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My favorite mini-conglomerate just swam into murky waters. Otter Tail (Nasdaq: OTTR ) subsidiary Otter Tail Power no longer wants any part of the Big Stone II coal-fired power plant, throwing years of planning to the wind.
Otter Tail Power was supposed to pump about $400 million of capital into Big Stone II. It was the largest, most public, and appointed leader of the five utility companies that were still involved in the project, and Otter Tail's retreat throws the very future of that power plant into question. Demand for baseline power is still there, but the other utilities involved now need to find some other way to fill that void.
Otter Tail Power CEO Chuck MacFarlane explained that a combination of factors played into this momentous decision. The tough financial environment would make for expensive financing, and environmental concerns are making coal-fired plants tougher to push through permit proceedings. The company has invested at least $11.6 million into this project over the years under capital expenses, and some of that expense will now hit the income statement. Otter Tail is a small company, making $38.8 million in profit before tax over the past four quarters -- expensing some or all of those capitalized costs will quickly eat into that. In other words, be prepared for a hit to net income when the accounting is all sorted out.
But in general, Otter Tail should do just fine. The strategy of building a diversified little conglomerate around the core business of electric power generation has created a micro version of Berkshire Hathaway (NYSE: BRK-A ) or General Electric (NYSE: GE ) . In 2008, the power business accounted for just 26% of the company's revenue. The rest came from a wide spectrum of operations that includes health care products, PVC pipe manufacturing, dried potato flakes, and heavy construction.
While Otter Tail Power has spent $300 million on wind power in the last three years, alternative energy sources generated a minuscule 0.6% of Otter Tail's power generation in 2007 but 4.6% in 2008. The company is adapting to the times, and might simply end up building out more wind farms. But it would take a lot to replace the 500-to-600 megawatts Big Stone II was supposed to produce.
With or without Big Stone II as a buffer against future energy needs, Otter Tail is still a favorite of our Motley Fool CAPS members. Over 1,000 members have rated this stock with a near 98% approval rating and five (out of five) solid stars. And if you love Otter Tail, chances are that you also like GE, Apple (Nasdaq: AAPL ) , and Johnson & Johnson (NYSE: JNJ ) . Not a bad crowd to hang with, I say.
CAPS is fun, free, and only a click away. Mosey on over right now and frolic in a fiesta of information and opinions on Otter Tail.