##### 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, 2008
 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 215 South Cascade Street, Box 496, Fergus Falls, Minnesota
    
    56538-0496(Address of principal executive offices)
    
    (Zip Code)
  
  
  þ o
  Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  July 31, 2008  30,172,396 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, 2008
and December 31, 2007 (not audited)
    
    
    2 & 3Consolidated Statements of Income  Three and Six Months
Ended June 30, 2008 and 2007 (not audited)
    
    
    4Consolidated Statements of Cash Flows  Six Months
Ended June 30, 2008 and 2007 (not audited)
    
    
    5Notes to Consolidated Financial Statements (not audited)
    
    
    6-26Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    26-46Item 3. Quantitative and Qualitative Disclosures About
Market Risk
    
    
    46-49Item 4. Controls and Procedures
    
    
    49Part II. Other InformationItem 1. Legal Proceedings
    
    
    49-50Item 1A. Risk Factors
    
    
    50Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    50Item 4. Submission of Matters to a Vote of Securities Holders
    
    
    51Item 6. Exhibits
    
    
    51Signatures
    
    
    51EX-31.1EX-31.2EX-32.1EX-32.2




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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 31,2008
    
    
    2007(Thousands of dollars)Current AssetsCash and Cash Equivalents
    
    $
    
    
    
    $
    39,824Accounts Receivable:TradeNet
    
    
    154,456
    
    
    
    151,446Other
    
    
    17,527
    
    
    
    14,934Inventories
    
    
    112,233
    
    
    
    97,214Deferred Income Taxes
    
    
    7,216
    
    
    
    7,200Accrued Utility and Cost-of-Energy Revenues
    
    
    13,402
    
    
    
    32,501Costs and Estimated Earnings in Excess of Billings
    
    
    70,578
    
    
    
    42,234Other
    
    
    30,531
    
    
    
    15,299Total Current Assets
    
    
    405,943
    
    
    
    400,652Investments
    
    
    9,200
    
    
    
    10,057Other Assets
    
    
    25,139
    
    
    
    24,500Goodwill
    
    
    107,228
    
    
    
    99,242Other IntangiblesNet
    
    
    36,470
    
    
    
    20,456Deferred DebitsUnamortized Debt Expense and Reacquisition Premiums
    
    
    6,537
    
    
    
    6,986Regulatory Assets and Other Deferred Debits
    
    
    40,157
    
    
    
    38,837Total Deferred Debits
    
    
    46,694
    
    
    
    45,823PlantElectric Plant in Service
    
    
    1,051,644
    
    
    
    1,028,917Nonelectric Operations
    
    
    306,755
    
    
    
    257,590Total Plant
    
    
    1,358,399
    
    
    
    1,286,507Less Accumulated Depreciation and Amortization
    
    
    528,725
    
    
    
    506,744PlantNet of Accumulated Depreciation and
Amortization
    
    
    829,674
    
    
    
    779,763Construction Work in Progress
    
    
    96,806
    
    
    
    74,261Net Plant
    
    
    926,480
    
    
    
    854,024Total
    
    $
    1,557,154
    
    
    $
    1,454,754
  2




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##### Table of Contents



Otter Tail Corporation
 Consolidated Balance Sheets
 -Liabilities-
 June 30,
    
    
    December 31,2008
    
    
    2007(Thousands of dollars)Current LiabilitiesShort-Term Debt
    
    $
    186,600
    
    
    $
    95,000Current Maturities of Long-Term Debt
    
    
    3,376
    
    
    
    3,004Accounts Payable
    
    
    148,317
    
    
    
    141,390Accrued Salaries and Wages
    
    
    23,997
    
    
    
    29,283Accrued Taxes
    
    
    9,194
    
    
    
    11,409Other Accrued Liabilities
    
    
    20,566
    
    
    
    13,873Total Current Liabilities
    
    
    392,050
    
    
    
    293,959Pensions Benefit Liability
    
    
    40,637
    
    
    
    39,429Other Postretirement Benefits Liability
    
    
    30,979
    
    
    
    30,488Other Noncurrent Liabilities
    
    
    21,448
    
    
    
    23,228Deferred CreditsDeferred Income Taxes
    
    
    109,099
    
    
    
    105,813Deferred Tax Credits
    
    
    17,790
    
    
    
    16,761Regulatory Liabilities
    
    
    63,439
    
    
    
    62,705Other
    
    
    316
    
    
    
    275Total Deferred Credits
    
    
    190,644
    
    
    
    185,554CapitalizationLong-Term Debt, Net of Current Maturities
    
    
    341,630
    
    
    
    342,694Class B Stock Options of Subsidiary
    
    
    1,255
    
    
    
    1,255Cumulative Preferred Shares
Authorized 1,500,000 Shares Without Par Value;
Outstanding 2008 and 2007 
 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 2008  30,124,709 and 2007  29,849,789
    
    
    150,624
    
    
    
    149,249Premium on Common Shares
    
    
    114,669
    
    
    
    108,885Retained Earnings
    
    
    256,867
    
    
    
    263,332Accumulated Other Comprehensive Income
    
    
    851
    
    
    
    1,181Total Common Equity
    
    
    523,011
    
    
    
    522,647Total Capitalization
    
    
    881,396
    
    
    
    882,096Total
    
    $
    1,557,154
    
    
    $
    1,454,754
  3




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##### Table of Contents



Otter Tail Corporation
 
 Consolidated Statements of Income
  Three months ended
    
    
    Six months endedJune 30,

    
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except share
    
    
    (In thousands, except shareand per share amounts)
    
    
    and per share amounts)Operating RevenuesElectric
    
    $
    68,577
    
    
    $
    70,498
    
    
    $
    166,083
    
    
    $
    160,351Nonelectric
    
    
    255,023
    
    
    
    235,346
    
    
    
    457,754
    
    
    
    446,614Total Operating Revenues
    
    
    323,600
    
    
    
    305,844
    
    
    
    623,837
    
    
    
    606,965Operating ExpensesProduction Fuel  Electric
    
    
    14,808
    
    
    
    14,077
    
    
    
    34,712
    
    
    
    30,502Purchased Power  Electric System Use
    
    
    10,156
    
    
    
    11,021
    
    
    
    29,142
    
    
    
    37,032Electric Operation and Maintenance Expenses
    
    
    27,757
    
    
    
    26,651
    
    
    
    54,500
    
    
    
    53,526Cost of Goods Sold  Nonelectric
(depreciation included below)
    
    
    204,235
    
    
    
    176,973
    
    
    
    369,458
    
    
    
    341,632Other Nonelectric Expenses
    
    
    36,242
    
    
    
    31,377
    
    
    
    70,989
    
    
    
    62,135Plant Closure Costs
    
    
    1,412
    
    
    
    
    
    
    
    1,412
    
    
    
    Depreciation and Amortization
    
    
    16,124
    
    
    
    12,947
    
    
    
    31,037
    
    
    
    26,040Property Taxes  Electric
    
    
    2,563
    
    
    
    2,527
    
    
    
    5,187
    
    
    
    5,053Total Operating Expenses
    
    
    313,297
    
    
    
    275,573
    
    
    
    596,437
    
    
    
    555,920Operating Income
    
    
    10,303
    
    
    
    30,271
    
    
    
    27,400
    
    
    
    51,045Other Income
    
    
    626
    
    
    
    340
    
    
    
    1,588
    
    
    
    613Interest Charges
    
    
    7,043
    
    
    
    5,026
    
    
    
    13,754
    
    
    
    9,894Income Before Income Taxes
    
    
    3,886
    
    
    
    25,585
    
    
    
    15,234
    
    
    
    41,764Income Taxes
    
    
    369
    
    
    
    9,482
    
    
    
    3,487
    
    
    
    15,253Net Income
    
    
    3,517
    
    
    
    16,103
    
    
    
    11,747
    
    
    
    26,511Preferred Dividend Requirements
    
    
    184
    
    
    
    184
    
    
    
    368
    
    
    
    368Earnings Available for Common Shares
    
    $
    3,333
    
    
    $
    15,919
    
    
    $
    11,379
    
    
    $
    26,143Earnings Per Common Share:Basic
    
    $
    0.11
    
    
    $
    0.54
    
    
    $
    0.38
    
    
    $
    0.88Diluted
    
    $
    0.11
    
    
    $
    0.53
    
    
    $
    0.38
    
    
    $
    0.88Average Number of Common Shares Outstanding:Basic
    
    
    29,993,484
    
    
    
    29,685,745
    
    
    
    29,905,782
    
    
    
    29,594,499Diluted
    
    
    30,300,207
    
    
    
    29,940,868
    
    
    
    30,198,967
    
    
    
    29,843,953Dividends Per Common Share
    
    $
    0.2975
    
    
    $
    0.2925
    
    
    $
    0.5950
    
    
    $
    0.5850
  4




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##### Table of Contents



Otter Tail Corporation
 
 Consolidated Statements of Cash Flows
 Six months endedJune 30,2008
    
    
    2007(Thousands of dollars)Cash Flows from Operating ActivitiesNet Income
    
    $
    11,747
    
    
    $
    26,511Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:Depreciation and Amortization
    
    
    31,037
    
    
    
    26,040Deferred Tax Credits
    
    
    (782
    )
    
    
    (568
    )Deferred Income Taxes
    
    
    5,959
    
    
    
    1,016Change in Deferred Debits and Other Assets
    
    
    (2,627
    )
    
    
    2,492Discretionary Contribution to Pension Plan
    
    
    
    
    
    
    (2,000
    )Change in Noncurrent Liabilities and Deferred Credits
    
    
    752
    
    
    
    6,450Allowance for Equity (Other) Funds Used During Construction
    
    
    (801
    )
    
    
    Change in Derivatives Net of Regulatory Deferral
    
    
    (655
    )
    
    
    (1,620
    )Stock Compensation Expense
    
    
    1,908
    
    
    
    1,097OtherNet
    
    
    316
    
    
    
    (390
    )Cash Provided by (Used for) Current Assets and Current Liabilities:Change in Receivables
    
    
    (1,904
    )
    
    
    (24,558
    )Change in Inventories
    
    
    (10,082
    )
    
    
    6,323Change in Other Current Assets
    
    
    (17,520
    )
    
    
    (4,136
    )Change in Payables and Other Current Liabilities
    
    
    16,244
    
    
    
    (28,190
    )Change in Interest and Income Taxes Payable
    
    
    1,348
    
    
    
    11,858Net Cash Provided by Operating Activities
    
    
    34,940
    
    
    
    20,325Cash Flows from Investing ActivitiesCapital Expenditures
    
    
    (117,785
    )
    
    
    (66,824
    )Proceeds from Disposal of Noncurrent Assets
    
    
    3,517
    
    
    
    7,043AcquisitionsNet of Cash Acquired
    
    
    (41,674
    )
    
    
    (6,750
    )Decreases (Increases) in Other Investments
    
    
    (376
    )
    
    
    (5,230
    )Net Cash Used in Investing Activities
    
    
    (156,318
    )
    
    
    (71,761
    )Cash Flows from Financing ActivitiesChange in Checks Written in Excess of Cash
    
    
    3,636
    
    
    
    4,649Net Short-Term Borrowings
    
    
    91,600
    
    
    
    55,056Proceeds from Issuance of Common Stock, Net of Issuance Expenses
    
    
    5,176
    
    
    
    5,805Payments for Retirement of Common Stock
    
    
    (91
    )
    
    
    (295
    )Proceeds from Issuance of Long-Term Debt
    
    
    1,137
    
    
    
    124Debt Issuance Expenses
    
    
    (19
    )
    
    
    (123
    )Payments for Retirement of Long-Term Debt
    
    
    (1,829
    )
    
    
    (1,543
    )Dividends Paid
    
    
    (18,212
    )
    
    
    (17,711
    )Net Cash Provided by Financing Activities
    
    
    81,398
    
    
    
    45,962Effect of Foreign Exchange Rate Fluctuations on Cash
    
    
    156
    
    
    
    (1,317
    )Net Change in Cash and Cash Equivalents
    
    
    (39,824
    )
    
    
    (6,791
    )Cash and Cash Equivalents at Beginning of Period
    
    
    39,824
    
    
    
    6,791Cash and Cash Equivalents at End of Period
    
    $
    
    
    
    $
    
  5




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##### Table of Contents



OTTER TAIL CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   1. Summary of Significant Accounting Policies
 Revenue Recognition
 Accounting for
Derivative Instruments and Hedging Activities,
   6




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##### Table of Contents



June 30,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007Costs Incurred on Uncompleted Contracts
    
    $
    406,701
    
    
    $
    286,358Less Billings to Date
    
    
    (404,020
    )
    
    
    (292,692
    )Plus Estimated Earnings Recognized
    
    
    54,767
    
    
    
    38,275$
    57,448
    
    
    $
    31,941
  June 30,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007Costs and Estimated Earnings
in Excess of Billings on
Uncompleted Contracts
    
    $
    70,578
    
    
    $
    42,234Billings in Excess of Costs
and Estimated Earnings on
Uncompleted Contracts
    
    
    (13,130
    )
    
    
    (10,293
    )$
    57,448
    
    
    $
    31,941
 Sales of Receivables
 Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities
 Marketing and Sales Incentive Costs
 Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of a Vendors
Products)
 7




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##### Table of Contents



Supplemental Disclosures of Cash Flow Information
 Six Months EndedJune 30,(in thousands)
    
    2008
    
    2007Increases (Decreases) in Accounts Payable and
Other Liabilities Related to Capital Expenditures
    
    $
    (21,419
    )
    
    $
    238Cash Paid During the Period for:Interest (net of amount capitalized)
    
    $
    11,924
    
    
    $
    9,178Income Taxes
    
    $
    1,136
    
    
    $
    1,138
 Fair Value Measurements
 Fair Value Measurements
     (in thousands)
    
    Level 1
    
    
    Level 2
    
    
    Level 3
    
    
    TotalAssets:Investments of Nonqualified Retirement
Savings Retirement Plan
    
    $
    180
    
    
    $
    10,995
    
    
    
    
    
    
    $
    11,175Cash Surrender Value of Keyman Life
Insurance Policies  Net of Policy Loans
    
    
    
    
    
    
    10,528
    
    
    
    
    
    
    
    10,528Forward Energy Contracts
    
    
    
    
    
    
    11,287
    
    
    
    
    
    
    
    11,287Investments of Captive Insurance Company:Corporate Debt Securities
    
    
    3,850
    
    
    
    
    
    
    
    
    
    
    
    3,850U.S. Government Debt Securities
    
    
    2,041
    
    
    
    
    
    
    
    
    
    
    
    2,041Forward Foreign Currency Exchange Contracts
    
    
    15
    
    
    
    
    
    
    
    
    
    
    
    15Total Assets
    
    $
    6,086
    
    
    $
    32,810
    
    
    
    
    
    
    $
    38,896Liabilities:Forward Energy Contracts
    
    $
    
    
    
    $
    10,015
    
    
    
    
    
    
    $
    10,015Total Liabilities
    
    $
    
    
    
    $
    10,015
    
    
    
    
    
    
    $
    10,015Net Assets
    
    $
    6,086
    
    
    $
    22,795
    
    
    
    
    
    
    $
    28,881
 8




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##### Table of Contents



Inventories
  June 30,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007Finished Goods
    
    $
    48,046
    
    
    $
    38,952Work in Process
    
    
    8,541
    
    
    
    5,218Raw Material, Fuel and Supplies
    
    
    55,646
    
    
    
    53,044$
    112,233
    
    
    $
    97,214
 Goodwill and Other Intangible Assets
   June 30, 2008
    
    
    December 31, 2007Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    Carrying(in thousands)
    
    Amount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountAmortized Intangible Assets:Covenants Not to Compete
    
    $
    2,456
    
    
    $
    1,947
    
    
    $
    509
    
    
    $
    2,637
    
    
    $
    2,113
    
    
    $
    524Customer Relationships
    
    
    26,979
    
    
    
    1,823
    
    
    
    25,156
    
    
    
    10,879
    
    
    
    1,469
    
    
    
    9,410Other Intangible Assets Including
Contracts
    
    
    2,784
    
    
    
    1,866
    
    
    
    918
    
    
    
    2,785
    
    
    
    1,775
    
    
    
    1,010Total
    
    $
    32,219
    
    
    $
    5,636
    
    
    $
    26,583
    
    
    $
    16,301
    
    
    $
    5,357
    
    
    $
    10,944Nonamortized Intangible Assets:Brand/Trade Name
    
    $
    9,887
    
    
    $
    
    
    
    $
    9,887
    
    
    $
    9,512
    
    
    $
    
    
    
    $
    9,512
  Comprehensive Income
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Net Income
    
    $
    3,517
    
    
    $
    16,103
    
    
    $
    11,747
    
    
    $
    26,511Other Comprehensive Income (net-of-tax)Foreign Currency Translation Gain (Loss)
    
    
    77
    
    
    
    942
    
    
    
    (375
    )
    
    
    1,046Amortization of Unrecognized Losses and
Costs Related to Postretirement Benefit
Programs
    
    
    37
    
    
    
    44
    
    
    
    80
    
    
    
    88Unrealized (Loss) Gain on
Available-For-Sale Securities
    
    
    (94
    )
    
    
    2
    
    
    
    (35
    )
    
    
    (17
    )Total Other Comprehensive Income (Loss)
    
    
    20
    
    
    
    988
    
    
    
    (330
    )
    
    
    1,117Total Comprehensive Income
    
    $
    3,537
    
    
    $
    17,091
    
    
    $
    11,417
    
    
    $
    27,628
 9




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##### Table of Contents



New Accounting Standards
 SFAS No. 157, Fair Value Measurements,
 SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an
Amendment of FASB Statement No. 115,
 SFAS No. 141 (revised 2007), Businesses Combinations (SFAS No. 141(R)), Business Combinations,
 SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB
Statement No. 133,
 10




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##### Table of Contents



2. Business Combination and Segment Information
 Acquisition
   (in thousands)AssetsCurrent assets
    
    $
    8,855Goodwill
    
    
    7,986Other Intangible Assets
    
    
    16,600Fixed Assets
    
    
    8,994Total Assets
    
    $
    42,435LiabilitiesCurrent Liabilities
    
    $
    761Noncurrent Liabilities
    
    
    Total Liabilities
    
    $
    761Cash Paid
    
    $
    41,674
  Segment Information
     11




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##### Table of Contents



Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007United States of America
    
    
    97.2
    %
    
    
    95.9
    %
    
    
    96.6
    %
    
    
    96.2
    %Canada
    
    
    1.5
    %
    
    
    2.1
    %
    
    
    1.4
    %
    
    
    1.6
    %All other countries (none greater than 1%)
    
    
    1.3
    %
    
    
    2.0
    %
    
    
    2.0
    %
    
    
    2.2
    %
 12




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##### Table of Contents



Operating Revenue
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Electric
    
    $
    68,666
    
    
    $
    70,572
    
    
    $
    166,256
    
    
    $
    160,552Plastics
    
    
    40,645
    
    
    
    39,525
    
    
    
    62,995
    
    
    
    77,344Manufacturing
    
    
    120,342
    
    
    
    104,786
    
    
    
    217,937
    
    
    
    191,011Health Services
    
    
    30,740
    
    
    
    32,452
    
    
    
    60,005
    
    
    
    65,415Food Ingredient Processing
    
    
    15,913
    
    
    
    18,403
    
    
    
    31,811
    
    
    
    37,898Other Business Operations
    
    
    48,080
    
    
    
    40,587
    
    
    
    86,190
    
    
    
    75,733Corporate Revenues and
Intersegment Eliminations
    
    
    (786
    )
    
    
    (481
    )
    
    
    (1,357
    )
    
    
    (988
    )Total
    
    $
    323,600
    
    
    $
    305,844
    
    
    $
    623,837
    
    
    $
    606,965
 Interest Expense
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    2007Electric
    
    $
    3,133
    
    
    $
    2,388
    
    
    $
    6,114
    
    
    $
    4,891Plastics
    
    
    327
    
    
    
    323
    
    
    
    468
    
    
    
    508Manufacturing
    
    
    2,231
    
    
    
    2,180
    
    
    
    4,377
    
    
    
    3,984Health Services
    
    
    176
    
    
    
    255
    
    
    
    355
    
    
    
    460Food Ingredient Processing
    
    
    31
    
    
    
    42
    
    
    
    41
    
    
    
    133Other Business Operations
    
    
    295
    
    
    
    243
    
    
    
    602
    
    
    
    442Corporate and Intersegment Eliminations
    
    
    850
    
    
    
    (405
    )
    
    
    1,797
    
    
    
    (524
    )Total
    
    $
    7,043
    
    
    $
    5,026
    
    
    $
    13,754
    
    
    $
    9,894
 Income Taxes
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Electric
    
    $
    (266
    )
    
    $
    2,679
    
    
    $
    6,154
    
    
    $
    5,905Plastics
    
    
    429
    
    
    
    2,280
    
    
    
    854
    
    
    
    4,140Manufacturing
    
    
    618
    
    
    
    3,660
    
    
    
    15
    
    
    
    5,205Health Services
    
    
    (11
    )
    
    
    528
    
    
    
    (426
    )
    
    
    1,222Food Ingredient Processing
    
    
    614
    
    
    
    710
    
    
    
    1,214
    
    
    
    949Other Business Operations
    
    
    543
    
    
    
    758
    
    
    
    (617
    )
    
    
    817Corporate
    
    
    (1,558
    )
    
    
    (1,133
    )
    
    
    (3,707
    )
    
    
    (2,985
    )Total
    
    $
    369
    
    
    $
    9,482
    
    
    $
    3,487
    
    
    $
    15,253
 13




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Earnings Available for Common Shares
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Electric
    
    $
    3,092
    
    
    $
    4,892
    
    
    $
    15,658
    
    
    $
    10,630Plastics
    
    
    652
    
    
    
    3,398
    
    
    
    1,272
    
    
    
    6,226Manufacturing
    
    
    1,396
    
    
    
    5,335
    
    
    
    780
    
    
    
    7,874Health Services
    
    
    (88
    )
    
    
    708
    
    
    
    (779
    )
    
    
    1,656Food Ingredient Processing
    
    
    685
    
    
    
    1,543
    
    
    
    1,808
    
    
    
    1,992Other Business Operations
    
    
    794
    
    
    
    1,157
    
    
    
    (971
    )
    
    
    1,234Corporate
    
    
    (3,198
    )
    
    
    (1,114
    )
    
    
    (6,389
    )
    
    
    (3,469
    )Total
    
    $
    3,333
    
    
    $
    15,919
    
    
    $
    11,379
    
    
    $
    26,143
 Total Assets
 June 30,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007Electric
    
    $
    848,287
    
    
    $
    813,565Plastics
    
    
    97,746
    
    
    
    77,971Manufacturing
    
    
    332,699
    
    
    
    274,780Health Services
    
    
    63,132
    
    
    
    64,824Food Ingredient Processing
    
    
    98,056
    
    
    
    91,966Other Business Operations
    
    
    77,564
    
    
    
    72,258Corporate
    
    
    39,670
    
    
    
    59,390Total
    
    $
    1,557,154
    
    
    $
    1,454,754
 3. Rate and Regulatory Matters
 Minnesota
 General Rate Case
   14




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Capacity Expansion 2020 (CapX 2020) Mega Certificate of Need
  Renewable Energy Standards, Conservation and Renewable Resource Riders
  15




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North Dakota
     16




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Federal
 Transmission Practices Audit
  Big Stone II Project
   17




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Holding Company Reorganization
  18




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4. Regulatory Assets and Liabilities
 Accounting for the Effect of Certain Types of
Regulation
  June 30,
    
    
    December 31,(in thousands)
    
    2008
    
    
    2007Regulatory Assets:Unrecognized Transition Obligation, Prior Service Costs
and Actuarial Losses on Pension and Other Postretirement
Benefits
    
    $
    25,691
    
    
    $
    26,933Deferred Income Taxes
    
    
    8,252
    
    
    
    8,733Accrued Cost-of-Energy Revenue
    
    
    3,572
    
    
    
    19,452Reacquisition Premiums
    
    
    3,546
    
    
    
    3,745Minnesota Renewable Resource Rider Recoverable Costs
    
    
    1,523
    
    
    
    Minnesota General Rate Case Recoverable Expenses
    
    
    1,460
    
    
    
    North Dakota Renewable Resource Rider Accrued Revenue
    
    
    1,361
    
    
    
    MISO Schedule 16 and 17 Deferred Administrative Costs  ND
    
    
    704
    
    
    
    576MISO Schedule 16 and 17 Deferred Administrative Costs  MN
    
    
    664
    
    
    
    855Accumulated ARO Accretion/Depreciation Adjustment
    
    
    449
    
    
    
    345Other Regulatory Assets
    
    
    53
    
    
    
    625Deferred Marked-to-Market Losses
    
    
    
    
    
    
    771Total Regulatory Assets
    
    $
    47,275
    
    
    $
    62,035Regulatory Liabilities:Accumulated Reserve for Estimated Removal Costs
    
    $
    58,765
    
    
    $
    57,787Deferred Income Taxes
    
    
    4,532
    
    
    
    4,502Gain on Sale of Division Office Building
    
    
    142
    
    
    
    145Deferred Marked-to-Market Gains
    
    
    
    
    
    
    271Total Regulatory Liabilities
    
    $
    63,439
    
    
    $
    62,705Net Regulatory Liability Position
    
    $
    16,164
    
    
    $
    670
 Employers Accounting for Defined Benefit Pension and Other
Postretirement Plans,
 Accounting for Income Taxes
   19




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5. Forward Contracts Classified as Derivatives
  20




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##### Table of Contents



(in thousands)
    
    June 30, 2008Current Asset  Marked-to-Market Gain
    
    $
    11,287Current Liability  Marked-to-Market Loss
    
    
    (10,015
    )Net Fair Value of Marked-to-Market Energy Contracts
    
    $
    1,272
 Year-to-Date(in thousands)
    
    June 30, 2008Fair Value at Beginning of Year
    
    $
    632Amount Realized on Contracts Entered into in 2007 and Settled in
2008
    
    
    (204
    )Changes in Fair Value of Contracts Entered into in 2007
    
    
    493Net Fair Value of Contracts Entered into in 2007 at End of Period
    
    
    921Changes in Fair Value of Open Contracts Entered into in 2008
    
    
    351Net Fair Value End of Period
    
    $
    1,272
    21




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##### Table of Contents



6. Common Shares and Earnings Per Share
  Common Shares Outstanding, December 31, 2007
    
    
    29,849,789Issuances:Stock Options Exercised
    
    
    191,774Executive Officer Stock Performance Awards
    
    
    62,625Restricted Stock Issued to Nonemployee Directors
    
    
    20,000Restricted Stock Issued to Employees
    
    
    19,371Vesting of Restricted Stock Units
    
    
    3,850Retirements:Shares Withheld for Individual Income Tax Requirements
    
    
    (22,700
    )Common Shares Outstanding, June 30, 2008
    
    
    30,124,709
   7. Share-Based Payments
    22




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Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    20071999 Employee Stock Purchase Plan
    
    $
    65
    
    
    $
    64
    
    
    $
    135
    
    
    $
    127Stock Options Granted Under the 1999 Stock Incentive
Plan
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    90Restricted Stock Granted to Directors
    
    
    132
    
    
    
    96
    
    
    
    240
    
    
    
    247Restricted Stock Granted to Employees
    
    
    121
    
    
    
    208
    
    
    
    239
    
    
    
    412Restricted Stock Units Granted to Employees
    
    
    144
    
    
    
    109
    
    
    
    238
    
    
    
    178Stock Performance Awards Granted to Executive Officers
    
    
    784
    
    
    
    221
    
    
    
    1,124
    
    
    
    441Totals
    
    $
    1,246
    
    
    $
    720
    
    
    $
    1,976
    
    
    $
    1,495
  9. Commitments and Contingencies
 Ashtabula Wind Center
  Sales of Receivables
  Dealer Floor Plan Financing
  23




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Sierra Club Complaint
   11. Class B Stock Options of Subsidiary
  12. Pension Plan and Other Postretirement Benefits
 Pension Plan
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Service CostBenefit Earned During the Period
    
    $
    1,275
    
    
    $
    1,263
    
    
    $
    2,550
    
    
    $
    2,526Interest Cost on Projected Benefit Obligation
    
    
    2,800
    
    
    
    2,733
    
    
    
    5,600
    
    
    
    5,466Expected Return on Assets
    
    
    (3,550
    )
    
    
    (3,223
    )
    
    
    (7,100
    )
    
    
    (6,446
    )Amortization of Prior-Service Cost
    
    
    175
    
    
    
    185
    
    
    
    350
    
    
    
    370Amortization of Net Actuarial Loss
    
    
    125
    
    
    
    309
    
    
    
    250
    
    
    
    618Net Periodic Pension Cost
    
    $
    825
    
    
    $
    1,267
    
    
    $
    1,650
    
    
    $
    2,534
 24




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##### Table of Contents



Executive Survivor and Supplemental Retirement Plan
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Service CostBenefit Earned During the Period
    
    $
    173
    
    
    $
    157
    
    
    $
    346
    
    
    $
    313Interest Cost on Projected Benefit Obligation
    
    
    384
    
    
    
    362
    
    
    
    768
    
    
    
    725Amortization of Prior-Service Cost
    
    
    16
    
    
    
    17
    
    
    
    32
    
    
    
    34Amortization of Net Actuarial Loss
    
    
    120
    
    
    
    135
    
    
    
    240
    
    
    
    270Net Periodic Pension Cost
    
    $
    693
    
    
    $
    671
    
    
    $
    1,386
    
    
    $
    1,342
 Postretirement Benefits
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,(in thousands)
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007Service CostBenefit Earned During the Period
    
    $
    300
    
    
    $
    315
    
    
    $
    600
    
    
    $
    630Interest Cost on Projected Benefit Obligation
    
    
    725
    
    
    
    698
    
    
    
    1,450
    
    
    
    1,396Amortization of Transition Obligation
    
    
    187
    
    
    
    187
    
    
    
    374
    
    
    
    374Amortization of Prior-Service Cost
    
    
    50
    
    
    
    (52
    )
    
    
    100
    
    
    
    (103
    )Amortization of Net Actuarial Loss
    
    
    125
    
    
    
    129
    
    
    
    250
    
    
    
    258Effect of Medicare Part D Expected Subsidy
    
    
    (400
    )
    
    
    (410
    )
    
    
    (800
    )
    
    
    (820
    )Net Periodic Postretirement Benefit Cost
    
    $
    987
    
    
    $
    867
    
    
    $
    1,974
    
    
    $
    1,735
 19. Subsequent Events
  25




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Managements Discussion and Analysis of Financial Condition and Results of
Operations
 RESULTS OF OPERATIONS
  Comparison of the Three Months Ended June 30, 2008 and 2007
   Three Months Ended
    
    Three Months Ended(in thousands)
    
    June 30, 2008
    
    June 30, 2007Operating Revenues:Electric
    
    $
    89
    
    
    $
    74Nonelectric
    
    
    697
    
    
    
    407Cost of Goods Sold
    
    
    599
    
    
    
    393Other Nonelectric Expenses
    
    
    187
    
    
    
    88
 26




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##### Table of Contents



Electric
 Three Months EndedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeRetail Sales Revenues
    
    $
    57,389
    
    
    $
    55,501
    
    
    $
    1,888
    
    
    
    3.4Wholesale Revenues
    
    
    6,221
    
    
    
    6,674
    
    
    
    (453
    )
    
    
    (6.8
    )Net Marked-to-Market (Loss) Gain
    
    
    (31
    )
    
    
    3,429
    
    
    
    (3,460
    )
    
    
    (100.9
    )Other Revenues
    
    
    5,087
    
    
    
    4,968
    
    
    
    119
    
    
    
    2.4Total Operating Revenues
    
    $
    68,666
    
    
    $
    70,572
    
    
    $
    (1,906
    )
    
    
    (2.7
    )Production Fuel
    
    
    14,808
    
    
    
    14,077
    
    
    
    731
    
    
    
    5.2Purchased Power  System Use
    
    
    10,156
    
    
    
    11,021
    
    
    
    (865
    )
    
    
    (7.8
    )Other Operation and Maintenance Expenses
    
    
    27,757
    
    
    
    26,651
    
    
    
    1,106
    
    
    
    4.1Depreciation and Amortization
    
    
    7,806
    
    
    
    6,250
    
    
    
    1,556
    
    
    
    24.9Property Taxes
    
    
    2,563
    
    
    
    2,527
    
    
    
    36
    
    
    
    1.4Operating Income
    
    $
    5,576
    
    
    $
    10,046
    
    
    $
    (4,470
    )
    
    
    (44.5
    )
     27




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##### Table of Contents



Plastics
 Three Months EndedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeOperating Revenues
    
    $
    40,645
    
    
    $
    39,525
    
    
    $
    1,120
    
    
    
    2.8Cost of Goods Sold
    
    
    36,685
    
    
    
    31,007
    
    
    
    5,678
    
    
    
    18.3Operating Expenses
    
    
    1,829
    
    
    
    1,753
    
    
    
    76
    
    
    
    4.3Depreciation and Amortization
    
    
    723
    
    
    
    764
    
    
    
    (41
    )
    
    
    (5.4
    )Operating Income
    
    $
    1,408
    
    
    $
    6,001
    
    
    $
    (4,593
    )
    
    
    (76.5
    )
  Manufacturing
 Three Months EndedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeOperating Revenues
    
    $
    120,342
    
    
    $
    104,786
    
    
    $
    15,556
    
    
    
    14.8Cost of Goods Sold
    
    
    99,377
    
    
    
    81,188
    
    
    
    18,189
    
    
    
    22.4Operating Expenses
    
    
    10,213
    
    
    
    9,108
    
    
    
    1,105
    
    
    
    12.1Plant Closure Costs
    
    
    1,412
    
    
    
    
    
    
    
    1,412
    
    
    
    Depreciation and Amortization
    
    
    4,876
    
    
    
    3,283
    
    
    
    1,593
    
    
    
    48.5Operating Income
    
    $
    4,464
    
    
    $
    11,207
    
    
    $
    (6,743
    )
    
    
    (60.2
    )
  
    
    Revenues at DMI Industries, Inc. (DMI) increased $13.0 million as a result of increases
in production and sales activity, including first-year production from its new plant in
Oklahoma.
    
    Revenues at BTD Manufacturing, Inc. (BTD) increased $5.5 million, of which $4.2 million
was from Miller Welding & Iron Works, Inc. (Miller Welding) acquired in May 2008. The
remainder of BTDs revenue increase came from increased product sales to existing and new
customers and increased prices related to higher raw material costs.
    
    Revenues at T.O. Plastics, Inc. (T.O. Plastics) increased $1.1 million as a result of
increased sales of horticultural products.
 28




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##### Table of Contents




    
    Revenues at ShoreMaster, Inc. (ShoreMaster) decreased $4.1 million between the quarters
mainly due to reduced sales of residential and commercial products, but also due to the
completion of a marina project in California in early April 2008. Revenues from the
California marina project decreased $0.9 million between the quarters.
  
    
    DMIs cost of goods sold increased $14.6 million as a result of increases in production
and sales activity, including first-year operations at its new plant in Oklahoma. DMI
experienced a reduction in gross profit margins between the quarters mainly due to a slow
start up of its Oklahoma plant where the levels of labor and overhead spending are higher
than expected and production has not reached levels necessary to cover these costs.
Increased gross profits in West Fargo and Fort Erie were offset by higher costs for
overhead items like rentals and shop supplies. Cost of goods sold includes continued
start-up costs at DMIs Oklahoma plant of $2.0 million incurred in the second quarter of
2008.
    
    Cost of goods sold at BTD increased $4.3 millionin relationship to their increased
salesmainly in the categories of materials and labor costs. Miller Welding accounted for
$3.5 million of the $4.3 million increase in cost of goods sold, including $0.7 million in
fair valuation write-ups of acquired inventory that was sold in the second quarter of 2008.
Under business combination accounting rules, acquired inventory is written up to fair
value.
    
    Cost of goods sold at T.O. Plastics increased $1.0 million, mainly in material costs
related to increased sales of horticultural products.
    
    Cost of goods sold at ShoreMaster decreased $1.7 million mainly due to reduced sales of
residential and commercial products.
  
    
    Operating expenses at DMI increased $1.0 million, mainly related to operation of its new
plant in Oklahoma which began construction in the third quarter of 2007 and went into
operation in January 2008.
    
    BTDs operating expenses increased $0.6 million as a result of increases in labor and
benefit expenses and the May 2008 acquisition of Miller Welding.
    
    T.O. Plastics operating expenses were flat between the quarters.
    
    ShoreMasters operating expenses decreased $0.5 million as a result of reductions in
professional services expenditures and bonus incentives.
   29




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Health Services
 Three Months EndedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeOperating Revenues
    
    $
    30,740
    
    
    $
    32,452
    
    
    $
    (1,712
    )
    
    
    (5.3
    )Cost of Goods Sold
    
    
    24,128
    
    
    
    23,849
    
    
    
    279
    
    
    
    1.2Operating Expenses
    
    
    5,534
    
    
    
    6,111
    
    
    
    (577
    )
    
    
    (9.4
    )Depreciation and Amortization
    
    
    1,013
    
    
    
    1,021
    
    
    
    (8
    )
    
    
    (0.8
    )Operating Income
    
    $
    65
    
    
    $
    1,471
    
    
    $
    (1,406
    )
    
    
    (95.6
    )
  Food Ingredient Processing
 Three Months EndedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeOperating Revenues
    
    $
    15,913
    
    
    $
    18,403
    
    
    $
    (2,490
    )
    
    
    (13.5
    )Cost of Goods Sold
    
    
    12,717
    
    
    
    14,310
    
    
    
    (1,593
    )
    
    
    (11.1
    )Operating Expenses
    
    
    828
    
    
    
    790
    
    
    
    38
    
    
    
    4.8Depreciation and Amortization
    
    
    1,071
    
    
    
    999
    
    
    
    72
    
    
    
    7.2Operating Income
    
    $
    1,297
    
    
    $
    2,304
    
    
    $
    (1,007
    )
    
    
    (43.7
    )
  30




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##### Table of Contents



Other Business Operations
 Three Months EndedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeOperating Revenues
    
    $
    48,080
    
    
    $
    40,587
    
    
    $
    7,493
    
    
    
    18.5Cost of Goods Sold
    
    
    31,927
    
    
    
    27,012
    
    
    
    4,915
    
    
    
    18.2Operating Expenses
    
    
    14,053
    
    
    
    10,979
    
    
    
    3,074
    
    
    
    28.0Depreciation and Amortization
    
    
    497
    
    
    
    502
    
    
    
    (5
    )
    
    
    (1.0
    )Operating Income
    
    $
    1,603
    
    
    $
    2,094
    
    
    $
    (491
    )
    
    
    (23.4
    )
  
    
    Revenues at Foley Company increased $2.8 million due to higher backlog going into 2008
resulting in an increase in volume of jobs in progress.
    
    Revenues at Midwest Construction Services, Inc. (MCS) increased $3.4 million as a result
of an increase in jobs in progress between the quarters, especially in the area of
electrical infrastructure connected to development and delivery of wind generated
electricity.
    
    Revenues at E.W. Wylie Corporation (Wylie) increased $1.3 million mainly as a result of
the impact of increased fuel costs on shipping rates, but also as a result of a 2.2%
increase in combined miles driven by company-owned and owner-operated trucks. Miles driven
by company-owned trucks increased 24.5% as a result of the addition of heavy haul and wind
tower transport services. Miles driven by owner-operated trucks decreased 34.8%.
  
    
    Foley Companys cost of goods sold increased $2.4 million, including increases of $1.7
million in labor and benefit costs, $0.3 million in subcontractor costs and $0.3 million in
material costs, as a result of increased construction activity and jobs in progress.
    
    Cost of goods sold at MCS increased $2.5 million between the quarters due to increases
in material, direct labor and subcontractor costs directly related to MCSs increase in
jobs in progress.
  
    
    Wylies operating expenses increased $1.5 million between the quarters. Fuel costs
increased $2.0 million as a result of higher diesel fuel prices and an increase in miles
driven by company-owned trucks. Labor costs increased by $0.3 million and equipment rental
costs increased by $0.1 million due to the addition of heavy-haul services in the fourth
quarter of 2007. Subcontractor expenses decreased $1.0 million as a result of the decrease
in miles driven by owner-operated trucks.
    
    MCSs operating expenses increased $1.2 million between the quarters mainly related to
personnel changes and the hiring of additional employees and also due to increases in
expenses for contracted services.
    
    Foley Companys operating expenses increased $0.2 million between the quarters due to
increases in labor and insurance costs.
    
    Operating expenses at Otter Tail Energy Services Company (OTESCO) increased $0.2 million
between the quarters related to the investigation and development of renewable energy
wind-generation projects.
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##### Table of Contents



Corporate
  Three Months EndedJune 30,
    
    
    
    
    
    %(in thousands)
    
    2008
    
    2007
    
    Change
    
    ChangeOperating Expenses
    
    $
    3,972
    
    
    $
    2,724
    
    
    $
    1,248
    
    
    
    45.8Depreciation and Amortization
    
    
    138
    
    
    
    128
    
    
    
    10
    
    
    
    7.8
  Interest Charges
  Other Income
  Income Taxes
  32




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##### Table of Contents



Comparison of the Six Months Ended June 30, 2008 and 2007
   Six Months Ended
    
    Six Months Ended(in thousands)
    
    June 30, 2008
    
    June 30, 2007Operating Revenues:Electric
    
    $
    173
    
    
    $
    201Nonelectric
    
    
    1,184
    
    
    
    787Cost of Goods Sold
    
    
    1,065
    
    
    
    762Other Nonelectric Expenses
    
    
    292
    
    
    
    226
 Electric
 Six Months EndedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeRetail Sales Revenues
    
    $
    144,689
    
    
    $
    136,677
    
    
    $
    8,012
    
    
    
    5.9Wholesale Revenues
    
    
    9,805
    
    
    
    10,908
    
    
    
    (1,103
    )
    
    
    (10.1
    )Net Marked-to-Market Gain
    
    
    2,219
    
    
    
    3,398
    
    
    
    (1,179
    )
    
    
    (34.7
    )Other Revenues
    
    
    9,543
    
    
    
    9,569
    
    
    
    (26
    )
    
    
    (0.3
    )Total Operating Revenues
    
    $
    166,256
    
    
    $
    160,552
    
    
    $
    5,704
    
    
    
    3.6Production Fuel
    
    
    34,712
    
    
    
    30,502
    
    
    
    4,210
    
    
    
    13.8Purchased Power  System Use
    
    
    29,142
    
    
    
    37,032
    
    
    
    (7,890
    )
    
    
    (21.3
    )Other Operation and Maintenance Expenses
    
    
    54,500
    
    
    
    53,526
    
    
    
    974
    
    
    
    1.8Depreciation and Amortization
    
    
    15,514
    
    
    
    12,920
    
    
    
    2,594
    
    
    
    20.1Property Taxes
    
    
    5,187
    
    
    
    5,053
    
    
    
    134
    
    
    
    2.7Operating Income
    
    $
    27,201
    
    
    $
    21,519
    
    
    $
    5,682
    
    
    
    26.4
  33




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##### Table of Contents



Plastics
 Six Months EndedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeOperating Revenues
    
    $
    62,995
    
    
    $
    77,344
    
    
    $
    (14,349
    )
    
    
    (18.6
    )Cost of Goods Sold
    
    
    55,621
    
    
    
    61,655
    
    
    
    (6,034
    )
    
    
    (9.8
    )Operating Expenses
    
    
    3,267
    
    
    
    3,292
    
    
    
    (25
    )
    
    
    (0.8
    )Depreciation and Amortization
    
    
    1,518
    
    
    
    1,529
    
    
    
    (11
    )
    
    
    (0.7
    )Operating Income
    
    $
    2,589
    
    
    $
    10,868
    
    
    $
    (8,279
    )
    
    
    (76.2
    )
  34




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##### Table of Contents



Manufacturing
 Six Months EndedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeOperating Revenues
    
    $
    217,937
    
    
    $
    191,011
    
    
    $
    26,926
    
    
    
    14.1Cost of Goods Sold
    
    
    182,225
    
    
    
    150,434
    
    
    
    31,791
    
    
    
    21.1Operating Expenses
    
    
    20,536
    
    
    
    17,039
    
    
    
    3,497
    
    
    
    20.5Plant Closure Costs
    
    
    1,412
    
    
    
    
    
    
    
    1,412
    
    
    
    Depreciation and Amortization
    
    
    8,625
    
    
    
    6,393
    
    
    
    2,232
    
    
    
    34.9Operating Income
    
    $
    5,139
    
    
    $
    17,145
    
    
    $
    (12,006
    )
    
    
    (70.0
    )
  
    
    Revenues at DMI increased $19.6 million as a result of increases in production and sales
activity, including first-year production from its new plant in Oklahoma.
    
    Revenues at BTD increased $8.6 million, of which $4.2 million was from Miller Welding
acquired in May 2008. The remainder of BTDs revenue increase came from increased product
sales to existing and new customers and increased prices related to higher raw material
costs.
    
    Revenues at T.O. Plastics increased $3.1 million as a result of increased sales of
horticultural products.
    
    Revenues at ShoreMaster, Inc. (ShoreMaster) decreased $4.4 million between the periods
mainly due to reduced sales of residential and commercial products, but also due to the
completion of a marina project in California in early April 2008. Revenues from the
California marina project decreased $0.6 million between the periods.
  
    
    DMIs cost of goods sold increased $23.7 million as a result of increases in production
and sales activity, including initial operations at its new plant in Oklahoma. DMI
experienced a $4.1 million reduction in gross profit margins between the periods mainly due
to a slow start up of its Oklahoma plant where the levels of labor and overhead spending
are higher than expected and production has not reached levels necessary to cover these
costs. Included in cost of goods sold for the six months ended June 30, 2008 are costs of
$2.8 million associated with the start up of DMIs new plant in Oklahoma and $3.2 million
in additional labor and material costs on a production contract at the Fort Erie plant.
    
    Cost of goods sold at BTD increased $6.9 millionin relationship to their increased
salesmainly in the categories of materials and supplies, labor and subcontractor costs.
Miller Welding accounted for $3.5 million of the $6.9 million increase in cost of goods
sold, including $0.7 million in fair valuation write-ups of acquired inventory that was
sold in the second quarter of 2008. Under business combination accounting rules, acquired
inventory is written up to fair value.
    
    Cost of goods sold at T.O. Plastics increased $2.4 million, mainly in material costs
related to increased sales of horticultural products.
    
    Cost of goods sold at ShoreMaster decreased $1.2 million mainly due to reduced sales of
residential and commercial products.
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##### Table of Contents




    
    Operating expenses at DMI increased $1.9 million, mainly related to operation of its new
plant in Oklahoma which began construction in the third quarter of 2007 and went into
operation in January 2008.
    
    BTDs operating expenses increased $1.1 million as a result of increases in labor and
benefit expenses and the May 2008 acquisition of Miller Welding.
    
    ShoreMasters operating expenses increased $0.5 million as a result of increases in
sales and marketing expenses.
    
    T.O. Plastics operating expenses were flat between the periods.
   Health Services
 Six Months EndedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeOperating Revenues
    
    $
    60,005
    
    
    $
    65,415
    
    
    $
    (5,410
    )
    
    
    (8.3
    )Cost of Goods Sold
    
    
    47,419
    
    
    
    48,232
    
    
    
    (813
    )
    
    
    (1.7
    )Operating Expenses
    
    
    11,459
    
    
    
    11,917
    
    
    
    (458
    )
    
    
    (3.8
    )Depreciation and Amortization
    
    
    1,995
    
    
    
    1,983
    
    
    
    12
    
    
    
    0.6Operating (Loss) Income
    
    $
    (868
    )
    
    $
    3,283
    
    
    $
    (4,151
    )
    
    
    (126.4
    )
  Food Ingredient Processing
 Six Months EndedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeOperating Revenues
    
    $
    31,811
    
    
    $
    37,898
    
    
    $
    (6,087
    )
    
    
    (16.1
    )Cost of Goods Sold
    
    
    25,036
    
    
    
    31,303
    
    
    
    (6,267
    )
    
    
    (20.0
    )Operating Expenses
    
    
    1,641
    
    
    
    1,542
    
    
    
    99
    
    
    
    6.4Depreciation and Amortization
    
    
    2,144
    
    
    
    1,968
    
    
    
    176
    
    
    
    8.9Operating Income
    
    $
    2,990
    
    
    $
    3,085
    
    
    $
    (95
    )
    
    
    (3.1
    )
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Other Business Operations
 Six Months EndedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    ChangeOperating Revenues
    
    $
    86,190
    
    
    $
    75,733
    
    
    $
    10,457
    
    
    
    13.8Cost of Goods Sold
    
    
    60,222
    
    
    
    50,770
    
    
    
    9,452
    
    
    
    18.6Operating Expenses
    
    
    26,066
    
    
    
    21,592
    
    
    
    4,474
    
    
    
    20.7Depreciation and Amortization
    
    
    958
    
    
    
    954
    
    
    
    4
    
    
    
    0.4Operating (Loss) Income
    
    $
    (1,056
    )
    
    $
    2,417
    
    
    $
    (3,473
    )
    
    
    (143.7
    )
  
    
    Revenues at Foley Company increased $7.0 million due to higher backlog going into 2008
resulting in an increase in volume of jobs in progress.
    
    Revenues at MCS increased $1.8 million as a result of an increase in jobs in progress
between the periods, especially in the area of electrical infrastructure connected to
development and delivery of wind generated electricity.
    
    Revenues at Wylie increased $1.7 million mainly as a result of the impact of increased
fuel costs on shipping rates. Miles driven by company-owned trucks increased 24.2% as a
result of the addition of heavy haul and wind tower transport services. Miles driven by
owner-operated trucks decreased 40.2%. Combined miles driven by company-owned and
owner-operated trucks decreased 0.5% between the periods.
  
    
    Foley Companys cost of goods sold increased $6.3 million, including increases of $4.1
million in subcontractor and material costs and $2.2 million in direct labor and benefit
costs, as a result of increased construction activity and jobs in progress.
    
    Cost of goods sold at MCS increased $3.1 million between the periods due to increases in
labor, material and subcontractor costs directly related to MCSs increase in jobs in
progress.
  
    
    Wylies operating expenses increased $2.4 million between the periods. Fuel costs
increased $3.5 million as a result of higher diesel fuel prices and an increase in miles
driven by company-owned trucks. Labor and benefit costs increased by $0.6 million and
equipment rental costs increased by $0.2 million due to the addition of heavy-haul services
in the fourth quarter of 2007. Subcontractor expenses decreased $2.0 million as a result of
the decrease in miles driven by owner-operated trucks.
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##### Table of Contents




    
    MCSs operating expenses increased $1.3 million between the periods mainly related to
personnel changes and the hiring of additional employees and also due to increases in
expenses for contracted services.
    
    Foley Companys operating expenses increased $0.3 million between the periods due to
increases in labor and insurance costs.
    
    Operating expenses at OTESCO increased $0.4 million between the periods related to the
investigation and development of renewable energy wind-generation projects.
 Corporate
  Six Months EndedJune 30,
    
    
    
    
    
    %(in thousands)
    
    2008
    
    2007
    
    Change
    
    ChangeOperating Expenses
    
    $
    8,312
    
    
    $
    6,979
    
    
    $
    1,333
    
    
    
    19.1Depreciation and Amortization
    
    
    283
    
    
    
    293
    
    
    
    (10
    )
    
    
    (3.4
    )
  Interest Charges
  Other Income
  Income Taxes
  38




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##### Table of Contents



2008 EXPECTATIONS
   
    
    We expect increased levels of net income from our electric segment in 2008. The increase
is attributable to the 2.9% rate increase granted in Minnesota and rate riders for wind
energy and transmission investments in North Dakota and Minnesota. The increase also
anticipates having lower-cost generation available for the year, as no major plant
shutdowns are planned for Big Stone Plant or Coyote Station in 2008.
    
    We expect our plastics segments 2008 performance to be below normal levels as this
segment continues to be impacted by the sluggish housing and construction markets.
Announced capacity expansions are not expected to have a material impact on 2008 results.
    
    We expect a decrease in net income in our manufacturing segment in 2008. Increased
capacity related to recent expansions and acquisitions as well as the start-up of DMIs
wind tower manufacturing plant in Oklahoma in 2008 are expected to result in increased
levels of revenue. DMI is investing in new facilities and incurring costs related to
starting up and expanding facilities as well as integrating new customers in order to
prepare for the anticipated growth in the wind industry subsequent to 2008. This is
expected to result in a decrease in net income in 2008 compared with 2007. Also, the impact
of a softening economy on ShoreMaster is expected to cause a decrease in net income for
this segment in 2008. Backlog in place on June 30, 2008 in the manufacturing segment to
support revenues for the remainder of 2008 is approximately $206 million. This compares
with $191 million in revenue earned in the third and fourth quarters of 2007. DMI
Industries accounts for a substantial portion of the 2008 backlog.
    
    We expect a decline in net income from our health services segment in 2008 due to lower
utilization levels of certain imaging assets.
    
    We expect net income from our food ingredient processing business to be on par with
2007. This business has backlog in place as of June 30, 2008 of 51 million pounds for the
remainder of 2008 compared with 52 million pounds in the third and fourth quarters of 2007.
    
    We expect our other business operations segment to have higher net income in 2008
compared with 2007. Backlog for the construction businesses at the end of the second
quarter of 2008 was approximately $79 million for the remainder of 2008 compared with $93
million in revenue in the third and fourth quarters of 2007.
    
    We expect corporate general and administrative costs to increase in 2008.
 39




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##### Table of Contents



FINANCIAL POSITION
      40




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##### Table of Contents



Moodys Investors
    
    StandardService
    
    & PoorsSenior Unsecured Debt
    
    A3
    
    BBB+Preferred Stock
    
    Baa2
    
    BBB-Outlook
    
    Negative
    
    Negative
  41




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##### Table of Contents



Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
     42




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##### Table of Contents



2008-(in millions)
    
    2008
    
    
    
    2012Electric
    
    $
    194
    
    
    
    $
    880Plastics
    
    
    13
    
    
    
    
    21Manufacturing
    
    
    52
    
    
    
    
    114Health Services
    
    
    2
    
    
    
    
    11Food Ingredient Processing
    
    
    4
    
    
    
    
    18Other Business Operations
    
    
    4
    
    
    
    
    9Corporate
    
    
    
    
    
    
    
    1Total
    
    $
    269
    
    
    
    $
    1,054
    43




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##### Table of Contents



Critical Accounting Policies Involving Significant Estimates
   Forward Looking Information  Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995
   
    
    We are subject to federal and state legislation, regulations and actions that may have a
negative impact on our business and results of operations.
    
    Actions by the regulators of the electric segment could result in rate reductions, lower
revenues and earnings or delays in recovering capital expenditures.
    
    Any significant impairment of our goodwill would cause a decrease in our assets and a
reduction in our net operating performance.
    
    Future operating results of the electric segment will be impacted by the outcome of rate
rider filings in Minnesota for transmission and wind energy investments.
    
    Certain costs currently included in the FCA in retail rates may be excluded from recovery
through the FCA but may be subject to recovery through rates established in a general rate
case. Further, all, or portions of, gross
 44




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##### Table of Contents



margins on asset-based wholesale electric sales may
become subject to refund through the FCA as a result of a general rate case.
    
    Weather conditions or changes in weather patterns can adversely affect our operations and
revenues.
    
    Electric wholesale margins could be further reduced as the MISO market becomes more
efficient.
    
    Electric wholesale trading margins could be reduced or eliminated by losses due to trading
activities.
    
    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.
    
    Wholesale sales of electricity from excess generation could be affected by reductions in
coal shipments to the Big Stone and Hoot Lake plants due to supply constraints or rail
transportation problems beyond our control.
    
    Our electric segment has capitalized $9.8 million in costs related to the planned
construction of a second electric generating unit at its Big Stone Plant site as of June 30,
2008. 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 may be subject to expense and may not be recoverable.
    
    Federal and state environmental regulation could cause us to incur substantial capital
expenditures which could result in increased operating costs.
    
    Existing or new laws or regulations addressing climate change or reductions of greenhouse
gas emissions by federal or state authorities, such as mandated levels of renewable
generation or mandatory reductions in carbon dioxide (CO2) emission levels or
taxes on CO2 emissions, that result in increases in electric service costs could
negatively impact our net income, financial position and operating cash flows
if such costs cannot be recovered through rates granted by ratemaking authorities in the
states where the electric utility provides service or through increased market prices for
electricity.
    
    We may not be able to respond effectively to deregulation initiatives in the electric
industry, which could result in reduced revenues and earnings.
    
    Our manufacturer of wind towers operates in a market that has been influenced by the
existence of a Federal Production Tax Credit. This tax credit is scheduled to expire on
December 31, 2008. Should this tax credit not be renewed, the revenues and earnings of this
business could be reduced.
    
    Our plans to grow and diversify through acquisitions and capital projects may not be
successful and could result in poor financial performance.
    
    Our ability to own and expand our nonelectric businesses could be limited by state law.
    
    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 and changes in our debt rating could restrict our ability to
access capital and could increase borrowing costs and pension plan expenses.
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##### Table of Contents




    
    The price and availability of raw materials could affect the revenue and earnings of our
manufacturing segment.
    
    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.
    
    Our food ingredient processing and wind tower manufacturing businesses could be adversely
affected by changes in foreign currency exchange rates.
    
    Our plastics segment is highly dependent on a limited number of vendors for PVC resin,
many of which are located in the Gulf Coast regions, and a limited supply of resin. 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.
    
    Changes in the rates or method of third-party reimbursements for diagnostic imaging
services could result in reduced demand for those services or create downward pricing
pressure, which would decrease revenues and earnings for our health services segment.
    
    Our health services businesses may be unable to renew and continue to maintain the
dealership arrangements with Philips Medical which are scheduled to expire on December 31,
2008.
    
    Actions by regulators of our health services segment could result in monetary penalties or
restrictions in our health services operations.
    
    A significant failure or an inability to properly bid or perform on projects by ours
construction businesses could lead to adverse financial results.
 
 
 Quantitative and Qualitative Disclosures about Market Risk
   46




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##### Table of Contents



(in thousands)
    
    June 30, 2008Current Asset  Marked-to-Market Gain
    
    $
    11,287Current Liability  Marked-to-Market Loss
    
    
    (10,015
    )Net Fair Value of Marked-to-Market Energy Contracts
    
    $
    1,272
 47




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##### Table of Contents



Year-to-Date(in thousands)
    
    June 30, 2008Fair Value at Beginning of Year
    
    $
    632Amount Realized on Contracts Entered into in 2007 and Settled in 2008
    
    
    (204
    )Changes in Fair Value of Contracts Entered into in 2007
    
    
    493Net Fair Value of Contracts Entered into in 2007 at End of Period
    
    
    921Changes in Fair Value of Contracts Entered into in 2008
    
    
    351Net Fair Value End of Period
    
    $
    1,272
  3rd Quarter
    
    4th Quarter(in thousands)
    
    2008
    
    2008
    
    TotalNet Gain
    
    $
    396
    
    
    $
    876
    
    
    $
    1,272
     48




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##### Table of Contents



Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Legal Proceedings
  49




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##### Table of Contents



Risk Factors
  Any significant impairment of our goodwill would cause a decrease in our assets and a reduction in
our net operating performance.
  
 Unregistered Sales of Equity Securities and Use of Proceeds
  Total Number of
    
    Average PriceCalendar Month
    
    Shares Purchased
    
    Paid per ShareApril 2008
    
    
    2,493
    
    
    $
    35.64May 2008
    
    
    
    
    
    
    June 2008
    
    
    
    
    
    
    Total
    
    
    2,493
 50




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##### Table of Contents



Submission of Matters to a Vote of Security Holders
   Shares
    
    Shares Voted
    
    BrokerElection of Directors
    
    Voted For
    
    Withheld Authority
    
    Non-VotesJohn D. Erickson
    
    
    22,437,950
    
    
    
    2,731,376
    
    
    
    -0-Nathan I. Partain
    
    
    21,787,661
    
    
    
    3,381,666
    
    
    
    -0-James B. Stake
    
    
    22,389,762
    
    
    
    2,779,564
    
    
    
    -0-
 Shares
    
    SharesShares
    
    Voted
    
    Voted
    
    BrokerVoted For
    
    Against
    
    Abstain
    
    Non-VotesRatification of
Deloitte & Touche LLP
as Independent
Registered
Public Accounting Firm
    
    
    24,665,084
    
    
    
    306,792
    
    
    
    197,451
    
    
    
    -0-
 
 Exhibits
 31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 SIGNATURES
  OTTER TAIL CORPORATIONBy:
    
    /s/ Kevin G. Moug

Kevin G. MougChief Financial Officer and Treasurer(Chief Financial Officer/Authorized Officer)
  51




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description31.1
    
    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