OTTR

Otter Tail Corp. 10-Q Summary: Period Ended September 30, 2009

Business Context and Reporting Period

This report covers the quarterly period ended September 30, 2009. On July 1, 2009, Otter Tail Corporation completed a holding company reorganization. The former operating entity, Otter Tail Power Company (OTP), became a wholly owned subsidiary of the new parent holding company, Otter Tail Corporation. The company operates in six segments: Electric, Plastics, Manufacturing, Health Services, Food Ingredient Processing, and Other Business Operations.

Key Financial Metrics (Nine Months Ended Sept 30, 2009)

Note: Total debt figures are derived from the balance sheet; 2008 comparative debt figures are not explicitly totaled in the provided text but can be inferred from the balance sheet structure.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased 20% year-over-year, driven primarily by significant drops in the Manufacturing (down 28%) and Other Business Operations (down 33%) segments due to the economic recession and reduced demand for wind towers and construction services.
• Electric Segment Performance: While retail sales revenues increased slightly due to rate hikes in North Dakota and South Dakota, wholesale revenues dropped 42% due to lower prices and volumes. Operating income for the Electric segment increased 5.5% due to lower fuel costs and higher efficiency.
• Food Ingredient Processing: This segment was a bright spot, with operating income increasing 588% to $9.3 million, driven by higher sales volumes and prices for dehydrated potato products.
• Cash Flow Improvement: Operating cash flow surged to $140.6 million from $40.2 million in the prior year, largely due to a $30 million decrease in receivables and a $17 million increase in tax refunds received.
• Unusual Items: The company incurred $1.8 million in product recall and testing costs in the Manufacturing segment (ShoreMaster) and withdrew from the Big Stone II project, deferring $13.6 million in costs pending regulatory recovery.

Guidance, Outlook, and Risks

• Earnings Guidance: Management expects 2009 earnings to be near the low end of the previously announced range of $0.70 to $1.10 per share.
• Segment Outlook:
  • Electric: Expected to be lower than 2008 due to mild weather and soft wholesale demand.
  • Manufacturing: Expected to post a net loss for the full year due to declines in wind tower demand and construction projects.
  • Health Services: Expected to record a net loss due to low utilization of imaging assets.
  • Food Ingredient Processing: Expected to show increased net income.
• Capital Expenditures: Revised 2009 capital expenditure estimate is $171 million, with $145 million allocated to the Electric segment (primarily the Luverne Wind Farm).
• Risks and Contingencies:
  • Regulatory: Pending rate cases in North Dakota and South Dakota; uncertainty regarding the recovery of $13.6 million in Big Stone II costs.
  • Legal: Ongoing appeal of a Sierra Club complaint regarding Clean Air Act violations at the Big Stone Plant; FERC complaint regarding interconnection access.
  • Goodwill Impairment: Management tested goodwill for the ShoreMaster subsidiary due to economic downturns and concluded no impairment was necessary, though future impairment remains a risk if cash flows do not meet projections.

Key Facts for Investor Verification

• Big Stone II Withdrawal: Verify the status of the $13.6 million in deferred costs and the likelihood of regulatory recovery in future rate cases.
• ShoreMaster Goodwill: Monitor the $12.2 million goodwill and $4.9 million intangible assets associated with ShoreMaster, as the segment is currently operating at a loss and faces significant economic headwinds.
• Debt Covenants: Confirm continued compliance with financial covenants, specifically the 0.60 to 1.00 Interest-bearing Debt to Total Capitalization ratio and the 1.50 to 1.00 Interest and Dividend Coverage Ratio.
• Luverne Wind Farm Grant: Verify the receipt and accounting treatment of the $30.2 million grant from the U.S. Department of Treasury received in October 2009 (subsequent event).
• Product Recall: Track the completion of the ShoreMaster trampoline recall and any associated additional costs beyond the $1.4 million already accrued.