##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For
the quarterly period ended March 31, 2006
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number 0-368
 OTTER TAIL CORPORATION
 
  Minnesota
    
    41-0462685(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 215 South Cascade Street, Box 496, Fergus Falls, Minnesota
    
    56538-0496(Address of principal executive offices)
    
    (Zip Code)
  
  
  þ o
  þ o o
 o þ
  April 30, 2006  29,461,507 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, 2006 and December 31, 2005 (not audited)
    
    2 & 3Consolidated Statements of Income - Three Months  Ended March 31, 2006 and 2005 (not audited)
    
    4Consolidated Statements of Cash Flows - Three Months  Ended March 31, 2006 and 2005  (not audited)
    
    5Notes to Consolidated Financial Statements (not audited)
    
    6-19Item 2.
    
    Managements Discussion and Analysis of Financial  Condition and Results of Operations
    
    20-32Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    32-35Item 4.
    
    Controls and Procedures
    
    35Part II. Other InformationItem 1.
    
    Legal Proceedings
    
    36Item 1A.
    
    Risk Factors
    
    36Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    36Item 6.
    
    Exhibits
    
    36Signatures
    
    37Certification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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##### Table of Contents



PART
I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Otter Tail Corporation
 
 Consolidated Balance Sheets
 -Assets-
 March 31,
    
    
    December 31,2006
    
    
    2005(Thousands of dollars)Current assetsCash and cash equivalents
    
    $
    
    
    
    $
    5,430Accounts receivable:Tradenet
    
    
    130,103
    
    
    
    128,355Other
    
    
    8,260
    
    
    
    11,790Inventories
    
    
    106,458
    
    
    
    88,677Deferred income taxes
    
    
    6,865
    
    
    
    6,871Accrued utility revenues
    
    
    22,833
    
    
    
    22,892Costs and estimated earnings in excess of billings
    
    
    35,618
    
    
    
    21,542Other
    
    
    17,162
    
    
    
    17,301Assets of discontinued operations
    
    
    981
    
    
    
    2,317Total current assets
    
    
    328,280
    
    
    
    305,175Investments and other assets
    
    
    35,972
    
    
    
    33,824Goodwillnet
    
    
    98,110
    
    
    
    98,110Other intangiblesnet
    
    
    20,891
    
    
    
    21,160Deferred debitsUnamortized debt expense and reacquisition premiums
    
    
    6,326
    
    
    
    6,520Regulatory assets and other deferred debits
    
    
    19,538
    
    
    
    19,616Total deferred debits
    
    
    25,864
    
    
    
    26,136PlantElectric plant in service
    
    
    917,222
    
    
    
    910,766Nonelectric operations
    
    
    230,331
    
    
    
    228,548Total plant
    
    
    1,147,553
    
    
    
    1,139,314Less accumulated depreciation and amortization
    
    
    466,476
    
    
    
    459,438Plantnet of accumulated depreciation and
amortization
    
    
    681,077
    
    
    
    679,876Construction work in progress
    
    
    24,773
    
    
    
    17,215Net plant
    
    
    705,850
    
    
    
    697,091Total
    
    $
    1,214,967
    
    
    $
    1,181,496
  - 2 -




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Otter Tail Corporation
Consolidated Balance Sheets   -Liabilities-
 March 31,
    
    
    December 31,2006
    
    
    2005(Thousands of dollars)Current liabilitiesShort-term debt
    
    $
    45,181
    
    
    $
    16,000Current maturities of long-term debt
    
    
    3,354
    
    
    
    3,340Accounts payable
    
    
    111,730
    
    
    
    106,570Accrued salaries and wages
    
    
    18,470
    
    
    
    24,326Accrued federal and state income taxes
    
    
    12,996
    
    
    
    8,776Other accrued taxes
    
    
    12,014
    
    
    
    12,620Other accrued liabilities
    
    
    14,135
    
    
    
    14,975Liabilities of discontinued operations
    
    
    330
    
    
    
    372Total current liabilities
    
    
    218,210
    
    
    
    186,979Pensions benefit liability
    
    
    22,716
    
    
    
    23,216Other postretirement benefits liability
    
    
    27,476
    
    
    
    26,982Other noncurrent liabilities
    
    
    17,454
    
    
    
    18,683Deferred creditsDeferred income taxes
    
    
    113,183
    
    
    
    113,737Deferred investment tax credit
    
    
    9,040
    
    
    
    9,327Regulatory liabilities
    
    
    60,004
    
    
    
    61,624Other
    
    
    1,305
    
    
    
    1,500Total deferred credits
    
    
    183,532
    
    
    
    186,188CapitalizationLong-term debt, net of current maturities
    
    
    257,553
    
    
    
    258,260Class B stock options of subsidiary
    
    
    1,258
    
    
    
    1,258Cumulative preferred shares
authorized 1,500,000 shares without par value;
outstanding 2006 and 2005  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 2006  29,446,952 and 2005  29,401,223
    
    
    147,235
    
    
    
    147,006Premium on common shares
    
    
    95,402
    
    
    
    96,768Unearned compensation
    
    
    
    
    
    
    (1,720
    )Retained earnings
    
    
    234,832
    
    
    
    228,515Accumulated other comprehensive loss
    
    
    (6,201
    )
    
    
    (6,139
    )Total common equity
    
    
    471,268
    
    
    
    464,430Total capitalization
    
    
    745,579
    
    
    
    739,448Total
    
    $
    1,214,967
    
    
    $
    1,181,496
  - 3 -




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##### Table of Contents



Otter Tail Corporation
 
 Consolidated Statements of Income
 Three months endedMarch 31,2006
    
    
    2005(In thousands, except shareand per share amounts)Operating revenues
    
    $
    278,778
    
    
    $
    232,133Operating expensesProduction fuel
    
    
    14,806
    
    
    
    15,177Purchased power  system use
    
    
    18,736
    
    
    
    11,538Electric operation and maintenance expenses
    
    
    23,407
    
    
    
    23,918Cost of goods sold (excludes depreciation; included below)
    
    
    153,074
    
    
    
    123,634Other nonelectric expenses
    
    
    26,316
    
    
    
    22,741Depreciation and amortization
    
    
    12,224
    
    
    
    11,385Property taxes  electric operations
    
    
    2,618
    
    
    
    2,673Total operating expenses
    
    
    251,181
    
    
    
    211,066Operating income
    
    
    27,597
    
    
    
    21,067Other income
    
    
    429
    
    
    
    194Interest charges
    
    
    4,494
    
    
    
    4,566Income from continuing operations before income taxes
    
    
    23,532
    
    
    
    16,695Income taxes  continuing operations
    
    
    8,572
    
    
    
    5,645Net income from continuing operations
    
    
    14,960
    
    
    
    11,050Discontinued operationsIncome from discontinued operations net of taxes of $333 in 2005
    
    
    
    
    
    
    497Loss on expected disposal of discontinued operations  net of
tax of ($1,051) in 2005
    
    
    
    
    
    
    (1,576
    )Net loss from discontinued operations
    
    
    
    
    
    
    (1,079
    )Net income
    
    
    14,960
    
    
    
    9,971Preferred dividend requirements
    
    
    184
    
    
    
    184Earnings available for common shares
    
    $
    14,776
    
    
    $
    9,787Basic earnings per common share:Continuing operations (net of preferred dividend requirement)
    
    $
    0.50
    
    
    $
    0.37Discontinued operations
    
    $
    
    
    
    $
    (0.03
    )$
    0.50
    
    
    $
    0.34Diluted earnings per common share:Continuing operations (net of preferred dividend requirement)
    
    $
    0.50
    
    
    $
    0.37Discontinued operations
    
    $
    
    
    
    $
    (0.04
    )$
    0.50
    
    
    $
    0.33Average number of common shares outstanding  basic
    
    
    29,325,986
    
    
    
    29,126,096Average number of common shares outstanding  diluted
    
    
    29,676,117
    
    
    
    29,230,188Dividends per common share
    
    $
    0.2875
    
    
    $
    0.2800
  - 4 -




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Otter Tail Corporation
 
 Consolidated Statements of Cash Flows
 Three months endedMarch 31,2006
    
    
    2005(Thousands of dollars)Cash flows from operating activitiesNet income
    
    $
    14,960
    
    
    $
    9,971Adjustments to reconcile net income to net cash
provided by operating activities:Net loss from sale of discontinued operations
    
    
    
    
    
    
    1,576Loss (income) from discontinued operations
    
    
    
    
    
    
    (497
    )Depreciation and amortization
    
    
    12,224
    
    
    
    11,385Deferred investment tax credit
    
    
    (287
    )
    
    
    (288
    )Deferred income taxes
    
    
    (866
    )
    
    
    (1,549
    )Change in deferred debits and other assets
    
    
    (1,149
    )
    
    
    745Discretionary contribution to pension plan
    
    
    (2,000
    )
    
    
    Change in noncurrent liabilities and deferred credits
    
    
    548
    
    
    
    2,028Allowance for equity (other) funds used during
construction
    
    
    (192
    )
    
    
    (180
    )Change in derivatives net of regulatory deferral
    
    
    2,400
    
    
    
    273Stock compensation expense
    
    
    339
    
    
    
    324Other  net
    
    
    548
    
    
    
    221Cash (used for) provided by current assets and current
liabilities:Change in receivables
    
    
    2,676
    
    
    
    (2,644
    )Change in inventories
    
    
    (17,811
    )
    
    
    (24,228
    )Change in other current assets
    
    
    (19,131
    )
    
    
    (438
    )Change in payables and other current liabilities
    
    
    (22,236
    )
    
    
    217Change in interest and income taxes payable
    
    
    6,374
    
    
    
    4,477Net cash (used in) provided by continuing operations
    
    
    (23,603
    )
    
    
    1,393Net cash provided by (used in) discontinued operations
    
    
    405
    
    
    
    (301
    )Net cash (used in) provided by operating activities
    
    
    (23,198
    )
    
    
    1,092Cash flows from investing activitiesCapital expenditures
    
    
    (15,473
    )
    
    
    (12,733
    )Proceeds from disposal of noncurrent assets
    
    
    94
    
    
    
    948Acquisitionsnet of cash acquired
    
    
    
    
    
    
    (6,665
    )Increases in other investments
    
    
    (1,331
    )
    
    
    (169
    )Net cash used in investing activities  continuing
operations
    
    
    (16,710
    )
    
    
    (18,619
    )Net proceeds from the sales of discontinued operations
    
    
    900
    
    
    
    Net cash
provided by investing activities 
discontinued operations
    
    
    
    
    
    
    41Net cash used in investing activities
    
    
    (15,810
    )
    
    
    (18,578
    )Cash flows from financing activitiesChange in checks written in excess of cash
    
    
    12,842
    
    
    
    8,132Net short-term borrowings
    
    
    29,181
    
    
    
    15,889Proceeds from issuance of common stock, net of issuance
expenses
    
    
    869
    
    
    
    4,241Payments for retirement of common stock
    
    
    (2
    )
    
    
    (6
    )Proceeds from issuance of long-term debt, net of issuance
expenses
    
    
    57
    
    
    
    44Payments for retirement of long-term debt
    
    
    (773
    )
    
    
    (2,277
    )Dividends paid
    
    
    (8,643
    )
    
    
    (8,342
    )Net cash provided by financing activities  continuing
operations
    
    
    33,531
    
    
    
    17,681Net cash used in financing activities  discontinued
operations
    
    
    
    
    
    
    (256
    )Net cash provided by financing activities
    
    
    33,531
    
    
    
    17,425Effect of foreign exchange rate fluctuations on cash
    
    
    47
    
    
    
    61Net change in cash and cash equivalents
    
    
    (5,430
    )
    
    
    Cash and
cash equivalents at beginning of period 
continuing operations
    
    
    5,430
    
    
    
    Cash and cash equivalents at end of period  continuing
operations
    
    $
    
    
    
    $
    Supplemental cash flow informationCash paid during the year from continuing operations for:Interest (net of amount capitalized)
    
    $
    2,144
    
    
    $
    2,238Income taxes
    
    $
    5,226
    
    
    $
    4,527Cash paid during the year from discontinued operations for:Interest
    
    $
    
    
    
    $
    28Income taxes
    
    $
    (156
    )
    
    $
    763
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OTTER TAIL CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   Revenue Recognition
    March 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Costs incurred on uncompleted contracts
    
    $
    203,332
    
    
    $
    194,076Less billings to date
    
    
    (201,441
    )
    
    
    (203,862
    )Plus estimated earnings recognized
    
    
    25,636
    
    
    
    22,834$
    27,527
    
    
    $
    13,048
 6




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##### Table of Contents



March 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Costs and estimated earnings in excess of billings on uncompleted contracts
    
    $
    35,618
    
    
    $
    21,542Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    (8,091
    )
    
    
    (8,494
    )$
    27,527
    
    
    $
    13,048
 Adjustments and Reclassifications
  Inventories
  March 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Finished goods
    
    $
    48,623
    
    
    $
    38,928Work in process
    
    
    7,521
    
    
    
    7,146Raw material, fuel and supplies
    
    
    50,314
    
    
    
    42,603$
    106,458
    
    
    $
    88,677
 Goodwill and Other Intangible Assets
   March 31, 2006
    
    
    December 31, 2005Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    Netcarrying
    
    
    Accumulated
    
    
    carrying
    
    
    carrying
    
    
    Accumulated
    
    
    carrying(in thousands)
    
    amount
    
    
    amortization
    
    
    amount
    
    
    amount
    
    
    amortization
    
    
    amountAmortized intangible assets:Covenants not to compete
    
    $
    2,198
    
    
    $
    1,549
    
    
    $
    649
    
    
    $
    2,338
    
    
    $
    1,620
    
    
    $
    718Customer relationships
    
    
    10,572
    
    
    
    691
    
    
    
    9,881
    
    
    
    10,575
    
    
    
    583
    
    
    
    9,992Other intangible assets
including contracts
    
    
    2,634
    
    
    
    1,618
    
    
    
    1,016
    
    
    
    2,785
    
    
    
    1,680
    
    
    
    1,105Total
    
    $
    15,404
    
    
    $
    3,858
    
    
    $
    11,546
    
    
    $
    15,698
    
    
    $
    3,883
    
    
    $
    11,815Non-amortized intangible assets:Brand/trade name
    
    $
    9,345
    
    
    $
    
    
    
    $
    9,345
    
    
    $
    9,345
    
    
    $
    
    
    
    $
    9,345
 7




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##### Table of Contents



Comprehensive Income
 Three months endedMarch 31,(in thousands)
    
    2006
    
    
    2005Net income
    
    $
    14,960
    
    
    $
    9,971Other comprehensive income (net-of-tax)Foreign currency translation (loss)
    
    
    (55
    )
    
    
    (83
    )Unrealized (loss) on available-for-sale securities
    
    
    (7
    )
    
    
    (22
    )Total other comprehensive income
    
    
    (62
    )
    
    
    (105
    )Total comprehensive income
    
    $
    14,898
    
    
    $
    9,866
  New Accounting Standards
 SFAS No. 123(R) (revised 2004), Share-Based Payment, Accounting for Stock-based Compensation Accounting for Stock Issued to Employees Share-based Payments
 SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, Accounting for
Derivative Instruments and Hedging Activities Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities
 8




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##### Table of Contents



SFAS No. 156 Accounting
for Servicing of Financial Assets, Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
 Segment Information
          9




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##### Table of Contents



Operating Revenue
 Three months endedMarch 31,(in thousands)
    
    2006
    
    
    2005Electric
    
    $
    82,584
    
    
    $
    73,483Plastics
    
    
    38,105
    
    
    
    32,155Manufacturing
    
    
    68,257
    
    
    
    55,529Health services
    
    
    32,076
    
    
    
    27,798Food ingredient processing
    
    
    9,350
    
    
    
    9,255Other business operations
    
    
    49,250
    
    
    
    34,897Intersegment eliminations
    
    
    (844
    )
    
    
    (984
    )Total
    
    $
    278,778
    
    
    $
    232,133
 Income (Loss) Before Income Taxes
 Three months endedMarch 31,(in thousands)
    
    2006
    
    
    2005Electric
    
    $
    14,695
    
    
    $
    11,805Plastics
    
    
    7,656
    
    
    
    4,407Manufacturing
    
    
    3,771
    
    
    
    1,691Health services
    
    
    588
    
    
    
    1,349Food ingredient processing
    
    
    (1,651
    )
    
    
    1,198Other business operations
    
    
    (1,527
    )
    
    
    (3,755
    )Total
    
    $
    23,532
    
    
    $
    16,695
 Total Assets
 March 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Electric
    
    $
    648,993
    
    
    $
    654,175Plastics
    
    
    95,643
    
    
    
    76,573Manufacturing
    
    
    208,035
    
    
    
    177,969Health services
    
    
    66,046
    
    
    
    67,066Food ingredient processing
    
    
    96,995
    
    
    
    96,023Other business operations
    
    
    98,274
    
    
    
    107,373Discontinued operations
    
    
    981
    
    
    
    2,317Total
    
    $
    1,214,967
    
    
    $
    1,181,496
  10




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##### Table of Contents



Three months endedMarch 31,(in thousands)
    
    2006
    
    2005United States of America
    
    
    97.2
    %
    
    
    98.1
    %Canada
    
    
    1.4
    %
    
    
    0.9
    %All other countries
    
    
    1.4
    %
    
    
    1.0
    %
 Rate and Regulatory Matters
     11




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##### Table of Contents



Regulatory Assets and Liabilities
 Accounting for the Effect of Certain Types of
Regulation
  March 31,
    
    
    December 31,(in thousands)
    
    2006
    
    
    2005Regulatory assets:Deferred income taxes
    
    $
    16,869
    
    
    $
    16,724Accrued cost-of-energy revenue
    
    
    10,620
    
    
    
    10,400Reacquisition premiums
    
    
    2,918
    
    
    
    2,995Deferred marked-to-market losses
    
    
    999
    
    
    
    1,423Deferred conservation program costs
    
    
    613
    
    
    
    1,064Accumulated ARO accretion/depreciation adjustment
    
    
    234
    
    
    
    209Plant acquisition costs
    
    
    185
    
    
    
    196Total regulatory assets
    
    $
    32,438
    
    
    $
    33,011Regulatory liabilities:Accumulated reserve for estimated removal costs
    
    $
    52,852
    
    
    $
    52,582Deferred income taxes
    
    
    5,778
    
    
    
    5,961Deferred marked-to-market gains
    
    
    1,219
    
    
    
    2,925Gain on sale of division office building
    
    
    155
    
    
    
    156Total regulatory liabilities
    
    $
    60,004
    
    
    $
    61,624Net regulatory liability position
    
    $
    27,566
    
    
    $
    28,613
 Accounting for Income Taxes Unamortized debt expense and reacquisition premiums Accrued utility revenues
 12




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##### Table of Contents



Share-based Payments
  Share-Based Payment, Accounting for Stock-based Compensation Accounting for
Stock Issued to Employees Unearned compensation Premium on
common shares.
  1999 Employee Stock Purchase Plan, as Amended (Purchase Plan)
 Stock Options granted under the 1999 Stock Incentive Plan, as Amended (Incentive Plan)
 13




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##### Table of Contents



Three months ended(in thousands)
    
    March 31, 2005Net incomeAs reported
    
    $
    9,971Total stock-based employee compensation
expense determined under fair value
based method for all awards net of
related tax effects
    
    
    (106
    )Pro forma
    
    $
    9,865Basic earnings per shareAs reported
    
    $
    0.34Pro forma
    
    $
    0.33Diluted earnings per shareAs reported
    
    $
    0.33Pro forma
    
    $
    0.33
   AggregateAverage
    
    
    intrinsicexercise
    
    
    valueOptions
    
    
    price
    
    
    (000s)Outstanding,
January 1, 2006
    
    
    1,237,164
    
    
    $
    25.58Granted
    
    
    Exercised
    
    
    45,218
    
    
    $
    22.98
    
    
    $
    321Forfeited
    
    
    Outstanding, March 31, 2006
    
    
    1,191,946
    
    
    $
    25.68
    
    
    $
    4,105Exercisable, March 31, 2006
    
    
    1,050,054
    
    
    $
    25.25
    
    
    $
    3,986
  14




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##### Table of Contents



Options outstanding
    
    
    Options exercisableWeighted-average
    
    
    Weighted-
    
    
    
    
    
    
    Weighted-Outstanding
    
    
    remaining
    
    
    average
    
    
    Exercisable
    
    
    averageRange of
    
    as of
    
    
    contractual
    
    
    exercise
    
    
    as of
    
    
    exerciseexercise prices
    
    3/31/06
    
    
    life (yrs)
    
    
    price
    
    
    3/31/06
    
    
    price$18.80-$21.94
    
    
    286,497
    
    
    
    3.7
    
    
    $
    19.48
    
    
    
    286,497
    
    
    $
    19.48$21.95-$25.07
    
    
    62,850
    
    
    
    9.3
    
    
    $
    24.93
    
    
    
    62,850
    
    
    $
    24.93$25.08-$28.21
    
    
    604,975
    
    
    
    6.1
    
    
    $
    26.54
    
    
    
    517,475
    
    
    $
    26.41$28.22-$31.34
    
    
    237,624
    
    
    
    6.1
    
    
    $
    31.21
    
    
    
    183,232
    
    
    $
    31.17
  Restricted Stock granted to Directors
  Weighted averagegrant-dateShares
    
    
    fair valueNonvested,
January 1, 2006
    
    
    27,900
    
    
    $
    22.37Granted
    
    
    Vested
    
    
    Forfeited
    
    
    Nonvested, March 31, 2006
    
    
    27,900
    
    
    $
    22.37
 Restricted Stock granted to Employees
 15




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##### Table of Contents



Unearned Compensation, Premium on common shares
  Weighted averagereporting-dateShares
    
    
    fair valueNonvested,
January 1, 2006
    
    
    71.525
    
    
    $
    27.99Granted
    
    
    Vested (fair
value: $29,000)
    
    
    996
    
    
    $
    28.47Forfeited
    
    
    Nonvested, March 31, 2006
    
    
    70,529
    
    
    $
    27.97
 Stock Performance Awards granted to Executive Officers
  16




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##### Table of Contents



Maximum
    
    
    
    Amount of expenseshares
    
    
    
    during the threePerformance
    
    subject
    
    Shares
    
    months endedperiod
    
    to award
    
    expected to be awarded
    
    March 31,2006
    
    20052005-2007
    
    
    75,150
    
    
    
    50,872
    
    
    $
    94,000
    
    
    
    2004-2006
    
    
    70,500
    
    
    
    23,500
    
    
    $
    47,000
    
    
    
    
 Common Shares and Earnings per Share
   Pension Plan and Other Postretirement Benefits
 Pension Plan
 Three months endedMarch 31,(in thousands)
    
    2006
    
    
    2005Service costbenefit earned during the period
    
    $
    1,210
    
    
    $
    1,034Interest cost on projected benefit obligation
    
    
    2,544
    
    
    
    2,448Expected return on assets
    
    
    (3,065
    )
    
    
    (2,996
    )Amortization of prior-service cost
    
    
    186
    
    
    
    241Amortization of net actuarial loss
    
    
    378
    
    
    
    Net periodic pension cost
    
    $
    1,253
    
    
    $
    727
  17




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##### Table of Contents



Executive Survivor and Supplemental Retirement Plan
 Three months endedMarch 31,(in thousands)
    
    2006
    
    
    2005Service costbenefit earned during the period
    
    $
    106
    
    
    $
    92Interest cost on projected benefit obligation
    
    
    326
    
    
    
    316Amortization of prior-service cost
    
    
    18
    
    
    
    18Recognized net actuarial loss
    
    
    118
    
    
    
    104Net periodic pension cost
    
    $
    568
    
    
    $
    530
 Postretirement Benefits
 Three months endedMarch 31,(in thousands)
    
    2006
    
    
    2005Service costbenefit earned during the period
    
    $
    334
    
    
    $
    311Interest cost on projected benefit obligation
    
    
    637
    
    
    
    666Amortization of transition obligation
    
    
    187
    
    
    
    187Amortization of prior-service cost
    
    
    (76
    )
    
    
    (77
    )Amortization of net actuarial loss
    
    
    133
    
    
    
    156Effect of Medicare Part D expected subsidy
    
    
    (293
    )
    
    
    (201
    )Net periodic postretirement benefit cost
    
    $
    922
    
    
    $
    1,042
 Discontinued Operations
 Accounting for the Impairment
or Disposal of Long-Lived Assets
  Three months endedMarch 31, 2005(in thousands)
    
    MIS
    
    
    SGS
    
    
    CLC
    
    
    TotalOperating revenues
    
    $
    2,044
    
    
    $
    4,870
    
    
    $
    1,705
    
    
    $
    8,619Impairment loss
    
    
    
    
    
    
    (2,627
    )
    
    
    
    
    
    
    (2,627
    )Income/(loss) before income taxes
    
    
    1,270
    
    
    
    (3,011
    )
    
    
    (56
    )
    
    
    (1,797
    )Income tax expense/(benefit)
    
    
    508
    
    
    
    (1,204
    )
    
    
    (22
    )
    
    
    (718
    )
 18




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##### Table of Contents



March 31, 2006
    
    
    December 31, 2005(in thousands)
    
    SGS
    
    
    CLC
    
    
    Total
    
    
    SGS
    
    
    CLC
    
    
    TotalCurrent assets
    
    $
    463
    
    
    $
    518
    
    
    $
    981
    
    
    $
    857
    
    
    $
    1,455
    
    
    $
    2,312Investments and other assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5
    
    
    
    5Assets of discontinued operations
    
    $
    463
    
    
    $
    518
    
    
    $
    981
    
    
    $
    857
    
    
    $
    1,460
    
    
    $
    2,317Current liabilities
    
    $
    274
    
    
    $
    56
    
    
    $
    330
    
    
    $
    328
    
    
    $
    44
    
    
    $
    372Liabilities of discontinued operations
    
    $
    274
    
    
    $
    56
    
    
    $
    330
    
    
    $
    328
    
    
    $
    44
    
    
    $
    372
  Subsequent Events
   Number ofVesting date
    
    shares vestingApril 10, 2006
    
    
    7,450April 8, 2007
    
    
    3,850June 27, 2007
    
    
    1,000April 8, 2008
    
    
    3,850January 9, 2009
    
    
    1,000January 16, 2009
    
    
    500April 8, 2009
    
    
    3,850May 1, 2009
    
    
    500April 8, 2010
    
    
    25,340
  19




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Managements Discussion and Analysis of Financial Condition and Results of
Operations
 RESULTS OF OPERATIONS
 Comparison of the Three Months Ended March 31, 2006 and 2005
   20




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##### Table of Contents



March 31,
    
    
    March 31,(in thousands)
    
    2006
    
    
    2005Operating revenues
    
    $
    844
    
    
    $
    984Cost of goods sold
    
    
    319
    
    
    
    511Other nonelectric expenses
    
    
    525
    
    
    
    473
 Electric
 Three months endedMarch 31,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeRetail sales revenues
    
    $
    73,359
    
    
    $
    63,315
    
    
    $
    10,044
    
    
    
    15.9Wholesale revenues
    
    
    5,658
    
    
    
    4,917
    
    
    
    741
    
    
    
    15.1Net marked-to-market (loss) gain
    
    
    (909
    )
    
    
    104
    
    
    
    (1,013
    )
    
    
    Other revenues
    
    
    4,476
    
    
    
    5,147
    
    
    
    (671
    )
    
    
    (13.0
    )Total operating revenues
    
    $
    82,584
    
    
    $
    73,483
    
    
    $
    9,101
    
    
    
    12.4Production fuel
    
    
    14,806
    
    
    
    15,177
    
    
    
    (371
    )
    
    
    (2.4
    )Purchased power  system use
    
    
    18,736
    
    
    
    11,538
    
    
    
    7,198
    
    
    
    62.4Other operation and maintenance expenses
    
    
    23,407
    
    
    
    23,918
    
    
    
    (511
    )
    
    
    (2.1
    )Depreciation and amortization
    
    
    6,357
    
    
    
    6,100
    
    
    
    257
    
    
    
    4.2Property taxes
    
    
    2,618
    
    
    
    2,673
    
    
    
    (55
    )
    
    
    (2.1
    )Operating income
    
    $
    16,660
    
    
    $
    14,077
    
    
    $
    2,583
    
    
    
    18.3
   21




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22




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##### Table of Contents



Plastics
 Three months endedMarch 31,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    38,105
    
    
    $
    32,155
    
    
    $
    5,950
    
    
    
    18.5Cost of goods sold
    
    
    28,180
    
    
    
    25,417
    
    
    
    2,763
    
    
    
    10.9Operating expenses
    
    
    1,448
    
    
    
    1,509
    
    
    
    (61
    )
    
    
    (4.0
    )Depreciation and amortization
    
    
    730
    
    
    
    591
    
    
    
    139
    
    
    
    23.5Operating income
    
    $
    7,747
    
    
    $
    4,638
    
    
    $
    3,109
    
    
    
    67.0
  Manufacturing
 Three months endedMarch 31,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    68,257
    
    
    $
    55,529
    
    
    $
    12,728
    
    
    
    22.9Cost of goods sold
    
    
    54,399
    
    
    
    45,359
    
    
    
    9,040
    
    
    
    19.9Operating expenses
    
    
    6,215
    
    
    
    5,422
    
    
    
    793
    
    
    
    14.6Depreciation and amortization
    
    
    2,569
    
    
    
    2,205
    
    
    
    364
    
    
    
    16.5Operating income
    
    $
    5,074
    
    
    $
    2,543
    
    
    $
    2,531
    
    
    
    99.5
  
    
    Revenues at DMI Industries, Inc. (DMI) increased $10.4 million due to an increase in
production and sales activity due in part to plant additions and continued improvements in
productivity and capacity utilization.
    
    Revenues at ShoreMaster increased $1.5 million between the quarters mainly due to the
acquisition of Southeast Floating Docks in May 2005.
    
    Revenues at BTD Manufacturing, Inc. (BTD) increased $0.5 million mainly as a result of
higher prices received for goods manufactured. The number of units sold at BTD decreased
8.7% between the quarters while the revenue per unit sold increased 18.0%. Increased
revenues from tooling activities enhanced by the acquisition of Performance Tool & Die in
January of 2005, contributed as well to BTDs revenue increase.
    
    Revenues at T.O. Plastics, Inc. increased $0.4 million between the quarters as a result
of a 7.5% increase in unit sales.
 23




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##### Table of Contents




    
    DMIs cost of goods sold increased $8.0 million between the quarters, including $6.4
million in material costs increases. The increase in cost of goods sold is directly related
to DMIs increase in production and sales activity.
    
    Cost of goods sold at ShoreMaster increased $0.8 million between the quarters as a
result of increase in labor and benefit costs, mainly related to the acquisition of
Southeast Floating Docks in May 2005.
    
    Cost of goods sold at BTD decreased $0.6 million between the quarters mainly due to
decreases in production labor costs related to a decrease in production employees and a
decrease in overtime pay between the quarters. Productivity gains at BTD were achieved
through efforts to better utilize and allocate available labor resources.
    
    Cost of goods sold at T.O. Plastics increased $0.7 million, reflecting $0.5 million in
material cost increases and $0.2 million in increased labor and benefit costs between the
quarters.
  Health Services
 Three months endedMarch 31,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    32,076
    
    
    $
    27,798
    
    
    $
    4,278
    
    
    
    15.4Cost of goods sold
    
    
    24,822
    
    
    
    20,292
    
    
    
    4,530
    
    
    
    22.3Operating expenses
    
    
    5,514
    
    
    
    4,913
    
    
    
    601
    
    
    
    12.2Depreciation and amortization
    
    
    957
    
    
    
    1,067
    
    
    
    (110
    )
    
    
    (10.3
    )Operating income
    
    $
    783
    
    
    $
    1,526
    
    
    $
    (743
    )
    
    
    (48.7
    )
  24




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##### Table of Contents



Food Ingredient Processing
 Three months endedMarch 31,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    9,350
    
    
    $
    9,255
    
    
    $
    95
    
    
    
    1.0Cost of goods sold
    
    
    9,318
    
    
    
    6,685
    
    
    
    2,633
    
    
    
    39.4Operating expenses
    
    
    685
    
    
    
    543
    
    
    
    142
    
    
    
    26.2Depreciation and amortization
    
    
    919
    
    
    
    825
    
    
    
    94
    
    
    
    11.4Operating (loss) income
    
    $
    (1,572
    )
    
    $
    1,202
    
    
    $
    (2,774
    )
    
    
    (230.8
    )
  Other Business Operations
 Three months endedMarch 31,
    
    
    
    
    
    
    %(in thousands)
    
    2006
    
    
    2005
    
    
    Change
    
    
    ChangeOperating revenues
    
    $
    49,250
    
    
    $
    34,897
    
    
    $
    14,353
    
    
    
    41.1Cost of goods sold
    
    
    36,674
    
    
    
    26,392
    
    
    
    10,282
    
    
    
    39.0Operating expenses
    
    
    12,979
    
    
    
    10,827
    
    
    
    2,152
    
    
    
    19.9Depreciation and amortization
    
    
    692
    
    
    
    597
    
    
    
    95
    
    
    
    15.9Operating loss
    
    $
    (1,095
    )
    
    $
    (2,919
    )
    
    $
    1,824
    
    
    
    (62.5
    )
  
    
    Revenues at Foley Company increased $7.3 million in the first quarter of 2006 compared
to the first quarter of 2005 due to an increase in the volume and dollar value of jobs in
progress.
    
    Revenues at Otter Tail Energy Services Co. (OTESCO) increased $4.9 million between the
quarters mainly as a result of increases in natural gas prices.
    
    Revenues at Midwest Construction Services, Inc. (MCS) increased $1.3 million between the
quarters as a result of an increase in work in progress.
    
    Revenues at E.W. Wylie Corporation (Wylie) increased $0.8 million between the quarters
mainly due to a 2.8% net increase in miles driven by owner-operated and company-operated
trucks. Miles driven by owner-operated trucks increased 48.8% while miles driven by
company-operated trucks decreased 12.8% between the quarters. Wylies increased revenues
also reflect increased fuel costs recovered through fuel surcharges between the quarters.
 25




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##### Table of Contents




    
    Foley Companys cost of goods sold increased $6.3 million mainly in the areas of
materials and subcontractor costs as a result of increased construction activity and jobs
in progress.
    
    Cost of goods sold at OTESCO increased by a $4.7 million as a result of increases in
natural gas costs.
    
    Cost of goods sold at MCS decreased $0.7 million mainly due to a reduction in
subcontractor costs between the quarters.
  
    
    Wylies revenue increase was more than offset by a $0.9 million increase in operating
expenses, mainly contractor costs related to the increase in miles driven by owner-operated
trucks between the periods.
    
    MCS operating expenses increased $0.3 million between the quarters, mainly as a result
of increases in salary and benefit expenses.
    
    Operating expenses in this segment also increased $1.1 million due to increases in
health and other insurance costs and other employee benefit costs not allocated to the
other operating segments.
 Income Taxes  Continuing Operations
  Discontinued Operations
 Accounting for the Impairment
or Disposal of Long-Lived Assets
  Three months endedMarch 31, 2005(in thousands)
    
    MIS
    
    
    SGS
    
    
    CLC
    
    
    TotalIncome (loss) before income taxes
    
    $
    1,270
    
    
    $
    (384
    )
    
    $
    (56
    )
    
    $
    830Loss on expected disposal
    
    
    
    
    
    
    (2,627
    )
    
    
    
    
    
    
    (2,627
    )Income tax expense (benefit)
    
    
    508
    
    
    
    (1,204
    )
    
    
    (22
    )
    
    
    (718
    )Net income (loss)
    
    $
    762
    
    
    $
    (1,807
    )
    
    $
    (34
    )
    
    $
    (1,079
    )
 26




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##### Table of Contents



2006 OUTLOOK
   
    
    Due to the coal supply issue mentioned above, decreasing margins on wholesale energy
sales involving the purchase and sale of electric energy contracts and increasing
transmission and wage and benefit costs, we expect performance in the electric segment in
2006 to be in the lower end of the range of historical earnings levels.
    
    We expect plastics segment earnings for 2006 to be higher than originally anticipated
due to the strong first quarter performance.
    
    Our forecasted 2006 net income from the manufacturing segment is in line with initial
2006 expectations. The improving economy, continued enhancements in productivity and
capacity utilization, expanded markets, and expansion of production capacity with the
opening of a new wind tower production facility in Fort Erie, Ontario, Canada are expected
to result in increased net income in our manufacturing segment in 2006.
    
    The health services segment is expected to have lower earnings than original 2006
guidance due to the lower than expected first quarter results.
    
    We expect break-even earnings performance from our food ingredient processing business
(IPH) in 2006. This is a reduction from the previously announced range of $2 million to $4
million in net earnings. This change in guidance is due to the factors mentioned in the
Results of Operations section of this report which are expected to continue through most of
2006.
    
    Our other business operations segment is expected to show improved results over 2005,
consistent with our expectations at the beginning of 2006, due to an improving economy and
an increase in its backlog of construction contracts. An increase in wind energy projects
activity is expected to have a positive impact on our electrical contracting business.
    
    Our outlook reflects the impact of Statement of Financial Accounting Standards No.
123(R), Share-Based Paymentin 2006, which is anticipated to lower diluted earnings per
share results by $0.015 in 2006. This standard requires that all share-based compensation
awards be measured at fair value at the date of grant and expensed over their vesting or
service periods. SFAS 123(R) became effective for us in January 2006.
 FINANCIAL POSITION
  27




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##### Table of Contents



Moody'sInvestors
    
    StandardService
    
    & Poor'sSenior unsecured debt
    
    A3
    
    BBB+Preferred stock
    
    Baa2
    
    BBB-Outlook
    
    Stable
    
    Stable
     29




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Critical Accounting Policies Involving Significant Estimates
   Goodwill Impairment
  30




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##### Table of Contents



Forward Looking Information  Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995
   
    
    We are subject to government regulations and actions that may have a negative impact on
its business and results of operations.
    
    Certain MISO-related costs currently included in the FCA in Minnesota retail rates may
be excluded from recovery through the FCA and subject to future recovery through rates
established in a general rate case.
    
    Weather conditions can adversely affect our operations and revenues.
    
    Electric wholesale margins could be reduced as the MISO market becomes more efficient.
    
    Electric wholesale trading margins could be reduced or eliminated by losses due to trading activities.
    
    Wholesale sales of electricity from excess generation may decrease as a result of
reduced coal shipments to Big Stone and Hoot Lake Plants due to rail transportation
bottlenecks.
    
    The Federal Energy Regulatory Commission issued an order on April 25, 2006 that requires
MISO to make refunds related to real time revenue sufficiency guarantee charges that were
not allocated to day-ahead virtual supply offers in accordance with MISOs Transmission and
Energy Markets Tariff going back to the commencement of the MISO Day 2 market in April
2005. We are not yet able to assess what financial impact, if any, this order will have on
our operations.
    
    Our manufacturer of wind towers operates in a market that has been dependent on the
Production Tax Credit. This tax credit is currently in place through December 31, 2007.
Should this tax credit not be renewed, the revenues and earnings of this business could be
reduced.
    
    Federal and state environmental regulation could cause us to incur substantial capital
expenditures which could result in increased operating costs.
 31




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##### Table of Contents




    
    Our plans to grow and diversify through acquisitions may not be successful and could result
in poor financial performance.
    
    Competition is a factor in all of our businesses.
    
    Economic uncertainty could have a negative impact on our future revenues and earnings.
    
    Volatile financial markets could restrict our ability to access capital and could
increase borrowing costs and pension plan expenses.
    
    Our food ingredient processing segment operates in a highly competitive market and is
dependent on adequate sources of raw materials for processing. Should the supply of these
raw materials be affected by poor growing conditions, this could negatively impact the
results of operations for this segment. This segment could also be impacted by foreign
currency changes between Canadian and United States currency and prices of natural gas.
    
    Our plastics segment is highly dependent on a limited number of vendors for PVC resin.
In the first quarter of 2006, 100% of resin purchased was from two vendors, 54% from one
and 46% from the other. The loss of a key vendor or an interruption or delay in the supply
of PVC resin could result in reduced sales or increased costs for this business. Reductions
in PVC resin prices could negatively impact PVC pipe prices, profit margins on PVC pipe
sales and the value of PVC pipe held in inventory.
    
    Our health services businesses may not be able to retain or comply with the dealership
arrangement and other agreements with Philips Medical.
  
 Quantitative and Qualitative Disclosures About Market Risk
   32




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Accounting for Derivative Instruments and Hedging Activities. Issues
Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in
Energy Trading and Risk Management Activities
  (in thousands)
    
    March 31, 2006Current asset  marked-to-market gain
    
    $
    594Current liability  marked-to-market loss
    
    
    (532
    )Net fair value of marked-to-market gas contracts
    
    $
    62
 Year-to-date(in thousands)
    
    March 31, 2006Fair value at beginning of year
    
    $
    (26
    )Amount realized on contracts entered into in 2005 and settled in 2006
    
    
    (26
    )Changes in fair value of contracts entered into in 2005
    
    
    Net fair value of contracts entered into in 2005 at end of period
    
    
    Changes in fair value of contracts entered into in 2006
    
    
    62Net fair value end of period
    
    $
    62
 33




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##### Table of Contents



2nd Quarter
    
    3rd Quarter
    
    4th Quarter(in thousands)
    
    2006
    
    2006
    
    2006
    
    TotalNet gain
    
    $
    85
    
    
    $
    40
    
    
    
    ($63
    )
    
    $
    62
   Megawatt Daily
   (in thousands)
    
    March 31, 2006Current asset  marked-to-market gain
    
    $
    3,584Regulatory asset  deferred marked-to-market loss
    
    
    999Total assets
    
    
    4,583Current liability  marked-to-market loss
    
    
    (2,937
    )Regulatory liability  deferred marked-to-market gain
    
    
    (1,219
    )Total liabilities
    
    
    (4,156
    )Net fair value of marked-to-market energy contracts
    
    $
    427
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##### Table of Contents



Year-to-date(in thousands)
    
    March 31, 2006Fair value at beginning of year
    
    $
    2,916Amount realized on contracts entered into in 2005 and settled in 2006
    
    
    (1,864
    )Changes in fair value of contracts entered into in 2005
    
    
    (556
    )Net fair value of contracts entered into in 2005 at end of period
    
    
    496Changes in fair value of contracts entered into in 2006
    
    
    (69
    )Net fair value end of period
    
    $
    427
  2nd Quarter
    
    3rd Quarter(in thousands)
    
    2006
    
    2006
    
    TotalNet gain
    
    $
    319
    
    
    $
    108
    
    
    $
    427
   
 Controls and Procedures
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##### Table of Contents



PART II. OTHER INFORMATION
 
 Legal Proceedings
  
 Risk Factors
  
 Unregistered Sales of Equity Securities and Use of Proceeds
  Total number of
    
    
    Average price paidCalendar Month
    
    shares purchased
    
    
    per shareJanuary 2006
    
    
    
    
    
    
    February 2006
    
    
    
    
    
    
    March 2006
    
    
    68
    
    
    $
    28.56Total
    
    
    68
 
 Exhibits
 31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 36




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##### Table of Contents



SIGNATURES
  OTTER TAIL CORPORATIONBy:
    /s/ Kevin G. MougKevin G. MougChief Financial Officer and Treasurer(Chief Financial Officer/Authorized Officer) May 10, 2006
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##### Table of Contents



Exhibit Number
    
    Description31.1
    
    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.