Attached files
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| 8-K - OTTER TAIL CORPORATION 8-K - Otter Tail Corp | a50466795.htm |
Exhibit 99.1
NEWS RELEASE
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Media contact:
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Michael J. Olsen, Sr. Vice President of Corporate Communications, (701) 451-3580 or (866) 410-8780
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Investor contact:
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Loren Hanson, Manager of Investor Relations, (218) 739-8481 or (800) 664-1259
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For release:
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November 5, 2012
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Financial Media
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Otter Tail Corporation Announces Third Quarter Earnings and Maintains Earnings from Continuing Operations Guidance; Board of Directors Declares Dividend
FERGUS FALLS, Minnesota - Otter Tail Corporation (NASDAQ: OTTR) today announced financial results for the quarter ended September 30, 2012.
Summary:
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The corporation entered into definitive agreements to sell the fixed assets of DMI Industries, Inc. (DMI) and completed the sale of DMI’s Canadian fixed assets in the third quarter of 2012. DMI’s U.S. assets will be sold, and its operations will be discontinued in the fourth quarter of 2012.
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The corporation retired, on July 13, 2012, its outstanding $50 million, 8.89% Senior Unsecured Note due November 30, 2017.
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Consolidated net income from continuing operations totaled $1.9 million, or $0.05 per diluted share, compared with net income from continuing operations of $7.3 million, or $0.20 per diluted share, for the third quarter of 2011.
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On a non-GAAP basis1, consolidated net income from continuing operations for the third quarter of 2012 totaled $12.7 million, or $0.35 per diluted share, compared to $10.1 million, or $0.27 per diluted share in last year’s third quarter. This comparison excludes the $7.9 million after-tax charge related to the early debt retirement and DMI third quarter 2012 and 2011 net losses of $3.0 million and $2.8 million, respectively.
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Consolidated net income from continuing and discontinued operations totaled $1.9 million, or $0.05 per diluted share, compared with net income of $6.4 million, or $0.17 per diluted share for the third quarter of 2011.
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1 This release includes measures of financial performance and presentations of financial information that are not defined by generally accepted accounting principles (GAAP). Management believes that adjusting for certain one-time costs, such as asset impairment charges and debt prepayment premiums, and presenting results on the basis of the expected future classification of continuing and discontinued operations will assist investors in making an evaluation of our performance against prior periods on a comparable basis. Management understands that there are material limitations on the use of non-GAAP measures. Non-GAAP measures are not substitutes for GAAP measures for the purpose of analyzing financial performance. These non-GAAP measures are not in accordance with, or an alternative for, measures prepared in accordance with, generally accepted accounting principles and may be different from non-GAAP measures used by other companies. In addition, these non-GAAP measures are not based on any comprehensive set of accounting rules or principles. This information should not be construed as an alternative to the reported results, which have been determined in accordance with GAAP.
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1
CEO Overview
“During the quarter, we moved forward with our strategy of migrating Otter Tail Corporation and our portfolio of companies toward a future with stronger, more predictable growth potential, a lower risk profile and enhanced financial stability,” said Otter Tail Corporation President and CEO Jim McIntyre. “The sale of DMI, our wind tower manufacturer, is proceeding as planned. We expect the orderly completion of contracted work, and the sale of DMI’s fixed assets, to be concluded by the end of this year. Additionally, we took steps to further strengthen our capital structure and lower our borrowing expense by retiring our $50 million, 8.89% Senior Unsecured Note due November 30, 2017.
“Completing the sale of DMI, with its related proceeds and monetization of net working capital, will help advance our focus on growth prospects in our Electric segment. We continue to invest in additional electric utility opportunities, such as the CapX2020 transmission projects currently under way, the environmental upgrades at the Big Stone Plant, and planned Midwest Independent Transmission System Operator transmission projects. These projects, which have already received certain regulatory approvals, will generate significant growth for our Electric segment over the next several years.
“Overall, third quarter operating income largely met our expectations. Our Plastics segment continued to experience better-than-expected volume and margins, generating significantly improved operating and net income compared with last year’s third quarter. Earnings from our Electric segment were consistent with our expectations. Earnings from our Manufacturing segment were slightly lower than anticipated, mainly due to continued lower sales at ShoreMaster, our waterfront equipment manufacturer, where we are exploring the full range of strategic alternatives. Our Construction segment continues to be challenged by cost overruns on certain projects at Foley Company, our water, wastewater and HVAC systems contractor. These projects are on track to be substantially completed by year-end 2012. The corporation has assigned additional resources to focus on the resolution of these issues, as well as modifying Foley’s internal bidding and estimating project review procedures.”
McIntyre concluded, “Based on our 2012 third quarter results and expectations for classification of DMI as discontinued operations by the end of 2012, we are maintaining our guidance for diluted earnings per share from continuing operations in the range of $0.84 to $1.09, which includes an after tax charge of $0.22 per share for the early retirement of long-term debt in the third quarter of 2012. The charted course Otter Tail Corporation is on may present periodic challenges as we work to further refine our portfolio and make the investments necessary to spur future growth. I am confident these initiatives will result in an organization that is much better positioned to deliver long-term shareholder value.
2
Board of Directors Declared Quarterly Dividends
On November 5, 2012 the Board of Directors declared a quarterly common stock dividend of $0.2975 per share. This dividend is payable December 10, 2012 to shareholders of record on November 15, 2012. The Board also declared quarterly dividends on the corporation’s four series of preferred stock, payable December 1, 2012 to shareholders of record on November 15, 2012.
Early Retirement of Debt
On July 13, 2012 the corporation prepaid in full its outstanding $50 million, 8.89% Senior Unsecured Note due November 30, 2017 (the Cascade Note). The price paid by the corporation to prepay the Cascade Note was $63,031,000, which included the principal amount of the Cascade Note plus accrued interest of $531,000 and a negotiated prepayment premium of $12,500,000. On repayment, $606,000 in unamortized debt expense related to this note was immediately recognized as expense along with the $12,500,000 negotiated prepayment premium.
Sale of DMI Assets
In September 2012, the corporation entered into definitive agreements to sell the fixed assets of DMI for $20 million, with the corporation retaining DMI’s net working capital—approximately $66 million on June 30, 2012. DMI recorded employee termination benefits and contract termination costs relating to the sale of the business totaling $4.4 million ($2.6 million net-of-tax) in the third quarter of 2012. The corporation completed the sale of DMI’s fixed assets in Fort Erie, Ontario in the third quarter of 2012. At September 30, 2012, the corporation had converted to cash $50 million of the $66 million in net working capital that was on hand at June 30, 2012.
DMI will complete its current backlog of towers ordered for delivery in 2012 before completing the sale of its U.S. plants. Under these circumstances, accounting rules require that DMI's assets and results of operations be reported as continuing operations. On completion of all remaining tower orders, DMI's assets will be considered available for immediate sale and the corporation expects DMI's results and any remaining assets will be reported as discontinued operations at the end of 2012.
The corporation completed the sale of the West Fargo plant on October 31, 2012 with gross proceeds of $8.8 million, and expects to complete the sale of the Tulsa plant on November 30, 2012 with gross proceeds of $8.4 million.
3
The following table provides a non-GAAP presentation of the corporation’s net income and earnings per share from continuing operations for the three and nine months period ended September 30, 2012 and 2011, excluding the loss on the early retirement of debt and treating DMI as discontinued operations:
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Quarter Ended
September 30,
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Year-to-Date
September 30,
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(in thousands, except per share amounts)
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2012
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2011
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2012
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2011
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Net Income (Loss) from Continuing Operations (GAAP)
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$ | 1,878 | $ | 7,336 | $ | (5,517 | ) | $ | 17,674 | |||||||
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Add back:
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Loss on Early Retirement of Debt (net-of-tax)
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7,864 | -- | 7,864 | -- | ||||||||||||
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DMI Net-of-Tax Loss
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2,974 | 2,770 | 28,597 | 15,568 | ||||||||||||
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Net Income from Continuing Operations excluding Loss on Early Retirement of Debt and treating DMI as discontinued operations (Non-GAAP)
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$ | 12,716 | $ | 10,106 | $ | 30,944 | $ | 33,242 | ||||||||
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Diluted Earnings Per Common Share:
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Continuing Operations (GAAP)
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$ | 0.05 | $ | 0.20 | $ | (0.17 | ) | $ | 0.47 | |||||||
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Add back:
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Loss on Early Retirement of Debt (net-of-tax)
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0.22 | -- | 0.22 | -- | ||||||||||||
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DMI Net-of-Tax Loss
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0.08 | 0.07 | 0.79 | 0.43 | ||||||||||||
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Continuing Operations – excluding Loss on Early Retirement of Debt and treating DMI as discontinued operations (Non-GAAP)
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$ | 0.35 | $ | 0.27 | $ | 0.84 | $ | 0.90 | ||||||||
Cash Flow from Operations and Liquidity
The corporation’s consolidated cash flow from continuing and discontinued operations for the nine months ended September 30, 2012 was $149.4 million compared with $80.4 million for the nine months ended September 30, 2011. The corporation used funds available from its then-existing $200 million credit facility for its July 13, 2012 debt prepayment. This early retirement reflects the corporation’s desire to lower its long-term debt outstanding and cost of capital, given its recent divestitures, strengthens its consolidated capital structure and will have a positive effect on future years’ earnings by lowering interest costs. By September 30, 2012, borrowings under the corporation’s $200 million credit facility then in effect had been completely repaid, mainly with proceeds from the monetization of DMI’s net working capital.
The following table presents the status of the corporation’s lines of credit as of September 30, 2012:
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(in thousands)
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Line Limit
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In Use On
September 30, 2012
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Restricted due to Outstanding Letters of Credit
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Available on
September 30, 2012
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Otter Tail Corporation Credit Agreement
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$ | 200,000 | $ | -- | $ | 733 | $ | 199,267 | ||||||||
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Otter Tail Power Company Credit Agreement
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170,000 | 12,417 | 3,050 | 154,533 | ||||||||||||
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Total
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$ | 370,000 | $ | 12,417 | $ | 3,783 | $ | 353,800 | ||||||||
4
As reported in the corporation’s Current Report on Form 8-K filed on November 2, 2012, on October 29, 2012 the corporation renewed its credit agreement with a $150 million line of credit, and renewed the Otter Tail Power Company credit agreement, providing for a $170 million line of credit, both for five-year terms.
The following table presents the status of the corporation’s renewed and extended lines of credit as of October 31, 2012:
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(in thousands)
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Line Limit
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In Use On
October 31, 2012
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Restricted due to Outstanding Letters of Credit
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Available on
October 31, 2012
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Otter Tail Corporation Credit Agreement
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$ | 150,000 | $ | -- | $ | 733 | $ | 149,267 | ||||||||
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Otter Tail Power Company Credit Agreement
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170,000 | 5,464 | 3,175 | 161,361 | ||||||||||||
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Total
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$ | 320,000 | $ | 5,464 | $ | 3,908 | $ | 310,628 | ||||||||
Segment Performance Summary
Electric
Electric revenues and net income were $88.6 million and $10.2 million, respectively, compared with $85.2 million and $10.9 million for the third quarter of 2011.
A $0.9 million increase in retail electric revenues reflects the following:
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a $1.4 million increase in revenues related to a 3.9% increase in retail kilowatt-hour (kwh) sales, mainly to commercial customers,
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a $1.4 million increase in revenue for the recovery of fuel and purchased power costs incurred to serve retail customers related to the increase in retail kwh sales, and
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a $0.5 million increase in transmission costs recovery rider revenues as a result of increased investment in transmission assets,
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offset by:
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a $2.4 million decrease in revenue mainly related to rate design changes implemented in October 2011, in conjunction with Otter Tail Power Company’s 2010 Minnesota general rate case, that shifted recovery of a portion of annual revenue requirements from summer to winter, reducing the amount of a seasonal rate differential in effect prior to October 2011.
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Other electric operating revenues increased $3.6 million, as a result of a $2.3 million increase in transmission tariff revenues, mainly related to recovery of CapX2020 transmission project investments, and a $1.1 million increase in revenue from shared use of transmission facilities with another regional transmission provider under an integrated transmission agreement.
Wholesale electric revenues from company-owned generation decreased $0.8 million as a result of a 13.5% decrease in the price per kwh sold. Net gains from energy trading activities, including mark-to-market losses and gains on forward energy contracts, decreased $0.4 million between the quarters.
5
Fuel costs increased $1.5 million as a result of a 6.9% increase in kwhs generated from Otter Tail Power Company’s steam-powered and combustion turbine generators, mainly at the Big Stone Plant, combined with a 1.1% increase in the cost of fuel per kwh generated. The cost of purchased power for retail sales increased $0.7 million as a result of a 33.5% increase in kwhs purchased, partially offset by an 18.6% decrease in the cost per kwh purchased.
Electric operating and maintenance expenses increased $1.6 million due to the following:
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a $0.9 million increase in transmission service charges related to investments in transmission facilities by Midwest Independent Transmission System Operator (MISO) member companies,
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a $0.5 million increase in labor and benefit expenses mainly due to increases in pension and retirement health benefit costs resulting from a reduction in the discount rate related to projected benefit obligations, and
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a $0.2 million increase in property tax expense related to higher taxes on electric distribution property and increased investments in transmission and distribution property.
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Electric segment depreciation expense increased $0.5 million mainly as a result of 2011 transmission plant additions. Income taxes in the Electric segment decreased $0.4 million as a result of a reduction in Electric segment income before income taxes.
Wind Energy
Wind Energy revenues and net losses were $55.0 million and $3.0 million, respectively, compared with $52.6 million and $2.8 million for the third quarter of 2011. At DMI’s U.S. plants, revenues increased $9.4 million as a result of higher revenue per tower offset slightly by fewer towers produced on a quarter over quarter basis. Operating income before employee termination benefits and contract termination costs of $4.4 million ($2.6 million net-of-tax) associated with the pending sale was $2.8 million for the third quarter of 2012 on a non-GAAP basis compared with an operating loss of $1.5 million for the third quarter of 2011. Net losses from U.S. operations inclusive of these charges increased $1.7 million in the third quarter of 2012. Revenues were down $7.0 million and net losses were down $1.5 million at DMI’s Canadian plant as a result of the plant being idled since the fourth quarter of 2011.
Manufacturing
Manufacturing revenues and net income were $53.6 million and $0.8 million, respectively, compared with $55.6 million and $1.4 million for the third quarter of 2011.
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At BTD, revenues decreased $0.5 million due to a reduction in sales to energy related customers and less revenue from scrap-metal sales as a result of lower prices due to reduced demand for steel. A slight decrease in operating expenses resulted in a $0.1 million increase in BTD’s net income between the quarters.
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At T.O. Plastics, revenues decreased $0.2 million while cost of goods sold decreased $0.6 million due to productivity improvements and more selective bidding practices, resulting in a $0.3 million increase in net income at T.O. Plastics between the quarters.
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At ShoreMaster revenues decreased $1.4 million and its net losses increased $0.9 million mainly due to a decrease in the sale of commercial products without a commensurate decrease in costs or expenses.
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Construction
Construction revenues and net losses were $37.9 million and $1.3 million, respectively, compared with $53.2 million and $0.2 million for the third quarter of 2011. Foley Company revenues decreased $20.1 million and its net losses increased $2.3 million due to a decrease in work volume and the effect of cost overruns on estimated revenues recognized under percentage-of-completion accounting. Estimated costs on certain projects in excess of previous period estimates resulted in pretax charges of $3.1 million in the third quarter of 2012 and $1.6 million in the third quarter of 2011. Aevenia's revenues and net income increased $4.8 million and $1.1 million, respectively, mainly as a result of an increase in electrical transmission, distribution and substation work in the oil patch region of western North Dakota and improved performance on construction projects when compared with the same quarter a year ago.
Plastics
Plastics revenues and net income were $42.2 million and $3.3 million, respectively, compared with $36.2 million and $2.0 million for the third quarter of 2011. The increase in revenues and net income was the result of a 21.4% increase in pounds of polyvinyl chloride (PVC) pipe sold, partially offset by a 4.0% decrease in the price per pound of pipe sold. The increase in pounds sold is primarily due to increased demand for PVC pipe across the markets this segment served compared to last year’s third quarter.
Corporate
A $4.2 million increase in corporate expenses, net-of-tax, between the quarters includes the $7.9 million after tax charge for the early retirement of long-term debt offset by a reduction in operating expenses, mainly related to the incurrence of termination benefits associated with the resignation of the corporation’s former chief executive officer in the third quarter of 2011.
Discontinued Operations
In the second quarter of 2011, the corporation sold Idaho Pacific Holdings, Inc. (IPH), its food ingredient processing company. In the fourth quarter of 2011, the corporation sold E.W. Wylie Corporation (Wylie), its trucking business. On January 18, 2012 ShoreMaster completed the sale of the assets of its wholly owned subsidiary, Aviva Sports, Inc. (Aviva), and on February 29, 2012 the corporation completed the sale of DMS Health Technologies, Inc. (DMS), its health services business. The financial position, results of operations, and cash flows of IPH, Wylie, Aviva and DMS are reported as discontinued operations in the corporation’s consolidated financial statements provided at the end of this report.
7
Following is a summary presentation of the results of discontinued operations for:
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Three Months Ended September 30,
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(in thousands)
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2012
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2011
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Operating Revenues
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$ | -- | $ | 33,385 | ||||
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Operating Expenses
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7 | 34,255 | ||||||
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Operating Loss
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(7 | ) | (870 | ) | ||||
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Interest Charges
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-- | 12 | ||||||
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Other Income
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-- | 61 | ||||||
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Income Tax Benefit
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(2 | ) | (307 | ) | ||||
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Net Loss from Operations
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(5 | ) | (514 | ) | ||||
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Loss on Disposition Before Taxes
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-- | (756 | ) | |||||
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Income Tax Benefit on Disposition
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-- | (302 | ) | |||||
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Net Loss on Disposition
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-- | (454 | ) | |||||
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Net Loss
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$ | (5 | ) | $ | (968 | ) | ||
The corporation continues to review its portfolio of companies to see where additional opportunities exist to improve its risk profile, improve credit metrics and generate additional sources of cash to support the dividend and future capital expenditure plans of its Electric segment consistent with the strategy to grow this business given its current investment opportunities.
2012 Business Outlook
Based on year-to-date segment performance and the anticipated classification of DMI under discontinued operations, the corporation is maintaining its 2012 expectations for diluted earnings per share from continuing operations in the range of $0.84 to $1.09 (inclusive of an after tax charge of $0.22 per share for early retirement of long-term debt in the third quarter of 2012). This guidance considers the cyclical nature of some of the corporation’s businesses and reflects challenges presented by current economic conditions, as well as the corporation’s plans and strategies for improving future operating results. The corporation’s current consolidated capital expenditures expectation for 2012 is in the range of $120 million to $130 million. This compares with $74 million of capital expenditures in 2011. The corporation plans to invest in generation and transmission projects for the Electric segment that have the potential to positively impact the corporation’s earnings and returns on capital. Future Electric segment investments include the construction of a new air quality control system at Big Stone Plant to meet requirements of the Clean Air Act and regional haze regulations, investment in two MISO-determined ‘multi-value’ transmission projects that will serve the MISO region, and continuing investment, with other utilities, in CapX2020 transmission projects underway.
8
Segment components of the corporation’s updated 2012 earnings per share guidance range are as follows:
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Previous 2012 Earnings Per Share
Guidance Range
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Updated 2012 Earnings Per Share
Guidance Range
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Low
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High
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Low
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High
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Electric
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$ | 1.00 | $ | 1.05 |
Electric
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$ | 1.01 | $ | 1.06 | ||||||||||
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Manufacturing
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$ | 0.25 | $ | 0.30 |
Manufacturing
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$ | 0.18 | $ | 0.23 | ||||||||||
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Construction
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$ | (0.18 | ) | $ | (0.13 | ) |
Construction
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$ | (0.23 | ) | $ | (0.18 | ) | ||||||
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Plastics
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$ | 0.24 | $ | 0.29 |
Plastics
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$ | 0.32 | $ | 0.37 | ||||||||||
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Corporate – Recurring Costs
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$ | (0.25 | ) | $ | (0.20 | ) |
Corporate – Recurring Costs
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$ | (0.22 | ) | $ | (0.17 | ) | ||||||
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Subtotal
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$ | 1.06 | $ | 1.31 |
Subtotal
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$ | 1.06 | $ | 1.31 | ||||||||||
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Corporate – Debt Extinguishment
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$ | (0.22 | ) | $ | (0.22 | ) |
Corporate – Debt Extinguishment
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$ | (0.22 | ) | $ | (0.22 | ) | ||||||
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Total – Continuing Operations
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$ | 0.84 | $ | 1.09 |
Total – Continuing Operations
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$ | 0.84 | $ | 1.09 | ||||||||||
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Discontinued Operations:
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Discontinued Operations:
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DMI Asset Impairment Charge
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$ | (0.81 | ) | $ | (0.76 | ) |
DMI Asset Impairment Charge
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$ | (0.76 | ) | $ | (0.76 | ) | ||||||
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Net Loss from Disc. Ops.
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$ | (0.19 | ) | $ | (0.12 | ) |
Net Loss from Discontinued Operations
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$ | (0.24 | ) | $ | (0.19 | ) | ||||||
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Total
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$ | (0.16 | ) | $ | 0.21 |
Total
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$ | (0.16 | ) | $ | 0.14 | ||||||||
Contributing to the earnings guidance for 2012 are the following items:
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The corporation expects net income in its Electric segment to be slightly improved over previous guidance.
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The corporation now expects 2012 earnings from its Manufacturing segment to be lower than previous guidance primarily due to lower earnings at ShoreMaster and BTD. Continued reductions in commercial revenues at ShoreMaster, along with higher than expected commercial operating expenses, are the primary reason for the revised outlook. BTD expects lower earnings compared to previous guidance due to reduction in sales volume at its Illinois plant and lower scrap prices for steel in the second half of 2012 compared with the first half of 2012. Backlog in place for the manufacturing companies is $50 million for 2012 compared with $34 million one year ago.
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The corporation expects a larger net loss from its Construction segment in 2012, compared with its previous guidance, due to the continued cost overruns incurred by Foley on certain major projects in 2012. Backlog in place for the construction businesses is $39 million for 2012 compared with $47 million one year ago.
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The corporation is increasing the earning guidance for its Plastics segment net income in 2012, compared with previous guidance, based on the strength of its performance in the first nine months of 2012 and current market conditions.
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Corporate general and administrative costs are expected to be slightly lower than previous guidance due to lower employee benefit and outside professional service costs.
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The corporation expects to complete a sale of its Wind Energy segment assets on November 30, 2012 and, therefore, expects DMI’s 2012 results to be included in discontinued operations. DMI has been able to stabilize production and improve productivity in 2012. Order backlog is expected to continue to generate revenues, earnings and cash flows for the remainder of 2012, but DMI’s 2012 noncash asset impairment charge and exit and disposal costs will have a negative impact on consolidated results in 2012.
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9
Risk Factors and Forward-Looking Statements that Could Affect Future Results
The information in this release includes certain forward-looking information, including 2012 expectations, made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Although the corporation believes its expectations are based on reasonable assumptions, actual results may differ materially from those expectations. The following factors, among others, could cause actual results for the corporation to differ materially from those discussed in the forward-looking statements:
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The corporation is subject to federal and state legislation, regulations and actions that may have a negative impact on its business and results of operations.
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Federal and state environmental regulation could require the corporation to incur substantial capital expenditures and increased operating costs.
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Volatile financial markets and changes in the corporation’s debt ratings could restrict its ability to access capital and could increase borrowing costs and pension plan and postretirement health care expenses.
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The corporation relies on access to both short- and long-term capital markets as a source of liquidity for capital requirements not satisfied by cash flows from operations. If the corporation is not able to access capital at competitive rates, its ability to implement its business plans may be adversely affected.
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The corporation may, from time to time, sell assets to provide capital to fund investments in its electric utility business or for other corporate purposes, which could result in the recognition of a loss on the sale of any assets sold. The sale of any of the corporation’s businesses could expose the corporation to additional risks associated with indemnification obligations under the applicable sales agreements and any related disputes.
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The corporation may experience fluctuations in revenues and expenses related to its operations, which may cause its financial results to fluctuate and could impair its ability to make distributions to its shareholders or scheduled payments on its debt obligations, or to meet covenants under its borrowing agreements.
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Disruptions, uncertainty or volatility in the financial markets can also adversely impact the corporation’s results of operations, the ability of its customers to finance purchases of goods and services, and its financial condition, as well as exert downward pressure on stock prices and/or limit its ability to sustain its current common stock dividend level.
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The corporation made a $10.0 million discretionary contribution to its defined benefit pension plan in January 2012. The corporation could be required to contribute additional capital to the pension plan in the future if the market value of pension plan assets significantly declines, plan assets do not earn in line with the corporation’s long-term rate of return assumptions or relief under the Pension Protection Act is no longer granted.
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Any significant impairment of the corporation’s goodwill would cause a decrease in its asset values and a reduction in its net operating income.
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The corporation currently has $7.3 million of goodwill and a $1.1 million indefinite-lived trade name recorded on its balance sheet related to the acquisition of Foley Company in 2003. Foley Company has generated a large operating loss for the nine months ended September 30, 2012 due to significant cost overruns on certain construction projects. If operating margins do not improve according to the corporation’s projections, the reductions in anticipated cash flows from Foley Company may indicate that its fair value is less than its book value, resulting in an impairment of some or all of the goodwill and indefinite-lived intangible assets associated with Foley along with a corresponding charge against earnings.
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A sustained decline in the corporation’s common stock price below book value or declines in projected operating cash flows at any of its operating companies may result in goodwill impairments that could adversely affect its results of operations and financial position, as well as financing agreement covenants.
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The inability of the corporation’s subsidiaries to provide sufficient earnings and cash flows to allow the corporation to meet its financial obligations and debt covenants and pay dividends to its shareholders could have an adverse effect on the corporation.
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Economic conditions could negatively impact the corporation’s businesses.
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If the corporation is unable to achieve the organic growth it expects, its financial performance may be adversely affected.
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The corporation’s plans to grow and realign its diversified business mix through capital projects, acquisitions and dispositions may not be successful, which could result in poor financial performance.
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The corporation’s plans to grow and operate businesses outside of its electric utility, while also owning a regulated utility, could be limited by state law.
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10
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|
The corporation’s subsidiaries enter into production and construction contracts, including contracts for new product designs, which could expose them to unforeseen costs and costs not within their control, which may not be recoverable and could adversely affect the corporation’s results of operations and financial condition.
|
|
|
●
|
Significant warranty claims and remediation costs in excess of amounts normally reserved for such items could adversely affect the corporation’s results of operations and financial condition.
|
|
|
●
|
The corporation is subject to risks associated with energy markets.
|
|
●
|
The corporation is subject to risks and uncertainties related to the timing and recovery of deferred tax assets which could have a negative impact on the corporation’s net income in future periods.
|
|
●
|
Certain of the corporation’s operating companies sell products to consumers that could be subject to recall.
|
|
●
|
Competition is a factor in all of the corporation’s businesses.
|
|
●
|
The corporation relies on its information systems to conduct its business, and failure to protect these systems against security breaches could adversely affect its business and results of operations. Additionally, if these systems fail or become unavailable for any significant period of time, the corporation’s business could be harmed.
|
|
●
|
Actions by the regulators of the corporation’s electric operations could result in rate reductions, lower revenues and earnings or delays in recovering capital expenditures.
|
|
●
|
Otter Tail Power Company’s electric generating facilities are subject to operational risks that could result in unscheduled plant outages, unanticipated operation and maintenance expenses and increased power purchase costs.
|
|
|
●
|
Changes to regulation of generating plant emissions, including but not limited to carbon dioxide (CO2) emissions, could affect Otter Tail Power Company’s operating costs and the costs of supplying electricity to its customers.
|
|
|
●
|
Competition from foreign and domestic manufacturers, cost management in a fixed price contract project environment, the price and availability of raw materials, the ability of suppliers to deliver materials at contracted prices, fluctuations in foreign currency exchange rates and general economic conditions could affect the revenues and earnings of the corporation’s manufacturing businesses.
|
|
|
●
|
A significant failure or an inability to properly bid or perform on projects by the corporation’s wind energy, construction or manufacturing businesses could lead to adverse financial results and could lead to the possibility of delay or liquidated damages.
|
|
|
The corporation’s Plastics segment is highly dependent on a limited number of vendors for PVC resin, many of which are located in the Gulf Coast regions, and a limited supply of resin. The loss of a key vendor, or an interruption or delay in the supply of PVC resin, could result in reduced sales or increased costs for this segment.
|
|
|
●
|
The corporation’s plastic pipe companies compete against a large number of other manufacturers of PVC pipe and manufacturers of alternative products. Customers may not distinguish the pipe companies’ products from those of its competitors.
|
|
|
●
|
Reductions in PVC resin prices can negatively impact PVC pipe prices, profit margins on PVC pipe sales and the value of PVC pipe held in inventory.
|
For a further discussion of other risk factors and cautionary statements, refer to reports the corporation files with the Securities and Exchange Commission.
About The Corporation: Otter Tail Corporation has interests in diversified operations that include an electric utility and energy services company, wind energy, and infrastructure businesses that include manufacturing, construction and plastics. Otter Tail Corporation stock trades on the NASDAQ Global Select Market under the symbol OTTR. The latest investor and corporate information is available at www.ottertail.com. Corporate offices are located in Fergus Falls, Minnesota, and Fargo, North Dakota.
See Otter Tail Corporation’s results of operations for the three and nine months ended September 30, 2012 and 2011 in the following financial statements: Consolidated Statements of Income, Consolidated Balance Sheets – Assets, Consolidated Balance Sheets – Liabilities and Equity, and Consolidated Statements of Cash Flows.
# # #
11
|
Otter Tail Corporation
|
||||||||||||||||
|
Consolidated Statements of Income
|
||||||||||||||||
|
In thousands, except share and per share amounts
|
||||||||||||||||
|
(not audited)
|
||||||||||||||||
|
Quarter Ended September 30,
|
Year-to-Date September 30,
|
|||||||||||||||
|
2012
|
2011
|
2012
|
2011
|
|||||||||||||
|
Operating Revenues by Segment
|
||||||||||||||||
|
Electric
|
$ | 88,564 | $ | 85,172 | $ | 257,530 | $ | 254,799 | ||||||||
|
Wind Energy
|
55,025 | 52,595 | 169,745 | 154,608 | ||||||||||||
|
Manufacturing
|
53,567 | 55,625 | 183,142 | 168,306 | ||||||||||||
|
Construction
|
37,931 | 53,247 | 111,482 | 139,895 | ||||||||||||
|
Plastics
|
42,217 | 36,231 | 118,582 | 99,082 | ||||||||||||
|
Corporate Revenue and Intersegment Eliminations
|
(161 | ) | (497 | ) | (2,040 | ) | (1,871 | ) | ||||||||
|
Total Operating Revenues
|
277,143 | 282,373 | 838,441 | 814,819 | ||||||||||||
|
Operating Expenses
|
||||||||||||||||
|
Fuel and Purchased Power
|
28,760 | 26,568 | 83,125 | 83,496 | ||||||||||||
|
Nonelectric Cost of Goods Sold (depreciation included below)
|
158,703 | 171,157 | 489,305 | 490,737 | ||||||||||||
|
Electric Operating and Maintenance Expense
|
31,550 | 29,924 | 99,257 | 92,145 | ||||||||||||
|
Nonelectric Operating and Maintenance Expense
|
16,438 | 19,114 | 51,118 | 49,204 | ||||||||||||
|
Asset Impairment Charge
|
-- | -- | 46,005 | -- | ||||||||||||
|
Exit and Disposal Costs – DMI Industries, Inc.
|
4,400 | -- | 4,400 | -- | ||||||||||||
|
Depreciation and Amortization
|
15,951 | 17,604 | 50,122 | 52,262 | ||||||||||||
|
Total Operating Expenses
|
255,802 | 264,367 | 823,332 | 767,844 | ||||||||||||
|
Operating Income (Loss) by Segment
|
||||||||||||||||
|
Electric
|
17,750 | 18,634 | 43,365 | 49,053 | ||||||||||||
|
Wind Energy
|
(1,625 | ) | (1,466 | ) | (39,994 | ) | (14,253 | ) | ||||||||
|
Manufacturing
|
2,665 | 3,371 | 13,020 | 14,604 | ||||||||||||
|
Construction
|
(1,908 | ) | (79 | ) | (11,256 | ) | 111 | |||||||||
|
Plastics
|
7,078 | 3,668 | 19,950 | 9,255 | ||||||||||||
|
Corporate
|
(2,619 | ) | (6,122 | ) | (9,976 | ) | (11,795 | ) | ||||||||
|
Total Operating Income
|
21,341 | 18,006 | 15,109 | 46,975 | ||||||||||||
|
Loss on Early Retirement of Debt
|
13,106 | -- | 13,106 | -- | ||||||||||||
|
Interest Charges
|
7,904 | 8,696 | 24,997 | 27,310 | ||||||||||||
|
Other Income
|
689 | 408 | 2,423 | 1,544 | ||||||||||||
|
Income Tax (Benefit) Expense – Continuing Operations
|
(858 | ) | 2,382 | (15,054 | ) | 3,535 | ||||||||||
|
Net Income (Loss) by Segment – Continuing Operations
|
||||||||||||||||
|
Electric
|
10,206 | 10,900 | 26,413 | 29,428 | ||||||||||||
|
Wind Energy
|
(2,974 | ) | (2,770 | ) | (28,597 | ) | (15,568 | ) | ||||||||
|
Manufacturing
|
833 | 1,366 | 5,464 | 6,793 | ||||||||||||
|
Construction
|
(1,325 | ) | (179 | ) | (7,252 | ) | (320 | ) | ||||||||
|
Plastics
|
3,309 | 1,970 | 10,629 | 4,908 | ||||||||||||
|
Corporate
|
(8,171 | ) | (3,951 | ) | (12,174 | ) | (7,567 | ) | ||||||||
|
Net Income (Loss) from Continuing Operations
|
1,878 | 7,336 | (5,517 | ) | 17,674 | |||||||||||
|
Discontinued Operations
|
||||||||||||||||
|
(Loss) Income - net of Income Tax (Benefit) Expense
of ($2), $(307), $571 and $261 for the respective periods
|
(5 | ) | (514 | ) | 821 | 420 | ||||||||||
|
(Loss) Gain on Disposition - net of Income Tax (Benefit) Expense
of $0, ($302), ($169) and $3,213 for the respective periods
|
-- | (454 | ) | (3,544 | ) | 12,798 | ||||||||||
|
Net (Loss) Income from Discontinued Operations
|
(5 | ) | (968 | ) | (2,723 | ) | 13,218 | |||||||||
|
Net Income (Loss)
|
1,873 | 6,368 | (8,240 | ) | 30,892 | |||||||||||
|
Preferred Dividend Requirement and Other Adjustments
|
183 | 184 | 551 | 874 | ||||||||||||
|
Balance for Common
|
$ | 1,690 | $ | 6,184 | $ | (8,791 | ) | $ | 30,018 | |||||||
|
Average Number of Common Shares Outstanding
|
||||||||||||||||
|
Basic
|
36,061,022 | 35,933,003 | 36,043,276 | 35,911,993 | ||||||||||||
|
Diluted
|
36,252,765 | 36,171,555 | 36,043,276 | 36,150,545 | ||||||||||||
|
Basic Earnings Per Common Share:
|
||||||||||||||||
|
Continuing Operations
|
$ | 0.05 | $ | 0.20 | $ | (0.17 | ) | $ | 0.48 | |||||||
|
Discontinued Operations
|
-- | (0.03 | ) | (0.07 | ) | 0.36 | ||||||||||
| $ | 0.05 | $ | 0.17 | $ | (0.24 | ) | $ | 0.84 | ||||||||
|
Diluted Earnings Per Common Share:
|
||||||||||||||||
|
Continuing Operations
|
$ | 0.05 | $ | 0.20 | $ | (0.17 | ) | $ | 0.47 | |||||||
|
Discontinued Operations
|
-- | (0.03 | ) | (0.07 | ) | 0.36 | ||||||||||
| $ | 0.05 | $ | 0.17 | $ | (0.24 | ) | $ | 0.83 | ||||||||
12
|
Otter Tail Corporation
|
||||||||
|
Consolidated Balance Sheets
|
||||||||
|
ASSETS
|
||||||||
|
in thousands
|
||||||||
|
(not audited)
|
||||||||
|
September 30,
|
December 31,
|
|||||||
|
2012
|
2011
|
|||||||
|
Current Assets
|
||||||||
|
Cash and Cash Equivalents
|
$ | -- | $ | 14,652 | ||||
|
Accounts Receivable:
|
||||||||
|
Trade—Net
|
133,674 | 116,522 | ||||||
|
Other
|
5,488 | 18,807 | ||||||
|
Inventories
|
73,430 | 77,983 | ||||||
|
Deferred Income Taxes
|
12,325 | 12,307 | ||||||
|
Accrued Utility Revenues
|
11,029 | 13,719 | ||||||
|
Costs and Estimated Earnings in Excess of Billings
|
23,900 | 67,109 | ||||||
|
Regulatory Assets
|
21,084 | 27,391 | ||||||
|
Other
|
17,766 | 21,414 | ||||||
|
Assets of Discontinued Operations
|
730 | 29,692 | ||||||
|
Total Current Assets
|
299,426 | 399,596 | ||||||
|
Investments
|
9,920 | 11,093 | ||||||
|
Other Assets
|
26,628 | 26,997 | ||||||
|
Goodwill
|
39,119 | 39,406 | ||||||
|
Other Intangibles—Net
|
14,549 | 15,286 | ||||||
|
Deferred Debits
|
||||||||
|
Unamortized Debt Expense
|
4,866 | 6,458 | ||||||
|
Regulatory Assets
|
117,537 | 124,137 | ||||||
|
Total Deferred Debits
|
122,403 | 130,595 | ||||||
|
Plant
|
||||||||
|
Electric Plant in Service
|
1,409,729 | 1,372,534 | ||||||
|
Nonelectric Operations
|
219,537 | 310,320 | ||||||
|
Construction Work in Progress
|
71,017 | 54,439 | ||||||
|
Total Gross Plant
|
1,700,283 | 1,737,293 | ||||||
|
Less Accumulated Depreciation and Amortization
|
642,402 | 659,744 | ||||||
|
Net Plant
|
1,057,881 | 1,077,549 | ||||||
|
Total
|
$ | 1,569,926 | $ | 1,700,522 | ||||
13
|
Otter Tail Corporation
|
||||||||
|
Consolidated Balance Sheets
|
||||||||
|
LIABILITIES AND EQUITY
|
||||||||
|
in thousands
|
||||||||
|
(not audited)
|
||||||||
|
September 30,
|
December 31,
|
|||||||
|
2012
|
2011
|
|||||||
|
Current Liabilities
|
||||||||
|
Short-Term Debt
|
$ | 12,417 | $ | -- | ||||
|
Current Maturities of Long-Term Debt
|
173 | 3,033 | ||||||
|
Accounts Payable
|
103,108 | 115,514 | ||||||
|
Accrued Salaries and Wages
|
24,360 | 19,043 | ||||||
|
Accrued Taxes
|
10,359 | 11,841 | ||||||
|
Derivative Liabilities
|
18,869 | 18,770 | ||||||
|
Other Accrued Liabilities
|
6,923 | 5,540 | ||||||
|
Liabilities of Discontinued Operations
|
164 | 13,763 | ||||||
|
Total Current Liabilities
|
176,373 | 187,504 | ||||||
|
Pensions Benefit Liability
|
99,534 | 106,818 | ||||||
|
Other Postretirement Benefits Liability
|
49,876 | 48,263 | ||||||
|
Other Noncurrent Liabilities
|
21,806 | 19,002 | ||||||
|
Deferred Credits
|
||||||||
|
Deferred Income Taxes
|
152,340 | 177,264 | ||||||
|
Deferred Tax Credits
|
31,822 | 33,182 | ||||||
|
Regulatory Liabilities
|
69,396 | 69,106 | ||||||
|
Other
|
449 | 520 | ||||||
|
Total Deferred Credits
|
254,007 | 280,072 | ||||||
|
Capitalization
|
||||||||
|
Long-Term Debt, Net of Current Maturities
|
421,725 | 471,915 | ||||||
|
Cumulative Preferred Shares
|
15,500 | 15,500 | ||||||
|
Cumulative Preference Shares
|
-- | -- | ||||||
|
Common Equity
|
||||||||
|
Common Shares, Par Value $5 Per Share
|
180,823 | 180,509 | ||||||
|
Premium on Common Shares
|
253,225 | 253,123 | ||||||
|
Retained Earnings
|
100,198 | 141,248 | ||||||
|
Accumulated Other Comprehensive Loss
|
(3,141 | ) | (3,432 | ) | ||||
|
Total Common Equity
|
531,105 | 571,448 | ||||||
|
Total Capitalization
|
968,330 | 1,058,863 | ||||||
|
Total
|
$ | 1,569,926 | $ | 1,700,522 | ||||
14
|
Consolidated Statements of Cash Flows
|
||||||||
|
In thousands
|
||||||||
|
(not audited)
|
||||||||
|
For the Nine Months Ended
September 30,
|
||||||||
|
In thousands
|
2012
|
2011
|
||||||
|
Cash Flows from Operating Activities
|
||||||||
|
Net (Loss) Income
|
$ | (8,240 | ) | $ | 30,892 | |||
|
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
|
||||||||
|
Net Loss (Gain) from Sale of Discontinued Operations
|
3,544 | (12,798 | ) | |||||
|
Income from Discontinued Operations
|
(821 | ) | (420 | ) | ||||
|
Depreciation and Amortization
|
50,122 | 52,262 | ||||||
|
Asset Impairment Charge
|
46,005 | -- | ||||||
|
Premium Paid for Early Retirement of Long-Term Debt
|
12,500 | -- | ||||||
|
Deferred Tax Credits
|
(1,568 | ) | (1,834 | ) | ||||
|
Deferred Income Taxes
|
(3,513 | ) | 10,117 | |||||
|
Change in Deferred Debits and Other Assets
|
16,493 | 11,976 | ||||||
|
Discretionary Contribution to Pension Plan
|
(10,000 | ) | -- | |||||
|
Change in Noncurrent Liabilities and Deferred Credits
|
7,129 | 1,690 | ||||||
|
Allowance for Equity (Other) Funds Used During Construction
|
(518 | ) | (576 | ) | ||||
|
Change in Derivatives Net of Regulatory Deferral
|
752 | (177 | ) | |||||
|
Stock Compensation Expense – Equity Awards
|
930 | 1,760 | ||||||
|
Other—Net
|
821 | 1,107 | ||||||
|
Cash (Used for) Provided by Current Assets and Current Liabilities:
|
||||||||
|
Change in Receivables
|
(3,815 | ) | (36,575 | ) | ||||
|
Change in Inventories
|
4,552 | (11,866 | ) | |||||
|
Change in Other Current Assets
|
43,202 | 10,225 | ||||||
|
Change in Payables and Other Current Liabilities
|
2,748 | 6,472 | ||||||
|
Change in Interest and Income Taxes Receivable/Payable
|
(12,263 | ) | 280 | |||||
|
Net Cash Provided by Continuing Operations
|
148,060 | 62,535 | ||||||
|
Net Cash Provided by Discontinued Operations
|
1,322 | 17,837 | ||||||
|
Net Cash Provided by Operating Activities
|
149,382 | 80,372 | ||||||
|
Cash Flows from Investing Activities
|
||||||||
|
Capital Expenditures
|
(96,548 | ) | (60,431 | ) | ||||
|
Proceeds from Disposal of Noncurrent Assets
|
5,478 | 1,859 | ||||||
|
Net (Increase) Decrease in Other Investments
|
(1,385 | ) | 334 | |||||
|
Net Cash Used in Investing Activities - Continuing Operations
|
(92,455 | ) | (58,238 | ) | ||||
|
Net Proceeds from Sale of Discontinued Operations
|
24,278 | 84,330 | ||||||
|
Net Cash Used in Investing Activities - Discontinued Operations
|
(11,705 | ) | (15,875 | ) | ||||
|
Net Cash (Used in) Provided by Investing Activities
|
(79,882 | ) | 10,217 | |||||
|
Cash Flows from Financing Activities
|
||||||||
|
Change in Checks Written in Excess of Cash
|
4,402 | (8,464 | ) | |||||
|
Net Short-Term Borrowings (Repayments)
|
12,417 | (40,415 | ) | |||||
|
Payments for Retirement of Common Stock and Common Stock Issuance Expenses
|
(291 | ) | (152 | ) | ||||
|
Proceeds from Issuance of Long-Term Debt
|
-- | 2,007 | ||||||
|
Short-Term and Long-Term Debt Issuance Expenses
|
(14 | ) | (1,577 | ) | ||||
|
Payments for Retirement of Long-Term Debt
|
(53,051 | ) | (368 | ) | ||||
|
Premium Paid for Early Retirement of Long-Term Debt
|
(12,500 | ) | -- | |||||
|
Dividends Paid and Other Distributions
|
(33,033 | ) | (33,011 | ) | ||||
|
Net Cash Used in Financing Activities - Continuing Operations
|
(82,070 | ) | (81,980 | ) | ||||
|
Net Cash Used in Financing Activities - Discontinued Operations
|
(1,409 | ) | (1,681 | ) | ||||
|
Net Cash Used in Financing Activities
|
(83,479 | ) | (83,661 | ) | ||||
|
Net Change in Cash and Cash Equivalents – Discontinued Operations
|
(673 | ) | 921 | |||||
|
Effect of Foreign Exchange Rate Fluctuations on Cash – Discontinued Operations
|
-- | (324 | ) | |||||
|
Net Change in Cash and Cash Equivalents
|
(14,652 | ) | 7,525 | |||||
|
Cash and Cash Equivalents at Beginning of Period
|
14,652 | -- | ||||||
|
Cash and Cash Equivalents at End of Period
|
$ | -- | $ | 7,525 | ||||
15