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SECURITIES AND EXCHANGE COMMISSION  FORM 10-Q (Mark One) [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934
  OR  [  ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934
 
 Commission file number 0-368 OTTER TAIL CORPORATION 
  Minnesota
    
    41-0462685(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 215 South Cascade Street, Box 496, Fergus Falls, Minnesota
    
    56538-0496(Address of principal executive offices)
    
    (Zip Code)
 866-410-8780      Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO
[   ] Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2
of the Exchange Act). YES [X] NO [   ] Indicate the number of shares outstanding of each of the issuers classes of
Common Stock, as of the latest practicable date: July 31, 2004  25,989,854 Common Shares ($5 par value)




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OTTER TAIL CORPORATION INDEX Page No.Part I.
    
    Financial InformationItem 1.
    
    Financial StatementsConsolidated Balance Sheets  June 30, 2004 and December 31, 2003 (Unaudited)
    
    
    2 & 3Consolidated Statements of Income - Three and Six Months Ended June 30, 2004 and 2003 (Unaudited)
    
    
    4Consolidated Statements of Cash Flows - Six Months Ended June 30, 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
    
    
    13-28Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    29-31Item 4.
    
    Controls and Procedures
    
    
    31Part II.
    
    Other InformationItem 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    32Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    33Signatures
    
    
    
    
    34Master Coal Purchase AgreementCoal Supply Confirmation LetterMaster Coal Purchase and Sale AgreementCoal Supply Confirmation LetterCoal Supply AgreementCertification 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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PART I. FINANCIAL INFORMATION Item 1. Financial Statements Otter Tail Corporation Consolidated Balance Sheets   -Assets-
 June 30,
    
    December 31,2004
    
    2003(Thousands of dollars)Current assetsCash and cash equivalents
    
    $
    
    
    
    $
    7,305Accounts receivable:Tradenet
    
    
    104,822
    
    
    
    107,634Other
    
    
    6,137
    
    
    
    7,830Inventories
    
    
    65,229
    
    
    
    56,966Deferred income taxes
    
    
    3,401
    
    
    
    3,532Accrued utility revenues
    
    
    10,602
    
    
    
    14,866Costs and estimated earnings in
excess of billings
    
    
    11,978
    
    
    
    4,591Other
    
    
    13,843
    
    
    
    10,385Total current assets
    
    
    216,012
    
    
    
    213,109Investments and other assets
    
    
    38,027
    
    
    
    35,987Goodwillnet
    
    
    72,933
    
    
    
    72,556Other intangiblesnet
    
    
    6,924
    
    
    
    7,096Deferred debitsUnamortized debt expense and reacquisition premiums
    
    
    7,727
    
    
    
    8,081Regulatory assets
    
    
    13,983
    
    
    
    14,669Other
    
    
    864
    
    
    
    1,600Total deferred debits
    
    
    22,574
    
    
    
    24,350PlantElectric plant in service
    
    
    876,657
    
    
    
    875,364Nonelectric operations
    
    
    193,870
    
    
    
    193,858Total plant
    
    
    1,070,527
    
    
    
    1,069,222Less accumulated depreciation and amortization
    
    
    461,720
    
    
    
    453,791Plantnet of accumulated depreciation and amortization
    
    
    608,807
    
    
    
    615,431Construction work in progress
    
    
    24,021
    
    
    
    17,894Net plant
    
    
    632,828
    
    
    
    633,325Total
    
    $
    989,298
    
    
    $
    986,423
 See accompanying notes to consolidated financial statements -2-




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Otter Tail Corporation Consolidated Balance Sheets   -Liabilities-
 June 30,
    
    December 31,2004
    
    2003(Thousands of dollars)Current liabilitiesShort-term debt
    
    $
    34,000
    
    
    $
    30,000Current maturities of long-term debt
    
    
    9,107
    
    
    
    9,718Accounts payable
    
    
    77,189
    
    
    
    83,338Accrued salaries and wages
    
    
    13,755
    
    
    
    14,677Accrued federal and state income taxes
    
    
    7,341
    
    
    
    4,152Other accrued taxes
    
    
    8,158
    
    
    
    10,491Other accrued liabilities
    
    
    8,755
    
    
    
    10,003Total current liabilities
    
    
    158,305
    
    
    
    162,379Pensions benefit liability
    
    
    17,940
    
    
    
    16,919Other postretirement benefits
liability
    
    
    24,522
    
    
    
    23,230Other noncurrent liabilities
    
    
    11,814
    
    
    
    11,102Deferred creditsDeferred income taxes
    
    
    103,646
    
    
    
    101,596Deferred investment tax credit
    
    
    11,054
    
    
    
    11,630Regulatory liabilities
    
    
    42,300
    
    
    
    42,926Other
    
    
    2,036
    
    
    
    2,061Total deferred credits
    
    
    159,036
    
    
    
    158,213CapitalizationLong-term debt, net of current
maturities
    
    
    261,336
    
    
    
    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 - 25,945,682 and
2003 - 25,723,814
    
    
    129,728
    
    
    
    128,619Premium on common shares
    
    
    30,911
    
    
    
    26,515Unearned compensation
    
    
    (3,226
    )
    
    
    (3,313
    )Retained earnings
    
    
    187,881
    
    
    
    186,495Accumulated other comprehensive loss
    
    
    (4,449
    )
    
    
    (4,429
    )Total common equity
    
    
    340,845
    
    
    
    333,887Total capitalization
    
    
    617,681
    
    
    
    614,580Total
    
    $
    989,298
    
    
    $
    986,423
 See accompanying notes to consolidated financial statements -3-




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Otter Tail Corporation Consolidated Statements of Income
 Three months ended
    
    Six months endedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003(In thousands, except share and per share amounts)Operating revenues
    
    $
    211,208
    
    
    $
    180,016
    
    
    $
    417,793
    
    
    $
    352,206Operating expensesProduction fuel
    
    
    11,193
    
    
    
    10,696
    
    
    
    25,790
    
    
    
    23,673Purchased power -
system use
    
    
    9,903
    
    
    
    9,702
    
    
    
    20,825
    
    
    
    19,314Other electric
operation and
maintenance
expenses
    
    
    22,366
    
    
    
    22,022
    
    
    
    43,807
    
    
    
    41,468Cost of goods sold
    
    
    115,867
    
    
    
    89,809
    
    
    
    223,552
    
    
    
    168,378Other nonelectric
expenses
    
    
    22,989
    
    
    
    19,103
    
    
    
    45,206
    
    
    
    38,632Depreciation and
amortization
    
    
    11,232
    
    
    
    11,334
    
    
    
    22,405
    
    
    
    22,490Property taxes
    
    
    2,359
    
    
    
    2,439
    
    
    
    4,848
    
    
    
    5,038Total
operating
expenses
    
    
    195,909
    
    
    
    165,105
    
    
    
    386,433
    
    
    
    318,993Operating income
    
    
    15,299
    
    
    
    14,911
    
    
    
    31,360
    
    
    
    33,213Other income
    
    
    781
    
    
    
    938
    
    
    
    818
    
    
    
    1,268Interest charges
    
    
    4,370
    
    
    
    4,420
    
    
    
    8,799
    
    
    
    8,812Income before
income taxes
    
    
    11,710
    
    
    
    11,429
    
    
    
    23,379
    
    
    
    25,669Income taxes
    
    
    3,843
    
    
    
    2,995
    
    
    
    7,417
    
    
    
    7,373Net income
    
    
    7,867
    
    
    
    8,434
    
    
    
    15,962
    
    
    
    18,296Preferred dividend
requirements
    
    
    184
    
    
    
    184
    
    
    
    368
    
    
    
    368Earnings available
for common shares
    
    $
    7,683
    
    
    $
    8,250
    
    
    $
    15,594
    
    
    $
    17,928Basic earnings per
common share
    
    $
    0.30
    
    
    $
    0.32
    
    
    $
    0.60
    
    
    $
    0.70Diluted earnings
per common share
    
    $
    0.30
    
    
    $
    0.32
    
    
    $
    0.60
    
    
    $
    0.70Average number of
common shares
outstanding - basic
    
    
    25,891,440
    
    
    
    25,672,592
    
    
    
    25,842,241
    
    
    
    25,632,477Average number of
common shares
outstanding -
diluted
    
    
    26,013,519
    
    
    
    25,854,898
    
    
    
    25,969,648
    
    
    
    25,786,453Dividends per
common share
    
    $
    0.275
    
    
    $
    0.270
    
    
    $
    0.550
    
    
    $
    0.540
 See accompanying notes to consolidated financial statements -4-




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Otter Tail Corporation Consolidated Statements of Cash Flows
 Six months endedJune 30,2004
    
    2003(Thousands of dollars)Cash flows from operating activitiesNet income
    
    $
    15,962
    
    
    $
    18,296Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    22,405
    
    
    
    22,490Deferred investment tax credit
    
    
    (576
    )
    
    
    (576
    )Deferred income taxes
    
    
    1,194
    
    
    
    879Change in deferred debits and other assets
    
    
    401
    
    
    
    (330
    )Discretionary contribution to pension plan
    
    
    (2,000
    )
    
    
    Change in noncurrent liabilities and deferred credits
    
    
    2,923
    
    
    
    3,935Allowance for equity (other) funds used during
construction
    
    
    (390
    )
    
    
    (1,063
    )Change in derivatives net of regulatory deferral
    
    
    (729
    )
    
    
    Other - net
    
    
    988
    
    
    
    836Cash (used for) provided by current assets & current
liabilities:Change in receivables and inventories
    
    
    (3,709
    )
    
    
    (28,267
    )Change in other current assets
    
    
    (7,119
    )
    
    
    (13,372
    )Change in payables and other current liabilities
    
    
    (8,174
    )
    
    
    5,371Change in interest and income taxes payable
    
    
    3,097
    
    
    
    6,843Net cash provided by operating activities
    
    
    24,273
    
    
    
    15,042Cash flows from investing activitiesCapital expenditures
    
    
    (21,778
    )
    
    
    (27,500
    )Proceeds from disposal of noncurrent assets
    
    
    2,672
    
    
    
    401Acquisitions, net of cash acquired
    
    
    (393
    )
    
    
    (1,287
    )Increases in other investments
    
    
    (1,784
    )
    
    
    (605
    )Net cash used in investing activities
    
    
    (21,283
    )
    
    
    (28,991
    )Cash flows from financing activitiesNet borrowings under line of credit
    
    
    4,000
    
    
    
    3,630Proceeds from issuance of common stock
    
    
    5,229
    
    
    
    410Proceeds from issuance of long-term debt, net of
issuance expenses
    
    
    392
    
    
    
    18,498Payments for retirement of common stock
    
    
    (345
    )
    
    
    Payments for retirement of long-term debt
    
    
    (4,995
    )
    
    
    (4,077
    )Dividends paid and other distributions
    
    
    (14,576
    )
    
    
    (14,449
    )Net cash (used in) provided by financing activities
    
    
    (10,295
    )
    
    
    4,012Net change in cash and cash equivalents
    
    
    (7,305
    )
    
    
    (9,937
    )Cash and cash equivalents at beginning of period
    
    
    7,305
    
    
    
    9,937Cash and cash equivalents at end of period
    
    $
    
    
    
    $
    Supplemental cash flow informationCash paid for interest and income taxesInterest
    
    $
    7,996
    
    
    $
    8,157Income taxes
    
    $
    3,696
    
    
    $
    242
 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-month
and six-month periods ended June 30, 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 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. Amounts received in advance under customer service
contracts are deferred and recognized on a straight-line basis over the
contract period. 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: June 30,
    
    December 31,(in thousands)
    
    2004
    
    2003Costs incurred on uncompleted contracts
    
    $
    137,514
    
    
    $
    124,839Less billings to date
    
    
    (145,737
    )
    
    
    (137,881
    )Plus estimated earnings recognized
    
    
    16,036
    
    
    
    13,611$
    7,813
    
    
    $
    569
 6




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The following amounts are included in the Companys consolidated balance
sheets. Billings in excess of costs and estimated earnings on uncompleted
contracts are included in Accounts payable: June 30,
    
    December 31,(in thousands)
    
    2004
    
    2003Costs and estimated earnings in excess of billings on uncompleted contracts
    
    $
    11,978
    
    
    $
    4,591Billings in excess of costs and estimated earnings on uncompleted contracts
    
    
    (4,165
    )
    
    
    (4,022
    )$
    7,813
    
    
    $
    569
 The percent of revenue recognized under the percentage-of-completion method
compared to total consolidated revenues was 21.1% for the six months ended June
30, 2004 compared with 16.1% for the six months ended June 30, 2003. The
increase reflects the addition of $22.8 million in revenue in the first half of
2004 related to the acquisition of Foley Company in November 2003. Stock-based compensation The Company has elected to follow the accounting provisions of Accounting
Principle Board Opinion No. 25, Accounting for Stock Issued to Employees, for
stock-based compensation and to furnish the pro forma disclosures required
under Statement of Financial Accounting Standards (SFAS) No. 123, Accounting
for Stock-Based Compensation. Had compensation costs for the stock options issued been determined based on
estimated fair value at the award dates, as prescribed by SFAS No. 123, the
Companys net income for three and six month periods ended June 30, 2004 and
June 30, 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 ended
    
    Six months endedJune 30,
    
    June 30,(in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Net incomeAs reported
    
    $
    7,867
    
    
    $
    8,434
    
    
    $
    15,962
    
    
    $
    18,296Total stock-based employee compensation
expense determined under fair value
based method for all awards net of
related tax effects
    
    
    (330
    )
    
    
    (247
    )
    
    
    (544
    )
    
    
    (465
    )Pro forma
    
    $
    7,537
    
    
    $
    8,187
    
    
    $
    15,418
    
    
    $
    17,831Basic earnings per shareAs reported
    
    $
    0.30
    
    
    $
    0.32
    
    
    $
    0.60
    
    
    $
    0.70Pro forma
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.58
    
    
    $
    0.68Diluted earnings per shareAs reported
    
    $
    0.30
    
    
    $
    0.32
    
    
    $
    0.60
    
    
    $
    0.70Pro forma
    
    $
    0.28
    
    
    $
    0.31
    
    
    $
    0.58
    
    
    $
    0.68
 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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Inventories Inventories consist of the following: June 30,
    
    December 31,(in thousands)
    
    2004
    
    2003Finished goods
    
    $
    21,708
    
    
    $
    20,349Work in process
    
    
    7,779
    
    
    
    6,234Raw material, fuel and supplies
    
    
    35,742
    
    
    
    30,383$
    65,229
    
    
    $
    56,966
 Goodwill and Other Intangible Assets Goodwill increased $377,000 in the first six months of 2004 as a result of
$214,000 in adjustments related to 2003 acquisitions and $163,000 related to
the acquisition of a small electronic surveillance equipment company in the
second quarter of 2004. The following table summarizes the components of the Companys intangible
assets at June 30, 2004 and December 31, 2003. June 30, 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
    
    
    $
    1,707
    
    
    $
    903
    
    
    $
    2,610
    
    
    $
    1,483
    
    
    $
    1,127Other intangible assets including
contracts
    
    
    2,561
    
    
    
    1,260
    
    
    
    1,301
    
    
    
    2,367
    
    
    
    1,118
    
    
    
    1,249Total
    
    $
    5,171
    
    
    $
    2,967
    
    
    $
    2,204
    
    
    $
    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 $366,000 for the six months ended June 30, 2004 compared to $280,000
for the six months ended June 30, 2003. The estimated annual amortization
expense for these intangible assets for the next five years is: $744,000 for
2004, $544,000 for 2005, $407,000 for 2006, $284,000 for 2007 and $232,000 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 was 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 $2.8 million as of June 30, 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. The Company includes these entities in its
consolidated financial statements on an equity method basis due to
immateriality. 8




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FASB Staff Position No. FAS 106-2 (FSP 106-2) Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003 (the Act)  FSP 106-2 provides guidance on accounting
for the effect of the federal subsidy for prescription drug plans when the
plans sponsor determines that the prescription drug benefits it offers to its
retirees are actuarially equivalent to those offered under Medicare Part D and
will qualify for the federal subsidy offered under 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. The
Companys postretirement medical plan provides prescription drug coverage for
all electric utility company retirees. The Companys accumulated postretirement
benefit obligation and net cost recognized for other postemployment benefits do
not reflect the effects of the Act. The Company has determined that the
prescription drug benefits it offers to its retirees who retired prior to 2003
are actuarially equivalent to those offered under Medicare Part D and will
qualify for the federal subsidy offered under the Act. The Company expects that
its share of the cost of the underlying postretirement prescription drug
coverage on which the subsidy is based will be reduced by the expected subsidy.
The effect of the subsidy on the Companys accumulated postretirement benefit
obligation will be accounted for as an actuarial experience gain in accordance
with the guidance in FAS 106. The Companys actuaries are currently determining
the effects of the expected subsidy on the Companys projected postretirement
benefit obligations. The Company expects to implement the requirements of FSP
106-2 in the third quarter of 2004 and estimates that the impact of the subsidy
on 2004 postretirement benefit costs under FAS 106 will be a reduction of
approximately $750,000 when remeasured and applied retroactively to January 1,
2004. Segment Information The Companys business operations consist of five segments based on products
and services. Electric includes the production, transmission, distribution and
sale of electric energy in Minnesota, North Dakota and South Dakota under the
name Otter Tail Power Company. Electric utility operations have been the
Companys primary business since incorporation. Plastics consists of businesses
producing polyvinyl chloride (PVC) and polyethylene (PE) pipe in the Upper
Midwest and Southwest regions of the United States. Manufacturing consists of
businesses in the following manufacturing activities: production of waterfront
equipment, wind towers, frame-straightening equipment and accessories for the
auto body shop industry, material and handling trays and horticultural
containers; fabrication of steel products; contract machining; and metal parts
stamping and fabrication. These businesses are located primarily 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 throughout
the United States. Other business operations consists of businesses in residential, commercial and
industrial electric industries; fiber optic and electric distribution systems;
waste-water, water and HVAC systems construction; transportation;
telecommunications; energy services and natural gas marketing; and the portion
of corporate general and administrative expenses that is not allocated to other
segments. These businesses operate primarily in the Central United States,
except for the transportation company which operates in 48 states and 6
Canadian provinces. 9




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##### Table of Contents



Operating Revenue Three months ended
    
    Six months endedJune 30,
    
    June 30,(in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Electric
    
    $
    60,449
    
    
    $
    59,100
    
    
    $
    133,304
    
    
    $
    127,170Plastics
    
    
    32,636
    
    
    
    19,647
    
    
    
    59,072
    
    
    
    42,582Manufacturing
    
    
    56,057
    
    
    
    48,838
    
    
    
    102,896
    
    
    
    83,557Health services
    
    
    26,597
    
    
    
    25,412
    
    
    
    52,273
    
    
    
    47,230Other business operations
    
    
    35,999
    
    
    
    27,183
    
    
    
    71,491
    
    
    
    51,986Intersegment eliminations
    
    
    (530
    )
    
    
    (164
    )
    
    
    (1,243
    )
    
    
    (319
    )Total
    
    $
    211,208
    
    
    $
    180,016
    
    
    $
    417,793
    
    
    $
    352,206
 Operating Income (Loss) Three months ended
    
    Six months endedJune 30,
    
    June 30,(in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Electric
    
    $
    8,613
    
    
    $
    7,832
    
    
    $
    26,083
    
    
    $
    24,816Plastics
    
    
    4,032
    
    
    
    1,909
    
    
    
    5,321
    
    
    
    4,561Manufacturing
    
    
    3,763
    
    
    
    5,035
    
    
    
    4,096
    
    
    
    6,244Health services
    
    
    532
    
    
    
    1,465
    
    
    
    956
    
    
    
    1,577Other business operations
    
    
    (1,641
    )
    
    
    (1,330
    )
    
    
    (5,096
    )
    
    
    (3,985
    )Total
    
    $
    15,299
    
    
    $
    14,911
    
    
    $
    31,360
    
    
    $
    33,213
 Identifiable Assets June 30,
    
    December 31,(in thousands)
    
    2004
    
    2003Electric
    
    $
    604,721
    
    
    $
    609,190Plastics
    
    
    63,431
    
    
    
    58,538Manufacturing
    
    
    154,406
    
    
    
    138,493Health services
    
    
    68,338
    
    
    
    67,587Other business operations
    
    
    98,402
    
    
    
    112,615Total
    
    $
    989,298
    
    
    $
    986,423
 Substantially all of the Companys long-lived assets are within the United
States. For the three months ended June 30, 2004, 97.4% of the Companys
consolidated revenue came from sales within the United States. For the six
months ended June 30, 2004, 95.4% of the Companys consolidated revenue came
from sales within the United States and 3.5% came from sales in Canada. Common Shares and Earnings per Share 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 June 30, 2004 a total of 1,555,158 options
were outstanding and a total of 214,434 shares of restricted stock had been
issued under the Plan. The Company accounts for the Plan under Accounting
Principles Board Opinion No. 25. 10




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##### Table of Contents



On April 12, 2004 the Companys Board of Directors granted performance-based
stock incentive awards to the Companys executive officers. Under these awards,
the officers could earn up to an aggregate of 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 period. The officers have no voting or dividend rights related to
the eligible shares until the shares are issued at the end of the performance
period. 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 Comprehensive income for the three months ended June 30, 2004 includes $20,000
in unrealized losses, net-of-tax, on investments in available-for-sale
securities and net income of $7.9 million as compared to $8.4 million of net
income for the three months ended June 30, 2003. Comprehensive income for the
six months ended June 30, 2004 includes $20,000 in unrealized losses,
net-of-tax, on investments in available-for-sale securities and net income of
$16.0 million as compared to $18.3 million of net income for the six months
ended June 30, 2003. 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: June 30,
    
    December 31,(in thousands)
    
    2004
    
    2003Regulatory assets:Deferred income taxes
    
    $
    13,369
    
    
    $
    12,750Debt expenses and reacquisition premiums
    
    
    3,643
    
    
    
    3,863Deferred conservation program costs
    
    
    962
    
    
    
    882Plant acquisition costs
    
    
    262
    
    
    
    285Deferred marked-to-market losses
    
    
    437
    
    
    
    1,802Accrued cost-of-energy revenue
    
    
    2,193
    
    
    
    3,693Accumulated ARO accretion/depreciation adjustment
    
    
    178
    
    
    
    117Total regulatory assets
    
    $
    21,044
    
    
    $
    23,392Regulatory liabilities:Accumulated reserve for estimated removal costs
    
    $
    33,571
    
    
    $
    33,579Deferred income taxes
    
    
    7,127
    
    
    
    7,496Deferred marked-to-market gains
    
    
    1,437
    
    
    
    1,684Gain on sale of division office building
    
    
    165
    
    
    
    167Total regulatory liabilities
    
    $
    42,300
    
    
    $
    42,926Net regulatory liability position
    
    $
    21,256
    
    
    $
    19,534
 11




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##### Table of Contents



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 18.1 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 5.9 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 from July 2004 through April 2005. 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. 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 ended
    
    Six months endedJune 30,
    
    June 30,(in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Service costbenefit earned during the period
    
    $
    900
    
    
    $
    945
    
    
    $
    1,800
    
    
    $
    1,890Interest cost on projected benefit obligation
    
    
    2,350
    
    
    
    2,373
    
    
    
    4,700
    
    
    
    4,746Expected return on assets
    
    
    (3,000
    )
    
    
    (3,233
    )
    
    
    (6,000
    )
    
    
    (6,466
    )Amortization of prior-service cost
    
    
    225
    
    
    
    293
    
    
    
    450
    
    
    
    585Net periodic pension cost
    
    $
    475
    
    
    $
    378
    
    
    $
    950
    
    
    $
    755
 Cash Flows: The Company made $2.0 million in discretionary contributions to the
pension plan in the first six months of 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 ended
    
    Six months endedJune 30,
    
    June 30,(in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Service costbenefit earned during the period
    
    $
    205
    
    
    $
    104
    
    
    $
    410
    
    
    $
    208Interest cost on projected benefit obligation
    
    
    372
    
    
    
    356
    
    
    
    744
    
    
    
    713Amortization of prior-service cost
    
    
    37
    
    
    
    37
    
    
    
    74
    
    
    
    74Recognized net actuarial loss
    
    
    170
    
    
    
    143
    
    
    
    340
    
    
    
    286Net periodic pension cost
    
    $
    784
    
    
    $
    640
    
    
    $
    1,568
    
    
    $
    1,281
 12




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##### Table of Contents



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 ended
    
    Six months endedJune 30,
    
    June 30,(in thousands)
    
    2004
    
    2003
    
    2004
    
    2003Service costbenefit earned during the period
    
    $
    289
    
    
    $
    252
    
    
    $
    577
    
    
    $
    504Interest cost on projected benefit obligation
    
    
    645
    
    
    
    655
    
    
    
    1,290
    
    
    
    1,310Amortization of transition obligation
    
    
    188
    
    
    
    187
    
    
    
    377
    
    
    
    374Amortization of prior-service cost
    
    
    (77
    )
    
    
    (76
    )
    
    
    (154
    )
    
    
    (152
    )Amortization of net actuarial loss
    
    
    171
    
    
    
    177
    
    
    
    343
    
    
    
    354Net periodic postretirement benefit cost
    
    $
    1,216
    
    
    $
    1,195
    
    
    $
    2,433
    
    
    $
    2,390
 
 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 repay 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 176,433 common shares and received $4.5
million in cash from the issuance of stock in the first six months of 2004 and
expects to generate approximately $4.5 million in additional equity funding
under these programs prior to December 31, 2004. The Company also received $0.7
million in cash from the issuance of 35,076 shares of common stock for stock
options exercised in the first six months of 2004. The Company has the ability to issue up to $135 million of unsecured debt
securities from time to time under its shelf registration statement filed with
the Securities and Exchange Commission in 2002. In addition, the Company filed
a universal shelf registration with the Securities and Exchange Commission on
June 4, 2004, which, when combined with the Companys prior registration
statement, will give the Company the ability to issue up to $335 million of
common stock, preferred stock, debt and certain other securities
from time to time after it becomes effective. On April 28, 2004 the Company renewed its $70 million line of credit. The terms
of the renewed line of credit are essentially the same as those in place prior
to the renewal. The renewed agreement expires on April 27, 2005. 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
June 30, 2004, $34 million of the Companys $70 million line of credit was in
use. The Companys obligations 13




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##### Table of Contents



under this line of credit are guaranteed by a 100%-owned subsidiary of the
Company that owns substantially all of the Companys nonelectric companies. The Companys line of credit, its $90 million 6.63% senior notes and its $16.3
million note with Lombard US Equipment Finance contain the following covenants:
a debt-to-total capitalization ratio not in excess of 60% and an interest and
dividend coverage ratio of at least 1.5 to 1. The 6.63% senior notes also
require that priority debt not be in excess of 20% of total capitalization. As
of June 30, 2004 the Company was in compliance with all of the covenants under
its financing agreements. 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 increased $9.2 million for the six
months ended June 30, 2004 compared to the six months ended June 30, 2003
primarily as a result of a $30.8 million decrease in cash used for receivables,
inventories and other current assets, offset by a $17.3 million increase in
cash used to reduce payables and other current liabilities including interest
and income taxes payable and a reduction in net income of $2.3 million between
the periods and $2.0 million in discretionary contributions to the Companys
pension plan in the first six months of 2004. Inventories increased by $8.3 million from December 31, 2003 to June 30, 2004.
The increase in inventories in the first six months of 2004 mainly reflects
$8.0 million in increased inventory in the manufacturing segment made up of
$3.4 million at the manufacturers of wind towers and structural steel products
related to increased business, $2.2 million at the Companys manufacturer of
waterfront equipment related to build-up for the summer sales season, $2.0
million at the metal parts stamping and fabrication company related to a
build-up of finished goods inventory for customers forecasted needs and $0.4
million at the Companys manufacturer of auto and truck frame-straightening
equipment. Inventories in the health services segment increased $1.8 million
from December 2003 to June 2004 based on expected increased equipment sales in
the second half of 2004. An increase in inventory at the electric utility of
$0.5 million in the first six months of 2004 is related to a build-up of
materials and supplies for the summer construction season. Inventories in the
plastics segment decreased $2.0 million from December 31, 2003 to June 30, 2004
as a result of increased sales in this segment. Receivables decreased by $4.5 million from December 31, 2003 to June 30, 2004.
A $4.6 million decrease in receivables in the manufacturing segment in the
first six months of 2004 reflects decreases of $10.4 million at the wind tower
manufacturing company due to declining sales related to the status of the
proposed production tax credit, $1.0 million at the Companys manufacturer of
structural steel products and $0.4 million at the Companys manufacturer of
thermoformed plastic and horticultural products offset by increases in
receivables of $4.5 million at the waterfront equipment company related to
seasonal sales fluctuations and $2.8 million at the metal parts stamping and
fabrication company. Receivables at the construction companies decreased by
$3.6 million from December 31, 2003 to June 30, 2004 reflecting a
reduction in business from year-end 2003 to June of 2004 and recent
efforts made to accelerate collections of outstanding receivables at the Companys
electrical construction contractor located in the Upper Midwest. The electric
utilitys receivables decreased $1.7 million mainly as a result of reductions
in billings for contracted construction services from the end of 2003 compared
to May and June of 2004 and a reduction in receivables from the joint owners of
power plants 14




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##### Table of Contents



operated by the electric utility. Receivables in the health services segment
decreased $0.7 million in the first six months of 2004. Receivables at the
energy services company decreased by $0.5 million as a result of a reduction in
natural gas consumption between winter and summer seasons. Receivables in the
plastics segment increased $6.6 million related to an $8.8 million increase in
sales in May and June of 2004 compared to November and December of 2003. Accounts payable and other current liabilities decreased by $8.2 million from
December 31, 2003 to June 30, 2004. Electric utility payables decreased $10.0
million reflecting a $5.0 million reduction in purchased power payables related
to a seasonal decrease in demand between December and June, a $2.8 million
reduction in property taxes payable related to the timing of property tax
payments and a $1.9 million reduction in accrued salaries and wages mainly
related to the payment of 2003 accrued bonuses and incentives in the first
quarter of 2004. The plastic pipe companies payables and other current
liabilities decreased by $8.9 million mainly related to payments made on raw
materials purchased prior to December 31, 2003. Accounts payable and other
current liabilities increased $8.0 million at the manufacturing companies: $3.3
million at the Companys manufacturer of waterfront equipment, $3.1 million at
the manufacturers of wind towers and structural steel products and $2.4 million
at the metal parts stamping and fabrication company, offset by a $0.8 million
decrease at the manufacturer of thermoformed plastic and horticultural
products. Health services accounts payable and other current liabilities
increased $3.6 million from December 31, 2003 to June 30, 2004. Construction
payables and other current liabilities increased by $0.9 million from December
31, 2003 to June 30, 2004. Net cash used in investing activities was $21.3 million for the six months
ended June 30, 2004 compared to net cash used in investing activities of $29.0
million for the six months ended June 30, 2003. Capital expenditures decreased
by $5.7 million between the periods. Capital expenditures at the electric
utility decreased by $4.4 million. In the first half of 2003 the utility was
still constructing the Solway gas-fired combustion turbine completed in June
2003. In the first half of 2004 the utility had no major capital projects under
construction. The plastic segments capital expenditures decreased by $1.8
million between the periods related to the completion of the new production
facility in Hampton, Iowa in 2003. Capital expenditures at the health services
companies decreased by $1.5 million between the periods. Capital expenditures
in the other business segment decreased by $1.2 million between the periods.
Capital expenditures at the manufacturing companies increased $3.2 million
between the periods mainly related to new equipment purchases at the waterfront equipment company and the metal parts stamping and
fabrication company. Proceeds from the disposal of noncurrent assets increased
$2.3 million for the six months ended June 30, 2004 compared with the six
months ended June 30, 2003. The increase reflects the proceeds from the sale of
the Fargo-Moorhead RedHawks baseball team, the sale of used diagnostic imaging
equipment in the second quarter of 2004 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 $10.3 million for the six months
ended June 30, 2004 compared with $4.0 million in net cash provided by
financing activities for the six months ended June 30, 2003 reflecting $18.1
million in proceeds from the issuance of long-term debt related primarily to
the Lombard US Equipment Finance note issued in 2003, partially offset by a
$4.8 million increase in proceeds from the issuance of common stock under the
dividend reinvestment and share purchase plan, the employee stock purchase
program and from stock options exercised in the first half of 2004. Contractual Obligations There have been no material changes in the Companys contractual obligations on
long-term debt, construction program commitments, capacity and energy
requirements, other purchase obligations or operating leases from those
reported in the Companys Annual Report on Form 10-K for the year ended
December 31, 2003. The electric utilitys operating lease for rail cars used to
ship coal to Hoot Lake Plant expired on July 31, 2004. The utility is currently
renting rail cars used to ship coal to Hoot Lake Plant on a month to month
basis and is in the process of negotiating a new rail car lease agreement. 15




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##### Table of Contents



In the second quarter of 2004, the electric utility entered into an agreement
with Kennecott Coal Sales Company for the purchase of subbituminous coal to be
burned at its Hoot Lake Plant from July 1, 2004 through December 31, 2007. In
July 2004, the electric utility signed separate agreements with both Kennecott
Coal Sales Company and Arch Coal Sales Company, Inc., for the purchase of
subbituminous coal to be burned at the Big Stone Plant from January 1, 2005
through December 31, 2007. The effect of these changes related to coal
contracts on the Companys obligations disclosed under coal contracts in its
2003 Annual Report on Form 10-K as of December 31, 2003 over the period 2005
through 2007 will be to increase those obligations by $15.7 million in 2005,
$16.5 million in 2006 and $15.7 million in 2007. 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. The electric utilitys transportation agreement with Burlington Northern Santa
Fe Railroad (BNSF) for the shipment of coal to Hoot Lake Plant expired on July
31, 2004. As of August 1, 2004, coal is being transported to Hoot Lake Plant
under general tariff rates for the shipment of subbituminous coal within the
United States. The electric utility is currently in the process of negotiating
a new agreement with BNSF for the shipment of coal to its Hoot Lake Plant. 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 material off-balance-sheet
arrangements or any material relationships with unconsolidated entities or
financial partnerships. MATERIAL CHANGES IN RESULTS OF OPERATIONS Comparison of the Three Months Ended June 30, 2004 and 2003 Consolidated Results of Operations Total operating revenues were $211.2 million for the three months ended June
30, 2004 compared with
$180.0 million for the three months ended June 30, 2003. Operating income was
$15.3 million for the three months ended June 30, 2004 compared with $14.9
million for the three months ended June 30, 2003. The Company recorded diluted
earnings per share of $0.30 for the three months ended June 30, 2004 compared
to $0.32 for the three months ended June 30, 2003. Following is a discussion of the results of operations by segment. Amounts presented in the following tables for the three month periods ended
June 30, 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:
$530,000 in operating revenues, $62,000 in cost of goods sold and $468,000 in
other nonelectric expenses for the three months ended June 30, 2004; and
$164,000 in operating revenues, $59,000 in cost of goods sold and $105,000 in
other nonelectric expenses in for the three months ended June 30, 2003. 16




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##### Table of Contents



Electric Three months endedJune 30,(in thousands)
    
    2004
    
    2003
    
    ChangeRetail sales revenues
    
    $
    49,291
    
    
    $
    49,789
    
    
    $
    (498
    )Wholesale revenues:Sales from company-owned generation
    
    
    3,763
    
    
    
    3,342
    
    
    
    421Net margins on purchased power resold
    
    
    1,484
    
    
    
    1,642
    
    
    
    (158
    )Net marked-to-market gains
    
    
    1,547
    
    
    
    
    
    
    
    1,547Other revenues
    
    
    4,364
    
    
    
    4,327
    
    
    
    37Total operating revenues
    
    $
    60,449
    
    
    $
    59,100
    
    
    $
    1,349Production fuel
    
    
    11,193
    
    
    
    10,696
    
    
    
    497Purchased power  system use
    
    
    9,903
    
    
    
    9,702
    
    
    
    201Other electric operation and maintenance expenses
    
    
    22,366
    
    
    
    22,022
    
    
    
    344Depreciation and amortization
    
    
    6,015
    
    
    
    6,409
    
    
    
    (394
    )Property taxes
    
    
    2,359
    
    
    
    2,439
    
    
    
    (80
    )Operating income
    
    $
    8,613
    
    
    $
    7,832
    
    
    $
    781
 Retail revenue decreased 1.0% despite a 5.9% increase in megawatt hour (mwh)
sales in the three months ended June 30, 2004 compared to the three months
ended June 30, 2003 due largely to a significant increase in consumption of
lower priced electricity by industrial customers under block pricing tariffs
where incremental increases in mwh consumption are sold at lower prices.
Recovery of fuel and purchased power costs through cost-of-energy adjustment
revenues was not a contributing factor to the reduction in retail revenues
between the periods nor was weather a discernable factor in the increase in mwh
sales. The 12.6% increase in revenue from wholesale electric sales from company-owned
generation reflects a 26.3% increase in mwhs sold as a result of having more
generating capacity available in May and June of 2004 compared with May and
June of 2003 when Coyote Station was shut down for scheduled maintenance. The
revenue per mwh sold for the three months ended June 30, 2004 compared with the
three months ended June 30, 2003 decreased by 10.9%. Net margins at market prices on energy contracts settled in the second quarter
of 2004 totaled $1,484,000 at the time of settlement. The $1,547,000 in net
marked-to-market gains recognized on forward energy contracts in the second
quarter of 2004 was comprised of $1,409,000 in unrealized net gains and
$138,000 in net marked-to-market gains realized during the quarter. Net
unrealized marked-to-market gains were $2,057,000 on December 31, 2003. Of this
amount, $1,923,000 was realized in the first quarter of 2004 and $24,000 was
realized in the second quarter of 2004, $20,000 remained unrealized as of June
30, 2004 and $90,000 was not realized due to subsequent marked-to-market net
losses recognized on contracts settled in the first six months of 2004. In the
second 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 second quarter of 2004 are not comparable to the margins recorded on the
resale of purchased power in the second quarter of 2003. Other electric operating revenues were about the same for the three months
ended June 30, 2004 compared to the three months ended June 30, 2003. However,
revenues from electric transmission related services increased 17




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##### Table of Contents



$0.7 million, supplemented by a settle-up payment for the shared use of
transmission facilities with another regional transmission provider, and
revenue from steam sales increased $0.1 million, while revenues from contracted
construction services decreased $0.8 million between the periods mainly as a
result of completion of a large wind- farm project in North Dakota in 2003. Fuel costs increased by 4.6% for the three months ended June 30, 2004 compared
with the three months ended June 30, 2003 as a result of a 14.1% increase in
generation combined with an 8.3% reduction in the cost of fuel per mwh
generated. The increase in mwh generation corresponds to an 11.9% increase in
mwhs generated for retail sales and a 26.3% increase in mwhs generated for
resale between the periods. The decrease in the fuel cost per mwh generated is
mainly a function of the mix of resources available for generation during the
second quarter of 2004 as compared with the second quarter of 2003. Generation
at Coyote Station, the Companys generating unit with the lowest fuel costs per
mwh, increased 184.7% while its cost of fuel per mwh generated decreased 0.4%.
Coyote Station was unavailable for generation in April and May of 2003 due to a
scheduled maintenance shutdown. Generation increased 8.5% at the Companys Big
Stone Plant where the fuel cost per mwh generated increased 3.5%. Generation at
Hoot Lake Plant, the Companys steam powered generating plant with higher fuel
costs per mwh, decreased 46.1% while its cost of fuel per mwh generated
increased 3.1%. Hoot Lake Unit 3 was unavailable for generation for six weeks
of the second quarter of 2004 due to an extended maintenance shutdown. Purchased power expense for energy purchased for system use (sale to retail
customers) increased 2.1% for the three months ended June 30, 2004 compared
with the three months ended June 30, 2003 as a result of a 4.2% increase in
mwhs purchased combined with a 2.0% decrease 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 1.6% increase in other electric operation and maintenance expenses for the
three months ended June 30, 2004 compared with the three months ended June 30,
2003 reflects increased labor expenses of $1.5 million related to an increase
in employee benefit costs, and general wage and salary increases averaging
about 3.5%, and increased line maintenance costs of $0.1 million, offset by
$0.8 million in reduced costs related to construction work performed for others
and $0.3 million in reduced materials and supplies expenditures between the
periods. The 6.1% decrease in depreciation expense is related to a recent
depreciation study and depreciation rates approved by the Minnesota Public
Utilities Commission. Plastics Three months endedJune 30,(in thousands)
    
    2004
    
    2003
    
    ChangeOperating revenues
    
    $
    32,636
    
    
    $
    19,647
    
    
    $
    12,989Cost of goods sold
    
    
    26,491
    
    
    
    16,328
    
    
    
    10,163Operating expenses
    
    
    1,530
    
    
    
    889
    
    
    
    641Depreciation and amortization
    
    
    583
    
    
    
    521
    
    
    
    62Operating income
    
    $
    4,032
    
    
    $
    1,909
    
    
    $
    2,123
 The 66.1% increase in operating revenues for the three months ended June 30,
2004 compared with the three months ended June 30, 2003 is the result of a
46.5% increase in pounds of polyvinyl chloride (PVC) pipe sold combined with a
13.4% increase in the price per pound of PVC pipe sold. The increase in revenue
from the increase in pounds of pipe sold and increased prices was partially offset by a 10.8%
increase in the cost per pound of PVC pipe sold. The cost per pound of resin,
the raw material used to produce PVC pipe, increased 10.8% between the periods.
Gross margins on pipe sold increased $2.8 million and the gross margin per
pound increased 26.8% between the periods. The 72.1% increase in plastics
operating expenses is mainly due to increases in salaries and sales
commissions related to the increase in pipe sales and increased employee
benefit and travel expenses. The increase in 18




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##### Table of Contents



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. Manufacturing Three months endedJune 30,(in thousands)
    
    2004
    
    2003
    
    ChangeOperating revenues
    
    $
    56,057
    
    
    $
    48,838
    
    
    $
    7,219Cost of goods sold
    
    
    43,343
    
    
    
    36,431
    
    
    
    6,912Operating expenses
    
    
    6,824
    
    
    
    5,433
    
    
    
    1,391Depreciation and amortization
    
    
    2,127
    
    
    
    1,939
    
    
    
    188Operating income
    
    $
    3,763
    
    
    $
    5,035
    
    
    $
    (1,272
    )
 The 14.8% increase in operating revenues for the three months ended June 30,
2004 compared with the three months ended June 30, 2003 reflects revenue
increases of $3.9 million from the waterfront equipment company, $3.4 million
from the Companys metal parts stamping and fabrication company, $0.9 million
from the manufacturer of thermoformed plastic and horticultural products and
$0.3 million from the manufacturer of structural steel products, offset by a
$1.2 million decrease in revenue from the manufacturer of wind towers. The
increase in revenue from the waterfront equipment company 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 metal parts stamping and fabrication company is mainly
attributable to an increase in fabrication activity. The revenue increase at
the manufacturer of thermoformed plastic and horticultural products reflects a
28.1% increase in the volume of all products sold partially offset by an 8.8%
decrease in the average price per unit sold between the periods. The increase
in revenue at the manufacturer of structural steel products is due to an
increase in the volume of work performed between the periods. The decrease in
revenues from the manufacturer of wind towers reflects a reduction in
product sales between the periods. Increased revenues in the manufacturing segment were mostly offset by a 19.0%
increase in cost of goods for the three months ended June 30, 2004 compared
with the three months ended June 30, 2003. The increase in cost of goods sold
primarily reflects increased costs of $3.1 million at the waterfront equipment
company, $2.2 million at the metal parts stamping and fabrication company,
$1.1 million at the manufacturer of thermoformed plastic and horticultural
products and $0.4 million at the manufacturer of structural steel products. Cost
increases at the manufacturer of thermoformed plastic and horticultural
products and the manufacturer of structural steel products increased in excess
of their revenue increases resulting in a decrease in gross margins and
operating income at these companies. The manufacturer of thermoformed plastic
and horticultural products has not been fully able to pass on raw material
increases to customers due to discounts offered by competitors. Competitive
pressures resulting in cost increases in excess of revenue increases at these
companies and cost increases combined with lower revenues at the wind tower
manufacturer and increased operating expenses at most of the manufacturing
companies contributed to a $1.3 million decrease in operating income in the
manufacturing segment between the periods. Increases in steel costs related to
raw material shortages and demand for steel in excess of world-wide milling
capacity, the continuing delay in a renewal of the expired federal production
tax credit for wind energy and excess manufacturing capacity has contributed to
a decrease in operating margins in this segment. The 25.6% increase in manufacturing operating expenses for the three months
ended June 30, 2004 compared with the three months ended June 30, 2003 is
mainly due to an increase in sales commissions at the waterfront equipment
company and incentive compensation accruals at the metal parts stamping and
fabrication company. The 9.7% increase in depreciation and amortization
expenses between the periods is the result of plant additions and expansion of
manufacturing capacity. 19




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##### Table of Contents



Health Services Three months endedJune 30,(in thousands)
    
    2004
    
    2003
    
    ChangeOperating revenues
    
    $
    26,597
    
    
    $
    25,412
    
    
    $
    1,185Cost of goods sold
    
    
    20,225
    
    
    
    18,737
    
    
    
    1,488Operating expenses
    
    
    4,544
    
    
    
    3,934
    
    
    
    610Depreciation and amortization
    
    
    1,296
    
    
    
    1,276
    
    
    
    20Operating income
    
    $
    532
    
    
    $
    1,465
    
    
    $
    (933
    )
 The 4.7% increase in health services operating revenues for the three months
ended June 30, 2004 compared with the three months ended June 30, 2003 reflects
$1.9 million in additional revenue mainly related to equipment sales offset by
a $0.7 million decrease in revenues from repair and maintenance of diagnostic
imaging equipment. While the imaging business experienced a $1.9 million
increase in revenues, net income decreased $0.2 million between the quarters
reflecting a decrease in revenues and profit margins per scan related to
contract price reductions on certain modalities. The decrease in repair and
maintenance services revenue is the result of shifting more resources to
service contract and warranty work in the second quarter of 2004 compared to
the second quarter of 2003. The 7.9% increase in cost of goods sold for the three months ended June 30,
2004 compared with the three months ended June 30, 2003 was mainly due to
increased equipment sales costs commensurate with the increase in revenue from
equipment sales and also due to an increase in equipment repairs and
maintenance costs and increases in equipment rental costs between the periods.
The 15.5% increase in operating expenses between the periods is mainly due to
increases in selling, general and administrative expenses at the company that
sells diagnostic and monitoring equipment and supplies and is partially
attributable to companies acquired in the second and third quarters of 2003.
The imaging business was also impacted by increased labor costs due to a shortage of technologists. Other Business Operations Three months endedJune 30,(in thousands)
    
    2004
    
    2003
    
    ChangeOperating revenues
    
    $
    35,999
    
    
    $
    27,183
    
    
    $
    8,816Cost of goods sold
    
    
    25,870
    
    
    
    18,372
    
    
    
    7,498Operating expenses
    
    
    10,559
    
    
    
    8,952
    
    
    
    1,607Depreciation and amortization
    
    
    1,211
    
    
    
    1,189
    
    
    
    22Operating (loss)
    
    $
    (1,641
    )
    
    $
    (1,330
    )
    
    $
    (311
    )
 The 32.4% increase in operating revenues for the three months ended June 30,
2004 compared with the three months ended June 30, 2003 reflects $12.6 million
in second quarter 2004 revenue from Foley Company (Foley) acquired in the
fourth quarter of 2003 and $1.2 million in increased revenues at the energy
services company, offset by a $5.5 million reduction in revenues at the
Companys other construction company. The 40.8% increase in cost of goods
between the quarters reflects $11.4 million in second quarter 2004 cost of
goods sold at Foley and a $1.2 million increase in cost of goods sold at the
energy services company, offset by a $5.1 million decrease in cost of goods
sold at the other construction company. The increases in revenues and cost of
goods sold at the energy services company reflects increases in natural gas
prices between the periods. The decrease in revenue and cost of goods sold at
the other construction company is due to a reduction in work in the second
quarter of 2004 compared to the second quarter of 2003. Operating losses at the
other construction company increased $0.6 million between the periods. This
increase is due to lower volumes of work and lower margins on the work due to
excess 20




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##### Table of Contents



capacity in the construction industry, poor performance on certain construction
projects and lack of passage of the expired federal production tax credit for
wind energy. The 18.0% increase in other business operations operating expenses is the
result of a $0.7 million increase related to the acquisition of Foley, a $0.9
million increase in operating expenses at the other operating companies
reflecting increased insurance costs, increased unallocated corporate overhead
due to increased defined benefit plan costs and increases in brokerage fees
directly related to an increase in brokerage revenues at the flatbed trucking
company. Other Income and Income Taxes For the three months ended June 30, 2004 compared with the three months ended
June 30, 2003, other income decreased $157,000 mainly related to a decrease in
allowance for funds used during construction at the electric utility due to
lower construction work in progress balances in the second quarter of 2004
compared to the second quarter of 2003 when the electric utilitys Solway
combustion turbine was under construction. The $0.8 million (28.3%) increase in income tax expense between the quarters is
partially due to a $0.3 million (2.5%) increase in income before income taxes
for the three months ended June 30, 2004 compared with the three months ended
June 30, 2003. The effective tax rate for the three months ended June 30, 2004
was 32.8% compared to 26.2% for the three months ended June 30, 2003. The
increase in income taxes and the effective tax rate reflects a $0.4 million
increase in deferred income taxes in the second quarter of 2004 related to
normalization of deferred income taxes under regulatory accounting at the
electric utility and a reduction in nontaxable income related to a reduction in
allowance for equity funds used during construction. Comparison of the Six Months Ended June 30, 2004 and 2003 Consolidated Results of Operations Total operating revenues were $417.8 million for the six months ended June 30,
2004 compared with
$352.2 million for the six months ended June 30, 2003. Operating income was
$31.4 million for the six months ended June 30, 2004 compared with $33.2
million for the six months ended June 30, 2003. The Company recorded diluted
earnings per share of $0.60 for the six months ended June 30, 2004 compared to
$0.70 for the six months ended June 30, 2003. Following is a discussion of the results of operations by segment. Amounts presented in the following tables for the six month periods ended June
30, 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:
$1,243,000 in operating revenues, $122,000 in cost of goods sold and $1,121,000
in other nonelectric expenses for the six months ended June 30, 2004; and
$319,000 in operating revenues, $111,000 in cost of goods sold and $208,000 in
other nonelectric expenses in for the six months ended June 30, 2003. 21




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##### Table of Contents



Electric Six months endedJune 30,(in thousands)
    
    2004
    
    2003
    
    ChangeRetail sales revenues
    
    $
    112,465
    
    
    $
    109,039
    
    
    $
    3,426Wholesale revenues:Sales from company-owned generation
    
    
    7,877
    
    
    
    7,268
    
    
    
    609Net margins on purchased power resold
    
    
    1,935
    
    
    
    4,096
    
    
    
    (2,161
    )Net marked-to-market gains
    
    
    3,159
    
    
    
    
    
    
    
    3,159Other revenues
    
    
    7,868
    
    
    
    6,767
    
    
    
    1,101Total operating revenues
    
    $
    133,304
    
    
    $
    127,170
    
    
    $
    6,134Production fuel
    
    
    25,790
    
    
    
    23,673
    
    
    
    2,117Purchased power  system use
    
    
    20,825
    
    
    
    19,314
    
    
    
    1,511Other electric operation and maintenance expenses
    
    
    43,807
    
    
    
    41,468
    
    
    
    2,339Depreciation and amortization
    
    
    11,951
    
    
    
    12,861
    
    
    
    (910
    )Property taxes
    
    
    4,848
    
    
    
    5,038
    
    
    
    (190
    )Operating income
    
    $
    26,083
    
    
    $
    24,816
    
    
    $
    1,267
 The 3.1% increase in retail electric revenue resulted from a 4.9% increase in
retail megawatt-hours sold offset by a 1.7% decrease in revenue per
megawatt-hour (mwh) sold in the six months ended June 30, 2004 compared with
the six months ended June 30, 2003. Increased sales reflect increased
consumption, mainly among commercial and industrial customers whose
lower-priced mwh consumption had the effect of decreasing revenue per mwh sold
between the periods. Revenue from sales to commercial customers increased $1.7
million on a 3.5% increase in mwhs sold. Revenue from sales to residential
customers increased $0.9 million on a 1.2% increase in mwhs sold. Revenue from
sales of lower priced electricity to industrial customers increased $0.8
million on a 22.5% increase in mwhs sold between the periods. Weather was not a
discernable factor in the increase in sales. The 8.4% increase in revenue from wholesale electric sales from company-owned
generation reflects a 21.8% increase in mwhs sold as a result of having more
generating capacity available in May and June of 2004 compared with May and
June of 2003 when Coyote Station was shut down for scheduled maintenance. The
revenue per mwh sold for the six months ended June 30, 2004 compared with the
six months ended June 30, 2003 decreased by 11.0%. Net margins at market prices on energy contracts settled in the first six
months of 2004 totaled $1.9 million at the time of settlement. The $3.2 million
in net marked-to-market gains recognized on forward energy contracts in the
first six months of 2004 was comprised of $2.8 million in unrealized net gains
and $0.4 million in marked-to-market gains realized in the first six months of
2004. Net unrealized marked-to-market gains were $2,057,000 on December 31,
2003. Of this amount, $1,947,000 was realized in the first six months of 2004,
$20,000 remained unrealized as of June 30, 2004 and $90,000 was not realized
due to subsequent marked-to-market net losses recognized on contracts settled
in the first six months of 2004. In the first six months 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 six months of 2004 are not comparable to
the margins recorded on the resale of purchased power in the first six months
of 2003. 22




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##### Table of Contents



The 16.3% increase in other electric operating revenues for the six months
ended June 30, 2004 compared to the six months ended June 30, 2003 reflects a
$0.6 million increase in revenues from sale of steam to an ethanol plant near
Big Stone Plant and a $1.0 million increase in transmission services related
revenue due to increased use of our transmission lines by others, offset by
$0.6 million decrease in revenue from contracted construction services mainly
related to the completion of a large wind-farm project in North Dakota in 2003. Fuel costs increased by 8.9% for the six months ended June 30, 2004 compared
with the six months ended June 30, 2003 as a result of a 10.1% increase in
generation combined with a 1.1% decrease in the cost of fuel per mwh generated.
The increase in mwh generation corresponds to a 8.3% increase in mwhs generated
for retail sales and a 21.8% increase in mwhs generated for resale between the
periods. The decrease in the fuel cost per mwh generated is mainly a function
of the mix of resources available for generation during the first six months of
2004 as compared with the first six months of 2003. Generation at Coyote
Station, the Companys generating unit with the lowest fuel costs per mwh,
increased 49.8% while its cost of fuel per mwh generated increased 1.7%. Coyote
Station was unavailable for generation in April and May of 2003 due to a
scheduled maintenance shutdown. Generation increased 11.1% at the Companys
Big Stone Plant where the fuel cost per mwh generated increased 3.8%.
Generation at Hoot Lake Plant, the Companys steam powered generating plant
with higher fuel costs per mwh, decreased 24.2% while its cost of fuel per mwh
generated increased 2.5%. Hoot Lake Unit 3 was unavailable for generation for
six weeks of the second quarter of 2004 due to an extended maintenance
shutdown. Purchased power expense for energy purchased for system use (sale to retail
customers) increased 7.8% for the six months ended June 30, 2004 compared with
the six months ended June 30, 2003 as a result of an 6.5% increase in mwhs
purchased combined with a 1.3% 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 5.6% increase in other electric operation and maintenance expenses for the
six months ended June 30, 2004 compared with the six months ended June 30, 2003
reflects $2.6 million in increased labor expenses due to an increase in
employee benefit costs, general wage and salary increases averaging about 3.5%
and a decrease in capitalized labor related to a decrease in construction
activity. The increase in other electric operation and maintenance expenses
also includes a $0.6 million increase in outside services expenditures mainly
for tree-trimming and $0.4 million in increased insurance costs. These
increases were offset by decreases of $0.7 million in bonus and incentive
accruals and $0.6 million in costs related to construction work performed for
others between the periods. The 7.1% decrease in depreciation expense is
related to a recent depreciation study and depreciation rates approved by the
Minnesota Public Utilities Commission. Plastics Six months endedJune 30,(in thousands)
    
    2004
    
    2003
    
    ChangeOperating revenues
    
    $
    59,072
    
    
    $
    42,582
    
    
    $
    16,490Cost of goods sold
    
    
    49,803
    
    
    
    35,059
    
    
    
    14,744Operating expenses
    
    
    2,796
    
    
    
    1,969
    
    
    
    827Depreciation and amortization
    
    
    1,152
    
    
    
    993
    
    
    
    159Operating income
    
    $
    5,321
    
    
    $
    4,561
    
    
    $
    760
 The 38.7% increase in operating revenues for the six months ended June 30, 2004
compared with the six months ended June 30, 2003 is the result of an 26.9%
increase in pounds of polyvinyl chloride (PVC) pipe sold combined with a 9.3%
increase in the price per pound of PVC pipe sold. The increase in revenue from
the increase in pounds of pipe sold and increased prices was partially offset by a 12.0%
increase in the cost per pound of PVC pipe sold. The cost per pound of resin, the raw material used to produce PVC pipe,
increased 12.8% between the periods.
Increased sales combined with
the increased cost per pound of pipe sold resulted in the 42.1% increase in the
cost of goods sold. Gross margins on pipe sold increased $1.7 million while the
gross margin per pound decreased 2.4% between 23




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##### Table of Contents



the periods. The 42.0% increase in operating expenses is mainly due to
increases in salaries and sales commissions related to the increase in pipe
sales and increased travel, insurance and employee benefit expenses.

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. The companies in this segment are highly dependent on a limited number of
third-party vendors for PVC resin. In the first six months of 2004, 100% of
resin purchased was from two vendors: 50% from one and 50% from the other. In
the first six months of 2003, 95% of resin purchased was from the same two
vendors: 68% from one and 27% from the other. The Company believes its
relationships with its 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 Six months endedJune 30,(in thousands)
    
    2004
    
    2003
    
    ChangeOperating revenues
    
    $
    102,896
    
    
    $
    83,557
    
    
    $
    19,339Cost of goods sold
    
    
    82,166
    
    
    
    62,731
    
    
    
    19,435Operating expenses
    
    
    12,394
    
    
    
    10,762
    
    
    
    1,632Depreciation and amortization
    
    
    4,240
    
    
    
    3,820
    
    
    
    420Operating income
    
    $
    4,096
    
    
    $
    6,244
    
    
    $
    (2,148
    )
 The 23.1% increase in operating revenues for the six months ended June 30, 2004
compared with the six months ended June 30, 2003 reflects revenue increases of
$6.9 million from the waterfront equipment company, $6.2 million from the
manufacturer of wind towers, $3.6 million from the metal parts stamping and
fabrication company, $2.2 million from the manufacturer of thermoformed plastic
and horticultural products and $0.7 million from the manufacturer of structural
steel products. The increase in revenue from the waterfront equipment company
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 increase in revenues from the manufacturer of wind towers reflects the sale
of towers to a Canadian customer in the first quarter of 2004. The revenue
increase at the metal parts stamping and fabrication company is mainly
attributable to an increase in fabrication activity. The revenue increase at
the manufacturer of thermoformed plastic and horticultural products reflects an
increase of 14.9% in the volume of units sold and a 2.6% increase in the price
per unit sold between the periods. The increase in revenue at the 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
31.0% increase in cost of goods for the six months ended June 30, 2004 compared
with the six months ended June 30, 2003. The increase in cost of goods sold
primarily reflects increased costs of $7.9 million at the manufacturer of wind
towers, $5.6 million at the waterfront equipment company, $2.8 million at the
manufacturer of thermoformed plastic and horticultural products, $2.3 million
at the metal parts stamping and fabrication company and $1.1 million at the
manufacturer 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 $2.1 million decrease in operating income in the manufacturing
segment between the periods. Operating income increased at the metal parts
stamping and fabrication company, the waterfront equipment company and the
manufacturer of auto and truck frame straightening equipment, but operating
income decreased at the wind tower manufacturing company, the manufacturer of
thermoformed plastic and horticultural products and the structural steel
products company. The 24




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##### Table of Contents



manufacturer of thermoformed plastic and horticultural products has not been
fully able to pass on raw material increases to customers due to discounts
offered by competitors. The 15.2% increase in manufacturing operating expenses for the six months ended
June 30, 2004 compared with the six months ended June 30, 2003 is mainly due to
an increase in incentive compensation accruals at the metal parts stamping and
fabrication company and increased sales commissions at the waterfront equipment
company and increased expenses for professional services at all of the
manufacturing companies. The 11.0% increase in depreciation and amortization
expenses between the periods is the a result of plant additions and expansion
of manufacturing capacity. Increases in steel costs related to raw material
shortages and demand for steel in excess of world-wide milling capacity, the
continuing delay in a renewal of the expired federal production tax credit for
wind energy and excess manufacturing capacity has contributed to a decrease in
operating margins in the manufacturing segment. Health Services Six months endedJune 30,(in thousands)
    
    2004
    
    2003
    
    ChangeOperating revenues
    
    $
    52,273
    
    
    $
    47,230
    
    
    $
    5,043Cost of goods sold
    
    
    39,622
    
    
    
    35,330
    
    
    
    4,292Operating expenses
    
    
    9,008
    
    
    
    7,860
    
    
    
    1,148Depreciation and amortization
    
    
    2,687
    
    
    
    2,463
    
    
    
    224Operating income
    
    $
    956
    
    
    $
    1,577
    
    
    $
    (621
    )
 The 10.7% increase in health services operating revenues for the six months
ended June 30, 2004 compared with the six months ended June 30, 2003 reflects
$2.8 million in additional revenue from scanning and other services and $2.2
million in additional revenue from the sale and servicing of diagnostic imaging
equipment. The number of scans performed decreased 2.1% while the average fee
per scan increased 2.3% between the periods. 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 12.1% increase in cost of goods sold for the six months ended June 30, 2004
compared with the six months ended June 30, 2003 was directly related to the
increases in revenues. The 14.6% increase in operating expenses between the
periods is mainly related to increases in salaries and benefits and sales
commissions expenses, but also reflects increases in travel, advertising and
other sales related expenses. The 9.1% increase in depreciation and
amortization expense is related to an increase in depreciable property as a
result of equipment purchases in 2003. Other Business Operations Six months endedJune 30,(in thousands)
    
    2004
    
    2003
    
    ChangeOperating revenues
    
    $
    71,491
    
    
    $
    51,986
    
    
    $
    19,505Cost of goods sold
    
    
    52,083
    
    
    
    35,369
    
    
    
    16,714Operating expenses
    
    
    22,129
    
    
    
    18,249
    
    
    
    3,880Depreciation and amortization
    
    
    2,375
    
    
    
    2,353
    
    
    
    22Operating (loss)
    
    $
    (5,096
    )
    
    $
    (3,985
    )
    
    $
    (1,111
    )
 The 37.5% increase in operating revenues for the six months ended June 30, 2004
compared with the six months ended June 30, 2003 reflects $22.8 million in 2004
revenue from Foley, acquired in the fourth quarter of 2003, $0.7 million in
increased revenues at the flatbed trucking company mainly related to brokerage
activity and $0.2 25




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##### Table of Contents



million in increased revenue at the energy services company. These revenue
increases were partially offset by a $5.2 million reduction in revenue at the
other construction company. The 47.3% increase in cost of goods between the
periods reflects $20.7 million in 2004 cost of goods sold at Foley and $0.4
million at the energy services company, offset by a $4.4 million reduction in
cost of goods sold at the other construction company. The increase in revenues
and cost of goods sold at the energy services company reflects increased
natural gas prices. The decrease in revenue and cost of goods sold at the other
construction company is mainly due to a reduction in work in the second quarter
of 2004 compared to the second quarter of 2003. Operating losses at the other
construction company increased $1.1 million between the periods. This increase
is due to lower volumes of work and lower margins on the work due to excess
capacity in the construction industry, poor performance on certain construction
projects and lack of passage of the expired federal production tax credit for
wind energy. The 21.3% increase in other business operations operating expenses is the
result of a $1.4 million increase related to the acquisition of Foley, a $0.8
million increase in operating expenses at the flatbed trucking company mainly
related to brokerage activity and $1.7 million in increased expenses at the
other operating companies mainly reflecting increases in insurance costs and
increased unallocated corporate overhead due to increased defined benefit plan
costs. Other Income and Income Taxes For the six months ended June 30, 2004 compared with the six months ended June
30, 2003, Other income decreased $450,000 mainly related to a decrease in
allowance for funds used during construction at the electric utility due to
lower construction work in progress balances in the first six months of 2004
compared to the first six months of 2003 when the electric utilitys Solway
combustion turbine was under construction. The Solway combustion turbine was
placed in service in June 2003. Income tax expense increased $44,000 (0.6%) in the first six months of 2004
compared to the first six months of 2003. The effective tax rate for the six
months ended June 30, 2004 was 31.7% compared to 28.7% for the six months ended
June 30, 2003. The increase in income taxes and the effective tax rate reflects
a $0.4 million increase in deferred income taxes in the second quarter of 2004
related to normalization of deferred income taxes under regulatory accounting
at the electric utility and a reduction in nontaxable income related to a
reduction in allowance for equity funds used during construction. 2004 Outlook by Segment Electric For the remainder of 2004, the Company anticipates continued solid 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 contracted
construction work for others compared to 2003. The initial application of
mark-to-market accounting in 2003 added $2.1 million to 2003 pre-tax income
that will not be duplicated in 2004. The electric segment has also been
impacted by unscheduled outages at generating plants in May and July of 2004. Plastics The Company expects the plastics segment to have a strong performance
throughout the remainder of the year. Additional PVC resin price increases
have been announced, however it is expected that the sales price of PVC pipe
will remain flat or decrease. Backlog is strong as is the demand for rural
water pipe. 26




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##### Table of Contents



Manufacturing While the results of operations for this segment were down for the six months
ended June 30, 2004 compared with the six months ended June 30, 2003, there are
objective signs of improved activity for the rest of the year. The metal parts
stamping and fabrication company has been successful with implementing price
increases to customers to mitigate raw material cost increases. The
manufacturers of wind towers and structural steel products are expected to have
improved margins during the rest of the year, which will result in improved
performance by these two companies over 2003. These businesses continue to be
affected by the uncertainty with regard to the renewal of the federal
production tax credit for wind energy and the pricing and availability of steel
and other commodities. The waterfront equipment business is expected to
continue its strong sales growth in both its residential and commercial
business. The previously announced marina renovation and expansion project has
been delayed due to issues beyond the Companys control. While this delay will
have a negative impact on 2004 earnings expectations, these earnings are
expected to be realized in 2005 and 2006. Health Services Revenues from the company that sells and services medical diagnostic and
monitoring equipment are expected to improve throughout the remainder of 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 assets. It is expected this
part of the health services segment will show improved earnings in comparison
to 2003. Other Business Operations The outlook for other business operations include the following considerations:  
    
    The acquisition of Foley Company will continue to generate net
earnings through 2004 with strong bidding activity and good backlog in
place for the remainder of the year.  
    
    The Companys other construction company continues to face
challenges. Lower volumes of work in the first half of 2004 at low
margins and losses on certain construction projects have generated $1.8
million of losses through June 30, 2004. While this company has
significant backlog in place for the rest of the year, the delay of the
passage of the expired federal production tax credit for wind energy has
caused a planned job to be delayed. This job delay has eliminated $8
million in revenues from the Companys forecast for the rest of the
year.  
    
    As previously announced, the Company has signed a non-binding letter
of intent and is in negotiations for the acquisition of Idaho Pacific
Holdings, Inc., a leading processor of dehydrated potatoes in North
America. The Company will make the appropriate announcements in the
future regarding the acquisition. 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 27




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##### Table of Contents



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. 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. An evaluation of projected cash flows from
this operation in January 2004 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 June 30, 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, market valuations of forward energy
contracts, growth of electric revenues, impact of the investment performance of
the utilitys pension plan, changes in the economy, governmental and regulatory
action, weather conditions, fuel and purchased power costs, environmental
issues, resin prices, and other factors discussed under Factors affecting
future earnings on pages 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. 28




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk At June 30, 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 June 30, 2004,
the Company had
$28.9 million of long-term debt subject to variable interest rates. Assuming no
change in the Companys financial structure, if variable interest rates were to
average 1% higher or lower than the average variable rate on
June 30, 2004, interest expense and pre-tax earnings would change by
approximately $289,000 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 June
30, 2004 the Company had $34 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, $1,947,000 was
realized in the first six months of 2004, $20,000 remained unrealized as of
June 30, 2004 and $90,000 was not realized due to subsequent marked-to-market
net losses recognized on contracts settled in the first six months of 2004. As
of June 30, 2004 the electric utility had recognized, on a pretax basis,
$2,787,000 in net unrealized gains on open forward contracts for the purchase
and sale of energy in the last six months of 2004 and the first four months of
2005. 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 pricing. Of the forward energy contracts that are marked to market
as of June 30, 2004, 65% of the forward energy purchases have offsetting sales
in terms of volumes and delivery periods. 29




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##### Table of Contents



The Company has in place an energy risk management policy with a goal to
manage, through the use of defined risk management practices, price risk and
credit risk associated with wholesale power purchases and sales. These policies
require that forward sales of electricity in wholesale markets be covered by
offsetting forward purchases of electricity with matching terms and delivery
dates when projected market prices deviate from contract prices beyond limits
set forth in the Companys energy risk management policy 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 June 30, 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 June 30, 2004 and the change in its consolidated balance sheet position from
December 31, 2003 to June 30, 2004: June 30,(in thousands)
    
    2004Current asset  marked-to-market gain
    
    $
    4,906Regulatory asset  deferred marked-to-market loss
    
    
    437Total assets
    
    
    5,343Current liability  marked-to-market loss
    
    
    (1,119
    )Regulatory liability  deferred marked-to-market gain
    
    
    (1,437
    )Total liabilities
    
    
    (2,556
    )Net fair value of marked-to-market energy contracts
    
    $
    2,787
 Year-to-date(in thousands)
    
    June 30, 2004Fair value at beginning of year
    
    $
    2,057Amount realized on contracts entered into in 2003 and settled in 2004
    
    
    (1,947
    )Changes in fair value of contracts entered into in 2003
    
    
    312Net fair value of contracts entered into in 2003 at end of period
    
    
    422Changes in fair value of contracts entered into in 2004
    
    
    2,365Net fair value end of period
    
    $
    2,787
 The $2.8 million in recognized but unrealized net gains on the forward energy
purchases and sales marked-to-market as of June 30, 2004 is expected to be
realized on physical settlement or settled by offsetting agreement with the
counterparty to the original contract as scheduled over the following quarters
in the amounts listed: 3rd Quarter
    
    4th Quarter
    
    1st Quarter
    
    2nd Quarter(in thousands)
    
    2004
    
    2004
    
    2005
    
    2005
    
    TotalNet gain
    
    $
    2,042
    
    
    $
    669
    
    
    $
    51
    
    
    $
    25
    
    
    $
    2,787
 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 30




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##### Table of Contents



forward contracts as of June 30, 2004 was $6.2 million. As of June 30, 2004 the
Company had a net credit risk exposure of $4.1 million from thirty-three
counterparties with investment grade credit ratings. The $4.1 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 June 30, 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 June 30, 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 June 30, 2004. During the fiscal quarter ended June 30, 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. 31




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Shareholders of the Company was held on
April 12, 2004, for the purpose of electing three nominees to the
Board of Directors with terms expiring in 2007 and to ratify the
appointment of Deloitte & Touche LLP as the Companys independent
auditors for the fiscal year ending December 31, 2004. All
nominees for directors as listed in the proxy statement were
elected. The names of each other director whose term of office
continued after the meeting are as follows: Karen M. Bohn, Thomas
M. Brown, Dennis R. Emmen, Kenneth L. Nelson, Nathan I. Partain
and Robert N. Spolum. The voting results are as follows: Shares
    
    Shares Voted
    
    BrokerElection of Directors
    
    Voted For
    
    Withheld Authority
    
    Non-VotesArvid R. Liebe
    
    
    20,983,337
    
    
    
    461,297
    
    
    
    -0-John C. MacFarlane
    
    
    20,972,980
    
    
    
    471,654
    
    
    
    -0-Gary J. Spies
    
    
    20,839,558
    
    
    
    605,076
    
    
    
    -0-
 Shares
    
    SharesShares
    
    Voted
    
    Voted
    
    BrokerVoted For
    
    Against
    
    Abstain
    
    Non-VotesRatification of Auditors
    
    
    20,723,548
    
    
    
    454,674
    
    
    
    266,412
    
    
    
    -0-
 32




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##### Table of Contents



Item 6. Exhibits and Reports on Form 8-K  a)
    
    Exhibits: 10.1
    
    Master Coal Purchase Agreement dated as of December 13, 2001 by
and between Otter Tail Power Company and Kennecott Coal Sales Company
 Hoot Lake Plant. *10.2
    
    Coal Supply Confirmation Letter dated as of May 26, 2004 by and
between Otter Tail Power Company and Kennecott Coal Sales Company for
shipments of coal from July 1, 2004 through December 31, 2007  Hoot
Lake Plant. *10.3
    
    Master Coal Purchase and Sale Agreement dated as of June 1,
2004 by and between Otter Tail Power Company, Montana-Dakota
Utilities Co., NorthWestern Corporation and Kennecott Coal Sales
Company  Big Stone Plant. *10.4
    
    Coal Supply Confirmation Letter dated as of July 14, 2004 by
and between Otter Tail Power Company, Montana-Dakota Utilities Co.,
NorthWestern Corporation and Kennecott Coal Sales Company for
shipments of coal from January 1, 2005 through December 31, 2007 
Big Stone Plant. *10.5
    
    Coal Supply Agreement dated as of July 22, 2004 by and between
Otter Tail Power Company, Montana-Dakota Utilities Co., NorthWestern
Corporation and Arch Coal Sales Company, Inc. for the period January
1, 2005 through December 31, 2007  Big Stone Plant. *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.
  *
    Confidential information has been omitted from this Exhibit and filed
separately with the Commission pursuant to a confidential treatment
request under Rule 24b-2.  b)
    
    Reports on Form 8-K.The Company filed a Form 8-K on May 4, 2004 to furnish under Item 12 the
press release issued on May 3, 2004 to report its earnings for the first
quarter of 2004. 33




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##### Table of Contents



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. Moug
Chief Financial Officer and Treasurer
(Chief Financial Officer/Authorized Officer)
 Dated: August 9, 2004 34




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##### Table of Contents



EXHIBIT INDEX Exhibit Number
    
    Description10.1
    
    
    Master Coal Purchase Agreement dated as of December 13, 2001 by
and between Otter Tail Power Company and Kennecott Coal Sales Company
 Hoot Lake Plant. *10.2
    
    
    Coal Supply Confirmation Letter dated as of May 26, 2004 by and
between Otter Tail Power Company and Kennecott Coal Sales Company for
shipments of coal from July 1, 2004 through December 31, 2007  Hoot
Lake Plant. *10.3
    
    
    Master Coal Purchase and Sale Agreement dated as of June 1,
2004 by and between Otter Tail Power Company, Montana-Dakota
Utilities Co., NorthWestern Corporation and Kennecott Coal Sales
Company  Big Stone Plant. *10.4
    
    
    Coal Supply Confirmation Letter dated as of July 14, 2004 by
and between Otter Tail Power Company, Montana-Dakota Utilities Co.,
NorthWestern Corporation and Kennecott Coal Sales Company for
shipments of coal from January 1, 2005 through December 31, 2007 
Big Stone Plant. *10.5
    
    
    Coal Supply Agreement dated as of July 22, 2004 by and between
Otter Tail Power Company, Montana-Dakota Utilities Co., NorthWestern
Corporation and Arch Coal Sales Company, Inc. for the period January
1, 2005 through December 31, 2007  Big Stone Plant. *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.
  *
    Confidential information has been omitted from this Exhibit and filed
separately with the Commission pursuant to a confidential treatment
request under Rule 24b-2.