##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For
the quarterly period ended June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 0-368
 OTTER TAIL CORPORATION
 
  Minnesota
    
    41-0462685(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 215 South Cascade Street, Box 496, Fergus Falls, Minnesota
    
    56538-0496(Address of principal executive offices)
    
    (Zip Code)
  
  
  þ o
  þ o o
 o þ
  July 24, 2007  29,761,657 Common Shares ($5 par value)




---



##### 



OTTER TAIL CORPORATION
 INDEX
  
 Page No.Part I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets  June 30, 2007 and December 31, 2006 (not audited)
    
    
    2 & 3Consolidated Statements of Income  Three and Six Months Ended June 30, 2007 and 2006 (not audited)
    
    
    4Consolidated Statements of Cash Flows  Six Months Ended June 30, 2007 and 2006 (not audited)
    
    
    5Notes to Consolidated Financial Statements (not audited)
    
    
    6-17Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    17-36Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    37-38Item 4. Controls and Procedures
    
    
    39Part II. Other InformationItem 1. Legal Proceedings
    
    
    39Item 1A. Risk Factors
    
    
    39Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 4. Submission of Matters to a Vote of Security Holders
    
    
    40Item 6. Exhibits
    
    
    41Signatures
    
    
    41302 Certification of Chief Executive Officer302 Certification of Chief Financial Officer906 Certification of Chief Executive Officer906 Certification of Chief Financial Officer




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Otter Tail Corporation
 
 Consolidated Balance Sheets
  -Assets-
 June 30,
    
    
    December 31,2007
    
    
    2006(Thousands of dollars)Current assetsCash and cash equivalents
    
    $
    
    
    
    $
    6,791Accounts receivable:Tradenet
    
    
    163,204
    
    
    
    135,011Other
    
    
    8,671
    
    
    
    10,265Inventories
    
    
    98,791
    
    
    
    103,002Deferred income taxes
    
    
    8,219
    
    
    
    8,069Accrued utility revenues
    
    
    17,793
    
    
    
    23,931Costs and estimated earnings in excess of billings
    
    
    41,555
    
    
    
    38,384Other
    
    
    20,858
    
    
    
    9,611Assets of discontinued operations
    
    
    
    
    
    
    289Total current assets
    
    
    359,091
    
    
    
    335,353Investments and other assets
    
    
    31,113
    
    
    
    29,946Goodwillnet
    
    
    99,158
    
    
    
    98,110Other intangiblesnet
    
    
    20,941
    
    
    
    20,080Deferred debitsUnamortized debt expense and reacquisition premiums
    
    
    5,824
    
    
    
    6,133Regulatory assets and other deferred debits
    
    
    46,923
    
    
    
    50,419Total deferred debits
    
    
    52,747
    
    
    
    56,552PlantElectric plant in service
    
    
    940,043
    
    
    
    930,689Nonelectric operations
    
    
    248,983
    
    
    
    239,269Total plant
    
    
    1,189,026
    
    
    
    1,169,958Less accumulated depreciation and amortization
    
    
    496,841
    
    
    
    479,557Plantnet of accumulated depreciation and amortization
    
    
    692,185
    
    
    
    690,401Construction work in progress
    
    
    71,506
    
    
    
    28,208Net plant
    
    
    763,691
    
    
    
    718,609Total
    
    $
    1,326,741
    
    
    $
    1,258,650
  - 2 -




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##### Table of Contents



Otter Tail Corporation
Consolidated Balance Sheets   -Liabilities-
 June 30,
    
    
    December 31,2007
    
    
    2006(Thousands of dollars)Current liabilitiesShort-term debt
    
    $
    93,956
    
    
    $
    38,900Current maturities of long-term debt
    
    
    3,096
    
    
    
    3,125Accounts payable
    
    
    105,256
    
    
    
    120,195Accrued salaries and wages
    
    
    23,950
    
    
    
    28,653Accrued federal and state income taxes
    
    
    14,237
    
    
    
    2,383Other accrued taxes
    
    
    8,688
    
    
    
    11,509Other accrued liabilities
    
    
    14,167
    
    
    
    10,495Liabilities of discontinued operations
    
    
    
    
    
    
    197Total current liabilities
    
    
    263,350
    
    
    
    215,457Pensions benefit liability
    
    
    43,599
    
    
    
    44,035Other postretirement benefits liability
    
    
    32,990
    
    
    
    32,254Other noncurrent liabilities
    
    
    22,175
    
    
    
    18,866Deferred creditsDeferred income taxes
    
    
    112,906
    
    
    
    112,740Deferred investment tax credit
    
    
    7,612
    
    
    
    8,181Regulatory liabilities
    
    
    64,155
    
    
    
    63,875Other
    
    
    997
    
    
    
    281Total deferred credits
    
    
    185,670
    
    
    
    185,077CapitalizationLong-term debt, net of current maturities
    
    
    254,140
    
    
    
    255,436Class B stock options of subsidiary
    
    
    1,255
    
    
    
    1,255Cumulative preferred shares
authorized 1,500,000 shares without par value;
outstanding 2007 and 2006  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 2007  29,759,979 and 2006  29,521,770
    
    
    148,800
    
    
    
    147,609Premium on common shares
    
    
    105,525
    
    
    
    99,223Retained earnings
    
    
    253,686
    
    
    
    245,005Accumulated other comprehensive income (loss)
    
    
    51
    
    
    
    (1,067
    )Total common equity
    
    
    508,062
    
    
    
    490,770Total capitalization
    
    
    778,957
    
    
    
    762,961Total
    
    $
    1,326,741
    
    
    $
    1,258,650
  - 3 -




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##### Table of Contents



Otter Tail Corporation
 
 Consolidated Statements of Income
  Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except share
    
    
    (In thousands, except shareand per share amounts)
    
    
    and per share amounts)Operating revenuesElectric
    
    $
    70,498
    
    
    $
    73,440
    
    
    $
    160,351
    
    
    $
    155,928Nonelectric
    
    
    235,346
    
    
    
    206,464
    
    
    
    446,614
    
    
    
    381,783Total operating revenues
    
    
    305,844
    
    
    
    279,904
    
    
    
    606,965
    
    
    
    537,711Operating expensesProduction fuel  electric
    
    
    14,077
    
    
    
    11,456
    
    
    
    30,502
    
    
    
    26,262Purchased power  electric system use
    
    
    11,021
    
    
    
    17,664
    
    
    
    37,032
    
    
    
    36,400Electric operation and maintenance expenses
    
    
    26,651
    
    
    
    28,049
    
    
    
    53,526
    
    
    
    51,456Cost of goods sold  nonelectric (excludes depreciation; included below)
    
    
    176,973
    
    
    
    156,363
    
    
    
    341,632
    
    
    
    288,757Other nonelectric expenses
    
    
    31,377
    
    
    
    29,306
    
    
    
    62,135
    
    
    
    55,554Depreciation and amortization
    
    
    12,947
    
    
    
    12,379
    
    
    
    26,040
    
    
    
    24,603Property taxes  electric
    
    
    2,527
    
    
    
    2,551
    
    
    
    5,053
    
    
    
    5,169Total operating expenses
    
    
    275,573
    
    
    
    257,768
    
    
    
    555,920
    
    
    
    488,201Operating income
    
    
    30,271
    
    
    
    22,136
    
    
    
    51,045
    
    
    
    49,510Other income
    
    
    340
    
    
    
    659
    
    
    
    613
    
    
    
    1,087Interest charges
    
    
    5,026
    
    
    
    5,100
    
    
    
    9,894
    
    
    
    9,544Income from continuing operations before income taxes
    
    
    25,585
    
    
    
    17,695
    
    
    
    41,764
    
    
    
    41,053Income taxes  continuing operations
    
    
    9,482
    
    
    
    6,558
    
    
    
    15,253
    
    
    
    15,061Net income from continuing operations
    
    
    16,103
    
    
    
    11,137
    
    
    
    26,511
    
    
    
    25,992Discontinued operations(Loss) income from discontinued operations net of taxes of
$0; ($41); $0 and $28 for the respective periods
    
    
    
    
    
    
    (79
    )
    
    
    
    
    
    
    26Net gain on disposition of discontinued operations  net of taxes of
$0; $224; $0 and $224 for the respective periods
    
    
    
    
    
    
    336
    
    
    
    
    
    
    
    336Net income from discontinued operations
    
    
    
    
    
    
    257
    
    
    
    
    
    
    
    362Net income
    
    
    16,103
    
    
    
    11,394
    
    
    
    26,511
    
    
    
    26,354Preferred dividend requirements
    
    
    184
    
    
    
    184
    
    
    
    368
    
    
    
    368Earnings available for common shares
    
    $
    15,919
    
    
    $
    11,210
    
    
    $
    26,143
    
    
    $
    25,986Basic earnings per common share:Continuing operations (net of preferred dividend requirement)
    
    $
    0.54
    
    
    $
    0.37
    
    
    $
    0.88
    
    
    $
    0.87Discontinued operations
    
    $
    
    
    
    $
    0.01
    
    
    $
    
    
    
    $
    0.01$
    0.54
    
    
    $
    0.38
    
    
    $
    0.88
    
    
    $
    0.88Diluted earnings per common share:Continuing operations (net of preferred dividend requirement)
    
    $
    0.53
    
    
    $
    0.37
    
    
    $
    0.88
    
    
    $
    0.86Discontinued operations
    
    $
    
    
    
    $
    0.01
    
    
    $
    
    
    
    $
    0.01$
    0.53
    
    
    $
    0.38
    
    
    $
    0.88
    
    
    $
    0.87Average number of common shares outstanding  basic
    
    
    29,685,745
    
    
    
    29,392,963
    
    
    
    29,594,499
    
    
    
    29,359,474Average number of common shares outstanding  diluted
    
    
    29,940,868
    
    
    
    29,766,040
    
    
    
    29,843,953
    
    
    
    29,751,718Dividends per common share
    
    $
    0.2925
    
    
    $
    0.2875
    
    
    $
    0.5850
    
    
    $
    0.5750
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Otter Tail Corporation
 
 Consolidated Statements of Cash Flows
  Six months endedJune 30,2007
    
    
    2006(Thousands of dollars)Cash flows from operating activitiesNet income
    
    $
    26,511
    
    
    $
    26,354Adjustments to reconcile net income to net cash
provided by operating activities:Net gain from sale of discontinued operations
    
    
    
    
    
    
    (336
    )Income from discontinued operations
    
    
    
    
    
    
    (26
    )Depreciation and amortization
    
    
    26,040
    
    
    
    24,603Deferred investment tax credit
    
    
    (568
    )
    
    
    (573
    )Deferred income taxes
    
    
    1,016
    
    
    
    1,134Change in deferred debits and other assets
    
    
    2,492
    
    
    
    383Discretionary contribution to pension plan
    
    
    (2,000
    )
    
    
    (4,000
    )Change in noncurrent liabilities and deferred credits
    
    
    6,450
    
    
    
    2,492Allowance for equity (other) funds used during construction
    
    
    
    
    
    
    (391
    )Change in derivatives net of regulatory deferral
    
    
    (1,620
    )
    
    
    1,918Stock compensation expense
    
    
    1,097
    
    
    
    1,320Other  net
    
    
    (390
    )
    
    
    629Cash (used for) provided by current assets and current liabilities:Change in receivables
    
    
    (24,558
    )
    
    
    (14,827
    )Change in inventories
    
    
    6,323
    
    
    
    (18,004
    )Change in other current assets
    
    
    (4,136
    )
    
    
    (25,648
    )Change in payables and other current liabilities
    
    
    (28,190
    )
    
    
    (7,411
    )Change in interest and income taxes payable
    
    
    11,858
    
    
    
    10,107Net cash provided by (used in) continuing operations
    
    
    20,325
    
    
    
    (2,276
    )Net cash provided by discontinued operations
    
    
    
    
    
    
    926Net cash provided by (used in) operating activities
    
    
    20,325
    
    
    
    (1,350
    )Cash flows from investing activitiesCapital expenditures
    
    
    (66,824
    )
    
    
    (33,949
    )Proceeds from disposal of noncurrent assets
    
    
    7,043
    
    
    
    1,048Acquisitionsnet of cash acquired
    
    
    (6,750
    )
    
    
    Increases in other investments
    
    
    (5,230
    )
    
    
    (1,171
    )Net cash used in investing activities  continuing operations
    
    
    (71,761
    )
    
    
    (34,072
    )Net proceeds from the sales of discontinued operations
    
    
    
    
    
    
    1,847Net cash used in investing activities
    
    
    (71,761
    )
    
    
    (32,225
    )Cash flows from financing activitiesChange in checks written in excess of cash
    
    
    4,649
    
    
    
    4,186Net short-term borrowings
    
    
    55,056
    
    
    
    43,032Proceeds from issuance of common stock, net of issuance expenses
    
    
    5,805
    
    
    
    1,017Payments for retirement of common stock
    
    
    (295
    )
    
    
    (463
    )Proceeds from issuance of long-term debt
    
    
    124
    
    
    
    105Debt issuance expenses
    
    
    (123
    )
    
    
    (293
    )Payments for retirement of long-term debt
    
    
    (1,543
    )
    
    
    (1,691
    )Dividends paid
    
    
    (17,711
    )
    
    
    (17,298
    )Net cash provided by financing activities  continuing operations
    
    
    45,962
    
    
    
    28,595Net cash provided by financing activities  discontinued operations
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    45,962
    
    
    
    28,595Effect of foreign exchange rate fluctuations on cash
    
    
    (1,317
    )
    
    
    (450
    )Net change in cash and cash equivalents
    
    
    (6,791
    )
    
    
    (5,430
    )Cash and cash equivalents at beginning of period  continuing operations
    
    
    6,791
    
    
    
    5,430Cash and cash equivalents at end of period  continuing operations
    
    $
    
    
    
    $
    Supplemental cash flow informationCash paid during the year from continuing operations for:Interest (net of amount capitalized)
    
    $
    9,178
    
    
    $
    8,624Income taxes
    
    $
    1,138
    
    
    $
    4,867Cash paid during the year from discontinued operations for:Interest
    
    $
    
    
    
    $
    91Income taxes
    
    $
    
    
    
    $
    423
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##### Table of Contents



OTTER TAIL CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Revenue Recognition
 Accounting for
Derivative Instruments and Hedging Activities
   June 30,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006Costs incurred on uncompleted contracts
    
    $
    242,540
    
    
    $
    257,370Less billings to date
    
    
    (261,206
    )
    
    
    (284,273
    )Plus estimated earnings recognized
    
    
    41,387
    
    
    
    35,955$
    22,721
    
    
    $
    9,052
 6




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##### Table of Contents



June 30,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006Costs and estimated earnings in excess of billings on uncompleted contracts
    
    $
    41,555
    
    
    $
    38,384Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    (18,834
    )
    
    
    (29,332
    )$
    22,721
    
    
    $
    9,052
 Inventories
  June 30,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006Finished goods
    
    $
    40,534
    
    
    $
    46,477Work in process
    
    
    5,350
    
    
    
    5,663Raw material, fuel and supplies
    
    
    52,907
    
    
    
    50,862$
    98,791
    
    
    $
    103,002
 Goodwill and Other Intangible Assets
   June 30, 2007
    
    
    December 31, 2006Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    Netcarrying
    
    
    Accumulated
    
    
    carrying
    
    
    carrying
    
    
    Accumulated
    
    
    carrying(in thousands)
    
    amount
    
    
    amortization
    
    
    amount
    
    
    amount
    
    
    amortization
    
    
    amountAmortized intangible assets:Covenants not to compete
    
    $
    2,637
    
    
    $
    1,984
    
    
    $
    653
    
    
    $
    2,198
    
    
    $
    1,813
    
    
    $
    385Customer relationships
    
    
    10,833
    
    
    
    1,241
    
    
    
    9,592
    
    
    
    10,574
    
    
    
    1,016
    
    
    
    9,558Other intangible assets including contracts
    
    
    2,787
    
    
    
    1,589
    
    
    
    1,198
    
    
    
    2,083
    
    
    
    1,291
    
    
    
    792Total
    
    $
    16,257
    
    
    $
    4,814
    
    
    $
    11,443
    
    
    $
    14,855
    
    
    $
    4,120
    
    
    $
    10,735Non-amortized intangible assets:Brand/trade name
    
    $
    9,498
    
    
    $
    
    
    
    $
    9,498
    
    
    $
    9,345
    
    
    $
    
    
    
    $
    9,345
  7




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##### Table of Contents



Comprehensive Income
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    16,103
    
    
    $
    11,394
    
    
    $
    26,511
    
    
    $
    26,354Other comprehensive income (net-of-tax)Foreign currency translation gain
    
    
    942
    
    
    
    618
    
    
    
    1,046
    
    
    
    564Amortization of unrecognized losses and costs
related to postretirement benefit programs
    
    
    44
    
    
    
    
    
    
    
    88
    
    
    
    Unrealized gain (loss) on available-for-sale securities
    
    
    2
    
    
    
    (4
    )
    
    
    (17
    )
    
    
    (12
    )Total other comprehensive income
    
    
    988
    
    
    
    614
    
    
    
    1,117
    
    
    
    552Total comprehensive income
    
    $
    17,091
    
    
    $
    12,008
    
    
    $
    27,628
    
    
    $
    26,906
 New Accounting Standards
 FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes  an interpretation of
FASB Statement No. 109, Accounting for Income Taxes
    SFAS No. 157, Fair Value Measurements,
 8




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##### Table of Contents



SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities  Including an
Amendment of FASB Statement No. 115,
 Acquisitions
     Pro(in thousands)
    
    Aviva
    
    
    EngineeringAssetsCurrent assets
    
    $
    2,083
    
    
    $
    1,956Goodwill
    
    
    
    
    
    
    1,048Other intangible assets
    
    
    870
    
    
    
    396Fixed assets
    
    
    
    
    
    
    1,600Total assets
    
    $
    2,953
    
    
    $
    5,000LiabilitiesCurrent liabilities
    
    $
    988
    
    
    $
    215Noncurrent liabilities
    
    
    
    
    
    
    Total liabilities
    
    $
    988
    
    
    $
    215Cash paid
    
    $
    1,965
    
    
    $
    4,785
  9




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##### Table of Contents



Segment Information
           Three months ended
    
    Six months endedJune 30,
    
    June 30,2007
    
    2006
    
    2007
    
    2006United States of America
    
    
    95.9
    %
    
    
    97.2
    %
    
    
    96.2
    %
    
    
    97.1
    %Canada
    
    
    2.1
    %
    
    
    1.7
    %
    
    
    1.6
    %
    
    
    1.6
    %All other countries (none greater than 1%)
    
    
    2.0
    %
    
    
    1.1
    %
    
    
    2.2
    %
    
    
    1.3
    %
 10




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##### Table of Contents



Operating Revenue
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Electric
    
    $
    70,572
    
    
    $
    73,518
    
    
    $
    160,552
    
    
    $
    156,102Plastics
    
    
    39,525
    
    
    
    52,685
    
    
    
    77,344
    
    
    
    90,790Manufacturing
    
    
    104,786
    
    
    
    81,631
    
    
    
    191,011
    
    
    
    149,888Health services
    
    
    32,452
    
    
    
    32,833
    
    
    
    65,415
    
    
    
    64,909Food ingredient processing
    
    
    18,403
    
    
    
    9,811
    
    
    
    37,898
    
    
    
    19,161Other business operations
    
    
    41,260
    
    
    
    30,379
    
    
    
    77,056
    
    
    
    58,658Intersegment eliminations
    
    
    (1,154
    )
    
    
    (953
    )
    
    
    (2,311
    )
    
    
    (1,797
    )Total
    
    $
    305,844
    
    
    $
    279,904
    
    
    $
    606,965
    
    
    $
    537,711
 Interest Expense
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Electric
    
    $
    2,388
    
    
    $
    2,553
    
    
    $
    4,891
    
    
    $
    5,130Plastics
    
    
    323
    
    
    
    359
    
    
    
    508
    
    
    
    476Manufacturing
    
    
    2,180
    
    
    
    1,841
    
    
    
    3,984
    
    
    
    3,212Health services
    
    
    255
    
    
    
    261
    
    
    
    460
    
    
    
    470Food ingredient processing
    
    
    42
    
    
    
    117
    
    
    
    133
    
    
    
    197Other business operations
    
    
    5,102
    
    
    
    4,995
    
    
    
    9,935
    
    
    
    9,316Intersegment eliminations
    
    
    (5,264
    )
    
    
    (5,026
    )
    
    
    (10,017
    )
    
    
    (9,257
    )Total
    
    $
    5,026
    
    
    $
    5,100
    
    
    $
    9,894
    
    
    $
    9,544
 Income Taxes
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Electric
    
    $
    2,679
    
    
    $
    1,748
    
    
    $
    5,905
    
    
    $
    6,985Plastics
    
    
    2,281
    
    
    
    3,126
    
    
    
    4,141
    
    
    
    6,206Manufacturing
    
    
    3,660
    
    
    
    2,772
    
    
    
    5,205
    
    
    
    4,298Health services
    
    
    528
    
    
    
    393
    
    
    
    1,222
    
    
    
    660Food ingredient processing
    
    
    710
    
    
    
    (321
    )
    
    
    949
    
    
    
    (962
    )Other business operations
    
    
    (376
    )
    
    
    (1,160
    )
    
    
    (2,169
    )
    
    
    (2,126
    )Total
    
    $
    9,482
    
    
    $
    6,558
    
    
    $
    15,253
    
    
    $
    15,061
 11




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Earnings Available for Common Shares from Continuing Operations
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Electric
    
    $
    4,892
    
    
    $
    3,349
    
    
    $
    10,630
    
    
    $
    12,623Plastics
    
    
    3,398
    
    
    
    5,023
    
    
    
    6,226
    
    
    
    9,599Manufacturing
    
    
    5,335
    
    
    
    4,160
    
    
    
    7,874
    
    
    
    6,405Health services
    
    
    708
    
    
    
    520
    
    
    
    1,656
    
    
    
    841Food ingredient processing
    
    
    1,543
    
    
    
    (1,416
    )
    
    
    1,992
    
    
    
    (2,426
    )Other business operations*
    
    
    43
    
    
    
    (683
    )
    
    
    (2,235
    )
    
    
    (1,418
    )Total
    
    $
    15,919
    
    
    $
    10,953
    
    
    $
    26,143
    
    
    $
    25,624
  *
    
    Other business operations includes corporate general and administrative expenses net-of-tax
of $1,349,000 and $1,748,000 for the three months ended June 30, 2007 and 2006,
respectively, and $3,873,000 and $3,623,000 for the six months ended June 30, 2007 and
2006, respectively. Total Assets
 June 30,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006Electric
    
    $
    715,912
    
    
    $
    689,653Plastics
    
    
    89,115
    
    
    
    80,666Manufacturing
    
    
    262,988
    
    
    
    219,336Health services
    
    
    66,484
    
    
    
    66,126Food ingredient processing
    
    
    94,369
    
    
    
    94,462Other business operations
    
    
    97,873
    
    
    
    108,118Discontinued operations
    
    
    
    
    
    
    289Total
    
    $
    1,326,741
    
    
    $
    1,258,650
 Rate and Regulatory Matters
  12




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##### Table of Contents



Regulatory Assets and Liabilities
 Accounting for the Effect of Certain Types of
Regulation
  June 30,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006Regulatory assets:Unrecognized transition obligation, prior service
costs and actuarial losses on pension and other
postretirement benefits
    
    $
    35,037
    
    
    $
    36,736Accrued cost-of-energy revenue
    
    
    6,986
    
    
    
    10,735Deferred income taxes
    
    
    10,331
    
    
    
    11,712Reacquisition premiums
    
    
    2,545
    
    
    
    2,694Deferred conservation program costs
    
    
    420
    
    
    
    1,036MISO schedule 16 and 17 deferred administrative costs
    
    
    709
    
    
    
    541Accumulated ARO accretion/depreciation adjustment
    
    
    296
    
    
    
    249Plant acquisition costs
    
    
    129
    
    
    
    151Total regulatory assets
    
    $
    56,453
    
    
    $
    63,854Regulatory liabilities:Accumulated reserve for estimated removal costs
    
    $
    59,142
    
    
    $
    58,496Deferred income taxes
    
    
    4,865
    
    
    
    5,228Gain on sale of division office building
    
    
    148
    
    
    
    151Total regulatory liabilities
    
    $
    64,155
    
    
    $
    63,875Net regulatory asset (liability) position
    
    $
    (7,702
    )
    
    $
    (21
    )
  13




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##### Table of Contents



Accounting for Income Taxes
  Common Shares and Earnings per Share
    Three months ended June 30,
    
    Options Outstanding
    
    Range of Exercise Prices2007
    
    
    
    N/A2006
    
    222,000
    
    $28.67  $31.34
 Six months ended June 30,
    
    Options Outstanding
    
    Range of Exercise Prices2007
    
    
    
    N/A2006
    
    216,000
    
    $29.74  $31.34
 14




---



##### Table of Contents



Share-based Payments
     Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    20061999 Employee Stock Purchase Plan
    
    $
    64
    
    
    $
    60
    
    
    $
    127
    
    
    $
    120Stock options granted under the Incentive Plan
    
    
    22
    
    
    
    68
    
    
    
    90
    
    
    
    136Restricted stock granted to directors
    
    
    96
    
    
    
    170
    
    
    
    247
    
    
    
    241Restricted stock granted to employees
    
    
    208
    
    
    
    151
    
    
    
    412
    
    
    
    442Restricted stock units granted to employees
    
    
    109
    
    
    
    289
    
    
    
    178
    
    
    
    289Stock performance awards granted to executive officers
    
    
    221
    
    
    
    395
    
    
    
    441
    
    
    
    535Totals
    
    $
    720
    
    
    $
    1,133
    
    
    $
    1,495
    
    
    $
    1,763
 Short-term and Long-term Borrowings
 Short-term Debt
 Long-term Debt
 15




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##### Table of Contents



Class B Stock Options of Subsidiary
  Pension Plan and Other Postretirement Benefits
 Pension Plan
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Service costbenefit earned during the period
    
    $
    1,263
    
    
    $
    1,210
    
    
    $
    2,526
    
    
    $
    2,420Interest cost on projected benefit obligation
    
    
    2,733
    
    
    
    2,544
    
    
    
    5,466
    
    
    
    5,088Expected return on assets
    
    
    (3,223
    )
    
    
    (3,065
    )
    
    
    (6,446
    )
    
    
    (6,130
    )Amortization of prior-service cost
    
    
    185
    
    
    
    186
    
    
    
    370
    
    
    
    372Amortization of net actuarial loss
    
    
    309
    
    
    
    378
    
    
    
    618
    
    
    
    756Net periodic pension cost
    
    $
    1,267
    
    
    $
    1,253
    
    
    $
    2,534
    
    
    $
    2,506
  Executive Survivor and Supplemental Retirement Plan
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Service costbenefit earned during the period
    
    $
    157
    
    
    $
    107
    
    
    $
    313
    
    
    $
    213Interest cost on projected benefit obligation
    
    
    362
    
    
    
    325
    
    
    
    725
    
    
    
    651Amortization of prior-service cost
    
    
    17
    
    
    
    18
    
    
    
    34
    
    
    
    36Recognized net actuarial loss
    
    
    135
    
    
    
    118
    
    
    
    270
    
    
    
    236Net periodic pension cost
    
    $
    671
    
    
    $
    568
    
    
    $
    1,342
    
    
    $
    1,136
 16




---



##### Table of Contents



Postretirement Benefits
 Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Service costbenefit earned during the period
    
    $
    315
    
    
    $
    334
    
    
    $
    630
    
    
    $
    668Interest cost on projected benefit obligation
    
    
    698
    
    
    
    637
    
    
    
    1,396
    
    
    
    1,274Amortization of transition obligation
    
    
    187
    
    
    
    187
    
    
    
    374
    
    
    
    374Amortization of prior-service cost
    
    
    (52
    )
    
    
    (76
    )
    
    
    (103
    )
    
    
    (152
    )Amortization of net actuarial loss
    
    
    129
    
    
    
    133
    
    
    
    258
    
    
    
    266Effect of Medicare Part D expected subsidy
    
    
    (410
    )
    
    
    (293
    )
    
    
    (820
    )
    
    
    (586
    )Net periodic postretirement benefit cost
    
    $
    867
    
    
    $
    922
    
    
    $
    1,735
    
    
    $
    1,844
 Discontinued Operations
 Accounting for the Impairment or Disposal of
Long-Lived Assets,
 Three months ended
    
    Six months ended(in thousands)
    
    June 30, 2006
    
    June 30, 2006Operating revenues
    
    $
    7,263
    
    
    $
    28,234(Loss) income before income taxes
    
    
    (120
    )
    
    
    54Gain on Disposition  pretax
    
    
    560
    
    
    
    560Income tax expense
    
    
    183
    
    
    
    252
   
 Managements Discussion and Analysis of Financial Condition and Results of Operations
 RESULTS OF OPERATIONS
 Comparison of the Three Months Ended June 30, 2007 and 2006
  17




---



##### Table of Contents



Three months ended
    
    Three months ended(in thousands)
    
    June 30, 2007
    
    June 30, 2006Operating revenues:Electric
    
    $
    74
    
    
    $
    78Nonelectric
    
    
    1,080
    
    
    
    875Cost of goods sold
    
    
    389
    
    
    
    448Other nonelectric expenses
    
    
    765
    
    
    
    505
 Electric
 Three months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeRetail sales revenues
    
    $
    55,501
    
    
    $
    61,805
    
    
    $
    (6,304
    )
    
    
    (10.2
    )Wholesale revenues
    
    
    6,674
    
    
    
    6,638
    
    
    
    36
    
    
    
    0.5Net marked-to-market gain
    
    
    3,429
    
    
    
    1,260
    
    
    
    2,169
    
    
    
    172.1Other revenues
    
    
    4,968
    
    
    
    3,815
    
    
    
    1,153
    
    
    
    30.2Total operating revenues
    
    $
    70,572
    
    
    $
    73,518
    
    
    $
    (2,946
    )
    
    
    (4.0
    )Production fuel
    
    
    14,077
    
    
    
    11,456
    
    
    
    2,621
    
    
    
    22.9Purchased power  system use
    
    
    11,021
    
    
    
    17,664
    
    
    
    (6,643
    )
    
    
    (37.6
    )Other operation and maintenance expenses
    
    
    26,651
    
    
    
    28,049
    
    
    
    (1,398
    )
    
    
    (5.0
    )Depreciation and amortization
    
    
    6,250
    
    
    
    6,447
    
    
    
    (197
    )
    
    
    (3.1
    )Property taxes
    
    
    2,527
    
    
    
    2,551
    
    
    
    (24
    )
    
    
    (0.9
    )Operating income
    
    $
    10,046
    
    
    $
    7,351
    
    
    $
    2,695
    
    
    
    36.7
   18




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19




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##### Table of Contents



Plastics
 Three months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    39,525
    
    
    $
    52,685
    
    
    $
    (13,160
    )
    
    
    (25.0
    )Cost of goods sold
    
    
    31,007
    
    
    
    41,442
    
    
    
    (10,435
    )
    
    
    (25.2
    )Operating expenses
    
    
    1,753
    
    
    
    2,058
    
    
    
    (305
    )
    
    
    (14.8
    )Depreciation and amortization
    
    
    764
    
    
    
    678
    
    
    
    86
    
    
    
    12.7Operating income
    
    $
    6,001
    
    
    $
    8,507
    
    
    $
    (2,506
    )
    
    
    (29.5
    )
  Manufacturing
 Three months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    104,786
    
    
    $
    81,631
    
    
    $
    23,155
    
    
    
    28.4Cost of goods sold
    
    
    81,188
    
    
    
    63,256
    
    
    
    17,932
    
    
    
    28.3Operating expenses
    
    
    9,108
    
    
    
    6,890
    
    
    
    2,218
    
    
    
    32.2Depreciation and amortization
    
    
    3,283
    
    
    
    2,710
    
    
    
    573
    
    
    
    21.1Operating income
    
    $
    11,207
    
    
    $
    8,775
    
    
    $
    2,432
    
    
    
    27.7
  
    
    Revenues at DMI Industries, Inc. (DMI) increased $14.8 million as a result of ramped up
production levels at Fort Erie compared with initial start-up levels beginning in May 2006.
    
    Revenues at ShoreMaster, Inc. (ShoreMaster) increased $5.9 million between the quarters
due to increased production at the Galva Foam location and higher residential sales during
the peak selling season. The Aviva Sports product line, acquired by ShoreMaster in February
2007, contributed $1.3 million to the increase in revenues.
    
    Revenues at BTD Manufacturing, Inc. (BTD) increased $2.1 million as a result of sales of
higher priced products and services and the acquisition of Pro Engineering, LLC (Pro
Engineering), a metal parts stamping business, in May 2007, which contributed $0.9 million
in revenues in the second quarter of 2007. A 17.2% decrease in unit sales between the
quarters at BTDs other manufacturing facilities was offset by a 21.5% increase in the
average price per unit sold.
    
    Revenues at T.O. Plastics, Inc. (T.O. Plastics) increased $0.3 million between the
quarters as a result of a 6.5% increase in the average price per unit sold, which was
mostly offset by a 4.6% decrease in the number of units sold between the quarters.
 20




---



##### Table of Contents




    
    DMIs cost of goods sold increased $12.0 million between the quarters, including $9.5
million in material costs increases. The increase in cost of goods sold is directly related
to DMIs increase in production and sales activity, including operations at the Ft. Erie
facilities which commenced in May 2006.
    
    Cost of goods sold at ShoreMaster increased $3.5 million between the quarters as a
result of increases in material and labor costs directly related to the increase in
residential product sales and the acquisition of the Aviva Sports product line in February
2007.
    
    Cost of goods sold at BTD increased $1.5 million between the quarters as a result of
increases in material and subcontractor costs and the acquisition of Pro Engineering in May
2007, offset by a decrease in costs at BTDs other manufacturing facilities related to a
decrease in unit sales between the quarters.
    
    Cost of goods sold at T.O. Plastics increased $0.9 million between the quarters,
including $0.6 million in material cost increases and $0.3 million in increased
manufacturing overhead costs.
  
    
    Operating expenses at DMI increased $0.9 million as a result of increases in labor and
benefit, professional services and promotional expenses mainly related to operations at the
Ft. Erie facilities which commenced in May 2006.
    
    ShoreMasters operating expenses increased $1.1 million as a result of increases in
labor, benefit and professional service expenses mainly related to the acquisition of the
Aviva Sports product line in February 2007.
    
    BTDs operating expenses increased $0.2 million between the quarters as a result of
increases in labor and professional service expenses.
    
    T.O. Plastics operating expenses increased by less than $0.1 million between the
quarters.
   21




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##### Table of Contents



Health Services
 Three months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    32,452
    
    
    $
    32,833
    
    
    $
    (381
    )
    
    
    (1.2
    )Cost of goods sold
    
    
    23,849
    
    
    
    25,225
    
    
    
    (1,376
    )
    
    
    (5.5
    )Operating expenses
    
    
    6,111
    
    
    
    5,568
    
    
    
    543
    
    
    
    9.8Depreciation and amortization
    
    
    1,021
    
    
    
    879
    
    
    
    142
    
    
    
    16.2Operating income
    
    $
    1,471
    
    
    $
    1,161
    
    
    $
    310
    
    
    
    26.7
  Food Ingredient Processing
 Three months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    18,403
    
    
    $
    9,811
    
    
    $
    8,592
    
    
    
    87.6Cost of goods sold
    
    
    14,310
    
    
    
    9,691
    
    
    
    4,619
    
    
    
    47.7Operating expenses
    
    
    790
    
    
    
    790
    
    
    
    
    
    
    
    Depreciation and amortization
    
    
    999
    
    
    
    948
    
    
    
    51
    
    
    
    5.4Operating income (loss)
    
    $
    2,304
    
    
    $
    (1,618
    )
    
    $
    3,922
    
    
    
    242.4
  22




---



##### Table of Contents



Other Business Operations
 Three months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    41,260
    
    
    $
    30,379
    
    
    $
    10,881
    
    
    
    35.8Cost of goods sold
    
    
    27,008
    
    
    
    17,197
    
    
    
    9,811
    
    
    
    57.1Operating expenses
    
    
    14,380
    
    
    
    14,505
    
    
    
    (125
    )
    
    
    (0.9
    )Depreciation and amortization
    
    
    630
    
    
    
    717
    
    
    
    (87
    )
    
    
    (12.1
    )Operating loss
    
    $
    (758
    )
    
    $
    (2,040
    )
    
    $
    1,282
    
    
    
    62.8
   
    
    Revenues at Foley Company increased $6.3 million in the second quarter of 2007 compared
to the second quarter of 2006 due to an increase in the volume of jobs in progress between
the quarters.
    
    Revenues at Midwest Construction Services, Inc. (MCS) increased $4.1 million between the
quarters as a result of an increase in volume of jobs in progress.
    
    Revenues at E.W. Wylie Corporation (Wylie) increased $0.3 million between the quarters
mainly due to a 2.4% increase in total miles driven by company-operated and owner-operated
trucks. Miles driven by company-operated trucks increased 7.6% while miles driven by
owner-operated trucks decreased 5.2% between the quarters.
  
    
    Foley Companys cost of goods sold increased $6.5 million mainly in the areas of
subcontractor and labor costs as a result of the increased volume of work performed between
the quarters.
    
    Cost of goods sold at MCS increased $3.3 million mainly due to increases in material,
labor and subcontractor costs related to the increase in volume of work performed between
the quarters.
  
    
    Wylies operating expenses increased by $0.3 million between the quarters mainly as a
result of increases in labor and fuel expenses related to the increase in miles driven by
company-operated trucks between the periods. Wylies depreciation expense decreased $0.1
million between the quarters as a result of leasing rather than buying replacement
equipment.
    
    Foley Companys operating expenses decreased $0.1 million between the quarters as a
result of decreases in compensation costs.
    
    At MCS, general and administrative expenses decreased $0.1 million between the quarters.
 23




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##### Table of Contents



Income Taxes  Continuing Operations
  Discontinued Operations
 Accounting for the Impairment or Disposal of Long-Lived Assets,
  Three months ended(in thousands)
    
    June 30, 2006Loss before income taxes
    
    $
    (120
    )Gain on disposition  pretax
    
    
    560Income tax expense
    
    
    183Net income
    
    $
    257
 Comparison of the Six Months Ended June 30, 2007 and 2006
   Six months ended
    
    Six months ended(in thousands)
    
    June 30, 2007
    
    June 30, 2006Operating revenues:Electric
    
    $
    201
    
    
    $
    174Nonelectric
    
    
    2,110
    
    
    
    1,623Cost of goods sold
    
    
    756
    
    
    
    768Other nonelectric expenses
    
    
    1,555
    
    
    
    1,029
 24




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##### Table of Contents



Electric
 Six months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeRetail sales revenues
    
    $
    136,677
    
    
    $
    135,164
    
    
    $
    1,513
    
    
    
    1.1Wholesale revenues
    
    
    10,908
    
    
    
    12,296
    
    
    
    (1,388
    )
    
    
    (11.3
    )Net marked-to-market gain
    
    
    3,398
    
    
    
    351
    
    
    
    3,047
    
    
    
    868.1Other revenues
    
    
    9,569
    
    
    
    8,291
    
    
    
    1,278
    
    
    
    15.4Total operating revenues
    
    $
    160,552
    
    
    $
    156,102
    
    
    $
    4,450
    
    
    
    2.9Production fuel
    
    
    30,502
    
    
    
    26,262
    
    
    
    4,240
    
    
    
    16.1Purchased power  system use
    
    
    37,032
    
    
    
    36,400
    
    
    
    632
    
    
    
    1.7Other operation and maintenance expenses
    
    
    53,526
    
    
    
    51,456
    
    
    
    2,070
    
    
    
    4.0Depreciation and amortization
    
    
    12,920
    
    
    
    12,804
    
    
    
    116
    
    
    
    0.9Property taxes
    
    
    5,053
    
    
    
    5,169
    
    
    
    (116
    )
    
    
    (2.2
    )Operating income
    
    $
    21,519
    
    
    $
    24,011
    
    
    $
    (2,492
    )
    
    
    (10.4
    )
     25




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##### Table of Contents



Plastics
 Six months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    77,344
    
    
    $
    90,790
    
    
    $
    (13,446
    )
    
    
    (14.8
    )Cost of goods sold
    
    
    61,655
    
    
    
    69,622
    
    
    
    (7,967
    )
    
    
    (11.4
    )Operating expenses
    
    
    3,292
    
    
    
    3,506
    
    
    
    (214
    )
    
    
    (6.1
    )Depreciation and amortization
    
    
    1,529
    
    
    
    1,408
    
    
    
    121
    
    
    
    8.6Operating income
    
    $
    10,868
    
    
    $
    16,254
    
    
    $
    (5,386
    )
    
    
    (33.1
    )
  Manufacturing
 Six months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    191,011
    
    
    $
    149,888
    
    
    $
    41,123
    
    
    
    27.4Cost of goods sold
    
    
    150,434
    
    
    
    117,655
    
    
    
    32,779
    
    
    
    27.9Operating expenses
    
    
    17,039
    
    
    
    13,105
    
    
    
    3,934
    
    
    
    30.0Depreciation and amortization
    
    
    6,393
    
    
    
    5,279
    
    
    
    1,114
    
    
    
    21.1Operating income
    
    $
    17,145
    
    
    $
    13,849
    
    
    $
    3,296
    
    
    
    23.8
  
    
    Revenues at DMI increased $31.9 million as a result of ramped up production levels at
Fort Erie compared with initial start-up levels beginning in May 2006.
    
    Revenues at ShoreMaster increased $6.3 million between the periods due to increased
production at the Galva Foam location and higher residential sales during the peak selling
season. The Aviva Sports product line, acquired by ShoreMaster in February 2007,
contributed $2.3 million to the increase in revenues.
    
    Revenues at T.O. Plastics increased $1.5 million between the periods as a result of a
21.2% increase in the average price per unit sold, partially offset by a 12.6% decrease in
the number of units sold between the periods.
 26




---



##### Table of Contents




    
    Revenues at BTD increased $1.4 million mainly as a result of the May 2007 acquisition of
Pro Engineering, which contributed $0.9 million to 2007 revenues. A 13.7% decrease in unit
sales between the periods at BTDs other manufacturing facilities was offset by a 14.1%
increase in the average price per unit sold.
  
    
    DMIs cost of goods sold increased $26.2 million between the periods, including $19.5
million in material costs increases. The increase in cost of goods sold is directly related
to DMIs increase in production and sales activity, including operations at the Ft. Erie
facilities which commenced in May 2006.
    
    Cost of goods sold at ShoreMaster increased $3.6 million between the periods as a result
of increases in material and labor costs directly related to the increase in residential
product sales and the acquisition of the Aviva Sports product line in February 2007.
    
    Cost of goods sold at T.O. Plastics increased $2.0 million, including $1.1 million in
material cost increases and $0.8 million in increased manufacturing overhead costs.
    
    Cost of goods sold at BTD increased $1.0 million between the periods as a result of
increases in material and subcontractor costs and the acquisition of Pro Engineering in May
2007, offset by a decrease in costs at BTDs other manufacturing facilities related to a
decrease in unit sales between the periods.
  
    
    Operating expenses at DMI increased $1.5 million as a result of increases in labor and
benefit, professional services and promotional expenses mainly related to operations at the
Ft. Erie facilities which commenced in May 2006.
    
    ShoreMasters operating expenses increased $1.6 million as a result of increases in
labor, benefit and professional service expenses mainly related to the acquisition of the
Aviva Sports product line in February 2007.
    
    BTDs operating expenses increased $0.5 million between the periods as a result of
increases in labor and professional service expenses.
    
    T.O. Plastics operating expenses increased by less than $0.3 million between the periods
mainly as a result of increases in labor and contracted service expenditures.
  27




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##### Table of Contents



Health Services
 Six months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    65,415
    
    
    $
    64,909
    
    
    $
    506
    
    
    
    0.8Cost of goods sold
    
    
    48,232
    
    
    
    50,047
    
    
    
    (1,815
    )
    
    
    (3.6
    )Operating expenses
    
    
    11,917
    
    
    
    11,082
    
    
    
    835
    
    
    
    7.5Depreciation and amortization
    
    
    1,983
    
    
    
    1,836
    
    
    
    147
    
    
    
    8.0Operating income
    
    $
    3,283
    
    
    $
    1,944
    
    
    $
    1,339
    
    
    
    68.9
  Food Ingredient Processing
 Six months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    37,898
    
    
    $
    19,161
    
    
    $
    18,737
    
    
    
    97.8Cost of goods sold
    
    
    31,303
    
    
    
    19,010
    
    
    
    12,293
    
    
    
    64.7Operating expenses
    
    
    1,542
    
    
    
    1,475
    
    
    
    67
    
    
    
    4.5Depreciation and amortization
    
    
    1,968
    
    
    
    1,866
    
    
    
    102
    
    
    
    5.5Operating income (loss)
    
    $
    3,085
    
    
    $
    (3,190
    )
    
    $
    6,275
    
    
    
    196.7
  28




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##### Table of Contents



Other Business Operations
 Six months endedJune 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    77,056
    
    
    $
    58,658
    
    
    $
    18,398
    
    
    
    31.4Cost of goods sold
    
    
    50,764
    
    
    
    33,191
    
    
    
    17,573
    
    
    
    52.9Operating expenses
    
    
    29,900
    
    
    
    27,415
    
    
    
    2,485
    
    
    
    9.1Depreciation and amortization
    
    
    1,247
    
    
    
    1,410
    
    
    
    (163
    )
    
    
    (11.6
    )Operating loss
    
    $
    (4,855
    )
    
    $
    (3,358
    )
    
    $
    (1,497
    )
    
    
    (44.6
    )
   
    
    Revenues at Foley Company increased $9.7 million in the first six months of 2007
compared to the first six months of 2006 due to an increase in the volume of jobs in
progress between the periods.
    
    Revenues at MCS increased $7.7 million between the periods as a result of an increase in
volume of jobs in progress.
    
    Revenues at Wylie increased $0.5 million between the periods mainly due to a 4.8%
increase in miles driven by owner-operated and company-operated trucks. Miles driven by
company-operated trucks increased 5.6% and miles driven by owner-operated trucks increased
3.5% between the periods.
  
    
    Foley Companys cost of goods sold increased $10.3 million mainly in the areas of
subcontractor and labor costs as a result of the increased volume of work performed between
the periods.
    
    Cost of goods sold at MCS increased $7.3 million mainly due to increases in material,
subcontractor and labor costs related to the increase in volume of jobs in progress between
the periods.
  
    
    Corporate operating expenses in this segment increased $1.4 million as a result of
higher labor, insurance and equipment rental costs.
    
    Wylies operating expenses increased $0.8 million between the periods, mainly as a
result of increases in fuel, equipment rental and labor expenses. Wylies depreciation
expense decreased $0.2 million between the periods as a result of leasing rather than
buying replacement equipment.
    
    Foley Companys operating expenses increased $0.3 million between the periods.
 29




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##### Table of Contents



Income Taxes  Continuing Operations
  Discontinued Operations
 Accounting for the Impairment or Disposal of Long-Lived Assets,
 Six months ended(in thousands)
    
    June 30, 2006Income before income taxes
    
    $
    54Gain on disposition  pretax
    
    
    560Income tax expense
    
    
    252Net income
    
    $
    362
 2007 EXPECTATIONS
   
    
    We expect earnings in the range of $19.0 million to $24.0 million in our electric
segment in 2007, an increase from prior guidance of $19.0 million to $22.5 million.
    
    We expect our plastics segments performance to be in the range of $6.0 million to $8.5
million in 2007, an increase from prior guidance of $5.5 million to $8.0 million, because
of stronger than expected performance in the first six months of 2007.
    
    We expect continued enhancements in productivity and capacity utilization, strong
backlogs and an announced expansion of DMIs Ft. Erie, Ontario facility that will increase
production to result in increased net income in our manufacturing segment in 2007.
    
    We expect moderate net income growth in our health services segment in 2007.
    
    We expect our food ingredient processing business (IPH) to generate net income in the
range of $2.5 million to $4.5 million in 2007, an increase from prior guidance of $2.0
million to $4.0 million.
    
    We expect our other business operations segment to have lower earnings in 2007 compared
with 2006 due to an expected return to more normal corporate cost levels. Our construction
companies are expected to have a strong 2007 given current backlogs.
 30




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##### Table of Contents



FINANCIAL POSITION
      31




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##### Table of Contents



MoodysInvestors
    
    StandardService
    
    & PoorsSenior unsecured debt
    
    
    A3
    
    
    BBB+Preferred stock
    
    Baa2
    
    BBB-Outlook
    
    Stable
    
    Stable
   32




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##### Table of Contents



33




---



##### Table of Contents



2007-(in millions)
    
    2007
    
    
    
    2011Electric
    
    $
    215
    
    
    
    $
    680Plastics
    
    
    5
    
    
    
    
    19Manufacturing
    
    
    38
    
    
    
    
    78Health services
    
    
    2
    
    
    
    
    12Food ingredient processing
    
    
    3
    
    
    
    
    17Other business operations
    
    
    1
    
    
    
    
    6Total
    
    $
    264
    
    
    
    $
    812
    Critical Accounting Policies Involving Significant Estimates
   34




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##### Table of Contents



Goodwill Impairment
  
 Forward Looking Information  Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995
   
    
    We are subject to federal and state legislation, regulations and actions that may have a negative impact on our
business and results of operations.
 
    
    Future operating results of the electric segment will be impacted by the outcome of a rate case to be filed in
Minnesota in late 2007.
 
    
    Certain costs currently included in the Fuel Clause Adjustment (FCA) in retail rates may be excluded from recovery
through the FCA but may be subject to recovery through rates established in a general rate case. Further, all, or
portions of, gross margins on asset-based wholesale electric sales may become subject to refund through the FCA as a
result of a general rate case.
 
    
    Weather conditions can adversely affect our operations and revenues.
 
    
    Electric wholesale margins could be further reduced as the MISO market becomes more efficient.
 
    
    Electric wholesale trading margins could be reduced or eliminated by losses due to trading activities.
 
    
    Our electric generating facilities are subject to operational risks that could result in unscheduled plant outages,
unanticipated operation and maintenance expenses and increased power purchase costs.
 
    
    Wholesale sales of electricity from excess generation could be affected by reductions in coal shipments to the Big
Stone and Hoot Lake plants due to supply constraints or rail transportation problems beyond our control.
 35




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##### Table of Contents




    
    Our electric segment has capitalized $7.25 million in costs related to the planned construction
of a second electric generating unit at its Big Stone Plant site as of June 30, 2007. Should
approvals of permits not be received on a timely basis, the project could be at risk. If the
project is abandoned for permitting or other reasons, these capitalized costs and others
incurred in future periods may be subject to expense and may not be recoverable.
 
    
    Our manufacturer of wind towers operates in a market that has been dependent on the Federal Production Tax Credit. This
tax credit is currently in place through December 31, 2008. Should this tax credit not be renewed, the revenues and
earnings of this business could be reduced.
 
    
    Federal and state environmental regulation could cause us to incur substantial capital expenditures which could result
in increased operating costs.
 
    
    Our plans to grow and diversify through acquisitions may not be successful and could result in poor financial
performance.
 
    
    Our plan to grow our nonelectric businesses could be limited by state law.
 
    
    Competition is a factor in all of our businesses.
 
    
    Economic uncertainty could have a negative impact on our future revenues and earnings.
 
    
    Volatile financial markets and changes in our debt rating could restrict our ability to access capital and could
increase borrowing costs and pension plan expenses.
 
    
    The price and availability of raw materials could affect the revenue and earnings of our manufacturing segment.
 
    
    Our food ingredient processing segment operates in a highly competitive market and is dependent on adequate sources of
raw materials for processing. Should the supply of these raw materials be affected by poor growing conditions, this
could negatively impact the results of operations for this segment. This segment 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, many of which are located in the
Gulf Coast regions, and a limited supply of resin. The loss of a key vendor or an interruption or delay in the supply
of PVC resin could result in reduced sales or increased costs for this business. Reductions in PVC resin prices could
negatively impact PVC pipe prices, profit margins on PVC pipe sales and the value of PVC pipe held in inventory.
 
    
    Changes in the rates or method of third-party reimbursements for diagnostic imaging services could result in reduced
demand for those services or create downward pricing pressure, which would decrease revenues and earnings for our
health services segment.
 
    
    Our health services businesses may not be able to retain or comply with the dealership arrangement and other agreements
with Philips Medical.
 
    
    A significant failure or an inability to properly bid or perform on projects by our construction businesses could lead
to adverse financial results.
 36




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##### Table of Contents



Quantitative and Qualitative Disclosures about Market Risk
      Megawatt Daily
  37




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##### Table of Contents



(in thousands)
    
    June 30, 2007Current asset  marked-to-market gain
    
    $
    7,822Current liability  marked-to-market loss
    
    
    (6,370
    )Net fair value of marked-to-market gas contracts
    
    $
    1,452
 Year-to-date(in thousands)
    
    June 30, 2007Fair value at beginning of year
    
    $
    203Amount realized on contracts entered into in 2006 and settled in 2007
    
    
    (203
    )Changes in fair value of contracts entered into in 2006
    
    
    Net fair value of contracts entered into in 2006 at end of period
    
    
    Changes in fair value of open contracts entered into in 2007
    
    
    1,452Net fair value end of period
    
    $
    1,452
  3rd Quarter
    
    4th Quarter
    
    1st Quarter(in thousands)
    
    2007
    
    2007
    
    2008
    
    TotalNet gain
    
    $
    902
    
    
    $
    335
    
    
    $
    215
    
    
    $
    1,452
    38




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##### Table of Contents



Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Legal Proceedings
  
 Risk Factors
  
 Unregistered Sales of Equity Securities and Use of Proceeds
  Total number of
    
    Average price paidCalendar Month
    
    shares purchased
    
    per shareApril 2007
    
    
    8,345
    
    
    $
    35.09May 2007
    
    
    
    
    
    
    June 2007
    
    
    
    
    
    
    Total
    
    
    8,345
 39




---



##### Table of Contents



Submission of Matters to a Vote of Security Holders
   Shares
    
    Shares Voted
    
    BrokerElection of Directors
    
    Voted For
    
    Withheld Authority
    
    Non-VotesArvid R. Liebe
    
    
    24,715,694
    
    
    
    508,521
    
    
    
    -0-John C. MacFarlane
    
    
    24,754,279
    
    
    
    469,936
    
    
    
    -0-Gary J. Spies
    
    
    24,742,644
    
    
    
    481,571
    
    
    
    -0-
 Shares
    
    SharesShares
    
    Voted
    
    Voted
    
    BrokerVoted For
    
    Against
    
    Abstain
    
    Non-VotesRatification of
Deloitte & Touche LLP
as Independent
Registered
Public Accounting Firm
    
    
    24,731,495
    
    
    
    290,604
    
    
    
    202,116
    
    
    
    -0-
 40




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##### Table of Contents



Exhibits
 4.1
    
    First Amendment to Credit Agreement dated as of April 13, 2007 between Otter
Tail Corporation dba Otter Tail Power Company and U.S. Bank National Association
(amending the Credit Agreement dated as of September 1, 2006 between Otter Tail
Corporation dba Otter Tail Power Company and U.S. Bank National Association)
(incorporated by reference to Exhibit 4.1 to the Companys Form 8-K filed April 18,
2007)10.1
    
    Amendment No. 4 to Participation Agreement, dated as of June 8, 2007, by and
among Central Minnesota Municipal Power Agency, Great River Energy, Heartland Consumers
Power District, Montana-Dakota Utilities Co., a division of MDU Resources Group, Inc.,
Otter Tail Corporation dba Otter Tail Power Company, Southern Minnesota Municipal Power
Agency and Western Minnesota Municipal Power Agency, as Owners, amending the
Participation Agreement, dated as of June 30, 2005, by and among the Owners
(incorporated by reference to Exhibit 10.1 to the Companys Form 8-K filed June 19,
2007)31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 SIGNATURES
  OTTER TAIL CORPORATIONBy:
    /s/ Kevin G. MougKevin G. MougChief Financial Officer and Treasurer
(Chief Financial Officer/Authorized Officer)  41




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##### Table of Contents



Exhibit Number
    
    Description4.1
    
    
    First Amendment to Credit Agreement dated as of April 13, 2007 between Otter Tail
Corporation dba Otter Tail Power Company and U.S. Bank National Association (amending the
Credit Agreement dated as of September 1, 2006 between Otter Tail Corporation dba Otter
Tail Power Company and U.S. Bank National Association) (incorporated by reference to
Exhibit 4.1 to the Companys Form 8-K filed April 18, 2007)10.1
    
    
    Amendment No. 4 to Participation Agreement, dated as of June 8, 2007, by and among
Central Minnesota Municipal Power Agency, Great River Energy, Heartland Consumers Power
District, Montana-Dakota Utilities Co., a division of MDU Resources Group, Inc., Otter
Tail Corporation dba Otter Tail Power Company, Southern Minnesota Municipal Power Agency
and Western Minnesota Municipal Power Agency, as Owners, amending the Participation
Agreement, dated as of June 30, 2005, by and among the Owners (incorporated by reference
to Exhibit 10.1 to the Companys Form 8-K filed June 19, 2007)31.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002