10-Q 1 c69656e10-q.txt FORM 10-Q FOR QUARTER ENDING MARCH 31, 2002 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 -------------- 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 CORPORATION ------------------------------------------------------ (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: 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-
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 ======== ========
See accompanying notes to consolidated financial statements -2- OTTER TAIL CORPORATION CONSOLIDATED BALANCE SHEETS (Unaudited) -LIABILITIES-
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 ========= =========
See accompanying notes to consolidated financial statements -3- OTTER TAIL CORPORATION CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
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
See accompanying notes to consolidated financial statements -4- OTTER TAIL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
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
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. 16 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.