SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-368
OTTER TAIL POWER COMPANY
(Exact name of registrant as specified in its charter)
Minnesota 41-0462685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
215 South Cascade Street, Box 496, Fergus Falls, Minnesota 56538-0496
(Address of principal executive offices) (Zip Code)
218-739-8200
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X NO
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date:
May 1, 1997 - 11,454,361 Common Shares ($5 par value)
OTTER TAIL POWER COMPANY
INDEX
Part I. Financial Information Page No.
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1997 (Unaudited)
and December 31, 1996 2 & 3
Consolidated Statements of Income - Three Months
Ended March 31, 1997 and 1996 (Unaudited) 4
Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1997 and 1996 (Unaudited) 5
Notes to Consolidated Financial Statements (Unaudited) 6 & 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7, 8 & 9
Part II. Other Information
Item 2. Changes in Securities 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 9
Part I. Financial Information
Item 1. Financial Statements
Otter Tail Power Company
Consolidated Balance Sheets
-Assets-
March 31, December 31,
1997 1996
------ ------
(Unaudited)
(Thousands of dollars)
Plant:
Electric plant in service $743,884 $742,065
Subsidiary companies 104,336 93,975
-------- --------
Total 848,220 836,040
Less accumulated depreciation and amortization 338,531 327,672
-------- --------
509,689 508,368
Construction work in progress 15,089 11,470
-------- --------
Net plant 524,778 519,838
-------- --------
Investments 19,743 19,880
-------- --------
Intangibles -- net 22,219 21,954
-------- --------
Other assets 6,544 6,553
-------- --------
Current assets:
Cash and cash equivalents 3,160 1,229
Temporary cash investments -- --
Accounts receivable:
Trade - net 34,755 32,590
Other 3,734 5,018
Materials and supplies:
Fuel 2,913 3,220
Inventory, materials and operating supplies 26,276 23,778
Deferred income taxes 4,674 4,550
Accrued utility revenues 4,248 5,349
Other 4,936 4,537
-------- --------
Total current assets 84,696 80,271
-------- --------
Deferred debits:
Unamortized debt expense and reacquisition premiums 4,105 4,270
Regulatory assets 5,822 5,866
Other 2,706 3,655
-------- --------
Total deferred debits 12,633 13,791
-------- --------
Total $670,613 $662,287
======== ========
See accompanying notes to consolidated financial statements
-2-
Otter Tail Power Company
Consolidated Balance Sheets
-Liabilities-
March 31, December 31,
1997 1996
------ ------
(Unaudited)
(Thousands of dollars)
Capitalization
Common shares, par value $5 per share - authorized
25,000,000 shares; outstanding 1997 -- 11,452,656;
and 1996 -- 11,214,652 shares $57,263 $56,073
Premium on common shares 32,376 31,271
Retained earnings 111,980 105,882
-------- --------
Total 201,619 193,226
Cumulative preferred shares - authorized 1,500,000
shares without par value; outstanding 1997
and 1996, 388,311 shares
Subject to mandatory redemption 18,000 18,000
Other 20,831 20,831
Cumulative preference shares - authorized 1,000,000
shares without par value; outstanding - none -- --
Long-term debt 164,662 160,492
-------- --------
Total capitalization 405,112 392,549
-------- --------
Current liabilities
Short-term debt 17,200 25,600
Sinking fund requirements and current maturities 48,003 42,136
Accounts payable 22,803 26,587
Accrued salaries and wages 2,776 3,847
Federal and state income taxes accrued 6,617 2,031
Other taxes accrued 12,759 12,043
Interest accrued 2,056 3,622
Other 2,623 2,822
-------- --------
Total current liabilities 114,837 118,688
-------- --------
Noncurrent liabilities 16,867 16,688
-------- --------
Deferred credits
Accumulated deferred income taxes 98,961 98,498
Accumulated deferred investment tax credit 19,558 19,818
Regulatory liabilities 13,093 13,283
Other 2,185 2,763
-------- --------
Total deferred credits 133,797 134,362
-------- --------
Total $670,613 $662,287
======== ========
See accompanying notes to consolidated financial statements
-3-
Otter Tail Power Company
Consolidated Statements of Income
(Unaudited)
Three months ended
March 31
1997 1996
------ ------
(Thousands of dollars)
Operating revenues
Electric $ 58,400 $ 57,031
Health services 15,390 10,015
Manufacturing 12,184 14,350
Other business operations 5,796 6,994
-------- --------
Total operating revenues 91,770 88,390
Operating expenses
Production fuel 7,992 8,592
Purchased power 7,373 7,107
Electric operation and maintenance expenses 16,545 16,601
Cost of goods sold 20,701 21,662
Other nonelectric expenses 10,456 7,097
Depreciation and amortization 6,325 5,561
Property taxes 3,098 2,938
-------- --------
Total operating expenses 72,490 69,558
Operating income
Electric 18,052 16,902
Health services 1,272 560
Manufacturing 978 1,712
Other business operations (1,022) (342)
-------- --------
Total operating income 19,280 18,832
Other income and deductions - net 1,122 486
Interest charges 4,537 3,691
-------- --------
Income before income taxes 15,865 15,627
Income taxes 5,631 5,595
-------- --------
Net income 10,234 10,032
Preferred dividend requirements 589 590
-------- --------
Earnings available for common shares $ 9,645 $ 9,442
======== ========
Earnings per average common share $0.85 $0.84
======== ========
Average number of common shares outstanding 11,409,916 11,180,136
Dividends per common share $0.465 $0.45
See accompanying notes to consolidated financial statements
-4-
Otter Tail Power Company
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended
March 31
1997 1996
------ ------
(Thousands of dollars)
Cash flows from operating activities:
Net income $ 10,234 $ 10,032
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation and amortization 9,851 7,583
Deferred investment tax credit - net (294) (294)
Deferred income taxes (498) (898)
Change in deferred debits and other assets 751 1,662
Change in noncurrent liabilities and deferred credits (400) 248
Allowance for equity (other) funds used during construction 0 (62)
(Gains)/Losses from investments and disposal of noncurrent assets (906) 11
Cash provided by (used for) current assets & current liabilities:
Change in receivables, materials and supplies (2,809) 420
Change in other current assets 708 (2,288)
Change in payables and other current liabilities (3,748) (6,283)
Change in interest and income taxes payable 3,021 4,389
-------- --------
Net cash provided by operating activities 15,910 14,520
Cash flows from investing activities:
Gross capital expenditures (10,497) (11,812)
Proceeds from disposal of noncurrent assets 485 1,229
Purchase of businesses, net of cash acquired 0 (221)
Change in temporary cash investments 0 1,102
Purchases of marketable securities (5) 0
Proceeds from sales of marketable securities 313 0
Change in other investments 527 (4,070)
-------- --------
Net cash used in investing activities (9,177) (13,772)
Cash flows from financing activities:
Change in short-term debt - net (8,400) 0
Proceeds from issuance of common stock 2,311 0
Proceeds from issuance of long-term debt 20,258 24,572
Payments for retirement of long-term debt (13,072) (16,797)
Dividends paid (5,899) (5,621)
-------- --------
Net cash provided by (used in) financing activities (4,802) 2,154
Net change in cash and cash equivalents 1,931 2,902
Cash and cash equivalents at beginning of year 1,229 1,867
-------- --------
Cash and cash equivalents at March 31 $ 3,160 $ 4,769
======== ========
Supplemental cash flow information
Cash paid for interest and income taxes:
Interest (net of amount capitalized) $ 5,817 $ 5,217
Income taxes $ 1,846 $ 749
See accompanying notes to consolidated financial statements
-5-
OTTER TAIL POWER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company, in its opinion, has included all adjustments (including normal
recurring accruals) necessary for a fair presentation of the results of
operations for the periods. The financial statements for 1997 are subject
to adjustment at the end of the year when they will be audited by
independent accountants. The financial statements and notes thereto should
be read in conjunction with the financial statements and notes for the
years ended December 31, 1996, 1995, and 1994 included in the Company's
1996 Annual Report to the Securities and Exchange Commission on Form 10-K.
Because of seasonal and other factors, the earnings for the three-month
period ended March 31, 1997, should not be taken as an indication of
earnings for all or any part of the balance of the year.
On January 2, 1997, the Company's telecommunications subsidiary, North
Central Utilities, Inc., acquired all of the outstanding common stock of
The Peoples Telephone Co. of Bigfork (Peoples) in exchange for 163,758
newly issued shares of the Company's common stock and $209,000 in cash in a
pooling-of-interests transaction. The acquisition has no significant pro
forma effect on the Company's balance sheet, operating revenues, net
income, or earnings per share for 1996. Therefore, the 1996 financial
statements included in this report have not been restated to reflect the
effect of the pooling. The following table shows the effect of the pooling
on the equity section of the Company's balance sheet on January 2, 1997:
Common Premium
Shares on Common Retained Total
Outstanding Par Shares Earnings Equity
----------- ------- --------- -------- --------
(dollars in thousands)
Otter Tail Power Company 11,214,652 $56,073 $31,271 $105,882 $193,226
Peoples 21 2,121 2,142
Shares Issued 163,758 819
Adjustments for:
Par value of new shares (21) (798)
Cash paid for Peoples shares (209)
---------- ------- ------- -------- --------
Combined 11,378,140 $56,892 $30,264 $108,003 $195,368
========== ======= ======= ======== ========
The net amount of cash used of ($209,000) and cash acquired of $36,000 in
the pooling is included in the Company's Statement of Cash Flows for the
three months ended March 31, 1997, under "Proceeds from issuance of common
stock."
Additional common stock issuances in the first quarter of 1997 include
41,055 shares issued under the Company's Automatic Dividend Reinvestment
and Share Purchase Plan, 30,561 shares issued to the Company's leveraged
employee stock ownership plan and 2,630 shares as a bonus to a consultant.
Quadrant Co. is currently processing solid waste for four Minnesota
counties under the terms of new waste incineration agreements which are
designed to provide the volume of waste needed for Quadrant to generate
positive future cash flows. If the anticipated volume of waste does not
materialize, an impairment to the carrying value of the Quadrant Plant is
still possible in 1997.
Spring Storm and Floods
- -----------------------
An early Spring ice storm and blizzard which hit the Company's electric
service territory on April 5, 6 and 7 of 1997 causing an estimated $3
million worth of damage to the Company's electric transmission and
distribution system is not expected to have a significant impact on second
quarter operating income. A portion of the repair costs will be charged to
the reserve for storm damage. The remainder of the costs related to
replacement of damaged facilities will be capitalized to the extent such
costs are an improvement to the system. Flooding in the Red River Valley
was mostly concentrated in areas not served by the Company and, therefore,
is not expected to have a significant impact on future earnings.
Forward Looking Information - Safe Harbor Statement
Under the Private Securities Litigation Reform Act of 1995
- ----------------------------------------------------------
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "Act"), the Company has filed cautionary
statements identifying important factors that could cause the Company's
actual results to differ materially from those discussed in forward-looking
statements made by or on behalf of the Company. When used in this Form
10-Q and in future filings by the Company with the Securities and Exchange
Commission, in the Company's press releases and in oral statements, words
such as "may", "will", "expect", "anticipate", "continue", "estimate",
"project", "believes" or similar expressions are intended to identify
forward-looking statements within the meaning of the Act. Factors that
might cause such differences include, but are not limited to, the factors
discussed under "Factors affecting future earnings" on pages 30-32 of the
Company's 1996 Annual Report to Shareholders, which is incorporated by
reference in the Company's Form 10-K for the fiscal year ended December 31,
1996. These factors are in addition to any other cautionary statements,
written or oral, which may be made or referred to in connection with any
such forward-looking statement or contained in any subsequent filings by
the Company with the Securities and Exchange Commission.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Material Changes in Financial Position
- --------------------------------------
Cash provided by operating activities of $15,910,000 as shown on the
Consolidated Statement of Cash Flows for the three months ended March 31,
1996, combined with funds on hand of $1,229,000 at December 31, 1996,
allowed the Company to finance its first quarter electric utility capital
expenditures and pay dividends. Additionally, cash flows from electric
utility operations, which are higher in the first quarter due to seasonal
sales increases and the timing of tax payments, provided the cash used to
decrease the balance of short-term debt outstanding in the first quarter of
1997. At March 31, 1997, the Company had $20,177,000 available in unused
lines of credit which could be used to supplement cash needs. The Company
estimates that funds internally generated, combined with funds on hand,
will be sufficient to meet all sinking fund payments for First Mortgage
Bonds in the next five years and to provide for its estimated 1997-2001
consolidated capital project expenditures.
Additional short-term or long-term financing will be required in the period
1997-2001 in connection with the maturity of First Mortgage Bonds and a
Long-Term Lease Obligation ($21,000,000), in the event the Company decides
to refund or retire early any of its presently outstanding debt or
cumulative preferred shares, or for other corporate purposes. Proceeds
from the issuance of long-term debt net of payments for the retirement of
long-term debt of $7,186,000, for the three months ended March 31, 1997,
were used to finance capital expenditures at the Company's subsidiaries and
also reflect increases in subsidiary credit line balances required to meet
first quarter operating needs due to seasonal fluctuations in cash flows.
The increase in subsidiary company plant is mainly due to the acquisition
of Peoples. The increase in construction work in progress is due to new
construction and capital expenditures at the electric utility, mainly in
the production, transmission and general plant areas. The net increase in
cash and cash equivalents is due to the timing of cash receipts and
payments at the subsidiary company level at the end of March 1997.
The increase in trade receivables reflects an increase in receivables in
the manufacturing segment as a result of one of the manufacturing companies
delivering product to its customers on a delayed payment dating plan. The
decrease in other receivables is due to the timing of payments received
from the Company's Big Stone Plant partners. The increase in inventory,
materials and operating supplies reflects a build up of finished goods at
one of the Company's manufacturing subsidiaries to accommodate a major
customers' delivery and production schedule. The decrease in other deferred
debits reflects increased allocation of deferred overhead costs to electric
construction activity in the first quarter of 1997.
A major portion of the increase in long-term debt is due to the addition of
Peoples long-term debt in the first quarter of 1997. The remainder of the
increase in long-term debt along with the increase in sinking fund
requirements and current maturities reflects increases in the subsidiary
Company's credit line balances to meet first quarter operating needs,
mainly in the manufacturing segment. Accounts payable decreased due to a
normal seasonal decline at the electric utility. Accrued salaries and
wages decreased as a result of the payment of 1996 accrued employee
incentives. The increase in federal and state income taxes accrued resulted
from the timing of first quarter estimated tax payments which are not due
until April. The reduction in interest accrued was caused by the timing of
bond interest payments, the majority of which are due in the first and
third quarters.
Material Changes in Results of Operations
- -----------------------------------------
The 2.4% increase in electric operating revenues for the quarter ended
March 31, 1997, as compared to the quarter ended March 31, 1996, is due to
increases of 3.7% in retail revenues and 17.6% in other electric revenue
offset by a 19.6% decrease in revenue from noncontractual power pool sales.
The increase in retail revenue is mainly due to an increase in cost-of-
energy revenue related to recovery of the costs of power purchased for sale
to retail customers in late 1996 and early 1997. Increases in transmission
service charge revenue and rental income contributed to the increase in
other electric revenue. The decrease in revenue from noncontractual power
pool sales is the result of the Company having less energy to market due to
generation cutbacks related to delayed coal shipments caused by the
blizzards of 1997 and to Big Stone Plant equipment problems. These factors
also contributed to the 7.0% decrease in production fuel expense and the
3.7% increase in purchased power costs for the three months ended March 31,
1997, as compared to the same period a year ago.
The breakdown of cost of goods sold and other nonelectric expenses by
business segments other than electric are as follows:
3 months ended
Cost of goods sold Other nonelectric expenses
------------------ --------------------------
1997 1996 1997 1996
------ ------ ------ ------
(in thousands)
Health services $ 7,980 $ 6,038 $ 6,006 $ 3,288
Manufacturing $ 9,514 $10,967 $ 1,554 $ 1,553
Other business operations $ 3,207 $ 4,657 $ 2,896 $ 2,256
------- ------- ------- -------
Total $20,701 $21,662 $10,456 $ 7,097
======= ======= ======= =======
The increase in health services operating revenue for the quarter ended
March 31, 1997, as compared to the same period a year ago reflects
additional revenues in 1997 related to the acquisitions of Radiographic
Supply in February 1996, and Northern Medical Imaging in April 1996. While
revenue from health services is up 54% the cost of goods sold in this
segment shows an increase of only 32% for the three months ended March 31,
1997, as compared to the same period in 1996, as a result of increased
revenues related to diagnostic imaging services. The 83% increase in
health services other nonelectric expenses in the first quarter of 1997
over the first quarter of 1996 is primarily associated with 1996
acquisitions.
The decrease in manufacturing operating revenue of 15% and cost of goods
sold of 13% for the three months ended March 31, 1997, as compared to the
three months ended March 31, 1996, is mainly due to the delayed shipment of
finished goods to a major customer of one of the Company's manufacturing
companies in order to accommodate that customer's delivery and production
schedule. The manufacturing company maintained its production schedule in
order to optimize the use of its plant capacity which, in conjunction with
stable operations at the Company's other manufacturing companies, resulted
in the same level of other nonelectric expenses in this segment in the
first quarter of 1997 as were recorded in the first quarter of 1996.
The decrease in other business operations revenue for the quarter ended
March 31, 1997, as compared to the quarter ended March 31, 1996, is mainly
due to a seasonal decline in revenue and reductions in material cost pass
through billings by the Company's construction subsidiaries slightly offset
by increases in media and telecommunications revenue due to the
acquisitions of several radio stations in 1996 and Peoples in January 1997.
The decreases in construction activity and material cost pass through
billings are the main factors contributing to the decrease in cost of goods
sold from other business operations for the comparable periods. Other
nonelectric expenses in other business operations increased for the three
months ended March 31, 1997, as compared to the same period a year ago, as
a result of the radio stations and Peoples acquisitions.
The increase in depreciation and amortization expense for the quarter ended
March 31, 1997, as compared to the quarter ended March 31, 1996, is related
to electric utility property additions including upgrades made to Big Stone
Plant in 1996, and increased depreciation at Quadrant and the acquisition
of Peoples in 1997.
The increase in property taxes for the three months ended March 31, 1997,
as compared to the same period in 1996, is due to increases in South Dakota
property taxes as a result of Big Stone Plant's 1996 property additions.
The increase in other income and deductions - net for the quarter ended
March 31, 1997, as compared to the quarter ended March 31, 1996, reflects
the recognition of $250,000 in realized gains on the sale of marketable
securities classified as available-for-sale and the recognition of $360,000
in unrealized gains on marketable securities classified as trading in the
first quarter of 1997.
PART II. OTHER INFORMATION
--------------------------
Item 2. Changes in Securities
---------------------
On January 2, 1997, the Company issued 163,758 shares of common stock in
connection with the acquisition of Peoples. The issuance of such shares
did not involve a public offering and therefore was exempt from
registration pursuant to section 4(2) of the Securities Act of 1933, as
amended (the "Act").
On January 8, 1997, the Company issued 2,630 shares of common stock as a
stock bonus to a consultant. The issuance of such shares did not
constitute a "sale" within the meaning of Section 2(3) of the Act.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits:
23 Consent of Deloitte & Touche LLP
27 Financial Data Schedule
b) Report on Form 8-K.
A report on Form 8-K was filed on January 27, 1997, relating to the
Rights Agreement dated January 27, 1997, between the Company and Norwest
Bank Minnesota, National Association.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OTTER TAIL POWER COMPANY
By: Jeff Legge
------------------------
Jeff Legge
Controller
(Chief Accounting Officer/Authorized Officer)
Dated: May 15, 1997
------------