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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended
    
    September 30, 2003


ORo
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the transition period from  to


Commission file number
    
    0-368


OTTER TAIL CORPORATION
(Exact name of registrant as specified in its charter)


Minnesota
    
    41-0462685(State or other jurisdiction ofincorporation or organization)
    
    (I.R.S. EmployerIdentification No.)


215 South Cascade Street, Box 496, Fergus Falls, Minnesota
    
    56538-0496(Address of principal executive offices)
    
    (Zip Code)


866-410-8780
(Registrants telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report.)


Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past
90 days.     YES X     NO

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2
of the Exchange
Act).     YES X     NO

Indicate the number of shares outstanding of each of the issuers classes of
Common Stock, as of the latest practicable date:

October 31, 2003  25,717,832 Common Shares ($5 par value)





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|                                                  |                                                                                               |                                                                                                         |  |  |  |  |  | 
|------------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  |  |  |  |  | 
|Part I. FINANCIAL INFORMATION                    
|                                                  | Item 1. Financial Statements                                                                 
|                                                  |                                                                                               | Consolidated Balance Sheets  September 30, 2003 and December 31, 2002 (Unaudited)                     
|                                                  |                                                                                               | Consolidated Statements of Income  Three and Nine Months Ended September 30, 2003 and 2002 (Unaudited)
|                                                  |                                                                                               | Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2003 and 2002 (Unaudited)      
|                                                  |                                                                                               | Notes to Consolidated Financial Statements (Unaudited)                                                 
|                                                  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                                  | Item 3. Quantitative and Qualitative Disclosures About Market Risk                           
|                                                  | Item 4. Controls and Procedures                                                              
|PART II. OTHER INFORMATION                       
|                                                  | Item 6. Exhibits and Reports on Form 8-K                                                     
|SIGNATURES                                       
|EXHIBIT INDEX                                    
|EX-4.1 Third Amendment to Credit Agreement       
|EX-10.1 Supplemental Agreement No. 4             
|EX-10.2 Amendment to Coyote Station Agreement    
|EX-31.1 Certification of CEO Pursuant to Sec. 302
|EX-31.2 Certification of CFO Pursuant to Sec. 302
|EX-32.1 Certification of CEO Pursuant to Sec. 906
|EX-32.2 Certification of CFO Pursuant to Sec. 906



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OTTER TAIL CORPORATION

INDEX

Part I.
    
    Financial Information
    
    Page No.Item 1.
    
    
    Financial StatementsConsolidated Balance Sheets  September 30, 2003
and December 31, 2002 (Unaudited)
    
    2 & 3Consolidated Statements of Income  Three and Nine
Months
Ended September 30, 2003 and 2002 (Unaudited)
    
    4Consolidated Statements of Cash Flows  Nine Months
Ended September 30, 2003 and 2002 (Unaudited)
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    6-12Item 2.
    
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    13-26Item 3.
    
    
    Quantitative and Qualitative Disclosures about
Market Risk
    
    27-29Item 4.
    
    
    Controls and Procedures
    
    29Part II.
    
    Other InformationItem 6.
    
    
    Exhibits and Reports on Form 8-K
    
    30Signatures
    
    30






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PART I. FINANCIAL INFORMATION




Item 1. Financial Statements




Otter Tail Corporation
Consolidated Balance Sheets
(Unaudited)-Assets-

September 30,
    
    
    December 31,2003
    
    
    2002(Thousands of dollars)Current assetsCash and cash equivalents
    
    $
    
    
    
    $
    9,937Accounts receivable:Tradenet
    
    
    108,018
    
    
    
    81,670Other
    
    
    9,543
    
    
    
    1,466Inventories
    
    
    56,158
    
    
    
    44,154Deferred income taxes
    
    
    4,492
    
    
    
    4,487Accrued utility revenues
    
    
    8,083
    
    
    
    11,633Costs and estimated earnings in excess of billings
    
    
    16,873
    
    
    
    5,529Other
    
    
    17,935
    
    
    
    5,337Total current assets
    
    
    221,102
    
    
    
    164,213Investments and other assets
    
    
    35,963
    
    
    
    36,135Goodwillnet
    
    
    66,431
    
    
    
    64,557Other intangiblesnet
    
    
    5,626
    
    
    
    5,592Deferred debitsUnamortized debt expense and reacquisition premiums
    
    
    8,310
    
    
    
    8,895Regulatory assets
    
    
    12,269
    
    
    
    10,238Other
    
    
    912
    
    
    
    1,220Total deferred debits
    
    
    21,491
    
    
    
    20,353PlantElectric plant in service
    
    
    866,173
    
    
    
    835,382Nonelectric operations
    
    
    187,947
    
    
    
    178,656Total plant
    
    
    1,054,120
    
    
    
    1,014,038Less accumulated depreciation and amortization
    
    
    470,069
    
    
    
    467,759Plantnet of accumulated depreciation and amortization
    
    
    584,051
    
    
    
    546,279Construction work in progress
    
    
    21,576
    
    
    
    41,607Net plant
    
    
    605,627
    
    
    
    587,886Total
    
    $
    956,240
    
    
    $
    878,736


See accompanying notes to consolidated financial statements

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Otter Tail Corporation
Consolidated Balance Sheets
(Unaudited)-Liabilities-

September 30,
    
    
    December 31,2003
    
    
    2002(Thousands of dollars)Current liabilitiesShort-term debt
    
    $
    37,251
    
    
    $
    30,000Current maturities of long-term debt
    
    
    9,347
    
    
    
    7,690Accounts payable
    
    
    66,431
    
    
    
    52,430Accrued salaries and wages
    
    
    13,813
    
    
    
    18,194Accrued federal and state income taxes
    
    
    6,317
    
    
    
    Other accrued taxes
    
    
    9,271
    
    
    
    10,150Other accrued liabilities
    
    
    9,761
    
    
    
    5,760Total current liabilities
    
    
    152,191
    
    
    
    124,224Pensions benefit liability
    
    
    22,844
    
    
    
    20,484Other postretirement benefits liability
    
    
    22,735
    
    
    
    20,382Other noncurrent liabilities
    
    
    10,764
    
    
    
    7,840Deferred creditsDeferred income taxes
    
    
    100,646
    
    
    
    94,147Deferred investment tax credit
    
    
    11,918
    
    
    
    12,782Regulatory liabilities
    
    
    25,839
    
    
    
    9,133Other
    
    
    1,959
    
    
    
    2,550Total deferred credits
    
    
    140,362
    
    
    
    118,612CapitalizationLong-term debt, net of current maturities
    
    
    268,436
    
    
    
    258,229Cumulative preferred shares
authorized 1,500,000 shares without par value;
outstanding 2003 and 2002  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 2003  25,717,067 and 2002  25,592,160
    
    
    128,585
    
    
    
    127,961Premium on common shares
    
    
    26,293
    
    
    
    24,135Unearned compensation
    
    
    (3,623
    )
    
    
    (1,946
    )Retained earnings
    
    
    184,223
    
    
    
    175,304Accumulated other comprehensive loss
    
    
    (12,070
    )
    
    
    (11,989
    )Total common equity
    
    
    323,408
    
    
    
    313,465Total capitalization
    
    
    607,344
    
    
    
    587,194Total
    
    $
    956,240
    
    
    $
    878,736


See accompanying notes to consolidated financial statements

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Otter Tail Corporation
Consolidated Statements of Income
(Unaudited)

Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2003
    
    
    2002
    
    
    2003
    
    
    2002(In thousands, except share and per share amounts)Operating revenuesElectric
    
    $
    113,434
    
    
    $
    82,049
    
    
    $
    284,906
    
    
    $
    228,339Plastics
    
    
    23,414
    
    
    
    22,370
    
    
    
    65,996
    
    
    
    62,650Manufacturing
    
    
    49,793
    
    
    
    34,576
    
    
    
    133,350
    
    
    
    101,646Health services
    
    
    26,284
    
    
    
    23,019
    
    
    
    73,514
    
    
    
    67,771Other business operations
    
    
    27,777
    
    
    
    23,736
    
    
    
    79,604
    
    
    
    59,649Total operating revenues
    
    
    240,702
    
    
    
    185,750
    
    
    
    637,370
    
    
    
    520,055Operating expensesProduction fuel
    
    
    14,307
    
    
    
    11,107
    
    
    
    37,980
    
    
    
    33,569Purchased power
    
    
    45,103
    
    
    
    27,703
    
    
    
    108,878
    
    
    
    70,262Other electric operation and maintenance expenses
    
    
    24,010
    
    
    
    20,143
    
    
    
    65,383
    
    
    
    58,698Cost of goods sold
    
    
    101,319
    
    
    
    73,446
    
    
    
    269,697
    
    
    
    205,425Other nonelectric expenses
    
    
    19,398
    
    
    
    16,926
    
    
    
    58,117
    
    
    
    51,321Depreciation and amortization
    
    
    11,718
    
    
    
    10,880
    
    
    
    34,208
    
    
    
    31,570Property taxes
    
    
    2,553
    
    
    
    2,537
    
    
    
    7,591
    
    
    
    7,419Total operating expenses
    
    
    218,408
    
    
    
    162,742
    
    
    
    581,854
    
    
    
    458,264Operating income (loss)Electric
    
    
    20,863
    
    
    
    14,316
    
    
    
    45,614
    
    
    
    39,777Plastics
    
    
    (165
    )
    
    
    3,998
    
    
    
    4,461
    
    
    
    10,825Manufacturing
    
    
    49
    
    
    
    1,737
    
    
    
    6,454
    
    
    
    6,718Health services
    
    
    1,877
    
    
    
    1,499
    
    
    
    3,505
    
    
    
    6,549Other business operations
    
    
    (330
    )
    
    
    1,458
    
    
    
    (4,518
    )
    
    
    (2,078
    )Total operating income
    
    
    22,294
    
    
    
    23,008
    
    
    
    55,516
    
    
    
    61,791Other income  net
    
    
    25
    
    
    
    746
    
    
    
    1,288
    
    
    
    1,155Interest charges
    
    
    4,528
    
    
    
    4,518
    
    
    
    13,344
    
    
    
    13,189Income before income taxes
    
    
    17,791
    
    
    
    19,236
    
    
    
    43,460
    
    
    
    49,757Income taxes
    
    
    5,830
    
    
    
    6,354
    
    
    
    13,203
    
    
    
    16,256Net income
    
    
    11,961
    
    
    
    12,882
    
    
    
    30,257
    
    
    
    33,501Preferred dividend requirements
    
    
    184
    
    
    
    184
    
    
    
    552
    
    
    
    552Earnings available for common shares
    
    $
    11,777
    
    
    $
    12,698
    
    
    $
    29,705
    
    
    $
    32,949Basic earnings per common share
    
    $
    0.46
    
    
    $
    0.50
    
    
    $
    1.16
    
    
    $
    1.32Diluted earnings per common share
    
    $
    0.46
    
    
    $
    0.50
    
    
    $
    1.15
    
    
    $
    1.30Average number of common shares outstanding  basic
    
    
    25,708,199
    
    
    
    25,327,522
    
    
    
    25,657,717
    
    
    
    25,037,601Average number of common shares outstanding  diluted
    
    
    25,868,975
    
    
    
    25,496,519
    
    
    
    25,810,697
    
    
    
    25,269,011Dividends per common share
    
    $
    0.270
    
    
    $
    0.265
    
    
    $
    0.810
    
    
    $
    0.795


See accompanying notes to consolidated financial statements

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Otter Tail Corporation
Consolidated Statements of Cash Flows
(Unaudited)

Nine months endedSeptember 30,2003
    
    
    2002(Thousands of dollars)Cash flows from operating activitiesNet income
    
    $
    30,257
    
    
    $
    33,501Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    34,208
    
    
    
    31,570Deferred investment tax credit  net
    
    
    (864
    )
    
    
    (864
    )Deferred income taxes
    
    
    4,628
    
    
    
    (1,208
    )Change in deferred debits and other assets
    
    
    (1,587
    )
    
    
    (5,445
    )Change in noncurrent liabilities and deferred credits
    
    
    5,397
    
    
    
    2,972Allowance for equity (other) funds used during construction
    
    
    (1,214
    )
    
    
    (1,537
    )Unrealized gains on derivatives net of regulatory deferral
    
    
    (3,901
    )
    
    
    Other  net
    
    
    1,330
    
    
    
    1,258Cash provided by (used for) current assets & current liabilities:Change in receivables and inventories
    
    
    (45,985
    )
    
    
    (1,848
    )Change in other current assets
    
    
    (12,164
    )
    
    
    (7,870
    )Change in payables and other current liabilities
    
    
    8,463
    
    
    
    (5,547
    )Change in interest and income taxes payable
    
    
    9,230
    
    
    
    5,701Net cash provided by operating activities
    
    
    27,798
    
    
    
    50,683Cash flows from investing activitiesCapital expenditures
    
    
    (35,827
    )
    
    
    (54,358
    )Proceeds from disposal of noncurrent assets
    
    
    931
    
    
    
    1,042Acquisitions, net of cash acquired
    
    
    (1,815
    )
    
    
    (9,120
    )Sale of other investments
    
    
    1,129
    
    
    
    884Net cash used in investing activities
    
    
    (35,582
    )
    
    
    (61,552
    )Cash flows from financing activitiesNet borrowings under line of credit
    
    
    7,181
    
    
    
    Proceeds from employee stock plans
    
    
    829
    
    
    
    2,293Proceeds from issuance of long-term debt
    
    
    18,638
    
    
    
    65,072Payments for retirement of long-term debt
    
    
    (6,963
    )
    
    
    (28,291
    )Payments for debt issuance expenses
    
    
    (98
    )
    
    
    (2,348
    )Dividends paid and other distributions
    
    
    (21,740
    )
    
    
    (20,499
    )Net cash (used in) provided by financing activities
    
    
    (2,153
    )
    
    
    16,227Net change in cash and cash equivalents
    
    
    (9,937
    )
    
    
    5,358Cash and cash equivalents at beginning of period
    
    
    9,937
    
    
    
    11,378Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    16,736Supplemental cash flow informationCash paid for interest and income taxesInterest
    
    $
    10,347
    
    
    $
    11,283Income taxes
    
    $
    2,308
    
    
    $
    14,196


See accompanying notes to consolidated financial statements

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OTTER TAIL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

In the opinion of management, Otter Tail Corporation (the Company) has included
all adjustments (including normal recurring accruals) necessary for a fair
presentation of the consolidated results of operations for the periods
presented. The consolidated financial statements and notes thereto should be
read in conjunction with the consolidated financial statements and notes as of
and for the years ended December 31, 2002, 2001 and 2000 included in the
Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2002. Because of seasonal and other factors, the earnings for the three and
nine-month periods ended September 30, 2003, should not be taken as an
indication of earnings for all or any part of the balance of the year.

Acquisitions

The Company completed two acquisitions during the quarter ended June 30, 2003
and one additional acquisition in the quarter ended September 30, 2003, none of
which individually, or in aggregate, was material, in the health services
segment for approximately $1.9 million in cash. The company has recorded
$1,874,000 of goodwill related to these acquisitions. Disclosure of pro forma
information related to the results of operations of the acquired entities for
the periods presented in this report is not required due to immateriality.

Revenue Recognition

Due to the diverse business operations of the Company, revenue recognition
depends on the product produced or sold. The Company recognizes revenue when
the earnings process is complete, evidenced by an agreement with the customer,
there has been delivery and acceptance and the price is fixed and determinable.
In cases where significant obligations remain after delivery, revenue is
deferred until such obligations are fulfilled. Provisions for sale returns and
warranty costs are recorded at the time of sale based on historical information
and current trends.

For those operating businesses recognizing revenue when shipped, the operating
businesses have no further obligation to provide services related to such
product. The shipping terms used in these instances are FOB shipping point.

Some of the operating businesses enter into fixed-price construction contracts.
Revenues under these contracts are recognized on a percentage-of-completion
basis. The method used to determine the progress of completion is based on the
ratio of costs incurred to total estimated costs. The following summarizes
costs incurred, billings and estimated earnings recognized on uncompleted
contracts:

September 30,
    
    
    December 31,(in thousands)
    
    2003
    
    
    2002Costs incurred on uncompleted contracts
    
    $
    88,762
    
    
    $
    42,768Less billings to date
    
    
    (80,149
    )
    
    
    (44,572
    )Plus estimated earnings recognized
    
    
    7,343
    
    
    
    6,340$
    15,956
    
    
    $
    4,536


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The following amounts are included in the Companys consolidated balance
sheets. Billings in excess of costs and estimated earnings on uncompleted
contracts are included in Accounts Payable:

September 30,
    
    
    December 31,(in thousands)
    
    2003
    
    
    2002Costs and estimated earnings in excess of billings on uncompleted contracts
    
    $
    16,873
    
    
    $
    5,529Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    (917
    )
    
    
    (993
    )$
    15,956
    
    
    $
    4,536


The percent of revenue recognized under the percentage-of-completion method
compared to total consolidated revenues was 15.7% for the nine months ended
September 30, 2003 compared with 11.6% for the nine months ended September 30,
2002.

Stock-based compensation

The Company has elected to follow the accounting provisions of Accounting
Principle Board Opinion No. 25, Accounting for Stock Issued to Employees, for
stock-based compensation and to furnish the pro forma disclosures required
under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation.

Had compensation costs for the stock options issued been determined based on
estimated fair value at the award dates, as prescribed by SFAS No. 123, the
Companys net income for three and nine-month periods ended September 30, 2003
and September 30, 2002 would have decreased as presented in the table below.
This may not be representative of the pro forma effects for future periods if
additional options are granted.

Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2003
    
    
    2002
    
    
    2003
    
    
    2002Net incomeAs reported
    
    $
    11,961
    
    
    $
    12,882
    
    
    $
    30,257
    
    
    $
    33,501Total stock-based employee compensation
expense determined under fair value
based method for all awards net of
related tax effects
    
    
    (260
    )
    
    
    (260
    )
    
    
    (725
    )
    
    
    (779
    )Pro forma
    
    $
    11,701
    
    
    $
    12,622
    
    
    $
    29,532
    
    
    $
    32,722Basic earnings per shareAs reported
    
    $
    0.46
    
    
    $
    0.50
    
    
    $
    1.16
    
    
    $
    1.32Pro forma
    
    $
    0.45
    
    
    $
    0.49
    
    
    $
    1.13
    
    
    $
    1.28Diluted earnings per shareAs reported
    
    $
    0.46
    
    
    $
    0.50
    
    
    $
    1.15
    
    
    $
    1.30Pro forma
    
    $
    0.45
    
    
    $
    0.49
    
    
    $
    1.12
    
    
    $
    1.27


Reclassifications

Certain prior year amounts reported on the Companys consolidated balance sheet
have been reclassified to conform to 2003 presentation. Such reclassifications
had no impact on net income, shareholders equity or cash provided by operating
activities.

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Inventories

Inventories consist of the following:

September 30,
    
    
    December 31,(in thousands)
    
    2003
    
    
    2002Finished goods
    
    $
    18,939
    
    
    $
    15,795Work in process
    
    
    7,740
    
    
    
    1,438Raw material, fuel and supplies
    
    
    29,479
    
    
    
    26,921$
    56,158
    
    
    $
    44,154


Goodwill and Other Intangible Assets

The carrying amount of goodwill increased by $1,874,000 during the nine months
ended September 30, 2003 as a result of three acquisitions in the health
services segment in 2003.

The following table summarizes the components of the Companys intangible
assets at September 30, 2003 and December 31, 2002.

September 30, 2003
    
    
    December 31, 2002Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    Netcarrying
    
    
    Accumulated
    
    
    carrying
    
    
    carrying
    
    
    Accumulated
    
    
    carrying(in thousands)
    
    amount
    
    
    amortization
    
    
    amount
    
    
    amount
    
    
    amortization
    
    
    amountAmortized intangible assets:Covenants not to compete
    
    $
    2,110
    
    
    $
    1,368
    
    
    $
    742
    
    
    $
    1,920
    
    
    $
    1,143
    
    
    $
    777Other intangible assets including
contracts
    
    
    2,314
    
    
    
    1,050
    
    
    
    1,264
    
    
    
    2,079
    
    
    
    884
    
    
    
    1,195Total
    
    $
    4,424
    
    
    $
    2,418
    
    
    $
    2,006
    
    
    $
    3,999
    
    
    $
    2,027
    
    
    $
    1,972Non-amortized intangible assets:Brandname
    
    $
    3,620
    
    
    $
    
    
    
    $
    3,620
    
    
    $
    3,620
    
    
    $
    
    
    
    $
    3,620


Intangible assets with finite lives are being amortized over average lives
ranging from one to five years. The amortization expense for these intangible
assets was $448,000 for the nine months ended September 30, 2003 compared to
$391,000 for the nine months ended September 30, 2002. The estimated annual
amortization expense for these intangible assets for the next five years is:
$603,000 for 2003, $593,000 for 2004, $387,000 for 2005, $264,000 for 2006 and
$152,000 for 2007.

New Accounting Standards

The Financial Accounting Standards Board (FASB) has issued SFAS No. 143,
Accounting for Asset Retirement Obligations (ARO), which provides accounting
requirements for retirement obligations associated with tangible long-lived
assets. The Company adopted SFAS No. 143 on January 1, 2003. Retirement
obligations associated with long-lived assets included within the scope of SFAS
No. 143 are those for which there is a legal obligation to settle under
existing or enacted law, statute, written or oral contract or by legal
constructions under the doctrine of promissory estoppel. Adoption of SFAS No.
143 changed the accounting for ARO costs of the utilitys generating plants. As
of June 30, 2003 the Company transferred $13.6 million in accumulated reserves
related to net salvage costs on assets with ARO from accumulated depreciation
to a regulatory liability account in accordance with the requirements of SFAS
No. 143 and Federal Energy Regulatory Commission rules issued on April 9, 2003.
SFAS No. 143 requires the present value of the future decommissioning cost to
be recognized as a liability on the balance sheet with an offsetting amount
being added to the capitalized cost of the related long-lived asset. The
liability will be accreted to its present value each period and the capitalized
cost will be depreciated over the useful life of the related asset.

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The Companys asset retirement obligations include site restoration, the
closure of ash pits and the removal of storage tanks and asbestos at certain
electric utility generating plants. The Company has legal obligations
associated with retirement of other long-lived assets used in its electric
operations that cannot be reasonably estimated because the useful lives of
those assets are not determinable. There are no assets legally restricted for
the settlement of any of the Companys asset retirement obligations.

The present value of the legal asset retirement obligations as of September 30,
2003 of $1,568,000 is included in Other noncurrent liabilities on the Companys
September 30, 2003 consolidated balance sheet. The $1,568,000 liability
includes the original obligation of $377,000 plus accumulated accretion expense
of $1,113,000 from the date the obligation arose through January 1, 2003, plus
$78,000 of additional accumulated accretion expense for the nine months ended
September 30, 2003. Since the recovery of these estimated removal costs, which
include accretion, has been provided for through the recovery of depreciation
expense included as a component of current electric retail rates, there is no
cumulative effect on income to be recorded related to the adoption of this
accounting principle. The difference between current accretion expense and
depreciation expense based on approved rates will accumulate as a regulatory
asset until the actual cost to settle the asset retirement obligation has been
incurred. At that time, the associated regulatory asset will be transferred to
the associated regulatory liability account as required by regulatory
accounting rules. The effects of the transitional noncash transactions
described above are not reflected in the Companys consolidated statement of
cash flows for the nine months ended September 30, 2003.

The following table shows the amount of the asset retirement obligation
liability that would have been included in Other noncurrent liabilities in
prior periods had the requirements of SFAS No. 143 been in effect in those
periods.

As of September 30,
    
    
    As of December 31,(in thousands)
    
    2003
    
    
    2002
    
    
    2002
    
    
    2001As reported
    
    $
    1,568
    
    
    
    
    
    
    
    
    
    
    
    Pro forma
    
    $
    1,568
    
    
    $
    1,465
    
    
    $
    1,490
    
    
    $
    1,392


The FASB issued SFAS No. 149, Amendment of Statement 133 on Derivative
Instruments and Hedging Activities, in April 2003. The statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. This statement is effective for contracts entered into
or modified after June 30, 2003. With the issuance of SFAS No.149, any forward
contracts for the purchase or sale of energy entered into after June 30, 2003,
that do not meet the definition of a capacity contract and are subject to
unplanned netting, referred to as a book out in the utility industry, are not
eligible for the normal purchases and sales exception provided for under SFAS
No. 133 and modified by SFAS No. 149. These contracts are considered
derivatives and are now subject to mark-to-market accounting. This
classification applies to virtually all of the Companys forward wholesale
purchases and sales of energy, which, prior to the issuance of SFAS No. 149,
qualified for the normal purchases and sales exception from mark-to-market
accounting treatment. As a result of the issuance of SFAS No. 149, unrealized
gains and losses on forward purchases and sales of energy are now recorded by
the Company. All provisions of this statement have been applied prospectively.

The Company recorded $3.9 million in net unrealized gains for the three and
nine-month periods ended September 30, 2003, which reflects the difference
between the contracted prices for forward purchases and sales of energy and the
September 30, 2003 market prices for contracts with matching terms and
characteristics. A portion of the net unrealized gain is not reflected in
current income but has been deferred under regulatory accounting treatment
until realized at the time of physical delivery. See further discussion of the
Companys marked-to-market position on forward energy contracts under Item 3.
Quantitative and Qualitative Disclosures About Market Risk.

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At the July 31, 2003 Emerging Issues Task Force (EITF) meeting, EITF Issue
03-11, Reporting Realized Gains and Losses on Derivative Instruments That Are
Subject to FASB Statement No. 133, and Not Held for
Trading Purposes  as
Defined in Issue No. 02-3, was discussed. The EITF reached a consensus by
agreeing that determining whether realized gains and losses on derivative
contracts not held for trading purposes should be reported on a net or gross
basis is a matter of judgment that depends on the relevant facts and
circumstances. The FASB ratified the EITF consensus at its August 13, 2003
meeting. The reporting requirements of EITF Issue 03-11 will be applicable to
financial statement presentation in the fourth quarter of 2003. The FASB staff
believes that transition for the consensus reached on this Issue should require
that comparative financial statements for prior periods be reclassified to
conform to the consensus. Early application of any consensus is permitted. The
Company will determine the appropriate reporting treatment for its forward
energy transactions under EITF Issue 03-11 in the fourth quarter of 2003.
Application of the reporting requirements of EITF 03-11, whether under a gross
or net basis, will not have an effect on the Companys consolidated net income,
financial position or cash flows.

FASB Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities,
is an interpretation of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, that addresses consolidation by business enterprises of
variable interest entities which have certain characteristics related to equity
at risk and rights and obligations to profits and losses. The effective date
for FIN 46 has been deferred until the fourth quarter of 2003 for interests in
variable interest entities created before February 1, 2003 and held by a public
entity that has not previously applied the provisions of FIN 46. The Company is
reviewing its investments reported on an equity-method basis to determine if
the provisions of FIN 46 apply to those investments.

Segment Information

The Companys business operations consist of five segments based on products
and services. Electric includes the electric utility operating in Minnesota,
North Dakota and South Dakota. Plastics consists of businesses involved in the
production of polyvinyl chloride (PVC) and polyethylene (PE) pipe in the Upper
Midwest and Southwest regions of the United States. Manufacturing consists of
businesses involved in the production of waterfront equipment, wind towers,
frame-straightening equipment and accessories for the auto repair industry,
custom plastic pallets, material and handling trays, horticultural containers,
fabrication of steel products, contract machining, and metal parts stamping and
fabrication located in the Upper Midwest, Missouri and Utah. Health services
include businesses involved in the sale of diagnostic medical equipment,
supplies and accessories. These businesses also provide service maintenance,
mobile diagnostic imaging, mobile positron emission tomography and nuclear
medicine imaging, portable x-ray imaging and rental of diagnostic medical
imaging equipment to various medical institutions located in 40 states. Other
business operations consists of businesses in electrical and telephone
construction contracting, transportation, telecommunications, entertainment,
energy services, and natural gas marketing, as well as the portion of corporate
administrative and general expenses that are not allocated to other segments.
The electrical and telephone construction contracting companies and energy
services and natural gas marketing business operate primarily in the Upper
Midwest. The telecommunications companies operate in central and northeast
Minnesota and the transportation company operates in 48 states and 6 Canadian
provinces. The Company evaluates the performance of its business segments and
allocates resources to them based on earnings contribution and return on total
invested capital.

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Operating Income (Loss)

Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,(in thousands)
    
    2003
    
    
    2002
    
    
    2003
    
    
    2002Electric
    
    $
    20,863
    
    
    $
    14,316
    
    
    $
    45,614
    
    
    $
    39,777Plastics
    
    
    (165
    )
    
    
    3,998
    
    
    
    4,461
    
    
    
    10,825Manufacturing
    
    
    49
    
    
    
    1,737
    
    
    
    6,454
    
    
    
    6,718Health services
    
    
    1,877
    
    
    
    1,499
    
    
    
    3,505
    
    
    
    6,549Other business operations
    
    
    (330
    )
    
    
    1,458
    
    
    
    (4,518
    )
    
    
    (2,078
    )Total
    
    $
    22,294
    
    
    $
    23,008
    
    
    $
    55,516
    
    
    $
    61,791


Identifiable Assets

September 30,
    
    
    December 31,(in thousands)
    
    2003
    
    
    2002Electric
    
    $
    591,285
    
    
    $
    550,855Plastics
    
    
    59,812
    
    
    
    54,926Manufacturing
    
    
    148,576
    
    
    
    114,120Health services
    
    
    68,270
    
    
    
    64,785Other business operations
    
    
    88,297
    
    
    
    94,050Total
    
    $
    956,240
    
    
    $
    878,736


Substantially all sales and long-lived assets of the Company are within the
United States.

Common Shares and Earnings per Share

On April 14, 2003 the Companys Board of Directors granted 222,750 stock
options to key management employees and 90,900 shares of restricted stock to
certain key executives and the directors under the 1999 Stock Incentive Plan.
The exercise price of the stock options is equal to the fair market value per
share at the date of the grant. The options vest ratably over a four-year
period and expire ten years after the date of the grant. As of
September 30, 2003 a total of 1,697,111 options were outstanding and a total of
193,094 shares of restricted stock had been issued under the Plan. The Company
accounts for the Plan under Accounting Principles Board
Opinion No. 25.

Basic earnings per common share are calculated by dividing earnings available
for common shares by the average number of common shares outstanding during the
period. Diluted earnings per common share are calculated by adjusting
outstanding shares, assuming conversion of all potentially dilutive stock
options.

Comprehensive Income

The only element of comprehensive income for the three months ended September
30, 2003 was net income of
$12.0 million as compared to $12.9 million of net income for the three months
ended September 30, 2002. The only elements of comprehensive income for the
nine months ended September 30, 2003 were net income of $30.3 million and an
additional accumulated comprehensive loss of $81,000 related to the Companys
Executive Survivor & Supplemental Retirement Plan as compared to $33.5 million
of net income for the nine months ended
September 30, 2002.

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Regulatory Assets and Liabilities

As a regulated entity the Company and the electric utility account for the
financial effects of regulation in accordance with SFAS No. 71, Accounting for
the Effect of Certain Types of Regulation. This statement allows for the
recording of a regulatory asset or liability for costs that will be collected
or refunded through the ratemaking process in the future.

The following table indicates the amount of regulatory assets and liabilities
recorded on the Companys consolidated balance sheet:

September 30,
    
    
    December 31,(in thousands)
    
    2003
    
    
    2002Regulatory assets:Deferred income taxes
    
    $
    11,577
    
    
    $
    10,238Debt expenses and reacquisition premiums
    
    
    3,975
    
    
    
    4,323Deferred conservation program costs
    
    
    664
    
    
    
    844Plant acquisition costs
    
    
    296
    
    
    
    329Deferred marked-to-market losses
    
    
    605
    
    
    
    Accrued cost-of-energy revenue
    
    
    41
    
    
    
    768Accumulated ARO accretion/depreciation adjustment
    
    
    87
    
    
    
    Total regulatory assets
    
    $
    17,245
    
    
    $
    16,502Regulatory liabilities:Accumulated depreciation on ARO assets negative salvage
    
    $
    13,056
    
    
    $
    Deferred income taxes
    
    
    8,433
    
    
    
    8,960Deferred marked-to-market gains
    
    
    4,181
    
    
    
    Gain on sale of division office building
    
    
    169
    
    
    
    173Total regulatory liabilities
    
    $
    25,839
    
    
    $
    9,133Net regulatory (liability)/asset position
    
    $
    (8,594
    )
    
    $
    7,369


The regulatory assets and liabilities related to deferred income taxes are the
result of the adoption of SFAS No. 109, Accounting for Income Taxes. Deferred
conservation program costs included in Deferred debits  Other represent
mandated conservation expenditures recoverable through retail electric rates
over the next 1.5 years. Plant acquisition costs included in
Deferred debits 
Other will be amortized over the next 7 years. Accrued cost-of-energy revenue
included in Accrued utility revenues will be recovered over the next nine
months. All deferred marked-to-market gains and losses are related to forward
purchases and sales of energy scheduled for delivery prior to May 2004. The
remaining regulatory assets and liabilities are being recovered from electric
customers over the next 32 years.

If for any reason, the Companys regulated businesses cease to meet the
criteria for application of SFAS No. 71 for all or part of their operations,
the regulatory assets and liabilities that no longer meet such criteria would
be removed from the consolidated balance sheet and included in the consolidated
statement of income as an extraordinary expense or income item in the period in
which the application of SFAS No. 71 ceases.

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Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations

MATERIAL CHANGES IN FINANCIAL POSITION

For the period 2003 through 2007, the Company estimates that funds internally
generated net of forecasted dividend payments will be sufficient to meet
scheduled debt retirements and provide for most of its estimated consolidated
capital expenditures. Reduced demand for electricity or products manufactured
and sold by the Company could have an effect on funds internally generated.
Additional short-term or long-term financing will be required in the period
2003 through 2007 to provide for the balance of estimated consolidated capital
expenditures, in the event the Company decides to refund or retire early any of
its presently outstanding debt or cumulative preferred shares, to complete
acquisitions or for other corporate purposes. There can be no assurance that
any additional required financing will be available through bank borrowings,
debt or equity financing or otherwise, or that if such financing is available,
it will be available on terms acceptable to the Company. If adequate funds are
not available on acceptable terms, the Companys business, results of
operations and financial condition could be adversely affected.

The Company has the ability to issue up to an additional $135 million of
unsecured debt securities from time to time under its shelf registration
statement on file with the SEC.

On August 25, 2003, the Companys line of credit was increased to $70 million.
This line is available to support borrowings of the Companys nonelectric
operations. The Company anticipates the electric utilitys cash requirements
through April 2004 will be provided for by cash flows from electric utility
operations. As of September 30, 2003, $37,251,000 of the $70 million line was
in use. The Companys obligations under this line of credit are guaranteed by a
100%-owned subsidiary of the Company that owns substantially all of the
Companys nonelectric companies.

The line of credit contains a number of covenants that restrict the Companys
ability, with significant exceptions, to: engage in mergers or consolidations;
dispose of assets; create liens on assets; engage in transactions with
affiliates; take any action which would result in a decrease in the ownership
interest in any subsidiary; redeem stock or any subsidiarys stock and pay
dividends on stock; make investments, loans or advances; guaranty the
obligations of other persons or agree to maintain the net worth or working
capital of, or provide funds to satisfy any other financial test applicable to,
any other person; and enter into a contract that requires payment to be made by
the Company whether or not delivery of the materials, supplies or services is
ever made under the contract. In addition, the Company is required to comply
with specified financial covenants, including maintaining a debt-to-total
capitalization ratio not in excess of 60% and an interest and dividend coverage
ratio of at least 1.5 to 1. As of September 30, 2003, the Company was in
compliance with all of the covenants under the line of credit. The interest
rate under the line of credit is subject to adjustment in the event of a change
in ratings on the Companys senior unsecured debt, up to LIBOR plus 0.8% if the
ratings on the Companys senior unsecured debt fall to BBB+ or below (Standard
& Poors) or Baa1 or below (Moodys). The line of credit also provides for
accelerated repayment in the event the Companys long-term unsecured and
unsubordinated debt is rated below BBB- (Standard & Poors) or Baa3 (Moodys).

On September 24, 2003, the Company borrowed $16.3 million under a loan
agreement with Lombard US Equipment Finance Corporation in the form of an
unsecured note. The terms of the note require quarterly principal payments in
the amount of $582,143 commencing in January 2004 with a final installment due
on October 2, 2006, the stated maturity date of the note. The term of the note
can be extended for additional one-year periods following the stated maturity
date through October 1, 2010. The note bears interest at a variable rate of
3-month LIBOR plus 1.43% on the unpaid principal balance with interest payments
due quarterly commencing on October 1, 2003 until the principal balance is
repaid in full. The Company used proceeds from the note to pay down borrowings
under the Companys line of credit that were used to finance acquisitions and
capital expenditures of its nonelectric

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subsidiaries. The covenants associated with the note are consistent with
existing credit facilities. There are no rating triggers associated with this
note.

Cash provided by operating activities of $27.8 million for the nine months
ended September 30, 2003 combined with cash on hand of $9.9 million as of
December 31, 2002 allowed the Company to pay dividends and fund 45% of its
capital expenditures. The remaining capital expenditures have been funded
through short-term borrowings and the issuance of long-term debt. Net cash
provided by operating activities decreased $22.9 million for the nine months
ended September 30, 2003 compared to the nine months ended September 30, 2002
primarily as a result of an increase in receivables, inventories and other
current assets of $58.1 million offset by an increase in accounts payable and
other current liabilities and interest and income taxes payable of $17.7
million in the first nine months of 2003 compared to an increase in
receivables, inventories and other current assets of $9.7 million in the first
nine months of 2002. The increase in cash used for working capital in the first
nine months of 2003 compared to the first nine months of 2002 of $30.9 million
was partially offset by a $5.8 million net change in cash provided by an
increase in deferred income taxes payable in 2003 of $4.6 million compared to a
$1.2 million decrease in deferred income taxes payable in 2002 and a $2.4
million net increase in noncurrent liabilities and deferred credits from 2002
to 2003.

Receivables in the manufacturing segment increased $13.7 million in the first
nine months of 2003 mainly related to increased sales in this segment with
receivable increases of $5.9 million at the wind tower manufacturing company,
$3.1 million at the waterfront equipment company related to seasonal sales
increases, $2.7 million at the metal parts stamping and fabrication company and
$1.7 million at the Companys manufacturer of structural steel products. The
electric utilitys receivables increased $10.7 million from December 31, 2002
to September 30, 2003 as a result of increases in wholesale sales of
electricity and billings for contracted electrical construction work in
September of 2003 compared to December of 2002. Receivables at the construction
companies increased $4.6 million from December 31, 2002 to September 30, 2003,
coinciding with a normal increase in regional construction business from winter
to summer. Receivables at the transportation company increased $2.3 million in
the first nine months of 2003 mainly due to increased brokerage activity. A
$2.1 million increase in receivables in the plastics segment from December 31,
2002 to September 30, 2003 is reflective of increased sales and increased
product prices in the third quarter of 2003 compared to the fourth quarter of
2002.

The increase in inventories in the first nine months of 2003 is mainly due to a
$5.7 million build-up of inventories at the Companys manufacturer of wind
towers, a $3.3 million increase in inventories at the other manufacturing
companies related to recent increases in sales and production activity and a
$2.0 million increase in inventory at the plastic pipe companies related to an
increase in raw material and production costs in September 2003 compared to
December 2002.

The $12.2 million increase in other current assets in the first nine months of
2003 is mainly due to an $11.3 million increase in costs and estimated earnings
in excess of billings on uncompleted contracts, of which $9.0 million was at
the Companys manufacturer of wind towers and $1.6 million was at the
construction companies. The $12.2 million increase in other current assets was
more than offset by the $8.5 million increase in payables and other current
liabilities plus the $7.3 million increase in income taxes payable related to
the timing and magnitude of estimated tax payments and the $1.9 million
increase in interest payable related to the timing of interest payments on
long-term debt and increases in the level of debt outstanding in the first nine
months of 2003.

Net cash used in investing activities was $35.6 million for the nine months
ended September 30, 2003 compared with net cash used in investing activities of
$61.6 million for the nine months ended September 30, 2002. Capital
expenditures decreased by $18.5 million and business acquisition expenditures
decreased by $7.3 million between the periods. Capital expenditures at the
electric utility decreased $10.8 million related to the completion of a major
transmission line in the fourth quarter of 2002 and winding down of
construction on the electric utilitys new gas-fired combustion turbine placed
in service in June 2003. Capital expenditures in other segments decreased by
$7.7 million between the periods, reflecting a $3.9 million reduction in
equipment purchases at the Companys metal

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parts stamping and fabrication company, a $3.5 million decrease in plant
expenditures at one of the plastic pipe manufacturing facilities, a $3.3
million reduction in equipment purchases at the Companys wind-tower
manufacturing company and a $1.6 million decrease in equipment expenditures at
the Companys transportation company. These decreases were offset by a $3.0
million increase in capital expenditures at one of the Companys pipe
manufacturing companies related to the construction of a new polyethylene pipe
production facility in Iowa, a $1.2 million increase in capital expenditures at
the Companys manufacturer of thermoformed plastic and horticultural products
related to a relocation and expansion of facilities and a $0.3 million increase
in capital expenditures at the Companys manufacturer of waterfront equipment.

Net cash used in financing activities was $2.2 million for the nine months
ended September 30, 2003 compared with net cash provided by financing
activities of $16.2 million for the nine months ended September 30, 2002. The
$18.4 million decrease in cash provided by financing activities between the
periods reflects a $39.3 million reduction in cash provided by short-term and
long-term borrowings, a $1.5 million reduction in cash from the issuance of
common stock and a $1.2 million increase in dividends paid and other
distributions offset by a $23.6 million reduction in the repayment and
retirement of long-term debt between the periods. Proceeds from the $25.8
million total increase in short-term and long-term borrowing in the first nine
months of 2003 were mainly used to finance construction and operating
activities at the Companys nonelectric operating companies.

As of September 30, 2003 there were no material changes in the Companys
contractual obligations on construction program commitments or coal contracts
from those reported in the Companys Annual Report on Form 10-K for the year
ended December 31, 2002. The Companys contractual obligations on long-term
debt increased $4.7 million in the two-year period 2004-2005 and $11.6 million
in the two-year period 2006-2007 as a result of the $16.3 million long-term
note issued in September 2003. The Companys contractual obligations associated
with long-term operating leases increased $0.1 million for the remainder of
2003, $0.7 million in the two-year period 2004-2005, $0.7 million in the
two-year period 2006-2007 and $0.2 million in 2008 related to the leasing of
new tractor-trailers by the Companys transportation company in September 2003.
The Companys contractual obligations associated with capacity and energy
requirements increased by approximately $4.2 million in the two-year period
2004-2005, $4.2 million in the two-year period 2006-2007 and $44.0 million in
the years after 2007 as a result of a long-term power purchase agreement
entered into in the second quarter of 2003. For more information on contractual
obligations and commitments, see Item 7 in the Companys Annual Report on Form
10-K for the year ended December 31, 2002.

On September 18, 2003 Standard & Poors Ratings Services lowered its rating on
the Companys senior unsecured debt from A to A-, lowered its rating on the
Companys preferred stock from A- to BBB and changed its outlook on the Company
from stable to negative. According to Standard & Poors, the rating action
reflects the Companys increased business risk profile due to the increasing
size of its nonregulated businesses and concerns associated with the future
financial performance of the Companys manufacturing and health services
segments. The ratings changes do not require any action under rating triggers
and will not increase interest rates on current outstanding debt.

The Companys current securities ratings are:

Moody'sInvestors
    
    StandardService
    
    & Poor'sSenior unsecured debt
    
    A2
    
    A-Preferred stock
    
    Baa1
    
    BBBOutlook
    
    Negative
    
    Negative


The Companys disclosure of these securities ratings is not a recommendation to
buy, sell or hold its securities. Downgrades in these securities ratings could
adversely affect the Company. Further downgrades could increase borrowing costs
resulting in possible reductions to net income in future periods and increase
the risk of default on the Companys debt obligations.

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MATERIAL CHANGES IN RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2003 and 2002

Consolidated Results of Operations

Total operating revenues were $240.7 million for the three months ended
September 30, 2003 compared with
$185.8 million for the three months ended September 30, 2002. Operating income
was $22.3 million for the three months ended September 30, 2003 compared with
$23.0 million for the three months ended September 30, 2002. The Company
recorded diluted earnings per share of $0.46 for the three months ended
September 30, 2003 compared to $0.50 for the three months ended September 30,
2002. Third quarter 2003 earnings include $0.09 per share related to the
initial recording of marked-to-market net unrealized gains on forward energy
contracts under SFAS No. 149, of which $0.04 per share relates to energy
scheduled for delivery in the fourth quarter of 2003.

Following is a discussion of the results of operations by segment.

Electric

Three months endedSeptember 30,(in thousands)
    
    2003
    
    
    2002
    
    
    ChangeRetail sales revenues
    
    $
    51,023
    
    
    $
    50,838
    
    
    $
    185Wholesale revenues
    
    
    53,976
    
    
    
    25,648
    
    
    
    28,328Other revenues
    
    
    8,435
    
    
    
    5,563
    
    
    
    2,872Total operating revenues
    
    $
    113,434
    
    
    $
    82,049
    
    
    $
    31,385Production fuel
    
    
    14,307
    
    
    
    11,107
    
    
    
    3,200Purchased power
    
    
    45,103
    
    
    
    27,703
    
    
    
    17,400Other electric operation and maintenance expenses
    
    
    24,010
    
    
    
    20,143
    
    
    
    3,867Depreciation and amortization
    
    
    6,598
    
    
    
    6,243
    
    
    
    355Property taxes
    
    
    2,553
    
    
    
    2,537
    
    
    
    16Operating income
    
    $
    20,863
    
    
    $
    14,316
    
    
    $
    6,547


Wholesale power revenues increased 110.4% mostly due to a 49.2% increase in
megawatt-hour (mwh) sales combined with a 30.9% increase in wholesale electric
prices for the three months ended September 30, 2003 compared with the three
months ended September 30, 2002. The increase in wholesale electric prices
reflects increased demand for electricity in the Mid-Continent Area Power Pool
(MAPP) region. Higher prices in the wholesale power markets also reflect
generally increasing generation costs, reduced generation from regional hydro
facilities due to lower spring runoff and the lack of summer rainfall and high
cost generation from natural gas fired peaking units. The higher prices
combined with increased availability of Company-owned generation and well-timed
energy purchases in the third quarter of 2003 compared to the third quarter of
2002, put the company in a favorable position to respond to the increased
demand for electricity resulting in the increase in wholesale electric sales.
Wholesale revenues in 2003 also include $3.9 million in net unrealized
marked-to-market gains on forward contracts for the purchase and sale of
electricity related to the adoption of SFAS No. 149.

The 51.6% increase in other electric operating revenues reflects a $2.1 million
net increase in revenues from contracted electrical construction work between
the periods. The third quarter of 2003 includes $5.4 million in revenue related
to work on regional wind energy projects that more than replaces $3.3 million
in third quarter 2002 revenues related to the construction of a transmission
line in North Dakota for another area utility. Revenues from the sale of steam
to an ethanol plant that began operations in the third quarter of 2002
increased $430,000 in the

16



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##### Table of Contents



third quarter of 2003 compared to the third quarter of 2002 and revenues
related to the transmission of electricity for other companies increased
$370,000 between the periods.

Fuel costs increased by 28.8% for the three months ended September 30, 2003
compared with the three months ended September 30, 2002 as a result of a 20.6%
increase in generation combined with a 6.8% increase in the cost of fuel per
mwh generated. Generation increased at all three of the Companys coal fired
generating stations, but the majority of the increase came from the Companys
Big Stone Plant which was shut down for two weeks in the third quarter of 2002
for scheduled maintenance. The increase in the fuel cost per mwh generated is
mostly a function of the mix of available generation sources during the third
quarter of 2003 as compared to the third quarter of 2002, but also reflects
slight increases in coal and coal transportation costs at Hoot Lake Plant along
with fuel costs for the Companys new combustion turbine brought on line in
June 2003.

Purchased power expense increased 62.8% for the three months ended September
30, 2003 compared with the three months ended September 30, 2002 as a result of
a 30.7% increase in the cost per mwh purchased combined with a 24.5% increase
in mwh purchases. A 41.7% decrease in mwh purchases for retail customers
resulted from the increased availability of Big Stone Plant in the third
quarter of 2003 compared to the third quarter of 2002. Mwh purchases for
wholesale customers increased 47.0% as increased demand and higher wholesale
prices provided opportunities for increased sales in wholesale power markets.

The $3.9 million (19.2%) increase in other electric operation and maintenance
expenses for the three months ended September 30, 2003 compared with the three
months ended September 30, 2002 reflects a $2.6 million increase in labor
expenses due to an increase in employee benefit costs, a general wage increase
and a reduction in capitalized and billable labor between the periods. The
increase in other electric operation and maintenance expenses also includes a
$0.8 million increase in costs related to contracted construction work and a
$0.5 million increase in insurance and other injury and damage repair expenses.
Overall, the Company expects continued strong performance in the electric
segment for the remainder of 2003.

Plastics

Three months endedSeptember 30,(in thousands)
    
    2003
    
    
    2002
    
    
    ChangeOperating revenues
    
    $
    23,414
    
    
    $
    22,370
    
    
    $
    1,044Cost of goods sold
    
    
    22,042
    
    
    
    16,920
    
    
    
    5,122Operating expenses
    
    
    984
    
    
    
    1,000
    
    
    
    (16
    )Depreciation and amortization
    
    
    553
    
    
    
    452
    
    
    
    101Operating (loss)/income
    
    $
    (165
    )
    
    $
    3,998
    
    
    $
    (4,163
    )


The 4.7% increase in operating revenues for the three months ended September
30, 2003 compared with the three months ended September 30, 2002 is the result
of a 19.8% increase in pounds of polyvinyl chloride (PVC) pipe sold, partially
offset by a 12.7% decrease in the price per pound of PVC pipe sold. The
increase in pipe sales combined with an 8.7% increase in the cost per pound of
PVC pipe sold contributed to the 30.3% increase in cost of goods sold. The cost
per pound of resin, the raw material used to produce PVC pipe, increased 6.4%
between the periods. The increase in depreciation and amortization expense is
due to a $3.5 million increase in depreciable plant in 2002 and a $3.1 million
increase in depreciable plant in 2003. Sales volumes and margins generally
decline in the fourth quarter due to normal slowdown in construction activities
as the winter season approaches.

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Manufacturing

Three months endedSeptember 30,(in thousands)
    
    2003
    
    
    2002
    
    
    ChangeOperating revenues
    
    $
    49,793
    
    
    $
    34,576
    
    
    $
    15,217Cost of goods sold
    
    
    42,339
    
    
    
    26,875
    
    
    
    15,464Operating expenses
    
    
    5,356
    
    
    
    4,238
    
    
    
    1,118Depreciation and amortization
    
    
    2,049
    
    
    
    1,726
    
    
    
    323Operating income
    
    $
    49
    
    
    $
    1,737
    
    
    $
    (1,688
    )


The 44.0% increase in operating revenues for the three months ended September
30, 2003 compared with the three months ended September 30, 2002 reflects
revenue increases of $7.2 million from the Companys manufacturer of wind
towers, $5.9 million from the waterfront equipment companies, one of which was
acquired in October of 2002, $1.6 million from the Companys manufacturer of
thermoformed plastic and horticultural products, $0.9 million from the metal
parts stamping and fabrication company and $0.2 million from the Companys
manufacturer of structural steel products. These revenue increases were offset
by a $0.6 million reduction in revenue from the manufacturer of automobile
frame-straightening equipment.

The 57.5% increase in cost of goods for the three months ended September 30,
2003 compared with the three months ended September 30, 2002 primarily reflects
$9.1 million in increased costs at the Companys manufacturer of wind towers
and a $4.5 million increase in costs of goods sold at the waterfront equipment
companies. The increase in cost of goods sold also reflects increases of $1.4
million from the Companys manufacturer of thermoformed plastic and
horticultural products, $0.5 million from the company that manufactures
structural steel products and $0.4 million from the metal parts stamping and
fabrication companies. These increases were offset by a $0.5 million decrease
in cost of goods sold at the manufacturer of automobile frame-straightening
equipment.

The $1.1 million (26.4%) increase in manufacturing operating expenses for the
three months ended September 30, 2003 compared with the three months ended
September 30, 2002 resulted mainly from a $1.0 million increase in operating
expenses related to the waterfront equipment companies. Depreciation and
amortization expenses increased between the periods as a result of significant
plant additions in 2002 most of which were at the metal parts stamping and
fabrication companies.

Results in the manufacturing segment were mixed depending on the types of
businesses served by our manufacturing companies. In the Companys view, the
continuing economic uneasiness, coupled with the impact of steel tariffs,
foreign competition and continued pressure from customers for price reductions
continue to place considerable downward pressure on the earnings of the metal
fabrication companies, including those that manufacture towers for the wind
energy industry. In addition, the uncertainty over the future of the Production
Tax Credit that is part of proposed federal energy legislation has slowed wind
developers decisions to issue more purchase orders for wind towers. The
Corporations wind tower manufacturer is taking steps to reduce overhead costs
in its operations.

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##### Table of Contents



Health Services

Three months endedSeptember 30,(in thousands)
    
    2003
    
    
    2002
    
    
    ChangeOperating revenues
    
    $
    26,284
    
    
    $
    23,019
    
    
    $
    3,265Cost of goods sold
    
    
    19,324
    
    
    
    16,745
    
    
    
    2,579Operating expenses
    
    
    3,747
    
    
    
    3,623
    
    
    
    124Depreciation and amortization
    
    
    1,336
    
    
    
    1,152
    
    
    
    184Operating income
    
    $
    1,877
    
    
    $
    1,499
    
    
    $
    378


The 14.2% increase in health services operating revenues for the three months
ended September 30, 2003 compared with the three months ended September 30,
2002 reflects $1.5 million in additional scan revenue mainly from the
acquisitions that occurred in November 2002 and May 2003. Revenues from the
sale of diagnostic imaging equipment increased $1.8 million in the third
quarter of 2003 compared with the third quarter of 2002 in part due to two
recent acquisitions in May and July of 2003 that added to the products and
geographic territory of the sales and service operations. The number of scans
performed increased 2.2% and the average fee per scan increased 4.3%.

The 15.4% increase in cost of goods sold for the three months ended September
30, 2003 compared with the three months ended September 30, 2002 was directly
related to the increases in revenues. The increase in operating expenses
between the periods is related to recent acquisitions. The increase in
depreciation and amortization expense is related to an increase in depreciable
property as a result of recent equipment purchases. The improved results in
this segment in the third quarter of 2003 are reflective of recent acquisitions
and steps taken by management to address increases in operating expenses of the
diagnostic imaging operations. Management continues to address the cost
structure of the diagnostic imaging operations and most recently hired a new
president/chief operating officer to lead the imaging part of the health
services segment. The health services company that sells and services
diagnostic medical equipment has negotiated a five-year extension of the Dealer
Agreement it has with Philips Medical Systems North America Company to December
31, 2008, unless terminated earlier under provisions of the agreement.

Other Business Operations

Three months endedSeptember 30,(in thousands)
    
    2003
    
    
    2002
    
    
    ChangeOperating revenues
    
    $
    27,777
    
    
    $
    23,736
    
    
    $
    4,041Cost of goods sold
    
    
    17,614
    
    
    
    12,906
    
    
    
    4,708Operating expenses
    
    
    9,311
    
    
    
    8,065
    
    
    
    1,246Depreciation and amortization
    
    
    1,182
    
    
    
    1,307
    
    
    
    (125
    )Operating (loss)/income
    
    $
    (330
    )
    
    $
    1,458
    
    
    $
    (1,788
    )


The 17.0% increase in operating revenues for the three months ended September
30, 2003 compared with the three months ended September 30, 2002 was mostly due
to a $2.9 million increase in construction company revenues between the
periods. Revenues and cost of goods sold related to natural gas sales at the
Companys energy services company both increased $0.7 million as a result of an
increase in natural gas prices between the periods. Revenues at the
transportation company increased $0.6 million as a result of increased
brokerage activities. The above increases in revenues were offset slightly by a
$0.2 million decrease in revenues at the telecommunications company.

19Table of Contents

The 36.5% increase in cost of goods sold for the three months ended September
30, 2003 compared with the three months ended September 30, 2002 is primarily
related to increases at the construction companies. The $2.9 million increase
in construction company revenues was more than offset by a $4.0 million
increase in construction company costs of goods sold between the quarters.
Construction margins have declined due to the sluggish economy in the region
and increased competition for available work.

The 15.4% increase in operating expenses is mostly due to a $0.6 million
increase in transportation company operating expenses mostly related to
brokerage activity and a $0.6 million increase in unallocated corporate
overhead costs mainly related to increased pension costs. The decrease in
depreciation and amortization expense reflects minor decreases at the
construction, telecommunications and transportation companies. The
transportation company continues to be profitable but is faced with continuing
pressure on operating margins because of increased fuel and insurance costs and
highly competitive pricing.

Other Income  net and Income Taxes

For the three months ended September 30, 2003 compared with the three months
ended September 30, 2002, Other Income  net decreased $721,000 related to the
recording of $277,000 in approved conservation improvement plan incentives in
the third quarter of 2002 and a $381,000 decrease in revenues from the
allowance for funds used during construction (AFUDC) due to lower construction
work in progress balances in the third quarter of 2003 compared to the third
quarter of 2002. An increase in expenses related to evaluation of electric
generation projects also contributed to a reduction in Other Income  net
between the quarters.

The $524,000 (8.2%) decrease in income tax expense between the quarters is
primarily the result of a
$1.4 million (7.5%) reduction in income before income tax for the three months
ended September 30, 2003 compared with the three months ended September 30,
2002. The effective tax rate for the three months ended September 30, 2003 was
32.8% compared to 33.0% for the three months ended September 30, 2002.

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Comparison of the Nine Months Ended September 30, 2003 and 2002

Consolidated Results of Operations

Total operating revenues were $637.4 million for the nine months ended
September 30, 2003 compared with $520.1 million for the nine months ended
September 30, 2002. Operating income was $55.5 million for the nine months
ended September 30, 2003 compared with $61.8 million for the nine months ended
September 30, 2002. The Company recorded diluted earnings per share of $1.15
for the nine months ended September 30, 2003 compared with $1.30 for the nine
months ended September 30, 2002. Earnings for the nine months ended September
30, 2003 include $0.09 per share related to the initial recording of
marked-to-market net unrealized gains on forward energy contracts under SFAS
No. 149, of which $0.04 per share relates to energy scheduled for delivery in
the fourth quarter of 2003.

Following is a discussion of the results of operations by segment.

Electric

Nine months endedSeptember 30,(in thousands)
    
    2003
    
    
    2002
    
    
    ChangeRetail sales revenues
    
    $
    160,062
    
    
    $
    150,090
    
    
    $
    9,972Wholesale revenues
    
    
    109,802
    
    
    
    63,320
    
    
    
    46,482Other revenues
    
    
    15,042
    
    
    
    14,929
    
    
    
    113Total operating revenues
    
    $
    284,906
    
    
    $
    228,339
    
    
    $
    56,567Production fuel
    
    
    37,980
    
    
    
    33,569
    
    
    
    4,411Purchased power
    
    
    108,878
    
    
    
    70,262
    
    
    
    38,616Other electric operation and maintenance expenses
    
    
    65,383
    
    
    
    58,698
    
    
    
    6,685Depreciation and amortization
    
    
    19,460
    
    
    
    18,614
    
    
    
    846Property taxes
    
    
    7,591
    
    
    
    7,419
    
    
    
    172Operating income
    
    $
    45,614
    
    
    $
    39,777
    
    
    $
    5,837


Retail electric revenues increased 6.6% while retail mwhs sold increased only
0.9% between the periods mainly due to a $8.0 million (5.3%) increase in
revenues related to increased fuel and purchased power costs passed on to most
retail customers through the cost-of-energy adjustment factor included in
retail rates.

The 73.4% increase in wholesale power revenues is mostly due to a 25.1%
increase in mwhs sold combined with a 33.7% increase in wholesale electric
prices during the nine months ended September 30, 2003 compared with the nine
months ended September 30, 2002. The increase in mwh sales and higher wholesale
prices reflect increased demand relative to available supply mainly due to
higher prices combined with increased availability of Company-owned generation
and well-timed energy purchases in the third quarter of 2003 compared to the
third quarter of 2002 and colder weather in the region in the first quarter of
2003 compared with the first quarter of 2002. Higher prices in the wholesale
power markets reflect generally increasing generation costs, a decrease in
available base-load resources due to the number of plants shut down for
maintenance in the second quarter of 2003, reduced generation from regional
hydro facilities due to lower spring runoff and lack of summer rainfall and
high cost generation from natural gas fired peaking units. Wholesale revenues
in 2003 also include $3.9 million in net unrealized marked-to-market gains on
forward contracts for the purchase and sale of electricity related to the
adoption of SFAS No. 149.

Other electric operating revenues related to contracted electrical construction
work were $7.3 million for the nine months ended September 30, 2003, mostly
related to contracted work on regional wind generation projects,

21



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##### Table of Contents



compared to $9.7 million for the nine months ended September 30, 2002 mainly
from work on a transmission line in North Dakota for another area utility that
was completed in the fourth quarter of 2002. The $2.4 million decrease in
construction revenue between the periods was offset by a $1.7 million increase
in transmission related revenues from control area services, transmission
tariffs and shared use deficiency payments, and a $0.9 million increase in
revenue from the sale of steam to an ethanol plant that began operations in the
third quarter of 2002.

Fuel costs increased by 13.1% for the nine months ended September 30, 2003
compared with the nine months ended September 30, 2002 as a result of a 11.2%
increase in the cost of fuel per mwh generated combined with a 1.8% increase in
generation. The increase in the fuel cost per mwh generated is mostly a
function of the mix of available generation sources between the periods. Coyote
Station, the Companys generating unit with the lowest fuel costs per mwh, was
unavailable for generation in April and May of 2003 due to a scheduled
maintenance shutdown. Consequently, proportionally more power generation came
from the Companys other generating units in the first nine months of 2003
compared to the first nine months of 2002 resulting in an increase in the cost
of fuel per mwh generated. The increase in the fuel cost per mwh generated also
reflects slight increases in coal costs at Big Stone Plant along with fuel
costs for the Companys new combustion turbine brought on line in June 2003.

Purchased power expense increased 55.0% for the nine months ended September 30,
2003 compared with the nine months ended September 30, 2002 as a result of a
22.0% increase in mwh purchases combined with a 27.1% increase in the cost per
mwh purchased. Increased demand for electricity brought on by the colder
weather in the first quarter of 2003 and a reduction in available generation in
the second quarter of 2003 were contributing factors to a 27.8% increase in mwh
purchases for wholesale customers between the periods. The increase in the cost
per mwh of purchased power resulted from an increase in generation fuel costs
combined with a decrease in available generation in the region.

The $6.7 million (11.4%) increase in other electric operation and maintenance
expenses for the nine months ended September 30, 2003 compared with the nine
months ended September 30, 2002 reflects a $5.3 million increase in labor
expenses due to increases in employee benefit costs, increased incentive
payments related to increased wholesale sales and a general wage increase.
Transportation expenses increased $0.7 million as a result of reductions in
billable work between the periods. Insurance and other injury and damage repair
expenses increased by $0.7 million. The 4.5% increase in depreciation expense
in 2003 is due to an increase in depreciable plant in 2002 and 2003. Overall,
the Company expects continued strong performance in the electric segment for
the remainder of 2003.

Plastics

Nine months endedSeptember 30,(in thousands)
    
    2003
    
    
    2002
    
    
    ChangeOperating revenues
    
    $
    65,996
    
    
    $
    62,650
    
    
    $
    3,346Cost of goods sold
    
    
    57,101
    
    
    
    47,309
    
    
    
    9,792Operating expenses
    
    
    2,888
    
    
    
    3,190
    
    
    
    (302
    )Depreciation and amortization
    
    
    1,546
    
    
    
    1,326
    
    
    
    220Operating income
    
    $
    4,461
    
    
    $
    10,825
    
    
    $
    (6,364
    )


The 5.3% increase in operating revenues for the nine months ended September 30,
2003 compared with the nine months ended September 30, 2002 is the result of a
8.7% increase in the price per pound of PVC pipe sold offset by a 3.1% decrease
in pounds of PVC pipe sold. Cost of goods sold increased 20.7% between the
periods despite the decrease in pounds of pipe sold as a result of a 24.5%
increase in the cost per pound of PVC pipe sold. The cost per pound of resin,
the raw material used to produce PVC pipe, increased 31.2% between the periods.
Operating expenses decreased 9.5% primarily due to decreased compensation
directly related to the decrease in

22



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##### Table of Contents



sales. The increase in depreciation and amortization expense is due to a $3.5
million increase in depreciable plant in 2002 and a $3.1 million increase in
depreciable plant in 2003. Sales volumes and margins generally decline in the
fourth quarter due to normal slowdown in construction activities as the winter
season approaches.

The companies in this segment are highly dependent on a limited number of
third-party vendors for PVC resin. For the nine months ended September 30, 2003
and 2002, purchases of raw materials from two vendors totaled 96.6% and 57.7%,
respectively, of total resin purchases. The companies in this segment believe
their relationships with their key raw material vendors are good. However, the
loss of a key supplier or any interruption or delay in the supply of PVC resin
could have a significant impact on the plastics segment.

Manufacturing

Nine months endedSeptember 30,(in thousands)
    
    2003
    
    
    2002
    
    
    ChangeOperating revenues
    
    $
    133,350
    
    
    $
    101,646
    
    
    $
    31,704Cost of goods sold
    
    
    104,964
    
    
    
    77,795
    
    
    
    27,169Operating expenses
    
    
    16,063
    
    
    
    12,427
    
    
    
    3,636Depreciation and amortization
    
    
    5,869
    
    
    
    4,706
    
    
    
    1,163Operating income
    
    $
    6,454
    
    
    $
    6,718
    
    
    $
    (264
    )


The 31.2% increase in operating revenues for the nine months ended September
30, 2003 compared with the nine months ended September 30, 2002 reflects a
$23.2 million increase in revenue from the waterfront equipment companies
acquired in May and October of 2002, an increase of $5.2 million from the
Companys manufacturer of thermoformed plastic and horticultural products, an
increase of $4.3 million from the Companys manufacturer of wind towers and an
increase of $3.0 million from the metal parts stamping and fabrication company.
These increases were offset by decreases in revenue of $3.7 million from the
company that manufactures structural steel products and $0.3 million from the
manufacturer of automobile frame-straightening equipment.

The 34.9% increase in cost of goods for the nine months ended September 30,
2003 compared with the nine months ended September 30, 2002 primarily reflects
a $17.1 million increase in costs of goods sold at the waterfront equipment
companies combined with increased costs of $6.1 million at the Companys
manufacturer of wind towers, $3.1 million from the Companys manufacturer of
thermoformed plastic and horticultural products and $2.8 million from the metal
parts stamping and fabrication company. These increases were offset by
reductions in cost of goods sold of $1.8 million at the company that
manufactures structural steel products and $0.1 million from the manufacturer
of automobile frame-straightening equipment.

The 29.3% increase in manufacturing operating expenses for the nine months
ended September 30, 2003 compared with the nine months ended September 30, 2002
reflects increases of $3.8 million related to the waterfront equipment
companies and $0.6 million at the Companys manufacturer of thermoformed
plastic and horticultural products. These increases were offset by a $0.6
million decrease in operating expenses at the Companys manufacturer of wind
towers and a $0.2 million decrease in operating expenses at the manufacturer of
automobile frame-straightening equipment. Depreciation and amortization
expenses increased 24.7% between the periods as a result of the waterfront
equipment company acquisitions and significant plant additions in 2002 most of
which were at the metal parts stamping and fabrication company.

Results in the manufacturing segment were mixed depending on the types of
businesses served by our manufacturing companies. In the Companys view, the
continuing economic uneasiness, coupled with the impact of steel tariffs,
foreign competition and continued pressure from customers for price reductions
continue to place considerable downward pressure on the earnings of the metal
fabrication companies, including those that

23



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##### Table of Contents



manufacture towers for the wind energy industry. In addition, the uncertainty
over the future of the Production Tax Credit that is part of proposed federal
energy legislation has slowed wind developers decisions to issue more purchase
orders for wind towers. The Corporations wind tower manufacturer is taking
steps to reduce overhead costs in its operations.

Health Services

Nine months endedSeptember 30,(in thousands)
    
    2003
    
    
    2002
    
    
    ChangeOperating revenues
    
    $
    73,514
    
    
    
    67,771
    
    
    $
    5,743Cost of goods sold
    
    
    54,648
    
    
    
    47,894
    
    
    
    6,754Operating expenses
    
    
    11,562
    
    
    
    10,169
    
    
    
    1,393Depreciation and amortization
    
    
    3,799
    
    
    
    3,159
    
    
    
    640Operating income
    
    $
    3,505
    
    
    $
    6,549
    
    
    $
    (3,044
    )


The 8.5% increase in health services operating revenues for the nine months
ended September 30, 2003 compared with the nine months ended September 30, 2002
reflects $5.1 million in additional scan and other services revenue, mostly
from the acquisitions that occurred in 2002 and May 2003. Revenues from the
sale of diagnostic imaging equipment increased $0.6 million between the periods
in part due to two recent acquisitions in May and July of 2003. The number of
scans performed increased 12.2% mainly due to the 2002 acquisitions, while the
average fee per scan decreased 0.6%.

Although revenues from imaging services increased by $5.1 million, the increase
was more than offset by increases in equipment and infrastructure costs
incurred to support expected revenue growth. While operating income for the
nine months ended September 30, 2003 was significantly less than operating
income for the same period a year ago, the segments 2003 results have improved
significantly from the first quarter of 2003 in part due to steps taken by
management to address increases in operating expenses of the diagnostic imaging
operations. Management continues to address the cost structure of the
diagnostic imaging operations and most recently hired a new president/chief
operating officer to lead the imaging part of the health services segment. The
health services company that sells and services diagnostic medical equipment
has negotiated a five-year extension of the Dealer Agreement it has with
Philips Medical Systems North America Company to December 31, 2008, unless
terminated earlier under provisions of the agreement.

Other Business Operations

Nine months endedSeptember 30,(in thousands)
    
    2003
    
    
    2002
    
    
    ChangeOperating revenues
    
    $
    79,604
    
    
    $
    59,649
    
    
    $
    19,955Cost of goods sold
    
    
    52,984
    
    
    
    32,427
    
    
    
    20,557Operating expenses
    
    
    27,604
    
    
    
    25,535
    
    
    
    2,069Depreciation and amortization
    
    
    3,534
    
    
    
    3,765
    
    
    
    (231
    )Operating loss
    
    $
    (4,518
    )
    
    $
    (2,078
    )
    
    $
    (2,440
    )


The 33.5% increase in operating revenues for the nine months ended September
30, 2003 compared with the nine months ended September 30, 2002 was mostly due
to a $12.5 million increase in revenues from natural gas sales at the Companys
energy services company related to an increase in natural gas prices. In
addition, construction revenues increased by $6.1 million and transportation
revenues increased by $1.9 million between the periods.

24Table of Contents

Telecommunications revenue decreased by $0.6 million between the periods. The
63.4% increase in cost of goods sold reflects a $12.5 million increase in the
cost of natural gas sold by the energy services company and an $8.0 million
increase in construction costs at the construction companies.

The 8.1% increase in operating expenses between the periods reflects a $1.7
million increase in transportation operating expenses mainly related to
increased brokerage activity, a $1.1 million increase in unallocated corporate
overhead costs mainly related to increased pension costs and a $0.5 million
increase in construction company operating expenses, offset by a $1.3 million
reduction in energy services operating expenses. The decrease in depreciation
and amortization expense reflects minor decreases at the construction,
telecommunications and transportation companies.

Construction margins have declined due to the sluggish economy and increased
competition for available work. Construction operating losses of $2.5 million
were partially offset by a $1.2 million decrease in operating losses from our
energy services company. The transportation company continues to be profitable
but is faced with continuing pressure on operating margins because of increased
fuel and insurance costs and highly competitive pricing.

Other Income  net, Interest Charges and Income Taxes

For the nine months ended September 30, 2003 compared with the nine months
ended September 30, 2002, other income increased $133,000 due mainly to
reductions in expenditures related to investigating the feasibility of
constructing a second electricity generating unit at the electric utilitys Big
Stone Plant.

The $155,000 (1.2%) increase in interest charges is mainly due to higher
short-term debt balances outstanding for the nine months ended September 30,
2003 compared with the nine months ended September 30, 2002.

The $3.1 million (18.8%) decrease in income tax expense between the periods is
primarily the result of a
$6.3 million (12.7%) reduction in income before income tax for the nine months
ended September 30, 2003 compared with the nine months ended September 30,
2002. The reduction in the effective tax rate from 32.7% for the nine months
ended September 30, 2002 to 30.4% for the nine months ended September 30, 2003
is due to a decrease in taxable income relative to the level of tax credits and
permanent differences between book income and taxable income.

Critical Accounting Policies Involving Significant Estimates

The discussion and analysis of the consolidated financial statements and
results of operations are based on the Companys consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these consolidated
financial statements requires management to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities.

The Company uses estimates based on the best information available in recording
transactions and balances resulting from business operations. Estimates are
used for such items as depreciable lives, asset impairment evaluations, tax
provisions, collectability of trade accounts receivable, self insurance
programs, environmental liabilities, unbilled electric revenues, unscheduled
power exchanges, market valuation of forward energy contracts, service contract
maintenance costs, percentage-of-completion and actuarially determined benefits
costs. As better information becomes available or actual amounts are known,
estimates are revised. Operating results can be affected by revised estimates.
Actual results may differ from these estimates under different assumptions or
conditions. Management has discussed the application of these critical
accounting policies and the development of these estimates with the audit
committee of the board of directors.

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Goodwill Impairment

The Company currently has $1.0 million of goodwill recorded on its balance
sheet related to its energy services subsidiary that markets natural gas to
approximately 150 retail customers. A recent evaluation of projected cash flows
from these operations indicated that the related goodwill was not impaired.
However, actual and projected cash flows from these operations are subject to
fluctuations due to low profit margins on natural gas sales combined with high
volatility of natural gas prices. Reductions in profit margins or the volume of
natural gas sales from these operations could result in an impairment of all or
a portion of its related goodwill. The Company will continue to evaluate this
reporting unit for impairment on an annual basis and as conditions warrant.

On September 1, 1999 the Company acquired the flatbed trucking operations of E.
W. Wylie Corporation (Wylie). The Company currently has $6.7 million of
goodwill recorded on its balance sheet relating to this acquisition. Highly
competitive pricing in the trucking industry in recent years has resulted in
decreased operating margins and lower returns on invested capital for Wylie.
The Companys current projections are for operating margins to increase from
current levels over the next three to five years as demand for shipping
increases relative to available shipping capacity and additional revenues are
generated from added terminal locations. If current conditions persist and
operating margins do not increase according to Company projections, the
reductions in anticipated cash flows from transportation operations may
indicate that the fair value of Wylie is less than its book value resulting in
an impairment of goodwill and a corresponding charge against earnings. The
Company will continue to evaluate this reporting unit for impairment on an
annual basis and as conditions warrant.

A discussion of critical accounting policies is included in the Companys
Annual Report on Form 10-K for the fiscal year ended December 31, 2002. There
were no material changes in critical accounting policies or estimates during
the quarter ended September 30, 2003, except for the initial recording of
marked-to-market gains and losses on forward purchases and sales of energy
under the requirements of SFAS No. 149.

Forward Looking Information  Safe Harbor Statement Under the Private
Securities Litigation Reform Act of 1995

In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 (the Act), the Company has filed cautionary
statements identifying important factors that could cause the Companys actual
results to differ materially from those discussed in forward-looking statements
made by or on behalf of the Company. When used in this Form 10-Q and in future
filings by the Company with the Securities and Exchange Commission, in the
Companys press releases and in oral statements, words such as may, will,
expect, anticipate, continue, estimate, project, believes or
similar expressions are intended to identify some of the forward-looking
statements within the meaning of the Act and are included, along with this
statement, for purposes of complying with the safe harbor provision of the Act.
Factors that might cause such differences include, but are not limited to, the
Companys ongoing involvement in diversification efforts, the timing and scope
of deregulation and open competition, market valuations of forward energy
contracts, growth of electric revenues, impact of the investment performance of
the utilitys pension plan, changes in the economy, governmental and regulatory
action, weather conditions, fuel and purchased power costs, environmental
issues, resin prices, and other factors discussed under Factors affecting
future earnings on pages 27-28 of the Companys 2002 Annual Report to
Shareholders, which is incorporated by reference in the Companys Annual Report
on Form 10-K for the fiscal year ended December 31, 2002. These factors are in
addition to any other cautionary statements, written or oral, which may be made
or referred to in connection with any such forward-looking statement or
contained in any subsequent filings by the Company with the Securities and
Exchange Commission. The Company is not obligated to publicly update or revise
any forward-looking statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

At September 30, 2003 the Company had limited exposure to market risk
associated with interest rates and commodity prices and no exposure to market
risk associated with changes in foreign currency exchange rates.

The majority of the Companys long-term debt has fixed interest rates. The
interest rate on variable rate long-term debt is reset on a periodic basis
reflecting current market conditions. The Company manages its interest rate
risk through the issuance of fixed-rate debt with varying maturities, through
economic refunding of debt through optional refundings, limiting the amount of
variable interest rate debt, and utilization of short-term borrowings to allow
flexibility in the timing and placement of long-term debt. As of September 30,
2003, the Company had
$30.9 million of long-term debt subject to variable interest rates. Assuming no
change in the Companys financial structure, if variable interest rates were to
average 1% higher or lower than the average variable rate on
September 30, 2003, interest expense and pre-tax earnings would change by
approximately $309,000 on an annual basis.

The Company has short-term borrowing arrangements to provide financing for
working capital and other purposes for its nonelectric operations. The level of
borrowings under these arrangements varies from period to period, depending
upon, among other factors, operating needs and capital expenditures. On
September 30, 2003 the Company had $37.3 million outstanding short-term
borrowings with variable interest rates under these arrangements.

The Company has not used interest rate swaps to manage net exposure to interest
rate changes related to the Companys portfolio of borrowings. The Company
maintains a ratio of fixed rate debt to total debt within a certain range. It
is the Companys policy to enter into interest rate transactions and other
financial instruments only to the extent considered necessary to meet its
stated objectives.

The electric utilitys retail portion of fuel and purchased power costs are
subject to cost of energy adjustment clauses that mitigate the commodity price
risk by allowing a pass through of most of the increase or decrease in energy
costs to retail customers. In addition, the electric utility participates in an
active wholesale power market providing access to commodity transactions that
may serve to mitigate price risk.

The Company has in place an energy risk management policy with a goal to
manage, through the use of defined risk management practices, price risk and
credit risk associated with wholesale power purchases and sales. These policies
require that forward sales of electricity in wholesale markets be covered by
offsetting forward purchases of electricity with matching terms and delivery
dates or by the portion of company-owned generation projected to be in excess
of retail load requirements. As a result of these policies, the Company is
exposed to very little market risk related to its forward energy contracts
because margins are locked in when offsetting positions are secured and
subsequent changes in market values are applied to both the purchase and
matching sales contract. Any marked-to-market gains or losses on a sales
contract will be offset by a marked-to-market loss or gain on the offsetting
purchase contract.

The Companys energy risk management policy allows for
long open positions with limitations on the aggregate marked-to-market value of open
positions. These positions are closely monitored and covered with
offsetting sales when the risk of loss exceeds predefined limits.
The exposure to price risk of these open positions as of September 30, 2003 was
not material.

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The following table shows the effect of marking-to-market forward contracts for
the purchase and sale of energy on the Companys consolidated balance sheet as
of September 30, 2003 and the change in its consolidated balance sheet position
from December 31, 2002 to September 30, 2003:

September 30,(in thousands)
    
    2003Current asset  marked-to-market gain
    
    $
    9,221Regulatory asset  deferred marked-to-market loss
    
    
    605Total assets
    
    
    9,826Current liability  marked-to-market loss
    
    
    (1,744
    )Regulatory liability  deferred marked-to-market gain
    
    
    (4,181
    )Total liabilities
    
    
    (5,925
    )Net fair value of marked-to-market energy contracts
    
    $
    3,901


Nine Months Ended(in thousands)
    
    September 30, 2003Fair value at beginning of year
    
    $
    Amount realized on contracts delivered in third quarter
    
    
    Changes in fair value
    
    
    3,901Net fair value at end of period
    
    
    3,901Net change recorded as marked-to-market
    
    $
    3,901


The $3.9 million in recognized but unrealized net gains on the forward energy
purchases and sales marked-to-market on September 30, 2003 are expected to be
realized upon physical settlement as scheduled over the following quarters in
the amounts listed:

4th Quarter
    
    
    1st Quarter
    
    
    2nd Quarter
    
    
    4th Quarter(in thousands)
    
    2003
    
    
    2004
    
    
    2004
    
    
    2004
    
    
    TotalGain/(loss)
    
    $
    1,885
    
    
    $
    2,075
    
    
    $
    (50
    )
    
    $
    (9
    )
    
    $
    3,901


The market prices used to value the Companys forward contracts for the
purchases and sales of electricity are determined by survey of the Companys
power services personnel responsible for contract pricing, as an open market
for the types of bilateral forward energy agreements being valued does not
exist. Over 98% of the $3.9 million in net unrealized marked-to-market gains
recorded as of September 30, 2003 are on forward purchase and sales contracts
that are offsetting in terms of volumes and delivery periods.

Due to the nature of electricity and the physical aspects of the electricity
transmission system, unanticipated events affecting the transmission grid can
result in transmission constraints and the cancellation of scheduled
transactions by the independent transmission system operator. In these
situations, which are relatively infrequent in occurrence, the counterparties
to the cancelled transaction are generally not made whole for the difference in
the contract price and the market price of the electricity at the time of
cancellation. In such instances the Company may be obligated to deliver on a
sale where its offsetting purchase has been cancelled or to take delivery on a
purchase where its offsetting sale has been cancelled. All forward energy
transactions are subject to a small, and likely unquantifiable, risk of
cancellation by the independent transmission system operator due to
unanticipated physical constraints on the transmission system. At the time of
cancellation, the Company could be in a gain or loss position depending on the
market price of electricity relative to the contract price and the Companys
position in the transaction.

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The Company has credit risk associated with the nonperformance or nonpayment by
counterparties to its forward energy purchases and sales agreements. The
Company has established guidelines and limits to manage credit risk associated
with wholesale power purchases and sales. Specific limits are determined by a
counterpartys financial strength. The Companys credit risk with its largest
counterparty on delivered and marked-to-market forward contracts as of
September 30, 2003 was $13.6 million. As of September 30, 2003, the Company had
a net credit risk exposure of $11.6 million from thirty-one counterparties with
investment grade credit ratings.

The $11.6 million credit risk exposure includes net amounts due to the Company
on receivables/payables from completed transactions billed and unbilled plus
marked-to-market gains/losses on forward contracts for the purchase and sale of
energy scheduled for delivery after September 30, 2003. Individual counterparty
exposures are offset according to legally enforceable netting arrangements.

Counterparties with investment grade credit ratings have minimum credit ratings
of BBB- (Standard & Poors), Baa3 (Moodys) or BBB- (Fitch).

The Companys energy services subsidiary markets natural gas to approximately
150 retail customers. Some of these customers are served under fixed-price
contracts. There is price risk associated with these limited number of
fixed-price contracts since the corresponding cost of natural gas is not
immediately locked in. This price risk is not considered material to the
Company. These contracts call for the physical delivery of natural gas and are
considered executory contracts for accounting purposes. Current accounting
guidance requires losses on firmly committed executory contracts to be
recognized when realized.

The plastics companies are exposed to market risk related to changes in
commodity prices for PVC resins, the raw material used to manufacture PVC pipe.
The PVC pipe industry is highly sensitive to commodity raw material pricing
volatility. Historically, when resin prices are rising or stable, margins and
sales volume have been higher and when resin prices are falling, sales volumes
and margins have been lower. Gross margins also decline when the supply of PVC
pipe increases faster than demand. Due to the commodity nature of PVC resin and
the dynamic supply and demand factors worldwide, it is very difficult to
predict gross margin percentages or to assume that historical trends will
continue.




Item 4. Controls and Procedures

Under the supervision and with the participation of the Companys management,
including the Chief Executive Officer and the Chief Financial Officer, the
Company evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934 (the Exchange Act)) as of September 30, 2003,
the end of the period covered by this report. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that the
Companys disclosure controls and procedures were effective as of September 30,
2003.

During the fiscal quarter ended September 30, 2003, there was no change in the
Companys internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over
financial reporting.

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##### Table of Contents






PART II. OTHER INFORMATION




Item 6. Exhibits and Reports on Form 8-K



|a) |  | Exhibits:
|-- |  | ---------



| |  | Pursuant to Item 601(b) (4) (iii) of Regulation S-K, copies of certain
instruments defining the rights of holders of certain long-term debt of
the Company are not filed, and in lieu thereof, the Company agrees to
furnish copies thereof to the Securities and Exchange Commission upon
request.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|4.1 |  | Third Amendment to Credit Agreement dated as of August 25, 2003.
|--- |  | ----------------------------------------------------------------



|10.1 |  | Supplemental Agreement No. 4 Big Stone Plant made as of April 24, 2003.
|---- |  | -----------------------------------------------------------------------



|10.2 |  | Amendment to Coyote Station Agreement made as of April 24, 2003.
|---- |  | ----------------------------------------------------------------



|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.
|---- |  | ---------------------------------------------------------------------------------------------------



|b) |  | Reports on Form 8-K.
|-- |  | --------------------



| |  | The Company filed a Form 8-K on July 28, 2003 to furnish under Item 12 the
press release issued on July 28, 2003 to report its earnings for the
second quarter of 2003.
| |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

OTTER TAIL CORPORATIONBy:/s/ Kevin G. MougKevin G. MougChief Financial Officer and Treasurer(Chief Financial Officer/Authorized Officer)


Dated: November 14, 2003

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EXHIBIT INDEX

Exhibit Number
    
    Description4.1
    
    Third Amendment to Credit Agreement dated as of August 25, 2003.


10.1
    
    Supplemental Agreement No. 4 Big Stone Plant made as of April 24, 2003.10.2
    
    Amendment to Coyote Station Agreement made as of April 24, 2003.31.1
    
    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.