##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from ____________ to ____________
 Commission file number 0-368
 OTTER TAIL CORPORATION
  Minnesota
    
    41-0462685(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)215 South Cascade Street, Box 496, Fergus Falls, Minnesota
    
    56538-0496(Address of principal executive offices)
    
    (Zip Code)
  
  
  þ o
  þ o o
 o þ
  July 31, 2006  29,466,245 Common Shares ($5 par value)




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##### 



OTTER TAIL CORPORATION
 INDEX
 Page No.Part I. Financial
InformationItem 1.
    
    Financial
StatementsConsolidated Balance
Sheets  June 30, 2006 and December 31, 2005 (not audited)
    
    
    2 & 3Consolidated
Statements of Income  Three and Six Months Ended June 30, 2006
and 2005 (not audited)
    
    
    4Consolidated
Statements of Cash Flows  Six Months Ended June 30, 2006 and
2005  (not audited)
    
    
    5Notes to Consolidated Financial Statements (not audited)
    
    
    6-21Item 2.
    
    Managements Discussion and Analysis of FinancialCondition and Results of Operations
    
    
    22-41Item 3.
    
    Quantitative and Qualitative Disclosures AboutMarket Risk
    
    
    41-43Item 4.
    
    Controls and Procedures
    
    
    43Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    
    44Item 1A.
    
    Risk Factors
    
    
    44Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    44Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    45Item 5.
    
    Other Information
    
    
    45-46Item 6.
    
    Exhibits
    
    
    46Signatures
    
    
    47Form of 2006 Restricted Stock Unit Award AgreementAmendment to Participation AgreementCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1.
Financial Statements
 
 Otter Tail Corporation
Consolidated Balance Sheets   -Assets-
 June 30,
    
    
    December 31,2006
    
    
    2005(Thousands of dollars)Current assetsCash and cash equivalents
    
    $
    
    
    
    $
    5,430Accounts receivable:Tradenet
    
    
    136,147
    
    
    
    117,796Other
    
    
    9,581
    
    
    
    11,790Inventories
    
    
    106,989
    
    
    
    88,677Deferred income taxes
    
    
    6,780
    
    
    
    6,871Accrued utility revenues
    
    
    24,634
    
    
    
    22,892Costs and estimated earnings in excess of billings
    
    
    41,826
    
    
    
    21,542Other
    
    
    17,376
    
    
    
    16,476Assets of discontinued operations
    
    
    600
    
    
    
    13,701Total current assets
    
    
    343,933
    
    
    
    305,175Investments and other assets
    
    
    34,825
    
    
    
    33,824Goodwillnet
    
    
    98,110
    
    
    
    98,110Other intangiblesnet
    
    
    20,636
    
    
    
    21,160Deferred debitsUnamortized debt expense and reacquisition premiums
    
    
    6,408
    
    
    
    6,520Regulatory assets and other deferred debits
    
    
    17,164
    
    
    
    19,616Total deferred debits
    
    
    23,572
    
    
    
    26,136PlantElectric plant in service
    
    
    917,838
    
    
    
    910,766Nonelectric operations
    
    
    232,267
    
    
    
    228,548Total plant
    
    
    1,150,105
    
    
    
    1,139,314Less accumulated depreciation and amortization
    
    
    473,884
    
    
    
    459,438Plantnet of accumulated depreciation and amortization
    
    
    676,221
    
    
    
    679,876Construction work in progress
    
    
    35,804
    
    
    
    17,215Net plant
    
    
    712,025
    
    
    
    697,091Total
    
    $
    1,233,101
    
    
    $
    1,181,496
  -2-




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##### Table of Contents



Consolidated Balance Sheets   -Liabilities-
 June 30,
    
    
    December 31,2006
    
    
    2005(Thousands of dollars)Current liabilitiesShort-term debt
    
    $
    59,032
    
    
    $
    16,000Current maturities of long-term debt
    
    
    3,232
    
    
    
    3,340Accounts payable
    
    
    106,297
    
    
    
    97,239Accrued salaries and wages
    
    
    21,122
    
    
    
    24,326Accrued federal and state income taxes
    
    
    18,143
    
    
    
    8,449Other accrued taxes
    
    
    8,971
    
    
    
    12,518Other accrued liabilities
    
    
    13,884
    
    
    
    14,124Liabilities of discontinued operations
    
    
    242
    
    
    
    10,983Total current liabilities
    
    
    230,923
    
    
    
    186,979Pensions benefit liability
    
    
    22,257
    
    
    
    23,216Other postretirement benefits liability
    
    
    27,901
    
    
    
    26,982Other noncurrent liabilities
    
    
    17,313
    
    
    
    18,683Deferred creditsDeferred income taxes
    
    
    113,921
    
    
    
    113,737Deferred investment tax credit
    
    
    8,754
    
    
    
    9,327Regulatory liabilities
    
    
    60,560
    
    
    
    61,624Other
    
    
    1,445
    
    
    
    1,500Total deferred credits
    
    
    184,680
    
    
    
    186,188CapitalizationLong-term debt, net of current maturities
    
    
    256,850
    
    
    
    258,260Class B stock options of subsidiary
    
    
    1,258
    
    
    
    1,258Cumulative preferred shares

authorized 1,500,000 shares without par value;

outstanding 2006 and 2005  155,000 shares
    
    
    15,500
    
    
    
    15,500Cumulative preference shares  authorized 1,000,000

shares without par value; outstanding  none
    
    
    
    
    
    
    Common shares, par value $5 per share

authorized 50,000,000 shares;

outstanding 2006  29,465,129 and 2005  29,401,223
    
    
    147,326
    
    
    
    147,006Premium on common shares
    
    
    97,109
    
    
    
    96,768Unearned compensation
    
    
    
    
    
    
    (1,720
    )Retained earnings
    
    
    237,571
    
    
    
    228,515Accumulated other comprehensive loss
    
    
    (5,587
    )
    
    
    (6,139
    )Total common equity
    
    
    476,419
    
    
    
    464,430Total capitalization
    
    
    750,027
    
    
    
    739,448Total
    
    $
    1,233,101
    
    
    $
    1,181,496
  -3-




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##### Table of Contents



Otter Tail Corporation
Consolidated Statements of Income
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except share
    
    
    (In thousands, except shareand per share amounts)
    
    
    and per share amounts)Operating revenues
    
    $
    279,904
    
    
    $
    245,799
    
    
    $
    537,711
    
    
    $
    461,883Operating expensesProduction fuel
    
    
    11,456
    
    
    
    10,549
    
    
    
    26,262
    
    
    
    25,726Purchased power  system use
    
    
    17,664
    
    
    
    19,904
    
    
    
    36,400
    
    
    
    31,442Electric operation and maintenance expenses
    
    
    28,049
    
    
    
    25,334
    
    
    
    51,456
    
    
    
    49,252Cost of goods sold (excludes depreciation; included below)
    
    
    156,363
    
    
    
    129,602
    
    
    
    288,757
    
    
    
    237,232Other nonelectric expenses
    
    
    29,306
    
    
    
    25,628
    
    
    
    55,554
    
    
    
    48,284Depreciation and amortization
    
    
    12,379
    
    
    
    11,553
    
    
    
    24,603
    
    
    
    22,938Property taxes  electric operations
    
    
    2,551
    
    
    
    2,408
    
    
    
    5,169
    
    
    
    5,081Total operating expenses
    
    
    257,768
    
    
    
    224,978
    
    
    
    488,201
    
    
    
    419,955Operating income
    
    
    22,136
    
    
    
    20,821
    
    
    
    49,510
    
    
    
    41,928Other income
    
    
    659
    
    
    
    210
    
    
    
    1,087
    
    
    
    401Interest charges
    
    
    5,100
    
    
    
    4,814
    
    
    
    9,544
    
    
    
    9,374Income from continuing operations before income taxes
    
    
    17,695
    
    
    
    16,217
    
    
    
    41,053
    
    
    
    32,955Income taxes  continuing operations
    
    
    6,558
    
    
    
    5,265
    
    
    
    15,061
    
    
    
    10,927Net income from continuing operations
    
    
    11,137
    
    
    
    10,952
    
    
    
    25,992
    
    
    
    22,028Discontinued operations(Loss) income from discontinued operations net of taxes of
($41); ($86); $28 and $230 for the respective periods
    
    
    (79
    )
    
    
    (134
    )
    
    
    26
    
    
    
    337Net gain on disposition of discontinued operations  net of taxes of
$224; $6,820; $224 and $5,769 for the respective periods
    
    
    336
    
    
    
    11,486
    
    
    
    336
    
    
    
    9,910Net income from discontinued operations
    
    
    257
    
    
    
    11,352
    
    
    
    362
    
    
    
    10,247Net income
    
    
    11,394
    
    
    
    22,304
    
    
    
    26,354
    
    
    
    32,275Preferred dividend requirements
    
    
    184
    
    
    
    183
    
    
    
    368
    
    
    
    367Earnings available for common shares
    
    $
    11,210
    
    
    $
    22,121
    
    
    $
    25,986
    
    
    $
    31,908Basic earnings per common share:Continuing operations (net of preferred dividend requirement)
    
    $
    0.37
    
    
    $
    0.37
    
    
    $
    0.87
    
    
    $
    0.74Discontinued operations
    
    $
    0.01
    
    
    $
    0.39
    
    
    $
    0.01
    
    
    $
    0.35$
    0.38
    
    
    $
    0.76
    
    
    $
    0.88
    
    
    $
    1.09Diluted earnings per common share:Continuing operations (net of preferred dividend requirement)
    
    $
    0.37
    
    
    $
    0.37
    
    
    $
    0.86
    
    
    $
    0.74Discontinued operations
    
    $
    0.01
    
    
    $
    0.39
    
    
    $
    0.01
    
    
    $
    0.35$
    0.38
    
    
    $
    0.76
    
    
    $
    0.87
    
    
    $
    1.09Average number of common shares outstanding  basic
    
    
    29,392,963
    
    
    
    29,158,140
    
    
    
    29,359,474
    
    
    
    29,142,118Average number of common shares outstanding  diluted
    
    
    29,766,040
    
    
    
    29,263,643
    
    
    
    29,751,718
    
    
    
    29,244,698Dividends per common share
    
    $
    0.2875
    
    
    $
    0.2800
    
    
    $
    0.5750
    
    
    $
    0.5600
  -4-




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##### Table of Contents



Otter Tail Corporation
Consolidated Statements of Cash Flows
 Six months endedJune 30,2006
    
    
    2005(Thousands of dollars)Cash flows from operating activitiesNet income
    
    $
    26,354
    
    
    $
    32,275Adjustments to reconcile net income to net cash
provided by operating activities:Net gain from sale of discontinued operations
    
    
    (336
    )
    
    
    (9,910
    )Net income from discontinued operations
    
    
    (26
    )
    
    
    (337
    )Depreciation and amortization
    
    
    24,603
    
    
    
    22,938Deferred investment tax credit
    
    
    (573
    )
    
    
    (576
    )Deferred income taxes
    
    
    1,134
    
    
    
    (3,985
    )Change in deferred debits and other assets
    
    
    383
    
    
    
    3,766Discretionary contribution to pension plan
    
    
    (4,000
    )
    
    
    (4,000
    )Change in noncurrent liabilities and deferred credits
    
    
    2,492
    
    
    
    5,750Allowance for equity (other) funds used during construction
    
    
    (391
    )
    
    
    (357
    )Change in derivatives net of regulatory deferral
    
    
    1,918
    
    
    
    (830
    )Stock compensation expense
    
    
    1,320
    
    
    
    668Other  net
    
    
    629
    
    
    
    157Cash (used for) provided by current assets and current liabilities:Change in receivables
    
    
    (14,827
    )
    
    
    (6,885
    )Change in inventories
    
    
    (18,004
    )
    
    
    (20,414
    )Change in other current assets
    
    
    (25,648
    )
    
    
    (17,625
    )Change in payables and other current liabilities
    
    
    (7,411
    )
    
    
    (6,124
    )Change in interest and income taxes payable
    
    
    10,107
    
    
    
    8,320Net cash (used in) provided by continuing operations
    
    
    (2,276
    )
    
    
    2,831Net cash provided by (used in) discontinued operations
    
    
    926
    
    
    
    (419
    )Net cash (used in) provided by operating activities
    
    
    (1,350
    )
    
    
    2,412Cash flows from investing activitiesCapital expenditures
    
    
    (33,949
    )
    
    
    (27,145
    )Proceeds from disposal of noncurrent assets
    
    
    1,048
    
    
    
    3,503Acquisitionsnet of cash acquired
    
    
    
    
    
    
    (10,661
    )Increases in other investments
    
    
    (1,171
    )
    
    
    (2,269
    )Net cash used in investing activities  continuing operations
    
    
    (34,072
    )
    
    
    (36,572
    )Net proceeds from the sales of discontinued operations
    
    
    1,847
    
    
    
    33,685Net cash provided by investing activities  discontinued operations
    
    
    
    
    
    
    558Net cash used in investing activities
    
    
    (32,225
    )
    
    
    (2,329
    )Cash flows from financing activitiesChange in checks written in excess of cash
    
    
    4,186
    
    
    
    (3,329
    )Net short-term borrowings
    
    
    43,032
    
    
    
    38,050Proceeds from issuance of common stock, net of issuance expenses
    
    
    1,017
    
    
    
    4,820Payments for retirement of common stock
    
    
    (463
    )
    
    
    (365
    )Proceeds from issuance of long-term debt
    
    
    105
    
    
    
    157Debt issuance expenses
    
    
    (293
    )
    
    
    Payments for retirement of long-term debt
    
    
    (1,691
    )
    
    
    (3,948
    )Dividends paid
    
    
    (17,298
    )
    
    
    (16,691
    )Net cash provided by financing activities  continuing operations
    
    
    28,595
    
    
    
    18,694Net cash used in financing activities  discontinued operations
    
    
    
    
    
    
    (2,781
    )Net cash provided by financing activities
    
    
    28,595
    
    
    
    15,913Effect of foreign exchange rate fluctuations on cash
    
    
    (450
    )
    
    
    183Net change in cash and cash equivalents
    
    
    (5,430
    )
    
    
    16,179Cash and cash equivalents at beginning of period  continuing operations
    
    
    5,430
    
    
    
    Cash and cash equivalents at end of period  continuing operations
    
    $
    
    
    
    $
    16,179Supplemental cash flow informationCash paid during the year from continuing operations for:Interest (net of amount capitalized)
    
    $
    8,624
    
    
    $
    8,746Income taxes
    
    $
    4,867
    
    
    $
    3,187Cash paid during the year from discontinued operations for:Interest
    
    $
    91
    
    
    $
    100Income taxes
    
    $
    423
    
    
    $
    2,560
  -5-




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##### Table of Contents



OTTER TAIL CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Revenue Recognition
    June 30,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Costs incurred on uncompleted contracts
    
    $
    183,920
    
    
    $
    194,076Less billings to date
    
    
    (184,595
    )
    
    
    (203,862
    )Plus estimated earnings recognized
    
    
    20,887
    
    
    
    22,834$
    20,212
    
    
    $
    13,048
  June 30,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Costs and estimated earnings in excess of billings on uncompleted contracts
    
    $
    41,826
    
    
    $
    21,542Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    (21,614
    )
    
    
    (8,494
    )$
    20,212
    
    
    $
    13,048
 6




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##### Table of Contents



Adjustments and Reclassifications
  Inventories
  June 30,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Finished goods
    
    $
    44,657
    
    
    $
    38,928Work in process
    
    
    6,269
    
    
    
    7,146Raw material, fuel and supplies
    
    
    56,063
    
    
    
    42,603$
    106,989
    
    
    $
    88,677
 Goodwill and Other Intangible Assets
   June 30, 2006
    
    
    December 31, 2005Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    Netcarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    carrying
    
    
    Accumulated
    
    
    Carryin(in thousands)
    
    amount
    
    
    amortization
    
    
    amount
    
    
    amount
    
    
    amortization
    
    
    amountAmortized intangible assets:Covenants not to compete
    
    $
    2,198
    
    
    $
    1,637
    
    
    $
    561
    
    
    $
    2,338
    
    
    $
    1,620
    
    
    $
    718Customer relationships
    
    
    10,599
    
    
    
    801
    
    
    
    9,798
    
    
    
    10,575
    
    
    
    583
    
    
    
    9,992Other intangible assets including
contracts
    
    
    2,634
    
    
    
    1,710
    
    
    
    924
    
    
    
    2,785
    
    
    
    1,680
    
    
    
    1,105Total
    
    $
    15,431
    
    
    $
    4,148
    
    
    $
    11,283
    
    
    $
    15,698
    
    
    $
    3,883
    
    
    $
    11,815Non-amortized intangible assets:Brand/trade name
    
    $
    9,353
    
    
    $
    
    
    
    $
    9,353
    
    
    $
    9,345
    
    
    $
    
    
    
    $
    9,345
  7




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##### Table of Contents



Comprehensive Income
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net income
    
    $
    11,394
    
    
    $
    22,304
    
    
    $
    26,354
    
    
    $
    32,275Other comprehensive income (net-of-tax)Minimum pension liability adjustment
    
    
    
    
    
    
    (1,263
    )
    
    
    
    
    
    
    (1,263
    )Foreign currency translation gain (loss)
    
    
    618
    
    
    
    (176
    )
    
    
    564
    
    
    
    (259
    )Unrealized (loss) gain on
available-for-sale securities
    
    
    (4
    )
    
    
    16
    
    
    
    (12
    )
    
    
    (6
    )Total other comprehensive income
    
    
    614
    
    
    
    (1,423
    )
    
    
    552
    
    
    
    (1,528
    )Total comprehensive income
    
    $
    12,008
    
    
    $
    20,881
    
    
    $
    26,906
    
    
    $
    30,747
  New Accounting Standards
 SFAS No. 123(R) (revised 2004), Share-Based Payment, Accounting for Stock-based Compensation Accounting for Stock Issued to Employees Share-based Payments
 SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, Accounting for
Derivative Instruments and Hedging Activities Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities
 SFAS No. 156 Accounting for Servicing of Financial Assets, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities
 8




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##### Table of Contents



FASB Interpretation (FIN) No. 48 Accounting for Uncertainty in Income Taxes  an interpretation of
FASB Statement No. 109, Accounting for Income Taxes
 Proposed Standard: Employers Accounting for
Defined Benefit Pension and Other Postretirement Plans Employers
Accounting for Pensions Employers Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits Employers Accounting for
Postretirement Benefits Other Than Pensions Employers
Disclosures about Pensions and Other Postretirement Benefits
 Segment Information
      9




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##### Table of Contents



Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Electric
    
    $
    73,518
    
    
    $
    74,150
    
    
    $
    156,102
    
    
    $
    147,633Plastics
    
    
    52,685
    
    
    
    36,004
    
    
    
    90,790
    
    
    
    68,159Manufacturing
    
    
    81,631
    
    
    
    67,858
    
    
    
    149,888
    
    
    
    123,387Health services
    
    
    32,833
    
    
    
    31,324
    
    
    
    64,909
    
    
    
    59,122Food ingredient processing
    
    
    9,811
    
    
    
    8,234
    
    
    
    19,161
    
    
    
    17,489Other business operations
    
    
    30,379
    
    
    
    29,128
    
    
    
    58,658
    
    
    
    47,976Intersegment eliminations
    
    
    (953
    )
    
    
    (899
    )
    
    
    (1,797
    )
    
    
    (1,883
    )Total
    
    $
    279,904
    
    
    $
    245,799
    
    
    $
    537,711
    
    
    $
    461,883
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Electric
    
    $
    5,281
    
    
    $
    7,750
    
    
    $
    19,976
    
    
    $
    19,555Plastics
    
    
    8,149
    
    
    
    3,950
    
    
    
    15,805
    
    
    
    8,357Manufacturing
    
    
    6,932
    
    
    
    7,528
    
    
    
    10,703
    
    
    
    9,219Health services
    
    
    913
    
    
    
    2,035
    
    
    
    1,501
    
    
    
    3,384Food ingredient processing
    
    
    (1,737
    )
    
    
    410
    
    
    
    (3,388
    )
    
    
    1,609Other business operations
    
    
    (1,843
    )
    
    
    (5,456
    )
    
    
    (3,544
    )
    
    
    (9,169
    )Total
    
    $
    17,695
    
    
    $
    16,217
    
    
    $
    41,053
    
    
    $
    32,955
 10




---



##### Table of Contents



June 30,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Electric
    
    $
    657,129
    
    
    $
    654,175Plastics
    
    
    94,548
    
    
    
    76,573Manufacturing
    
    
    223,620
    
    
    
    177,969Health services
    
    
    67,784
    
    
    
    67,066Food ingredient processing
    
    
    98,861
    
    
    
    96,023Other business operations
    
    
    90,559
    
    
    
    95,989Discontinued operations
    
    
    600
    
    
    
    13,701Total
    
    $
    1,233,101
    
    
    $
    1,181,496
   Three months ended
    
    Six months endedJune 30,
    
    June 30,(in thousands)
    
    2006
    
    2005
    
    2006
    
    2005United States of America
    
    
    97.2
    %
    
    
    98.1
    %
    
    
    97.1
    %
    
    
    98.0
    %Canada
    
    
    1.7
    %
    
    
    1.1
    %
    
    
    1.6
    %
    
    
    1.1
    %All other countries
    
    
    1.1
    %
    
    
    0.8
    %
    
    
    1.3
    %
    
    
    0.9
    %
 Rate and Regulatory Matters
   11




---



##### Table of Contents



Regulatory Assets and Liabilities
 Accounting for the Effect of Certain Types of
Regulation
 12




---



##### Table of Contents



June 30,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Regulatory assets:Deferred income taxes
    
    $
    15,387
    
    
    $
    16,724Accrued cost-of-energy revenue
    
    
    15,410
    
    
    
    10,400Reacquisition premiums
    
    
    2,843
    
    
    
    2,995Deferred marked-to-market losses
    
    
    1,486
    
    
    
    1,423Deferred conservation program costs
    
    
    337
    
    
    
    1,064Accumulated ARO accretion/depreciation adjustment
    
    
    256
    
    
    
    209Plant acquisition costs
    
    
    174
    
    
    
    196Total regulatory assets
    
    $
    35,893
    
    
    $
    33,011Regulatory liabilities:Accumulated reserve for estimated removal costs
    
    $
    52,812
    
    
    $
    52,582Deferred income taxes
    
    
    5,595
    
    
    
    5,961Deferred marked-to-market gains
    
    
    2,000
    
    
    
    2,925Gain on sale of division office building
    
    
    153
    
    
    
    156Total regulatory liabilities
    
    $
    60,560
    
    
    $
    61,624Net regulatory liability position
    
    $
    24,667
    
    
    $
    28,613
 Accounting for Income Taxes Unamortized debt expense and reacquisition premiums Accrued utility revenues
  Share-based Payments
 Share-Based Payment, Accounting for Stock-based Compensation Accounting for
Stock Issued to Employees 13
    Table of Contents  Unearned compensation Premium on common shares.
    1999 Employee Stock Purchase Plan, as Amended (Purchase Plan)
   Stock Options Granted Under the Incentive Plan
   14
    Table of Contents  Three months ended
    
    
    Six months ended(in thousands)
    
    June 30, 2005
    
    
    June 30, 2005Net incomeAs reported
    
    $
    22,304
    
    
    $
    32,275Total stock-based employee compensation expense
determined under fair value based method for all
stock option awards net of related tax effects
    
    
    (177
    )
    
    
    (283
    )Pro forma
    
    $
    22,127
    
    
    $
    31,992Basic earnings per share:As reported
    
    $
    0.76
    
    
    $
    1.09Pro forma
    
    $
    0.75
    
    
    $
    1.09Diluted earnings per share:As reported
    
    $
    0.76
    
    
    $
    1.09Pro forma
    
    $
    0.75
    
    
    $
    1.08
   Weighted
    
    
    Aggregateaverage
    
    
    intrinsicexercise
    
    
    valueOptions
    
    
    price
    
    
    (000s)Outstanding, January 1, 2006
    
    
    1,237,164
    
    
    $
    25.58Granted
    
    
    Exercised
    
    
    52,415
    
    
    $
    22.89
    
    
    $
    371Forfeited
    
    
    25,423
    
    
    $
    29.27
    
    
    $
    27Outstanding, June 30, 2006
    
    
    1,159,326
    
    
    $
    25.64
    
    
    $
    3,020Exercisable, June 30, 2006
    
    
    1,118,112
    
    
    $
    25.58
    
    
    $
    3,008
   15
    Table of Contents  Options outstanding
    
    
    Options exercisableWeighted-average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Outstanding
    
    
    remaining
    
    
    average
    
    
    Exercisable
    
    
    averageRange of
    
    as of
    
    
    contractual
    
    
    exercise
    
    
    as of
    
    
    exerciseexercise prices
    
    6/30/06
    
    
    life (yrs)
    
    
    price
    
    
    6/30/06
    
    
    price$18.80-$21.94
    
    
    279,213
    
    
    
    3.3
    
    
    $
    19.48
    
    
    
    279,213
    
    
    $
    19.48$21.95-$25.07
    
    
    62,850
    
    
    
    8.8
    
    
    $
    24.93
    
    
    
    62,850
    
    
    $
    24.93$25.08-$28.21
    
    
    595,263
    
    
    
    5.6
    
    
    $
    26.53
    
    
    
    554,049
    
    
    $
    26.47$28.22-$31.34
    
    
    222,000
    
    
    
    5.8
    
    
    $
    31.20
    
    
    
    222,000
    
    
    $
    31.20
 Restricted Stock Granted to Directors
   Weighted averagegrant-dateShares
    
    
    fair valueNonvested, January 1, 2006
    
    
    27,000
    
    
    $
    24.59Granted
    
    
    19,800
    
    
    $
    28.24Vested (fair
value: $376,000)
    
    
    14,025
    
    
    $
    26.82Forfeited
    
    
    Nonvested, June 30, 2006
    
    
    32,775
    
    
    $
    27.27
 Restricted Stock Granted to Employees
  16
    Table of Contents  Unearned compensation, Premium on
common shares
  Weighted averagereporting-dateShares
    
    
    fair valueNonvested, January 1, 2006
    
    
    72,974
    
    
    $
    28.91Granted
    
    
    Vested (fair value: $1,167,000)
    
    
    41,308
    
    
    $
    28.25Forfeited
    
    
    Nonvested, June 30, 2006
    
    
    31,666
    
    
    $
    27.54
 Restricted Stock Units Granted to Employees
   Restricted
    
    
    Aggregate grant-stock
    
    
    date fair valueunits
    
    
    (000s)Outstanding, January 1, 2006
    
    
    
    
    
    $
    Granted
    
    
    47,425
    
    
    
    1,205Converted
    
    
    7,450
    
    
    
    220Forfeited
    
    
    930
    
    
    
    23Outstanding, June 30, 2006
    
    
    39,045
    
    
    $
    962
  17
    Table of Contents  Stock Performance Awards granted to Executive Officers
    Maximum
    
    Shares
    
    Amount of expense
    
    Amount of expenseshares
    
    used to
    
    during the three
    
    during the sixPerformance
    
    subject
    
    estimate
    
    months ended
    
    months endedperiod
    
    to award
    
    expense
    
    June 30,
    
    June 30,2006
    
    2005
    
    2006
    
    20052004-2006
    
    
    70,500
    
    
    
    23,500
    
    
    $
    47,000
    
    
    $
    323,000
    
    
    $
    94,000
    
    
    $
    323,0002005-2007
    
    
    75,150
    
    
    
    50,872
    
    
    
    94,000
    
    
    
    169,000
    
    
    
    187,000
    
    
    
    169,0002006-2008
    
    
    88,050
    
    
    
    58,700
    
    
    
    254,000
    
    
    
    
    
    
    
    254,000
    
    
    
    Total
    
    
    233,700
    
    
    
    133,072
    
    
    $
    395,000
    
    
    $
    492,000
    
    
    $
    535,000
    
    
    $
    492,000
  18
    Table of Contents  Class B Stock Options and Class B Stock of Subsidiary
  Common Shares and Earnings per Share
   Pension Plan and Other Postretirement Benefits
 Pension Plan
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Service costbenefit earned during the period
    
    $
    1,210
    
    
    $
    1,034
    
    
    $
    2,420
    
    
    $
    2,068Interest cost on projected benefit obligation
    
    
    2,544
    
    
    
    2,448
    
    
    
    5,088
    
    
    
    4,896Expected return on assets
    
    
    (3,065
    )
    
    
    (2,996
    )
    
    
    (6,130
    )
    
    
    (5,992
    )Amortization of prior-service cost
    
    
    186
    
    
    
    240
    
    
    
    372
    
    
    
    481Amortization of net actuarial loss
    
    
    378
    
    
    
    
    
    
    
    756
    
    
    
    Net periodic pension cost
    
    $
    1,253
    
    
    $
    726
    
    
    $
    2,506
    
    
    $
    1,453
  19
    Table of Contents  Executive Survivor and Supplemental Retirement Plan
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Service costbenefit earned during the period
    
    $
    107
    
    
    $
    92
    
    
    $
    213
    
    
    $
    184Interest cost on projected benefit obligation
    
    
    325
    
    
    
    316
    
    
    
    651
    
    
    
    632Amortization of prior-service cost
    
    
    18
    
    
    
    18
    
    
    
    36
    
    
    
    36Recognized net actuarial loss
    
    
    118
    
    
    
    104
    
    
    
    236
    
    
    
    208Net periodic pension cost
    
    $
    568
    
    
    $
    530
    
    
    $
    1,136
    
    
    $
    1,060
 Postretirement Benefits
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Service costbenefit earned during the period
    
    $
    334
    
    
    $
    311
    
    
    $
    668
    
    
    $
    622Interest cost on projected benefit obligation
    
    
    637
    
    
    
    666
    
    
    
    1,274
    
    
    
    1,332Amortization of transition obligation
    
    
    187
    
    
    
    187
    
    
    
    374
    
    
    
    374Amortization of prior-service cost
    
    
    (76
    )
    
    
    (77
    )
    
    
    (152
    )
    
    
    (154
    )Amortization of net actuarial loss
    
    
    133
    
    
    
    156
    
    
    
    266
    
    
    
    312Effect of Medicare Part D expected subsidy
    
    
    (293
    )
    
    
    (201
    )
    
    
    (586
    )
    
    
    (402
    )Net periodic postretirement benefit cost
    
    $
    922
    
    
    $
    1,042
    
    
    $
    1,844
    
    
    $
    2,084
 Discontinued Operations
 Accounting for the Impairment or Disposal of Long-Lived Assets
 20
    Table of Contents  Three months ended
    
    
    Three months endedJune 30, 2006
    
    
    June 30, 2005OTESCO
    
    
    OTESCO(in thousands)
    
    Gas
    
    
    Gas
    
    MIS
    
    SGS
    
    CLC
    
    TotalOperating revenues
    
    $
    7,263
    
    
    
    $
    10,579
    
    
    $
    1,729
    
    
    $
    1,459
    
    
    $
    2,067
    
    
    $
    15,834Income (loss) before income taxes
    
    
    (120
    )
    
    
    
    25
    
    
    
    897
    
    
    
    (1,179
    )
    
    
    37
    
    
    
    (220
    )Gain (loss) on disposition  pretax
    
    
    560
    
    
    
    
    
    
    
    
    19,025
    
    
    
    (419
    )
    
    
    (300
    )
    
    
    18,306Income tax expense (benefit)
    
    
    183
    
    
    
    
    10
    
    
    
    7,467
    
    
    
    (639
    )
    
    
    (104
    )
    
    
    6,734
 Six months ended
    
    
    Six months endedJune 30, 2006
    
    
    June 30, 2005OTESCO
    
    
    OTESCO(in thousands)
    
    Gas
    
    
    Gas
    
    MIS
    
    SGS
    
    CLC
    
    TotalOperating revenues
    
    $
    28,234
    
    
    
    $
    26,628
    
    
    $
    3,773
    
    
    $
    6,329
    
    
    $
    3,772
    
    
    $
    40,502Income (loss) before income taxes
    
    
    54
    
    
    
    
    (18
    )
    
    
    2,167
    
    
    
    (1,563
    )
    
    
    (19
    )
    
    
    567Gain (loss) on disposition  pretax
    
    
    560
    
    
    
    
    
    
    
    
    19,025
    
    
    
    (3,046
    )
    
    
    (300
    )
    
    
    15,679Income tax expense (benefit)
    
    
    252
    
    
    
    
    (7
    )
    
    
    7,975
    
    
    
    (1,843
    )
    
    
    (126
    )
    
    
    5,999
  June 30, 2006
    
    
    
    December 31, 2005OTESCO(in thousands)
    
    SGS
    
    
    CLC
    
    
    Total
    
    
    
    Gas
    
    
    SGS
    
    
    CLC
    
    
    TotalCurrent assets
    
    $
    406
    
    
    $
    194
    
    
    $
    600
    
    
    
    $
    11,384
    
    
    $
    857
    
    
    $
    1,455
    
    
    $
    13,696Investments and other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5Assets of discontinued operations
    
    $
    406
    
    
    $
    194
    
    
    $
    600
    
    
    
    $
    11,384
    
    
    $
    857
    
    
    $
    1,460
    
    
    $
    13,701Current liabilities
    
    $
    195
    
    
    $
    47
    
    
    $
    242
    
    
    
    $
    10,611
    
    
    $
    328
    
    
    $
    44
    
    
    $
    10,983Liabilities of discontinued operations
    
    $
    195
    
    
    $
    47
    
    
    $
    242
    
    
    
    $
    10,611
    
    
    $
    328
    
    
    $
    44
    
    
    $
    10,983
  21
    Table of Contents  Managements Discussion and Analysis of Financial Condition and Results of
Operations
 RESULTS OF OPERATIONS
 Comparison of the Three Months Ended June 30, 2006 and 2005
    Three months endedJune 30,(in thousands)
    
    2006
    
    2005Operating revenues
    
    $
    953
    
    
    $
    899Cost of goods sold
    
    
    448
    
    
    
    442Other nonelectric expenses
    
    
    505
    
    
    
    457
 Electric
 Three months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeRetail sales revenues
    
    $
    61,805
    
    
    $
    59,532
    
    
    $
    2,273
    
    
    
    3.8Wholesale revenues
    
    
    6,638
    
    
    
    9,440
    
    
    
    (2,802
    )
    
    
    (29.7
    )Net marked-to-market gain
    
    
    1,260
    
    
    
    999
    
    
    
    261
    
    
    
    26.1Other revenues
    
    
    3,815
    
    
    
    4,179
    
    
    
    (364
    )
    
    
    (8.7
    )Total operating revenues
    
    $
    73,518
    
    
    $
    74,150
    
    
    $
    (632
    )
    
    
    (0.9
    )Production fuel
    
    
    11,456
    
    
    
    10,549
    
    
    
    907
    
    
    
    8.6Purchased power  system use
    
    
    17,664
    
    
    
    19,904
    
    
    
    (2,240
    )
    
    
    (11.3
    )Other operation and maintenance expenses
    
    
    28,049
    
    
    
    25,334
    
    
    
    2,715
    
    
    
    10.7Depreciation and amortization
    
    
    6,447
    
    
    
    6,103
    
    
    
    344
    
    
    
    5.6Property taxes
    
    
    2,551
    
    
    
    2,408
    
    
    
    143
    
    
    
    5.9Operating income
    
    $
    7,351
    
    
    $
    9,852
    
    
    $
    (2,501
    )
    
    
    (25.4
    )
 22
    Table of Contents  23
    Table of Contents  Plastics
 Three months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    52,685
    
    
    $
    36,004
    
    
    $
    16,681
    
    
    
    46.3Cost of goods sold
    
    
    41,442
    
    
    
    29,664
    
    
    
    11,778
    
    
    
    39.7Operating expenses
    
    
    2,058
    
    
    
    1,460
    
    
    
    598
    
    
    
    41.0Depreciation and amortization
    
    
    678
    
    
    
    628
    
    
    
    50
    
    
    
    8.0Operating income
    
    $
    8,507
    
    
    $
    4,252
    
    
    $
    4,255
    
    
    
    100.1
  Manufacturing
 Three months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    81,631
    
    
    $
    67,858
    
    
    $
    13,773
    
    
    
    20.3Cost of goods sold
    
    
    63,256
    
    
    
    51,519
    
    
    
    11,737
    
    
    
    22.8Operating expenses
    
    
    6,890
    
    
    
    5,332
    
    
    
    1,558
    
    
    
    29.2Depreciation and amortization
    
    
    2,710
    
    
    
    2,345
    
    
    
    365
    
    
    
    15.6Operating income
    
    $
    8,775
    
    
    $
    8,662
    
    
    $
    113
    
    
    
    1.3
  
    
    Revenues at DMI Industries, Inc. (DMI) increased $12.7 million, of which $3.8 million is
related to the new Ft. Erie plant, as a result of an increase in production and sales
activity due in part to plant additions and continued improvements in productivity and
capacity utilization.
 24
    Table of Contents  
    
    Revenues at T.O. Plastics increased $0.8 million between the quarters as a result of an
11.1% increase in revenue per unit sold directly related to increased material costs,
partially offset by a 2.1% reduction in unit sales.
    
    Revenues at ShoreMaster increased $0.7 million between the quarters mainly due to the
acquisition of Southeast Floating Docks on May 31, 2005.
    
    Revenues at BTD Manufacturing, Inc. (BTD) decreased $0.4 million mainly as a result of a
4.2% decrease in units sold between the quarters.
  
    
    DMIs cost of goods sold increased $11.3 million between the quarters, including $7.7
million in material cost increases. The increase in cost of goods sold is directly related
to the increase in DMIs production and sales activity.
    
    Cost of goods sold at T.O. Plastics increased $0.8 million, mainly due to $0.7 million
in material cost increases between the quarters.
    
    Cost of goods sold at ShoreMaster increased $0.7 million between the quarters as a
result of increases in aluminum, subcontractor and other costs, mainly related to the
acquisition of Southeast Floating Docks in May 2005.
    
    Cost of goods sold at BTD decreased $1.1 million between the quarters mainly due to a
decrease in material costs related to the decrease in unit sales between the quarters.
  
    
    Operating expenses at DMI increased $0.7 million as a result of increases in labor,
travel and professional service expenses mainly related to start-up costs at the Ft. Erie,
plant.
    
    T.O. Plastics operating expenses increased $0.3 million, which reflects a $0.2 reduction
in gains on sales of fixed assets related to fixed asset sales in the second quarter of
2005.
    
    ShoreMasters operating expenses increased $0.3 million as a result of a $0.2 million
increase in bad debt expense and an increase in labor costs between the quarters.
    
    An increase in incentive accruals contributed to a $0.3 million increase in BTDs
operating expenses between the quarters.
  25
    Table of Contents  Health Services
 Three months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    32,833
    
    
    $
    31,324
    
    
    $
    1,509
    
    
    
    4.8Cost of goods sold
    
    
    25,225
    
    
    
    22,795
    
    
    
    2,430
    
    
    
    10.7Operating expenses
    
    
    5,568
    
    
    
    5,272
    
    
    
    296
    
    
    
    5.6Depreciation and amortization
    
    
    879
    
    
    
    1,010
    
    
    
    (131
    )
    
    
    (13.0
    )Operating income
    
    $
    1,161
    
    
    $
    2,247
    
    
    $
    (1,086
    )
    
    
    (48.3
    )
  Food Ingredient Processing
 Three months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    9,811
    
    
    $
    8,234
    
    
    $
    1,577
    
    
    
    19.2Cost of goods sold
    
    
    9,691
    
    
    
    6,421
    
    
    
    3,270
    
    
    
    50.9Operating expenses
    
    
    790
    
    
    
    536
    
    
    
    254
    
    
    
    47.4Depreciation and amortization
    
    
    948
    
    
    
    821
    
    
    
    127
    
    
    
    15.5Operating (loss) income
    
    $
    (1,618
    )
    
    $
    456
    
    
    $
    (2,074
    )
    
    
    (454.8
    )
  26
    Table of Contents  Other Business Operations
 Three months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    30,379
    
    
    $
    29,128
    
    
    $
    1,251
    
    
    
    4.3Cost of goods sold
    
    
    17,197
    
    
    
    19,645
    
    
    
    (2,448
    )
    
    
    (12.5
    )Operating expenses
    
    
    14,505
    
    
    
    13,485
    
    
    
    1,020
    
    
    
    7.6Depreciation and amortization
    
    
    717
    
    
    
    646
    
    
    
    71
    
    
    
    11.0Operating loss
    
    $
    (2,040
    )
    
    $
    (4,648
    )
    
    $
    2,608
    
    
    
    (56.1
    )
  
    
    Revenues at Foley Company increased $3.9 million in the second quarter of 2006 compared
to the second quarter of 2005 due to an increase in the volume of work performed between
the periods.
    
    Revenues at E.W. Wylie Corporation (Wylie) increased $1.9 million between the quarters
mainly due to a 13.0% net increase in miles driven by owner-operated and company-operated
trucks. Miles driven by owner-operated trucks increased 62.5% while miles driven by
company-operated trucks decreased 6.5% between the quarters. Wylies increased revenues
also reflect increased fuel costs recovered through fuel surcharges between the quarters.
    
    Revenues at Midwest Construction Services, Inc. (MCS) decreased $4.5 million between the
quarters as a result of a delay on the start-up of several wind projects. Selected projects
have been delayed nationwide due to Federal Aviation Administration actions related to
possible radar issues.
  
    
    Foley Companys cost of goods sold increased $2.7 million mainly in the areas of
subcontractor and labor costs as a result of increased volume of work performed between the
periods.
    
    Cost of goods sold at MCS decreased $5.1 million mainly due to a reduction in material
and labor costs between the quarters.
  
    
    Wylies revenue increase was mostly offset by a $1.8 million increase in operating
expenses, mainly contractor costs related to the increase in miles driven by owner-operated
trucks between the periods.
    
    Foley Companys operating expenses increased $0.4 million between the quarters, mainly
as a result of increases in compensation costs.
    
    Operating expenses in this segment decreased $1.2 million mainly due to a decrease in
self-insurance costs related to health insurance.
 27
    Table of Contents  Income Taxes  Continuing Operations
  Discontinued Operations
  Three months ended
    
    
    
    Three months endedJune 30, 2006
    
    
    
    June 30, 2005OTESCO
    
    
    
    OTESCO(in thousands)
    
    Gas
    
    
    
    Gas
    
    
    MIS
    
    
    SGS
    
    
    CLC
    
    
    Total(Loss) Income before income taxes
    
    $
    (120
    )
    
    
    $
    25
    
    
    $
    897
    
    
    $
    (1,179
    )
    
    $
    37
    
    
    $
    (220
    )Gain (loss) on disposition  pretax
    
    
    560
    
    
    
    
    
    
    
    
    19,025
    
    
    
    (419
    )
    
    
    (300
    )
    
    
    18,306Income tax expense (benefit)
    
    
    183
    
    
    
    
    10
    
    
    
    7,467
    
    
    
    (639
    )
    
    
    (104
    )
    
    
    6,734Net income (loss)
    
    $
    257
    
    
    
    $
    15
    
    
    $
    12,455
    
    
    $
    (959
    )
    
    $
    (159
    )
    
    $
    11,352
 28
    Table of Contents  Comparison of the Six Months Ended June 30, 2006 and 2005
   Six months endedJune 30,(in thousands)
    
    2006
    
    2005Operating revenues
    
    $
    1,797
    
    
    $
    1,883Cost of goods sold
    
    
    768
    
    
    
    953Other nonelectric expenses
    
    
    1,029
    
    
    
    930
 Electric
 Six months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeRetail sales revenues
    
    $
    135,164
    
    
    $
    122,847
    
    
    $
    12,317
    
    
    
    10.0Wholesale revenues
    
    
    12,296
    
    
    
    14,357
    
    
    
    (2,061
    )
    
    
    (14.4
    )Net marked-to-market gain
    
    
    351
    
    
    
    1,103
    
    
    
    (752
    )
    
    
    (68.2
    )Other revenues
    
    
    8,291
    
    
    
    9,326
    
    
    
    (1,035
    )
    
    
    (11.1
    )Total operating revenues
    
    $
    156,102
    
    
    $
    147,633
    
    
    $
    8,469
    
    
    
    5.7Production fuel
    
    
    26,262
    
    
    
    25,726
    
    
    
    536
    
    
    
    2.1Purchased power  system use
    
    
    36,400
    
    
    
    31,442
    
    
    
    4,958
    
    
    
    15.8Other operation and maintenance expenses
    
    
    51,456
    
    
    
    49,252
    
    
    
    2,204
    
    
    
    4.5Depreciation and amortization
    
    
    12,804
    
    
    
    12,203
    
    
    
    601
    
    
    
    4.9Property taxes
    
    
    5,169
    
    
    
    5,081
    
    
    
    88
    
    
    
    1.7Operating income
    
    $
    24,011
    
    
    $
    23,929
    
    
    $
    82
    
    
    
    0.3
  29
    Table of Contents  30
    Table of Contents  Plastics
 Six months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    90,790
    
    
    $
    68,159
    
    
    $
    22,631
    
    
    
    33.2Cost of goods sold
    
    
    69,622
    
    
    
    55,081
    
    
    
    14,541
    
    
    
    26.4Operating expenses
    
    
    3,506
    
    
    
    2,969
    
    
    
    537
    
    
    
    18.1Depreciation and amortization
    
    
    1,408
    
    
    
    1,219
    
    
    
    189
    
    
    
    15.5Operating income
    
    $
    16,254
    
    
    $
    8,890
    
    
    $
    7,364
    
    
    
    82.8
  Manufacturing
 Six months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    149,888
    
    
    $
    123,387
    
    
    $
    26,501
    
    
    
    21.5Cost of goods sold
    
    
    117,655
    
    
    
    96,878
    
    
    
    20,777
    
    
    
    21.4Operating expenses
    
    
    13,105
    
    
    
    10,754
    
    
    
    2,351
    
    
    
    21.9Depreciation and amortization
    
    
    5,279
    
    
    
    4,550
    
    
    
    729
    
    
    
    16.0Operating income
    
    $
    13,849
    
    
    $
    11,205
    
    
    $
    2,644
    
    
    
    23.6
 31
    Table of Contents  
    
    Revenues at DMI increased $23.1 million as a result of increases in production and sales
activity due in part to plant additions, including initial operations at the Ft. Erie
facilities, and continued improvements in productivity and capacity utilization.
    
    Revenues at ShoreMaster increased $2.2 million between the periods mainly due to the
acquisition of Southeast Floating Docks in May 2005.
    
    Revenues at T.O. Plastics increased $1.2 million between the periods as a result of a
2.8% increase in unit sales combined with a 4.3% increase in revenue per unit sold.
    
    Revenues at BTD were essentially unchanged between the periods.
  
    
    DMIs cost of goods sold increased $19.3 million between the periods, including
increases of $14.1 million in material costs, $3.5 million in labor and benefit costs and
$1.6 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 start up costs at its
Ft. Erie facilities.
    
    Cost of goods sold at ShoreMaster increased $1.5 million between the periods as a result
of increases in labor and other direct costs, mainly related to the acquisition of
Southeast Floating Docks in May 2005.
    
    Cost of goods sold at T.O. Plastics increased $1.5 million, reflecting $1.2 million in
material cost increases and $0.3 million in increased labor and benefit costs between the
periods.
    
    Cost of goods sold at BTD decreased $1.7 million between the periods due to a $0.9
million decrease in material costs related to a 6.5% decrease in unit sales between the
periods and a $0.8 million decrease in labor costs. The decrease in production labor costs
is related to a reduction in the number of production employees and a decrease in overtime
pay between the periods. Productivity gains at BTD were achieved through efforts to better
utilize and allocate available labor resources.
  
    
    Operating expenses at DMI increased $1.3 million as a result of increases in labor,
professional services and maintenance expenses mainly related to start-up costs at the Ft.
Erie plant.
    
    ShoreMasters operating expenses increased $0.5 million as a result of increases in wage
and benefit expenses mainly related to the May 2005 acquisition of Southeast Floating
Docks.
    
    An increase in incentive accruals contributed to a $0.4 million increase in BTDs
operating expenses between the periods.
    
    T.O. Plastics operating expenses increased $0.2 million due to a reduction in gains on
sales of fixed assets related to fixed asset sales in the second quarter of 2005.
  32
    Table of Contents  Health Services
 Six months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    64,909
    
    
    $
    59,122
    
    
    $
    5,787
    
    
    
    9.8Cost of goods sold
    
    
    50,047
    
    
    
    43,087
    
    
    
    6,960
    
    
    
    16.2Operating expenses
    
    
    11,082
    
    
    
    10,185
    
    
    
    897
    
    
    
    8.8Depreciation and amortization
    
    
    1,836
    
    
    
    2,077
    
    
    
    (241
    )
    
    
    (11.6
    )Operating income
    
    $
    1,944
    
    
    $
    3,773
    
    
    $
    (1,829
    )
    
    
    (48.5
    )
  Food Ingredient Processing
 Six months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    19,161
    
    
    $
    17,489
    
    
    $
    1,672
    
    
    
    9.6Cost of goods sold
    
    
    19,010
    
    
    
    13,106
    
    
    
    5,904
    
    
    
    45.0Operating expenses
    
    
    1,475
    
    
    
    1,079
    
    
    
    396
    
    
    
    36.7Depreciation and amortization
    
    
    1,866
    
    
    
    1,646
    
    
    
    220
    
    
    
    13.4Operating (loss) income
    
    $
    (3,190
    )
    
    $
    1,658
    
    
    $
    (4,848
    )
    
    
    (292.4
    )
  33
    Table of Contents  Other Business Operations
 Six months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    58,658
    
    
    $
    47,976
    
    
    $
    10,682
    
    
    
    22.3Cost of goods sold
    
    
    33,191
    
    
    
    30,033
    
    
    
    3,158
    
    
    
    10.5Operating expenses
    
    
    27,415
    
    
    
    24,227
    
    
    
    3,188
    
    
    
    13.2Depreciation and amortization
    
    
    1,410
    
    
    
    1,243
    
    
    
    167
    
    
    
    13.4Operating loss
    
    $
    (3,358
    )
    
    $
    (7,527
    )
    
    $
    4,169
    
    
    
    (55.4
    )
  
    
    Revenues at Foley Company increased $11.1 million in the first six months of 2006
compared to the first six months of 2005 due to an increase in the volume of work performed
between the periods.
    
    Revenues at Wylie increased $2.7 million between the periods mainly due to a 7.8% net
increase in miles driven by owner-operated and company-operated trucks. Miles driven by
owner-operated trucks increased 55.9% while miles driven by company-operated trucks
decreased 9.8% between the periods. Wylies increased revenues also reflect increased fuel
costs recovered through fuel surcharges between the periods.
    
    Revenues at MCS decreased $3.1 million between the periods as a result of a delay on the
start-up of several wind projects. Selected projects have been delayed nationwide due to
Federal Aviation Administration actions related to possible radar issues.
  
    
    Foley Companys cost of goods sold increased $9.0 million mainly in the areas of
materials, subcontractor costs and labor as a result of an increase in the volume of work
performed between the periods.
    
    Cost of goods sold at MCS decreased $5.8 million mainly due to a reduction in material
and labor costs between the periods related to a reduction in job activity.
  
    
    Wylies revenue increase was entirely offset by a $2.7 million increase in operating
expenses, including $2.2 million in contractor costs related to the increase in miles
driven by owner-operated trucks between the periods, $0.3 million in increased insurance
costs and $0.2 million in increased fuel costs.
    
    Foley Companys operating expenses increased $0.5 million between the periods, mainly as
a result of increases in compensation costs.
    
    MCS operating expenses increased $0.4 million between the periods, mainly due to
increases in salary and benefit expenses.
    
    Operating expenses in this segment decreased $0.4 million mainly due to a decrease in
self-insurance costs related to health insurance.
 34
    Table of Contents  Income Taxes  Continuing Operations
  Discontinued Operations
  Six months ended
    
    
    
    Six months endedJune 30, 2006
    
    
    
    June 30, 2005OTESCO
    
    
    
    OTESCO(in thousands)
    
    Gas
    
    
    
    Gas
    
    
    MIS
    
    
    SGS
    
    
    CLC
    
    
    TotalIncome (loss) before income taxes
    
    $
    54
    
    
    
    $
    (18
    )
    
    $
    2,167
    
    
    $
    (1,563
    )
    
    $
    (19
    )
    
    $
    567Gain (loss) on disposition  pretax
    
    
    560
    
    
    
    
    
    
    
    
    19,025
    
    
    
    (3,046
    )
    
    
    (300
    )
    
    
    15,679Income tax expense (benefit)
    
    
    252
    
    
    
    
    (7
    )
    
    
    7,975
    
    
    
    (1,843
    )
    
    
    (126
    )
    
    
    5,999Net income (loss)
    
    $
    362
    
    
    
    $
    (11
    )
    
    $
    13,217
    
    
    $
    (2,766
    )
    
    $
    (193
    )
    
    $
    10,247
 2006 OUTLOOK
   
    
    Due to the coal supply issues in the first quarter and early second quarter of 2006,
decreasing margins on wholesale energy sales involving the purchase and sale of electric
energy contracts and increasing transmission and wage and benefit costs, we expect earnings
in the electric segment in 2006 to be in a range of $26.5 million to $28.0 million.
    
    We expect plastics segment earnings for 2006 to be similar to 2005 levels due to the
strong performance in the first and second quarters of 2006 and continued high prices for
PVC resin.
 35
    Table of Contents  
    
    Our forecasted 2006 net income from our manufacturing segment is in line with initial
2006 expectations. The improving economy, continued enhancements in productivity and
capacity utilization, expanded markets, and expansion of production capacity with the
opening of a new wind tower production facility in Fort Erie, Ontario, Canada, are expected
to result in increased net income in our manufacturing segment in 2006.
    
    The health services segment is expected to have lower earnings than original 2006
guidance due to the lower than expected results in the first half of 2006.
    
    We expect to record a net loss in the range of $1.6 million to $3.4 million from our
food ingredient processing business in 2006. This is a reduction from the break-even
expectation announced in our first quarter earnings release. This change in guidance is due
to lower than expected results in the first half of 2006 and the continuing shortage of raw
potato supplies, which are expected to continue through most of 2006.
    
    Our other business operations segment is expected to show improved results over 2005,
consistent with our expectations at the beginning of 2006, due to an improving economy and
an increase in its backlog of construction contracts. An increase in wind energy projects
activity is expected to have a positive impact on our electrical contracting business.
 FINANCIAL POSITION
     36
    Table of Contents  MoodysInvestors
    
    StandardService
    
    & PoorsSenior unsecured debt
    
    
    A3
    
    
    BBB+Preferred stock
    
    Baa2
    
    BBB-Outlook
    
    Stable
    
    Stable
    37
    Table of Contents   38
    Table of Contents  Critical Accounting Policies Involving Significant Estimates
   Goodwill Impairment
  
  Forward Looking Information  Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995
   
    
    We are subject to government regulations and actions that may have a negative impact on
our business and results of operations.
 39
    Table of Contents  
    
    Certain MISO-related costs currently included in the FCA in Minnesota retail rates may
be excluded from recovery through the FCA and subject to future recovery through rates
established in a general rate case.
    
    Weather conditions can adversely affect our operations and revenues.
    
    Electric wholesale margins could be reduced as the MISO market becomes more efficient.
    
    Electric wholesale trading margins could be reduced or eliminated by losses due to trading activities.
    
    Wholesale sales of electricity from excess generation could be reduced by reductions in
coal shipments to Big Stone and Hoot Lake plants due to supply constraints or rail
transportation problems beyond our control.
    
    The FERC issued an order on April 25, 2006 that could require MISO to make refunds
related to real-time revenue sufficiency guarantee charges that were not allocated to
day-ahead virtual supply offers in accordance with MISOs Transmission and Energy Markets
Tariff going back to the commencement of the MISO Day 2 market in April 2005. On May 17,
2006 the FERC issued a Notice of Extension of Time permitting MISO to delay compliance with
the directives contained in its April 2006 order, including the requirement to refund
customers the amounts due, with interest, from April 1, 2005 and the requirement to submit
a compliance filing. The Notice stated that the order on rehearing would provide the
appropriate guidance regarding the timing of compliance filing. We are not yet able to
assess what financial impact, if any, this order will have on our operations.
    
    Our electric utility has capitalized $3.3 million in costs related to the planned
construction of a second electric generating unit at its Big Stone Plant site as of June
30, 2006. Should approvals of permits not be received on a timely basis, the project could
be at risk. If the project is abandoned for permitting or other reasons, these capitalized
costs and others incurred in future periods would be subject to expense and may not be
recoverable.
    
    Our manufacturer of wind towers operates in a market that has been dependent on the
Production Tax Credit. This tax credit is currently in place through December 31, 2007.
Should this tax credit not be renewed, the revenues and earnings of this business could be
reduced.
    
    Federal and state environmental regulation could cause us to incur substantial capital
expenditures which could result in increased operating costs.
    
    Our plans to grow and diversify through acquisitions may not be successful and could
result in poor financial performance.
    
    Competition is a factor in all of our businesses.
    
    Economic uncertainty could have a negative impact on our future revenues and earnings.
    
    Volatile financial markets could restrict our ability to access capital and could
increase borrowing costs and pension plan expenses.
    
    Our food ingredient processing segment operates in a highly competitive market and is
dependent on adequate sources of raw materials for processing. Should the supply of these
raw materials be affected by poor growing conditions, this could negatively impact the
results of operations for this segment. This segment could also be impacted by foreign
currency changes between Canadian and United States currency and prices of natural gas.
 40
    Table of Contents  
    
    Our plastics segment is highly dependent on a limited number of vendors for PVC resin.
In the first six months of 2006, 98% of resin purchased was from two vendors, 51% from one
and 47% from the other. The
loss of a key vendor or an interruption or delay in the supply of PVC resin could result in
reduced sales or increased costs for this business. Reductions in PVC resin prices could
negatively impact PVC pipe prices, profit margins on PVC pipe sales and the value of PVC
pipe held in inventory.
    
    Our health services businesses may not be able to retain or comply with the dealership
arrangement and other agreements with Philips Medical.
  
 Quantitative and Qualitative Disclosures About Market Risk
      41
    Table of Contents  Megawatt Daily
   (in thousands)
    
    June 30, 2006Current asset  marked-to-market gain
    
    $
    5,883Regulatory asset  deferred marked-to-market loss
    
    
    1,486Total assets
    
    
    7,369Current liability  marked-to-market loss
    
    
    (4,372
    )Regulatory liability  deferred marked-to-market gain
    
    
    (2,000
    )Total liabilities
    
    
    (6,372
    )Net fair value of marked-to-market energy contracts
    
    $
    997
 Year-to-date(in thousands)
    
    June 30, 2006Fair value at beginning of year
    
    $
    2,916Amount realized on contracts entered into in 2005 and settled in 2006
    
    
    (2,253
    )Changes in fair value of contracts entered into in 2005
    
    
    (555
    )Net fair value of contracts entered into in 2005 at end of period
    
    
    108Changes in fair value of contracts entered into in 2006
    
    
    889Net fair value end of period
    
    $
    997
 42
    Table of Contents  3rd Quarter
    
    4th Quarter(in thousands)
    
    2006
    
    2006
    
    TotalNet gain
    
    $802
    
    $195
    
    $997
   
 Controls and Procedures
   43
    Table of Contents  PART II. OTHER INFORMATION
 
 Legal Proceedings
  
 Risk Factors
  
 Unregistered Sales of Equity Securities and Use of Proceeds
  Total number of
    
    
    Average priceCalendar Month
    
    shares purchased
    
    
    paid per shareApril 2006
    
    
    16,302
    
    
    $
    28.28May 2006
    
    
    
    
    
    
    June 2006
    
    
    
    
    
    
    Total
    
    
    16,302
 44
    Table of Contents  Submission of Matters to a Vote of Security Holders
  Shares
    
    Shares Voted
    
    BrokerElection of Directors
    
    Voted For
    
    Withheld Authority
    
    Non-VotesKaren M. Bohn
    
    
    23,718,943
    
    
    
    492,645
    
    
    
    -0-Edward J. McIntyre
    
    
    23,730,820
    
    
    
    480,768
    
    
    
    -0-Joyce Nelson Schuette
    
    
    23,779,920
    
    
    
    431,668
    
    
    
    -0-
 Shares
    
    SharesShares
    
    Voted
    
    Voted
    
    BrokerVoted For
    
    Against
    
    Abstain
    
    Non-Votes1999 Employee Stock
Purchase Plan
Amendment
    
    
    17,022,566
    
    
    
    718,582
    
    
    
    836,390
    
    
    
    -0-1999 Stock Incentive
Plan Amendment
    
    
    12,936,097
    
    
    
    4,789,615
    
    
    
    851,826
    
    
    
    -0-Ratification of
Deloitte & Touche LLP
as Independent
Registered
Public Accounting Firm
    
    
    23,597,802
    
    
    
    384,857
    
    
    
    228,928
    
    
    
    -0-
 
 Other Information
  45
    Table of Contents  Exhibits
 4.1
    
    Credit Agreement, dated as of April 26, 2006, among the Company, the Banks
named therein, U.S. Bank National Association, as Agent and Lead Arranger; JPMorgan
Chase Bank, N.A., as Syndication Agent; and Wells Fargo Bank, National Association, as
Documentation Agent (incorporated by reference to Exhibit 4.1 to the Companys Form 8-K
filed May 2, 2006)10.1
    
    Form of Restricted Stock Award Agreement for Directors (incorporated by
reference to Exhibit 10.1 to the Companys Form 8-K filed April 13, 2006) *10.2
    
    Form of 2006 Performance Award Agreement (Effective April 1, 2006)
(incorporated by reference to Exhibit 10.2 to the Companys Form 8-K filed April 13,
2006) *10.3
    
    1999 Employee Stock Purchase Plan, as Amended (incorporated by reference to
Exhibit 10.3 to the Companys Form 8-K filed April 13, 2006) *10.4
    
    1999 Stock Incentive Plan, as Amended (incorporated by reference to Exhibit
10.4 to the Companys Form 8-K filed April 13, 2006) *10.5
    
    Form of 2006 Restricted Stock Unit Award Agreement *10.6
    
    Amendment No. 1 to Participation Agreement, dated June 1, 2006, by and among
Central Minnesota Municipal Power Agency, Great River Energy, Heartland Consumers Power
District, Montana-Dakota Utilities Co., a division of MDU Resources Group, Inc., Otter
Tail Corporation dba Otter Tail Power Company, Southern Minnesota Municipal Power
Agency and Western Minnesota Municipal Power Agency, as Owners, amending the
Participation Agreement, dated June 30, 2005, by and among the Owners31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 *
    
    Management contract or compensatory plan or arrangement required to be filed pursuant to
Item 601(b)(10)(iii)(A) of Regulation S-K.
 46
    Table of Contents  SIGNATURES
  OTTER TAIL CORPORATIONBy:
    
    /s/ Kevin G. Moug

Kevin G. MougChief Financial Officer and Treasurer(Chief Financial Officer/Authorized Officer)
  47
    Table of Contents  EXHIBIT INDEX
 Exhibit Number
    
    Description4.1
    
    Credit Agreement, dated as of April 26, 2006, among the Company, the Banks named
therein, U.S. Bank National Association, as Agent and Lead Arranger; JPMorgan Chase Bank,
N.A., as Syndication Agent; and Wells Fargo Bank, National Association, as Documentation
Agent (incorporated by reference to Exhibit 4.1 to the Companys Form 8-K filed May 2,
2006)10.1
    
    Form of Restricted Stock Award Agreement for Directors (incorporated by reference
to Exhibit 10.1 to the Companys Form 8-K filed April 13, 2006) *10.2
    
    Form of 2006 Performance Award Agreement (Effective April 1, 2006) (incorporated by
reference to Exhibit 10.2 to the Companys Form 8-K filed April 13, 2006) *10.3
    
    1999 Employee Stock Purchase Plan, as Amended (incorporated by reference to Exhibit
10.3 to the Companys Form 8-K filed April 13, 2006) *10.4
    
    1999 Stock Incentive Plan, as Amended (incorporated by reference to Exhibit 10.4 to
the Companys Form 8-K filed April 13, 2006) *10.5
    
    Form of 2006 Restricted Stock Unit Award Agreement *10.6
    
    Amendment No. 1 to Participation Agreement, dated June 1, 2006, by and among
Central Minnesota Municipal Power Agency, Great River Energy, Heartland Consumers Power
District, Montana-Dakota Utilities Co., a division of MDU Resources Group, Inc., Otter
Tail Corporation dba Otter Tail Power Company, Southern Minnesota Municipal Power Agency
and Western Minnesota Municipal Power Agency, as Owners, amending the Participation
Agreement, dated June 30, 2005, by and among the Owners31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
 
 *
    
    Management contract or compensatory plan or arrangement required to be filed
pursuant to Item 601(b)(10)(iii)(A) of Regulation S-K