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, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-368
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OTTER TAIL CORPORATION
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(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
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(Registrant's telephone number, including area code)
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(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:
APRIL 30, 2002 - 24,799,369 COMMON SHARES ($5 PAR VALUE)
OTTER TAIL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 2002 2 & 3
and December 31, 2001 (Unaudited)
Consolidated Statements of Income - Three Months 4
Ended March 31, 2002 and 2001 (Unaudited)
Consolidated Statements of Cash Flows - Three Months 5
Ended March 31, 2002 and 2001 (Unaudited)
Notes to Consolidated Financial Statements (Unaudited) 6-9
Item 2. Management's Discussion and Analysis of Financial 10-15
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about 15
Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
OTTER TAIL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
-ASSETS-
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
(Thousands of dollars)
CURRENT ASSETS:
Cash and cash equivalents $ -- $ 11,378
Accounts receivable:
Trade - net 62,289 64,215
Other 6,128 5,047
Inventory, fuel, materials and supplies 42,216 39,301
Deferred income taxes 3,967 4,020
Accrued utility revenues 10,734 11,055
Other 13,219 8,878
-------- --------
TOTAL CURRENT ASSETS 138,553 143,894
INVESTMENTS 18,056 18,009
INTANGIBLES -- NET 49,678 49,805
OTHER ASSETS 17,617 15,687
DEFERRED DEBITS:
Unamortized debt expense and reacquisition premiums 5,580 5,646
Regulatory assets 5,538 5,117
Other 524 1,406
-------- --------
TOTAL DEFERRED DEBITS 11,642 12,169
PLANT:
Electric plant in service 811,445 810,470
Diversified operations 149,039 145,712
-------- --------
TOTAL PLANT 960,484 956,182
Less accumulated depreciation and amortization 450,113 441,863
-------- --------
510,371 514,319
Construction work in progress 43,442 28,658
-------- --------
NET PLANT 553,813 542,977
-------- --------
TOTAL $789,359 $782,541
======== ========
</Table>
See accompanying notes to consolidated financial statements
-2-
OTTER TAIL CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
-LIABILITIES-
<Table>
<Caption>
MARCH 31, DECEMBER 31,
2002 2001
---------- ------------
(Thousands of dollars)
CURRENT LIABILITIES
Short-term debt $ 5,393 $ --
Sinking fund requirements and current maturities 28,641 28,946
Accounts payable 47,483 46,871
Accrued salaries and wages 9,561 17,397
Accrued federal and state income taxes 6,177 1,634
Other accrued taxes 10,189 9,854
Other accrued liabilities 7,459 6,090
--------- ---------
TOTAL CURRENT LIABILITIES 114,903 110,792
NONCURRENT LIABILITIES 33,122 32,981
DEFERRED CREDITS
Accumulated deferred income taxes 85,650 85,591
Accumulated deferred investment tax credit 13,647 13,935
Regulatory liabilities 9,749 9,914
Other 8,613 7,160
--------- ---------
TOTAL DEFERRED CREDITS 117,659 116,600
CAPITALIZATION
Long-term debt, net of sinking fund and current maturities 224,824 227,360
Cumulative preferred shares
authorized 1,500,000 shares without par value;
outstanding 2002 and 2001 -- 155,000 shares 15,500 15,500
Cumulative preference shares - authorized 1,000,000
shares without par value; outstanding - none -- --
Common shares, par value $5 per share
authorized 50,000,000 shares;
outstanding 2002 -- 24,693,672 and 2001 -- 24,653,490 123,468 123,267
Premium on common shares 2,130 1,526
Unearned compensation (225) (151)
Retained earnings 159,953 156,641
Accumulated other comprehensive loss (1,975) (1,975)
--------- ---------
TOTAL 283,351 279,308
TOTAL CAPITALIZATION 523,675 522,168
--------- ---------
TOTAL $ 789,359 $ 782,541
========= =========
</Table>
See accompanying notes to consolidated financial statements
-3-
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
2002 2001
------------ -------------
(in thousands, except share
and per share amounts)
OPERATING REVENUES
Electric $ 74,401 $ 82,631
Plastics 15,875 13,961
Health services 21,119 17,900
Manufacturing 31,328 28,265
Other business operations 15,010 16,897
------------ ------------
Total operating revenues 157,733 159,654
OPERATING EXPENSES
Production fuel 11,517 11,505
Purchased power 18,934 26,391
Other electric operation and maintenance expenses 19,972 15,565
Cost of goods sold 59,136 56,758
Other nonelectric expenses 16,520 14,039
Depreciation and amortization 10,184 10,174
Property taxes 2,535 2,784
------------ ------------
Total operating expenses 138,798 137,216
OPERATING INCOME (LOSS)
Electric 15,293 20,372
Plastics 1,892 (1,163)
Health services 2,437 1,754
Manufacturing 1,906 3,025
Other business operations (2,593) (1,550)
------------ ------------
Total operating income 18,935 22,438
OTHER INCOME AND (DEDUCTIONS) - NET 51 318
INTEREST CHARGES 4,324 4,102
------------ ------------
INCOME BEFORE INCOME TAXES 14,662 18,654
INCOME TAXES 4,630 6,654
------------ ------------
NET INCOME 10,032 12,000
Preferred dividend requirements 184 470
------------ ------------
EARNINGS AVAILABLE FOR COMMON SHARES $ 9,848 $ 11,530
============ ============
Basic earnings per average common share: $ 0.40 $ 0.47
============ ============
Diluted earnings per average common share: $ 0.40 $ 0.47
============ ============
Average number of common shares outstanding - basic 24,667,956 24,576,808
Average number of common shares outstanding - diluted 24,919,068 24,776,034
Dividends per common share $ 0.265 $ 0.260
</Table>
See accompanying notes to consolidated financial statements
-4-
OTTER TAIL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
2002 2001
--------- ---------
(Thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 10,032 $ 12,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,184 10,174
Deferred investment tax credit - net (288) (288)
Deferred income taxes (471) (94)
Change in deferred debits and other assets (1,194) (1,730)
Change in noncurrent liabilities and deferred credits 1,594 2,314
Allowance for equity (other) funds used during construction (432) (105)
Losses from investments and disposal of noncurrent assets 358 173
Cash provided by (used for) current assets & current liabilities:
Change in receivables, materials and supplies (2,070) (17,653)
Change in other current assets (5,248) 1,195
Change in payables and other current liabilities (6,521) (1,305)
Change in interest and income taxes payable 5,544 3,131
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,488 7,812
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (20,983) (9,518)
Proceeds from disposal of noncurrent assets 808 333
(Purchase)/sale of other investments 1,016 (521)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (19,159) (9,706)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 5,393 20,679
Proceeds from employee stock plans 485 2
Payments for retirement of long-term debt (2,865) (4,033)
Dividends paid (6,720) (6,840)
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (3,707) 9,808
NET CHANGE IN CASH AND CASH EQUIVALENTS (11,378) 7,914
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 11,378 1,259
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ 9,173
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes:
Interest $ 2,920 $ 4,840
Income taxes $ 289 $ 2,427
</Table>
See accompanying notes to consolidated financial statements
-5-
OTTER TAIL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Otter Tail Corporation (the Company), in its opinion, has included all
adjustments (including normal recurring accruals) necessary for a fair
presentation of the consolidated results of operations for the periods
presented. The consolidated financial statements and notes thereto should be
read in conjunction with the consolidated financial statements and notes for the
years ended December 31, 2001, 2000, and 1999 included in the Company's 2001
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, 2002, should not be taken as an indication of earnings for all or any part
of the balance of the year.
Common Shares and Earnings per Share
Basic earnings per common share are calculated by dividing earnings available
for common shares by the average number of common shares outstanding during the
period. Diluted earnings per common share are calculated by adjusting
outstanding shares, assuming conversion of all potentially dilutive stock
options.
Comprehensive Income
The only element of comprehensive income for the three months ended March 31,
2002 and March 31, 2001 was net income of $10.0 million and $12.0 million,
respectively.
Goodwill and Other Intangible Assets - Adoption of Statement of Financial
Accounting Standards No. 142
In June 2001 the Financial Accounting Standards Board (FASB) approved the
issuance of Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. These
standards, issued in July 2001, established accounting and reporting for
business combinations. SFAS No. 141 requires that all business combinations
entered into subsequent to June 30, 2001 be accounted for using the purchase
method of accounting. SFAS No. 142 provides that goodwill and other intangible
assets with indefinite lives will not be amortized, but tested for impairment on
an annual basis. Intangible assets with finite useful lives will be amortized
over their respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. The Company adopted SFAS No. 142 on January 1, 2002.
The Company has determined that as of January 1, 2002 goodwill is not impaired
and therefore no write-off is necessary. The impact of not amortizing goodwill
would have resulted in an increase in net income for the three months ended
March 31, 2001 of $595,000. The following table presents the effects of not
amortizing goodwill on reported net income and basic and diluted earnings per
share.
Three months ended
March 31,
(in thousands, except per share amounts) 2002 2001
- -----------------------------------------------------------------------------
Net income:
Reported net income $ 10,032 $ 12,000
Add back: goodwill amortization, net of tax -- 595
---------- ----------
Adjusted net income $ 10,032 $ 12,595
========== ==========
6
Basic and diluted earnings per share:
Reported basic and diluted earnings per share $ 0.40 $ 0.47
Add back: goodwill amortization, net of tax -- 0.02
---------- ----------
Adjusted basic and diluted earnings per share: $ 0.40 $ 0.49
========== ==========
The carrying amount of goodwill by segment was
As of As of
March 31, December 31,
(in thousands) 2002 2001
- -------------------------------------------------------------------------
Plastics $19,302 $19,302
Health services 13,311 13,311
Manufacturing 1,667 1,627
Other business operations 13,981 13,981
------- -------
Total $48,261 $48,221
======= =======
The following is a summary of the Company's intangible assets with finite lives
that are subject to amortization at March 31, 2002 and December 31, 2001.
March 31, 2002 December 31, 2001
-------------- -----------------
Gross Net Gross Net
carrying Accumulated carrying carrying Accumulated carrying
(in thousands) amount amortization amount amount amortization amount
- ----------------------------------------------------------------------------------------------------------------------------
Amortized intangible assets:
Covenants not to complete $1,568 $ 974 $ 594 $1,575 $ 933 $ 642
Organization costs 281 128 153 281 118 163
Other intangible assets including contracts 1,190 520 670 1,230 451 779
------ ------ ------ ------ ------ ------
Total $3,039 $1,622 $1,417 $3,086 $1,502 $1,584
====== ====== ====== ====== ====== ======
These intangibles are being amortized on a straight-line basis over a period of
5 years or less. The amortization expense for these intangible assets was
$120,000 for the three months ended March 31, 2002 compared to $77,000 for the
three months ended March 31, 2001. The estimated annual amortization expense for
these intangible assets for the next five years is $480,000 for 2002, $440,000
for 2003, $290,000 for 2004, $200,000 for 2005, and $100,000 for 2006.
Segment Information
The Company's business operations consist of five segments based on products and
services. Electric includes the electric utility operating in Minnesota, North
Dakota, and South Dakota. Plastics consists of businesses involved in the
production of PVC pipe in the Upper Midwest and Southwest regions of the United
States. Health services include businesses involved in the sale of diagnostic
medical equipment, supplies and accessories. In addition these businesses also
provide service maintenance, mobile diagnostic imaging, mobile PET and nuclear
medicine imaging, portable x-ray imaging and rental of diagnostic medical
imaging equipment to various medical institutions located in 31 states.
Manufacturing consists of businesses involved in the production of wind towers,
frame-straightening equipment and accessories for the auto repair industry,
custom plastic pallets, material and handling trays, and horticultural
containers, fabrication of steel products, contract machining, and metal parts
stamping and fabrication located in the Upper Midwest and Utah. Other business
operations consists of businesses in electrical and telephone construction
contracting, transportation, telecommunications, entertainment, energy services,
and natural gas marketing, as well as the portion of corporate administrative
and general expenses that are not allocated to other segments. The electrical
and telephone construction contracting companies and energy
7
services and natural gas marketing business operate primarily in the Upper
Midwest. The telecommunications companies operate in central and northeast
Minnesota and the transportation company operates in 48 states and 6 Canadian
provinces. The Company evaluates the performance of its business segments and
allocates resources to them based on earnings contribution and return on total
invested capital.
Operating Income (Loss)
Three months ended
March 31,
2002 2001
-------- --------
(in thousands)
Electric $ 15,293 $ 20,372
Plastics 1,892 (1,163)
Health services 2,437 1,754
Manufacturing 1,906 3,025
Other business operations (2,593) (1,550)
-------- --------
Total $ 18,935 $ 22,438
======== ========
Identifiable Assets
March 31, December 31,
2001 2001
--------- ------------
(in thousands)
Electric $535,841 $523,948
Plastics 50,521 45,649
Health services 47,568 50,560
Manufacturing 76,790 67,033
Other business operations 78,639 95,351
-------- --------
Total $789,359 $782,541
======== ========
Substantially all sales and long-lived assets of the Company are within the
United States.
Reclassifications
Certain prior year amounts have been reclassified to conform to 2002
presentation. Such reclassifications had no impact on net income, shareholders'
equity or cash provided by operating activities.
New Accounting Standards
In July 2001 the FASB issued SFAS 143, Accounting for Asset Retirement
Obligations, which provides accounting requirements for retirement obligations
associated with tangible long-lived assets. This statement is effective for
fiscal years beginning after June 15, 2002. The Company is assessing this
statement but has not yet determined the impact of SFAS 143 on its consolidated
financial position or results of operations.
The FASB issued SFAS 144, Accounting for the Impairment or Disposal of
Long-Lived Assets in October 2001. SFAS 144 replaces SFAS 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
This statement develops one accounting model for long-lived assets to be
disposed of by sale and also broadens the reporting of discontinued operations
to include all components of an entity with operations that can
8
be distinguished from the rest of the entity in a disposal transaction. The
Company adopted the accounting model for impairment or disposal of long-lived
assets on January 1, 2002. Adoption of this statement did not have a material
effect on the Company's consolidated financial statements.
Subsequent Events
On April 8, 2002 the Company's Board of Directors granted 278,750 stock options
to key management employees and 75,800 shares of restricted stock to executives
and outside board directors under the 1999 Stock Incentive Plan (Incentive
Plan). The exercise price of the stock options is equal to the fair market value
per share at the date of the grant. Both the options and restricted stock vest
ratably over a four-year period. The options expire ten years after the date of
the grant. As of April 30, 2002 a total of 1,429,316 options were outstanding
and a total of 100,513 shares of restricted stock had been issued under the
Incentive Plan. The Company accounts for the Incentive Plan under Accounting
Principles Board Opinion No. 25.
On May 1, 2002 the Company acquired 100% of the outstanding stock of Computed
Imaging Service, Inc. of Houston, Texas. Computed Imaging Service provides
computed tomography and magnetic resonance imaging mobile services, interim
rental, and sales and service of new, used, and refurbished diagnostic imaging
equipment. Computed Imaging Service serves hospitals and other healthcare
facilities in the south central United States. The acquisition will be accounted
for as a purchase, in accordance with the guidance in SFAS No. 141, Business
Combinations.
On May 1, 2002 the Company established a new $50 million line of credit. This
line of credit bears interest at the rate of LIBOR plus 0.5% and expires on
April 30, 2003. The line of credit contains various covenants, including
interest-bearing debt to total capitalization and interest charges coverage
ratios.
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 Company's ongoing involvement in diversification efforts,
the timing and scope of deregulation and open competition, growth of electric
revenues, impact of the investment performance of the utility's pension plan,
changes in the economy, governmental and regulatory action, weather conditions,
fuel and purchased power costs, environmental issues, resin prices, and other
factors discussed under "Factors affecting future earnings" on pages 26-27 of
the Company's 2001 Annual Report to Shareholders, which is incorporated by
reference in the Company's Form 10-K for the fiscal year ended December 31,
2001. 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.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MATERIAL CHANGES IN FINANCIAL POSITION
The Company estimates that funds internally generated net of forecasted dividend
payments, combined with funds on hand at December 31, 2001, will be sufficient
to meet scheduled debt retirements and almost completely provide for its
estimated 2002-2006 consolidated capital expenditures. Reduced demand for
electricity or in the products manufactured or sold by the Company could have an
effect on funds internally generated. Additional short-term or long-term
financing will be required in the period 2002-2006 in order to complete the
planned capital expenditures, in the event the Company decides to refund or
retire early any of its presently outstanding debt or cumulative preferred
shares, to complete acquisitions, or for other corporate purposes. There can be
no assurance that any additional required financing will be available through
bank borrowings, debt or equity financing or otherwise, or that if such
financing is available, it will be available on terms acceptable to the Company.
If adequate funds are not available on acceptable terms, our business, results
of operations, and financial condition could be adversely affected.
As of March 31, 2002, $36.6 million was available in three separate unused lines
of credit. On May 1, 2002 the Company established a new $50 million line of
credit that replaced the three separate lines of credit. This new line of credit
bears interest at the rate of LIBOR plus 0.5% and expires on April 30, 2003. The
line of credit contains various covenants, including interest-bearing debt to
total capitalization and interest charges coverage ratios.
Cash provided by operating activities of $11.5 million for the three months
ended March 31, 2002 combined with cash on hand of $11.4 million as of December
31, 2001 allowed the Company to pay dividends and partially fund its capital
expenditures. Net cash provided by operating activities increased $3.7 million
for the three months ended March 31, 2002 compared to the three months ended
March 31, 2001 primarily as a result of changes in working capital items.
Net cash used in investing activities was $19.2 million for the three months
ended March 31, 2002 compared with net cash used in investing activities of $9.7
million for the three months ended March 31, 2001. Capital expenditures
increased $11.5 million between the periods. The majority of this increase
occurred in the electric segment reflecting ongoing construction expenditures
for a gas-fired combustion turbine peaking plant and a new transmission line in
North Dakota. In addition, building expansions at the companies that manufacture
wind energy towers and perform metal parts stamping and fabrication contributed
to the increase in capital expenditures.
Net cash used in financing activities was $3.7 million for the three months
ended March 31, 2002 compared with net cash provided by financing activities of
$9.8 million for the three months ended March 31, 2001. This change primarily is
caused by reduction in short-term borrowings between the periods. As a result of
the financing that was done at the end of December 2001, the Company started the
year with $11.4 million in cash reducing the need for short-term borrowing.
There are no material changes in the Company's contractual obligations on
long-term debt, coal contracts, construction program commitments, capacity and
energy requirements, and operating leases from those reported in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001. For more
information on contractual obligations and commitments, see Item 7 in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
10
MATERIAL CHANGES IN RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2002 and 2001
Consolidated Results of Operations
Total operating revenues were $157.7 million for the three months ended March
31, 2002, down $2.0 million (1.2%) from the $159.7 million for the three months
ended March 31, 2001. Operating income was $18.9 million for the three months
ended March 31, 2002 compared with $22.4 million for the three months ended
March 31, 2001. The Company recorded diluted earnings per share of $0.40 for the
three months ended March 31, 2002 compared to $0.47 for the three months ended
March 31, 2001. Mild winter weather during the three months ended March 31, 2002
impacted retail and wholesale energy sales and reduced revenues and earnings
from the electric segment compared to record results for the electric segment
during the three months ended March 31, 2001. Operating income from the health
services segment increased 38.9% as a result of 2001 platform acquisitions and
improved operating margins. The operating income from the plastics segment
increased $3.1 million. Operating results from the manufacturing and other
segments decreased between the quarters reflecting the effects of a slower
economy on some of the businesses in those segments. The benefit resulting
solely from the discontinuance of goodwill amortization is $0.02 per common
share during the quarter.
Electric
Three months ended
March 31,
2002 2001 Change
------- ------- -------
(in thousands)
Operating revenues $74,401 $82,631 ($8,230)
Production fuel 11,517 11,505 12
Purchased power 18,934 26,391 (7,457)
Other electric operation and maintenance expenses 19,972 15,565 4,407
Depreciation and amortization 6,150 6,014 136
Property taxes 2,535 2,784 (249)
------- ------- -------
Operating income $15,293 $20,372 ($5,079)
======= ======= =======
The 10.0% decrease in electric operating revenues for the three months ended
March 31, 2002 compared with the three months ended March 31, 2001 is due to an
$8.4 million (34.3%) decrease in wholesale power revenues, a $2.7 million (4.7%)
decrease in retail electric revenues and a $2.8 million (142.1%) increase in
other operating revenues.
The decrease in wholesale power revenues primarily resulted from a 36.4%
decrease in revenue per megawatt-hour (mwh) sold reflecting the soft wholesale
power market during the three months ended March 31, 2002 compared with the
three months ended March 31, 2001. Gross margin per mwh sold on wholesale power
sales decreased 35.2%. The decrease in retail electric revenue resulted from a
4.3% reduction in retail mwh sold between the periods combined with a 0.5%
reduction in revenue per mwh sold. Retail mwh sold decreased due to the mild
winter weather during 2002 compared with the winter of 2001. Sales were down in
all customer categories. Heating degree-days in the area served by the electric
utility decreased 7.9% between the periods. The increase in other operating
revenues reflects revenues from the construction of a transmission line for
another utility.
11
The cost of purchased power decreased 28.3% due to a 24.1% decrease in cost per
mwh purchased combined with a 5.5% decrease in mwh purchased. Mwh purchased for
resale decreased 7.4% and mwh purchased for system use increased 0.6%. The
reduction in the cost per mwh purchased is due to the mild weather and the
availability of power within the power pool. Activity in the short-term energy
market is subject to change based on a number of factors and it is difficult to
predict the quantity of wholesale power sales or prices for wholesale power,
although it does appear that market conditions for wholesale power transactions
will be depressed during part of 2002.
The 28.3% increase in other electric operating and maintenance expenses for the
three months ended March 31, 2002 compared with the three months ended March 31,
2001 reflects an increase in expenses related to construction work performed for
other utilities, in addition to increased labor costs and an increase in
professional services expenses.
Plastics
Three months ended
March 31,
2002 2001 Change
-------- -------- --------
(in thousands)
Operating revenues $ 15,875 $ 13,961 $ 1,914
Cost of goods sold 12,688 13,432 (744)
Operating expenses 856 873 (17)
Depreciation and amortization 439 819 (380)
-------- -------- --------
Operating income (loss) $ 1,892 ($1,163) $ 3,055
======== ======== ========
The 13.7% increase in operating revenues for the three months ended March 31,
2002 compared with the three months ended March 31, 2001 is the result of a
35.5% increase in pounds of PVC pipe sold offset by a 16.1% decline in average
sales price per pound. Cost of goods sold decreased 5.5% due to a $1.0 million
decrease in material costs offset by a $265,000 increase in overhead costs
primarily resulting from an increase in freight expense. The $1.0 million
decrease in material costs reflects a 32.3% reduction in the cost per pound of
resin, the raw material used to produce PVC pipe. The 46.3% decrease in
depreciation and amortization is due to the accounting change that eliminated
the amortization of goodwill beginning in 2002.
Health Services
Three months ended
March 31,
2002 2001 Change
------- ------- -------
(in thousands)
Operating revenues $21,119 $17,900 $ 3,219
Cost of goods sold 14,687 13,109 1,578
Operating expenses 3,051 2,306 745
Depreciation and amortization 944 731 213
------- ------- -------
Operating income $ 2,437 $ 1,754 $ 683
======= ======= =======
Health services operating revenues for the three months ended March 31, 2002
compared with the three months ended March 31, 2001 increased 18.0% due to added
revenues from the acquisitions that occurred during the third quarter of 2001
combined with increases in the number of scans performed and revenue per scan.
The number of
12
scans increased due to the addition of positron emission tomography service. The
increase in cost of goods sold, operating expenses and depreciation and
amortization are due in part to the 2001 acquisitions. The 38.9% increase in the
net operating margin reflects the operating results from the 2001 acquisitions,
an increase in margins on service sales provided and lower maintenance expense
on equipment.
Manufacturing
Three months ended
March 31,
2002 2001 Change
------- ------- -------
(in thousands)
Operating revenues $31,328 $28,265 $ 3,063
Cost of goods sold 23,789 21,217 2,572
Operating expenses 4,186 2,821 1,365
Depreciation and amortization 1,447 1,202 245
------- ------- -------
Operating income $ 1,906 $ 3,025 ($1,119)
======= ======= =======
The 10.8% increase in operating revenues for the three months ended March 31,
2002 compared with the three months ended March 31, 2001 came from sales of wind
towers and steel fabrication offset by a reduction in sales volumes of metal
parts stamping and fabrication. The 12.1% increase in cost of goods sold
primarily reflects the material costs for the construction of the wind towers
and steel fabrication. The increase in operating expenses reflects an increase
in labor costs and other general and administrative expenses.
Other Business Operations
Three months ended
March 31,
2002 2001 Change
-------- -------- --------
(in thousands)
Operating revenues $ 15,010 $ 16,897 ($ 1,887)
Cost of goods sold 7,972 9,000 (1,028)
Operating expenses 8,427 8,039 388
Depreciation and amortization 1,204 1,408 (204)
-------- -------- --------
Operating loss ($ 2,593) ($ 1,550) ($ 1,043)
======== ======== ========
The 11.2% decrease in operating revenues for the three months ended March 31,
2002 compared with the three months ended March 31, 2001 occurred primarily at
the transportation and energy services subsidiaries. Total miles driven in the
transportation business decreased 10.8% between the quarters and revenue per
mile was down 5.7%. This is due to a difficult freight environment that caused
rates to be extremely competitive. The transportation business has also been
hampered by recent spikes in insurance premiums. Both operating revenues and
cost of goods sold decreased significantly for the energy services company due
to the high cost of natural gas during the three months ended March 31, 2001.
Increased operating expenses relating to developing a new line of business
within the energy services company also contributed to the lower results in this
segment.
13
Interest Charges and Income Taxes
The $222,000 (5.4%) increase in interest charges is due to higher long-term debt
balances outstanding for the three months ended March 31, 2002 compared to the
three months ended March 31, 2001, offset by significantly lower interest rates
and lower average balances under the lines of credit between the periods. The
$2.0 million decrease in income tax expense between the quarters is primarily
the result of lower income before income tax.
Critical Accounting Policies
The discussion and analysis of the Company's consolidated financial condition
and results of operations are based on consolidated financial statements
prepared in accordance with accounting principles generally accepted in the
United States. Preparation of these consolidated financial statements requires
the use of estimates and judgments that affect the reported results. Actual
results may differ from these estimates under different assumptions or
conditions.
Critical accounting policies are those that require significant management
judgments and business uncertainties and could result in materially different
results using different assumptions and conditions. The following accounting
policies meet the criteria of a critical accounting policy.
Revenue recognition--Due to the diverse business operations of the Company,
revenue recognition depends on the product produced and sold. In general, the
Company recognizes revenue when the earnings process is complete, evidenced by
an agreement with the customer, there has been delivery and acceptance and the
price is fixed or determinable. In cases where significant obligations remain
after delivery, revenue is deferred until such obligations are fulfilled.
Provisions for sale returns and warranty costs are recorded at the time of the
sale based on historical information and current trends.
Electric customers' meters are read and bills are rendered on a cycle basis.
Revenue is accrued for electricity consumed but not yet billed. Rate schedules
applicable to substantially all customers include a cost of energy adjustment
clause, under which the rates are adjusted to reflect changes in average cost of
fuels and purchased power, and a surcharge for recovery of conservation-related
expenses. Revenues on almost all wholesale sales are recognized when energy is
delivered. The majority of revenue is the result of bilateral agreements with
individual counter-parties. Plastics operating revenues are recorded when the
product is shipped. Health services operating revenues on major equipment and
installation contracts are recorded when the equipment is delivered. Amounts
received in advance under customer service contracts are deferred and recognized
on a straight-line basis over the contract period. Revenues generated in the
mobile imaging operations are recorded on a fee for scan basis. Manufacturing
operating revenues are recorded when products are shipped and on a
percentage-of-completion basis for construction type contracts. Other business
operations operating revenues are recorded when services are rendered or
products are shipped. In the case of construction contracts, the
percentage-of-completion method is used.
Inventory valuation--The majority of the Company's inventory is stated at the
lower of cost (first in, first out) or market. Changes in the market conditions
could require a write down of inventory values.
Use of estimates--The Company uses estimates based on the best information
available in recording transactions and balances resulting from business
operations. Estimates are used for such items as depreciable lives, tax
provisions, collectability of trade accounts receivable, self insurance
programs, environmental liabilities, unbilled electric revenues, unscheduled
power exchanges, service contract maintenance costs, percentage-of-completion
and actuarially determined benefits costs. As better information becomes
available or actual amounts are known, estimates are revised. Operating results
can be affected by changes made to prior accounting estimates.
14
The Company's significant accounting policies are more fully described in note 1
of the notes to consolidated financial statements included under Item 8 in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has limited exposure to market risk associated with interest rates
and commodity prices. The majority of the Company's long-term debt obligations
bear interest at a fixed rate. Variable rate long-term debt bears interest at a
rate that is reset on a periodic basis reflecting current market conditions. The
Company manages its interest rate risk through the issuance of fixed-rate debt
with varying maturities, through economic refunding of debt through optional
refundings, limiting the amount of variable interest rate debt, and utilization
of short-term borrowings to allow flexibility in the timing and placement of
long-term debt. As of March 31, 2002, the Company had $16.6 million of long-term
debt subject to variable interest rates. Assuming no change in the Company's
financial structure, if variable interest rates were to average 1 percent higher
(lower) than what the average variable rate was on March 31, 2002, interest
expense and pre-tax earnings would change by approximately $166,000. The Company
has short-term borrowing arrangements to provide financing for working capital
and general corporate purposes. The level of borrowings under these arrangements
vary from period to period, depending upon, among other factors, operating needs
and capital expenditures.
The electric utility's retail portion of fuel and purchased power costs are
subject to cost of energy adjustment clauses that mitigate the commodity price
risk by allowing a pass through of most of the increase or decrease in energy
costs to retail customers. In addition, the electric utility participates in an
active wholesale power market providing access to commodity transactions that
may serve to mitigate price risk. The Company has in place an energy risk
management policy whose primary goal is to manage, through the use of defined
risk management practices, price risk and credit risk associated with wholesale
power purchases and sales.
The Company through its energy services subsidiary markets natural gas to
approximately 150 retail customers. A portion of these customers are served
under fixed-price contracts. There is price risk associated with these limited
number of fixed-price contracts since the corresponding cost of natural gas is
not immediately locked in. This price risk is not considered material to the
Company.
The plastics companies are exposed to market risk related to changes in
commodity prices for PVC resins, the raw material used to manufacture PVC pipe.
The PVC pipe industry is highly sensitive to commodity raw material pricing
volatility. Currently, margins are very tight due to aggressive competition in a
period of soft demand.
The Company does not use derivative financial instruments for speculative or
trading purposes.
15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits:
10-A Form of Executive Employment Agreement.*
10-B Nonqualified Retirement Savings Plan, as amended.*
10-C Executive Survivor and Supplemental Retirement Plan, as amended.*
10-D Deferred Compensation Plan for Directors, as amended.*
10-E Form of Change in Control Severance Agreement.*
*Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 601(b) (10) (iii) (A) of Regulation S-K.
b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter ended
March 31, 2002.
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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 CORPORATION
By: /s/ Kevin G. Moug
-----------------
Kevin G. Moug
Chief Financial Officer and Treasurer
(Chief Financial Officer/Authorized Officer)
Dated: May 15, 2002
------------
17
EXHIBIT INDEX
Exhibit Number Description
- -------------- -----------
10-A Form of Executive Employment Agreement.*
10-B Nonqualified Retirement Savings Plan, as amended.*
10-C Executive Survivor and Supplemental Retirement Plan, as
amended.*
10-D Deferred Compensation Plan for Directors, as amended.*
10-E Form of Change in Control Severance Agreement.*
*Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 601(b) (10) (iii) (A) of Regulation S-K.