##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
  For the quarterly period ended
March 31, 2004 OR o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to  Commission file number
0-368 OTTER TAIL CORPORATION(Exact name of registrant as specified in its charter)
 Minnesota
    
    41-0462685(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)215 South Cascade Street, Box 496, Fergus Falls, Minnesota
    
    56538-0496(Address of principal executive offices)
    
    (Zip Code)
 866-410-8780(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 þ NO o Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2
of the Exchange Act). YES þ NO o Indicate the number of shares outstanding of each of the issuers classes of
Common Stock, as of the latest practicable date: April 30, 2004
 25,874,904 Common Shares ($5 par value)




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OTTER TAIL CORPORATION INDEX Page No.Part I. Financial InformationItem 1. Financial StatementsConsolidated Balance Sheets  March 31, 2004
and December 31, 2003 (Unaudited)
    
    
    2&3Consolidated Statements of Income  Three Months
Ended March 31, 2004 and 2003 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows  Three Months
Ended March 31, 2004 and 2003 (Unaudited)
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6-13Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    13-22Item 3. Quantitative and Qualitative Disclosures about
Market Risk
    
    
    23-25Item 4. Controls and Procedures
    
    
    25Part II. Other InformationItem 6. Exhibits and Reports on Form 8-K
    
    
    26Signatures
    
    
    26Fourth Amendment to Credit AgreementCertification of Chief Executive OfficerCertification of Chief Financial OfficerCertification of Chief Executive OfficerCertification of Chief Financial Officer




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1. Financial Statements Otter Tail Corporation 
 Consolidated Balance Sheets   -Assets-
 March 31,
    
    December 31,2004
    
    2003(Thousands of dollars)Current assetsCash and cash equivalents
    
    $
    
    
    
    $
    7,305Accounts receivable:Tradenet
    
    
    116,228
    
    
    
    107,634Other
    
    
    6,218
    
    
    
    7,830Inventories
    
    
    60,518
    
    
    
    56,966Deferred income taxes
    
    
    3,422
    
    
    
    3,532Accrued utility revenues
    
    
    12,844
    
    
    
    14,866Costs and estimated earnings in excess of billings
    
    
    6,105
    
    
    
    4,591Other
    
    
    10,704
    
    
    
    10,385Total current assets
    
    
    216,039
    
    
    
    213,109Investments and other assets
    
    
    35,587
    
    
    
    35,987Goodwillnet
    
    
    72,769
    
    
    
    72,556Other intangiblesnet
    
    
    6,917
    
    
    
    7,096Deferred debitsUnamortized debt expense and reacquisition premiums
    
    
    7,853
    
    
    
    8,081Regulatory assets
    
    
    13,927
    
    
    
    14,669Other
    
    
    637
    
    
    
    1,600Total deferred debits
    
    
    22,417
    
    
    
    24,350PlantElectric plant in service
    
    
    872,175
    
    
    
    875,364Nonelectric operations
    
    
    195,046
    
    
    
    193,858Total plant
    
    
    1,067,221
    
    
    
    1,069,222Less accumulated depreciation and amortization
    
    
    455,500
    
    
    
    453,791Plantnet of accumulated depreciation and amortization
    
    
    611,721
    
    
    
    615,431Construction work in progress
    
    
    18,991
    
    
    
    17,894Net plant
    
    
    630,712
    
    
    
    633,325Total
    
    $
    984,441
    
    
    $
    986,423
 See accompanying notes to consolidated financial statements -2-




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Otter Tail Corporation
Consolidated Balance Sheets
(Unaudited)-Liabilities- March 31,
    
    December 31,2004
    
    2003(Thousands of dollars)Current liabilitiesShort-term debt
    
    $
    35,000
    
    
    $
    30,000Current maturities of long-term debt
    
    
    9,450
    
    
    
    9,718Accounts payable
    
    
    76,181
    
    
    
    83,338Accrued salaries and wages
    
    
    11,601
    
    
    
    14,677Accrued federal and state income taxes
    
    
    4,164
    
    
    
    4,152Other accrued taxes
    
    
    10,651
    
    
    
    10,491Other accrued liabilities
    
    
    9,985
    
    
    
    10,003Total current liabilities
    
    
    157,032
    
    
    
    162,379Pensions benefit liability
    
    
    17,459
    
    
    
    16,919Other postretirement benefits liability
    
    
    23,970
    
    
    
    23,230Other noncurrent liabilities
    
    
    11,128
    
    
    
    11,102Deferred creditsDeferred income taxes
    
    
    102,590
    
    
    
    101,596Deferred investment tax credit
    
    
    11,342
    
    
    
    11,630Regulatory liabilities
    
    
    42,282
    
    
    
    42,926Other
    
    
    2,154
    
    
    
    2,061Total deferred credits
    
    
    158,368
    
    
    
    158,213CapitalizationLong-term debt, net of current maturities
    
    
    262,975
    
    
    
    265,193Cumulative preferred shares
authorized 1,500,000 shares without par value;
outstanding 2004 and 2003  155,000 shares
    
    
    15,500
    
    
    
    15,500Cumulative preference shares  authorized 1,000,000
shares without par value; outstanding  none
    
    
    
    
    
    
    Common shares, par value $5 per share
authorized 50,000,000 shares;
outstanding 2004  25,847,484 and 2003  25,723,814
    
    
    129,237
    
    
    
    128,619Premium on common shares
    
    
    28,975
    
    
    
    26,515Unearned compensation
    
    
    (3,090
    )
    
    
    (3,313
    )Retained earnings
    
    
    187,316
    
    
    
    186,495Accumulated other comprehensive loss
    
    
    (4,429
    )
    
    
    (4,429
    )Total common equity
    
    
    338,009
    
    
    
    333,887Total capitalization
    
    
    616,484
    
    
    
    614,580Total
    
    $
    984,441
    
    
    $
    986,423
 See accompanying notes to consolidated financial statements -3-




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Otter Tail
Corporation 
 Consolidated Statements of Income
 Three months endedMarch 31,2004
    
    2003(In thousands, except shareand per share amounts)Operating revenues
    
    $
    206,585
    
    
    $
    172,190Operating expensesProduction fuel
    
    
    14,597
    
    
    
    12,977Purchased power  retail use
    
    
    10,922
    
    
    
    9,612Other electric operation and maintenance expenses
    
    
    21,441
    
    
    
    19,446Cost of goods sold
    
    
    107,685
    
    
    
    78,569Other nonelectric expenses
    
    
    22,217
    
    
    
    19,529Depreciation and amortization
    
    
    11,173
    
    
    
    11,156Property taxes
    
    
    2,489
    
    
    
    2,599Total operating expenses
    
    
    190,524
    
    
    
    153,888Operating income
    
    
    16,061
    
    
    
    18,302Other income
    
    
    37
    
    
    
    330Interest charges
    
    
    4,429
    
    
    
    4,392Income before income taxes
    
    
    11,669
    
    
    
    14,240Income taxes
    
    
    3,574
    
    
    
    4,378Net income
    
    
    8,095
    
    
    
    9,862Preferred dividend requirements
    
    
    184
    
    
    
    184Earnings available for common shares
    
    $
    7,911
    
    
    $
    9,678Basic earnings per common share
    
    $
    0.31
    
    
    $
    0.38Diluted earnings per common share
    
    $
    0.31
    
    
    $
    0.38Average number of common shares outstanding  basic
    
    
    25,793,041
    
    
    
    25,592,361Average number of common shares outstanding  diluted
    
    
    25,936,219
    
    
    
    25,729,714Dividends per common share
    
    $
    0.275
    
    
    $
    0.270
 See accompanying notes to consolidated financial statements -4-




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Otter Tail
Corporation 
 Consolidated Statements of Cash Flows
 Three months endedMarch 31,2004
    
    2003(Thousands of dollars)Cash flows from operating activitiesNet income
    
    $
    8,095
    
    
    $
    9,862Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    11,173
    
    
    
    11,156Deferred investment tax credit
    
    
    (288
    )
    
    
    (288
    )Deferred income taxes
    
    
    293
    
    
    
    502Change in deferred debits and other assets
    
    
    434
    
    
    
    141Discretionary contribution to pension plan
    
    
    (1,000
    )
    
    
    Change in noncurrent liabilities and deferred credits
    
    
    1,370
    
    
    
    2,538Allowance for equity (other) funds used during construction
    
    
    (190
    )
    
    
    (395
    )Change in derivatives net of regulatory deferral
    
    
    369
    
    
    
    Other  net
    
    
    373
    
    
    
    346Cash provided by (used for) current assets & current liabilities:Change in receivables and inventories
    
    
    (10,534
    )
    
    
    (14,707
    )Change in other current assets
    
    
    (1,766
    )
    
    
    (3,971
    )Change in payables and other current liabilities
    
    
    (9,472
    )
    
    
    (5,855
    )Change in interest and income taxes payable
    
    
    1,927
    
    
    
    5,866Net cash provided by operating activities
    
    
    784
    
    
    
    5,195Cash flows from investing activitiesCapital expenditures
    
    
    (8,237
    )
    
    
    (13,591
    )Proceeds from disposal of noncurrent assets
    
    
    1,952
    
    
    
    154Decreases/(increases) in other investments
    
    
    53
    
    
    
    (815
    )Net cash used in investing activities
    
    
    (6,232
    )
    
    
    (14,252
    )Cash flows from financing activitiesNet borrowings under line of credit
    
    
    5,000
    
    
    
    7,000Proceeds from issuance of common stock
    
    
    2,920
    
    
    
    31Proceeds from issuance of long-term debt
    
    
    8
    
    
    
    2,169Payments for retirement of long-term debt
    
    
    (2,511
    )
    
    
    (1,941
    )Dividends paid and other distributions
    
    
    (7,274
    )
    
    
    (7,255
    )Net cash (used in) provided by financing activities
    
    
    (1,857
    )
    
    
    4Net change in cash and cash equivalents
    
    
    (7,305
    )
    
    
    (9,053
    )Cash and cash equivalents at beginning of period
    
    
    7,305
    
    
    
    9,937Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    884Supplemental cash flow informationCash paid for interest and income taxesInterest
    
    $
    2,062
    
    
    $
    2,152Income taxes
    
    $
    3,657
    
    
    $
    218
 See accompanying notes to consolidated financial statements -5-




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OTTER TAIL CORPORATION 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) In the opinion of management, Otter Tail Corporation (the Company) has included
all adjustments (including normal recurring accruals) necessary for a fair
presentation of the consolidated results of operations for the periods
presented. The consolidated financial statements and notes thereto should be
read in conjunction with the consolidated financial statements and notes as of
and for the years ended December 31, 2003, 2002 and 2001 included in the
Companys Annual Report on Form 10-K for the fiscal year ended December 31,
2003. Because of seasonal and other factors, the earnings for the three months
ended March 31, 2004, should not be taken as an indication of earnings for all
or any part of the balance of the year. Revenue Recognition Due to the diverse business operations of the Company, revenue recognition
depends on the product or service 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. In the case of derivative instruments, such as
the electric utilitys forward energy contracts, the Company recognizes gains
and losses based on changes in the fair market value of derivative instruments
over the period held, and also when realized on settlement, on a net basis in
revenue in a manner prescribed by Emerging Issues Task Force (EITF) Issue
03-11. Gains and losses subject to regulatory treatment on forward energy
contracts are deferred and recognized on a net basis in revenue in the period
in which the contract settles. For those operating businesses recognizing revenue when products are shipped,
the operating businesses have no further obligation to provide services related
to such product. The shipping terms used in these instances are FOB shipping
point. Some of the operating businesses enter into fixed-price construction contracts.
Revenues under these contracts are recognized on a percentage-of-completion
basis. The method used to determine the 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: March 31,
    
    December 31,(in thousands)
    
    2004
    
    2003Costs incurred on uncompleted contracts
    
    $
    123,400
    
    
    $
    124,839Less billings to date
    
    
    (134,863
    )
    
    
    (137,881
    )Plus estimated earnings recognized
    
    
    14,529
    
    
    
    13,611$
    3,066
    
    
    $
    569
 The following amounts are included in the Companys consolidated balance
sheets. Billings in excess of costs and estimated earnings on uncompleted
contracts are included in Accounts payable: March 31,
    
    December 31,(in thousands)
    
    2004
    
    2003Costs and estimated earnings in excess of billings on uncompleted contracts
    
    $
    6,105
    
    
    $
    4,591Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    (3,039
    )
    
    
    (4,022
    )$
    3,066
    
    
    $
    569
 6




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The percent of revenue recognized under the percentage-of-completion method
compared to total consolidated revenues was 18.4% for the three months ended
March 31, 2004 compared with 9.7% for the three months ended March 31, 2003.
The increase reflects the addition of $10.2 million in revenue in the first
quarter of 2004 related to the acquisition of Foley Company in November 2003.
Revenues at the company that manufactures wind towers increased by $7.5 million
between the periods. Stock-based compensation The Company has elected to follow the accounting provisions of Accounting
Principle Board Opinion No. 25, Accounting for Stock Issued to Employees, for
stock-based compensation and to furnish the pro forma disclosures required
under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation. Had compensation costs for the stock options issued been determined based on
estimated fair value at the award dates, as prescribed by SFAS No. 123, the
Companys net income for three month periods ended March 31, 2004 and March 31,
2003 would have decreased as presented in the table below. This may not be
representative of the pro forma effects for future periods if additional
options are granted. Three months endedMarch 31,(in thousands)
    
    2004
    
    2003Net incomeAs reported
    
    $
    8,095
    
    
    $
    9,862Total stock-based employee compensation
expense determined under fair value
based method for all awards net of
related tax effects
    
    
    (214
    )
    
    
    (218
    )Pro forma
    
    $
    7,881
    
    
    $
    9,644Basic earnings per shareAs reported
    
    $
    0.31
    
    
    $
    0.38Pro forma
    
    $
    0.30
    
    
    $
    0.37Diluted earnings per shareAs reported
    
    $
    0.31
    
    
    $
    0.38Pro forma
    
    $
    0.30
    
    
    $
    0.37
 Reclassifications Certain prior year amounts reported on the Companys consolidated statement of
income have been reclassified to conform to 2004 presentation. Such
reclassifications had no impact on net income, shareholders equity or cash
provided by operating activities. 7




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##### Table of Contents



Inventories Inventories consist of the following: March 31,
    
    December 31,(in thousands)
    
    2004
    
    2003Finished goods
    
    $
    18,288
    
    
    $
    20,349Work in process
    
    
    7,115
    
    
    
    6,234Raw material, fuel and supplies
    
    
    35,115
    
    
    
    30,383$
    60,518
    
    
    $
    56,966
 Goodwill and Other Intangible Assets The following table summarizes the components of the Companys intangible
assets at March 31, 2004 and December 31, 2003. March 31, 2004
    
    December 31, 2003Gross
    
    
    
    
    
    Net
    
    Gross
    
    
    
    
    
    Netcarrying
    
    Accumulated
    
    carrying
    
    carrying
    
    Accumulated
    
    carrying(in thousands)
    
    amount
    
    amortization
    
    amount
    
    amount
    
    amortization
    
    amountAmortized intangible assets:Covenants not to compete
    
    $
    2,610
    
    
    $
    1,592
    
    
    $
    1,018
    
    
    $
    2,610
    
    
    $
    1,483
    
    
    $
    1,127Other intangible assets including
contracts
    
    
    2,367
    
    
    
    1,188
    
    
    
    1,179
    
    
    
    2,367
    
    
    
    1,118
    
    
    
    1,249Total
    
    $
    4,977
    
    
    $
    2,780
    
    
    $
    2,197
    
    
    $
    4,977
    
    
    $
    2,601
    
    
    $
    2,376Non-amortized intangible assets:Brand/trade name
    
    $
    4,720
    
    
    $
    
    
    
    $
    4,720
    
    
    $
    4,720
    
    
    $
    
    
    
    $
    4,720
 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 $179,000 for the three months ended March 31, 2004 compared to
$132,000 for the three months ended March 31, 2003. The estimated annual
amortization expense for these intangible assets for the next five years is:
$717,000 for 2004, $551,000 for 2005, $402,000 for 2006, $245,000 for 2007 and
$193,000 for 2008. New Accounting Standards FASB Interpretation (FIN) No. 46 (revised December 2003), Consolidation of
Variable Interest Entities, is an interpretation of Accounting Research
Bulletin No. 51, 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 application of certain provisions of FIN 46 is the first quarter of 2004
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 has determined that it does not have any arrangements with
unconsolidated entities under FIN 46 except for majority interests in eight
limited partnerships that invest in tax-credit-qualifying, affordable-housing
projects. The net investment in these entities, which are currently accounted
for on an equity-method basis, totaled $2.9 million as of March 31, 2004. Full
consolidation of these entities would not have a material effect on the
Companys consolidated financial statements and would have no effect on its
consolidated net income. Therefore, the Company will continue to include these
entities in its consolidated financial statements on an equity method basis due
to immateriality. 8




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##### Table of Contents



Segment Information The Companys business operations consist of five segments based on products
and services. Electric includes electric utility operations 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
consists of businesses involved in the sale of diagnostic medical equipment,
patient monitoring equipment, and related supplies and accessories. These
businesses also provide service maintenance, 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 42 states. Other business operations consists of businesses in construction contracting
including design and build services for new construction, transportation,
telecommunications, energy services, and natural gas marketing, as well as the
portion of corporate administrative and general expenses that is not allocated
to other segments. The construction contracting companies and energy services
and natural gas marketing business operate primarily in the central region of
the United States. 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. Operating Revenue Three months endedMarch 31,(in thousands)
    
    2004
    
    2003Electric
    
    $
    72,855
    
    
    $
    68,070Plastics
    
    
    26,436
    
    
    
    22,935Manufacturing
    
    
    46,839
    
    
    
    34,719Health services
    
    
    25,676
    
    
    
    21,818Other business operations
    
    
    35,492
    
    
    
    24,803Intersegment eliminations
    
    
    (713
    )
    
    
    (155
    )Total
    
    $
    206,585
    
    
    $
    172,190
 Operating Income (Loss) Three months endedMarch 31,(in thousands)
    
    2004
    
    2003Electric
    
    $
    17,470
    
    
    $
    16,984Plastics
    
    
    1,289
    
    
    
    2,652Manufacturing
    
    
    333
    
    
    
    1,209Health services
    
    
    424
    
    
    
    112Other business operations
    
    
    (3,455
    )
    
    
    (2,655
    )Total
    
    $
    16,061
    
    
    $
    18,302
 9




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##### Table of Contents



Identifiable Assets March 31,
    
    December 31,(in thousands)
    
    2004
    
    2003Electric
    
    $
    612,248
    
    
    $
    609,190Plastics
    
    
    66,334
    
    
    
    58,538Manufacturing
    
    
    143,529
    
    
    
    138,493Health services
    
    
    67,044
    
    
    
    67,587Other business operations
    
    
    95,286
    
    
    
    112,615Total
    
    $
    984,441
    
    
    $
    986,423
 Substantially all of the Companys long-lived assets are within the United
States. For the three months ended March 31, 2004, 93.4% of the Companys
consolidated revenue came from sales within the Untied States and 6.2% came
from sales in Canada. For the three months ended March 31, 2003 substantially
all sales were within the United States. Earnings per Share 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 March 31,
2004 was net income of
$8.1 million as compared to $9.9 million of net income for the three months
ended March 31, 2003. 10




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##### Table of Contents



Regulatory Assets and Liabilities As a regulated entity the Company and the electric utility account for the
financial effects of regulation in accordance with SFAS No. 71, Accounting for
the Effect of Certain Types of Regulation. This accounting standard allows for
the recording of a regulatory asset or liability for costs that will be
collected or refunded in the future as required under regulation. The following table indicates the amount of regulatory assets and liabilities
recorded on the Companys consolidated balance sheet: March 31,
    
    December 31,(in thousands)
    
    2004
    
    2003Regulatory assets:Deferred income taxes
    
    $
    13,379
    
    
    $
    12,750Debt expenses and reacquisition premiums
    
    
    3,753
    
    
    
    3,863Deferred conservation program costs
    
    
    551
    
    
    
    882Plant acquisition costs
    
    
    273
    
    
    
    285Deferred marked-to-market losses
    
    
    401
    
    
    
    1,802Accrued cost-of-energy revenue
    
    
    1,914
    
    
    
    3,693Accumulated ARO accretion/depreciation adjustment
    
    
    147
    
    
    
    117Total regulatory assets
    
    $
    20,418
    
    
    $
    23,392Regulatory liabilities:Accumulated reserve for estimated removal costs
    
    $
    33,573
    
    
    $
    33,579Deferred income taxes
    
    
    7,311
    
    
    
    7,496Deferred marked-to-market gains
    
    
    1,232
    
    
    
    1,684Gain on sale of division office building
    
    
    166
    
    
    
    167Total regulatory liabilities
    
    $
    42,282
    
    
    $
    42,926Net regulatory liability position
    
    $
    21,864
    
    
    $
    19,534
 The regulatory assets and liabilities related to deferred income taxes are the
result of the adoption of SFAS No. 109, Accounting for Income Taxes. Debt
expenses and reacquisition premiums are being recovered from electric utility
customers over the remaining original lives of the reacquired debt issues, the
longest of which is 19 years. 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 6.2 years. Accrued cost-of-energy revenue included in Accrued utility
revenues will be recovered over the next nine months. All deferred
marked-to-market gains and losses are related to forward purchases and sales of
energy scheduled for delivery in 2004. The Accumulated reserve for estimated
removal costs is reduced for actual removal costs incurred. The remaining
regulatory assets and liabilities are being recovered from electric customers
over the next 30 years. If for any reason, the Companys regulated businesses cease to meet the
criteria for application of SFAS No. 71 for all or part of their operations,
the regulatory assets and liabilities that no longer meet such criteria would
be removed from the consolidated balance sheet and included in the consolidated
statement of income as an extraordinary expense or income item in the period in
which the application of SFAS No. 71 ceases. 11




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##### Table of Contents



Pension Plan and Other Postretirement Benefits Pension PlanComponents of net periodic pension benefit cost of the Companys
noncontributory funded pension plan are as follows: Three months endedMarch 31,(in thousands)
    
    2004
    
    2003Service costbenefit earned during the period
    
    $
    900
    
    
    $
    945Interest cost on projected benefit obligation
    
    
    2,350
    
    
    
    2,373Expected return on assets
    
    
    (3,000
    )
    
    
    (3,233
    )Amortization of prior-service cost
    
    
    225
    
    
    
    292Net periodic pension cost
    
    $
    475
    
    
    $
    377
 Cash Flows: The Company made a $1.0 million discretionary contribution to the
pension plan in the first quarter of 2004 and made an additional $1.0 million
discretionary contribution to the plan in April 2004. Executive Survivor and Supplemental Retirement PlanComponents of net periodic
pension benefit cost of the Companys unfunded, nonqualified benefit plan for
executive officers and certain key management employees are as follows: Three months endedMarch 31,(in thousands)
    
    2004
    
    2003Service costbenefit earned during the period
    
    $
    205
    
    
    $
    104Interest cost on projected benefit obligation
    
    
    372
    
    
    
    357Amortization of prior-service cost
    
    
    37
    
    
    
    37Recognized net actuarial loss
    
    
    170
    
    
    
    143Net periodic pension cost
    
    $
    784
    
    
    $
    641
 Postretirement BenefitsComponents of net periodic postretirement benefit cost
for health insurance and life insurance benefits for retired electric utility
and corporate employees are as follows: Three months endedMarch 31,(in thousands)
    
    2004
    
    2003Service costbenefit earned during the period
    
    $
    288
    
    
    $
    252Interest cost on projected benefit obligation
    
    
    645
    
    
    
    655Amortization of transition obligation
    
    
    189
    
    
    
    187Amortization of prior-service cost
    
    
    (77
    )
    
    
    (76
    )Amortization of net actuarial loss
    
    
    172
    
    
    
    177Net periodic postretirement benefit cost
    
    $
    1,217
    
    
    $
    1,195
 Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the
Act)The Companys postretirement medical plan provides prescription drug
coverage for all retirees. The Companys accumulated postretirement benefit
obligation (APBO) and net cost recognized for other postemployment benefits
(OPEB) do not reflect the effects of the Act. The provisions of the Act provide
for a federal subsidy for plans that provide prescription drug benefits and
meet certain qualifications, and alternatively would allow prescription drug
plan sponsors to coordinate with the Medicare benefit. Specific authoritative
guidance is pending from the FASB and Federal Government, and when that
guidance is issued, it could require the Company to change its actuarially
determined APBO and net cost for OPEB. 12




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##### Table of Contents



Subsequent Events On April 12, 2004 the Companys Board of Directors granted 72,400 stock options
to key employees and 17,050 shares of restricted stock to the directors and
certain key employees 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 six months from the grant date and expire ten years
after the date of the grant. As of March 31, 2004 a total of 1,509,577 options
were outstanding and a total of 197,384 shares of restricted stock had been
issued under the Plan. The Company accounts for the Plan under Accounting
Principles Board Opinion No. 25. On April 12, 2004 the Companys Board of Directors approved a performance-based
stock incentive plan for the Companys executive officers. Under the plan, the
officers could be awarded up to 70,300 shares of the Companys common stock
based on the Companys stock performance relative to the stock performances of
its peer group of companies in the Edison Electric Institute Index over a three
year period ending on December 31, 2006. The number of shares earned, if any,
would be awarded and issued at the end of the three year performance
measurement period.
The participants under this
plan have no voting or dividend rights related to the eligible shares
until the shares are issued at the end of the measurement period. On April 28, 2004 the
Company renewed its $70 million line of credit. The renewed
agreement expires on April 27, 2005. The terms
of the renewed line of credit are essentially the same as those in place prior
to the renewal. This line is available to support borrowings of the Companys
nonelectric operations. The Company anticipates that the electric utilitys
cash requirements through April 2005 will be provided for by cash flows from
electric utility operations. 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations MATERIAL CHANGES IN FINANCIAL POSITION For the period 2004 through 2008, the Company estimates that funds internally
generated net of forecasted dividend payments will be sufficient to meet
scheduled debt retirements, provide for its estimated consolidated capital
expenditures and payoff its currently outstanding short-term debt. Reduced
demand for electricity, reductions in wholesale sales of electricity or margins
on wholesale sales, or declines in the number of products manufactured and sold
by the Company could have an effect on funds internally generated. Additional
equity or debt financing will be required in the period 2004 through 2008 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 began issuing new shares of common stock in January 2004 to meet
the requirements of its dividend reinvestment and share purchase plan and its
employee stock purchase program, rather than purchasing shares on the open
market. As a result, the Company issued 104,263 common shares and received $2.7
million in cash from the issuance of stock in the first quarter of 2004 and
expects to generate approximately $6.3 million in additional equity funding
prior to December 31, 2004. The Company also received $0.2 million in cash from
the issuance of 14,681 shares of common stock for stock options exercised in
the first quarter of 2004. 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 April 28, 2004 the
Company renewed its $70 million line of credit. The renewed
agreement expires on April 27, 2005. The terms
of the renewed line of credit are essentially the same as those in place prior
to the renewal. This line is available to support borrowings of the Companys
nonelectric operations. The Company anticipates that the electric utilitys
cash requirements through April 2005 will be provided for by cash flows from
electric utility operations. As of March 31, 2004, $35 million of the Companys $70 million line of credit
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. 13




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##### Table of Contents



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. Net cash provided by operating activities decreased $4.4 million for the three
months ended March 31, 2004 compared to the three months ended March 31, 2003
primarily as a result of a $1.8 million decrease in net income, a $1.2 million
reduction in cash from noncurrent liabilities and deferred credits, a $1.2
million increase in net cash used for current assets and current liabilities
between the periods and a $1.0 million discretionary contribution to the
Companys pension plan in the first quarter of 2004. The $1.2 million increase
in cash used for working capital items between the periods is made up of a $3.9
million decrease in cash from changes in interest and income taxes payable and
a $3.6 million increase in cash used for accounts payables and other current
liabilities offset by a $4.2 million decrease in cash used for inventories and
receivables and a $2.2 million decrease in cash used for other current assets. Receivables increased by $7.0 million from December 31, 2003 to March 31, 2004.
The electric utilitys receivables increased $7.8 million mainly as a result of
increases in wholesale sales of electricity in March 2004 compared to December
of 2003. Receivables in the plastics segment increased $7.9 million as a result
of an $7.4 million increase in sales in February and March of 2004 compared to
November and December of 2003. Receivables in the health services segment
increased $0.5 million in the first quarter of 2004 related to increased sales
of diagnostic medical equipment. Receivables in the construction segment
decreased $6.4 million in the first three months of 2004 coinciding with a
seasonal decrease in regional construction business. A $2.9 million decrease in
receivables in the manufacturing segment in the first three months of 2004
reflects decreases of $4.6 million at the wind tower manufacturing company and
$1.2 million at the Companys manufacturer of structural steel products offset
by increases in receivables of $1.2 million at the waterfront equipment
company, $0.9 million at the metal parts stamping and fabrication company and
$0.7 million at the Companys manufacturer of thermoformed plastic and horticultural
products. Inventories increased by $3.5 million from December 31, 2003 to March 31, 2004.
The increase in inventories in the first three months of 2004 is mainly due to
a $2.4 million build-up of inventories at the Companys manufacturer of
waterfront equipment in preparation for the spring and summer sales seasons and
a $1.5 million increase in inventories at the metal parts stamping and
fabrication company related to a build-up of finished goods inventory for
customers forecasted needs. Inventories in the plastics segment decreased $0.3
million from December 2003 to March 2004 as a result of increased sales in this
segment. Accounts payable and other current liabilities decreased by $9.5 million from
December 31, 2003 to March 31, 2004. The plastic pipe companies payables and
other current liabilities decreased by $4.4 million related to payments made on
raw materials purchased prior to December 31, 2003. Construction payables and
other current liabilities decreased by $2.7 million related to the seasonal
winter slowdown in construction activity in the region. Electric utility
payables decreased $2.4 million. 14




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##### Table of Contents



Net cash used in investing activities was $6.2 million for the three months
ended March 31, 2004 compared to net cash used in investing activities of $14.3
million for the three months ended March 31, 2003. Capital expenditures
decreased by $5.4 million between the periods. Capital expenditures at the
electric utility decreased by $4.5 million. In the first quarter of 2003 the
utility was still constructing the Solway gas-fired combustion turbine
completed in June 2003. In the first quarter of 2004 the utility had no major
capital projects under construction. The plastic segments capital expenditures
decreased by $1.6 million between the periods related to the completion of the
new production facility in Hampton, Iowa in 2003. Capital expenditures at the
manufacturing companies increased $0.9 million between the periods mainly
related to new equipment purchases and expansion of facilities at the
waterfront equipment company and the manufacturer of thermoformed plastic and
horticultural products. Proceeds from the disposal of noncurrent assets
increased $1.8 million for the three months ended March 31, 2004 compared with
the three months ended March 31, 2003. The increase reflects the proceeds from
the sale of the Fargo-Moorhead RedHawks baseball team and the sale of Dakota
Direct Controls, an energy management consulting firm located in Sioux Falls,
South Dakota, in the first quarter of 2004. Net cash used in financing activities was $1.9 million in the three months
ended March 31, 2004 compared with $4,000 in net cash provided by financing
activities for the three months ended March 31, 2003 reflecting a $2.0 million
reduction in proceeds from short term borrowings between the periods. Proceeds
from the $5.0 million increase in short-term debt outstanding in the first
quarter of 2004 were mainly used to finance construction and operating
activities at the Companys nonelectric operating companies. The Company
received $2.9 million in cash from the issuance of common stock under its
dividend reinvestment and share purchase plan, its employee stock purchase
program and from stock options exercised in the first quarter of 2004 and paid
out $2.5 million for the retirement of long-term debt during the same period. There have been no material changes in the Companys contractual obligations on
long-term debt, coal contracts, construction program commitments, capacity and
energy requirements, other purchase obligations and operating leases from those
reported in the Companys Annual Report on Form 10-K for the year ended
December 31, 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, 2003. As disclosed in the Companys Annual Report on
Form 10-K for the year ended December 31, 2003, the Company does not have any
off-balance-sheet arrangements or any relationships with unconsolidated
entities or financial partnerships. 15




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##### Table of Contents



MATERIAL CHANGES IN RESULTS OF OPERATIONS Comparison of the Three Months Ended March 31, 2004 and 2003 Consolidated Results of Operations Total operating revenues were $206.6 million for the three months ended March
31, 2004 compared with
$172.2 million for the three months ended March 31, 2003. Operating income was
$16.1 million for the three months ended March 31, 2004 compared with $18.3
million for the three months ended March 31, 2003. The Company recorded diluted
earnings per share of $0.31 for the three months ended March 31, 2004 compared
to $0.38 for the three months ended March 31, 2003. Following is a discussion of the results of operations by segment. Amounts presented in the following tables for the three month periods ended
March 31, 2004 and 2003 for operating revenues, cost of goods sold and
nonelectric segment operating expenses will not agree with amounts presented in
the consolidated statements of income for those periods due to the elimination
of intersegment transactions. The total intersegment eliminations include:
$713,000 in operating revenues, $60,000 in cost of goods sold and $653,000 in
other nonelectric expenses for the three months ended March 31, 2004; and
$155,000 in operating revenues, $52,000 in cost of goods sold and $103,000 in
other nonelectric expenses in for the three months ended March 31, 2003. Electric Three months endedMarch 31,(in thousands)
    
    2004
    
    2003
    
    ChangeRetail sales revenues
    
    $
    63,174
    
    
    $
    59,250
    
    
    $
    3,924Wholesale revenues:Sales from company-owned generation
    
    
    4,114
    
    
    
    3,926
    
    
    
    188Net margins on purchased power resold
    
    
    451
    
    
    
    2,454
    
    
    
    (2,003
    )Net marked-to-market gains
    
    
    1,612
    
    
    
    
    
    
    
    1,612Other revenues
    
    
    3,504
    
    
    
    2,440
    
    
    
    1,064Total operating revenues
    
    $
    72,855
    
    
    $
    68,070
    
    
    $
    4,785Production fuel
    
    
    14,597
    
    
    
    12,977
    
    
    
    1,620Purchased power  system use
    
    
    10,922
    
    
    
    9,612
    
    
    
    1,310Other electric operation and maintenance expenses
    
    
    21,441
    
    
    
    19,446
    
    
    
    1,995Depreciation and amortization
    
    
    5,936
    
    
    
    6,452
    
    
    
    (516
    )Property taxes
    
    
    2,489
    
    
    
    2,599
    
    
    
    (110
    )Operating income
    
    $
    17,470
    
    
    $
    16,984
    
    
    $
    486
 The 6.6% increase in retail electric revenue resulted from a 4.1% increase in
retail megawatt-hours sold between the periods combined with a 2.4% increase in
revenue per megawatt-hour (mwh) sold partially attributable to a $0.7 million
increase in fuel cost recovery revenue. Increased sales reflect increased
consumption, mainly among commercial and industrial customers. Revenue from
sales to commercial customers increased $2.1 million on a 4.1% increase in mwhs
sold. Revenue from sales to residential customers increased $1.2 million on a
1.0% increase in mwhs sold. Revenue from sales to industrial customers
increased $0.5 million on a 15.6% increase in mwhs sold. Weather was not a
discernable factor in the increase in sales. 16




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##### Table of Contents



The 4.8% increase in revenue from wholesale electric sales from company-owned
generation resulted from a 17.5% increase in mwhs sold. The revenue per mwh
sold for the three months ended March 31, 2004 compared with the three months
ended March 31, 2003 decreased by 10.8%. Net margins at market prices on energy contracts settled in the first quarter
of 2004 totaled $451,000 at the time of settlement. The $1,612,000 in net
marked-to-market gains recognized on forward energy contracts in the first
three months of 2004 was comprised of $1,657,000 in unrealized net gains and
$45,000 in marked-to-market losses realized in the first quarter of 2004. Net
unrealized marked-to-market gains were $2,057,000 on December 31, 2003. Of this
amount, $31,000 remained unrealized as of March 31, 2004, $103,000 was not
realized due to subsequent marked-to-market net losses recognized in the first
quarter of 2004 and $1,923,000 was realized on settlement in the first quarter
of 2004. In the first quarter of 2003, the Company was recognizing net margins
on purchased power resold at contract prices at the time of settlement. The
Company adopted mark-to-market accounting in the third quarter of 2003 with the
issuance of SFAS No. 149, which eliminated application of the normal purchases
and sales exception to the Companys forward energy contracts which generally
result in physical settlement but are subject to net settlement. The
application of mark-to-market accounting under this accounting change is not
applied retroactively. Therefore, wholesale margins from the resale of
purchased power in the first quarter of 2004 are not comparable to the margins
recorded on the resale of purchased power in the first quarter of 2003. The 43.6% increase in other electric operating revenues for the three months
ended March 31, 2004 compared to the three months ended March 31, 2003 reflects
a $0.5 million increase in revenues from sale of steam to an ethanol plant near
Big Stone Plant, a $0.3 million increase in transmission services related
revenue and a $0.3 million increase revenue from contracted construction
services. Fuel costs increased by 12.5% for the three months ended March 31, 2004
compared with the three months ended March 31, 2003 as a result of a 7.1%
increase in generation combined with a 5.1% increase in the cost of fuel per
mwh generated. Generation increased 13.3% at the Companys Big Stone Plant
where the fuel cost per mwh generated increased 4.2%. Fuel costs for the Solway
combustion turbine that was put in service in June 2003 were $0.4 million for
the three months ended March 31, 2004. The increase in mwh generation
corresponds to a 5.6% increase in mwhs generated for retail sales and a 17.5%
increase in mwhs generated for resale between the periods. Purchased power expense for energy purchased for system use (sale to retail
customers) increased 13.6% for the three months ended March 31, 2004 compared
with the three months ended March 31, 2003 as a result of an 8.4% increase in
mwhs purchased combined with a 4.8% increase in the cost per mwh purchased. The
increase in mwhs purchased for system use corresponds to the increase in retail
sales between the periods. The 10.3% increase in other electric operation and maintenance expenses for the
three months ended March 31, 2004 compared with the three months ended March
31, 2003 reflects increased labor expenses due to an increase in employee
benefit costs, and general wage and salary increases averaging about 3.5%. The
increase also includes $0.4 million in increased line maintenance expenses
mainly for tree-trimming and $0.2 million in increased costs related to
contracted construction work. The 8.0% decrease in depreciation expense is
related to a recent depreciation study and depreciation rates approved by the
Minnesota Public Utilities Commission.  17




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##### Table of Contents



Plastics Three months endedMarch 31,(in thousands)
    
    2004
    
    2003
    
    ChangeOperating revenues
    
    $
    26,436
    
    
    $
    22,935
    
    
    $
    3,501Cost of goods sold
    
    
    23,312
    
    
    
    18,731
    
    
    
    4,581Operating expenses
    
    
    1,266
    
    
    
    1,080
    
    
    
    186Depreciation and amortization
    
    
    569
    
    
    
    472
    
    
    
    97Operating income
    
    $
    1,289
    
    
    $
    2,652
    
    
    $
    (1,363
    )
 The 15.3% increase in operating revenues for the three months ended March 31,
2004 compared with the three months ended March 31, 2003 is the result of an
11.6% increase in pounds of polyvinyl chloride (PVC) pipe sold combined with a
3.3% increase in the price per pound of PVC pipe sold. The increase in revenue
from increased pipe sales and increased prices was more than offset by an 11.6%
increase in the cost per pound of PVC pipe sold. Increased sales combined with
the increased cost per pound of pipe sold resulted in the 24.5% increase in the
cost of goods sold and a 33.4% reduction in the profit margin per pound of pipe
sold between the periods. The 17.2% increase in plastics operating expenses is
mainly due to increases in salaries, sales commissions, insurance and travel
expenses. The cost per pound of resin, the raw material used to produce PVC
pipe, increased 13.0% between the periods. The increase in depreciation and
amortization expense is due to 2003 plant additions, most of which related to
the completion of the polyethylene pipe factory in Hampton, Iowa. In the first quarter of 2004, 100% of resin purchased was from two vendors; 58%
from one and 42% from the other. In the first quarter of 2003, 92% of resin
purchased was from the same two vendors; 71% from one and 21% from the other.
The Company believes 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 Three months endedMarch 31,(in thousands)
    
    2004
    
    2003
    
    ChangeOperating revenues
    
    $
    46,839
    
    
    $
    34,719
    
    
    $
    12,120Cost of goods sold
    
    
    38,823
    
    
    
    26,300
    
    
    
    12,523Operating expenses
    
    
    5,570
    
    
    
    5,329
    
    
    
    241Depreciation and amortization
    
    
    2,113
    
    
    
    1,881
    
    
    
    232Operating income
    
    $
    333
    
    
    $
    1,209
    
    
    $
    (876
    )
 The 34.9% increase in operating revenues for the three months ended March 31,
2004 compared with the three months ended March 31, 2003 reflects revenue
increases of $7.5 million from the Companys manufacturer of wind towers, $2.9
million from the waterfront equipment companies, $1.3 million from the
Companys manufacturer of thermoformed plastic and horticultural products and
$0.4 million from the Companys manufacturer of structural steel products. The
increase in revenues from the Companys manufacturer of wind towers reflects
the sale of towers to a Canadian customer in the first quarter of 2004. The
increase in revenue from the waterfront equipment companies reflects increased
sales of residential and commercial products as a result of increased
advertising, new products and dealership expansion that is partly attributable
to the acquisition of Missouri-based Galva Foam in October 2002. The revenue
increase at the Companys manufacturer of 18




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##### Table of Contents



thermoformed plastic and horticultural products reflects an increase in sales
of higher priced products; the volume of all products sold increased 1.0%
between the periods. The increase in revenue at the Companys manufacturer of
structural steel products is due to an increase in the volume of work performed
between the periods. Increased revenues in the manufacturing segment were more than offset by a
47.6% increase in cost of goods for the three months ended March 31, 2004
compared with the three months ended March 31, 2003. The increase in cost of
goods sold primarily reflects increased costs of $7.6 million at the Companys
manufacturer of wind towers, $2.5 million at the waterfront equipment
companies, $1.7 million at the Companys manufacturer of thermoformed plastic
and horticultural products and $0.7 million at the Companys manufacture of
structural steel products. The increased costs are commensurate with the
increases in manufacturing company revenues. However, competitive pressures
resulting in cost increases in excess of revenue increases along with increased
operating expenses at most of the manufacturing companies have resulted in a
$0.9 million decrease in operating income in the manufacturing segment between
the periods. The 4.5% increase in manufacturing operating expenses for the three months
ended March 31, 2004 compared with the three months ended March 31, 2003 is
mainly due to an increase in sales commissions at the waterfront equipment
company and increased expenses for professional services at all of the
manufacturing companies. The 12.3% increase in depreciation and amortization
expenses between the periods is the a result of plant additions and expansion
of manufacturing capacity. Health Services Three months endedMarch 31,(in thousands)
    
    2004
    
    2003
    
    ChangeOperating revenues
    
    $
    25,676
    
    
    $
    21,818
    
    
    $
    3,858Cost of goods sold
    
    
    19,397
    
    
    
    16,593
    
    
    
    2,804Operating expenses
    
    
    4,464
    
    
    
    3,926
    
    
    
    538Depreciation and amortization
    
    
    1,391
    
    
    
    1,187
    
    
    
    204Operating income
    
    $
    424
    
    
    $
    112
    
    
    $
    312
 The 17.7% increase in health services operating revenues for the three months
ended March 31, 2004 compared with the three months ended March 31, 2003
reflects $1.8 million in additional revenue from the sale and
servicing of diagnostic imaging
equipment, $1.3 million in additional scan revenue and a $0.7 million increase
in revenue from other services. The increase in equipment sales revenue is
partially due to the acquisition of two medical equipment supply companies in
the second and third quarters of 2003 that added to the products and geographic
territory of the sales and service operations. The number of scans performed
decreased 9.1% while the average fee per scan increased 15.0% between the
periods. The 16.9% increase in cost of goods sold for the three months ended March 31,
2004 compared with the three months ended March 31, 2003 was directly related
to the increases in revenues. The increase in operating expenses between the
periods is related to increases in selling, general and administrative expenses
at the company that sells diagnostic and monitoring equipment and supplies and
is partially attributable to the 2003 acquisitions. The 17.1% increase in
depreciation and amortization expense is related to an increase in depreciable
property as a result of equipment purchases in 2003. Increased sales and servicing
of equipment resulted in a $674,000 increase in operating income in
this segment between the periods. The imaging business experienced a
$362,000 decrease in operating income as a result of the
Houston-based operations not performing in accordance with internal
expectations. 19




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##### Table of Contents



Other Business Operations Three months endedMarch 31,(in thousands)
    
    2004
    
    2003
    
    ChangeOperating revenues
    
    $
    35,492
    
    
    $
    24,803
    
    
    $
    10,689Cost of goods sold
    
    
    26,213
    
    
    
    16,997
    
    
    
    9,216Operating expenses
    
    
    11,570
    
    
    
    9,297
    
    
    
    2,273Depreciation and amortization
    
    
    1,164
    
    
    
    1,164
    
    
    
    Operating (loss)
    
    $
    (3,455
    )
    
    $
    (2,655
    )
    
    $
    (800
    )
 The 43.1% increase in operating revenues and 54.2% increase in cost of goods
sold for the three months ended March 31, 2004 compared with the three months
ended March 31, 2003 was mostly due to the acquisition of Foley Company (Foley)
in the fourth quarter of 2003. The 24.4% increase in other business operations
operating expenses is the result of a $0.8 million increase related to the
acquisition of Foley, a $0.9 million increase in operating expenses at the
other operating companies and a $0.6 million increase in unallocated corporate
overheads. Operating losses at the construction companies increased $0.6
million between the periods as a result of losses incurred on certain jobs and
a lower volume of available work than anticipated due to excess capacity in the
construction industry. The construction companies normally report operating
losses during the winter when construction activity is down. Revenues at the Companys energy services company that sells natural gas
decreased $948,000 for the three months ended March 31, 2004 compared with the
three months ended March 31, 2003 while the cost of gas sold decreased $682,000
and operating expenses decreased $392,000, resulting in an increase in the
energy services companys operating income of $126,000. Operating income at the
Companys flatbed trucking company increased $58,000 in the three months ended
March 31, 2004 compared with the three months ended March 31, 2003. The $0.6
million increase in unallocated corporate overhead reflects increase in
employee benefit costs and increases in expenditures for outside professional
services. Other Income and Income Taxes For the three months ended March 31, 2004 compared with the three months ended
March 31, 2003, Other income decreased $293,000 mainly related to a decrease in
allowance for funds used during construction (AFUDC) at the electric utility
due to lower construction work in progress balances in the first quarter of
2004 compared to the first quarter of 2003 when the electric utilitys Solway
combustion turbine was under construction. The Solway combustion turbine was
placed in service in June 2003. The $0.8 million (18.4%) decrease in income tax expense between the quarters is
primarily the result of a $2.6 million (18.1%) reduction in income before income taxes for the three
months ended March 31, 2004 compared with the three months ended March 31,
2003. The effective tax rate for the three months ended March 31, 2004 was
30.6% compared to 30.7% for the three months ended March 31, 2003. 2004 Outlook by Segment Electric For the remainder of 2004, the Company anticipates continued strong performance
from the electric segment, although results are not expected to equal the
record levels of 2003. While retail and wholesale revenues are expected to
remain steady, the Company also expects increased operating expenses mainly
related to higher employee benefit costs and less opportunity for outside
construction work compared to 2003. 20




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##### Table of Contents



Plastics The Company expects the plastics segment to have a strong performance
throughout the remainder of the year. PVC resin prices have been increasing,
causing the sale price of PVC pipe to increase as well. Backlog is strong and
customers are increasing pipe orders in anticipation of higher pipe prices and
strong rural water pipe demand. Manufacturing While the results of operations for the manufacturing segment were down for
the quarter ended March 31, 2004 compared with the quarter ended March 31,
2003, there are objective signs of improved activity for the rest of the year.
Several of the Companys manufacturing companies are attempting to implement
price increases to customers to mitigate the cost increases in raw materials.
The Companys manufacturers of wind towers and structural steel products have
backlogs that are expected to result in improved margins during the rest of
the year. These businesses will continue to be affected by uncertainty related
to the renewal of the federal production tax credit for wind energy and the
pricing and availability of steel and other commodities. The Companys
waterfront equipment business is expected to continue its strong sales growth
in both its residential and commercial business and has recently been awarded
a significant marina renovation and expansion project that will extend over a
two-year period. Health Services Revenues from the company that sells and services medical diagnostic and
monitoring equipment are expected to remain strong throughout 2004 and produce
financial results consistent with 2003. Management continues to address the
cost structure of the diagnostic imaging operations with a continued emphasis
on improving non-performing routes. This part of the health services segment
is expected to show improved earnings in comparison to 2003. Other Business Operations While market conditions remain extremely competitive in the construction
business, there is improvement in the backlog of work. Bidding activity is
increasing and jobs are being awarded in the second quarter of 2004 for work
to be performed throughout the rest of the year. 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, valuation of forward energy contracts,
unbilled electric revenues, unscheduled power exchanges, service contract
maintenance costs, percentage-of-completion and actuarially determined benefits
costs. As better information becomes available or actual amounts are known,
estimates are revised. Operating results can be affected by revised estimates.
Actual results may differ from these estimates under different assumptions or
conditions. Management has discussed the application of these critical
accounting policies and the development of these estimates with the Audit
Committee of the Board of Directors. 21




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##### Table of Contents



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 this operation indicated that the related goodwill was not impaired.
However, actual and projected cash flows from this operation are subject to
fluctuations due to low profit margins on natural gas sales combined with high
volatility of natural gas prices. Reductions in profit margins or the volume of
natural gas sales could result in an impairment of all or a portion of its
related goodwill. The Company will continue to evaluate this reporting unit for
impairment on an annual basis and as conditions warrant. The Company currently has $6.7 million of goodwill recorded on its balance
sheet related to the acquisition of E.W. Wylie Corporation (Wylie), its flatbed
trucking company. 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 and increased brokerage
activity. 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. At December 31, 2003, assessment of Wylie indicated
that its goodwill was not impaired. 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, 2003. There
were no material changes in critical accounting policies or estimates during
the quarter ended March 31, 2004. 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, Federal Energy Regulatory
Commission mandated operational changes to the electricity
transmission grid, 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, availability of resin suppliers, resin prices, steel prices, and other factors discussed under Factors affecting
future earnings on pages 24-25 of the Companys 2003 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, 2003. 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 undertakes no obligation to publicly update or
revise any forward-looking statements. 22




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk At March 31, 2004 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 March 31,
2004, the Company had
$29.8 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
March 31, 2004, interest expense and pre-tax earnings would change by
approximately $298,000 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 March
31, 2004 the Company had $35 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 Company does not enter into transactions for speculative
or trading purposes. 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 energy resources that may
serve to mitigate price risk. The electric utility has market, price and credit risk associated with forward
contracts for the purchase and sale of energy. Net unrealized marked-to-market
gains were $2,057,000 on December 31, 2003. Of this amount, $31,000 remained
unrealized as of March 31, 2004, $103,000 was not realized due to subsequent
marked-to-market net losses recognized in the first quarter of 2004 and
$1,923,000 was realized on settlement in the first quarter of 2004. As of March
31, 2004 the electric utility had recognized, on a pretax basis, $1,689,000 in
net unrealized gains on open forward contracts for the purchase and sale of
energy in 2004. Due to the nature of electricity and the physical aspects of
the electricity transmission system, unanticipated events affecting the
transmission grid can result in transmission constraints and the cancellation
of scheduled transactions by the independent transmission system operator. In
these situations, the counterparties to the cancelled transaction are generally
not made whole for the difference in the contract price and the market price of
the electricity at the time of cancellation. In some instances the electric
utility may deliver on a sale where its offsetting purchase has been cancelled
or is undeliverable, or take delivery on a purchase where its offsetting sale
has been cancelled or is undeliverable. All forward energy transactions are
subject to a small, and likely unquantifiable, risk of cancellation by the
independent transmission system operator due to unanticipated physical
constraints on the transmission system. At the time of cancellation, the
electric utility could be in a gain or loss position depending on the market
price of electricity relative to the contract price and the electric utilitys
position in the transaction. The market prices used to value the electric utilitys forward contracts for
the purchases and sales of electricity are determined by survey of
counterparties by the electric utilitys power services personnel responsible
for contract 23




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##### Table of Contents



pricing. Over 88% of the forward purchase and sales contracts that are marked
to market as of March 31, 2004 are offsetting in terms of volumes and delivery
periods. 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 most forward sales of electricity in wholesale markets be covered
by offsetting forward purchases of electricity with matching terms and delivery
dates or by the portion of company-owned generation projected to be in excess
of retail load requirements. Currently, a portion of marked-to-market gains or
losses on a sales contract will be offset by a marked-to-market loss or gain on
the offsetting purchase contract. 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 March 31, 2004 was not material. The following tables show the effect of marking-to-market forward contracts for
the purchase and sale of energy on the Companys consolidated balance sheet as
of March 31, 2004 and the change in its consolidated balance sheet position
from December 31, 2003 to March 31, 2004: March 31,(in thousands)
    
    2004Current asset  marked-to-market gain
    
    $
    3,489Regulatory asset  deferred marked-to-market loss
    
    
    401Total assets
    
    
    3,890Current liability  marked-to-market loss
    
    
    (969
    )Regulatory liability  deferred marked-to-market gain
    
    
    (1,232
    )Total liabilities
    
    
    (2,201
    )Net fair value of marked-to-market energy contracts
    
    $
    1,689
 Year-to-date(in thousands)
    
    March 31, 2004Fair value at beginning of year
    
    $
    2,057Amount realized on 2003 contracts settled in 2004
    
    
    (1,923
    )Changes in fair value of 2003 contracts
    
    
    163Net fair value of 2003 contracts at end of period
    
    
    297Changes in fair value of 2004 contracts
    
    
    1,392Net fair value end of period
    
    $
    1,689
 The $1.7 million in recognized but unrealized net gains on the forward energy
purchases and sales marked-to-market as of March 31, 2004 is expected to be
realized on physical settlement as scheduled over the following quarters in the
amounts listed: 2nd Quarter
    
    3rd Quarter
    
    4th Quarter(in thousands)
    
    2004
    
    2004
    
    2004
    
    TotalNet gain
    
    $
    311
    
    
    $
    1,226
    
    
    $
    152
    
    
    $
    1,689
 24




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##### Table of Contents



The electric utility 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 March 31, 2004 was $6.8 million. As of March 31, 2004 the
Company had a net credit risk exposure of $9.4 million from thirty
counterparties with investment grade credit ratings. The $9.4 million credit risk exposure includes net amounts due to the electric
utility on receivables/payables from completed transactions billed and unbilled
plus marked-to-market gains/losses on forward contracts for the purchase and
sale of energy scheduled for delivery after March 31, 2004. 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 March 31, 2004, the
end of the period covered by this report. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures were effective as of March 31, 2004. During the fiscal quarter ended March 31, 2004, there were no changes in the
Companys internal controls 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 controls over
financial reporting. 25




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 6. Exhibits and Reports on Form 8-K a) Exhibits: 4.1
    
    Fourth Amendment to Credit Agreement dated as of April 28, 2004.31.1
    
    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 February 3, 2004 to furnish under Item 12
the press release issued on February 2, 2004 to report its earnings for
the fourth quarter and year ended December 31, 2003, announce a dividend
increase and 2004 expectations. 
 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: May 7, 2004 26




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##### Table of Contents



EXHIBIT INDEX Exhibit Number
    
    Description4.1
    
    Fourth Amendment to Credit Agreement dated as of April 28,
2004.31.1
    
    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.