##### 



Selected Consolidated Financial Data
 (in thousands, except number of shareholders and per-share data)
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    1996RevenuesElectric
    
    $
    306,014
    
    
    $
    312,985
    
    
    $
    266,385
    
    
    $
    267,494
    
    
    $
    244,005
    
    
    $
    232,720
    
    
    $
    192,849Plastics
    
    
    163,135
    
    
    
    158,548
    
    
    
    115,426
    
    
    
    86,009
    
    
    
    82,931
    
    
    
    63,216
    
    
    
    22,049Manufacturing
    
    
    311,811
    
    
    
    244,311
    
    
    
    201,615
    
    
    
    157,401
    
    
    
    119,880
    
    
    
    96,571
    
    
    
    34,819Health services
    
    
    135,051
    
    
    
    123,991
    
    
    
    114,318
    
    
    
    100,912
    
    
    
    93,420
    
    
    
    79,129
    
    
    
    61,697Food ingredient processing
    
    
    45,084
    
    
    
    38,501
    
    
    
    14,023
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other business operations (1)
    
    
    147,436
    
    
    
    107,400
    
    
    
    104,002
    
    
    
    79,427
    
    
    
    56,225
    
    
    
    54,934
    
    
    
    39,714Intersegment eliminations
    
    
    (3,577
    )
    
    
    (3,867
    )
    
    
    (2,733
    )
    
    
    (2,254
    )
    
    
    (1,036
    )
    
    
    
    
    
    
    Total operating revenues (1)
    
    $
    1,104,954
    
    
    $
    981,869
    
    
    $
    813,036
    
    
    $
    688,989
    
    
    $
    595,425
    
    
    $
    526,570
    
    
    $
    351,128Net income from continuing operations
(1)
    
    
    50,750
    
    
    
    53,902
    
    
    
    40,502
    
    
    
    38,297
    
    
    
    44,297
    
    
    
    39,697
    
    
    
    28,905Net income from discontinued operations (1)
    
    
    362
    
    
    
    8,649
    
    
    
    1,693
    
    
    
    1,359
    
    
    
    1,831
    
    
    
    3,906
    
    
    
    1,719Net income
    
    
    51,112
    
    
    
    62,551
    
    
    
    42,195
    
    
    
    39,656
    
    
    
    46,128
    
    
    
    43,603
    
    
    
    30,624Operating cash flow from continuing operations (1)
    
    
    79,207
    
    
    
    90,348
    
    
    
    54,410
    
    
    
    76,464
    
    
    
    71,584
    
    
    
    71,010
    
    
    
    66,356Operating cash flow  continuing and discontinued operations
    
    
    80,246
    
    
    
    95,800
    
    
    
    56,301
    
    
    
    76,955
    
    
    
    76,797
    
    
    
    77,529
    
    
    
    68,611Capital expenditures  continuing operations (1)
    
    
    69,448
    
    
    
    59,969
    
    
    
    49,484
    
    
    
    48,783
    
    
    
    73,442
    
    
    
    50,723
    
    
    
    63,335Total assets
    
    
    1,258,650
    
    
    
    1,181,496
    
    
    
    1,134,148
    
    
    
    986,423
    
    
    
    914,112
    
    
    
    817,778
    
    
    
    703,881Long-term debt
    
    
    255,436
    
    
    
    258,260
    
    
    
    261,805
    
    
    
    262,311
    
    
    
    254,015
    
    
    
    221,643
    
    
    
    153,452Redeemable preferred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,000Basic earnings per share  continuing operations (1) (2)
    
    
    1.70
    
    
    
    1.82
    
    
    
    1.53
    
    
    
    1.47
    
    
    
    1.73
    
    
    
    1.53
    
    
    
    1.15Basic earnings per share  total (2)
    
    
    1.71
    
    
    
    2.12
    
    
    
    1.59
    
    
    
    1.52
    
    
    
    1.80
    
    
    
    1.69
    
    
    
    1.23Diluted earnings per share  continuing operations (1) (2)
    
    
    1.69
    
    
    
    1.81
    
    
    
    1.52
    
    
    
    1.46
    
    
    
    1.72
    
    
    
    1.52
    
    
    
    1.15Diluted earnings per share  total (2)
    
    
    1.70
    
    
    
    2.11
    
    
    
    1.58
    
    
    
    1.51
    
    
    
    1.79
    
    
    
    1.68
    
    
    
    1.23Return on average common equity
    
    
    10.6
    %
    
    
    13.9
    %
    
    
    12.0
    %
    
    
    12.2
    %
    
    
    15.3
    %
    
    
    15.5
    %
    
    
    14.9
    %Dividends per common share
    
    
    1.15
    
    
    
    1.12
    
    
    
    1.10
    
    
    
    1.08
    
    
    
    1.06
    
    
    
    1.04
    
    
    
    0.90Dividend payout ratio
    
    
    68
    %
    
    
    53
    %
    
    
    70
    %
    
    
    72
    %
    
    
    59
    %
    
    
    62
    %
    
    
    73
    %Common shares outstanding  year end
    
    
    29,522
    
    
    
    29,401
    
    
    
    28,977
    
    
    
    25,724
    
    
    
    25,592
    
    
    
    24,653
    
    
    
    23,072Number of common shareholders (3)
    
    
    14,692
    
    
    
    14,801
    
    
    
    14,889
    
    
    
    14,723
    
    
    
    14,503
    
    
    
    14,358
    
    
    
    13,829
 Notes:
 (1)
    
    Prior years are restated to exclude OTESCOs gas
marketing operations, which were sold in 2006 and are now classified as discontinued. See note 16 to consolidated financial statements.(2)
    
    Based on average number of shares outstanding.(3)
    
    Holders of record at year end.




---



##### 



MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 OVERVIEW
    
    
    ability to provide returns on invested capital that exceed our weighted average cost of
capital over the long term; and
    
    assessment of an operating companys business and potential for future earnings growth.
   
    
    Our annual consolidated revenues topped $1.1 billion for the first time in our history.
    
    We reported record earnings in our plastics, manufacturing and construction operations.
    
    We continued to work with six other regional utilities on the planning and permitting
process for a new 630-megawatt coal-fired electric generating plant (Big Stone II) on the
site of the existing Big Stone Plant.
  
    
    Planned capital budget expenditures of up to $889 million for the years 2007-2011 of
which $776 million is for capital projects at the electric utility, including $360 million
related to Big Stone II, $64 million for a wind generation project and $59 million for
anticipated expansion of transmission capacity in Minnesota. See Capital Requirements
section for further discussion.
    
    Pursuing the regulatory approvals, financing and other arrangements necessary to build Big Stone II.




---



##### 




    
    Adding more renewable energy to our electric resource mix.
    
    Increasing wind tower production through expansion and continued improvements in
productivity, including an increase of DMIs production capacity by 30% at its Ft. Erie,
Ontario facility.
    
    Focus on improving the operating results of Idaho Pacific Holdings, Inc. (IPH).
    
    The continued investigation and evaluation of strategic acquisition opportunities.
  (in thousands)
    
    2006
    
    
    2005Operating revenues:Electric
    
    $
    305,703
    
    
    $
    312,624Nonelectric
    
    
    799,251
    
    
    
    669,245Total operating revenues
    
    $
    1,104,954
    
    
    $
    981,869Net income from continuing operations:Electric
    
    $
    24,181
    
    
    $
    37,301Nonelectric
    
    
    26,569
    
    
    
    16,60150,750
    
    
    
    53,902Net income from discontinued operations
    
    
    362
    
    
    
    8,649Total net income
    
    $
    51,112
    
    
    $
    62,551




---



##### 



RESULTS OF OPERATIONS
   (in thousands)
    
    2006
    
    2005
    
    2004Operating revenues:Electric
    
    $
    311
    
    
    $
    361
    
    
    $
    365Nonelectric
    
    
    3,266
    
    
    
    3,506
    
    
    
    2,368Cost of goods sold
    
    
    1,433
    
    
    
    2,070
    
    
    
    1,083Other nonelectric expenses
    
    
    2,144
    
    
    
    1,797
    
    
    
    1,650
 ELECTRIC
  %
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    change
    
    
    2005
    
    
    change
    
    
    2004Retail sales revenues
    
    $
    260,926
    
    
    
    5
    
    
    $
    248,939
    
    
    
    11
    
    
    $
    224,326Wholesale revenues
    
    
    25,514
    
    
    
    (39
    )
    
    
    41,953
    
    
    
    75
    
    
    
    24,000Net marked-to-market gains
    
    
    451
    
    
    
    (90
    )
    
    
    4,444
    
    
    
    38
    
    
    
    3,228Other revenues
    
    
    19,123
    
    
    
    8
    
    
    
    17,649
    
    
    
    19
    
    
    
    14,831Total operating revenues
    
    $
    306,014
    
    
    
    (2
    )
    
    $
    312,985
    
    
    
    17
    
    
    $
    266,385Production fuel
    
    
    58,729
    
    
    
    5
    
    
    
    55,927
    
    
    
    7
    
    
    
    52,056Purchased power  system use
    
    
    58,281
    
    
    
    (1
    )
    
    
    58,828
    
    
    
    47
    
    
    
    40,098Other operation and maintenance expenses
    
    
    103,548
    
    
    
    4
    
    
    
    99,904
    
    
    
    17
    
    
    
    85,361Depreciation and amortization
    
    
    25,756
    
    
    
    6
    
    
    
    24,397
    
    
    
    1
    
    
    
    24,236Property taxes
    
    
    9,589
    
    
    
    (5
    )
    
    
    10,043
    
    
    
    (4
    )
    
    
    10,411Operating income
    
    $
    50,111
    
    
    
    (22
    )
    
    $
    63,886
    
    
    
    18
    
    
    $
    54,223
 2006 compared with 2005




---



##### 








---



##### 



2005 compared with 2004




---



##### 



PLASTICS
  %
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    change
    
    
    2005
    
    
    change
    
    
    2004Operating revenues
    
    $
    163,135
    
    
    
    3
    
    
    $
    158,548
    
    
    
    37
    
    
    $
    115,426Cost of goods sold
    
    
    126,374
    
    
    
    4
    
    
    
    121,245
    
    
    
    25
    
    
    
    97,126Operating expenses
    
    
    10,239
    
    
    
    (6
    )
    
    
    10,939
    
    
    
    91
    
    
    
    5,718Depreciation and amortization
    
    
    2,815
    
    
    
    12
    
    
    
    2,511
    
    
    
    9
    
    
    
    2,297Operating income
    
    $
    23,707
    
    
    
    (1
    )
    
    $
    23,853
    
    
    
    132
    
    
    $
    10,285
 2006 compared with 2005




---



##### 



2005 compared with 2004
  MANUFACTURING
  %
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    change
    
    
    2005
    
    
    change
    
    
    2004Operating revenues
    
    $
    311,811
    
    
    
    28
    
    
    $
    244,311
    
    
    
    21
    
    
    $
    201,615Cost of goods sold
    
    
    246,649
    
    
    
    27
    
    
    
    194,264
    
    
    
    23
    
    
    
    157,802Operating expenses
    
    
    26,508
    
    
    
    11
    
    
    
    23,872
    
    
    
    13
    
    
    
    21,098Depreciation and amortization
    
    
    11,076
    
    
    
    17
    
    
    
    9,447
    
    
    
    21
    
    
    
    7,828Operating income
    
    $
    27,578
    
    
    
    65
    
    
    $
    16,728
    
    
    
    12
    
    
    $
    14,887
 2006 compared with 2005
  
    
    Revenues at DMI Industries, Inc. (DMI), our manufacturer of wind towers, increased $64.0
million (88.4%) as a result of increases in production and sales activity due in part to
plant additions, including initial operations at the Ft. Erie, Ontario facility which
generated $25.3 million in revenue in 2006, its first year of operations, and continued
improvements in productivity and capacity utilization.
    
    Revenues at ShoreMaster, Inc., our waterfront equipment manufacturer, increased $3.2
million (5.7%) between the years due to price increases driven by higher material costs,
especially aluminum and due to the acquisition of Southeast Floating Docks in May 2005.
    
    Revenues at T.O. Plastics, Inc., our manufacturer of thermoformed plastic and
horticultural products, increased $0.7 million (1.9%) between the periods as a result of a
0.9% increase in unit sales combined with a 1.5% increase in revenue per unit sold.




---



##### 




    
    Revenues at BTD Manufacturing Inc. (BTD), our metal parts stamping and fabrication
company, decreased $0.4 million (0.5%) between the periods. However, BTDs operating income increased
$3.6 million due, in part, to productivity improvements between the years.
  
    
    DMIs cost of goods sold increased $51.5 million between the periods, including
increases of $39.6 million in material costs, $9.2 million in labor and benefit costs and
$2.7 million in tools and supplies expenditures. The increase in cost of goods sold is
directly related to the increase in DMIs production and sales activity and initial
operation and start up costs at its Ft. Erie facility.
    
    Cost of goods sold at ShoreMaster increased $2.4 million between the years as a result
of increases in labor, material (especially aluminum) and other direct costs and a full
year of operations relating to the acquisition of Southeast Floating Docks, which occurred
in May 2005.
    
    Cost of goods sold at T.O. Plastics increased $2.0 million, reflecting $1.0 million in
material cost increases and $0.8 million in increased labor and benefit costs between the
years.
    
    Cost of goods sold at BTD decreased $3.3 million between the periods mainly due to a
decrease in labor costs between the years due to a reduction in the number of production
employees, a decrease in overtime pay between the periods and a reduction in production
hours in December 2006. Productivity gains at BTD were achieved through efforts to better
utilize and allocate available labor resources.
  
    
    Operating expenses at DMI increased $2.7 million as a result of increases in labor,
professional services and maintenance expenses mainly related to initial operation and
start-up costs at the Ft. Erie plant.
    
    ShoreMasters operating expenses increased $0.2 million between the years.
    
    T.O. Plastics operating expenses increased $0.2 million between the years.
    
    BTDs operating expenses decreased $0.4 million between the years.
  2005 compared with 2004




---



##### 




    
    Revenues at DMI increased $23.8 million (48.9%) due to increased production and sales
activity. This is in part related to the production tax credits for wind-generated
electricity being in place for 2005 as well as improvements in productivity and capacity
utilization.
    
    Revenues at BTD increased $10.2 million (14.9%) mainly as a result of product price
increases to cover rising material costs reflected in an 11.8% increase in revenue per unit
sold between the periods. The purchase of Performance Tool in January 2005 contributed $3.8
million toward BTDs revenue increase.
    
    Revenues at ShoreMaster increased $4.9 million (9.5%) due to the acquisitions of
Shoreline Industries and Southeast Floating Docks, offset in part by a decline in revenues
in its residential and commercial divisions.
    
    Revenues at T.O. Plastics increased $3.8 million (11.6%) as a result of productivity
improvements and higher prices that provided for recovery of increased raw material costs.
  
    
    DMI cost of goods sold increased $18.4 million between the periods as a result of
increased production and higher raw material costs, subcontractor and labor costs. DMI cost
of goods sold also includes a $1.0 million write-down of inventory in the third quarter
2005 for tower sections that had limited use in the wind business due to changes in wind
tower design requirements.
    
    Cost of goods sold at BTD increased $12.1 million as a result of higher raw material and
labor costs mainly related to increased production. The purchase of Performance Tool in
January 2005 contributed $2.8 million toward BTDs increase in cost of goods sold.
    
    ShoreMasters cost of goods sold increased $3.8 million mainly due to the acquisitions
of Shoreline Industries and Southeast Floating Docks and increases in material costs.
    
    T.O. Plastics cost of goods sold increased $2.3 million between the periods as a result
of increased material costs.
  
    
    DMI operating expenses increased $1.2 million as a result of a $0.5 million increase in
wages, salaries and benefit expenses, a $0.4 million increase in costs associated with
changes in plant layout to improve productivity and a $0.2 million increase in repairs and
maintenance costs.
    
    ShoreMasters operating expenses increased $1.5 million mainly as a result of the
acquisitions of Shoreline Industries and Southeast Floating Docks in January and May of
2005.




---



##### 



HEALTH SERVICES
  %
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    change
    
    
    2005
    
    
    change
    
    
    2004Operating revenues
    
    $
    135,051
    
    
    
    9
    
    
    $
    123,991
    
    
    
    8
    
    
    $
    114,318Cost of goods sold
    
    
    104,108
    
    
    
    15
    
    
    
    90,327
    
    
    
    5
    
    
    
    85,731Operating expenses
    
    
    22,745
    
    
    
    3
    
    
    
    21,989
    
    
    
    25
    
    
    
    17,593Depreciation and amortization
    
    
    3,660
    
    
    
    (9
    )
    
    
    4,038
    
    
    
    (20
    )
    
    
    5,047Operating income
    
    $
    4,538
    
    
    
    (41
    )
    
    $
    7,637
    
    
    
    28
    
    
    $
    5,947
 2006 compared with 2005
  2005 compared with 2004




---



##### 



FOOD INGREDIENT PROCESSING
  %
    
    
    
    
    
    
    2004(in thousands)
    
    2006
    
    
    change
    
    
    2005
    
    
    (19 weeks)Operating revenues
    
    $
    45,084
    
    
    
    17
    
    
    $
    38,501
    
    
    $
    14,023Cost of goods sold
    
    
    44,233
    
    
    
    43
    
    
    
    30,930
    
    
    
    11,379Operating expenses
    
    
    2,920
    
    
    
    15
    
    
    
    2,533
    
    
    
    876Depreciation and amortization
    
    
    3,759
    
    
    
    11
    
    
    
    3,399
    
    
    
    1,118Operating (loss) income
    
    $
    (5,828
    )
    
    
    (456
    )
    
    $
    1,639
    
    
    $
    650
 2006 compared with 2005
   2005 compared with 2004
  OTHER BUSINESS OPERATIONS
  %
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    change
    
    
    2005
    
    
    change
    
    
    2004Operating revenues
    
    $
    147,436
    
    
    
    37
    
    
    $
    107,400
    
    
    
    3
    
    
    $
    104,002Cost of goods sold
    
    
    91,806
    
    
    
    36
    
    
    
    67,711
    
    
    
    (2
    )
    
    
    69,439Operating expenses
    
    
    55,022
    
    
    
    5
    
    
    
    52,171
    
    
    
    23
    
    
    
    42,402Depreciation and amortization
    
    
    2,917
    
    
    
    9
    
    
    
    2,666
    
    
    
    (9
    )
    
    
    2,945Operating loss
    
    $
    (2,309
    )
    
    
    85
    
    
    $
    (15,148
    )
    
    
    (40
    )
    
    $
    (10,784
    )




---



##### 



2006 compared with 2005
  
    
    Revenues at Foley Company, a mechanical and prime contractor on industrial projects,
increased $33.3 million (106.4%) due to an increase in the volume of work performed between
the years.
    
    Revenues at E.W. Wylie Corporation (Wylie), our flatbed trucking company, increased $4.5
million (14.8%) between the years mainly due to an 8.4% net increase in miles driven by
owner-operated and company-operated trucks. Miles driven by owner-operated trucks increased
50.3% while miles driven by company-operated trucks decreased 9.3% between the periods.
Wylies increased revenues also reflect higher rates related to increased fuel costs
recovered through fuel surcharges between the periods for both owner-operated and
company-operated trucks.
    
    Revenues at Midwest Construction Services, Inc. (MCS), our electrical design and
construction services company, increased $2.3 million (5.2%) between the periods as a
result of increased activity on several wind projects in the fourth quarter of 2006.
  
    
    Foley Companys cost of goods sold increased $28.3 million mainly in the areas of
materials, subcontractor and labor costs as a result of an increase in the volume of work
performed between the years.
    
    Cost of goods sold at MCS decreased $4.2 million mainly due to a reduction in material
and labor costs between the periods mostly related to a job completed in 2005 on which
large losses were incurred as a result of higher than expected costs.
  
    
    Wylies revenue increase was entirely offset by a $4.5 million increase in operating
expenses, including $4.0 million in contractor costs related to higher fuel costs combined
with an increase in miles driven by owner-operated trucks between the periods and $0.5
million in increased insurance costs.
    
    Foley Companys operating expenses increased $0.7 million between the periods as a
result of increases in employee benefit costs.
    
    MCS operating expenses increased $1.0 million between the periods, mainly due to
increases in employee benefit costs.
    
    Other operating expenses decreased $3.3 million as a result of lower corporate costs
consisting of lower health insurance plan costs, improved claims experience in our captive
insurance company and a gain on the sale of property.




---



##### 



2005 compared with 2004
  
    
    Revenues at MCS increased $16.6 million (61.4%) between the years as a result of an
increase in work in progress, which was mostly offset by a $13.7 million increase in cost
of goods sold including $4.4 million in increased material and labor costs incurred on a
single project that resulted in a significant loss on that project.
    
    Revenues at Wylie increased $3.7 million (13.7%) in 2005 compared with 2004 due to a
9.7% increase in miles driven by company-operated and owner-operated trucks and a $0.9
million increase in fuel surcharge revenue.
    
    Revenues at Foley Company decreased $17.2 million (35.4%) in 2005 compared with 2004 due
to a decrease in jobs in progress. The decrease in Foleys revenues was mostly offset by a
decrease of $15.4 million in material, subcontractor, labor and insurance costs between the
periods.
  
    
    Wylies operating expenses increased $3.9 million as a result of higher fuel prices,
increased fuel usage and labor costs related to the increase in miles driven and increases
in truck leasing costs between the periods.
    
    Increases in employee health insurance and other employee benefit costs and increases in
insurance costs at our captive insurance company contributed $1.9 million to the increase
in net losses in this segment.
    
    MCS reported increased expenses of $0.8 million for wages and benefits, outside
contracted services and advertising and promotions in 2005 compared with 2004.
  CONSOLIDATED OTHER INCOME AND DEDUCTIONS
  CONSOLIDATED INTEREST CHARGES




---



##### 



CONSOLIDATED INCOME TAXES
   DISCONTINUED OPERATIONS
    (in thousands)
    
    2006
    
    
    2005
    
    
    2004Operating revenues
    
    $
    28,234
    
    
    $
    80,988
    
    
    $
    78,027Expenses
    
    
    28,180
    
    
    
    81,601
    
    
    
    75,213Goodwill impairment loss
    
    
    
    
    
    
    1,003
    
    
    
    Income tax expense (benefit)
    
    
    28
    
    
    
    (261
    )
    
    
    1,121Income (loss) from discontinued operations
    
    $
    26
    
    
    $
    (1,355
    )
    
    $
    1,693
   2006
    
    
    
    2005(in thousands)
    
    OTESCO-gas
    
    
    
    MIS
    
    
    SGS
    
    
    CLC
    
    
    TotalGain (loss) on sale
    
    $
    560
    
    
    
    $
    19,025
    
    
    $
    (2,919
    )
    
    $
    (271
    )
    
    $
    15,835Income tax (expense) benefit
    
    
    (224
    )
    
    
    
    (7,107
    )
    
    
    1,168
    
    
    
    108
    
    
    
    (5,831
    )Net gain (loss) on sale
    
    $
    336
    
    
    
    $
    11,918
    
    
    $
    (1,751
    )
    
    $
    (163
    )
    
    $
    10,004




---



##### 



IMPACT OF INFLATION
   2007 EXPECTATIONS
  
    
    We expect slightly improved performance in our electric segment in 2007.
    
    We expect our plastics segments performance to return to more historical levels in 2007
following two strong years in 2005 and 2006.
    
    We expect continued enhancements in productivity and capacity utilization, strong
backlogs and an announced expansion of DMIs Ft. Erie, Ontario facility that will increase
the facilitys production capacity by 30% to result in increased net income in our
manufacturing segment in 2007.
    
    We expect moderate net income growth in our health services segment in 2007.
    
    We expect our food ingredient processing business (IPH) to generate net income in the
range of $2.0 million to $4.0 million in 2007.
    
    We expect our other business operations segment to have lower earnings in 2007 compared
with 2006 due to an expected return to more normal unallocated corporate cost levels. The
construction companies are expected to have a strong 2007 given backlogs at December 31,
2006.
  LIQUIDITY




---



##### 



(PERFORMANCE GRAPH)
    


(PERFORMANCE GRAPH)




---



##### 



CAPITAL REQUIREMENTS
   (in millions)
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007
    
    
    
    20072011Electric
    
    $
    25
    
    
    $
    30
    
    
    $
    35
    
    
    $
    130
    
    
    
    $
    776Plastics
    
    
    3
    
    
    
    4
    
    
    
    5
    
    
    
    12
    
    
    
    
    19Manufacturing
    
    
    13
    
    
    
    16
    
    
    
    20
    
    
    
    19
    
    
    
    
    59Health services
    
    
    4
    
    
    
    3
    
    
    
    5
    
    
    
    2
    
    
    
    
    12Food ingredient processing
    
    
    4
    
    
    
    3
    
    
    
    2
    
    
    
    3
    
    
    
    
    17Other business operations
    
    
    1
    
    
    
    4
    
    
    
    2
    
    
    
    1
    
    
    
    
    6Total
    
    $
    50
    
    
    $
    60
    
    
    $
    69
    
    
    $
    167
    
    
    
    $
    889




---



##### 



Less than
    
    
    13
    
    
    35
    
    
    More than(in millions)
    
    Total
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsLong-term debt obligations
    
    $
    259
    
    
    $
    55
    
    
    $
    6
    
    
    $
    93
    
    
    $
    105Interest on long-term debt obligations
    
    
    130
    
    
    
    15
    
    
    
    24
    
    
    
    24
    
    
    
    67Operating lease obligations
    
    
    154
    
    
    
    41
    
    
    
    69
    
    
    
    33
    
    
    
    11Capacity and energy requirements
    
    
    95
    
    
    
    20
    
    
    
    40
    
    
    
    11
    
    
    
    24Coal contracts (required minimums)
    
    
    80
    
    
    
    17
    
    
    
    14
    
    
    
    14
    
    
    
    35Postretirement benefit obligations
    
    
    49
    
    
    
    4
    
    
    
    7
    
    
    
    7
    
    
    
    31Other purchase obligations
    
    
    38
    
    
    
    38
    
    
    
    
    
    
    
    
    
    
    
    Total contractual cash obligations
    
    $
    805
    
    
    $
    190
    
    
    $
    160
    
    
    $
    182
    
    
    $
    273
  CAPITAL RESOURCES




---



##### 



MoodysInvestors
    
    
    StandardService
    
    
    & PoorsSenior unsecured debt
    
    
    A3
    
    
    BBB+Preferred stock
    
    Baa2
    
    BBB-Outlook
    
    Stable
    
    Stable




---



##### 



OFF-BALANCE-SHEET ARRANGEMENTS
  RISK FACTORS AND CAUTIONARY STATEMENTS




---



##### 



GENERAL
 Federal and state environmental regulation could require us to incur substantial capital
expenditures which could result in increased operating costs.
   Volatile financial markets could restrict our ability to access capital and increase our borrowing
costs and pension plan expenses.




---



##### 



Our plans to grow and diversify through acquisitions may not be successful, which could result in
poor financial performance.
  Our plans to grow our nonelectric businesses could be limited by state law.
  ELECTRIC
 We may experience fluctuations in revenues and expenses related to our electric operations, which
may cause our financial results to fluctuate and could impair our ability to make distributions to
shareholders or scheduled payments on our debt obligations.




---



##### 



Actions by the regulators of our electric operations could result in rate reductions, lower
revenues and earnings or delays in recovering capital expenditures.
   We may not be able to respond effectively to deregulation initiatives in the electric industry,
which could result in reduced revenues and earnings.
  Our 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.




---



##### 



PLASTICS
 Our plastics operations are highly dependent on a limited number of vendors for PVC resin and a
limited supply of PVC resin. The loss of a key vendor, or any interruption or delay in the supply
of PVC resin, could result in reduced sales or increased costs for our plastics business.
  We compete against a large number of other manufacturers of PVC pipe and manufacturers of
alternative products. Customers may not distinguish our products from those of our competitors.
  Reductions in PVC resin prices can negatively affect our plastics business.
  MANUFACTURING
 Competition from foreign and domestic manufacturers, the price and availability of raw materials,
the availability of production tax credits and general economic conditions could affect the
revenues and earnings of our manufacturing businesses.




---



##### 



HEALTH SERVICES
 Changes in the rates or methods of third-party reimbursements for our diagnostic imaging services
could result in reduced demand for those services or create downward pricing pressure, which would
decrease our revenues and earnings.
  Our health services operations has a dealership and other agreements with Philips Medical from
which it derives significant revenues from the sale and service of Philips Medical diagnostic
imaging equipment.
  Technological change in the diagnostic imaging industry could reduce the demand for diagnostic
imaging services and require our health services operations to incur significant costs to upgrade
its equipment.
  Actions by regulators of our health services operations could result in monetary penalties or
restrictions in our health services operations.
  FOOD INGREDIENT PROCESSING
 Our company that processes dehydrated potato flakes, flour and granules competes in a highly
competitive market and is dependent on adequate sources of potatoes for processing.




---



##### 



OTHER BUSINESS OPERATIONS
 Our construction companies may be unable to properly bid and perform on projects.
  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




---



##### 



Megawatt Daily




---



##### 



December 31,(in thousands)
    
    2006Current asset  marked-to-market gain
    
    $
    2,215Regulatory asset  deferred marked-to-market loss
    
    
    Total assets
    
    
    2,215Current liability  marked-to-market loss
    
    
    (2,012
    )Regulatory liability  deferred marked-to-market gain
    
    
    Total liabilities
    
    
    (2,012
    )Net fair value of marked-to-market energy contracts
    
    $
    203
 Year ended(in thousands)
    
    December 31, 2006Fair value at beginning of year
    
    $
    2,916Amount realized on contracts entered into in 2005 and settled in 2006
    
    
    (2,090
    )Changes in fair value of contracts entered into in 2005
    
    
    (826
    )Net fair value of contracts entered into in 2005 at year end 2006
    
    
    Changes in fair value of contracts entered into in 2006
    
    
    203Net fair value at end of year
    
    $
    203
  1st Quarter
    
    2nd Quarter(in thousands)
    
    2007
    
    2007
    
    TotalNet gain
    
    $
    159
    
    
    $
    44
    
    
    $
    203




---



##### 



CRITICAL ACCOUNTING POLICIES INVOLVING SIGNIFICANT ESTIMATES
   PENSION AND OTHER POSTRETIREMENT BENEFITS OBLIGATIONS AND COSTS




---



##### 



REVENUE RECOGNITION
  FORWARD ENERGY CONTRACTS CLASSIFIED AS DERIVATIVES
 Megawatt Daily




---



##### 



ALLOWANCE FOR DOUBTFUL ACCOUNTS
     DEPRECIATION EXPENSE AND DEPRECIABLE LIVES




---



##### 



TAXATION
 Accounting for Contingencies, Accounting for Income Taxes
  ASSET IMPAIRMENT
 Accounting for the Impairment or Disposal of Long-Lived Assets
   GOODWILL IMPAIRMENT
 Goodwill
and Other Intangible Assets




---



##### 



PURCHASE ACCOUNTING
    Business Combinations
  KEY ACCOUNTING PRONOUNCEMENTS
 SFAS No. 123(R) (revised 2004), Share-Based Payment, Accounting for Stock-based Compensation, Accounting for Stock Issued to Employees
 
    
    $163,000 for non-vested stock options that were outstanding on December 31, 2005.
    
    $235,000 for the 15% discount offered under our Employee Stock Purchase Plan.




---



##### 



Transition Election Related to Accounting for Tax Effects of Share-Based Payment
Awards.
 FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of
FASB Statement No. 109, Accounting for Income Taxes
 SFAS No. 157, Fair Value Measurements,




---



##### 



SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, Accounting for the Effects of
Certain Types of Regulation,
 (in thousands)
    
    2006Decrease in Executive Survivor and Supplemental Retirement Plan intangible asset
    
    $
    (767
    )Increase in regulatory assets for the unrecognized portions of net actuarial
losses, prior service costs and transition obligations that are subject to
recovery through electric rates
    
    
    36,736Increase in pension benefit and other postretirement liability
    
    
    (34,714
    )Increase in deferred tax liability
    
    
    (502
    )Decrease in accumulated other comprehensive loss for the unrecognized portions
of net actuarial losses, prior service costs and transition obligations that
are not subject to recovery through electric rates (increase to equity)
    
    
    (753
    )
  Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,




---



##### 



Managements Report Regarding Internal Controls Over Financial Reporting
   Internal Control  Integrated Framework
    /s/ John EricksonJohn Erickson
President and Chief Executive Officer/s/ Kevin MougKevin Moug
Chief Financial Officer and TreasurerFebruary 19, 2007




---



##### 



TO THE SHAREHOLDERS OF OTTER TAIL CORPORATION




---



##### 








---



##### 



Otter Tail Corporation
 Consolidated Statements of IncomeFor the Years Ended December 31
 (in thousands, except per-share amounts)
    
    2006
    
    
    2005
    
    
    2004Operating revenuesElectric
    
    $
    305,703
    
    
    $
    312,624
    
    
    $
    266,020Nonelectric
    
    
    799,251
    
    
    
    669,245
    
    
    
    547,016Total operating revenues
    
    
    1,104,954
    
    
    
    981,869
    
    
    
    813,036Operating expensesProduction fuel  electric
    
    
    58,729
    
    
    
    55,927
    
    
    
    52,056Purchased power  electric system use
    
    
    58,281
    
    
    
    58,828
    
    
    
    40,098Electric operation and maintenance expenses
    
    
    103,548
    
    
    
    99,904
    
    
    
    85,361Cost of goods sold  nonelectric (excludes depreciation;
included below)
    
    
    611,737
    
    
    
    502,407
    
    
    
    420,394Other nonelectric expenses
    
    
    115,290
    
    
    
    109,707
    
    
    
    86,037Depreciation and amortization
    
    
    49,983
    
    
    
    46,458
    
    
    
    43,471Property taxes  electric
    
    
    9,589
    
    
    
    10,043
    
    
    
    10,411Total operating expenses
    
    
    1,007,157
    
    
    
    883,274
    
    
    
    737,828Operating income
    
    
    97,797
    
    
    
    98,595
    
    
    
    75,208Other income and deductions
    
    
    (440
    )
    
    
    1,773
    
    
    
    788Interest charges
    
    
    19,501
    
    
    
    18,459
    
    
    
    18,128Income from continuing operations before income taxes
    
    
    77,856
    
    
    
    81,909
    
    
    
    57,868Income taxes  continuing operations
    
    
    27,106
    
    
    
    28,007
    
    
    
    17,366Net income from continuing operations
    
    
    50,750
    
    
    
    53,902
    
    
    
    40,502Discontinued operationsIncome (loss) from discontinued operations net of taxes of
$28 in 2006, ($261) in 2005 and $1,121 in 2004
    
    
    26
    
    
    
    (352
    )
    
    
    1,693Goodwill impairment loss
    
    
    
    
    
    
    (1,003
    )
    
    
    Net gain on disposition of discontinued operations
net of taxes of $224 in 2006 and $5,831 in 2005
    
    
    336
    
    
    
    10,004
    
    
    
    Net income from discontinued operations
    
    
    362
    
    
    
    8,649
    
    
    
    1,693Net income
    
    
    51,112
    
    
    
    62,551
    
    
    
    42,195Preferred dividend requirements
    
    
    736
    
    
    
    735
    
    
    
    736Earnings available for common shares
    
    $
    50,376
    
    
    $
    61,816
    
    
    $
    41,459Average number of common shares outstandingbasic
    
    
    29,394
    
    
    
    29,223
    
    
    
    26,089Average number of common shares outstandingdiluted
    
    
    29,664
    
    
    
    29,348
    
    
    
    26,207Basic earnings per share:Continuing operations (net of preferred dividend
requirements)
    
    $
    1.70
    
    
    $
    1.82
    
    
    $
    1.53Discontinued operations
    
    
    0.01
    
    
    
    0.30
    
    
    
    0.06$
    1.71
    
    
    $
    2.12
    
    
    $
    1.59Diluted earnings per share:Continuing operations (net of preferred dividend
requirements)
    
    $
    1.69
    
    
    $
    1.81
    
    
    $
    1.52Discontinued operations
    
    
    0.01
    
    
    
    0.30
    
    
    
    0.06$
    1.70
    
    
    $
    2.11
    
    
    $
    1.58Dividends per common share
    
    $
    1.15
    
    
    $
    1.12
    
    
    $
    1.10
 See accompanying notes to consolidated financial statements.




---



##### 



Otter Tail Corporation
 Consolidated Balance Sheets, December 31
 (in thousands)
    
    2006
    
    
    2005AssetsCurrent assetsCash and cash equivalents
    
    $
    6,791
    
    
    $
    5,430Accounts receivable:Trade (less allowance for doubtful accounts of
$2,964 for 2006 and $3,493 for 2005)
    
    
    135,011
    
    
    
    117,796Other
    
    
    10,265
    
    
    
    11,790Inventories
    
    
    103,002
    
    
    
    88,677Deferred income taxes
    
    
    8,069
    
    
    
    6,871Accrued utility revenues
    
    
    23,931
    
    
    
    22,892Costs and estimated earnings in excess of billings
    
    
    38,384
    
    
    
    21,542Other
    
    
    9,611
    
    
    
    16,476Assets of discontinued operations
    
    
    289
    
    
    
    13,701Total current assets
    
    
    335,353
    
    
    
    305,175Investments and other assets
    
    
    29,946
    
    
    
    33,824Goodwillnet
    
    
    98,110
    
    
    
    98,110Other intangiblesnet
    
    
    20,080
    
    
    
    21,160Deferred debitsUnamortized debt expense and reacquisition premiums
    
    
    6,133
    
    
    
    6,520Regulatory assets and other deferred debits
    
    
    50,419
    
    
    
    19,616Total deferred debits
    
    
    56,552
    
    
    
    26,136PlantElectric plant in service
    
    
    930,689
    
    
    
    910,766Nonelectric operations
    
    
    239,269
    
    
    
    228,548Total
    
    
    1,169,958
    
    
    
    1,139,314Less accumulated depreciation and amortization
    
    
    479,557
    
    
    
    459,438Plantnet of accumulated depreciation and
amortization
    
    
    690,401
    
    
    
    679,876Construction work in progress
    
    
    28,208
    
    
    
    17,215Net plant
    
    
    718,609
    
    
    
    697,091Total
    
    $
    1,258,650
    
    
    $
    1,181,496
 See accompanying notes to consolidated financial statements.




---



##### 



Otter Tail Corporation
 Consolidated Balance Sheets, December 31
 (in thousands, except share data)
    
    2006
    
    
    2005Liabilities and EquityCurrent liabilitiesShort-term debt
    
    $
    38,900
    
    
    $
    16,000Current maturities of long-term debt
    
    
    3,125
    
    
    
    3,340Accounts payable
    
    
    120,195
    
    
    
    97,239Accrued salaries and wages
    
    
    28,653
    
    
    
    24,326Accrued federal and state income taxes
    
    
    2,383
    
    
    
    8,449Other accrued taxes
    
    
    11,509
    
    
    
    12,518Other accrued liabilities
    
    
    10,495
    
    
    
    14,124Liabilities of discontinued operations
    
    
    197
    
    
    
    10,983Total current liabilities
    
    
    215,457
    
    
    
    186,979Pensions benefit liability
    
    
    44,035
    
    
    
    23,216Other postretirement benefits liability
    
    
    32,254
    
    
    
    26,982Other noncurrent liabilities
    
    
    18,866
    
    
    
    18,683Commitments (note 9)Deferred creditsDeferred income taxes
    
    
    112,740
    
    
    
    113,737Deferred investment tax credit
    
    
    8,181
    
    
    
    9,327Regulatory liabilities
    
    
    63,875
    
    
    
    61,624Other
    
    
    281
    
    
    
    1,500Total deferred credits
    
    
    185,077
    
    
    
    186,188Capitalization (page 40)Long-term debt, net of current maturities
    
    
    255,436
    
    
    
    258,260Class B stock options of subsidiary
    
    
    1,255
    
    
    
    1,258Cumulative preferred shares
    
    
    15,500
    
    
    
    15,500Common shares, par value $5 per shareauthorized, 50,000,000 shares;
outstanding, 200629,521,770 shares; 200529,401,223 shares
    
    
    147,609
    
    
    
    147,006Premium on common shares
    
    
    99,223
    
    
    
    96,768Unearned compensation
    
    
    
    
    
    
    (1,720
    )Retained earnings
    
    
    245,005
    
    
    
    228,515Accumulated other comprehensive loss
    
    
    (1,067
    )
    
    
    (6,139
    )Total common equity
    
    
    490,770
    
    
    
    464,430Total capitalization
    
    
    762,961
    
    
    
    739,448Total
    
    $
    1,258,650
    
    
    $
    1,181,496
 See accompanying notes to consolidated financial statements.




---



##### 



Otter Tail Corporation
 Consolidated Statements of Common Shareholders Equity
 AccumulatedCommon
    
    Par value,
    
    Premium on
    
    
    
    
    
    
    
    
    
    othershares
    
    common
    
    common
    
    Unearned
    
    Retained
    
    comprehensive
    
    Total(in thousands, except common shares
outstanding)
    
    outstanding
    
    shares
    
    shares
    
    compensation
    
    earnings
    
    income/(loss)
    
    equityBalance, December 31, 2003
    
    
    25,723,814
    
    
    $
    128,619
    
    
    $
    26,515
    
    
    $
    (3,313
    )
    
    $
    186,495
    
    
    $
    (4,429
    )
    
    $
    333,887Common stock issuances, net of expenses
    
    
    3,266,266
    
    
    
    16,332
    
    
    
    63,373
    
    
    
    (566
    )
    
    
    
    
    
    
    
    
    
    
    79,139Common stock retirements
    
    
    (13,161
    )
    
    
    (66
    )
    
    
    (283
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (349
    )Amortization of unearned compensationstock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,302
    
    
    
    
    
    
    
    
    
    
    
    1,302Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    42,195
    
    
    
    
    
    
    
    42,195Unrealized loss on marketable equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (14
    )
    
    
    (14
    )Foreign currency exchange translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,014
    
    
    
    1,014Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,039
    
    
    
    3,039Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46,234Tax benefit for exercise of stock options
    
    
    
    
    
    
    
    
    
    
    92
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    92Valuation of stock options of subsidiary acquired in 2004
    
    
    
    
    
    
    
    
    
    
    (1,832
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,832
    )Cumulative preferred dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (735
    )
    
    
    
    
    
    
    (735
    )Common dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,528
    )
    
    
    
    
    
    
    (28,528
    )Balance, December 31, 2004
    
    
    28,976,919
    
    
    $
    144,885
    
    
    $
    87,865
    
    
    $
    (2,577
    )
    
    $
    199,427
    
    
    $
    (390
    )
    
    $
    429,210Common stock issuances, net of expenses
    
    
    456,211
    
    
    
    2,281
    
    
    
    8,483
    
    
    
    (529
    )
    
    
    
    
    
    
    
    
    
    
    10,235Common stock retirements
    
    
    (31,907
    )
    
    
    (160
    )
    
    
    (756
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (916
    )Amortization of unearned compensationstock awards
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,386
    
    
    
    
    
    
    
    
    
    
    
    1,386Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    62,551
    
    
    
    
    
    
    
    62,551Unrealized loss on marketable equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23
    )
    
    
    (23
    )Foreign currency exchange translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    437
    
    
    
    437Minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,163
    )
    
    
    (6,163
    )Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,802Tax benefit for exercise of stock options
    
    
    
    
    
    
    
    
    
    
    596
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    596Stock incentive plan performance award accrual
    
    
    
    
    
    
    
    
    
    
    943
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    943Premium on purchase of stock for employee purchase plan
    
    
    
    
    
    
    
    
    
    
    (363
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (363
    )Cumulative preferred dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (735
    )
    
    
    
    
    
    
    (735
    )Common dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,728
    )
    
    
    
    
    
    
    (32,728
    )Balance, December 31, 2005
    
    
    29,401,223
    
    
    $
    147,006
    
    
    $
    96,768
    
    
    $
    (1,720
    )
    
    $
    228,515
    
    
    $
    (6,139
    )
    
    $
    464,430Common stock issuances, net of expenses
    
    
    136,917
    
    
    
    685
    
    
    
    1,837
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,522Common stock retirements
    
    
    (16,370
    )
    
    
    (82
    )
    
    
    (378
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (460
    )SFAS No. 123(R) reclassifications (note 7)
    
    
    
    
    
    
    
    
    
    
    (2,490
    )
    
    
    1,720
    
    
    
    
    
    
    
    
    
    
    
    (770
    )Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,112
    
    
    
    
    
    
    
    51,112Unrealized loss on marketable equity securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56
    
    
    
    56Foreign currency exchange translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6
    
    
    
    6SFAS No. 87 minimum pension liability adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,257
    
    
    
    4,257Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,431SFAS No. 158 items (net-of-tax)Reversal of 12/31/06 minimum pension liability
balance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,296
    
    
    
    3,296Unrecognized postretirement benefit costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (24,585
    )
    
    
    (24,585
    )Unrecognized costs classified as regulatory assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,042
    
    
    
    22,042Tax benefit for exercise of stock options
    
    
    
    
    
    
    
    
    
    
    288
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    288Stock compensation award accruals
    
    
    
    
    
    
    
    
    
    
    2,404
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,404Vesting of restricted stock granted to employees
    
    
    
    
    
    
    
    
    
    
    1,096
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,096Premium on purchase of stock for employee purchase plan
    
    
    
    
    
    
    
    
    
    
    (302
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (302
    )Cumulative preferred dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (736
    )
    
    
    
    
    
    
    (736
    )Common dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (33,886
    )
    
    
    
    
    
    
    (33,886
    )Balance, December 31, 2006
    
    
    29,521,770
    
    
    $
    147,609
    
    
    $
    99,223
    
    
    $
    
    
    
    $
    245,005
    
    
    $
    (1,067
    )(a)
    
    $
    490,770
 (a)
    
    Accumulated other comprehensive loss on December 31, 2006 is comprised of the following:
 (in thousands)
    
    Before tax
    
    Tax effect
    
    Net-of-taxUnamortized actuarial losses and transition obligation related to pension and postretirement benefits
    
    $
    (4,238
    )
    
    $
    1,695
    
    
    $
    (2,543
    )Foreign currency exchange translation
    
    
    2,430
    
    
    
    (972
    )
    
    
    1,458Unrealized gain on marketable equity securities
    
    
    30
    
    
    
    (12
    )
    
    
    18Net accumulated other comprehensive loss
    
    $
    (1,778
    )
    
    $
    711
    
    
    $
    (1,067
    )
 See accompanying notes to consolidated financial statements.




---



##### 



Otter Tail Corporation
 Consolidated Statements of Cash FlowsFor the Years Ended December 31
 (in thousands)
    
    2006
    
    
    2005
    
    
    2004Cash flows from operating activitiesNet income
    
    $
    51,112
    
    
    $
    62,551
    
    
    $
    42,195Adjustments to reconcile net income to net cash provided
by operating activities:Net gain on sale of discontinued operations
    
    
    (336
    )
    
    
    (10,004
    )
    
    
    (Income) loss from discontinued operations
    
    
    (26
    )
    
    
    1,355
    
    
    
    (1,693
    )Depreciation and amortization
    
    
    49,983
    
    
    
    46,458
    
    
    
    43,471Deferred investment tax credit
    
    
    (1,146
    )
    
    
    (1,150
    )
    
    
    (1,152
    )Deferred income taxes
    
    
    (1,258
    )
    
    
    (9,223
    )
    
    
    3,950Change in deferred debits and other assets
    
    
    (38,499
    )
    
    
    8,865
    
    
    
    (1,641
    )Discretionary contribution to pension plan
    
    
    (4,000
    )
    
    
    (4,000
    )
    
    
    (4,000
    )Change in noncurrent liabilities and deferred credits
    
    
    45,340
    
    
    
    1,321
    
    
    
    2,110Allowance for equity (other) funds used during construction
    
    
    2,529
    
    
    
    (723
    )
    
    
    (716
    )Change in derivatives net of regulatory deferral
    
    
    3,083
    
    
    
    (2,615
    )
    
    
    1,755Stock compensation expense
    
    
    2,404
    
    
    
    2,388
    
    
    
    87Othernet
    
    
    418
    
    
    
    1,118
    
    
    
    1,343Cash (used for) provided by current assets and current liabilities:Change in receivables
    
    
    (15,713
    )
    
    
    (9,715
    )
    
    
    (7,357
    )Change in inventories
    
    
    (14,345
    )
    
    
    (12,500
    )
    
    
    (6,894
    )Change in other current assets
    
    
    (17,409
    )
    
    
    (13,908
    )
    
    
    (15,360
    )Change in payables and other current liabilities
    
    
    23,022
    
    
    
    32,682
    
    
    
    (647
    )Change in interest and income taxes payable
    
    
    (5,952
    )
    
    
    (2,552
    )
    
    
    (1,041
    )Net cash provided by continuing operations
    
    
    79,207
    
    
    
    90,348
    
    
    
    54,410Net cash provided by discontinued operations
    
    
    1,039
    
    
    
    5,452
    
    
    
    1,891Net cash provided by operating activities
    
    
    80,246
    
    
    
    95,800
    
    
    
    56,301Cash flows from investing activitiesCapital expenditures
    
    
    (69,448
    )
    
    
    (59,969
    )
    
    
    (49,484
    )Proceeds from disposal of noncurrent assets
    
    
    5,233
    
    
    
    4,193
    
    
    
    5,844Acquisitionsnet of cash acquired
    
    
    
    
    
    
    (11,223
    )
    
    
    (69,069
    )(Increases) decreases in other investments
    
    
    (3,326
    )
    
    
    4,171
    
    
    
    (5,099
    )Net cash used in investing activities  continuing operations
    
    
    (67,541
    )
    
    
    (62,828
    )
    
    
    (117,808
    )Net proceeds from sale of discontinued operations
    
    
    1,960
    
    
    
    34,185
    
    
    
    Net cash provided by (used in) investing activities  discontinued operations
    
    
    
    
    
    
    602
    
    
    
    (1,310
    )Net cash used in investing activities
    
    
    (65,581
    )
    
    
    (28,041
    )
    
    
    (119,118
    )Cash flows from financing activitiesChange in checks written in excess of cash
    
    
    (11
    )
    
    
    (3,329
    )
    
    
    3,458Net short-term borrowings (repayments)
    
    
    22,900
    
    
    
    (23,950
    )
    
    
    9,950Proceeds from issuance of common stock, net of issuance expenses
    
    
    2,444
    
    
    
    9,690
    
    
    
    78,780Payments for retirement of common stock and Class B stock of subsidiary
    
    
    (463
    )
    
    
    (939
    )
    
    
    (349
    )Proceeds from issuance of long-term debt
    
    
    149
    
    
    
    368
    
    
    
    4,186Debt issuance expenses
    
    
    (458
    )
    
    
    (140
    )
    
    
    (121
    )Payments for retirement of long-term debt
    
    
    (3,287
    )
    
    
    (7,232
    )
    
    
    (9,061
    )Dividends paid
    
    
    (34,621
    )
    
    
    (33,463
    )
    
    
    (29,263
    )Net cash (used in) provided by financing activities  continuing operations
    
    
    (13,347
    )
    
    
    (58,995
    )
    
    
    57,580Net cash used in financing activities  discontinued operations
    
    
    
    
    
    
    (2,996
    )
    
    
    (1,679
    )Net cash (used in) provided by financing activities
    
    
    (13,347
    )
    
    
    (61,991
    )
    
    
    55,901Effect of foreign exchange rate fluctuations on cash
    
    
    43
    
    
    
    (338
    )
    
    
    (794
    )Net change in cash and cash equivalents
    
    
    1,361
    
    
    
    5,430
    
    
    
    (7,710
    )Cash and cash equivalents at beginning of year  continuing operations
    
    
    5,430
    
    
    
    
    
    
    
    7,710Cash and cash equivalents at end of year  continuting operations
    
    $
    6,791
    
    
    $
    5,430
    
    
    $
    Supplemental disclosures of cash flow informationCash paid during the year from continuing operations forInterest (net of amount capitalized)
    
    $
    18,456
    
    
    $
    17,637
    
    
    $
    16,410Income taxes
    
    $
    35,061
    
    
    $
    39,548
    
    
    $
    16,211Cash paid during the year from discontinued operations forInterest
    
    $
    91
    
    
    $
    119
    
    
    $
    144Income taxes
    
    $
    423
    
    
    $
    323
    
    
    $
    833
 See accompanying notes to consolidated financial statements.




---



##### 



Otter Tail Corporation
 Consolidated Statements of Capitalization, December 31
 (in thousands, except share data)
    
    2006
    
    
    2005Long-term debtSenior notes 6.63%, due December 1, 2011
    
    $
    90,000
    
    
    $
    90,000Senior debentures 6.375%, due December 1, 2007
    
    
    50,000
    
    
    
    50,000Insured senior notes 5.625%, due October 1, 2017
    
    
    40,000
    
    
    
    40,000Senior notes 6.80%, due October 1, 2032
    
    
    25,000
    
    
    
    25,000Mercer County, North Dakota pollution control refunding revenue bonds 4.85%, due September 1, 2022
    
    
    20,735
    
    
    
    20,735Pollution control refunding revenue bonds, variable, 4.31% at December 31, 2006, due December 1, 2012
    
    
    10,400
    
    
    
    10,400Lombard US Equipment Finance note 6.76%, due October 2, 2010
    
    
    9,314
    
    
    
    11,643Grant County, South Dakota pollution control refunding revenue bonds 4.65%, due September 1, 2017
    
    
    5,185
    
    
    
    5,185Obligations of Varistar Corporation  various up to 9.33% at December 31, 2006
    
    
    8,424
    
    
    
    9,235Total
    
    
    259,058
    
    
    
    262,198Less:Current maturities
    
    
    3,125
    
    
    
    3,340Unamortized debt discount
    
    
    497
    
    
    
    598Total long-term debtcontinuing operations
    
    
    255,436
    
    
    
    258,260Class B stock options of subsidiary
    
    
    1,255
    
    
    
    1,258Cumulative preferred shareswithout par value (stated and
liquidating value $100 a share)authorized 1,500,000 shares;
Series outstanding:$3.60, 60,000 shares
    
    
    6,000
    
    
    
    6,000$4.40, 25,000 shares
    
    
    2,500
    
    
    
    2,500$4.65, 30,000 shares
    
    
    3,000
    
    
    
    3,000$6.75, 40,000 shares
    
    
    4,000
    
    
    
    4,000Total preferred
    
    
    15,500
    
    
    
    15,500Cumulative preference shareswithout par value, authorized 1,000,000 shares; outstanding: noneTotal common shareholders equity
    
    
    490,770
    
    
    
    464,430Total capitalization
    
    $
    762,961
    
    
    $
    739,448
 See accompanying notes to consolidated financial statements.




---



##### 



Principles of Consolidation
 Accounting for the Effects of Certain Types of Regulation
 Regulation and Statement of Financial Accounting Standards No. 71
   Plant, Retirements and Depreciation




---



##### 



Jointly Owned Plants
 
 (in thousands)
    
    Big Stone Plant
    
    
    Coyote StationDecember 31, 2006Electric plant in service
    
    $
    124,965
    
    
    $
    147,319Accumulated depreciation
    
    
    (75,872
    )
    
    
    (80,336
    )Net plant
    
    $
    49,093
    
    
    $
    66,983December 31, 2005Electric plant in service
    
    $
    124,852
    
    
    $
    146,405Accumulated depreciation
    
    
    (71,824
    )
    
    
    (77,909
    )Net plant
    
    $
    53,028
    
    
    $
    68,496
  Recoverability of Long-Lived Assets
  Income Taxes
  Revenue Recognition
 Accounting for Derivative Instruments and Hedging Activities,




---



##### 



December 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Costs incurred on uncompleted contracts
    
    $
    257,370
    
    
    $
    194,076Less billings to date
    
    
    (284,273
    )
    
    
    (203,862
    )Plus estimated earnings recognized
    
    
    35,955
    
    
    
    22,834$
    9,052
    
    
    $
    13,048
  December 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Costs and estimated earnings in excess of billings on uncompleted contracts
    
    $
    38,384
    
    
    $
    21,542Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    (29,332
    )
    
    
    (8,494
    )$
    9,052
    
    
    $
    13,048
 Foreign Currency Translation




---



##### 



Pre-Production Costs
 Accounting for Pre-production Costs Related to Long-Term Supply Arrangements
 Shipping and Handling Costs
  Use of Estimates
  Adjustments and Reclassifications
  Cash Equivalents




---



##### 



Investments
  December 31,
    
    December 31,(in thousands)
    
    2006
    
    2005Cost method:Economic development loan pools
    
    $
    569
    
    
    $
    742Other
    
    
    1,518
    
    
    
    1,913Equity method:Affordable housing partnerships
    
    
    2,228
    
    
    
    2,980Marketable securities classified as available-for-sale
    
    
    4,640
    
    
    
    3,067Total investments
    
    $
    8,955
    
    
    $
    8,702
 Consolidation of Variable Interest Entities,
  Inventories
  December 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Finished goods
    
    $
    46,477
    
    
    $
    38,928Work in process
    
    
    5,663
    
    
    
    7,146Raw material, fuel and supplies
    
    
    50,862
    
    
    
    42,603Total inventories
    
    $
    103,002
    
    
    $
    88,677
 Goodwill and Intangible Assets
 Goodwill and Other Intangible Assets, Accounting for the Impairment or Disposal of Long-Lived Assets
  December 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Plastics
    
    $
    19,302
    
    
    $
    19,302Manufacturing
    
    
    15,698
    
    
    
    15,698Health services
    
    
    24,328
    
    
    
    24,328Food ingredient processing
    
    
    24,240
    
    
    
    24,240Other business operations
    
    
    14,542
    
    
    
    14,542Total
    
    $
    98,110
    
    
    $
    98,110




---



##### 



Gross carrying
    
    
    Accumulated
    
    
    Net carrying2006 (in thousands)
    
    amount
    
    
    amortization
    
    
    amountAmortized intangible assets:Covenants not to compete
    
    $
    2,198
    
    
    $
    1,813
    
    
    $
    385Customer relationships
    
    
    10,574
    
    
    
    1,016
    
    
    
    9,558Other intangible assets including contracts
    
    
    2,083
    
    
    
    1,291
    
    
    
    792Total
    
    $
    14,855
    
    
    $
    4,120
    
    
    $
    10,735Nonamortized intangible assets:Brand/trade name
    
    $
    9,345
    
    
    $
    
    
    
    $
    9,3452005 (in thousands)Amortized intangible assets:Covenants not to compete
    
    $
    2,338
    
    
    $
    1,620
    
    
    $
    718Customer relationships
    
    
    10,575
    
    
    
    583
    
    
    
    9,992Other intangible assets including contracts
    
    
    2,785
    
    
    
    1,680
    
    
    
    1,105Total
    
    $
    15,698
    
    
    $
    3,883
    
    
    $
    11,815Nonamortized intangible assets:Brand/trade name
    
    $
    9,345
    
    
    $
    
    
    
    $
    9,345
  New Accounting Standards
 SFAS No. 123(R) (revised 2004), Share-Based Payment, Accounting for Stock-based Compensation, Accounting for Stock Issued to Employees.
 
    
    $163,000, net-of-tax, in 2006 for non-vested stock options that were outstanding on
December 31, 2005.
    
    $235,000 in 2006 for the 15% discount offered under our Employee Stock Purchase
Plan.
  Transition Election Related to Accounting for Tax Effects of Share-Based
Payment Awards.
 FIN No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No.
109, Accounting for Income Taxes.




---



##### 



SFAS No. 157, Fair Value Measurements,
 SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plans, Accounting for the Effects of Certain Types of Regulation
 (in thousands)
    
    2006Decrease in Executive Survivor and Supplemental Retirement Plan intangible asset
    
    $
    (767
    )Increase in regulatory assets for the unrecognized portions of net actuarial
losses, prior service costs and transition obligations that are subject to
recovery through electric rates
    
    
    36,736Increase in pension benefit and other postretirement liability
    
    
    (34,714
    )Increase in deferred tax liability
    
    
    (502
    )Decrease in accumulated other comprehensive loss for the unrecognized portions
of net actuarial losses, prior service costs and transition obligations that
are not subject to recovery through electric rates (increase to equity)
    
    
    (753
    )
  Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements,




---



##### 



Performance
    
    
    Shoreline
    
    
    Southeast(in thousands)
    
    Tool
    
    
    Industries
    
    
    Floating DocksAssetsCurrent assets
    
    $
    748
    
    
    $
    464
    
    
    $
    2,437Plant
    
    
    1,396
    
    
    
    260
    
    
    
    415Deferred income taxes
    
    
    22
    
    
    
    
    
    
    
    Goodwill
    
    
    1,772
    
    
    
    1,442
    
    
    
    2,804Other intangible assets
    
    
    800
    
    
    
    557
    
    
    
    1,150Total assets
    
    $
    4,738
    
    
    $
    2,723
    
    
    $
    6,806LiabilitiesCurrent liabilities
    
    $
    324
    
    
    $
    86
    
    
    $
    318Deferred revenue
    
    
    
    
    
    
    
    
    
    
    2,520Deferred income taxes
    
    
    
    
    
    
    235
    
    
    
    Long-term debt
    
    
    298
    
    
    
    
    
    
    
    Total liabilities
    
    $
    622
    
    
    $
    321
    
    
    $
    2,838Cash paid
    
    $
    4,116
    
    
    $
    2,402
    
    
    $
    3,968




---



##### 



(in thousands)
    
    IPHAssetsCurrent assets
    
    $
    17,740Plant
    
    
    35,296Goodwill
    
    
    24,240Other intangible assets
    
    
    13,200Total assets
    
    $
    90,476LiabilitiesCurrent liabilities
    
    $
    5,893Deferred income taxes
    
    
    12,408Long-term debt
    
    
    2,140Class B common stock options
    
    
    1,832Total liabilities
    
    $
    22,273Cash paid
    
    $
    68,203
    Segment Information




---



##### 



Percent of sales revenue by country for the year ended December 31:2006
    
    2005
    
    2004United States of America
    
    
    97.2
    %
    
    
    97.8
    %
    
    
    96.9
    %Canada
    
    
    1.3
    %
    
    
    1.1
    %
    
    
    2.2
    %All other countries
    
    
    1.5
    %
    
    
    1.1
    %
    
    
    0.9
    %




---



##### 



(in thousands)
    
    2006
    
    
    2005
    
    
    2004Operating revenueElectric
    
    $
    306,014
    
    
    $
    312,985
    
    
    $
    266,385Plastics
    
    
    163,135
    
    
    
    158,548
    
    
    
    115,426Manufacturing
    
    
    311,811
    
    
    
    244,311
    
    
    
    201,615Health services
    
    
    135,051
    
    
    
    123,991
    
    
    
    114,318Food ingredient processing
    
    
    45,084
    
    
    
    38,501
    
    
    
    14,023Other business operations
    
    
    147,436
    
    
    
    107,400
    
    
    
    104,002Intersegment eliminations
    
    
    (3,577
    )
    
    
    (3,867
    )
    
    
    (2,733
    )Total
    
    $
    1,104,954
    
    
    $
    981,869
    
    
    $
    813,036Depreciation and amortizationElectric
    
    $
    25,756
    
    
    $
    24,397
    
    
    $
    24,236Plastics
    
    
    2,815
    
    
    
    2,511
    
    
    
    2,297Manufacturing
    
    
    11,076
    
    
    
    9,447
    
    
    
    7,828Health services
    
    
    3,660
    
    
    
    4,038
    
    
    
    5,047Food ingredient processing
    
    
    3,759
    
    
    
    3,399
    
    
    
    1,118Other business operations
    
    
    2,917
    
    
    
    2,666
    
    
    
    2,945Total
    
    $
    49,983
    
    
    $
    46,458
    
    
    $
    43,471Interest chargesElectric
    
    $
    10,315
    
    
    $
    10,271
    
    
    $
    10,109Plastics
    
    
    814
    
    
    
    1,080
    
    
    
    834Manufacturing
    
    
    6,550
    
    
    
    4,516
    
    
    
    2,480Health services
    
    
    910
    
    
    
    822
    
    
    
    925Food ingredient processing
    
    
    481
    
    
    
    165
    
    
    
    13Other business operations
    
    
    431
    
    
    
    1,605
    
    
    
    3,767Total
    
    $
    19,501
    
    
    $
    18,459
    
    
    $
    18,128Income before income taxesElectric
    
    $
    38,802
    
    
    $
    55,984
    
    
    $
    45,234Plastics
    
    
    22,959
    
    
    
    22,803
    
    
    
    9,453Manufacturing
    
    
    21,148
    
    
    
    12,242
    
    
    
    12,543Health services
    
    
    3,909
    
    
    
    6,875
    
    
    
    5,075Food ingredient processing
    
    
    (6,325
    )
    
    
    1,482
    
    
    
    618Other business operations*
    
    
    (2,637
    )
    
    
    (17,477
    )
    
    
    (15,055
    )Total
    
    $
    77,856
    
    
    $
    81,909
    
    
    $
    57,868Earnings available for common sharesElectric
    
    $
    23,445
    
    
    $
    36,566
    
    
    $
    30,799Plastics
    
    
    14,326
    
    
    
    13,936
    
    
    
    5,657Manufacturing
    
    
    13,171
    
    
    
    7,589
    
    
    
    7,563Health services
    
    
    2,230
    
    
    
    4,007
    
    
    
    2,951Food ingredient processing
    
    
    (4,115
    )
    
    
    329
    
    
    
    351Other business operations
    
    
    957
    
    
    
    (9,260
    )
    
    
    (7,555
    )Total
    
    $
    50,014
    
    
    $
    53,167
    
    
    $
    39,766Capital expendituresElectric
    
    $
    35,207
    
    
    $
    30,479
    
    
    $
    25,368Plastics
    
    
    5,504
    
    
    
    3,636
    
    
    
    2,544Manufacturing
    
    
    20,048
    
    
    
    16,112
    
    
    
    13,163Health services
    
    
    4,720
    
    
    
    3,095
    
    
    
    3,919Food ingredient processing
    
    
    1,762
    
    
    
    2,952
    
    
    
    3,528Other business operations
    
    
    2,207
    
    
    
    3,695
    
    
    
    962Total
    
    $
    69,448
    
    
    $
    59,969
    
    
    $
    49,484Identifiable assetsElectric
    
    $
    689,653
    
    
    $
    654,175
    
    
    $
    634,433Plastics
    
    
    80,666
    
    
    
    76,573
    
    
    
    67,574Manufacturing
    
    
    219,336
    
    
    
    177,969
    
    
    
    150,800Health services
    
    
    66,126
    
    
    
    67,066
    
    
    
    66,506Food ingredient processing
    
    
    94,462
    
    
    
    96,023
    
    
    
    92,392Other business operations
    
    
    108,118
    
    
    
    95,989
    
    
    
    81,851Discontinued operations
    
    
    289
    
    
    
    13,701
    
    
    
    40,592Total
    
    $
    1,258,650
    
    
    $
    1,181,496
    
    
    $
    1,134,148
 
 *
    
    Income before income taxes of other business operations includes unallocated corporate expenses
of $11,303,000, $16,650,000 and $13,855,000 for the years ended December 31, 2006, 2005 and
2004, respectively.




---



##### 



Minnesota




---



##### 



North Dakota
   Federal




---



##### 




    
    The Public Utility Holding Company Act of 1935 (PUHCA) was repealed effective February
8, 2006. PUHCA significantly restricted mergers and acquisitions in the electric utility
sector.
    
    The FERC will appoint and oversee an electric reliability organization to establish
and enforce mandatory reliability rules regarding the interstate electric transmission
system. It is expected that the electric reliability organization will be approved and
begin operation by mid-year 2006.
    
    The FERC will establish incentives for transmission companies, such as
performance-based rates, recovery of costs to comply with reliability rules and
accelerated depreciation for investments in transmission infrastructure.
    
    Federal support will be available for certain clean coal power initiatives, nuclear
power projects and renewable energy technologies.
    December 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Regulatory assets:Unrecognized transition obligation, prior service
costs and actuarial losses on pension and other
postretirement benefits
    
    $
    36,736
    
    
    $
    Deferred income taxes
    
    
    11,712
    
    
    
    16,724Accrued cost-of-energy revenue
    
    
    10,735
    
    
    
    10,400Reacquisition premiums
    
    
    2,694
    
    
    
    2,995Deferred conservation program costs
    
    
    1,036
    
    
    
    1,064MISO schedule 16 and 17 deferred administrative costs
    
    
    541
    
    
    
    Accumulated ARO accretion/depreciation adjustment
    
    
    249
    
    
    
    209Plant acquisition costs
    
    
    151
    
    
    
    196Deferred marked-to-market losses
    
    
    
    
    
    
    1,423Total regulatory assets
    
    $
    63,854
    
    
    $
    33,011Regulatory liabilities:Accumulated reserve for estimated removal costs
    
    $
    58,496
    
    
    $
    52,582Deferred income taxes
    
    
    5,228
    
    
    
    5,961Deferred marked-to-market gains
    
    
    
    
    
    
    2,925Gain on sale of division office building
    
    
    151
    
    
    
    156Total regulatory liabilities
    
    $
    63,875
    
    
    $
    61,624Net regulatory liability position
    
    $
    21
    
    
    $
    28,613




---



##### 



Employers Accounting for Defined Benefit
Pension and Other Postretirement Plans, Accounting for Income Taxes
   Electricity Contracts
   (in thousands)
    
    2006
    
    
    2005
    
    
    2004Wholesale sales  companyowned generation
    
    $
    23,130
    
    
    $
    24,799
    
    
    $
    17,970Revenue from settled contracts at market prices
    
    
    385,978
    
    
    
    474,882
    
    
    
    134,715Market cost of settled contracts
    
    
    (383,594
    )
    
    
    (457,728
    )
    
    
    (128,685
    )Net margins on settled contracts at market
    
    
    2,384
    
    
    
    17,154
    
    
    
    6,030Marked-to-market gains on settled contracts
    
    
    20,950
    
    
    
    11,118
    
    
    
    12,663Marked-to-market losses on settled contracts
    
    
    (20,702
    )
    
    
    (9,590
    )
    
    
    (9,736
    )Net marked-to-market gain on settled contracts
    
    
    248
    
    
    
    1,528
    
    
    
    2,927Unrealized marked-to-market gains on open contracts
    
    
    2,215
    
    
    
    5,678
    
    
    
    514Unrealized marked-to-market losses on open contracts
    
    
    (2,012
    )
    
    
    (2,762
    )
    
    
    (213
    )Net unrealized marked-to-market gain on open contracts
    
    
    203
    
    
    
    2,916
    
    
    
    301Wholesale electric revenue
    
    $
    25,965
    
    
    $
    46,397
    
    
    $
    27,228




---



##### 



December 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Current asset  marked-to-market gain
    
    $
    2,215
    
    
    $
    8,603Regulatory asset  deferred marked-to-market loss
    
    
    
    
    
    
    1,423Total assets
    
    
    2,215
    
    
    
    10,026Current liability  marked-to-market loss
    
    
    (2,012
    )
    
    
    (4,185
    )Regulatory liability  deferred marked-to-market gain
    
    
    
    
    
    
    (2,925
    )Total liabilities
    
    
    (2,012
    )
    
    
    (7,110
    )Net fair value of marked-to-market energy contracts
    
    $
    203
    
    
    $
    2,916
 Year ended(in thousands)
    
    December 31, 2006Fair value at beginning of year
    
    $
    2,916Amount realized on contracts entered into in 2005 and settled in
2006
    
    
    (2,090
    )Changes in fair value of contracts entered into in 2005
    
    
    (826
    )Net fair value of contracts entered into in 2005 at year end 2006
    
    
    Changes in fair value of contracts entered into in 2006
    
    
    203Net fair value at end of year
    
    $
    203
  1st Quarter
    
    2nd Quarter(in thousands)
    
    2007
    
    2007
    
    TotalNet gain
    
    $
    159
    
    
    $
    44
    
    
    $
    203
  Natural Gas Contracts




---



##### 



Stock Incentive Plan
  Employee Stock Purchase Plan
  Dividend Reinvestment and Share Purchase Plan
  Shareholder Rights Plan
  Earnings Per Share




---



##### 



Year
    
    Options Outstanding
    
    Range of Exercise Prices2006
    
    
    210,250
    
    
    $
    29.74  $31.342005
    
    
    237,624
    
    
    $
    28.66  $31.342004
    
    
    1,067,900
    
    
    $
    26.25  $31.34
 Share-Based Payments
 Share-Based Payment, Accounting for Stock-based Compensation, Accounting for Stock Issued to Employees.
   Purchase Plan
  Stock Options Granted Under the Incentive Plan




---



##### 



(in thousands, except per share amounts)
    
    2005
    
    
    2004Net incomeAs reported
    
    $
    62,551
    
    
    $
    42,195Total stock-based employee compensation
expense determined under fair value-based
method for all awards net of related tax
effects
    
    
    (640
    )
    
    
    (1,087
    )Pro forma
    
    $
    61,911
    
    
    $
    41,108Basic earnings per shareAs reported
    
    $
    2.12
    
    
    $
    1.59Pro forma
    
    $
    2.09
    
    
    $
    1.55Diluted earnings per shareAs reported
    
    $
    2.11
    
    
    $
    1.58Pro forma
    
    $
    2.08
    
    
    $
    1.54
  2006
    
    
    2005
    
    
    2004Average
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    Averageexercise
    
    
    
    
    
    
    exercise
    
    
    
    
    
    
    exerciseStock Option Activity
    
    Options
    
    
    price
    
    
    Options
    
    
    price
    
    
    Options
    
    
    priceOutstanding,
beginning of year
    
    
    1,237,164
    
    
    $
    25.58
    
    
    
    1,508,277
    
    
    $
    25.35
    
    
    
    1,531,125
    
    
    $
    25.16Granted
    
    
    
    
    
    
    
    
    
    
    74,900
    
    
    
    24.93
    
    
    
    72,400
    
    
    
    26.50Exercised
    
    
    107,458
    
    
    
    22.88
    
    
    
    257,948
    
    
    
    22.90
    
    
    
    51,468
    
    
    
    19.83Forfeited
    
    
    38,468
    
    
    
    28.60
    
    
    
    88,065
    
    
    
    28.79
    
    
    
    43,780
    
    
    
    27.37Outstanding, year end
    
    
    1,091,238
    
    
    
    25.74
    
    
    
    1,237,164
    
    
    
    25.58
    
    
    
    1,508,277
    
    
    
    25.35Exercisable, year end
    
    
    1,049,713
    
    
    
    25.69
    
    
    
    1,095,272
    
    
    
    25.16
    
    
    
    1,111,681
    
    
    
    24.27Cash received for
Options exercised
    
    $
    2,458,000
    
    
    
    
    
    
    $
    5,911,000
    
    
    
    
    
    
    $
    1,022,000Fair value of options
granted during year
    
    none granted
    
    
    
    
    
    $
    4.76
    
    
    
    
    
    
    $
    5.27
  2005
    
    
    2004Risk-free interest rate
    
    
    4.3
    %
    
    
    3.9
    %Expected lives
    
    7 years
    
    7 yearsExpected volatility
    
    
    25.4
    %
    
    
    25.7
    %Dividend yield
    
    
    4.4
    %
    
    
    4.0
    %
  Options outstanding
    
    Options exercisableWeighted-average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Outstanding
    
    
    remaining
    
    
    average
    
    
    Exercisable
    
    
    averageRange of
    
    as of
    
    
    contractual
    
    
    exercise
    
    
    as of
    
    
    exerciseexercise prices
    
    12/31/06
    
    
    life (yrs)
    
    
    price
    
    
    12/31/06
    
    
    price$18.80$21.94
    
    
    251,873
    
    
    
    2.8
    
    
    $
    19.50
    
    
    
    251,873
    
    
    $
    19.48$21.95$25.07
    
    
    56,350
    
    
    
    8.3
    
    
    $
    24.93
    
    
    
    56,350
    
    
    $
    24.93$25.08$28.21
    
    
    566,765
    
    
    
    5.0
    
    
    $
    26.52
    
    
    
    525,240
    
    
    $
    26.42$28.22$31.34
    
    
    216,250
    
    
    
    5.2
    
    
    $
    31.19
    
    
    
    216,250
    
    
    $
    31.17




---



##### 



Restricted Stock Granted to Directors
   2006
    
    
    2005
    
    
    2004Weighted average
    
    
    
    
    
    
    Weighted average
    
    
    
    
    
    
    Weighted averagegrant-date fair
    
    
    
    
    
    
    grant-date fair
    
    
    
    
    
    
    grant-date fairShares
    
    
    value
    
    
    Shares
    
    
    value
    
    
    Shares
    
    
    valueNonvested, beginning of year
    
    
    27,000
    
    
    $
    26.32
    
    
    
    22,600
    
    
    $
    27.61
    
    
    
    18,450
    
    
    $
    28.74Granted
    
    
    19,800
    
    
    $
    28.24
    
    
    
    11,700
    
    
    $
    24.93
    
    
    
    10,800
    
    
    $
    26.49Vested
    
    
    14,025
    
    
    $
    26.82
    
    
    
    7,300
    
    
    $
    28.09
    
    
    
    6,650
    
    
    $
    28.94Forfeited
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Nonvested, end of year
    
    
    32,775
    
    
    $
    27.27
    
    
    
    27,000
    
    
    $
    26.32
    
    
    
    22,600
    
    
    $
    27.61Compensation expense
recognized
    
    
    
    
    
    $
    401,000
    
    
    
    
    
    
    $
    261,000
    
    
    
    
    
    
    $
    219,000Fair value of shares vested
in year
    
    
    
    
    
    $
    376,000
    
    
    
    
    
    
    $
    205,057
    
    
    
    
    
    
    $
    192,000
 Restricted Stock Granted to Employees




---



##### 



2006
    
    
    2005
    
    
    2004Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    Weightedaverage
    
    
    
    
    
    
    average
    
    
    
    
    
    
    averagereporting
    
    
    
    
    
    
    reporting
    
    
    
    
    
    
    reportingdate fair
    
    
    
    
    
    
    date fair
    
    
    
    
    
    
    date fairShares
    
    
    value
    
    
    Shares
    
    
    value
    
    
    Shares
    
    
    valueNonvested, beginning of year
    
    
    72,974
    
    
    $
    28.91
    
    
    
    103,340
    
    
    $
    25.31
    
    
    
    131,800
    
    
    $
    27.16Granted
    
    
    
    
    
    
    
    
    
    
    9,000
    
    
    $
    26.31
    
    
    
    10,540
    
    
    $
    26.57Vested
    
    
    41,308
    
    
    $
    28.98
    
    
    
    39,126
    
    
    $
    25.08
    
    
    
    39,000
    
    
    $
    26.40Forfeited
    
    
    
    
    
    
    
    
    
    
    240
    
    
    
    
    
    
    
    Nonvested, end of year
    
    
    31,666
    
    
    $
    31.47
    
    
    
    72,974
    
    
    $
    28.91
    
    
    
    103,340
    
    
    $
    25.31Compensation expense
recognized
    
    
    
    
    
    $
    815,000
    
    
    
    
    
    
    $
    1,118,000
    
    
    
    
    
    
    $
    1,083,000Fair value of shares vested
in year
    
    
    
    
    
    $
    1,197,000
    
    
    
    
    
    
    $
    981,000
    
    
    
    
    
    
    $
    1,030,000
 Restricted Stock Units Granted to Employees
   AggregateRestricted
    
    
    grant-datestock units
    
    
    fair valueOutstanding, January 1, 2006
    
    
    
    
    
    $
    Granted
    
    
    47,425
    
    
    
    1,205,000Converted
    
    
    7,450
    
    
    
    220,000Forfeited
    
    
    1,360
    
    
    
    33,000Outstanding, December, 2006
    
    
    38,615
    
    
    $
    952,000Compensation expense recognized in 2006
    
    
    
    
    
    $
    427,000
 Stock Performance Awards granted to Executive Officers




---



##### 



Maximum shares
    
    Shares used
    
    
    
    
    
    Expense recognizedPerformance
    
    subject to
    
    to estimate
    
    Fair
    
    in the year endedperiod
    
    award
    
    expense
    
    Value
    
    December 31,2006
    
    2005
    
    200420042006
    
    
    70,500
    
    
    
    23,500
    
    
    $
    23.90
    
    
    $
    187,000
    
    
    $
    490,000
    
    
    
    20052007
    
    
    75,150
    
    
    
    50,872
    
    
    $
    22.10
    
    
    
    375,000
    
    
    
    453,000
    
    
    
    20062008
    
    
    88,050
    
    
    
    58,700
    
    
    $
    25.95
    
    
    
    508,000
    
    
    
    
    
    
    
    Total
    
    
    233,700
    
    
    
    133,072
    
    
    
    
    
    
    $
    1,070,000
    
    
    $
    943,000
    
    
    
    
         Electric
    
    
    Nonelectric
    
    
    Total(in thousands)2007
    
    $
    2,075
    
    
    $
    38,787
    
    
    $
    40,8622008
    
    
    1,475
    
    
    
    34,692
    
    
    
    36,1672009
    
    
    1,475
    
    
    
    31,149
    
    
    
    32,6242010
    
    
    1,475
    
    
    
    23,058
    
    
    
    24,5332011
    
    
    1,430
    
    
    
    7,534
    
    
    
    8,964Later years
    
    
    9,931
    
    
    
    1,262
    
    
    
    11,193Total
    
    $
    17,861
    
    
    $
    136,482
    
    
    $
    154,343




---



##### 



Short-Term Debt
     Long-Term Debt




---



##### 



Covenants




---



##### 



Cumulative Preferred Shares
  Series outstanding
    
    Call price$3.60, 60,000 shares
    
    $
    102.25$4.40, 25,000 shares
    
    $
    102.00$4.65, 30,000 shares
    
    $
    101.50$6.75, 40,000 shares
    
    $
    102.3625
 Class B Stock Options of Subsidiary
    Accounting for Defined Benefit
Pension and Other Postretirement Plans, Accounting for the Effects of Certain Types of Regulation




---



##### 



January 1, 2005 through
    
    July 1, 2005 throughKey assumptions and data
    
    June 30, 2005
    
    December 31, 2005Discount rate
    
    
    6.00%
    
    
    
    5.25%Long-term rate of return on plan assets
    
    
    8.50%
    
    
    
    8.50%Social Security wage base
    
    
    4.00%
    
    
    
    3.50%Rate of inflation
    
    
    3.00%
    
    
    
    2.50%Rate of withdrawal
    
    1% per year through age 54
    
    2% per year through age 54Mortality table
    
    GAM 83
    
    RP-2000 projected to 2006Market value of assets  beginning of period
    
    $
    141,685,000
    
    
    $
    142,547,832
  Pension Plan
     (in thousands)
    
    2006
    
    
    2005
    
    
    2004Service costbenefit earned during the period
    
    $
    5,057
    
    
    $
    4,695
    
    
    $
    4,063Interest cost on projected benefit obligation
    
    
    10,435
    
    
    
    9,721
    
    
    
    9,458Expected return on assets
    
    
    (12,288
    )
    
    
    (12,071
    )
    
    
    (12,438
    )Amortization of prior-service cost
    
    
    742
    
    
    
    726
    
    
    
    897Amortization of net actuarial loss
    
    
    1,844
    
    
    
    1,364
    
    
    
    Net periodic pension cost
    
    $
    5,790
    
    
    $
    4,435
    
    
    $
    1,980
  (in thousands)
    
    2006
    
    
    2005Prepaid pension cost
    
    $
    
    
    
    $
    9,795Current liability
    
    
    
    
    
    
    Noncurrent liability
    
    
    (19,252
    )
    
    
    Additional minimum liability
    
    
    
    
    
    
    (13,380
    )Net amount recognized
    
    $
    (19,252
    )
    
    $
    (3,585
    )
  (in thousands)
    
    2006
    
    
    2005Regulatory assets:Unrecognized prior service cost
    
    $
    (4,748
    )
    
    $
    Unrecognized actuarial loss
    
    
    (21,771
    )
    
    
    Accumulated other comprehensive loss
    
    
    (738
    )
    
    
    (7,757
    )Prepaid pension cost
    
    
    8,005
    
    
    
    9,795Intangible asset
    
    
    
    
    
    
    (5,623
    )Net amount recognized
    
    $
    (19,252
    )
    
    $
    (3,585
    )




---



##### 



(in thousands)
    
    2006Increase in regulatory assets:Unrecognized actuarial loss
    
    $
    21,771Unrecognized prior service cost
    
    
    4,748Increase in accumulated
other comprehensive loss:Unrecognized actuarial loss
    
    
    606Unrecognized prior service cost
    
    
    132Total change
    
    $
    27,257
  (in thousands)
    
    2006
    
    
    2005Fair value of plan assets
    
    $
    167,508
    
    
    $
    146,982Projected benefit obligation
    
    
    (186,760
    )
    
    
    (181,587
    )Funded status
    
    $
    (19,252
    )
    
    $
    (34,605
    )Accumulated benefit obligation
    
    $
    (153,816
    )
    
    $
    (150,567
    )
  (in thousands)
    
    2006
    
    
    2005Reconciliation of fair value of plan assets:Fair value of plan assets at January 1
    
    $
    146,982
    
    
    $
    141,685Actual return on plan assets
    
    
    24,856
    
    
    
    9,864Discretionary company contributions
    
    
    4,000
    
    
    
    4,000Benefit payments
    
    
    (8,330
    )
    
    
    (8,567
    )Fair value of plan assets at December 31
    
    $
    167,508
    
    
    $
    146,982Estimated asset return
    
    
    17.24
    %
    
    
    7.08
    %Reconciliation of projected benefit obligation:Projected benefit obligation at January 1
    
    $
    181,587
    
    
    $
    166,190Service cost
    
    
    5,057
    
    
    
    4,695Interest cost
    
    
    10,435
    
    
    
    9,721Benefit payments
    
    
    (8,330
    )
    
    
    (8,567
    )Plan amendments
    
    
    
    
    
    
    222Actuarial (gain) loss
    
    
    (1,989
    )
    
    
    9,326Projected benefit obligation at December 31
    
    $
    186,760
    
    
    $
    181,587Reconciliation of prepaid pension cost:Prepaid pension cost at January 1
    
    $
    9,795
    
    
    $
    10,230Net periodic pension cost
    
    
    (5,790
    )
    
    
    (4,435
    )Discretionary company contributions
    
    
    4,000
    
    
    
    4,000Prepaid pension cost at December 31
    
    $
    8,005
    
    
    $
    9,795
  2006
    
    
    2005Discount rate
    
    
    6.00
    %
    
    
    5.75
    %Rate of increase in future compensation level
    
    
    3.75
    %
    
    
    3.75
    %
  2006
    
    2005Discount rate (2005 is remeasurement composite rate)
    
    
    5.75
    %
    
    
    5.625
    %Long-term rate of return on plan assets
    
    
    8.50
    %
    
    
    8.50
    %Rate of increase in future compensation level
    
    
    3.75
    %
    
    
    3.75
    %




---



##### 



Market-related
value of plan assets:
    Measurement dates:
    
    2006
    
    2005Net periodic pension cost
    
    January 1, 2006
    
    January 1, 2005 & July 1, 2005End of year benefit obligations
    
    January 1, 2006
projected to
December 31, 2006
    
    January 1, 2005
projected to
December 31, 2005Market value of assets
    
    December 31, 2006
    
    December 31, 2005
  (in thousands)
    
    2007Decrease in regulatory assets:Amortization of unrecognized actuarial loss
    
    $
    1,751Amortization of unrecognized prior service cost
    
    
    722Decrease in accumulated other comprehensive loss:Amortization of unrecognized actuarial loss
    
    
    49Amortization of unrecognized prior service cost
    
    
    20Total estimated amortization
    
    $
    2,542
 Cash flows
  Years(in thousands)
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    

20122016$
    8,735
    
    
    $
    8,901
    
    
    $
    9,072
    
    
    $
    9,248
    
    
    $
    9,644
    
    
    $
    56,411
  Asset Allocation
    
    2006
    
    2005Large capitalization equity securities
    
    
    49.3
    %
    
    
    51.2
    %Small capitalization equity securities
    
    
    11.6
    %
    
    
    11.4
    %International equity securities
    
    
    10.6
    %
    
    
    9.8
    %Total equity securities
    
    
    71.5
    %
    
    
    72.4
    %Cash and fixed-income securities
    
    
    28.5
    %
    
    
    27.6
    %100.0
    %
    
    
    100.0
    %




---



##### 




    
    The Plan is managed to operate in perpetuity.
    
    The Plan will meet the pension benefit obligation payments of Otter Tail Corporation.
    
    The Plans assets should be invested with the objective of meeting current and future
payment requirements while minimizing annual contributions and their volatility.
    
    The asset strategy reflects the desire to meet current and future benefit payments
while considering a prudent level of risk and diversification.
   Strategic
    
    TacticalAsset Allocation
    
    Target
    
    RangeLarge capitalization equity securities
    
    
    48
    %
    
    
    40%55
    %Small capitalization equity securities
    
    
    12
    %
    
    
    9%15
    %International equity securities
    
    
    10
    %
    
    
    5%15
    %Total equity securities
    
    
    70
    %
    
    
    60%80
    %Fixed-income securities
    
    
    30
    %
    
    
    20%40
    %
 Executive Survivor and Supplemental Retirement Plan (ESSRP)




---



##### 



(in thousands)
    
    2006
    
    
    2005
    
    
    2004Service costbenefit earned during the period
    
    $
    426
    
    
    $
    406
    
    
    $
    820Interest cost on projected benefit obligation
    
    
    1,303
    
    
    
    1,267
    
    
    
    1,489Amortization of prior-service cost
    
    
    71
    
    
    
    71
    
    
    
    147Recognized net actuarial loss
    
    
    473
    
    
    
    498
    
    
    
    680Total
    
    $
    2,273
    
    
    $
    2,242
    
    
    $
    3,136
  (in thousands)
    
    2006
    
    
    2005Regulatory assets:Unrecognized net actuarial loss
    
    $
    5,796
    
    
    $
    Unrecognized prior service cost
    
    
    496
    
    
    
    Total regulatory asset
    
    
    6,292
    
    
    
    Intangible asset
    
    
    
    
    
    
    891Projected benefit obligation liability
    
    
    (24,783
    )Accumulated benefit obligation liability
    
    
    
    
    
    
    (19,631
    )Accumulated other comprehensive loss:Unrecognized net actuarial loss
    
    
    3,162Unrecognized prior service cost
    
    
    271Total accumulated other comprehensive loss
    
    
    3,433
    
    
    
    4,831Net amount recognized
    
    $
    (15,058
    )
    
    $
    (13,909
    )
  (in thousands)
    
    2006
    
    2005Projected benefit obligation
    
    $
    24,783
    
    
    $
    23,271Accumulated benefit obligation
    
    
    21,317
    
    
    
    19,631Increase in regulatory asset  unrecognized costs
    
    
    6,292
    
    
    
    Change in comprehensive loss  unrecognized costs
    
    
    3,433
    
    
    
    Change in minimum liability in comprehensive loss
    
    
    (4,831
    )
    
    
    409
  Before
    
    
    
    
    
    After(in thousands)
    
    SFAS No. 158
    
    Adjustments
    
    SFAS No. 158Intangible asset
    
    $
    767
    
    
    $
    (767
    )
    
    $
    Regulatory assets
    
    
    
    
    
    
    6,292
    
    
    
    6,292Liability for pension benefits
    
    
    21,317
    
    
    
    3,466
    
    
    
    24,783Accumulated other comprehensive loss
    
    
    5,492
    
    
    
    (2,059
    )
    
    
    3,433




---



##### 



(in thousands)
    
    2006
    
    
    2005Reconciliation of fair value of plan assets:Fair value of plan assets at January 1
    
    $
    
    
    
    $
    Actual return on plan assets
    
    
    
    
    
    
    Employer contributions
    
    
    1,124
    
    
    
    1,094Benefit payments
    
    
    (1,124
    )
    
    
    (1,094
    )Fair value of plan assets at December 31
    
    $
    
    
    
    $
    Reconciliation of projected benefit obligation:Projected benefit obligation at January 1
    
    $
    23,271
    
    
    $
    23,123Service cost
    
    
    426
    
    
    
    406Interest cost
    
    
    1,303
    
    
    
    1,267Benefit payments
    
    
    (1,124
    )
    
    
    (1,094
    )Plan amendments
    
    
    (53
    )
    
    
    (663
    )Actuarial loss
    
    
    960
    
    
    
    232Projected benefit obligation at December 31
    
    $
    24,783
    
    
    $
    23,271Reconciliation of funded status:Funded status at December 31
    
    $
    (24,783
    )
    
    $
    (23,271
    )Unrecognized net actuarial loss
    
    
    8,958
    
    
    
    8,471Unrecognized prior service cost
    
    
    767
    
    
    
    891Net amount recognized
    
    $
    (15,058
    )
    
    $
    (13,909
    )
  2006
    
    2005Discount rate
    
    
    6.00
    %
    
    
    5.75
    %Rate of increase in future compensation level
    
    
    4.71
    %
    
    
    4.69
    %
  2006
    
    2005Discount rate (2005 is remeasurement composite rate)
    
    
    5.75
    %
    
    
    5.625
    %Rate of increase in future compensation level
    
    
    4.69
    %
    
    
    4.69
    %
  (in thousands)
    
    2007-Decrease in regulatory assets:Amortization of unrecognized actuarial loss
    
    $
    349Amortization of unrecognized prior service cost
    
    
    43Decrease in accumulated other comprehensive loss:Amortization of unrecognized actuarial loss
    
    
    191Amortization of unrecognized prior service cost
    
    
    24Total estimated amortization
    
    $
    607
 Cash flows:
 Years(in thousands)
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    20122016$1,121
    
    
    
    $1,105
    
    
    
    $1,113
    
    
    
    $1,111
    
    
    
    $1,202
    
    
    
    $6,600




---



##### 



Other Postretirement Benefits
 Employers Accounting for
Postretirement Benefits Other Than Pensions
 Accounting and Disclosure Requirements Related to the Medicare Prescription Drug,
Improvement and Modernization Act of 2003
  (in thousands)
    
    2006
    
    
    2005
    
    
    2004Service costbenefit earned during the period
    
    $
    1,319
    
    
    $
    1,307
    
    
    $
    1,170Interest cost on projected benefit obligation
    
    
    2,556
    
    
    
    2,480
    
    
    
    2,580Amortization of transition obligation
    
    
    748
    
    
    
    748
    
    
    
    748Amortization of prior-service cost
    
    
    (305
    )
    
    
    (305
    )
    
    
    (305
    )Amortization of net actuarial loss
    
    
    556
    
    
    
    742
    
    
    
    702Expense decrease due to Medicare Part D subsidy
    
    
    (1,543
    )
    
    
    (1,251
    )
    
    
    (757
    )Net periodic postretirement benefit cost
    
    $
    3,331
    
    
    $
    3,721
    
    
    $
    4,138
  (in thousands)
    
    2006
    
    
    2005Regulatory asset:Unrecognized transition obligation
    
    $
    4,414
    
    
    $
    Unrecognized net actuarial gain
    
    
    (2,077
    )
    
    
    Unrecognized prior service cost
    
    
    1,588
    
    
    
    Net regulatory asset
    
    
    3,925
    
    
    
    Projected benefit obligation liability
    
    
    (32,254
    )Benefit obligation liability
    
    
    
    
    
    
    (26,982
    )Accumulated other comprehensive loss:Unrecognized transition obligation
    
    
    75Unrecognized net actuarial gain
    
    
    (35
    )Unrecognized prior service cost
    
    
    27Accumulated other comprehensive loss
    
    
    67
    
    
    
    Net amount recognized
    
    $
    (28,262
    )
    
    $
    (26,982
    )
  (in thousands)
    
    2006Increase in regulatory asset  net:Unrecognized transition obligation
    
    $
    4,414Unrecognized net actuarial gain
    
    
    (2,077
    )Unrecognized prior service cost
    
    
    1,588Net regulatory asset
    
    
    3,925Increase in accumulated other comprehensive loss:Unrecognized transition obligation
    
    
    75Unrecognized net actuarial gain
    
    
    (35
    )Unrecognized prior service cost
    
    
    27Accumulated other comprehensive loss
    
    
    67Total change
    
    $
    3,992




---



##### 



(in thousands)
    
    2006
    
    
    2005Reconciliation of fair value of plan assets:Fair value of plan assets at January 1
    
    $
    
    
    
    $
    Actual return on plan assets
    
    
    
    
    
    
    Company contributions
    
    
    2,051
    
    
    
    1,792Benefit payments (net of Medicare Part D subsidy)
    
    
    (3,625
    )
    
    
    (3,112
    )Participant premium payments
    
    
    1,574
    
    
    
    1,320Fair value of plan assets at December 31
    
    $
    
    
    
    $
    Reconciliation of projected benefit obligation:Projected benefit obligation at January 1
    
    $
    36,757
    
    
    $
    39,639Service cost (net of Medicare Part D subsidy)
    
    
    1,110
    
    
    
    1,172Interest cost (net of Medicare Part D subsidy)
    
    
    1,779
    
    
    
    1,998Benefit payments (net of Medicare Part D subsidy)
    
    
    (3,625
    )
    
    
    (3,112
    )Participant premium payments
    
    
    1,574
    
    
    
    1,320Actuarial gain
    
    
    (5,341
    )
    
    
    (4,260
    )Projected benefit obligation at December 31
    
    $
    32,254
    
    
    $
    36,757Reconciliation of accrued postretirement cost:Accrued postretirement cost at January 1
    
    $
    (26,982
    )
    
    $
    (25,053
    )Expense
    
    
    (3,331
    )
    
    
    (3,721
    )Net company contribution
    
    
    2,051
    
    
    
    1,792Accrued postretirement cost at December 31
    
    $
    (28,262
    )
    
    $
    (26,982
    )
  2006
    
    2005Discount rate
    
    
    6.00
    %
    
    
    5.75
    %
  2006
    
    2005Discount rate (2005 is remeasurement composite rate)
    
    
    5.75
    %
    
    
    5.625
    %
  2006
    
    2005Healthcare cost-trend rate assumed for next year pre-65
    
    
    9.00
    %
    
    
    9.00
    %Healthcare cost-trend rate assumed for next year post-65
    
    
    10.00
    %
    
    
    9.00
    %Rate at which the cost-trend rate is assumed to decline
    
    
    5.00
    %
    
    
    5.00
    %Year the rate reaches the ultimate trend rate
    
    
    2012
    
    
    
    2010
    %
  (in thousands)
    
    1 point increase
    
    
    1 point decreaseEffect on total of service and interest cost
    
    $
    433
    
    
    $
    (350
    )Effect on the postretirement benefit obligation
    
    $
    2,926
    
    
    $
    (2,691
    )
 Measurement dates:
    
    2006
    
    2005Net periodic postretirement
    
    January 1, 2006
    
    January 1, 2005 &benefit cost
    
    
    
    July 1, 2005End of year benefit obligations
    
    January 1, 2006
    
    January 1, 2005projected to
    
    projected toDecember 31, 2006
    
    December 31, 2005




---



##### 



(in thousands)
    
    2007Decrease in regulatory assets:Amortization of transition obligation
    
    $
    735Accumulation of unrecognized prior service cost
    
    
    (203
    )Decrease in accumulated other comprehensive loss:Amortization of transition obligation
    
    
    13Accumulation of unrecognized prior service cost
    
    
    (3
    )Total estimated amortization
    
    $
    542
 Cash flows:
 Years(in thousands)
    
    2007
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012-2016$
    2,391
    
    
    $
    2,357
    
    
    $
    2,431
    
    
    $
    2,433
    
    
    $
    2,564
    
    
    $
    13,895
  Leveraged Employee Stock Ownership Plan




---



##### 



Cash and Short-Term Investments
 Other Investments
 Long-Term Debt
 December 31, 2006
    
    December 31, 2005(in thousands)Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    value
    
    amount
    
    valueCash and short-term investments
    
    $
    6,791
    
    
    $
    6,791
    
    
    $
    5,430
    
    
    $
    5,430Other investments
    
    
    8,955
    
    
    
    8,955
    
    
    
    8,702
    
    
    
    8,702Long-term debt
    
    
    (255,436
    )
    
    
    (265,547
    )
    
    
    (258,260
    )
    
    
    (273,456
    )
  December 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Electric plantProduction
    
    $
    360,304
    
    
    $
    357,285Transmission
    
    
    189,683
    
    
    
    182,502Distribution
    
    
    307,825
    
    
    
    296,301General
    
    
    72,877
    
    
    
    74,678Electric plant
    
    
    930,689
    
    
    
    910,766Less accumulated depreciation and amortization
    
    
    388,254
    
    
    
    374,786Electric plant net of accumulated depreciation
    
    
    542,435
    
    
    
    535,980Construction work in progress
    
    
    18,503
    
    
    
    12,449Net electric plant
    
    $
    560,938
    
    
    $
    548,429Nonelectric operations plant
    
    $
    239,269
    
    
    $
    228,548Less accumulated depreciation and amortization
    
    
    91,303
    
    
    
    84,652Nonelectric plant net of accumulated depreciation
    
    
    147,966
    
    
    
    143,896Construction work in progress
    
    
    9,705
    
    
    
    4,766Net nonelectric operations plant
    
    $
    157,671
    
    
    $
    148,662Net plant
    
    $
    718,609
    
    
    $
    697,091
  Service Life Range(years)
    
    Low
    
    HighElectric fixed assets:Production plant
    
    
    34
    
    
    
    62Transmission plant
    
    
    40
    
    
    
    55Distribution plant
    
    
    15
    
    
    
    55General plant
    
    
    5
    
    
    
    65Nonelectric fixed assets
    
    
    3
    
    
    
    40




---



##### 



2006
    
    
    2005
    
    
    2004(in thousands)Tax computed at federal statutory rate
    
    $
    27,232
    
    
    $
    28,325
    
    
    $
    20,253Increases (decreases) in tax from:State income taxes net of
federal income tax benefit
    
    
    2,261
    
    
    
    1,906
    
    
    
    1,808Investment tax credit amortization
    
    
    (1,146
    )
    
    
    (1,151
    )
    
    
    (1,152
    )Differences reversing in excess of federal rates
    
    
    1,271
    
    
    
    (15
    )
    
    
    (136
    )Dividend received/paid deduction
    
    
    (718
    )
    
    
    (703
    )
    
    
    (703
    )Affordable housing tax credits
    
    
    (839
    )
    
    
    (1,324
    )
    
    
    (1,418
    )Permanent and other differences
    
    
    (955
    )
    
    
    969
    
    
    
    (1,286
    )Total income tax expense
    
    $
    27,106
    
    
    $
    28,007
    
    
    $
    17,366Income tax expense  discontinued operations
    
    $
    252
    
    
    $
    5,570
    
    
    $
    1,121Overall effective federal and state income tax rate
    
    
    34.9
    %
    
    
    34.9
    %
    
    
    30.5
    %Income tax expense includes the following:Current federal income taxes
    
    $
    26,276
    
    
    $
    32,795
    
    
    $
    15,228Current state income taxes
    
    
    4,232
    
    
    
    5,265
    
    
    
    2,913Deferred federal income taxes
    
    
    (937
    )
    
    
    (7,112
    )
    
    
    1,776Deferred state income taxes
    
    
    (189
    )
    
    
    (899
    )
    
    
    194Affordable housing tax credits
    
    
    (839
    )
    
    
    (1,324
    )
    
    
    (1,418
    )Investment tax credit amortization
    
    
    (1,146
    )
    
    
    (1,151
    )
    
    
    (1,152
    )Foreign income taxes
    
    
    (291
    )
    
    
    433
    
    
    
    (175
    )Total
    
    $
    27,106
    
    
    $
    28,007
    
    
    $
    17,366
  2006
    
    
    2005(in thousands)Deferred tax assetsAmortization of tax credits
    
    $
    5,231
    
    
    $
    5,964Vacation accrual
    
    
    2,751
    
    
    
    2,432Unearned revenue
    
    
    2,013
    
    
    
    2,803Benefit liabilities
    
    
    29,418
    
    
    
    29,657SFAS 158 liabilities
    
    
    14,694
    
    
    
    Cost of removal
    
    
    22,813
    
    
    
    20,507Differences related to property
    
    
    7,923
    
    
    
    7,400Other
    
    
    3,382
    
    
    
    3,689Total deferred tax assets
    
    $
    88,225
    
    
    $
    72,452Deferred tax liabilitiesDifferences related to property
    
    $
    (160,635
    )
    
    $
    (154,833
    )Excess tax over book pension
    
    
    (3,153
    )
    
    
    (3,861
    )Transfer to regulatory asset
    
    
    (11,712
    )
    
    
    (16,724
    )SFAS 158 regulatory asset
    
    
    (14,694
    )
    
    
    Other
    
    
    (2,702
    )
    
    
    (3,900
    )Total deferred tax liabilities
    
    $
    (192,896
    )
    
    $
    (179,318
    )Deferred income taxes
    
    $
    (104,671
    )
    
    $
    (106,866
    )




---



##### 



Accounting for the Impairment or Disposal of
Long-Lived Assets
  2006(in thousands)
    
    OTESCO GasOperating revenues
    
    $
    28,234Income before income taxes
    
    
    54Gain on disposition  pretax
    
    
    560Income tax expense
    
    
    252
 2005(in thousands)
    
    OTESCO Gas
    
    MIS
    
    SGS
    
    CLC
    
    TotalOperating revenues
    
    $
    64,539
    
    
    $
    3,773
    
    
    $
    6,564
    
    
    $
    6,112
    
    
    $
    80,988Income (loss) before income taxes
    
    
    (84
    )
    
    
    2,167
    
    
    
    (1,740
    )
    
    
    (956
    )
    
    
    (613
    )Goodwill impairment loss
    
    
    (1,003
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,003
    )Gain (loss) on disposition  pretax
    
    
    
    
    
    
    19,025
    
    
    
    (2,919
    )
    
    
    (271
    )
    
    
    15,835Income tax (benefit) expense
    
    
    (40
    )
    
    
    7,975
    
    
    
    (1,863
    )
    
    
    (502
    )
    
    
    5,570
 2004(in thousands)
    
    OTESCO Gas
    
    MIS
    
    SGS
    
    CLC
    
    TotalOperating revenues
    
    $
    44,326
    
    
    $
    8,739
    
    
    $
    17,209
    
    
    $
    7,753
    
    
    $
    78,027Income (loss) before income taxes
    
    
    211
    
    
    
    3,698
    
    
    
    (932
    )
    
    
    (163
    )
    
    
    2,814Income tax expense (benefit)
    
    
    81
    
    
    
    1,483
    
    
    
    (371
    )
    
    
    (72
    )
    
    
    1,121
  December 31, 2006
    
    
    December 31, 2005(in thousands)
    
    SGS
    
    
    OTESCO Gas
    
    
    SGS
    
    
    CLC
    
    
    TotalCurrent assets
    
    $
    289
    
    
    $
    11,384
    
    
    $
    857
    
    
    $
    1,455
    
    
    $
    13,696Investments and other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5Assets of discontinued operations
    
    $
    289
    
    
    $
    11,384
    
    
    $
    857
    
    
    $
    1,460
    
    
    $
    13,701Current liabilities
    
    $
    197
    
    
    $
    10,611
    
    
    $
    328
    
    
    $
    44
    
    
    $
    10,983Liabilities of discontinued operations
    
    $
    197
    
    
    $
    10,611
    
    
    $
    328
    
    
    $
    44
    
    
    $
    10,983




---



##### 



(in thousands)
    
    2006
    
    
    2005Asset retirement obligationsBeginning balance
    
    $
    1,524
    
    
    $
    1,437New obligations recognized
    
    
    
    
    
    
    Adjustments due to revisions in cash flow estimates
    
    
    
    
    
    
    Accrued accretion
    
    
    85
    
    
    
    87Settlements
    
    
    (274
    )
    
    
    Ending balance
    
    $
    1,335
    
    
    $
    1524Asset retirement costs capitalizedBeginning balance
    
    $
    349
    
    
    $
    349New obligations recognized
    
    
    
    
    
    
    Adjustments due to revisions in cash flow estimates
    
    
    
    
    
    
    Settlements
    
    
    (64
    )
    
    
    Ending balance
    
    $
    285
    
    
    $
    349Accumulated depreciation  asset retirement costs capitalizedBeginning balance
    
    $
    234
    
    
    $
    225New obligations recognized
    
    
    
    
    
    
    Adjustments due to revisions in cash flow estimates
    
    
    
    
    
    
    Accrued depreciation
    
    
    8
    
    
    
    9Settlements
    
    
    (64
    )
    
    
    Ending balance
    
    $
    178
    
    
    $
    234SettlementsOriginal capitalized asset retirement cost   retired
    
    $
    64
    
    
    $
    Accumulated depreciation
    
    
    (64
    )
    
    
    Asset retirement obligation
    
    $
    274
    
    
    $
    Settlement cost
    
    
    (222
    )
    
    
    Gain on settlement  deferred under regulatory accounting
    
    $
    52
    
    
    $
    




---



##### 



Three Months EndedMarch 31
    
    
    June 30
    
    
    September 30
    
    
    December 312006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands, except per share data)Operating revenues (a)
    
    $
    257,807
    
    
    $
    216,084
    
    
    $
    279,904
    
    
    $
    245,799
    
    
    $
    280,542
    
    
    $
    261,187
    
    
    $
    286,701
    
    
    $
    258,799Operating income (a)
    
    
    27,374
    
    
    
    21,107
    
    
    
    22,136
    
    
    
    20,821
    
    
    
    24,170
    
    
    
    33,479
    
    
    
    24,117
    
    
    
    23,188Net income:Continuing operations
    
    
    14,855
    
    
    
    11,076
    
    
    
    11,137
    
    
    
    10,952
    
    
    
    13,476
    
    
    
    19,168
    
    
    
    11,282
    
    
    
    12,706Discontinued operations
    
    
    105
    
    
    
    (1,105
    )
    
    
    257
    
    
    
    11,352
    
    
    
    
    
    
    
    (1,565
    )
    
    
    
    
    
    
    (33
    )14,960
    
    
    
    9,971
    
    
    
    11,394
    
    
    
    22,304
    
    
    
    13,476
    
    
    
    17,603
    
    
    
    11,282
    
    
    
    12,673Earnings available for common shares:Continuing operations
    
    
    14,671
    
    
    
    10,892
    
    
    
    10,953
    
    
    
    10,769
    
    
    
    13,293
    
    
    
    18,983
    
    
    
    11,097
    
    
    
    12,523Discontinued operations
    
    
    105
    
    
    
    (1,105
    )
    
    
    257
    
    
    
    11,352
    
    
    
    
    
    
    
    (1,565
    )
    
    
    
    
    
    
    (33
    )14,776
    
    
    
    9,787
    
    
    
    11,210
    
    
    
    22,121
    
    
    
    13,293
    
    
    
    17,418
    
    
    
    11,097
    
    
    
    12,490Basic earnings per share:Continuing operations
    
    $
    .50
    
    
    $
    .37
    
    
    $
    .37
    
    
    $
    .37
    
    
    $
    .45
    
    
    $
    .65
    
    
    $
    .38
    
    
    $
    .43Discontinued operations
    
    
    
    
    
    
    (.03
    )
    
    
    .01
    
    
    
    .39
    
    
    
    
    
    
    
    (.05
    )
    
    
    
    
    
    
    .50
    
    
    
    .34
    
    
    
    .38
    
    
    
    .76
    
    
    
    .45
    
    
    
    .60
    
    
    
    .38
    
    
    
    .43Diluted earnings per share:Continuing operations
    
    
    .50
    
    
    $
    .37
    
    
    
    .37
    
    
    $
    .37
    
    
    
    .45
    
    
    $
    .64
    
    
    
    .37
    
    
    $
    .42Discontinued operations
    
    
    
    
    
    
    (.04
    )
    
    
    .01
    
    
    
    .39
    
    
    
    
    
    
    
    (.05
    )
    
    
    
    
    
    
    .50
    
    
    
    .33
    
    
    
    .38
    
    
    
    .76
    
    
    
    .45
    
    
    
    .59
    
    
    
    .37
    
    
    
    .42Dividends paid per common share
    
    
    .2875
    
    
    
    .28
    
    
    
    .2875
    
    
    
    .28
    
    
    
    .2875
    
    
    
    .28
    
    
    
    .2875
    
    
    
    .28Price range:High
    
    $
    31.34
    
    
    $
    25.87
    
    
    $
    30.09
    
    
    $
    27.77
    
    
    $
    30.80
    
    
    $
    31.95
    
    
    $
    31.92
    
    
    $
    31.95Low
    
    
    27.32
    
    
    
    24.17
    
    
    
    25.78
    
    
    
    24.02
    
    
    
    26.50
    
    
    
    27.20
    
    
    
    28.60
    
    
    
    26.76Average number of common shares
outstandingbasic
    
    
    29,326
    
    
    
    29,126
    
    
    
    29,393
    
    
    
    29,158
    
    
    
    29,413
    
    
    
    29,246
    
    
    
    29,445
    
    
    
    29,361Average number of common shares
outstandingdiluted
    
    
    29,676
    
    
    
    29,230
    
    
    
    29,766
    
    
    
    29,264
    
    
    
    29,806
    
    
    
    29,441
    
    
    
    29,731
    
    
    
    29,555
 
 (a)
    
    From continuing operations.




---



##### 



Stock Listing