compared with the same period in 2011, and

? a $0.2 million reduction in accrued conservation program cost recovery revenues and incentives.

Wholesale electric revenues from company-owned generation decreased $1.6 million due to a 6.7% decline in wholesale kwh sales in combination with a 4.4% decrease in the average price per wholesale kwh sold. This was related to an 8.7% reduction in kwh generation mainly as a result of two major shutdowns of OTP's lowest-cost baseload resource, Coyote Station, in 2012. The first occurred in the second quarter of 2012 for seven weeks of scheduled maintenance, and the second occurred on November 27, 2012, when an electrical fault caused major damage to the station's generator, which needed to be moved offsite for repairs that took 11 weeks. Lower demand in wholesale markets and low natural gas prices for alternative generation also contributed to the reduction in wholesale electric sales.

Net revenue from energy trading activities, including net mark-to-market gains on forward energy contracts, decreased $0.9 million mainly as a result of a decrease in mark-to-market gains on open energy contracts, along with a reduction in trading activity.

Other electric operating revenues increased $6.1 million as a result of:

? a $3.6 million increase in MISO Schedule 26 transmission tariff revenues, driven in part by returns on, and recovery of, CapX2020 investment costs and operating expenses,

? a $1.5 million increase in revenues earned under agreements for shared use of transmission facilities with other regional transmission providers,

? $0.9 million in MISO Schedule 26A revenue, new in 2012, mainly related to investments in MISO designated MVPs,

? $0.8 million in revenue earned under a contract to upgrade a distribution system for another regional electric service provider, and

? a $0.7 million increase in MISO Schedule 1 transmission tariff revenues due to 2011 and 2012 changes in the calculation methodology used to determine Schedule 1 revenues,

offset by:

? a $1.3 million reduction in revenue related to payments received in 2011 from a transmission cooperative to OTESCO for access rights to construct a high voltage transmission line through a wind farm site where OTESCO owned development rights, and for assistance in obtaining easements from landowners.

The $2.7 million decrease in production fuel costs resulted from a 9.0% decrease in kwhs generated from OTP's steam-powered and combustion turbine generators, partially offset by a 5.5% increase in the cost of fuel per kwh generated. The decrease in kwh generation was due to the two major maintenance shutdowns of Coyote Station in 2012. The cost of purchased power for retail sales increased $5.7 million as a result of a 28.2% increase in kwhs purchased for system use, partially offset by an 11.7% decrease in the cost per kwh purchased. The increase in kwh purchases was driven by the need to buy replacement power after Coyote Station went off-line in November 2012.

Electric operating and maintenance expenses increased $5.2 million due to the following:

? a $3.4 million increase in MISO transmission service charges, mainly MISO Schedule 26 charges related to increased investment in transmission facilities by MISO member companies,

? a $2.2 million increase in labor and benefit expenses mainly due to increases in pension and retiree health benefit costs resulting from a reduction in the discount rate applied to projected benefit obligations,

? a $1.1 million increase in maintenance expenses at Coyote Station related to its second quarter 2012 seven-week scheduled major maintenance shutdown,

? a $0.4 million increase in wind farm maintenance service costs, and

? a $0.3 million increase in maintenance costs at Big Stone Plant,

offset by:

? a $1.7 million reduction in material and supply costs related to costs incurred in conjunction with a major overhaul of Big Stone Plant in the fourth quarter of 2011, and

? a $0.4 million reduction in incurred conservation program costs, commensurate with a reduction in accrued revenues related to the future recovery of those costs.

OTESCO recorded asset impairment charges of $0.4 million in the first quarter of 2012 and $0.5 million in the fourth quarter of 2011 related to its wind farm development rights at its Sheridan Ridge and Stutsman County sites in North Dakota, based on market indicators of the value of those assets.

The $1.8 million increase in depreciation expense is related to 2011 property additions, mainly transmission assets.

Property taxes increased $0.5 million due to higher taxes on electric distribution property and increased investments in transmission property.

                                 MANUFACTURING

The following table summarizes the results of operations for our Manufacturing
segment for the years ended December 31:

                                                 %                           %
 (in thousands)                    2013        change          2012        change        2011
 Operating Revenues              $ 204,997          (2 )     $ 208,965          10     $ 189,459
 Cost of Products Sold             154,235          (2 )       157,437           9       144,987
 Other Operating Expenses           18,820           3          18,233          10        16,524
 Depreciation and Amortization      11,194          (8 )        12,208           1        12,116
 Operating Income                $  20,748          (2 )     $  21,087          33     $  15,832

2013 compared with 2012
The decrease in revenues in our Manufacturing segment in 2013 compared with 2012 relates to the following:

? Revenues at BTD Manufacturing, Inc. (BTD), our metal parts stamping and fabrication company, decreased $1.7 million (1.0%) as a result of lower sales volume due to reduced demand from customers in end markets serving the construction and energy industries, partially offset by increased sales to 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, decreased $2.3 million (5.7%) due to the discontinuance of a packaging product for a major customer who took production of the product in-house, partially offset by increased sales volumes in certain horticultural and industrial product lines.

The decrease in cost of products sold in our Manufacturing segment in 2013 compared with 2012 consists of the following:

? Cost of products sold at BTD decreased by $0.1 million as a reduction in costs related to lower sales volumes was mostly offset by increases in labor costs due to a ramp up in hiring personnel in anticipation of larger sales volumes in 2014.

? Cost of products sold at T.O. Plastics decreased $3.1 million as a result of reductions in raw material costs and reduced conversion costs related to productivity improvements.

The increase in other operating expenses in our Manufacturing segment in 2013 compared with 2012 relates to the following:

? Operating expenses at BTD increased $0.2 million mainly as a result of upgrades and enhancements made to BTD's communications systems.

? Operating expenses at T.O. Plastics increased $0.4 million as a result of increased hiring costs associated with new management team members and increased sales incentives and commissions.

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

2012 compared with 2011
The increase in revenues in our Manufacturing segment in 2012 compared with 2011 relates to the following:

? Revenues at BTD increased $17.7 million (11.8%) as a result of higher sales . . .

  Add OTTR to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for OTTR - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.