Otter Tail Power Company

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Otter Tail Power Company

215 South Cascade Street
P.O. Box 496
Fergus Falls, Minnesota 56538-0496
U.S.A.
(218) 739-8200
Fax: 218-739-8218
Web site: http://www.otpco.com

Public Company
Incorporated: 1907
Employees: 798
Sales: $328.6 million (1995)
Stock Exchanges: NASDAQ
SICs: 4911 Electric Services; 6719 Holding Companies, Not Elsewhere Classified

Otter Tail Power Company, an investor-owned electric utility, serves a 50,000-square-mile territory in western Minnesota, eastern North Dakota, and northeastern South Dakota. Operating in a highly regulated electric industry and in an extreme climate, Otter Tail Power has built a reputation of being a well-run company and a good investment. Management historically has had strong ties to its operating region. The company launched a successful diversification program into nonregulated businesses in the late 1980s.

The Frontier Days

Vermont native George Burdict Wright arrived in Minnesota in 1855 and worked as a surveyor, civil engineer, and land examiner. In 1867 he took ownership of 160 acres of riverfront land about 170 miles northwest of what is now Minneapolis. Wright added adjacent land to his holdings and began looking for ways to develop the property. Wright and the owner of the property on the other side of the Otter Tail River struck an agreement and began construction of a dam, sawmill, and gristmill in 1870. The property changed hands shortly after completion of the project, but Wright resumed ownership toward the end of the decade. Wright, an enthusiastic promoter of the area, was instrumental in founding the city of Fergus Falls.

Just prior to his death in 1882, Wright and two other men launched the Fergus Brush Electric Company (named for Charles F. Brush, inventor of the electric arc light) and provided nighttime lighting service to local businesses until a competing technology entered the scene in 1884. George Wright’s widow and son, Vernon Ames Wright, inherited the Fergus Falls holdings. The Boston architect later purchased his stepmother’s share of the property and became directly involved in its development.

The Founding of Otter Tail Power in 1907

By the turn of the century, the city of Fergus Falls had taken over a privately held plant and was providing electricity to residential and commercial customers. The Wright Dam, also known as the Central Dam, served industrial customers through direct drive power. Beginning in 1902 Vernon Wright began to shift his customers to electricity. Improvements in electric transmission had opened the way for development of more remotely located dams, and just downstream from Fergus Falls was a site with both good water flow and room for a holding pond. But Wright needed investors for the $100,000 dam project.

Frederick G. Barrows, one of the original developers of the city’s power plant, invested in the Dayton Hollow Dam project and convinced other Fergus Falls businessmen to do so as well, thus paving the way for the incorporation of Otter Tail Power Company in 1907. Wright led planning and operations, while Barrows managed the financial aspects of the business.

Dam construction was difficult, dangerous work. Ralph S. Johnson wrote, “The men wore felt hats or caps, not hard hats. With derring-do that was typical of the times, they lugged heavy rocks across twelve-inch planks stretched high above the raging torrent of the river. But they got the job done.” Otter Tail Power’s first hydroelectric station at the Dayton Hollow Dam began operation in 1909.

Northern Light Electric Company, operated by C. B. Kidder in Wahpeton, North Dakota, was Otter Tail Power’s first customer. Kidder’s power source was a steam engine: it was now cheaper to purchase rather than generate electricity. Otter Tail Power hired three brothers to build a 25-mile low-voltage transmission line connecting the power plant to Northern Light Electric.

A few months following the start-up of the Dayton Hollow Dam, the new city dam, which was located upstream from Fergus Falls, failed. Wright’s Central Dam and the other dams just downstream were badly damaged by the rush of water. The Dayton Hollow Dam was protected by its distance from the city dam and the capacity of its holding pond. In spite of rumors of sabotage and community interest in rebuilding the city dam, Fergus Falls and Otter Tail Power Company successfully negotiated terms for an electric service contract. The company now served the two largest communities in the region. Wright sold the damaged Central Dam to the company, and Kidder, who had agreed to supply steam-generated power when water levels were low at the hydroelectric plant, was hired as Otter Tail Power’s general manager.

Expansion Begins in 1913

Otter Tail Power Company’s first major expansion began in 1913: Ten Minnesota towns were hooked up with electric service; Northern Light Electric Company was acquired; and construction commenced on a river diversion project. Plant and equipment costs from 1913 to 1917 exceeded $1 million. Labor to construct miles of new transmission line was done largely by hand. Crews of linemen worked seven days a week to connect new towns to the system.

Fred Barrows, who had been drawn away from the business by opportunities in mining, lumber, and land speculation, sold his share of Otter Tail Power Company in 1921. Another significant personnel change occurred when general manager C. B. Kidder died in 1920 and was succeeded by Clifford S. Kennedy. “A legendary figure in the company, Kennedy could best be described as a benevolent autocrat,” wrote Ralph S. Johnson.

The construction boom quieted in the early 1920s with the addition of two steam-generating plants at the Hoot Lake river diversion site; the new plants burned eastern bituminous coal shipped in by train from Duluth. With competing companies serving surrounding areas in Minnesota, Otter Tail Power moved west. By 1926, the company’s territory reached Wash-burn, North Dakota, on the Missouri River, and more generating capacity was needed. Otter Tail Power pioneered the use of North Dakota lignite coal in large-scale power production. The new lignite plants, along with the dams and the Hoot Lake plants, served as the backbone of the company for more than 20 years.

The Depression Years

The droughts of the 1930s hit Otter Tail Power Company hard. Its source of hydroelectric power dwindled, and the agricultural economy of the region it served faltered. Although he was the largest shareholder, Wright stopped dividend payments. Kennedy aggressively cut costs and pursued new business. In 1934 electric rates were cut. Ralph Johnson noted that the action created a long-lasting bond between the company and the people it served.

The 1930s also were marked by the passage of leadership from Vernon Wright to his two sons. Both of the men were educated in eastern universities and had worked in various departments in the company. Thomas C. Wright succeeded Vernon as president in 1933, and Cyrus G. Wright was named vice-president in 1936. Vernon continued on as chairman of the board until his death in 1938.

The National Rural Electrification Act of 1936 instituted government-financed electric cooperatives in underserved areas. Although Otter Tail Power had built its first power line to farm customers in 1919, it was an investor-owner company and added lines based on economic factors. Even though the company objected to the existence of federally subsidized competition, Otter Tail Power had to find a way to coexist. Ultimately, the company sold the cooperatives electricity at wholesale prices and, according to Johnson, went on to establish a relationship with the cooperatives that was unique for its time.

Otter Tail Power ended the 1930s under improved conditions. When rainfall increased, the agricultural economy improved, and business recovery followed. Electric consumption climbed. A second major expansion period began in 1940. Otter Tail Power gained service territory to its south, east, and north and by the end of 1944 served about 500 communities in an area of about 50,000 square miles.

World War II and Postwar Modernization

World War II left Otter Tail Power shorthanded. About 20 percent of company employees served in the military even though they could have claimed a “strategic” industry exemption. With factories committed to the war effort, materials, tools, and equipment were also in short supply. Construction and maintenance work was restricted. C. S. Kennedy left the company just before the war ended. His resignation marked the beginning of a trend toward the decentralization of Otter Tail Power Company.

Company Perspectives:

Our vision is one of: being the energy supplier of choice by providing quality service with low, stable rates; improving sales, earnings and performance annually, to the balanced benefit of customers, shareholders and employees; being instrumental in creating jobs and improving the economy and quality of life in the area in which we do business; being an industry leader with successful involvements in other ventures that can enhance both our service area and bottom line.

When World War II ended in 1945, ration-weary Americans went on a consumption binge. The rapid increase in demand for electric power strained Otter Tail Power’s neglected plants and electric lines while personnel and parts were still in short supply. While the nation’s manufacturing industry made the shift from war to peace-time production, Otter Tail Power had to make due: A railroad locomotive was used to boost output at a Bemidji, Minnesota plant, and elsewhere every available piece of equipment was put into service. The first new pieces of equipment available were diesel generators. They helped mitigate the capacity problem, but operating Vice-President Cyrus Wright was still forced to ask customers to scale back on peak-hour electric use during the winter of 1947–1948 while construction on new steam-generating plants was being completed.

The decentralization process resulted in a doubling of the number of district offices by 1948. In 1949, the districts were divided into five divisions, which were led by electrical engineers. Otter Tail Power had become an increasingly specialized company. Business professionals entered the middle-management ranks and technical school graduates filled many nonman-agement positions. Joining Otter Tail Power at this time were two men who would later lead the company: Albert V. Hartl and Robert M. Bigwood.

Federal Influence in the 1950s

By 1948 electric loads to rural cooperatives accounted for 18.9 percent of Otter Tail Power’s system peak. That year, the Bureau of Reclamation (later renamed the Western Area Power Administration) announced plans to market power generated by new federal dams to municipalities, public entities, and cooperatives. Otter Tail Power stopped building new capacity for the Garrison Dam region in North Dakota, but worked with the cooperatives during the transition period. In Minnesota, Otter Tail Power, together with Northern States Power Company and Interstate Power Company, made rate agreements to ensure the continued business of the cooperatives there.

The prospect of cheap power lured some local governments to set up municipal power agencies; the city of Fergus Falls was contemplating the idea in the early 1950s. Faced with the possibility of losing its home town as a customer, Otter Tail Power offered to purchase and operate the city’s electric system; if a deal could not be made the company would build a new office building elsewhere. The issue was hotly debated, but a majority of the citizens of Fergus Falls voted for the proposed purchase deal.

Otter Tail Power faced production overcapacity when service to rural electric cooperatives began declining in 1952. To capture more retail electric sales the company accelerated retail marketing efforts: Associations with electric appliance dealers were cultivated; use of electric heat was promoted; special rates for “total electric” homes and businesses were offered; and the right to use Reddy Kilowatt, an investor-owned electric utility symbol, was secured. Retail sales increased, and Otter Tail Power began a plant building program that lasted from the late 1950s into the 1960s.

Building Interconnections: The Late 1950s–60s

Otter Tail Power extended its 115,000-volt transmission grid in the late 1950s. Subsequent interconnections with adjacent electric systems set the stage for sharing electric power. In 1961 the company became a charter member of the Upper Mississippi Valley Power Pool. Benefits included a reduction of individual generating capacity requirements, decreased operating costs through using the most economical units in the pool, and greater reliability of service to customers.

Thomas Wright retired in 1961; Cyrus Wright succeeded him as chairman of the board. Albert Hartl moved up to the post of president and became the first nonfamily member to lead the company.

In 1963 Otter Tail Power joined with other investor-owned companies, cooperatives, and electric agencies to form the Mid-Continent Area Power Planners (MAPP) to coordinate future facility and transmission development in a region including ten states and part of Canada. The company entered into joint agreements for the construction of a 230,000-volt transmission line and a 410,000-kilowatt lignite-burning power plant in 1967.

Otter Tail Power formalized its own internal planning system in 1967 with the appointment of a vice-president of planning and a planning council assigned to investigate investment opportunities. In 1969, the company and a group of Fergus Falls businessmen agreed to build a total electric motel in the city. When costs became prohibitive for the business group, the company bought them out and established the Otter Tail Management Corporation. A second subsidiary, Otter Tail Realty Company, was formed to manage the land acquired for the motel project. The motel was sold in 1973. Another diversification about the same time, in the mobile home business, was a costly failure.

Big Expenditures: The 1970s–80s

The rapid increase of residential and industrial electric loads of the late 1960s and early 1970s again drove the need for increased electric capacity. Even while the Big Stone Plant near Milbank, South Dakota, was under construction, another jointly owned lignite-burning plant was being planned. In 1975, the company began developing comprehensive load-control management systems and offered rate reductions to customers who would restrict peak-time electric use.

CEO Al Hartl retired in 1975. Otter Tail Power’s annual revenues climbed from approximately $21 million to $71 million over the 15 years he led the company. Bob Bigwood, Hartl’s successor, rose to the top of the company at a time when many of the top managers were approaching retirement; the company’s leadership team was rebuilt over the next few years.

Electric rates had generally fallen until the late 1950s, when customers began to experience incremental increases. But the immense costs associated with the Big Stone and then the Coyote plant construction forced Otter Tail Power to ask the regulatory commissions for substantial rate hikes. The company faced objections from customers, but the regulators granted the increases.

A lingering dispute was settled out of court in 1981, when Otter Tail Power agreed to pay the city of Elbow Lake $1.3 million over a period of 14 years. When the two parties could not come to an agreement over the renewal of electric service in the early 1960s, the city formed a municipal electric company. Otter Tail Power refused to use their lines to transmit electricity from the U.S. Bureau of Reclamation to the city. In 1967, Elbow Lake filed a suit for $3.5 million in damages against the company for delaying establishment of the business. The U.S. Justice Department followed up with an antitrust suit against the company in 1969. The U.S. District Court decided in favor of Elbow Lake. When the U.S. Supreme Court upheld the ruling in 1973, Otter Tail Power began transmitting power to the city.

A Mixed Bag in the 1980s and 1990s

Otter Tail Power had financed its large jointly owned generating plants through first-mortgage bonds, pollution control bonds, and preferred and common stock offerings. After the Coyote plant was completed in 1981, the company was able to begin using internally generated funds for its smaller scale construction and capital expenses. A period of rate stability began as did the passage to new leadership: John C. MacFarlane, with the company since 1961, was next in line to serve as president.

A National Association of Regulatory Utility Commissioners survey released in 1985 ranked Otter Tail Power first in increased productivity for the period between 1972 and 1983. In 1981, James P. Shannon wrote, “Well before productivity became a buzzword in American industry, Otter Tail Power cultivated among its employees the kind of cohesiveness and company pride which, translated into efficiency of operation, have helped this small rural utility achieve a record of productivity which shareholders and customers have come to appreciate—for different reasons.”

According to an article by George Beran, Otter Tail Power Company long-term investors earned an average annual return of 23 cents per dollar during the ten-year period from 1981 to 1991. And when the agricultural downturn of the 1980s resulted in job loss and population decline in Otter Tail Power’s service area, the company fostered an economic development program to gather together financial and human resources to help create and keep jobs in the region.

The 1990 amendments to the Clean Air Act set new emission reduction standards. Sulfur dioxide and nitrogen oxides, which are released when coal is burned, combine with water in the atmosphere to form an acid, which falls back to earth via precipitation. To meet the new guidelines, Otter Tail Power either had to switch to coal containing a lower level of sulfur or install additional pollution-control equipment. In 1995 the company began burning subbituminous coal in its Big Stone plant. In 1994 the Minnesota Public Utilities Commission (PUC) directed electric utilities to include environmental costs related to fossil fuel emissions when submitting plans for future generating plants.

Diversification for the Future

Otter Tail Power incorporated a holding company, Mid-States Development, Inc., in 1989. According to Joel Hoekstra, John MacFarlane had begun “crafting his diversification plan shortly after he took the helm in 1982.” Kilowatt-hour sales, which experienced annual growth of seven percent in the 1960s and 1970s, had fallen to one to two percent and remained flat. Earlier ventures into nonregulated businesses prompted the company to bring in an experienced investment specialist this time around. Mid-States’ first business venture, a suit manufacturer, failed, but its second purchase, a machining company, was a success. Another subsidiary, North Central Utilities, Inc., was established in 1992 to purchase regulated businesses.

By 1995, Otter Tail Power held radio stations, a telephone utility, manufacturing operations, electrical and telephone construction contractors, and a medical imaging equipment supplier. The low-profile Otter Tail Power gained some media attention in 1995 when Mid-States Development, Inc. purchased an 85 percent interest in a Northern League baseball franchise, the Fargo-Moorhead Red Hawks, for about $1.2 million. Mid-States initially offered to buy a minority interest in the team to assure radio broadcast rights of the games, but other investors pulled out of the deal.

In the 1995 annual report John MacFarlane attributed the current success of the electric utility to downsizing—the number of employees was reduced from 850 in 1985 to 800 in 1987—while increasing electric sales, revenues, and the number of customers.

Subsidiary growth also improved the company’s outlook. About 38 percent of total revenues came from subsidiaries in 1995. Hoekstra said Otter Tail Power CEO and Chairman MacFarlane was modest about his successful diversification program, saying, “I’m like a baseball player: I have to get my job back every spring.” The future success of Otter Tail Power would be influenced by not only the health of its diversified businesses but also proposed changes in the electric industry itself and continuing environmental concerns.