##### 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 September 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 215 South Cascade Street, Box 496, Fergus Falls, Minnesota
    
    56538-0496(Address of principal executive offices)
    
    (Zip Code)
  
  
  þ o
  þ o o
 o þ
  October 31, 2007  29,847,515 Common Shares ($5 par value)




---



##### 



OTTER TAIL CORPORATION
 INDEX
 Page No.Part I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets  September 30, 2007 and December 31, 2006 (not audited)
    
    
    2 & 3Consolidated Statements of Income  Three and Nine Months Ended September 30, 2007 and 2006 (not audited)
    
    
    4Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2007 and 2006 (not audited)
    
    
    5Notes to Consolidated Financial Statements (not audited)
    
    
    6-22Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22-42Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    42-44Item 4. Controls and Procedures
    
    
    44Part II. Other InformationItem 1. Legal Proceedings
    
    
    45Item 1A. Risk Factors
    
    
    45-46Item 6. Exhibits
    
    
    46-47Signatures
    
    
    47Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Otter Tail Corporation
 
 Consolidated Balance Sheets
  -Assets-
 September 30,
    
    
    December 31,2007
    
    
    2006(Thousands of dollars)Current assetsCash and cash equivalents
    
    $
    704
    
    
    $
    6,791Accounts receivable:Tradenet
    
    
    161,684
    
    
    
    135,011Other
    
    
    12,713
    
    
    
    10,265Inventories
    
    
    97,757
    
    
    
    103,002Deferred income taxes
    
    
    8,221
    
    
    
    8,069Accrued utility revenues
    
    
    12,693
    
    
    
    23,931Costs and estimated earnings in excess of billings
    
    
    44,055
    
    
    
    38,384Other
    
    
    13,637
    
    
    
    9,611Assets of discontinued operations
    
    
    
    
    
    
    289Total current assets
    
    
    351,464
    
    
    
    335,353Investments and other assets
    
    
    32,959
    
    
    
    29,946Goodwillnet
    
    
    99,242
    
    
    
    98,110Other intangiblesnet
    
    
    20,698
    
    
    
    20,080Deferred debitsUnamortized debt expense and reacquisition premiums
    
    
    5,813
    
    
    
    6,133Regulatory assets and other deferred debits
    
    
    46,882
    
    
    
    50,419Total deferred debits
    
    
    52,695
    
    
    
    56,552PlantElectric plant in service
    
    
    946,727
    
    
    
    930,689Nonelectric operations
    
    
    255,913
    
    
    
    239,269Total plant
    
    
    1,202,640
    
    
    
    1,169,958Less accumulated depreciation and amortization
    
    
    503,295
    
    
    
    479,557Plantnet of accumulated depreciation and amortization
    
    
    699,345
    
    
    
    690,401Construction work in progress
    
    
    86,621
    
    
    
    28,208Net plant
    
    
    785,966
    
    
    
    718,609Total
    
    $
    1,343,024
    
    
    $
    1,258,650
  - 2 -




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##### Table of Contents



Otter Tail Corporation
Consolidated Balance Sheets   -Liabilities-
 September 30,
    
    
    December 31,2007
    
    
    2006(Thousands of dollars)Current liabilitiesShort-term debt
    
    $
    78,781
    
    
    $
    38,900Current maturities of long-term debt
    
    
    3,019
    
    
    
    3,125Accounts payable
    
    
    111,550
    
    
    
    120,195Accrued salaries and wages
    
    
    26,660
    
    
    
    28,653Accrued federal and state income taxes
    
    
    4,308
    
    
    
    2,383Other accrued taxes
    
    
    10,075
    
    
    
    11,509Other accrued liabilities
    
    
    13,843
    
    
    
    10,495Liabilities of discontinued operations
    
    
    
    
    
    
    197Total current liabilities
    
    
    248,236
    
    
    
    215,457Pensions benefit liability
    
    
    42,260
    
    
    
    44,035Other postretirement benefits liability
    
    
    33,335
    
    
    
    32,254Other noncurrent liabilities
    
    
    21,581
    
    
    
    18,866Deferred creditsDeferred income taxes
    
    
    114,843
    
    
    
    112,740Deferred investment tax credit
    
    
    7,328
    
    
    
    8,181Regulatory liabilities
    
    
    64,614
    
    
    
    63,875Other
    
    
    255
    
    
    
    281Total deferred credits
    
    
    187,040
    
    
    
    185,077CapitalizationLong-term debt, net of current maturities
    
    
    278,378
    
    
    
    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  29,827,870 and 2006  29,521,770
    
    
    149,139
    
    
    
    147,609Premium on common shares
    
    
    107,502
    
    
    
    99,223Retained earnings
    
    
    258,129
    
    
    
    245,005Accumulated other comprehensive income (loss)
    
    
    669
    
    
    
    (1,067
    )Total common equity
    
    
    515,439
    
    
    
    490,770Total capitalization
    
    
    810,572
    
    
    
    762,961Total
    
    $
    1,343,024
    
    
    $
    1,258,650
  - 3 -




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##### Table of Contents



Otter Tail Corporation
 
 Consolidated Statements of Income
  Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except share
    
    
    (In thousands, except shareand per share amounts)
    
    
    and per share amounts)Operating revenuesElectric
    
    $
    72,052
    
    
    $
    71,134
    
    
    $
    232,403
    
    
    $
    227,062Nonelectric
    
    
    230,183
    
    
    
    209,408
    
    
    
    676,797
    
    
    
    591,191Total operating revenues
    
    
    302,235
    
    
    
    280,542
    
    
    
    909,200
    
    
    
    818,253Operating expensesProduction fuel  electric
    
    
    16,994
    
    
    
    15,846
    
    
    
    47,496
    
    
    
    42,108Purchased power  electric system use
    
    
    6,499
    
    
    
    8,590
    
    
    
    43,531
    
    
    
    44,990Electric operation and maintenance expenses
    
    
    27,212
    
    
    
    26,433
    
    
    
    80,738
    
    
    
    77,889Cost of goods sold  nonelectric (excludes depreciation; included below)
    
    
    179,868
    
    
    
    161,148
    
    
    
    521,500
    
    
    
    449,905Other nonelectric expenses
    
    
    30,211
    
    
    
    29,543
    
    
    
    92,346
    
    
    
    85,097Depreciation and amortization
    
    
    13,366
    
    
    
    12,552
    
    
    
    39,406
    
    
    
    37,155Property taxes  electric
    
    
    2,538
    
    
    
    2,260
    
    
    
    7,591
    
    
    
    7,429Total operating expenses
    
    
    276,688
    
    
    
    256,372
    
    
    
    832,608
    
    
    
    744,573Operating income
    
    
    25,547
    
    
    
    24,170
    
    
    
    76,592
    
    
    
    73,680Other income
    
    
    619
    
    
    
    1,060
    
    
    
    1,232
    
    
    
    2,147Interest charges
    
    
    4,927
    
    
    
    5,078
    
    
    
    14,821
    
    
    
    14,622Income from continuing operations before income taxes
    
    
    21,239
    
    
    
    20,152
    
    
    
    63,003
    
    
    
    61,205Income taxes  continuing operations
    
    
    7,907
    
    
    
    6,676
    
    
    
    23,160
    
    
    
    21,737Net income from continuing operations
    
    
    13,332
    
    
    
    13,476
    
    
    
    39,843
    
    
    
    39,468Discontinued operationsIncome from discontinued operations net of taxes of
$0; $0; $0 and $28 for the respective periods
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26Net gain on disposition of discontinued operations  net of taxes of
$0; $0; $0 and $224 for the respective periods
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    336Net income from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    362Net income
    
    
    13,332
    
    
    
    13,476
    
    
    
    39,843
    
    
    
    39,830Preferred dividend requirements
    
    
    184
    
    
    
    183
    
    
    
    552
    
    
    
    551Earnings available for common shares
    
    $
    13,148
    
    
    $
    13,293
    
    
    $
    39,291
    
    
    $
    39,279Basic earnings per common share:Continuing operations (net of preferred dividend requirement)
    
    $
    0.44
    
    
    $
    0.45
    
    
    $
    1.33
    
    
    $
    1.33Discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.01$
    0.44
    
    
    $
    0.45
    
    
    $
    1.33
    
    
    $
    1.34Diluted earnings per common share:Continuing operations (net of preferred dividend requirement)
    
    $
    0.44
    
    
    $
    0.45
    
    
    $
    1.31
    
    
    $
    1.31Discontinued operations
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    0.01$
    0.44
    
    
    $
    0.45
    
    
    $
    1.31
    
    
    $
    1.32Average number of common shares outstanding  basic
    
    
    29,745,600
    
    
    
    29,412,526
    
    
    
    29,644,866
    
    
    
    29,377,158Average number of common shares outstanding  diluted
    
    
    29,995,660
    
    
    
    29,805,897
    
    
    
    29,887,510
    
    
    
    29,764,752Dividends per common share
    
    $
    0.2925
    
    
    $
    0.2875
    
    
    $
    0.8775
    
    
    $
    0.8625
  - 4 -




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Otter Tail Corporation
 
 Consolidated Statements of Cash Flows
  Nine months endedSeptember 30,2007
    
    
    2006(Thousands of dollars)Cash flows from operating activitiesNet income
    
    $
    39,843
    
    
    $
    39,830Adjustments 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
    
    
    39,406
    
    
    
    37,155Deferred investment tax credit
    
    
    (852
    )
    
    
    (860
    )Deferred income taxes
    
    
    2,706
    
    
    
    52Change in deferred debits and other assets
    
    
    (484
    )
    
    
    (564
    )Discretionary contribution to pension plan
    
    
    (4,000
    )
    
    
    (4,000
    )Change in noncurrent liabilities and deferred credits
    
    
    6,116
    
    
    
    4,552Allowance for equity (other) funds used during construction
    
    
    
    
    
    
    (611
    )Change in derivatives net of regulatory deferral
    
    
    (163
    )
    
    
    3,364Stock compensation expense
    
    
    1,592
    
    
    
    1,871Other  net
    
    
    (469
    )
    
    
    (123
    )Cash (used for) provided by current assets and current liabilities:Change in receivables
    
    
    (26,883
    )
    
    
    (9,063
    )Change in inventories
    
    
    7,779
    
    
    
    (17,663
    )Change in other current assets
    
    
    3,562
    
    
    
    (19,260
    )Change in payables and other current liabilities
    
    
    (15,194
    )
    
    
    12,248Change in interest and income taxes payable
    
    
    4,382
    
    
    
    (3,831
    )Net cash provided by continuing operations
    
    
    57,341
    
    
    
    42,735Net cash provided by discontinued operations
    
    
    
    
    
    
    1,011Net cash provided by operating activities
    
    
    57,341
    
    
    
    43,746Cash flows from investing activitiesCapital expenditures
    
    
    (99,433
    )
    
    
    (53,291
    )Proceeds from disposal of noncurrent assets
    
    
    8,297
    
    
    
    3,623Acquisitionsnet of cash acquired
    
    
    (6,750
    )
    
    
    Increases in other investments
    
    
    (5,824
    )
    
    
    (3,540
    )Net cash used in investing activities  continuing operations
    
    
    (103,710
    )
    
    
    (53,208
    )Net proceeds from the sales of discontinued operations
    
    
    
    
    
    
    1,898Net cash used in investing activities
    
    
    (103,710
    )
    
    
    (51,310
    )Cash flows from financing activitiesChange in checks written in excess of cash
    
    
    
    
    
    
    (11
    )Net short-term borrowings
    
    
    39,881
    
    
    
    38,037Proceeds from issuance of common stock, net of issuance expenses
    
    
    7,633
    
    
    
    1,634Payments for retirement of common stock
    
    
    (305
    )
    
    
    (463
    )Proceeds from issuance of long-term debt
    
    
    25,128
    
    
    
    142Debt issuance expenses
    
    
    (328
    )
    
    
    (302
    )Payments for retirement of long-term debt
    
    
    (2,445
    )
    
    
    (2,523
    )Dividends paid
    
    
    (26,601
    )
    
    
    (25,954
    )Net cash provided by financing activities  continuing operations
    
    
    42,963
    
    
    
    10,560Net cash provided by financing activities  discontinued operations
    
    
    
    
    
    
    Net cash provided by financing activities
    
    
    42,963
    
    
    
    10,560Effect of foreign exchange rate fluctuations on cash
    
    
    (2,681
    )
    
    
    (427
    )Net change in cash and cash equivalents
    
    
    (6,087
    )
    
    
    2,569Cash and cash equivalents at beginning of period  continuing operations
    
    
    6,791
    
    
    
    5,430Cash and cash equivalents at end of period  continuing operations
    
    $
    704
    
    
    $
    7,999Supplemental cash flow informationCash paid during the year from continuing operations for:Interest (net of amount capitalized)
    
    $
    11,899
    
    
    $
    11,419Income taxes
    
    $
    18,896
    
    
    $
    28,967Cash paid during the year from discontinued operations for:Interest
    
    $
    
    
    
    $
    91Income taxes
    
    $
    
    
    
    $
    423
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OTTER TAIL CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Revenue Recognition
 Accounting for
Derivative Instruments and Hedging Activities
   September 30,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006Costs incurred on uncompleted contracts
    
    $
    311,917
    
    
    $
    257,370Less billings to date
    
    
    (338,756
    )
    
    
    (284,273
    )Plus estimated earnings recognized
    
    
    54,569
    
    
    
    35,955$
    27,730
    
    
    $
    9,052
 6




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##### Table of Contents



September 30,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006Costs and estimated earnings in excess of billings on uncompleted contracts
    
    $
    44,055
    
    
    $
    38,384Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    (16,325
    )
    
    
    (29,332
    )$
    27,730
    
    
    $
    9,052
 Inventories
  September 30,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006Finished goods
    
    $
    40,789
    
    
    $
    46,477Work in process
    
    
    6,203
    
    
    
    5,663Raw material, fuel and supplies
    
    
    50,765
    
    
    
    50,862$
    97,757
    
    
    $
    103,002
 Goodwill and Other Intangible Assets
   September 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
    
    
    $
    2,045
    
    
    $
    592
    
    
    $
    2,198
    
    
    $
    1,813
    
    
    $
    385Customer relationships
    
    
    10,879
    
    
    
    1,358
    
    
    
    9,521
    
    
    
    10,574
    
    
    
    1,016
    
    
    
    9,558Other intangible assets including contracts
    
    
    2,787
    
    
    
    1,714
    
    
    
    1,073
    
    
    
    2,083
    
    
    
    1,291
    
    
    
    792Total
    
    $
    16,303
    
    
    $
    5,117
    
    
    $
    11,186
    
    
    $
    14,855
    
    
    $
    4,120
    
    
    $
    10,735Non-amortized intangible assets:Brand/trade name
    
    $
    9,512
    
    
    $
    
    
    
    $
    9,512
    
    
    $
    9,345
    
    
    $
    
    
    
    $
    9,345
  7




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##### Table of Contents



Comprehensive Income
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Net income
    
    $
    13,332
    
    
    $
    13,476
    
    
    $
    39,843
    
    
    $
    39,830Other comprehensive income (loss) (net-of-tax)Foreign currency translation gain (loss)
    
    
    571
    
    
    
    (19
    )
    
    
    1,617
    
    
    
    545Amortization of unrecognized losses and costs
related to postretirement benefit programs
    
    
    43
    
    
    
    
    
    
    
    131
    
    
    
    Unrealized (loss) on cash flow hedges
    
    
    
    
    
    
    (271
    )
    
    
    
    
    
    
    (271
    )Unrealized gain (loss) on available-for-sale securities
    
    
    5
    
    
    
    45
    
    
    
    (12
    )
    
    
    33Total other comprehensive income (loss)
    
    
    619
    
    
    
    (245
    )
    
    
    1,736
    
    
    
    307Total comprehensive income
    
    $
    13,951
    
    
    $
    13,231
    
    
    $
    41,579
    
    
    $
    40,137
 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
    
    Nine months endedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006United States of America
    
    
    97.8
    %
    
    
    96.8
    %
    
    
    96.7
    %
    
    
    97.0
    %Canada
    
    
    0.9
    %
    
    
    1.4
    %
    
    
    1.4
    %
    
    
    1.5
    %All other countries (none greater than 1%)
    
    
    1.3
    %
    
    
    1.8
    %
    
    
    1.9
    %
    
    
    1.5
    %
 10




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##### Table of Contents



Operating Revenue
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Electric
    
    $
    72,110
    
    
    $
    71,206
    
    
    $
    232,662
    
    
    $
    227,308Plastics
    
    
    36,975
    
    
    
    45,941
    
    
    
    114,319
    
    
    
    136,731Manufacturing
    
    
    95,330
    
    
    
    76,667
    
    
    
    286,341
    
    
    
    226,555Health services
    
    
    31,360
    
    
    
    35,432
    
    
    
    96,775
    
    
    
    100,341Food ingredient processing
    
    
    15,714
    
    
    
    11,474
    
    
    
    53,612
    
    
    
    30,635Other business operations
    
    
    51,956
    
    
    
    40,739
    
    
    
    129,012
    
    
    
    99,397Intersegment eliminations
    
    
    (1,210
    )
    
    
    (917
    )
    
    
    (3,521
    )
    
    
    (2,714
    )Total
    
    $
    302,235
    
    
    $
    280,542
    
    
    $
    909,200
    
    
    $
    818,253
 Interest Expense
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Electric
    
    $
    2,465
    
    
    $
    2,561
    
    
    $
    7,356
    
    
    $
    7,691Plastics
    
    
    242
    
    
    
    166
    
    
    
    750
    
    
    
    642Manufacturing
    
    
    2,141
    
    
    
    1,799
    
    
    
    6,125
    
    
    
    5,011Health services
    
    
    223
    
    
    
    225
    
    
    
    683
    
    
    
    695Food ingredient processing
    
    
    34
    
    
    
    157
    
    
    
    167
    
    
    
    354Other business operations
    
    
    5,074
    
    
    
    4,920
    
    
    
    15,009
    
    
    
    14,236Intersegment eliminations
    
    
    (5,252
    )
    
    
    (4,750
    )
    
    
    (15,269
    )
    
    
    (14,007
    )Total
    
    $
    4,927
    
    
    $
    5,078
    
    
    $
    14,821
    
    
    $
    14,622
 Income Taxes
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Electric
    
    $
    3,595
    
    
    $
    3,488
    
    
    $
    9,500
    
    
    $
    10,473Plastics
    
    
    940
    
    
    
    3,067
    
    
    
    5,081
    
    
    
    9,273Manufacturing
    
    
    2,359
    
    
    
    1,690
    
    
    
    7,564
    
    
    
    5,988Health services
    
    
    84
    
    
    
    243
    
    
    
    1,306
    
    
    
    903Food ingredient processing
    
    
    942
    
    
    
    (690
    )
    
    
    1,891
    
    
    
    (1,652
    )Other business operations
    
    
    (13
    )
    
    
    (1,122
    )
    
    
    (2,182
    )
    
    
    (3,248
    )Total
    
    $
    7,907
    
    
    $
    6,676
    
    
    $
    23,160
    
    
    $
    21,737
 11




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Earnings Available for Common Shares from Continuing Operations
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Electric
    
    $
    6,309
    
    
    $
    6,311
    
    
    $
    16,939
    
    
    $
    18,934Plastics
    
    
    1,384
    
    
    
    4,578
    
    
    
    7,610
    
    
    
    14,177Manufacturing
    
    
    3,477
    
    
    
    2,456
    
    
    
    11,351
    
    
    
    8,861Health services
    
    
    53
    
    
    
    300
    
    
    
    1,709
    
    
    
    1,141Food ingredient processing
    
    
    993
    
    
    
    (1,078
    )
    
    
    2,985
    
    
    
    (3,504
    )Other business operations*
    
    
    932
    
    
    
    726
    
    
    
    (1,303
    )
    
    
    (692
    )Total
    
    $
    13,148
    
    
    $
    13,293
    
    
    $
    39,291
    
    
    $
    38,917
 
 *
    
    Other business operations includes corporate general and administrative expenses net-of-tax
of $1,270,000 and $1,680,000 for the three months ended September 30, 2007 and 2006,
respectively, and $5,633,000 and $5,479,000 for the nine months ended September 30,
2007 and 2006, respectively. Total Assets
 September 30,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006Electric
    
    $
    727,959
    
    
    $
    689,653Plastics
    
    
    80,491
    
    
    
    80,666Manufacturing
    
    
    260,569
    
    
    
    219,336Health services
    
    
    63,635
    
    
    
    66,126Food ingredient processing
    
    
    94,149
    
    
    
    94,462Other business operations
    
    
    116,221
    
    
    
    108,118Discontinued operations
    
    
    
    
    
    
    289Total
    
    $
    1,343,024
    
    
    $
    1,258,650
 Rate and Regulatory Matters
 Minnesota AAA Fuel Clause Filing
 12




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2007 Minnesota General Rate Case Filing
 Capacity Expansion 2020 (CapX) Mega Certificate of Need 
 North Dakota Fuel Clause/MISO Schedule 16 and 17 Agreement
 Big Stone II Project
  13




---



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Federal
      14




---



##### Table of Contents



Regulatory Assets and Liabilities
 Accounting for the Effect of Certain Types of
Regulation
  September 30,
    
    
    December 31,(in thousands)
    
    2007
    
    
    2006Regulatory assets:Unrecognized transition obligation, prior service costs
and actuarial losses on pension and other postretirement
benefits
    
    $
    34,187
    
    
    $
    36,736Deferred income taxes
    
    
    10,170
    
    
    
    11,712Accrued cost-of-energy revenue
    
    
    3,592
    
    
    
    10,735Reacquisition premiums
    
    
    2,470
    
    
    
    2,694MISO schedule 16 and 17 deferred administrative costs  MN
    
    
    781
    
    
    
    541MISO schedule 16 and 17 deferred administrative costs  ND
    
    
    523
    
    
    
    Deferred marked-to-market losses
    
    
    451
    
    
    
    Deferred conservation program costs
    
    
    331
    
    
    
    1,036Accumulated ARO accretion/depreciation adjustment
    
    
    321
    
    
    
    249Plant acquisition costs
    
    
    118
    
    
    
    151Total regulatory assets
    
    $
    52,944
    
    
    $
    63,854Regulatory liabilities:Accumulated reserve for estimated removal costs
    
    $
    59,784
    
    
    $
    58,496Deferred income taxes
    
    
    4,684
    
    
    
    5,228Gain on sale of division office building
    
    
    146
    
    
    
    151Total regulatory liabilities
    
    $
    64,614
    
    
    $
    63,875Net regulatory (liability) position
    
    $
    (11,670
    )
    
    $
    (21
    )
  15




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##### Table of Contents



Accounting for Income Taxes
  Common Shares and Earnings per Share
  Common shares outstanding, December 31, 2006
    
    
    29,521,770Issuances:Stock options exercised
    
    
    293,382Directors compensation:Restricted shares
    
    
    15,200Unrestricted shares
    
    
    885Vesting of restricted stock units
    
    
    4,522Restricted shares issued for employee compensation
    
    
    600Retirements:Shares withheld for individual income tax requirements
    
    
    (8,409
    )Restricted shares forfeited
    
    
    (80
    )Common shares outstanding, September 30, 2007
    
    
    29,827,870
  16




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##### Table of Contents



Three months ended September 30,
    
    Options Outstanding
    
    Range of Exercise Prices2007
    
    
    
    N/A2006
    
    213,000
    
    $29.74 - $31.34
 Nine months ended September 30,
    
    Options Outstanding
    
    Range of Exercise Prices2007
    
    
    
    N/A2006
    
    213,000
    
    $29.74 - $31.34
 Share-based Payments
     Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    20061999 Employee Stock Purchase Plan
    
    $
    66
    
    
    $
    54
    
    
    $
    193
    
    
    $
    174Stock options granted under the Incentive Plan
    
    
    
    
    
    
    68
    
    
    
    90
    
    
    
    204Restricted stock granted to directors
    
    
    103
    
    
    
    80
    
    
    
    350
    
    
    
    321Restricted stock granted to employees
    
    
    43
    
    
    
    183
    
    
    
    455
    
    
    
    625Restricted stock units granted to employees
    
    
    103
    
    
    
    69
    
    
    
    281
    
    
    
    358Stock performance awards granted to executive officers
    
    
    221
    
    
    
    267
    
    
    
    662
    
    
    
    802Totals
    
    $
    536
    
    
    $
    721
    
    
    $
    2,031
    
    
    $
    2,484
 17




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##### Table of Contents



Short-term and Long-term Borrowings
 Short-term Debt
   Long-term Debt
 18




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##### Table of Contents



Class B Stock Options of Subsidiary
  19




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##### Table of Contents



Pension Plan and Other Postretirement Benefits
 Pension Plan
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Service costbenefit earned during the period
    
    $
    1,102
    
    
    $
    1,373
    
    
    $
    3,628
    
    
    $
    3,793Interest cost on projected benefit obligation
    
    
    2,626
    
    
    
    2,738
    
    
    
    8,092
    
    
    
    7,826Expected return on assets
    
    
    (3,265
    )
    
    
    (3,086
    )
    
    
    (9,711
    )
    
    
    (9,216
    )Amortization of prior-service cost
    
    
    187
    
    
    
    185
    
    
    
    557
    
    
    
    557Amortization of net actuarial loss
    
    
    200
    
    
    
    627
    
    
    
    818
    
    
    
    1,383Net periodic pension cost
    
    $
    850
    
    
    $
    1,837
    
    
    $
    3,384
    
    
    $
    4,343
  Executive Survivor and Supplemental Retirement Plan
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Service costbenefit earned during the period
    
    $
    157
    
    
    $
    107
    
    
    $
    470
    
    
    $
    320Interest cost on projected benefit obligation
    
    
    362
    
    
    
    325
    
    
    
    1,087
    
    
    
    977Amortization of prior-service cost
    
    
    17
    
    
    
    18
    
    
    
    51
    
    
    
    53Recognized net actuarial loss
    
    
    135
    
    
    
    118
    
    
    
    405
    
    
    
    354Net periodic pension cost
    
    $
    671
    
    
    $
    568
    
    
    $
    2,013
    
    
    $
    1,704
 Postretirement Benefits
 Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Service costbenefit earned during the period
    
    $
    194
    
    
    $
    321
    
    
    $
    824
    
    
    $
    989Interest cost on projected benefit obligation
    
    
    528
    
    
    
    643
    
    
    
    1,924
    
    
    
    1,917Amortization of transition obligation
    
    
    187
    
    
    
    187
    
    
    
    561
    
    
    
    561Amortization of prior-service cost
    
    
    (52
    )
    
    
    (77
    )
    
    
    (155
    )
    
    
    (229
    )Amortization of net actuarial loss
    
    
    (125
    )
    
    
    151
    
    
    
    133
    
    
    
    417Effect of Medicare Part D expected subsidy
    
    
    (105
    )
    
    
    (571
    )
    
    
    (925
    )
    
    
    (1,157
    )Net periodic postretirement benefit cost
    
    $
    627
    
    
    $
    654
    
    
    $
    2,362
    
    
    $
    2,498
 20




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##### Table of Contents



Discontinued Operations
 Accounting for the Impairment or Disposal of
Long-Lived Assets,
 Nine months ended(in thousands)
    
    September 30, 2006Operating revenues
    
    $
    28,234Income before income taxes
    
    
    54Gain on Disposition  pretax
    
    
    560Income tax expense
    
    
    252
  Subsequent Events
   21




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##### Table of Contents



Managements Discussion and Analysis of Financial Condition and Results of Operations
 RESULTS OF OPERATIONS
 Comparison of the Three Months Ended September 30, 2007 and 2006
    Three months ended
    
    Three months ended(in thousands)
    
    September 30, 2007
    
    September 30, 2006Operating revenues:Electric
    
    $
    59
    
    
    $
    72Nonelectric
    
    
    1,151
    
    
    
    845Cost of goods sold
    
    
    417
    
    
    
    359Other nonelectric expenses
    
    
    793
    
    
    
    558
 22




---



##### Table of Contents



Electric
 Three months endedSeptember 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeRetail sales revenues
    
    $
    59,896
    
    
    $
    59,694
    
    
    $
    202
    
    
    
    0.3Wholesale revenues
    
    
    6,779
    
    
    
    6,099
    
    
    
    680
    
    
    
    11.1Net marked-to-market loss
    
    
    (751
    )
    
    
    (207
    )
    
    
    (544
    )
    
    
    (262.8
    )Other revenues
    
    
    6,186
    
    
    
    5,620
    
    
    
    566
    
    
    
    10.1Total operating revenues
    
    $
    72,110
    
    
    $
    71,206
    
    
    $
    904
    
    
    
    1.3Production fuel
    
    
    16,994
    
    
    
    15,846
    
    
    
    1,148
    
    
    
    7.2Purchased power  system use
    
    
    6,499
    
    
    
    8,590
    
    
    
    (2,091
    )
    
    
    (24.3
    )Other operation and maintenance expenses
    
    
    27,212
    
    
    
    26,433
    
    
    
    779
    
    
    
    2.9Depreciation and amortization
    
    
    6,581
    
    
    
    6,430
    
    
    
    151
    
    
    
    2.3Property taxes
    
    
    2,538
    
    
    
    2,260
    
    
    
    278
    
    
    
    12.3Operating income
    
    $
    12,286
    
    
    $
    11,647
    
    
    $
    639
    
    
    
    5.5
      23




---



##### Table of Contents



Plastics
 Three months endedSeptember 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    36,975
    
    
    $
    45,941
    
    
    $
    (8,966
    )
    
    
    (19.5
    )Cost of goods sold
    
    
    31,910
    
    
    
    34,172
    
    
    
    (2,262
    )
    
    
    (6.6
    )Operating expenses
    
    
    1,781
    
    
    
    3,284
    
    
    
    (1,503
    )
    
    
    (45.8
    )Depreciation and amortization
    
    
    769
    
    
    
    693
    
    
    
    76
    
    
    
    11.0Operating income
    
    $
    2,515
    
    
    $
    7,792
    
    
    $
    (5,277
    )
    
    
    (67.7
    )
  Manufacturing
 Three months endedSeptember 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    95,330
    
    
    $
    76,667
    
    
    $
    18,663
    
    
    
    24.3Cost of goods sold
    
    
    75,236
    
    
    
    61,315
    
    
    
    13,921
    
    
    
    22.7Operating expenses
    
    
    8,800
    
    
    
    6,563
    
    
    
    2,237
    
    
    
    34.1Depreciation and amortization
    
    
    3,341
    
    
    
    2,845
    
    
    
    496
    
    
    
    17.4Operating income
    
    $
    7,953
    
    
    $
    5,944
    
    
    $
    2,009
    
    
    
    33.8
  
    
    Revenues at DMI Industries, Inc. (DMI) increased $15.0 million as a result of increased
production levels and productivity gains at both its West Fargo and Ft. Erie plants. The
first phase of a two-phase expansion project at the Ft. Erie plant began operations in
April 2007.
    
    Revenues at ShoreMaster, Inc. (ShoreMaster) increased $2.6 million due to increased
sales of commercial products. The Aviva Sports product line, acquired by ShoreMaster in
February 2007, contributed $0.5 million to the increase in revenues.
    
    Revenues at BTD Manufacturing, Inc. (BTD) increased $0.6 million between the quarters
due to $1.5 million in revenues from Pro Engineering, LLC (Pro Engineering), a metal parts
stamping business acquired in May 2007, partially offset by a reduction in unit sales at
BTDs main manufacturing facility.
    
    Revenues at T.O. Plastics, Inc. (T.O. Plastics) increased $0.5 million as a result of
increases in product sales volumes between the quarters.
 24




---



##### Table of Contents




    
    Cost of goods sold at DMI increased $12.2 million between the quarters, including
$10.3 million in material cost increases. The increase in cost of goods sold is directly
related to DMIs increase in production and sales activity at both its West Fargo and Ft.
Erie plants.
    
    Cost of goods sold at ShoreMaster increased $1.5 million between the quarters as a
result of increases in material and labor costs directly related to the increase in
commercial product sales and the acquisition of the Aviva Sports product line in February
2007.
    
    Cost of goods sold at BTD increased $0.5 million between the quarters primarily as a
result of increases in subcontractor costs and the acquisition of Pro Engineering in May
2007.
    
    Cost of goods sold at T.O. Plastics decreased $0.1 million between the quarters.
  
    
    Operating expenses at DMI increased $0.9 million as a result of increases in labor and
benefit expenses, professional services and sales and promotional expenses including $0.3
million in pre-production start-up costs at DMIs new plant site in Tulsa, Oklahoma,
expected to be operational in 2008.
    
    Operating expenses at ShoreMaster increased $0.8 million as a result of increases in
professional service expenses,
and in labor and sales expenses related to the acquisition of the Aviva Sports product line
in February 2007.
    
    Operating expenses at BTD increased $0.5 million between the quarters, reflecting
increases in labor and benefit expenses and a $0.1 million gain on the sale of equipment in
the third quarter of 2006.
    
    Operating expenses at T.O. Plastics increased by $0.1 million between the quarters.
  Health Services
 Three months endedSeptember 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    31,360
    
    
    $
    35,432
    
    
    $
    (4,072
    )
    
    
    (11.5
    )Cost of goods sold
    
    
    24,193
    
    
    
    28,100
    
    
    
    (3,907
    )
    
    
    (13.9
    )Operating expenses
    
    
    5,816
    
    
    
    5,686
    
    
    
    130
    
    
    
    2.3Depreciation and amortization
    
    
    1,003
    
    
    
    897
    
    
    
    106
    
    
    
    11.8Operating income
    
    $
    348
    
    
    $
    749
    
    
    $
    (401
    )
    
    
    (53.5
    )
  25




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##### Table of Contents



Food Ingredient Processing
 Three months endedSeptember 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    15,714
    
    
    $
    11,474
    
    
    $
    4,240
    
    
    
    37.0Cost of goods sold
    
    
    11,926
    
    
    
    11,409
    
    
    
    517
    
    
    
    4.5Operating expenses
    
    
    792
    
    
    
    728
    
    
    
    64
    
    
    
    8.8Depreciation and amortization
    
    
    1,017
    
    
    
    939
    
    
    
    78
    
    
    
    8.3Operating income (loss)
    
    $
    1,979
    
    
    $
    (1,602
    )
    
    $
    3,581
    
    
    
    223.5
  Other Business Operations
 Three months endedSeptember 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    51,956
    
    
    $
    40,739
    
    
    $
    11,217
    
    
    
    27.5Cost of goods sold
    
    
    37,021
    
    
    
    26,511
    
    
    
    10,510
    
    
    
    39.6Operating expenses
    
    
    13,814
    
    
    
    13,840
    
    
    
    (26
    )
    
    
    (0.2
    )Depreciation and amortization
    
    
    655
    
    
    
    748
    
    
    
    (93
    )
    
    
    (12.4
    )Operating income (loss)
    
    $
    466
    
    
    $
    (360
    )
    
    $
    826
    
    
    
    229.4
   
    
    Revenues at Midwest Construction Services, Inc. (MCS) increased $10.4 million between
the quarters as a result of an increase in volume of jobs in progress.
    
    Revenues at Foley Company increased $1.0 million in the third quarter of 2007 compared
to the third quarter of 2006 due to an increase in the volume of jobs in progress between
the quarters.
    
    Revenues at E.W. Wylie Corporation (Wylie) decreased $0.4 million between the quarters.
Revenues from company-operated trucks increased $0.6 million due to a 19.2% increase in
miles driven while revenues from owner-operated trucks decreased $0.9 million due to a
19.8% decrease in miles driven. Brokerage revenues decreased $0.1 million.
 26




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##### Table of Contents




    
    Cost of goods sold at MCS increased $10.0 million due to increases in material, labor
and subcontractor costs related to the increase in volume of work performed between the
quarters.
    
    Cost of goods sold at Foley Company increased $0.5 million due to labor and benefit cost
increases as a result of the increased volume of work performed between the quarters.
 Income Taxes  Continuing Operations
  Comparison of the Nine Months Ended September 30, 2007 and 2006
   Nine months ended
    
    Nine months ended(in thousands)
    
    September 30, 2007
    
    September 30, 2006Operating revenues:Electric
    
    $
    259
    
    
    $
    246Nonelectric
    
    
    3,262
    
    
    
    2,468Cost of goods sold
    
    
    1,173
    
    
    
    1,127Other nonelectric expenses
    
    
    2,348
    
    
    
    1,587
 27




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##### Table of Contents



Electric
 Nine months endedSeptember 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeRetail sales revenues
    
    $
    196,573
    
    
    $
    194,858
    
    
    $
    1,715
    
    
    
    0.9Wholesale revenues
    
    
    17,687
    
    
    
    18,395
    
    
    
    (708
    )
    
    
    (3.8
    )Net marked-to-market gain
    
    
    2,647
    
    
    
    144
    
    
    
    2,503
    
    
    
    1,738.2Other revenues
    
    
    15,755
    
    
    
    13,911
    
    
    
    1,844
    
    
    
    13.3Total operating revenues
    
    $
    232,662
    
    
    $
    227,308
    
    
    $
    5,354
    
    
    
    2.4Production fuel
    
    
    47,496
    
    
    
    42,108
    
    
    
    5,388
    
    
    
    12.8Purchased power  system use
    
    
    43,531
    
    
    
    44,990
    
    
    
    (1,459
    )
    
    
    (3.2
    )Other operation and maintenance expenses
    
    
    80,738
    
    
    
    77,889
    
    
    
    2,849
    
    
    
    3.7Depreciation and amortization
    
    
    19,501
    
    
    
    19,234
    
    
    
    267
    
    
    
    1.4Property taxes
    
    
    7,591
    
    
    
    7,429
    
    
    
    162
    
    
    
    2.2Operating income
    
    $
    33,805
    
    
    $
    35,658
    
    
    $
    (1,853
    )
    
    
    (5.2
    )
     28




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##### Table of Contents



Plastics
 Nine months endedSeptember 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    114,319
    
    
    $
    136,731
    
    
    $
    (22,412
    )
    
    
    (16.4
    )Cost of goods sold
    
    
    93,565
    
    
    
    103,794
    
    
    
    (10,229
    )
    
    
    (9.9
    )Operating expenses
    
    
    5,073
    
    
    
    6,790
    
    
    
    (1,717
    )
    
    
    (25.3
    )Depreciation and amortization
    
    
    2,298
    
    
    
    2,101
    
    
    
    197
    
    
    
    9.4Operating income
    
    $
    13,383
    
    
    $
    24,046
    
    
    $
    (10,663
    )
    
    
    (44.3
    )
  29




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##### Table of Contents



Manufacturing
 Nine months endedSeptember 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    286,341
    
    
    $
    226,555
    
    
    $
    59,786
    
    
    
    26.4Cost of goods sold
    
    
    225,670
    
    
    
    178,970
    
    
    
    46,700
    
    
    
    26.1Operating expenses
    
    
    25,839
    
    
    
    19,668
    
    
    
    6,171
    
    
    
    31.4Depreciation and amortization
    
    
    9,734
    
    
    
    8,124
    
    
    
    1,610
    
    
    
    19.8Operating income
    
    $
    25,098
    
    
    $
    19,793
    
    
    $
    5,305
    
    
    
    26.8
  
    
    Revenues at DMI increased $46.9 million as a result of increased production levels at
the Ft. Erie plant compared with initial start-up levels beginning in May 2006,
contributing $22.4 million to the increase in revenues, and increased productivity at the
West Fargo plant.
    
    Revenues at ShoreMaster increased $8.9 million between the periods due to increased
production and sales of commercial products and higher residential sales during the peak
selling season. The Aviva Sports product line, acquired by ShoreMaster in February 2007,
contributed $2.9 million to the increase in revenues.
    
    Revenues at BTD increased $2.0 million between the periods mainly as a result of the May
2007 acquisition of Pro Engineering, which contributed $2.5 million to 2007 revenues,
partially offset by reduced unit sales at BTDs other manufacturing facilities.
    
    Revenues at T.O. Plastics increased $1.9 million between the periods as a result of an
18.7% increase in unit sales partially offset by an 11.7% decrease in the average price per
unit sold, which also reflects a change in the level of sales of lower-priced products
relative to higher-priced products between the periods.
  
    
    Cost of goods sold at DMI increased $38.3 million between the periods, including $29.8
million in material costs increases and $5.9 million in labor and benefit cost 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 $5.1 million between the periods as a
result of increases in material and labor costs directly related to the increase in
commercial and residential product sales and the acquisition of the Aviva Sports product
line in February 2007 which contributed $2.2 million to cost of goods sold in 2007.
    
    Cost of goods sold at BTD increased $1.4 million between the periods as a result of
increases in material and subcontractor costs mainly related to the acquisition of Pro
Engineering in May 2007, partially offset by a decrease in costs at BTDs other
manufacturing facilities related to a decrease in unit sales between the periods.
    
    Cost of goods sold at T.O. Plastics increased $1.9 million, including $1.1 million in
material cost increases and $0.7 million in increased manufacturing overhead costs
related to increased production.
 30




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
    
    Operating expenses at DMI increased $2.4 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. DMIs 2007 operating expenses include $0.4
million in pre-production start-up costs at its new Tulsa, Oklahoma plant.
    
    Operating expenses at ShoreMaster increased $2.4 million as a result of increases in
labor, benefit and professional service, and sales expenses, of which $1.1 million is
related to the Aviva Sports product line acquired in February 2007.
    
    Operating expenses at BTD increased $1.0 million between the periods as a result of
increases in labor and professional service expenses mainly related to the acquisition of
Pro Engineering in May 2007.
    
    Operating expenses at T.O. Plastics increased by $0.4 million between the periods mainly
as a result of increases in labor and contracted service expenditures.
   Health Services
 Nine months endedSeptember 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    96,775
    
    
    $
    100,341
    
    
    $
    (3,566
    )
    
    
    (3.6
    )Cost of goods sold
    
    
    72,425
    
    
    
    78,147
    
    
    
    (5,722
    )
    
    
    (7.3
    )Operating expenses
    
    
    17,733
    
    
    
    16,768
    
    
    
    965
    
    
    
    5.8Depreciation and amortization
    
    
    2,986
    
    
    
    2,733
    
    
    
    253
    
    
    
    9.3Operating income
    
    $
    3,631
    
    
    $
    2,693
    
    
    $
    938
    
    
    
    34.8
  31




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Food Ingredient Processing
 Nine months endedSeptember 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    53,612
    
    
    $
    30,635
    
    
    $
    22,977
    
    
    
    75.0Cost of goods sold
    
    
    43,229
    
    
    
    30,419
    
    
    
    12,810
    
    
    
    42.1Operating expenses
    
    
    2,334
    
    
    
    2,203
    
    
    
    131
    
    
    
    5.9Depreciation and amortization
    
    
    2,985
    
    
    
    2,805
    
    
    
    180
    
    
    
    6.4Operating income (loss)
    
    $
    5,064
    
    
    $
    (4,792
    )
    
    $
    9,856
    
    
    
    205.7
  Other Business Operations
 Nine months endedSeptember 30,
    
    
    
    
    
    
    %(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    129,012
    
    
    $
    99,397
    
    
    $
    29,615
    
    
    
    29.8Cost of goods sold
    
    
    87,785
    
    
    
    59,702
    
    
    
    28,083
    
    
    
    47.0Operating expenses
    
    
    43,714
    
    
    
    41,255
    
    
    
    2,459
    
    
    
    6.0Depreciation and amortization
    
    
    1,902
    
    
    
    2,158
    
    
    
    (256
    )
    
    
    (11.9
    )Operating loss
    
    $
    (4,389
    )
    
    $
    (3,718
    )
    
    $
    (671
    )
    
    
    (18.0
    )
   
    
    Revenues at MCS increased $18.1 million between the periods as a result of an increase
in volume of jobs in progress.
    
    Revenues at Foley Company increased $10.6 million between the periods due to an increase
in the volume of jobs in progress.
    
    Revenues at Wylie increased $0.2 million between the periods mainly due to a 3.8%
increase in miles driven by owner-operated and company-operated trucks. Miles driven by
company-operated trucks increased 9.9% and miles driven by owner-operated trucks decreased
5.0% between the periods.
 32




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##### Table of Contents




    
    Cost of goods sold at MCS increased $17.4 million mainly due to increases in material,
subcontractor and labor costs related to the increase in volume of jobs in progress between
the periods.
    
    Cost of goods sold at Foley Company increased $10.8 million mainly in the areas of
subcontractor and labor costs as a result of the increased volume of work performed between
the periods.
  
    
    Corporate operating expenses in this segment increased $1.0 million as a result of
higher labor and equipment rental costs.
    
    Operating expenses at Wylie increased $1.0 million between the periods, mainly as a
result of increases in fuel, equipment rental and labor expenses, partly offset by a
decrease in subcontractor costs related to the decrease in miles driven by owner-operated
trucks. Wylies depreciation expense decreased $0.4 million between the periods as a result
of leasing rather than buying replacement equipment.
    
    Operating expenses at MCS increased $0.2 million and its depreciation expense increased
$0.1 million between the periods.
    
    Operating expenses at Foley Company increased $0.2 million between the periods.
 Income Taxes  Continuing Operations
  Discontinued Operations
 Accounting for the Impairment or Disposal of Long-Lived Assets,
 Nine months ended(in thousands)
    
    September 30, 2006Income before income taxes
    
    $
    54Gain on disposition  pretax
    
    
    560Income tax expense
    
    
    252Net income
    
    $
    362
 33




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##### Table of Contents



2007 EXPECTATIONS
   
    
    We expect electric segment earnings in the range of $19.0 million to $24.0 million in
2007, which is consistent with 2007 prior guidance. A major maintenance shutdown of Big
Stone Plant planned for the third quarter of 2007 was rescheduled for the fourth quarter of
2007, resulting in a shift in anticipated expenditures and plant availability between the
quarters.
    
    We expect our plastics segments earnings performance to be in the range of $6.0 million
to $8.5 million in 2007, which is consistent with 2007 prior guidance.
    
    We expect continued enhancements in productivity and capacity utilization and strong
backlogs to result in increased net income in our manufacturing segment in 2007.
    
    We expect flat to slightly declining earnings in our health services segment in 2007
primarily due to lower sales at the diagnostic imaging services company. This is a change
from prior guidance of moderate net income growth from this segment in 2007.
    
    We expect our food ingredient processing business (IPH) to generate net income in the
range of $3.0 million to $4.5 million in 2007, a change from prior guidance of $2.5 million
to $4.5 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. We expect our
construction companies to have a strong 2007 given performance in the first nine months of
2007 and current backlogs.
 FINANCIAL POSITION
   34




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36




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MoodysInvestors
    
    StandardService
    
    & PoorsSenior unsecured debt
    
    A3
    
    BBB+Preferred stock
    
    Baa2
    
    BBB-Outlook
    
    Negative
    
    Negative
    37




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##### Table of Contents



(in millions)
    
    2007
    
    
    
    2007-2011Electric
    
    $
    125
    
    
    
    $
    680Plastics
    
    
    5
    
    
    
    
    19Manufacturing
    
    
    38
    
    
    
    
    78Health services
    
    
    4
    
    
    
    
    12Food ingredient processing
    
    
    1
    
    
    
    
    17Other business operations
    
    
    4
    
    
    
    
    9Total
    
    $
    177
    
    
    
    $
    815
   38




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##### Table of Contents




    
    The increase in Long-term debt obligations is $90.0 million in the years beyond 2011.
    
    The increases in Interest on long-term debt obligations are $0.2 million in 2007,
$10.5 million in 2008 and 2009 combined, $11.6 million in 2010 and 2011 combined and $109.9
million in the years beyond 2011.
    
    The increases in operating lease obligations will be $0.4 million in 2007, $2.1
million in 2008 and 2009 combined and $0.7 million in 2010.
    
    The increases in capacity and energy requirements are estimated to be $5.4 million in
2008 and 2009 combined, $5.4 million in 2010 and 2011 combined and $56.7 million in the
years beyond 2011. This power purchase agreement is for energy only and includes no
capacity payment requirements.
  Critical Accounting Policies Involving Significant Estimates
   39




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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 our electric segment will be impacted by the outcome of a rate
case filed in Minnesota on October 1, 2007, requesting an overall increase in Minnesota rates
of 6.66%. The filing includes a request for an interim rate increase of 5.41% beginning
November 30, 2007. If approved by the Minnesota Public Utilities Commission (MPUC), interim
rates will remain in effect for all Minnesota customers until the MPUC makes a final
determination on the electric utilitys request, which is expected by August 1, 2008. If
final rates are lower than interim rates, the electric utility will refund Minnesota
customers the difference with interest.
 40




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##### Table of Contents




    
    Certain costs currently included in the FCA in retail rates may be excluded from
recovery through the FCA but may be subject to recovery through rates established in a general
rate case.Further, all, or portions of, gross margins on asset-based wholesale
electric sales may become subject to refund through the FCA as a result of a general rate case.
    
    Weather conditions or changes in weather patterns can adversely affect our operations and
revenues.
    
    Electric wholesale margins could be further reduced as the MISO market becomes more
efficient.
    
    Electric wholesale trading margins could be reduced or eliminated by losses due to trading
activities.
    
    Our electric generating facilities are subject to operational risks that could result in
unscheduled plant outages, unanticipated operation and maintenance expenses and increased
power purchase costs.
    
    Wholesale sales of electricity from excess generation could be affected by reductions in
coal shipments to the Big Stone and Hoot Lake plants due to supply constraints or rail
transportation problems beyond our control.
    
    Our electric segment has capitalized $8.1 million in costs related to the planned
construction of a second electric generating unit at our Big Stone Plant site as of September
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.
    
    Existing or new laws or regulations addressing climate change or reductions of greenhouse
gas emissions by federal or state authorities, such as mandated levels of renewable
generation or mandatory reductions in carbon dioxide (CO2) emission levels or
taxes on CO2 emissions, that result in increases in electric service costs could
negatively impact our net income, financial position and operating cash flows if such costs
cannot be recovered through rates granted by ratemaking authorities in the states where the
electric utility provides service or through increased market prices for electricity.
    
    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.
 41




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##### Table of Contents




    
    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.
 
 Quantitative and Qualitative Disclosures about Market Risk
     42




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Megawatt Daily
   September 30,(in thousands)
    
    2007Current asset  marked-to-market gain
    
    $
    3,734Regulatory asset  deferred marked-to-market loss
    
    
    451Current liability  marked-to-market loss
    
    
    (4,190
    )Net fair value of marked-to-market gas contracts
    
    $
    (5
    )
 Year-to-dateSeptember 30,(in thousands)
    
    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
    
    
    (5
    )Net fair value end of period
    
    $
    (5
    )
 43




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##### Table of Contents



4th Quarter
    
    1st Quarter(in thousands)
    
    2007
    
    2008
    
    TotalNet (loss) gain
    
    $
    (418
    )
    
    $
    413
    
    
    $
    (5
    )
    
 Controls and Procedures
   44




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Legal Proceedings
  
 Risk Factors
  Federal and state environmental regulation could require us to incur substantial capital
expenditures and increased operating costs.
   2 2
 45




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##### Table of Contents



Actions by the regulators of our electric operations could result in rate reductions, lower
revenues and earnings or delays in recovering capital expenditures.
    
 Exhibits
 4.1
    
    Note Purchase Agreement, dated as of August 20, 2007, between Otter Tail
Corporation and each of Deutsche Bank AG New York Branch, Teachers Insurance and
Annuity Association of America, Provident Life and Accident Insurance Company, The
Guardian Life Insurance Company of America, Thrivent Financial For Lutherans, Fort
Dearborn Life Insurance Company, The Catholic Aid Association, Great West Insurance
Company, American Republic Insurance Company, Cincinnati Insurance Company, Colorado
Bankers Life Insurance Company, Navy Mutual Aid Association and National Guardian Life
Insurance Company (incorporated by reference to Exhibit 4.1 to Otter Tail Corporations
Form 8-K filed August 23, 2007)4.2
    
    Second Amendment to Credit Agreement dated as of August 31, 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 Otter Tail Corporations Form 8-K filed
September 6, 2007)
 46




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##### Table of Contents



10.1
    
    Amendment No. 5 to Participation Agreement, dated as of September 1, 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 Otter Tail Corporations Form 8-K
filed September 12, 2007)10.2
    
    Amendment No. 6 to Participation Agreement, dated as of September 20, 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 Otter Tail Corporations Form 8-K
filed September 24, 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
 
 SIGNATURES
   By:
    
    /s/ Kevin G. Moug

      Kevin G. MougChief Financial Officer and Treasurer(Chief Financial Officer/Authorized Officer)
 November 9, 2007
 47




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##### Table of Contents



EXHIBIT INDEX
 Exhibit Number
    
    Description4.1
    
    Note Purchase Agreement, dated as of August 20, 2007, between Otter Tail
Corporation and each of Deutsche Bank AG New York Branch, Teachers Insurance and Annuity
Association of America, Provident Life and Accident Insurance Company, The Guardian Life
Insurance Company of America, Thrivent Financial For Lutherans, Fort Dearborn Life
Insurance Company, The Catholic Aid Association, Great West Insurance Company, American
Republic Insurance Company, Cincinnati Insurance Company, Colorado Bankers Life Insurance
Company, Navy Mutual Aid Association and National Guardian Life Insurance Company
(incorporated by reference to Exhibit 4.1 to Otter Tail Corporations Form 8-K filed
August 23, 2007)4.2
    
    Second Amendment to Credit Agreement dated as of August 31, 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 Otter Tail Corporations Form 8-K filed September 6, 2007)10.1
    
    Amendment No. 5 to Participation Agreement, dated as of September 1, 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 Otter Tail Corporations Form 8-K filed September 12,
2007)10.2
    
    Amendment No. 6 to Participation Agreement, dated as of September 20, 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 Otter Tail Corporations Form 8-K filed September 24,
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