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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One)  þ
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period
ended March 31, 2005 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)
 866-410-8780      Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YESþ NOo Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2
of the Exchange Act). YESþ NOo Indicate the number of shares outstanding of each of the issuers classes of Common Stock, as of
the latest practicable date: April 30, 2005  29,159,584 Common Shares ($5 par value)




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OTTER TAIL CORPORATION INDEX Page No.Part I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets  March 31, 2005
and December 31, 2004 (Unaudited)
    
    
    2 & 3Consolidated Statements of Income  Three Months
Ended March 31, 2005 and 2004 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows  Three Months
Ended March 31, 2005 and 2004 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6-16Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    16-27Item 3. Quantitative and Qualitative Disclosures about
Market Risk
    
    
    27-30Item 4. Controls and Procedures
    
    
    30Part II. Other InformationItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 6. Exhibits
    
    
    31Signatures
    
    
    31Certification 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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PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements Otter Tail Corporation
Consolidated Balance Sheets
(Unaudited)-Assets- March 31,
    
    
    December 31,2005
    
    
    2004(Thousands of dollars)Current assetsCash and cash equivalents
    
    
    
    
    
    $
    
    
    
    $
    Accounts receivable:Tradenet
    
    
    
    
    
    
    121,882
    
    
    
    116,878Other
    
    
    
    
    
    
    7,925
    
    
    
    9,872Inventories
    
    
    
    
    
    
    99,664
    
    
    
    74,829Deferred income taxes
    
    
    
    
    
    
    4,854
    
    
    
    4,858Accrued utility revenues
    
    
    
    
    
    
    14,504
    
    
    
    15,344Costs and estimated earnings in excess of billings
    
    
    
    
    
    
    14,580
    
    
    
    18,145Other
    
    
    
    
    
    
    14,532
    
    
    
    7,824Assets held for sale from discontinued operations
    
    
    
    
    
    
    25,415
    
    
    
    27,410Total current assets
    
    
    
    
    
    
    303,356
    
    
    
    275,160Investments and other assets
    
    
    
    
    
    
    42,853
    
    
    
    42,655Goodwillnet
    
    
    
    
    
    
    95,219
    
    
    
    92,196Other intangiblesnet
    
    
    
    
    
    
    20,757
    
    
    
    19,674Deferred debitsUnamortized debt expense and reacquisition premiums
    
    
    
    
    
    
    7,059
    
    
    
    7,291Regulatory assets and other deferred debits
    
    
    
    
    
    
    15,799
    
    
    
    16,692Total deferred debits
    
    
    
    
    
    
    22,858
    
    
    
    23,983PlantElectric plant in service
    
    
    
    
    
    
    892,528
    
    
    
    890,200Nonelectric operations
    
    
    
    
    
    
    215,545
    
    
    
    209,240Total plant
    
    
    
    
    
    
    1,108,073
    
    
    
    1,099,440Less accumulated depreciation and amortization
    
    
    
    
    
    
    443,387
    
    
    
    437,429Plantnet of accumulated depreciation and amortization
    
    
    
    
    
    
    664,686
    
    
    
    662,011Construction work in progress
    
    
    
    
    
    
    18,290
    
    
    
    18,469Net plant
    
    
    
    
    
    
    682,976
    
    
    
    680,480Total
    
    
    
    
    
    $
    1,168,019
    
    
    $
    1,134,148
 See accompanying notes to consolidated financial statements -2-




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Otter Tail Corporation
Consolidated Balance Sheets
(Unaudited)-Liabilities- March 31,
    
    
    December 31,2005
    
    
    2004(Thousands of dollars)Current liabilitiesShort-term debt
    
    $
    55,839
    
    
    $
    39,950Current maturities of long-term debt
    
    
    5,680
    
    
    
    6,055Accounts payable
    
    
    95,887
    
    
    
    85,100Accrued salaries and wages
    
    
    13,340
    
    
    
    17,475Accrued federal and state income taxes
    
    
    6,566
    
    
    
    3,682Other accrued taxes
    
    
    12,579
    
    
    
    11,395Other accrued liabilities
    
    
    14,558
    
    
    
    10,417Liabilities from discontinued operations
    
    
    6,321
    
    
    
    7,710Total current liabilities
    
    
    210,770
    
    
    
    181,784Pensions benefit liability
    
    
    16,947
    
    
    
    16,703Other postretirement benefits liability
    
    
    25,625
    
    
    
    25,053Other noncurrent liabilities
    
    
    12,905
    
    
    
    11,874Deferred creditsDeferred income taxes
    
    
    120,524
    
    
    
    121,334Deferred investment tax credit
    
    
    10,189
    
    
    
    10,477Regulatory liabilities
    
    
    56,971
    
    
    
    56,909Other
    
    
    1,548
    
    
    
    1,662Total deferred credits
    
    
    189,232
    
    
    
    190,382CapitalizationLong-term debt, net of current maturities
    
    
    260,334
    
    
    
    261,810Class B stock options of subsidiary
    
    
    1,832
    
    
    
    1,832Cumulative preferred shares
authorized 1,500,000 shares without par value;
outstanding 2004 and 2003  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 2005  29,145,597 and 2004  28,976,919
    
    
    145,728
    
    
    
    144,885Premium on common shares
    
    
    90,838
    
    
    
    87,865Unearned compensation
    
    
    (2,252
    )
    
    
    (2,577
    )Retained earnings
    
    
    201,055
    
    
    
    199,427Accumulated other comprehensive loss
    
    
    (495
    )
    
    
    (390
    )Total common equity
    
    
    434,874
    
    
    
    429,210Total capitalization
    
    
    712,540
    
    
    
    708,352Total
    
    $
    1,168,019
    
    
    $
    1,134,148
 See accompanying notes to consolidated financial statements -3-




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Otter Tail Corporation
Consolidated Statements of Income
(Unaudited) Three months endedMarch 31,2005
    
    
    2004(In thousands, except shareand per share amounts)Operating revenues
    
    $
    233,838
    
    
    $
    201,653Operating expensesProduction fuel
    
    
    15,177
    
    
    
    14,597Purchased power  system use
    
    
    11,538
    
    
    
    10,922Electric operation and maintenance expenses
    
    
    23,918
    
    
    
    21,277Cost of goods sold (excludes depreciation; included below)
    
    
    124,828
    
    
    
    104,593Other nonelectric expenses
    
    
    23,239
    
    
    
    21,064Depreciation and amortization
    
    
    11,435
    
    
    
    10,583Property taxes  electric operations
    
    
    2,673
    
    
    
    2,489Total operating expenses
    
    
    212,808
    
    
    
    185,525Operating income
    
    
    21,030
    
    
    
    16,128Other income
    
    
    194
    
    
    
    11Interest charges
    
    
    4,585
    
    
    
    4,390Income from continuing operations before income taxes
    
    
    16,639
    
    
    
    11,749Income taxes  continuing operations
    
    
    5,623
    
    
    
    3,539Income from continuing operations
    
    
    11,016
    
    
    
    8,210Discontinued operationsIncome from discontinued operations  net of taxes of $355 in 2005 and $35 in 2004
    
    
    531
    
    
    
    49Loss on expected disposal of discontinued operations  net of tax of ($1,051)
    
    
    (1,576
    )
    
    
    Net (loss) income from discontinued operations
    
    
    (1,045
    )
    
    
    49Net income
    
    
    9,971
    
    
    
    8,259Preferred dividend requirements
    
    
    184
    
    
    
    184Earnings available for common shares
    
    $
    9,787
    
    
    $
    8,075Basic earnings per common share:Continuing operations (net of preferred dividend requirement)
    
    $
    0.37
    
    
    $
    0.31Discontinued operations
    
    $
    (0.03
    )
    
    $
    $
    0.34
    
    
    $
    0.31Diluted earnings per common share:Continuing operations (net of preferred dividend requirement)
    
    $
    0.37
    
    
    $
    0.31Discontinued operations
    
    $
    (0.04
    )
    
    $
    $
    0.33
    
    
    $
    0.31Average number of common shares outstanding  basic
    
    
    29,126,096
    
    
    
    25,793,041Average number of common shares outstanding  diluted
    
    
    29,230,188
    
    
    
    25,936,219Dividends per common share
    
    $
    0.280
    
    
    $
    0.275
 See accompanying notes to consolidated financial statements -4-




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Otter Tail Corporation
Consolidated Statements of Cash Flows
(Unaudited) Three months endedMarch 31,2005
    
    
    2004(Thousands of dollars)Cash flows from operating activitiesNet income
    
    $
    9,971
    
    
    $
    8,259Adjustments to reconcile net income to net cash
provided by operating activities:Income from discontinued operations
    
    
    1,045
    
    
    
    (49
    )Depreciation and amortization
    
    
    11,435
    
    
    
    10,583Deferred investment tax credit
    
    
    (288
    )
    
    
    (288
    )Deferred income taxes
    
    
    (1,549
    )
    
    
    293Change in deferred debits and other assets
    
    
    745
    
    
    
    434Discretionary contribution to pension plan
    
    
    
    
    
    
    (1,000
    )Change in noncurrent liabilities and deferred credits
    
    
    2,028
    
    
    
    1,206Allowance for equity (other) funds used during construction
    
    
    (180
    )
    
    
    (190
    )Change in derivatives net of regulatory deferral
    
    
    273
    
    
    
    369Other  net
    
    
    545
    
    
    
    373Cash (used for) provided by current assets and current liabilities:Change in receivables
    
    
    (2,470
    )
    
    
    (8,250
    )Change in inventories
    
    
    (24,298
    )
    
    
    (2,658
    )Change in other current assets
    
    
    (489
    )
    
    
    (1,585
    )Change in payables and other current liabilities
    
    
    35
    
    
    
    (14,191
    )Change in interest and income taxes payable
    
    
    4,477
    
    
    
    1,927Net cash provided by continuing operations
    
    
    1,280
    
    
    
    (4,767
    )Net cash (used in) provided by discontinued operations
    
    
    (188
    )
    
    
    1,553Net cash provided by (used for) operating activities
    
    
    1,092
    
    
    
    (3,214
    )Cash flows from investing activitiesCapital expenditures
    
    
    (12,744
    )
    
    
    (8,118
    )Proceeds from disposal of noncurrent assets
    
    
    948
    
    
    
    1,952Acquisitionsnet of cash acquired
    
    
    (6,665
    )
    
    
    Increases in other investments
    
    
    (169
    )
    
    
    (60
    )Net cash used in investing activities  continuing operations
    
    
    (18,630
    )
    
    
    (6,226
    )Net cash used in investing activities  discontinued operations
    
    
    52
    
    
    
    (6
    )Net cash used in investing activities
    
    
    (18,578
    )
    
    
    (6,232
    )Cash flows from financing activitiesChange in checks written in excess of cash
    
    
    8,179
    
    
    
    3,895Net short-term borrowings
    
    
    15,889
    
    
    
    5,000Proceeds from issuance of common stock, net of issuance expenses
    
    
    4,241
    
    
    
    2,920Payments for retirement of common stock
    
    
    (6
    )
    
    
    Proceeds from issuance of long-term debt, net of issuance expenses
    
    
    44
    
    
    
    8Payments for retirement of long-term debt
    
    
    (2,293
    )
    
    
    (2,162
    )Dividends paid and other distributions
    
    
    (8,342
    )
    
    
    (7,274
    )Net cash provided by (used in) financing activities  continuing operations
    
    
    17,712
    
    
    
    2,387Net cash provided by (used in) financing activities  discontinued operations
    
    
    (287
    )
    
    
    (560
    )Net cash provided by (used in) financing activities
    
    
    17,425
    
    
    
    1,827Effect of foreign exchange rate fluctuations on cash
    
    
    61
    
    
    
    Net change in cash and cash equivalents
    
    
    
    
    
    
    (7,619
    )Cash and cash equivalents at beginning of period
    
    
    
    
    
    
    7,619Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    Supplemental cash flow informationCash paid during the year from continuing operations for:Interest (net of amount capitalized)
    
    $
    2,238
    
    
    $
    2,031Income taxes
    
    $
    4,509
    
    
    $
    3,215Cash paid during the year from discontinued operations for:Interest (net of amount capitalized)
    
    $
    28
    
    
    $
    31Income taxes
    
    $
    781
    
    
    $
    442
 See accompanying notes to consolidated financial statements -5-




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OTTER TAIL CORPORATION 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) In the opinion of management, Otter Tail Corporation (the Company) has included all adjustments
(including normal recurring accruals) necessary for a fair presentation of the consolidated results
of operations for the periods presented. The consolidated financial statements and notes thereto
should be read in conjunction with the consolidated financial statements and notes as of and for
the years ended December 31, 2004, 2003 and 2002 included in the Companys Annual Report on Form
10-K for the fiscal year ended December 31, 2004. Because of seasonal and other factors, the
earnings for the three months ended March 31, 2005 should not be taken as an indication of earnings
for all or any part of the balance of the year. Acquisitions On January 3, 2005 the Companys wholly-owned subsidiary, BTD Manufacturing, Inc. (BTD), acquired
the assets of Performance Tool & Die, Inc. (Performance Tool) of Lakeville, Minnesota, for $4.1
million in cash. Performance Tool specializes in manufacturing mid to large progressive dies for
customers throughout the Midwest, East and West Coasts, and the southern United States. Performance
Tools revenues for the year ended December 31, 2004 were $4.1 million. The Company expects this
acquisition to provide expanded growth opportunities for both BTD and Performance Tool. Also, on January 3, 2005 the Companys wholly-owned subsidiary, ShoreMaster, Inc., acquired the
common stock of Shoreline Industries, Inc. (Shoreline), of Pine River, Minnesota, and associated
assets for $2.4 million in cash. Shoreline is a manufacturer of boatlift motors and other
accessories for lifts and docks with sales throughout the United States, but primarily in Minnesota
and Wisconsin. Shorelines revenues for the year ended December 31, 2004 were $2.1 million. The
acquisition of Shoreline secures a source of components and expands potential markets for
ShoreMaster products. Below, are condensed balance sheets, at the date of the business combinations, disclosing the
preliminary allocation of the purchase price assigned to each major asset and liability category of
the acquired companies: Performance
    
    
    Shoreline(in thousands)
    
    Tool
    
    
    IndustriesAssetsCurrent assets
    
    $
    748
    
    
    $
    457Plant
    
    
    1,396
    
    
    
    260Goodwill
    
    
    1,769
    
    
    
    1,505Other intangible assets
    
    
    800
    
    
    
    557Total assets
    
    $
    4,713
    
    
    $
    2,779Liabilities and equityCurrent liabilities
    
    $
    324
    
    
    $
    86Deferred income taxes
    
    
    
    
    
    
    295Long-term debt
    
    
    298
    
    
    
    Total liabilities
    
    $
    622
    
    
    $
    381Cash paid
    
    $
    4,091
    
    
    $
    2,398
 Goodwill and other intangible assets related to the Performance Tool acquisition are deductible for
income tax purposes over 15 years. Other intangible assets related to the Performance Tool
acquisition includes $239,000 for a nonamortizable trade name and $561,000 in other intangible
assets being amortized over 3 to 15 years for book 6




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purposes. Goodwill and other intangible assets related to the Shoreline acquisition are not
deductible for income tax purposes, except for a $171,000 noncompete agreement being amortized over
15 years for income tax purposes. Other intangible assets related to the Shoreline acquisition
includes $149,000 for a nonamortizable brand name and $408,000 in other intangible assets being
amortized over 5 to 8 years for book purposes. Revenue Recognition Due to the diverse business operations of the Company, revenue recognition depends on the product
produced or sold. The Company recognizes revenue when the earnings process is complete, evidenced
by an agreement with the customer, there has been delivery and acceptance and the price is fixed
and determinable. In cases where significant obligations remain after delivery, revenue is deferred
until such obligations are fulfilled. Provisions for sale returns and warranty costs are recorded
at the time of sale based on historical information and current trends. Amounts received in advance
under customer service contracts are deferred and recognized on a straight-line basis over the
contract period. In the case of derivative instruments, such as the electric utilitys forward
energy contracts and the energy services companys forward natural gas swap transactions, the
Company recognizes gains and losses based on changes in the fair market value of derivative
instruments over the period held, and also when realized on settlement, on a net basis in revenue
in a manner prescribed by Emerging Issues Task Force (EITF) Issue 03-11. Gains and losses subject
to regulatory treatment on forward energy contracts are deferred and recognized on a net basis in
revenue in the period in which the contract settles. For those operating businesses recognizing revenue when products are shipped, the operating
businesses have no further obligation to provide services related to such product. The shipping
terms used in these instances are FOB shipping point. Some of the operating businesses enter into fixed-price construction contracts. Revenues under
these contracts are recognized on a percentage-of-completion basis. The method used to determine
the percentage of completion is based on the ratio of labor costs incurred to total estimated labor
costs at the Companys wind tower manufacturer, square footage completed to total bid square
footage for certain floating dock projects and costs incurred to total estimated costs on all other
construction projects. The following summarizes costs incurred, billings and estimated earnings
recognized on uncompleted contracts: March 31,
    
    
    December 31,(in thousands)
    
    2005
    
    
    2004Costs incurred on uncompleted contracts
    
    $
    89,307
    
    
    $
    99,213Less billings to date
    
    
    (95,896
    )
    
    
    (96,413
    )Plus estimated earnings recognized
    
    
    12,118
    
    
    
    12,469$
    5,529
    
    
    $
    15,269
 The following amounts are included in the Companys consolidated balance sheets. Billings in excess
of costs and estimated earnings on uncompleted contracts are included in Accounts payable: March 31,
    
    
    December 31,(in thousands)
    
    2005
    
    
    2004Costs and estimated earnings in excess of billings on uncompleted contracts
    
    $
    14,580
    
    
    $
    18,145Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    (9,051
    )
    
    
    (2,876
    )$
    5,529
    
    
    $
    15,269
 The percent of revenue recognized under the percentage-of-completion method compared to total
consolidated revenues was 16.5% for the three months ended March 31, 2005 compared with 17.4% for
the three months ended March 31, 2004. 7




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Stock-based compensation The Company has elected to follow the accounting provisions of Accounting Principle Board Opinion
No. 25, Accounting for Stock Issued to Employees, for stock-based compensation and to furnish the
pro forma disclosures required under Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation. Had compensation costs for the stock options issued been determined based on estimated fair value
at the award dates, as prescribed by SFAS No. 123, the Companys net income for three month periods
ended March 31, 2005 and March 31, 2004 would have decreased as presented in the table below. This
may not be representative of the pro forma effects for future periods if additional options are
granted. Three months endedMarch 31,(in thousands)
    
    2005
    
    
    2004Net incomeAs reported
    
    $
    9,971
    
    
    $
    8,259Total stock-based employee compensation
expense determined under fair value
based method for all awards net of
related tax effects
    
    
    (106
    )
    
    
    (214
    )Pro forma
    
    $
    9,865
    
    
    $
    8,045Basic earnings per shareAs reported
    
    $
    0.34
    
    
    $
    0.31Pro forma
    
    $
    0.33
    
    
    $
    0.30Diluted earnings per shareAs reported
    
    $
    0.33
    
    
    $
    0.31Pro forma
    
    $
    0.33
    
    
    $
    0.30
 Adjustments and Reclassifications Net income for the first quarter of 2004 has been adjusted to reflect the effects of applying FASB
Staff Position No. FAS 106-2 (FSP 106-2), Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003(the Act), retroactive to the
beginning of 2004 on adoption in the third quarter of 2004. The adoption of FSP 106-2 had the
effect of reducing 2004 first quarter operating expenses and increasing 2004 first quarter net
income by $164,000. In accordance with the provisions of the Act, the expected subsidy has no
effect on income tax expense. Certain prior year amounts reported on the Companys consolidated balance sheet have been
reclassified to conform to 2005 presentation. On the Companys consolidated balance sheets,
regulatory assets and other deferred debits, previously disclosed on separate lines, have been
combined on a single line. December 31, 2004 balance sheet amounts reflect the reclassification of
St. George Steel Fabrication, Inc. from continuing operations to discontinued operations as a
result of the pending sale of that business initiated in the first quarter of 2005. The Companys
income statement for the three months ended March 31, 2004 reflects the reclassifications of the
operating results of Midwest Information Systems, Inc. and St. George Steel Fabrication, Inc. to
discontinued operations as a result of their pending sales. Such reclassifications had no impact on
total assets, net income or shareholders equity. 8




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On the Companys
statement of cash flows for the three months ended March 31, 2004 the change in
the amount of checks issued in excess of cash, included in accounts payable on the Companys
consolidated balance sheet, was reclassified from change in payables and other current liabilities
under cash flows from operating activities to change in checks written in excess of cash under cash
flows from financing activities.This reclassification decreased cash flows from operating
activities and increased cash flows from financing activities by $3,895,000 for the three months
ended March 31, 2004. Inventories Inventories consist of the following: March 31,
    
    
    December 31,(in thousands)
    
    2005
    
    
    2004Finished goods
    
    $
    41,568
    
    
    $
    34,172Work in process
    
    
    4,771
    
    
    
    4,531Raw material, fuel and supplies
    
    
    53,325
    
    
    
    36,126$
    99,664
    
    
    $
    74,829
 Goodwill and Other Intangible Assets Goodwill increased $3,023,000 in the first three months of 2005: $1,769,000 related to the
acquisition of Performance Tool in January 2005; $1,505,000 related to the acquisition of Shoreline
in January 2005; a $249,000 adjustment related to the acquisition of Idaho Pacific Holdings, Inc.
(IPH), in August 2004; and a reversal of $500,000 related to the return to the Company of stock
that was held in escrow for performance contingencies in a health services acquisition that were
not achieved. The following table summarizes the components of the Companys intangible assets at March 31, 2005
and December 31, 2004. March 31, 2005
    
    
    December 31, 2004Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    Netcarrying
    
    
    Accumulated
    
    
    carrying
    
    
    carrying
    
    
    Accumulated
    
    
    carrying(in thousands)
    
    amount
    
    
    amortization
    
    
    amount
    
    
    amount
    
    
    amortization
    
    
    amountAmortized intangible assets:Covenants not to compete
    
    $
    2,781
    
    
    $
    1,977
    
    
    $
    804
    
    
    $
    2,559
    
    
    $
    1,893
    
    
    $
    666Customer relationships
    
    
    10,552
    
    
    
    256
    
    
    
    10,296
    
    
    
    10,045
    
    
    
    148
    
    
    
    9,897Other intangible assets including
contracts
    
    
    2,772
    
    
    
    1,437
    
    
    
    1,335
    
    
    
    2,599
    
    
    
    1,423
    
    
    
    1,176Total
    
    $
    16,105
    
    
    $
    3,670
    
    
    $
    12,435
    
    
    $
    15,203
    
    
    $
    3,464
    
    
    $
    11,739Non-amortized intangible assets:Brand/trade name
    
    $
    8,322
    
    
    $
    
    
    
    $
    8,322
    
    
    $
    7,935
    
    
    $
    
    
    
    $
    7,935
 Intangible assets with finite lives are being amortized over average lives ranging from one to
twenty-five years. The amortization expense for these intangible assets was $269,000 for the three
months ended March 31, 2005 compared to $177,000 for the three months ended March 31, 2004. The
estimated annual amortization expense for these intangible assets for the next five years is:
$1,026,000 for 2005, $950,000 for 2006, $809,000 for 2007, $741,000 for 2008 and $617,000 for 2009. New Accounting Standards SFAS No. 151,Inventory Costs an amendment of ARB No. 43, Chapter 4,was issued in November 2004 to
clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted
materials (spoilage) should be recognized as current-period charges. This statement also requires
that allocation of fixed production 9




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##### Table of Contents



overheads to the costs of converting materials into finished products be based on the normal
capacity of the production facilities. The provisions of this statement are effective for inventory
costs incurred during fiscal years beginning after June 15, 2005 with earlier application
permitted. The Company does not expect the application of the requirements of SFAS No. 151 to have
a material effect on the Companys consolidated net income, financial position or cash flows. SFAS No. 123(R) (revised 2004),Share-Based Payment, issued in December 2004 is a revision of SFAS
No. 123, Accounting for Stock-based Compensation, and supersedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. The Company currently reports its stock-based compensation under the
requirements of APB Opinion No. 25 and furnishes related pro forma footnote information required
under SFAS No. 123. Under SFAS No. 123(R), the Company will be required to record its stock-based
compensation as an expense on its income statement over the period earned based on the fair value
of the stock or options awarded on their grant date. The effective date for application of SFAS No.
123(R) for the Company is January 2006 with early adoption allowed. The Company will adopt SFAS No.
123(R) in January 2006. The application of SFAS No. 123(R) reporting requirements will have the
effect of reducing 2006 net income by $163,000 for currently outstanding options. FASB Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations,(FIN 47)
issued in March 2005, clarifies that the term conditional asset retirement obligation as used in
SFAS No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform
an asset retirement activity in which the timing and/or method of settlement are conditional on a
future event that may or may not be within the control of the entity. However, the obligation to
perform the asset retirement activity is unconditional even though uncertainty exists about the
timing and/or method of settlement. FIN 47 requires that the uncertainty about the timing and/or
method of settlement of a conditional asset retirement obligation be factored into the measurement
of the liability when sufficient information exists. FIN 47 also clarifies when an entity would
have sufficient information to reasonably estimate the fair value of an asset retirement
obligation. FIN 47 is effective for fiscal years ending after December 15, 2005. Retroactive
application of interim financial information is permitted, but not required. The Company is
evaluating the impact of this interpretation, but does not expect it to have a material effect on
the Companys consolidated net income, financial position or cash flows. Segment Information The Companys businesses have been classified into six segments based on products and services and
reach customers in all 50 states and international markets. The six segments are: electric,
plastics, manufacturing, health services, food ingredient processing and other business operations. Electric includes the production, transmission, distribution and sale of electric energy in
Minnesota, North Dakota and South Dakota under the name Otter Tail Power Company. Electric utility
operations have been the Companys primary business since incorporation. Plastics consist of businesses producing polyvinyl chloride (PVC) and polyethylene (PE) pipe in the
Upper Midwest and Southwest regions of the United States. Manufacturing consists of businesses in the following manufacturing activities: production of
waterfront equipment, wind towers, frame-straightening equipment and accessories for the auto body
shop industry, material and handling trays and horticultural containers, contract machining, and
metal parts stamping and fabrication. These businesses are located primarily in the Upper Midwest
and Missouri. Health services consists of businesses involved in the sale of diagnostic medical equipment,
patient monitoring equipment and related supplies and accessories. These businesses also provide
service maintenance, diagnostic imaging, positron emission tomography and nuclear medicine imaging,
portable X-ray imaging and rental of diagnostic medical imaging equipment to various medical
institutions located throughout the United States. 10




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##### Table of Contents



Food ingredient processing, established as a result of the acquisition of IPH in August 2004,
consists of IPH, which owns and operates potato dehydration plants in Ririe, Idaho; Center,
Colorado and Souris, Prince Edward Island, Canada, producing dehydrated potato products that are
sold in the United States, Canada, Europe, the Middle East, the Pacific Rim and Central America. Other business operations consists of businesses involved in residential, commercial and industrial
electric contracting industries; fiber optic and electric distribution systems; waste-water, water
and HVAC systems construction; transportation; energy services and natural gas marketing and the
portion of corporate general and administrative expenses that are not allocated to other segments.
These businesses operate primarily in the Central United States, except for the transportation
company which operates in 48 states and six Canadian provinces. The Companys electric operations, including wholesale power sales, are operated as a division of
Otter Tail Corporation, and the Companys energy services and natural gas marketing operations are
operated as a subsidiary of Otter Tail Corporation. Substantially all of the other businesses are
owned by a wholly owned subsidiary of the Company. The Company evaluates the performance of its business segments and allocates resources to them
based on earnings contribution and return on total invested capital. Information on continuing
operations for the business segments for three month periods ended March 31, 2005 and 2004 and
total assets by business segment as of March 31, 2005 and December 31, 2004 is presented in the
following tables. Operating Revenue Three months endedMarch 31,(in thousands)
    
    2005
    
    
    2004Electric
    
    $
    73,483
    
    
    $
    72,855Plastics
    
    
    32,155
    
    
    
    26,436Manufacturing
    
    
    57,234
    
    
    
    43,884Health services
    
    
    27,798
    
    
    
    25,676Food ingredient processing
    
    
    9,255
    
    
    
    Other business operations
    
    
    34,897
    
    
    
    33,515Intersegment eliminations
    
    
    (984
    )
    
    
    (713
    )Total
    
    $
    233,838
    
    
    $
    201,653
 Income (Loss) Before Income Taxes Three months endedMarch 31,(in thousands)
    
    2005
    
    
    2004Electric
    
    $
    11,805
    
    
    $
    15,147Plastics
    
    
    4,407
    
    
    
    1,073Manufacturing
    
    
    1,635
    
    
    
    427Health services
    
    
    1,349
    
    
    
    203Food ingredient processing
    
    
    1,198
    
    
    
    Other business operations
    
    
    (3,755
    )
    
    
    (5,101
    )Total
    
    $
    16,639
    
    
    $
    11,749
 11




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##### Table of Contents



Identifiable Assets March 31,
    
    
    December 31,(in thousands)
    
    2005
    
    
    2004Electric
    
    $
    622,231
    
    
    $
    634,433Plastics
    
    
    79,121
    
    
    
    67,574Manufacturing
    
    
    187,135
    
    
    
    154,327Health services
    
    
    66,560
    
    
    
    66,506Food ingredient processing
    
    
    94,510
    
    
    
    92,392Other business operations
    
    
    93,047
    
    
    
    91,506Discontinued operations
    
    
    25,415
    
    
    
    27,410Total
    
    $
    1,168,019
    
    
    $
    1,134,148
 No single external customer accounts for 10% or more of the Companys revenues. Substantially all
of the Companys long-lived assets are within the United States except for a food ingredient
processing dehydration plant in Souris, Prince Edward Island, Canada. For the three months ended
March 31, 2005, 98.0% of the Companys consolidated revenue came from sales within the United
States and 1.0% came from sales in Canada, with the remaining 1.0% coming from various foreign
countries in Europe, the Middle East, the Pacific Rim and Asia. For the three months ended March
31, 2004, 93.2% of the Companys consolidated revenue came from sales within the United States and
6.4% came from sales in Canada. Discontinued Operations As part of an ongoing evaluation of the prospects and growth opportunities of the Companys
business operations, the Company decided to sell its telecommunications company, Midwest
Information Systems, Inc. (MIS), and St. George Steel Fabrication, Inc. (SGS), its structural steel
fabricator located in St. George, Utah. The Company has entered into a definitive agreement to sell
MIS to Arvig Enterprises, Inc., which is pending approval by regulatory agencies, and is in
negotiations with an interested party to sell SGS. Discontinued operations includes the operating
results of MIS and SGS and an estimated loss related to the anticipated sale of SGS based on the
expected sales price and the costs of disposition. MIS and SGS meet requirements to be reported as
discontinued operations in accordance with SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets. The Company expects to complete the sale of these businesses prior to the end
of 2005. The results of discontinued operations for the three months ended March 31, 2005 and 2004 are
summarized as follows: Three months ended
    
    
    Three months endedMarch 31, 2005
    
    
    March 31, 2004(in thousands)
    
    MIS
    
    
    SGS
    
    
    Total
    
    
    MIS
    
    
    SGS
    
    
    TotalOperating revenues
    
    $
    2,044
    
    
    $
    4,870
    
    
    $
    6,914
    
    
    $
    1,977
    
    
    $
    2,955
    
    
    $
    4,932Impairment loss
    
    
    
    
    
    
    (2,627
    )
    
    
    (2,627
    )
    
    
    
    
    
    
    
    
    
    
    Income/(loss) before income taxes
    
    
    1,270
    
    
    
    (3,011
    )
    
    
    (1,741
    )
    
    
    735
    
    
    
    (651
    )
    
    
    84Income tax expense/(benefit)
    
    
    508
    
    
    
    (1,204
    )
    
    
    (696
    )
    
    
    295
    
    
    
    (260
    )
    
    
    35
 12




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##### Table of Contents



The results of discontinued operations for the year ended December 31, 2004 are as follows: (in thousands)
    
    MIS
    
    
    SGS
    
    
    TotalOperating revenues
    
    $
    8,739
    
    
    $
    17,209
    
    
    $
    25,948Income/(loss) before income taxes
    
    
    3,698
    
    
    
    (932
    )
    
    
    2,766Income tax expense/(benefit)
    
    
    1,483
    
    
    
    (371
    )
    
    
    1,112
 At March 31, 2005 and December 31, 2004 the major components of assets and liabilities of the
discontinued operations were as follows: March 31, 2005
    
    
    December 31, 2004(in thousands)
    
    MIS
    
    
    SGS
    
    
    Total
    
    
    MIS
    
    
    SGS
    
    
    TotalCurrent assets
    
    $
    510
    
    
    $
    7,669
    
    
    $
    8,179
    
    
    $
    275
    
    
    $
    9,344
    
    
    $
    9,619Investments and other assets
    
    
    2,171
    
    
    
    
    
    
    
    2,171
    
    
    
    2,270
    
    
    
    
    
    
    
    2,270Goodwillnet
    
    
    5,925
    
    
    
    
    
    
    
    5,925
    
    
    
    5,925
    
    
    
    
    
    
    
    5,925Other intangiblesnet
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18
    
    
    
    18Net plant
    
    
    7,990
    
    
    
    1,150
    
    
    
    9,140
    
    
    
    7,960
    
    
    
    1,618
    
    
    
    9,578Assets of discontinued operations
    
    $
    16,596
    
    
    $
    8,819
    
    
    $
    25,415
    
    
    $
    16,430
    
    
    $
    10,980
    
    
    $
    27,410Current liabilities
    
    $
    3,177
    
    
    $
    863
    
    
    $
    4,040
    
    
    $
    2,920
    
    
    $
    2,228
    
    
    $
    5,148Deferred credits
    
    
    580
    
    
    
    271
    
    
    
    851
    
    
    
    581
    
    
    
    271
    
    
    
    852Long-term debt
    
    
    1,430
    
    
    
    
    
    
    
    1,430
    
    
    
    1,710
    
    
    
    
    
    
    
    1,710Liabilities of discontinued operations
    
    $
    5,187
    
    
    $
    1,134
    
    
    $
    6,321
    
    
    $
    5,211
    
    
    $
    2,499
    
    
    $
    7,710
 Common Shares and Earnings per Share In January 2005, 175,000 common shares were issued as a result of the underwriters exercising a
portion of their over-allotment option in connection with the Companys December 2004 public
offering. The proceeds to the Company of $24.50 per share were used to pay down debt borrowed to
finance the acquisition of IPH. In addition, during the first quarter of 2005, the Company issued
10,448 common shares for stock options exercised and 602 common shares for directors compensation.
In the first quarter of 2005, the Company retired 252 common shares for tax withholding purposes
related to restricted shares that vested and also retired 17,120 common shares related to the
return to the Company of stock that was held in escrow for performance contingencies in a health
services acquisition that were not achieved. Basic earnings per common share are calculated by dividing earnings available for common shares by
the average number of common shares outstanding during the period. Diluted earnings per common
share are calculated by adjusting outstanding shares, assuming conversion of all potentially
dilutive stock options. Stock options with exercise prices greater than the market price are
excluded from the calculation of diluted earnings per common share. Comprehensive Income Comprehensive income for the three months ended March 31, 2005 includes $83,000 in foreign currency
translation losses, net-of-tax, related to the Canadian operations of IPH, $22,000 in unrealized
losses, net-of-tax, on investments in available-for-sale securities and net income of $10.0 million
as compared to $8.3 million of net income for the three months ended March 31, 2004. 13




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##### Table of Contents



Regulatory Assets and Liabilities As a regulated entity the Company and the electric utility account for the financial effects of
regulation in accordance with SFAS No. 71, Accounting for the Effect of Certain Types of
Regulation. This accounting standard allows for the recording of a regulatory asset or liability
for costs that will be collected or refunded in the future as required under regulation. The following table indicates the amount of regulatory assets and liabilities recorded on the
Companys consolidated balance sheet: March 31,
    
    
    December 31,(in thousands)
    
    2005
    
    
    2004Regulatory assets:Deferred income taxes
    
    $
    14,806
    
    
    $
    14,526Debt expenses and reacquisition premiums
    
    
    3,315
    
    
    
    3,424Deferred conservation program costs
    
    
    917
    
    
    
    1,203Plant acquisition costs
    
    
    229
    
    
    
    240Deferred marked-to-market losses
    
    
    178
    
    
    
    331Accrued cost-of-energy revenue
    
    
    2,830
    
    
    
    3,348Accumulated ARO accretion/depreciation adjustment
    
    
    139
    
    
    
    114Total regulatory assets
    
    $
    22,414
    
    
    $
    23,186Regulatory liabilities:Accumulated reserve for estimated removal costs
    
    $
    50,201
    
    
    $
    49,823Deferred income taxes
    
    
    6,543
    
    
    
    6,727Deferred marked-to-market gains
    
    
    67
    
    
    
    197Gain on sale of division office building
    
    
    160
    
    
    
    162Total regulatory liabilities
    
    $
    56,971
    
    
    $
    56,909Net regulatory liability position
    
    $
    34,557
    
    
    $
    33,723
 The regulatory assets and liabilities related to deferred income taxes are the result of the
adoption of SFAS No. 109, Accounting for Income Taxes. Debt expenses and reacquisition premiums are
being recovered from electric utility customers over the remaining original lives of the reacquired
debt issues, the longest of which is 17.3 years. Deferred conservation program costs represent
mandated conservation expenditures recoverable through retail electric rates over the next 1.5
years. Plant acquisition costs will be amortized over the next 5.2 years. Accrued cost-of-energy
revenue included in accrued utility revenues will be recovered over the next nine months. All
deferred marked-to-market gains and losses are related to forward purchases and sales of energy
scheduled for delivery prior to June 2005. The accumulated reserve for estimated removal costs is
reduced for actual removal costs incurred. The remaining regulatory assets and liabilities are
being recovered from, or will be paid to, electric customers over the next 30 years. If, for any reason, the Companys regulated businesses cease to meet the criteria for application
of SFAS No. 71 for all or part of their operations, the regulatory assets and liabilities that no
longer meet such criteria would be removed from the consolidated balance sheet and included in the
consolidated statement of income as an extraordinary expense or income item in the period in which
the application of SFAS No. 71 ceases. 14




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##### Table of Contents



Pension Plan and Other Postretirement Benefits Pension PlanComponents of net periodic pension benefit cost of the Companys
noncontributory funded pension plan are as follows: Three months endedMarch 31,(in thousands)
    
    2005
    
    
    2004Service costbenefit earned during the period
    
    $
    1,034
    
    
    $
    900Interest cost on projected benefit obligation
    
    
    2,448
    
    
    
    2,350Expected return on assets
    
    
    (2,996
    )
    
    
    (3,000
    )Amortization of prior-service cost
    
    
    241
    
    
    
    225Net periodic pension cost
    
    $
    727
    
    
    $
    475
 Executive Survivor and Supplemental Retirement PlanComponents of net periodic pension
benefit cost of the Companys unfunded, nonqualified benefit plan for executive officers and
certain key management employees are as follows: Three months endedMarch 31,(in thousands)
    
    2005
    
    
    2004Service costbenefit earned during the period
    
    $
    92
    
    
    $
    205Interest cost on projected benefit obligation
    
    
    316
    
    
    
    372Amortization of prior-service cost
    
    
    18
    
    
    
    37Recognized net actuarial loss
    
    
    104
    
    
    
    170Net periodic pension cost
    
    $
    530
    
    
    $
    784
 On January 31, 2005 the Board of Directors of the Company amended and restated the Otter Tail
Corporation Executive Survivor and Supplemental Retirement Plan (the ESSRP). The amendments to the
ESSRP provide for reduced future benefits effective January 1, 2005, which are expected to result
in reduced expense to the Company. Effective January 1, 2005 new participants in the ESSRP will accrue benefits under a new formula.
The new formula is the same as the formula used under the Companys qualified defined benefit
pension plan but includes bonus in the computation of covered compensation and is not subject to
statutory compensation and benefit limits. Individuals who became participants in the ESSRP before
January 1, 2005 will receive the greater of the old formula or the new formula until December 31,
2010. On December 31, 2010, their benefit under the old formula will be frozen. After 2010, they
will receive the greater of their frozen December 31, 2010 benefit or their benefit calculated
under the new formula. The amendments to the ESSRP also provide for increased service credits for
certain participants and eliminate certain distribution features. Postretirement BenefitsComponents of net periodic postretirement benefit cost for health
insurance and life insurance benefits for retired electric utility and corporate employees are as
follows: Three months endedMarch 31,(in thousands)
    
    2005
    
    
    2004Service costbenefit earned during the period
    
    $
    311
    
    
    $
    288Interest cost on projected benefit obligation
    
    
    666
    
    
    
    645Amortization of transition obligation
    
    
    187
    
    
    
    189Amortization of prior-service cost
    
    
    (77
    )
    
    
    (77
    )Amortization of net actuarial loss
    
    
    156
    
    
    
    172Effect of Medicare Part D expected subsidy
    
    
    (201
    )
    
    
    (189
    )Net periodic postretirement benefit cost
    
    $
    1,042
    
    
    $
    1,028
 15




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##### Table of Contents



Subsequent Events On April 11, 2005 the Companys Board of Directors granted 74,900 stock options to key employees
and 17,700 shares of restricted stock to the directors and certain key employees under the 1999
Stock Incentive Plan (the Plan). The exercise price of the stock options is equal to the fair
market value per share at the date of the grant. The options vest six months from the grant date
and expire ten years after the date of the grant. As of March 31, 2005 a total of 1,498,029 vested
and unvested options were outstanding and a total of 214,434 shares of restricted stock had been
issued under the Plan. The Company currently accounts for the Plan under Accounting Principles
Board Opinion No. 25. On April 11, 2005 the Companys Board of Directors approved performance award agreements under the
Plan for the Companys executive officers. Under these agreements, the officers could be awarded up
to 75,150 common shares based on the Companys stock performance relative to the stock performances
of its peer group of companies in the Edison Electric Institute Index over a three year period
ending on December 31, 2007. The number of shares earned, if any, would be issued at the end of the
three year performance measurement period. The participants under this plan have no voting or
dividend rights under these agreements until the shares are issued at the end of the performance
measurement period. On April 27, 2005 the Company renewed its line of credit with U.S. Bank National Association,
JPMorgan Chase Bank, N.A., Wells Fargo Bank, National Association, and Bank Hapoalim B.M.,
and increased the amount available under the line from $70 million to $100 million. The
renewed agreement expires on April 26, 2006. The terms of the renewed line of credit are
essentially the same as those in place prior to the renewal. However, outstanding letters of credit
issued by the Company can reduce the amount available for borrowing under the line by up to $20
million. Borrowings under the line of credit bear interest at LIBOR plus 0.6%, subject to
adjustment based on the ratings of the Companys senior unsecured debt. This line is an unsecured
revolving credit facility available to support borrowings of the Companys nonelectric operations.
The Company anticipates that the electric utilitys cash requirements through April 2006 will be
provided for by cash flows from electric utility operations. The Companys obligations under this
line of credit are guaranteed by a 100%-owned subsidiary that owns substantially all of the
Companys nonelectric companies. As of March 31, 2005, $55.8 million of the $70 million line of
credit in place at that date was in use. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations RESULTS OF OPERATIONS Comparison of the Three Months Ended March 31, 2005 and 2004 Consolidated operating revenues were $233.8 million for the three months ended March 31, 2005
compared with
$201.7 million for the three months ended March 31, 2004. Operating income was $21.0 million for
the three months ended March 31, 2005 compared with $16.1 million for the three months ended March
31, 2004. The Company recorded diluted earnings per share from continuing operations of $0.37 for
the three months ended March 31, 2005 compared to $0.31 for the three months ended March 31, 2004
and total diluted earnings per share from continuing and discontinued operations of $0.33 for the
three months ended March 31, 2005 compared to $0.31 for the three months ended March 31, 2004. Bolstered by growth in the nonelectric segments, consolidated earnings grew by $1.7 million over
the first quarter of 2004. Despite a decline in earnings from the electric segment, electric
results were in line with our previously stated outlook for 2005, which anticipated a reduction in
wholesale electric margins primarily because of uncertainty in wholesale electric markets with the
introduction of the Midwest Independent Transmission System Operator (MISO) market initiatives. Our
nonelectric business segments, in aggregate, produced a $5.0 million 16




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##### Table of Contents



increase in net income from continuing operations in the first quarter of 2005 compared to the
first quarter of 2004. These results were led by a record first quarter performance for our
plastics segment and an increase in net income in our manufacturing operations. We also had
improvement in our health services segment. Net income included $0.7 million from a new segment,
food ingredient processing, which was created as a result of the acquisition of IPH in August 2004. Following is a more detailed analysis of our operating results by business segment for the quarters
ended March 31, 2005 and 2004, followed by our outlook for the remainder of 2005 and a discussion
of changes in our financial position during the quarter ended March 31, 2005. Amounts presented in the segment tables below for the three month periods ended March 31, 2005 and
2004 for operating revenues, cost of goods sold and nonelectric segment operating expenses will not
agree with amounts presented in the consolidated statements of income for those periods due to the
elimination of intersegment transactions. The total intersegment eliminations include: $984,000 in
operating revenues, $511,000 in cost of goods sold and $473,000 in other nonelectric expenses for
the three months ended March 31, 2005; and $713,000 in operating revenues, $60,000 in cost of goods
sold and $653,000 in other nonelectric expenses for the three months ended March 31, 2004. Electric Three months endedMarch 31,
    
    
    
    
    
    
    %(in thousands)
    
    2005
    
    
    2004
    
    
    Change
    
    
    ChangeRetail sales revenues
    
    $
    63,315
    
    
    $
    63,128
    
    
    $
    187
    
    
    
    0.3Wholesale revenues
    
    
    4,917
    
    
    
    4,611
    
    
    
    306
    
    
    
    6.6Net marked-to-market gains
    
    
    104
    
    
    
    1,612
    
    
    
    (1,508
    )
    
    
    (93.5
    )Other revenues
    
    
    5,147
    
    
    
    3,504
    
    
    
    1,643
    
    
    
    46.9Total operating revenues
    
    $
    73,483
    
    
    $
    72,855
    
    
    $
    628
    
    
    
    0.9Production fuel
    
    
    15,177
    
    
    
    14,597
    
    
    
    580
    
    
    
    4.0Purchased power  retail use
    
    
    11,538
    
    
    
    10,922
    
    
    
    616
    
    
    
    5.6Other operation and maintenance expenses
    
    
    23,918
    
    
    
    21,277
    
    
    
    2,641
    
    
    
    12.4Depreciation and amortization
    
    
    6,100
    
    
    
    5,936
    
    
    
    164
    
    
    
    2.8Property taxes
    
    
    2,673
    
    
    
    2,489
    
    
    
    184
    
    
    
    7.4Operating income
    
    $
    14,077
    
    
    $
    17,634
    
    
    $
    (3,557
    )
    
    
    (20.2
    )
 The increase in retail electric revenue resulted from a 1.3% increase in retail megawatt-hours
(mwh) sold between the periods partially offset by a 1.0% decrease in revenue per mwh sold.
Increased sales reflect minor increases in consumption in the range of 1% to 2% among all major
classes of customers, residential, commercial and industrial. Weather was not a discernable factor
in the increase in sales. Wholesale mwh sales from company-owned generation decreased 15.1% in the three months ended March
31, 2005, compared to the three months ended March 31, 2004 while the revenue per mwh sold
increased 18.6%, resulting in an increase in revenue from sales of company-owned generation of
$28,000 between the periods. The increase in prices for company-owned generation resold is
commensurate with general increases in fuel and purchased power costs across the Mid-Continent Area
Power Pool (MAPP) region between the periods. The increased prices are partially due to a decrease
in available electricity from hydro-generation in the region due to lower water levels in
Upper-Missouri River reservoirs resulting from a prolonged drought in the Upper-Missouri River
basin. Net margins on purchased power resold increased $0.3 million despite a 58.5% decrease in
mwhs resold. This decrease was offset by a 290% increase in the net margin per mwh of purchased
power resold. Margins on purchased power resold at 17




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##### Table of Contents



market prices in the first quarter of 2005 were $1.46 per mwh compared with $0.37 per mwh in the
first quarter of 2004 as a result of a 9.3% increase in the market price per mwh sold offset by a
6.8% increase in the market cost per mwh purchased for resale between the periods. The decrease in net marked-to-market gains on forward purchases and sales of electricity is
directly related to a decline in activity in forward energy markets in the MAPP region due to
uncertainty related to the implementation of the MISO electric market initiatives in April 2005. As
of March 31, 2005, the electric utility had forward contracts
for the purchase and sale of electricity
subject to mark-to-market accounting and not subject to deferred regulatory treatment totaling
92,300 mwh and extending out only to May 2005, compared to open contracts totaling 866,050 mwh
extending out to December 2004 as of March 31, 2004. MISO electric market initiatives are designed
to facilitate open access to electric transmission facilities and generation sources and
transparency in pricing for buyers and sellers of electricity in the geographical region under MISO
control. The increase in other electric operating revenues for the three months ended March 31, 2005
compared to the three months ended March 31, 2004 includes $1.4 million in increased revenue from
contracted construction services mainly related to two transmission line projects done for another
regional utility in the first quarter of 2005 and $0.3 million in increased transmission services
related revenue. Fuel costs increased 4.0% for the three months ended March 31, 2005 compared with the three months
ended March 31, 2004 despite a 2.5% decrease in mwhs generated as a result of a 6.6% increase in
the cost of fuel per mwh generated. Generation used for wholesale electric sales decreased 15.1%
while generation for retail sales was essentially unchanged between the periods. Fuel costs at all
three of our coal-fired generating plants increased as a result of increases in coal and coal
transportation costs between the periods. Approximately 90% of the fuel cost increases associated
with generation to serve retail electric customers is subject to recovery through the fuel cost
recovery component of retail rates. Purchased power expense for energy purchased for system use (sale to retail customers) increased
5.6%. This increase is due to an 11.9% increase in the cost per mwh
purchased, offset by a 5.6% decrease in mwhs purchased for system use.

The increase in purchased power costs reflects a general increase in
fuel and purchased power costs across the MAPP region related to increased coal mining and
transportation costs mainly as a result of higher fuel prices. A decrease in hydro-generation in
the region as a result of low water levels in Upper-Missouri River reservoirs is also a
contributing factor to the increase in purchased power costs between the periods. The increase in other operation and maintenance expenses for the three months ended March 31, 2005
compared with the three months ended March 31, 2004 reflects $1.8 million in increased labor
expenses due to an increase in employee benefit costs, general wage and salary increases averaging
approximately 3.7% and a decrease in labor costs capitalized on self-constructed assets between the
periods. Labor and other costs charged to construction services provided to other utilities
increased $0.8 million between the periods. Expenditures for external services related to our Big
Stone Plant unit II feasibility study, tree-trimming and coal transportation rail-rate litigation
increased $0.4 million between the periods. The increase in property taxes between the periods is a
result of increases in property tax rates and property values subject to taxation. 18




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##### Table of Contents



Plastics Three months endedMarch 31,
    
    
    
    
    
    
    %(in thousands)
    
    2005
    
    
    2004
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    32,155
    
    
    $
    26,436
    
    
    $
    5,719
    
    
    
    21.6Cost of goods sold
    
    
    25,417
    
    
    
    23,312
    
    
    
    2,105
    
    
    
    9.0Operating expenses
    
    
    1,509
    
    
    
    1,266
    
    
    
    243
    
    
    
    19.2Depreciation and amortization
    
    
    591
    
    
    
    569
    
    
    
    22
    
    
    
    3.9Operating income
    
    $
    4,638
    
    
    $
    1,289
    
    
    $
    3,349
    
    
    
    259.8
 Although pounds of PVC pipe sold decreased by 16.0% for the three months ended March 31, 2005
compared with the three months ended March 31, 2004, operating revenues for the plastics segment
increased 21.6% between the periods mainly as result of a 41.9% increase in the price per pound of
PVC pipe sold. The increase in PVC pipe prices is related to an increase in PVC resin prices. The
resin cost per pound of PVC pipe shipped increased 28.3% for the three months ended March 31, 2005
compared with the three months ended March 31, 2004 and was the main contributing factor to the
$2.1 million increase in cost of goods sold. The increase in operating expenses is mainly due to
increases in employee benefit costs. The increase in depreciation and amortization expense is due
to 2004 plant additions. In the first quarter of 2005, 98% of resin purchased was from two vendors; 49% from one and 49%
from the other. In the first quarter of 2004, 100% of resin purchased was from the same two
vendors; 58% from one and 42% from the other. We believe relationships with our key raw material
vendors are good. However, the loss of a key supplier or any interruption or delay in the supply of
PVC resin could have a significant impact on the plastics segment. Manufacturing Three months endedMarch 31,
    
    
    
    
    
    
    %(in thousands)
    
    2005
    
    
    2004
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    57,234
    
    
    $
    43,884
    
    
    $
    13,350
    
    
    
    30.4Cost of goods sold
    
    
    46,553
    
    
    
    35,731
    
    
    
    10,822
    
    
    
    30.3Operating expenses
    
    
    5,920
    
    
    
    5,207
    
    
    
    713
    
    
    
    13.7Depreciation and amortization
    
    
    2,255
    
    
    
    1,972
    
    
    
    283
    
    
    
    14.3Operating income
    
    $
    2,506
    
    
    $
    974
    
    
    $
    1,532
    
    
    
    157.3
 Revenue increases at the manufacturing companies are due to a combination of factors including
increased unit sales, increased sales of higher-priced products and higher prices related to
material cost increases. Revenues at BTD Manufacturing, Inc. (BTD), our metal parts stamping and
fabrication company, increased $6.5 million between the quarters as a result of a 27.7% increase in
unit sales combined with a 20.7% increase in revenue per unit sold. Revenues at DMI Industries,
Inc. (DMI), our manufacturer of wind towers, increased $4.1 million in the first quarter of 2005
compared with the first quarter of 2004 due to an increase in production and sales of wind towers
mainly as a result of legislative action in the fall of 2004 extending production tax credits for
investments in wind generation through 2005. The revenue increase for DMI also reflects continued
improvements in productivity and plant utilization in 2005. Revenues at ShoreMaster, our waterfront
equipment manufacturer, increased $2.3 million (21.0%) in the first quarter of 2005 compared to the
first quarter of 2004 as a result of increased production mainly in the area of large marina
projects. Revenues at T.O. Plastics, our manufacturer of thermoformed plastic and horticultural
products, increased $0.7 million (8.1%) between the quarters despite a 19




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##### Table of Contents



25.0% decrease in unit sales. An increase in sales of higher-priced products at T.O Plastics offset
a large reduction in unit sales of a lower-priced product that resulted from a customer moving to
another supplier for that product. Revenues at Chassis Liner, our manufacturer of auto and truck
frame-straightening equipment, decreased $0.4 million between the quarters as a result of a
decrease in unit sales. Cost of goods sold at BTD increased $5.6 million as a result of higher raw material and labor costs
mainly related to increased production. DMI cost of goods sold increased $3.4 million between the
quarters as a result of increased production and higher raw material costs, especially for steel.
ShoreMasters $2.3 million increase in revenue was mostly offset by a $2.1 million increase in
costs of goods sold mainly related to increases in material costs. Chassis Liners cost of goods
sold decreased $0.4 million, commensurate with its decrease in revenues. The decrease in revenues
and costs at Chassis Liner is reflective of decreased sales activity. BTD operating expenses increased $0.4 million mainly due to increases in advertising, promotional,
sales commissions, salaries and technology expenditures. BTD depreciation expense increased $0.1
million between the quarters as a result of 2004 equipment additions that increased BTDs
production capacity. DMI operating expenses increased $0.2 million mainly due to increases in
payroll and outside service expenses. ShoreMasters operating and depreciation expenses increased
$0.2 million between the quarters. T.O. Plastics revenue increase was partially offset by a $0.2
million increase in operating and depreciation expenses. The increase in operating expenses at T.O.
Plastics was mainly due to an increase in employee benefit costs. Health Services Three months endedMarch 31,
    
    
    
    
    
    
    %(in thousands)
    
    2005
    
    
    2004
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    27,798
    
    
    $
    25,676
    
    
    $
    2,122
    
    
    
    8.3Cost of goods sold
    
    
    20,292
    
    
    
    19,397
    
    
    
    895
    
    
    
    4.6Operating expenses
    
    
    4,913
    
    
    
    4,464
    
    
    
    449
    
    
    
    10.1Depreciation and amortization
    
    
    1,067
    
    
    
    1,391
    
    
    
    (324
    )
    
    
    (23.3
    )Operating income
    
    $
    1,526
    
    
    $
    424
    
    
    $
    1,102
    
    
    
    259.9
 The increase in health services operating revenues for the three months ended March 31, 2005
compared with the three months ended March 31, 2004 reflects a $2.9 million increase in imaging
revenues offset by a $0.8 million decrease in revenues from the sale and servicing of diagnostic
imaging equipment. On the imaging side of the business, $2.0 million of the $2.9 million increase
in revenue came from rentals and interim installations of scanning equipment along with providing
technical support services for those rental and interim installations. The number of scans
performed in the first quarter of 2005 compared with the first quarter of 2004 increased by 7.9%,
while the fee per scan increased by 1.2%. The increase in health services revenue was partially
offset by increases in cost of goods sold and operating expenses of $1.3 million to support the
increases in imaging services activity. The increase in cost of goods sold is mainly related to
increased equipment rental costs and increased labor costs. The increase in operating expenses is
mainly due to increased payroll costs and a $0.2 million increase in bad debt expenses between the
quarters. The decrease in depreciation and amortization expense is
the result of certain assets reaching the ends of their depreciable
lives. When these assets are replaced, they are generally replaced
with assets leased under operating leases. The decrease in revenue from sales and servicing of equipment
was not offset by a comparable decrease in costs and operating expenses in these operations,
resulting in a $0.6 million decrease in operating income from sales of supplies and sales and
servicing of diagnostic medical equipment. 20




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##### Table of Contents



Food Ingredient Processing Three months ended(in thousands)
    
    March 31, 2005Operating revenues
    
    $
    9,255Cost of goods sold
    
    

    6,685Operating expenses
    
    
    543Depreciation and amortization
    
    
    825Operating income
    
    $
    1,202
 The food ingredient processing segment has been established as a result of the acquisition of IPH
in August 2004. See managements outlook for this segment in the 2005 Outlook section that follows
managements discussion of the results of operations. Other Business Operations Three months endedMarch 31,
    
    
    
    
    
    
    %(in thousands)
    
    2005
    
    
    2004
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    34,897
    
    
    $
    33,515
    
    
    $
    1,382
    
    
    
    4.1Cost of goods sold
    
    
    26,392
    
    
    
    26,213
    
    
    
    179
    
    
    
    0.7Operating expenses
    
    
    10,827
    
    
    
    10,780
    
    
    
    47
    
    
    
    0.4Depreciation and amortization
    
    
    597
    
    
    
    715
    
    
    
    (118
    )
    
    
    (16.5
    )Operating loss
    
    $
    (2,919
    )
    
    $
    (4,193
    )
    
    $
    1,274
    
    
    
    (30.4
    )
 Revenues at Otter Tail Energy Services Co. (OTESCO), our natural gas marketing company, increased
$3.7 million in the three months ended March 31, 2005 compared with the three months ended March
31, 2004. The increase in OTESCO revenues is directly related to increases in natural gas prices
between the periods and was more than offset by a $3.8 million increase in natural gas costs.
Revenues at E.W. Wylie Corporation (Wylie), our flatbed trucking company, increased $1.1 million
between the quarters mainly due to a 14.5% increase in miles driven by company-operated trucks.
Wylies increased revenues also reflect increased fuel costs recovered through fuel surcharges
between the quarters. Revenues at Midwest Construction Services, Inc. (MCS), our electrical design
and construction services company, increased $0.8 million (19.4%) between the quarters as a result
of an increase in work in progress, which was partially offset by a $0.4 million increase in
construction labor and material costs between the quarters. Revenues at Foley Company, a mechanical
and prime contractor on industrial projects, decreased $4.1 million in the first quarter of 2005
compared to the first quarter of 2004 due to a decrease in jobs in progress. The decrease in
Foleys revenues was entirely offset by a $4.1 million decrease in material and subcontractor costs
between the periods. Wylies increased revenue was partially offset by a $0.8 million increase in operating expenses
mainly related to higher fuel prices and increased fuel usage and labor costs related to the
increase in miles driven between the periods. Wylies depreciation and amortization expenses
decreased by $0.1 million between the quarters as a result of leasing rather than buying new fleet
trucks in 2004. Wylies increase in miles driven resulted in a $0.4 million increase in operating
income in the first quarter of 2005 compared to the first quarter of 2004.
Reductions in unallocated corporate overheads related to reduced benefit costs and reductions in
insurance costs provided $0.4 million of the $1.3 million operating loss reduction in the other
business operations segment in the first quarter of 2005 compared with the first quarter of 2004. 21




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##### Table of Contents



Interest Charges and Income Taxes  Continuing Operations The $195,000 (4.4%) increase in interest charges in the three months ended March 31, 2005 compared
with the three months ended March 31, 2004 is due to increased interest rates on short-term debt
and an increase in the average level of short-term debt outstanding between the periods. The $2.1 million (58.9%) increase in income taxes  continuing operations between the quarters is
primarily the result of a $4.9 million (41.6%) increase in income from continuing operations before
income taxes for the three months ended March 31, 2005 compared with the three months ended March
31, 2004. The effective tax rate for continuing operations for the three months ended March 31,
2005 was 33.8% compared to 30.1% for the three months ended March 31, 2004. The increase in the
effective tax rate is primarily due to the increase in net income before tax between the quarters. Discontinued Operations Discontinued operations includes the operating results of MIS, our telecommunications company
located in Parkers Prairie, Minnesota, and SGS, our structural steel fabricator located in St.
George, Utah. We have entered into a definitive agreement to sell MIS to Arvig Enterprises, Inc.,
which is pending approval by regulatory agencies, and we are in negotiations with an interested
party to sell SGS. Discontinued operations consists of two components: net income on earnings from
discontinued operations of $0.5 million for the first quarter of 2005 compared with net income of
$49,000 for the first quarter of 2004 and a provision for an expected $1.6 million after-tax loss
on the sale of SGS based on the expected sales price and the costs of disposition. 2005 OUTLOOK The statements in this section are based on our current outlook for 2005 and are subject to risks
and uncertainties described under Forward Looking Information  Safe Harbor Statement Under the
Private Securities Litigation Reform Act of 1995. We expect 2005 earnings to be in the range of $1.50 to $1.70 of diluted earnings per share from
continuing operations. Total earnings, which include expected earnings, gains and losses from
discontinued operations, are expected to be in the range of $1.80 to $2.00 of diluted earnings per
share. Contributing to the earnings guidance for 2005 are the following items:  
    We expect solid performance in the electric segment in 2005 although net income is
anticipated to be lower than 2004 levels. This is primarily because of uncertainty in the
wholesale electric markets due to the implementation of MISO electric markets on April 1,
2005 and anticipated increases in transmission service costs. Regulated returns in 2005 for
the electric segment are expected to be consistent with authorized levels.
    We expect the plastics segment will perform well in 2005 due to continuing strong demand
in the southwestern region of the United States and sustained high PVC resin prices. 2005
net income for this segment is expected to be similar to 2004 net income levels.
    The improving economy, continued enhancements in productivity and capacity utilization,
and the extension of the production tax credit are expected to result in increased net
income in our manufacturing segment.
    The health services segment is expected to grow net income in 2005 as it continues to
realize earnings improvement from its imaging business. 22




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##### Table of Contents




    We expect our food ingredient processing business to generate net income in the range of $2.9 million to $3.8 million for the year ending
December 31, 2005. The drop in expected earnings from original guidance is due to projected reduction in sales volumes over original
expectations as the potato industry is experiencing unusual and unfavorable conditions in potato inventories. Energy costs are also expected to
be higher than initially anticipated.
    The other business operations segment is expected to show improved results over 2004 due to the improving economy. The extension of the
production tax credit is expected to have a positive impact on our electrical contracting business.
    Our outlook reflects the impact of not applying the reporting
requirements of Statement of Financial Accounting Standards
No. 123(R), Share-Based Payment, until the required adoption date for the Company of January 1, 2006. Contributing to overall earnings guidance for 2005 is
an anticipated gain on the sale of MIS and the recorded loss related to the anticipated sale of SGS. FINANCIAL POSITION For the period 2005 through 2009, we estimate that funds internally generated net of forecasted dividend payments will be sufficient to meet scheduled debt
retirements, to repay currently outstanding short-term debt and to provide for our estimated consolidated capital expenditures, which currently do not
include the proposed generating unit at the Big Stone Plant site. Reduced demand for electricity, reductions in wholesale sales of electricity or margins
on wholesale sales, or declines in the number of products manufactured and sold by our companies could have an effect on funds internally generated.
Additional equity or debt financing will be required in the period 2005 through 2009 in the event the we decide to refund or retire early any of our
presently outstanding debt or cumulative preferred shares, to complete acquisitions, to fund the construction of a new generating unit at the Big Stone
Plant site if we decide to move forward with the project or for other corporate purposes. There can be no assurance that any additional required financing
will be available through bank borrowings, debt or equity financing or otherwise, or that if such financing is available, it will be available on terms
acceptable to us. If adequate funds are not available on acceptable terms, our business, results of operations, and financial condition could be adversely
affected. In January 2005, we issued 175,000 common shares as a result of the underwriters exercising a portion of their over-allotment option in connection with our
December 2004 public offering. Proceeds from the January 2005 issuance of $4.3 million were used to pay down debt borrowed to finance the acquisition of
IPH. The common stock was issued under a universal shelf registration statement filed with the Securities and Exchange Commission that gives us the ability
to issue up to an additional $256 million of common stock, preferred stock, debt and certain other securities from time to time. During the first quarter
of 2005, we also issued 10,448 common shares for stock options exercised. On April 27, 2005 we renewed our line of credit with U.S. Bank National Association, JPMorgan Chase Bank, N.A., Wells Fargo Bank, National Association, and
Bank Hapoalim B.M., and increased the amount available under the line from $70 million to $100 million. The renewed agreement expires on April 26, 2006.
The terms of the renewed line of credit are essentially the same as those in place prior to the renewal. However, outstanding letters of credit issued by
the Company can reduce the amount available for borrowing under the line by up to $20 million. Borrowings under the line of credit bear interest at LIBOR
plus 0.6%, subject to adjustment based on the ratings of our senior unsecured debt. This line is an unsecured revolving credit facility available to
support borrowings of our nonelectric operations. We anticipate that the electric utilitys cash requirements through April 2006 will be provided for by
cash flows from electric utility operations. Our obligations under this line of credit are guaranteed by our 100%-owned subsidiary that owns substantially
all of our nonelectric companies. As of March 31, 2005, $55.8 million of the $70 million line of credit in place at that date was in use. 23




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##### Table of Contents



Our line of credit, $90 million 6.63% senior notes, and Lombard US Equipment Finance note
contain the following covenants: a debt-to-total capitalization ratio not in excess of 60% and an
interest and dividend coverage ratio of at least 1.5 to 1. The 6.63% senior notes also require that
priority debt not be in excess of 20% of total capitalization. We were in compliance with all of
the covenants under these financing agreements as of March 31, 2005. Our obligations under the 6.63% senior notes are guaranteed by our 100%-owned subsidiary that owns
substantially all of our nonelectric companies. Our Grant County and Mercer County pollution
control refunding revenue bonds require that we grant to Ambac Assurance Corporation, under a
financial guaranty insurance policy relating to the bonds, a security interest in the assets of the
electric utility if the rating on our senior unsecured debt is downgraded to Baa2 or below
(Moodys) or BBB or below (Standard & Poors). Our current securities ratings are: Moody'sInvestors
    
    StandardService
    
    & Poor'sSenior unsecured debt
    
    A2
    
    BBB+Preferred stock
    
    Baa1
    
    BBB-Outlook
    
    Negative
    
    Negative
 Our disclosure of these securities ratings is not a recommendation to buy, sell or hold our
securities. Downgrades in these securities ratings could adversely affect our company. Further
downgrades could increase borrowing costs resulting in possible reductions to net income in future
periods and increase the risk of default on our debt obligations. Cash provided by operating activities from continuing operations increased $6.0 million for the
three months ended March 31, 2005 compared to the three months ended March 31, 2004, reflecting a
$3.7 million increase in net income and depreciation expense from continuing operations, a $2.0
million decrease in changes in working capital, a $1.0 million decrease in discretionary pension
contributions and a $0.8 million decrease in cash used for noncurrent liabilities and deferred
credits, offset by a $1.5 million net increase in cash used for deferred taxes and other deferred
debits between the periods. The $6.0 million increase in cash provided by continuing operations was
partially offset by a $1.7 million reduction in cash provided by discontinued operations between
the quarters resulting in an increase in net cash provided by continuing and discontinued
operations of $4.3 million. A major use of operating cash in the first quarter of 2005 related to a $24 million increase in
inventory during the quarter, exclusive of inventory from business acquisitions. Inventories
increased $17.0 million among the manufacturing companies, $4.1 million in the plastics segment and
$2.0 million in the food ingredient processing segment. The
increase is due to typical increases in
inventories during this time of year and also due to an increase in backlog at DMI which caused
more steel to be ordered to support production of wind tower orders. The $4.5 million increase in
interest and income taxes payable from December 31, 2004 to March 31, 2005 is related to the timing
of interest and income tax payments and is normal for our company in the first quarter of the year.
The magnitude of the increase compared to the increase in interest and income taxes payable in the
first quarter of 2004 is related to the impact of the $4.9 million increase in income before income
taxes on income taxes payable between the periods. Net cash used in investing activities was $18.6 million for the three months ended March 31, 2005
compared to $6.2 million for the three months ended March 31, 2004. Capital expenditures increased
by $4.6 million between the periods. Capital expenditures in the manufacturing segment increased by
$3.8 million between the periods and capital expenditures at IPH were $1.0 million in the first
quarter of 2005 related to the installation of additional production
capacity. BTD had an increase in capital expenditures of $2.6 million in the first quarter of 2005
compared to the first quarter of 2004 related to the purchase and installation of additional
fabrication equipment in 24




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##### Table of Contents



2005. An increase in capital expenditures of $1.3 million at DMI in the
first quarter of 2005 compared to the first quarter of 2004 was mainly related to the purchase of
production equipment and warehouse improvements in the first quarter of 2005. We invested $6.4
million in cash, net of cash acquired, in the acquisitions of Performance Tool and Shoreline. Net cash provided by financing activities from continuing and discontinued operations increased
$15.6 million in the three months ended March 31, 2005 compared with the three months ended March
31, 2004 mainly due to a $15.2 million increase in short-term borrowings and checks issued in
excess of cash between the quarters. An increase of $1.3 million in proceeds from the issuance of
common stock related to the partial exercise of the underwriters over-allotment option in January
2005 was mostly offset by a $1.1 million increase in common dividends paid between the periods as a
result of the issuance of over 3.2 million common shares since March 31, 2004 combined with a
half-cent increase in the dividend paid per common share in the first quarter of 2005 compared with
the first quarter of 2004. There have been no material changes in our contractual obligations from those reported under the
caption Capital Requirements on page 24 of our 2004 Annual Report to Shareholders. We do not have
any off-balance-sheet arrangements or any relationships with unconsolidated entities or financial
partnerships. Critical Accounting Policies Involving Significant Estimates The discussion and analysis of the consolidated financial statements and results of operations are
based on our consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation of these
consolidated financial statements requires management to make estimates and judgments that affect
the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We use estimates based on the best information available in recording transactions and balances
resulting from business operations. Estimates are used for such items as depreciable lives, asset
impairment evaluations, tax provisions, collectability of trade accounts receivable, self-insurance
programs, valuation of forward energy contracts, unbilled electric revenues, unscheduled power
exchanges, service contract maintenance costs, percentage-of-completion and actuarially determined
benefits costs. As better information becomes available or actual amounts are known, estimates are
revised. Operating results can be affected by revised estimates. Actual results may differ from
these estimates under different assumptions or conditions. Management has discussed the application
of these critical accounting policies and the development of these estimates with the Audit
Committee of the Board of Directors. Goodwill Impairment The Company currently has $1.0 million of goodwill recorded on its balance sheet related to OTESCO,
its energy services subsidiary that markets natural gas to approximately 160 retail customers. An
evaluation of projected cash flows from this operation in December 2004 indicated that the related
goodwill was not impaired. However, actual and projected cash flows from this operation are subject
to fluctuations due to low profit margins on natural gas sales combined with high volatility of
natural gas prices. Reductions in profit margins or the volume of natural gas sales could result in
an impairment of all or a portion of its related goodwill. The Company will continue to evaluate
this reporting unit for impairment on an annual basis and as conditions warrant. We currently have $6.7 million of goodwill recorded on our balance sheet related to the acquisition
of Wylie. Highly competitive pricing in the trucking industry in recent years had resulted in
decreased operating margins and lower returns on invested capital for Wylie. Wylies performance
improved in 2004 and current projections are for operating margins to increase from current levels
over the next three to five years as demand for shipping continues
to increase relative to available shipping capacity and additional revenues are generated from
added 25




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terminal locations and increased brokerage activity. If current trends reverse and operating
margins do not increase according to our projections, the reductions in anticipated cash flows from
transportation operations may indicate that the fair value of Wylie is less than its book value
resulting in an impairment of goodwill and a corresponding charge against earnings. At December 31,
2004, assessment of Wylie indicated that its goodwill was not impaired. We will continue to
evaluate this reporting unit for impairment on an annual basis and as conditions warrant. A discussion of critical accounting policies is included under the caption Critical Accounting
Policies Involving Significant Estimates on pages 29 through 31 of our 2004 Annual Report to
Shareholders. There were no material changes in critical accounting policies or estimates during
the quarter ended March 31, 2005. Forward Looking Information  Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995 In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 (the Act), we have filed cautionary statements identifying important factors that could cause
our actual results to differ materially from those discussed in forward-looking statements made by
or on behalf of the Company. When used in this Form 10-Q and in future filings by the Company with
the Securities and Exchange Commission, in our press releases and in oral statements, words such as
may, will, expect, anticipate, continue, estimate, project, believes or similar
expressions are intended to identify forward-looking statements within the meaning of the Act and
are included, along with this statement, for purposes of complying with the safe harbor provision
of the Act. The following factors, among others, could cause actual results for the Company to differ
materially from those discussed in the forward-looking statements:  
    We are subject to government regulations and actions that may have a negative impact on
our business and results of operations.
    Weather conditions can adversely affect our operations and revenues.
    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 business 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 of this
business. This business could also be impacted by foreign currency changes between Canadian
and United States currency and prices of natural gas.
    Our plastics segment is highly dependent on a limited number of vendors for PVC 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 segment. 26




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
    Our health services businesses may not be able to retain or comply with the dealership
arrangement and other agreements with Philips Medical. For a further discussion of other risk factors and cautionary statements, refer to Risk Factors
and Cautionary Statements That May Affect Future Results and Critical Accounting Policies
Involving Significant Estimates on pages 25 through 31 of our 2004 Annual Report to Shareholders.
These factors are in addition to any other cautionary statements, written or oral, which may be
made or referred to in connection with any such forward-looking statement or contained in any
subsequent filings by the Company with the Securities and Exchange Commission. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk At March 31, 2005 we had limited exposure to market risk associated with interest rates and
commodity prices and limited exposure to market risk associated with changes in foreign currency
exchange rates. Outstanding trade accounts receivable of the Canadian operations of IPH are not at
risk of valuation change due to changes in foreign currency exchange rates because the Canadian
company transacts all sales in U.S. dollars. However, IPH does have market risk related to changes
in foreign currency exchange rates because approximately 25% of IPH sales are outside the United
States. The majority of our consolidated long-term debt has fixed interest rates. The interest rate on
variable rate long-term debt is reset on a periodic basis reflecting current market conditions. We
manage our interest rate risk through the issuance of fixed-rate debt with varying maturities,
through economic refunding of debt through optional refundings, limiting the amount of variable
interest rate debt, and the utilization of short-term borrowings to allow flexibility in the timing
and placement of long-term debt. As of March 31, 2005, we had $23.8 million of long-term debt
subject to variable interest rates excluding $2.55 million in long-term debt included in
liabilities of discontinued operations on our March 31, 2005 consolidated balance sheet. Assuming
no change in our financial structure, if variable interest rates were to average one percentage
point higher or lower than the average variable rate on March 31, 2005, interest expense and pretax
earnings would change by approximately $238,000 on an annualized basis. We have not used interest rate swaps to manage net exposure to interest rate changes related to our
portfolio of borrowings. We maintain a ratio of fixed-rate debt to total debt within a certain
range. It is our policy to enter into interest rate transactions and other financial instruments
only to the extent considered necessary to meet our stated objectives. We do not enter into
interest rate transactions for speculative or trading purposes. The plastics companies are exposed to market risk related to changes in commodity prices for PVC
resins, the raw material used to manufacture PVC pipe. The PVC pipe industry is highly sensitive to
commodity raw material pricing volatility. Historically, when resin prices are rising or stable,
margins and sales volumes have been higher and when resin prices are falling, sales volumes and
margins have been lower. Gross margins also decline when the supply of PVC pipe increases faster
than demand. Due to the commodity nature of PVC resin and the dynamic supply and demand factors
worldwide, it is very difficult to predict gross margin percentages or to assume that historical
trends will continue. Our energy services subsidiary markets natural gas to approximately 160 retail customers. Some of
these customers are served under fixed-price contracts. There is price risk associated with a
limited number of these fixed-price contracts since the corresponding cost of natural gas is not
immediately locked in. However, any price risk associated with these contracts is within the
acceptable risk parameters established in our risk management policy. We do not consider this price
risk to be material. These contracts call for the physical delivery of natural gas and are
considered executory contracts for accounting purposes. Current accounting guidance requires losses
on firmly committed executory contracts to be recognized when realized. 27




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Our energy services subsidiary has entered into over-the-counter natural gas forward swap
transactions that qualify as derivatives subject to mark-to-market accounting under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. Although our energy services
subsidiary manages its risk by balancing its position in these transactions relative to its market
position in the contracts entered into for physical delivery, these swap transactions do not
qualify for the normal purchases and sales exception nor do they qualify for hedge accounting
treatment under SFAS No. 133. These contracts are held for trading purposes with both realized and
unrealized net gains and losses reflected in revenue on our consolidated statement of income for
the three months ended March 31, 2005 in accordance with the guidance provided in EITF 02-3, Issues
Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in
Energy Trading and Risk Management Activities. The following table shows the effect of marking-to-market our energy services subsidiarys forward
natural gas swap transactions on our consolidated balance sheet as of March 31, 2005 and the change
in our consolidated balance sheet position from December 31, 2004 to March 31, 2005: (in thousands)
    
    March 31, 2005Current asset  marked-to-market gain
    
    $
    4,117Current liability  marked-to-market loss
    
    
    (4,061
    )Net fair value of marked-to-market gas contracts
    
    $
    56
 Year-to-date(in thousands)
    
    March 31, 2005Fair value at beginning of year
    
    $
    134Amount realized on contracts entered into in 2004 and settled in 2005
    
    
    (8
    )Changes in fair value of contracts entered into in 2004
    
    
    (55
    )Net fair value of contracts entered into in 2004 at end of period
    
    
    71Changes in fair value of contracts entered into in 2005
    
    
    (15
    )Net fair value end of period
    
    $
    56
 The $56,000 in recognized but unrealized net gain on these forward natural gas swap transactions
marked-to-market on March 31, 2005 is expected to be realized on settlement as scheduled over the
following quarters in the amounts listed: 2nd Quarter
    
    
    3rd Quarter
    
    
    4th Quarter(in thousands)
    
    2005
    
    
    2005
    
    
    2005
    
    
    TotalNet gain
    
    
    ($33)
    
    
    
    $67
    
    
    
    $22
    
    
    
    $56
 We have minimal credit risk associated with the nonperformance or nonpayment by counterparties to
these forward gas swap transactions as we have only one major counterparty to these transactions
and this counterparty has a high investment grade credit rating. The electric utility has market, price and credit risk associated with forward contracts for the
purchase and sale of electricity. As of March 31, 2005 the electric utility had recognized, on a
pretax basis, $106,000 in net unrealized gains on open forward contracts for the purchase and sale
of electricity. Due to the nature of electricity and the physical aspects of the electricity
transmission system, unanticipated events affecting the transmission grid can result in
transmission constraints and the cancellation of scheduled transactions by the independent
transmission system operator. In these situations, the counterparties to the cancelled transaction
are generally not made whole for the difference in the contract price and the market price of the
electricity at the time of cancellation. In some instances the electric utility may deliver on a
sale where its offsetting purchase has been cancelled or is undeliverable, or take delivery on a
purchase where its offsetting sale has been cancelled or is undeliverable. All forward energy
transactions are subject to a small, and likely unquantifiable, risk of cancellation by the 28




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independent transmission system operator due to unanticipated physical constraints on the
transmission system. At the time of cancellation, the electric utility could be in a gain or loss
position depending on the market price of electricity relative to the contract price and the
electric utilitys position in the transaction. The market prices used to value the electric utilitys forward contracts for the purchases and
sales of electricity are determined by survey of counterparties by the electric utilitys power
services personnel responsible for contract pricing. Of the forward energy contracts that are
marked-to-market as of March 31, 2005, 64% of the forward purchases of electricity had offsetting
sales in terms of volumes and delivery periods. The amount of unrealized marked-to-market gains
recognized on forward purchases of electricity that were not offset by forward sales of electricity
was $87,000. We have in place an energy risk management policy with a goal to manage, through the use of defined
risk management practices, price risk and credit risk associated with wholesale power purchases and
sales. These policies require that most forward sales of electricity in wholesale markets be
covered by offsetting forward purchases of electricity with matching terms and delivery dates or by
the portion of company-owned generation projected to be in excess of retail load requirements.
Currently, a portion of marked-to-market gains or losses on a sales contract will be offset by a
marked-to-market loss or gain on the offsetting purchase contract. Our energy risk management policy allows for open long positions with limitations on the aggregate
marked-to-market value of open positions. These positions are closely monitored and covered with
offsetting sales when the risk of loss exceeds predefined limits. The exposure to price risk of
these open positions as of March 31, 2005 was not material. The following tables show the effect of marking-to-market forward contracts for the purchase and
sale of electricity on our consolidated balance sheet as of March 31, 2005 and the change in our
consolidated balance sheet position from December 31, 2004 to March 31, 2005: (in thousands)
    
    March 31, 2005Current asset  marked-to-market gain
    
    $
    240Regulatory asset  deferred marked-to-market loss
    
    
    178Total assets
    
    
    418Current liability  marked-to-market loss
    
    
    (245
    )Regulatory liability  deferred marked-to-market gain
    
    
    (67
    )Total liabilities
    
    
    (312
    )Net fair value of marked-to-market energy contracts
    
    $
    106
 Year-to-date(in thousands)
    
    March 31, 2005Fair value at beginning of year
    
    $
    301Amount realized on contracts entered into in 2004 and settled in 2005
    
    
    (259
    )Changes in fair value of contracts entered into in 2004
    
    
    44Net fair value of contracts entered into in 2004 at end of period
    
    
    86Changes in fair value of contracts entered into in 2005
    
    
    20Net fair value end of period
    
    $
    106
 29




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The $106,000 in recognized but unrealized net gains on the forward energy purchases and sales
marked-to-market on March 31, 2005 is expected to be realized on physical settlement as scheduled
over the following quarter in the amount listed: 2nd Quarter(in thousands)
    
    2005
    
    
    TotalNet gain
    
    
    $106
    
    
    
    $106
 We have credit risk associated with the nonperformance or nonpayment by counterparties to our
forward energy purchases and sales agreements. We have established guidelines and limits to manage
credit risk associated with wholesale power purchases and sales. Specific limits are determined by
a counterpartys financial strength. Our credit risk with our largest counterparty on delivered and
marked-to-market forward contracts as of March 31, 2005 was $3.7 million. As of March 31, 2005 we
had a net credit risk exposure of $234,000 from thirty-three counterparties with investment grade
credit ratings. The $234,000 credit risk exposure includes net amounts due to the electric utility on
receivables/payables from completed transactions billed and unbilled plus marked-to-market
gains/losses on forward contracts for the purchase and sale of electricity scheduled for delivery
after March 31, 2005. Individual counterparty exposures are offset according to legally enforceable
netting arrangements. Counterparties with investment grade credit ratings have minimum credit ratings of BBB- (Standard &
Poors), Baa3 (Moodys) or BBB- (Fitch). 
 Item 4. Controls and Procedures Under the supervision and with the participation of the Companys management, including the Chief
Executive Officer and the Chief Financial Officer, the Company evaluated the effectiveness of the
design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under
the Securities Exchange Act of 1934) as of March 31, 2005, the end of the period covered by this
report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Companys disclosure controls and procedures were effective as of March 31, 2005. During the fiscal quarter ended March 31, 2005, there were no changes in the Companys internal
control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially affect, the Companys internal control
over financial reporting. 30




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PART II. OTHER INFORMATION 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company does not have a publicly announced stock repurchase program. The following table shows
previously issued common shares that were surrendered to the Company by employees to pay taxes in
connection with the vesting of restricted stock granted to such employees under the Companys 1999
Stock Incentive Plan: Total number of
    
    
    Average priceCalendar Month
    
    shares purchased
    
    
    paid per shareJanuary 2005
    
    
    
    
    
    
    February 2005
    
    
    164
    
    
    $
    25.12March 2005
    
    
    88
    
    
    $
    25.57Total
    
    
    252
 
 Item 6. 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 Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized. OTTER TAIL CORPORATION By: /s/ Kevin G. Moug
Kevin G. Moug
Chief Financial Officer and Treasurer
(Chief Financial Officer/Authorized Officer) Dated: May 10, 2005 31




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EXHIBIT INDEX Exhibit Number
    
    Description31.1
    
    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.