SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2006

OR

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

OTTER TAIL CORPORATION

(Exact name of registrant as specified in its charter)

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

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer þ      Accelerated filer o      Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). YES o      NO þ

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

July 31, 2006 – 29,466,245 Common Shares ($5 par value)

 

 

OTTER TAIL CORPORATION

INDEX

						Page No.
Part I. Financial Information
		Item 1.		Financial Statements
				Consolidated Balance Sheets — June 30, 2006 and December 31, 2005 (not audited)			2 & 3
				Consolidated Statements of Income — Three and Six Months Ended June 30, 2006 and 2005 (not audited)			4
				Consolidated Statements of Cash Flows — Six Months Ended June 30, 2006 and 2005 (not audited)			5
				Notes to Consolidated Financial Statements (not audited)			6-21
		Item 2.		Management’s Discussion and Analysis of Financial
				Condition and Results of Operations			22-41
		Item 3.		Quantitative and Qualitative Disclosures About
				Market Risk			41-43
		Item 4.		Controls and Procedures			43
Part II. Other Information
		Item 1.		Legal Proceedings			44
		Item 1A.		Risk Factors			44
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			44
		Item 4.		Submission of Matters to a Vote of Security Holders			45
		Item 5.		Other Information			45-46
		Item 6.		Exhibits			46
Signatures							47
Form of 2006 Restricted Stock Unit Award Agreement
Amendment to Participation Agreement
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Otter Tail Corporation
Consolidated Balance Sheets
(not audited)
-Assets-

		June 30,				December 31,
		2006				2005
		(Thousands of dollars)
Current assets
Cash and cash equivalents		$	—			$	5,430
Accounts receivable:
Trade—net			136,147				117,796
Other			9,581				11,790
Inventories			106,989				88,677
Deferred income taxes			6,780				6,871
Accrued utility revenues			24,634				22,892
Costs and estimated earnings in excess of billings			41,826				21,542
Other			17,376				16,476
Assets of discontinued operations			600				13,701
Total current assets			343,933				305,175
Investments and other assets			34,825				33,824
Goodwill—net			98,110				98,110
Other intangibles—net			20,636				21,160
Deferred debits
Unamortized debt expense and reacquisition premiums			6,408				6,520
Regulatory assets and other deferred debits			17,164				19,616
Total deferred debits			23,572				26,136
Plant
Electric plant in service			917,838				910,766
Nonelectric operations			232,267				228,548
Total plant			1,150,105				1,139,314
Less accumulated depreciation and amortization			473,884				459,438
Plant—net of accumulated depreciation and amortization			676,221				679,876
Construction work in progress			35,804				17,215
Net plant			712,025				697,091
Total		$	1,233,101			$	1,181,496

See accompanying notes to consolidated financial statements

Consolidated Balance Sheets
(not audited)
-Liabilities-

		June 30,				December 31,
		2006				2005
		(Thousands of dollars)
Current liabilities
Short-term debt		$	59,032			$	16,000
Current maturities of long-term debt			3,232				3,340
Accounts payable			106,297				97,239
Accrued salaries and wages			21,122				24,326
Accrued federal and state income taxes			18,143				8,449
Other accrued taxes			8,971				12,518
Other accrued liabilities			13,884				14,124
Liabilities of discontinued operations			242				10,983
Total current liabilities			230,923				186,979
Pensions benefit liability			22,257				23,216
Other postretirement benefits liability			27,901				26,982
Other noncurrent liabilities			17,313				18,683
Deferred credits
Deferred income taxes			113,921				113,737
Deferred investment tax credit			8,754				9,327
Regulatory liabilities			60,560				61,624
Other			1,445				1,500
Total deferred credits			184,680				186,188
Capitalization
Long-term debt, net of current maturities			256,850				258,260
Class B stock options of subsidiary			1,258				1,258
Cumulative preferred shares authorized 1,500,000 shares without par value; outstanding 2006 and 2005 — 155,000 shares			15,500				15,500
Cumulative preference shares — authorized 1,000,000 shares without par value; outstanding — none			—				—
Common shares, par value $5 per share authorized 50,000,000 shares; outstanding 2006 — 29,465,129 and 2005 — 29,401,223			147,326				147,006
Premium on common shares			97,109				96,768
Unearned compensation			—				(1,720	)
Retained earnings			237,571				228,515
Accumulated other comprehensive loss			(5,587	)			(6,139	)
Total common equity			476,419				464,430
Total capitalization			750,027				739,448
Total		$	1,233,101			$	1,181,496

See accompanying notes to consolidated financial statements

Otter Tail Corporation
Consolidated Statements of Income
(not audited)

		Three months ended								Six months ended
		June 30,								June 30,
		2006				2005				2006				2005
		(In thousands, except share								(In thousands, except share
		and per share amounts)								and per share amounts)
Operating revenues		$	279,904			$	245,799			$	537,711			$	461,883
Operating expenses
Production fuel			11,456				10,549				26,262				25,726
Purchased power — system use			17,664				19,904				36,400				31,442
Electric operation and maintenance expenses			28,049				25,334				51,456				49,252
Cost of goods sold (excludes depreciation; included below)			156,363				129,602				288,757				237,232
Other nonelectric expenses			29,306				25,628				55,554				48,284
Depreciation and amortization			12,379				11,553				24,603				22,938
Property taxes — electric operations			2,551				2,408				5,169				5,081
Total operating expenses			257,768				224,978				488,201				419,955
Operating income			22,136				20,821				49,510				41,928
Other income			659				210				1,087				401
Interest charges			5,100				4,814				9,544				9,374
Income from continuing operations before income taxes			17,695				16,217				41,053				32,955
Income taxes — continuing operations			6,558				5,265				15,061				10,927
Net income from continuing operations			11,137				10,952				25,992				22,028
Discontinued operations
(Loss) income from discontinued operations net of taxes of ($41); ($86); $28 and $230 for the respective periods			(79	)			(134	)			26				337
Net gain on disposition of discontinued operations — net of taxes of $224; $6,820; $224 and $5,769 for the respective periods			336				11,486				336				9,910
Net income from discontinued operations			257				11,352				362				10,247
Net income			11,394				22,304				26,354				32,275
Preferred dividend requirements			184				183				368				367
Earnings available for common shares		$	11,210			$	22,121			$	25,986			$	31,908
Basic earnings per common share:
Continuing operations (net of preferred dividend requirement)		$	0.37			$	0.37			$	0.87			$	0.74
Discontinued operations		$	0.01			$	0.39			$	0.01			$	0.35
		$	0.38			$	0.76			$	0.88			$	1.09
Diluted earnings per common share:
Continuing operations (net of preferred dividend requirement)		$	0.37			$	0.37			$	0.86			$	0.74
Discontinued operations		$	0.01			$	0.39			$	0.01			$	0.35
		$	0.38			$	0.76			$	0.87			$	1.09
Average number of common shares outstanding — basic			29,392,963				29,158,140				29,359,474				29,142,118
Average number of common shares outstanding — diluted			29,766,040				29,263,643				29,751,718				29,244,698
Dividends per common share		$	0.2875			$	0.2800			$	0.5750			$	0.5600

See accompanying notes to consolidated financial statements

Otter Tail Corporation
Consolidated Statements of Cash Flows
(not audited)

		Six months ended
		June 30,
		2006				2005
		(Thousands of dollars)
Cash flows from operating activities
Net income		$	26,354			$	32,275
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain from sale of discontinued operations			(336	)			(9,910	)
Net income from discontinued operations			(26	)			(337	)
Depreciation and amortization			24,603				22,938
Deferred investment tax credit			(573	)			(576	)
Deferred income taxes			1,134				(3,985	)
Change in deferred debits and other assets			383				3,766
Discretionary contribution to pension plan			(4,000	)			(4,000	)
Change in noncurrent liabilities and deferred credits			2,492				5,750
Allowance for equity (other) funds used during construction			(391	)			(357	)
Change in derivatives net of regulatory deferral			1,918				(830	)
Stock compensation expense			1,320				668
Other — net			629				157
Cash (used for) provided by current assets and current liabilities:
Change in receivables			(14,827	)			(6,885	)
Change in inventories			(18,004	)			(20,414	)
Change in other current assets			(25,648	)			(17,625	)
Change in payables and other current liabilities			(7,411	)			(6,124	)
Change in interest and income taxes payable			10,107				8,320
Net cash (used in) provided by continuing operations			(2,276	)			2,831
Net cash provided by (used in) discontinued operations			926				(419	)
Net cash (used in) provided by operating activities			(1,350	)			2,412
Cash flows from investing activities
Capital expenditures			(33,949	)			(27,145	)
Proceeds from disposal of noncurrent assets			1,048				3,503
Acquisitions—net of cash acquired			—				(10,661	)
Increases in other investments			(1,171	)			(2,269	)
Net cash used in investing activities — continuing operations			(34,072	)			(36,572	)
Net proceeds from the sales of discontinued operations			1,847				33,685
Net cash provided by investing activities — discontinued operations			—				558
Net cash used in investing activities			(32,225	)			(2,329	)
Cash flows from financing activities
Change in checks written in excess of cash			4,186				(3,329	)
Net short-term borrowings			43,032				38,050
Proceeds from issuance of common stock, net of issuance expenses			1,017				4,820
Payments for retirement of common stock			(463	)			(365	)
Proceeds from issuance of long-term debt			105				157
Debt issuance expenses			(293	)			—
Payments for retirement of long-term debt			(1,691	)			(3,948	)
Dividends paid			(17,298	)			(16,691	)
Net cash provided by financing activities — continuing operations			28,595				18,694
Net cash used in financing activities — discontinued operations			—				(2,781	)
Net cash provided by financing activities			28,595				15,913
Effect of foreign exchange rate fluctuations on cash			(450	)			183
Net change in cash and cash equivalents			(5,430	)			16,179
Cash and cash equivalents at beginning of period — continuing operations			5,430				—
Cash and cash equivalents at end of period — continuing operations		$	—			$	16,179
Supplemental cash flow information
Cash paid during the year from continuing operations for:
Interest (net of amount capitalized)		$	8,624			$	8,746
Income taxes		$	4,867			$	3,187
Cash paid during the year from discontinued operations for:
Interest		$	91			$	100
Income taxes		$	423			$	2,560

See accompanying notes to consolidated financial statements

OTTER TAIL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(not audited)

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, 2005, 2004 and 2003 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005. Because of seasonal and other factors, the earnings for the three-month and six-month periods ended June 30, 2006 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 and sold or service performed. 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 or determinable. In cases where significant obligations remain after delivery, revenue is deferred until such obligations are fulfilled. Provisions for sales returns and warranty costs are recorded at the time of the sale based on historical information and current trends. In the case of derivative instruments, such as the electric utility’s forward energy contracts and the energy services company’s swap transactions, marked-to-market and realized gains and losses are recognized on a net basis in revenue in accordance with Statement of Financial Accounting Standards (SFAS) No. 133 and Emerging Issues Task Force (EITF) Issues 02-3 and 03-11. Gains and losses on forward energy contracts subject to regulatory treatment are deferred and recognized on a net basis in revenue in the period realized.

For our operating companies recognizing revenue on certain products when shipped, those operating companies 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 companies enter into fixed-price construction contracts. Revenues under these contracts are primarily recognized on a percentage-of-completion basis. The method used to determine the percentage of completion is based on the ratio of labor costs incurred to total estimated labor costs at the Company’s wind tower manufacturer, square footage completed to total bid square footage for certain floating dock projects and costs incurred to total estimated costs on all other construction projects. The following summarizes costs incurred, billings and estimated earnings recognized on uncompleted contracts:

		June 30,				December 31,
(in thousands)		2006				2005
Costs incurred on uncompleted contracts		$	183,920			$	194,076
Less billings to date			(184,595	)			(203,862	)
Plus estimated earnings recognized			20,887				22,834
		$	20,212			$	13,048

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)		2006				2005
Costs and estimated earnings in excess of billings on uncompleted contracts		$	41,826			$	21,542
Billings in excess of costs and estimated earnings on uncompleted contracts			(21,614	)			(8,494	)
		$	20,212			$	13,048

Adjustments and Reclassifications

The Company’s consolidated statements of income for the three and six months ended June 30, 2005, its consolidated statement of cash flows for the six months ended June 30, 2005 and its December 31, 2005 consolidated balance sheet reflect the reclassifications of the operating results, assets and liabilities of the natural gas marketing operations of OTESCO, the Company’s energy services company, to discontinued operations as a result of the sale of these operations in June 2006. The reclassifications had no impact on the Company’s total consolidated net income or cash flows for the three or six months ended June 30, 2005, or on its total consolidated assets or liabilities as of December 31, 2005.

Inventories

Inventories consist of the following:

		June 30,				December 31,
(in thousands)		2006				2005
Finished goods		$	44,657			$	38,928
Work in process			6,269				7,146
Raw material, fuel and supplies			56,063				42,603
		$	106,989			$	88,677

Goodwill and Other Intangible Assets

Goodwill did not change in the first six months of 2006 as the Company did not acquire any businesses or make any adjustments to goodwill during the period.

The following table summarizes the components of the Company’s intangible assets at June 30, 2006 and December 31, 2005.

		June 30, 2006												December 31, 2005
		Gross								Net				Gross								Net
		carrying				Accumulated				Carrying				carrying				Accumulated				Carryin
(in thousands)		amount				amortization				amount				amount				amortization				amount
Amortized intangible assets:
Covenants not to compete		$	2,198			$	1,637			$	561			$	2,338			$	1,620			$	718
Customer relationships			10,599				801				9,798				10,575				583				9,992
Other intangible assets including contracts			2,634				1,710				924				2,785				1,680				1,105
Total		$	15,431			$	4,148			$	11,283			$	15,698			$	3,883			$	11,815
Non-amortized intangible assets:
Brand/trade name		$	9,353			$	—			$	9,353			$	9,345			$	—			$	9,345

Intangible assets with finite lives are being amortized over average lives ranging from one to twenty-five years. The amortization expense for these intangible assets was $557,000 for the six months ended June 30, 2006 compared to $543,000 for the six months ended June 30, 2005. The estimated annual amortization expense for these intangible assets for the next five years is: $1,070,000 for 2006, $872,000 for 2007, $727,000 for 2008, $636,000 for 2009 and $507,000 for 2010.

Comprehensive Income

		Three months ended								Six months ended
		June 30,								June 30,
(in thousands)		2006				2005				2006				2005
Net income		$	11,394			$	22,304			$	26,354			$	32,275
Other comprehensive income (net-of-tax)
Minimum pension liability adjustment			—				(1,263	)			—				(1,263	)
Foreign currency translation gain (loss)			618				(176	)			564				(259	)
Unrealized (loss) gain on available-for-sale securities			(4	)			16				(12	)			(6	)
Total other comprehensive income			614				(1,423	)			552				(1,528	)
Total comprehensive income		$	12,008			$	20,881			$	26,906			$	30,747

The foreign currency translation adjustments are associated with the Canadian operations of Idaho Pacific Holdings, Inc. (IPH). The unrealized losses on available-for-sale securities are associated with investments of the Company’s captive insurance company.

New Accounting Standards

SFAS No. 123(R) (revised 2004), Share-Based Payment, issued in December 2004 is a revision of SFAS No. 123, Accounting for Stock-based Compensation, and supersedes Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock Issued to Employees. Beginning in January 2006, the Company adopted SFAS No. 123(R) on a modified prospective basis. The Company is required to record stock-based compensation as an expense on its income statement over the period earned based on the fair value of the stock or options awarded on their grant date. The application of SFAS No. 123(R) reporting requirements will result in recording compensation expense of approximately $160,000, net-of-tax, in 2006 for non-vested stock options that were outstanding on December 31, 2005. Additionally, the application of SFAS No. 123(R) reporting requirements will result in recording compensation expense of approximately $240,000 in 2006 for the 15% discount offered under our Employee Stock Purchase Plan based on amounts currently being withheld for investment by participants. See additional discussion under Share-based Payments in the footnotes that follow. For years prior to 2006, we reported our stock-based compensation under the requirements of APB No. 25 and furnished related pro forma footnote information required under SFAS No. 123.

SFAS No. 155, Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140, was issued in February 2006. This statement amends SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to resolve issues addressed in SFAS No. 133 Implementation Issue No. D1, Application of Statement 133 to Beneficial Interests in Securitized Financial Assets. This statement also amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company has not issued nor does it currently hold any financial instruments that would be affected by this statement and does not anticipate that this statement will have any impact on its consolidated financial statements on the date the statement becomes effective.

SFAS No. 156, Accounting for Servicing of Financial Assets, was issued in March 2006. This statement amends SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This statement is effective as of the beginning of an entity’s first fiscal year that begins after September 15, 2006. The Company does not currently have any servicing assets or servicing liabilities and does not anticipate that this statement will have any impact on its consolidated financial statements on the date the statement becomes effective.

FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109, was issued by the FASB in June 2006. FIN No. 48 clarifies the accounting for uncertain tax positions in accordance with SFAS 109, Accounting for Income Taxes. The Company will be required to recognize in its financial statements the largest tax benefit of a tax position that is “more-likely-than-not” to be sustained on audit based solely on the technical merits of the position as of the reporting date. The term “more-likely-than-not” means a likelihood of more than 50 percent. FIN No. 48 also provides guidance on new disclosure requirements, reporting and accrual of interest and penalties, accounting in interim periods and transition. FIN No. 48 is effective as of the beginning of the first fiscal year after December 15, 2006, which will be as of January 1, 2007, for the Company. Only tax positions that meet the “more-likely-than-not” threshold at that date may be recognized. The cumulative effect of initially applying FIN No. 48 will be recognized as a change in accounting principle as of the end of the period in which FIN No. 48 is adopted. The Company is currently assessing the impact of FIN No. 48 on its uncertain tax positions.

Proposed Standard: In March 2006, the FASB issued an Exposure Draft, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans that would amend SFAS No. 87, Employers’ Accounting for Pensions, SFAS No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits, SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, and SFAS No. 132 (Revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits. The FASB has received all comments and is expected to issue a new accounting standard in September 2006, to be effective for the Company’s 2006 annual reporting period. Assuming the provisions of the new standard are consistent with current proposals, the standard will require, among other things, balance sheet recognition of the unrecognized portion of projected benefit obligations and of previously unrecognized actuarial gains and losses, prior service costs and transition obligations that have not yet been included in income, with an offsetting change in accumulated other comprehensive income (loss) in equity, net of the effect on deferred taxes. This initial stage of the FASB project is not expected to affect the measurement of the net periodic cost. The result of this proposed pronouncement will be the recognition on the Company’s consolidated balance sheet of the over or under funded status of the benefit plans impacted by this statement. Had the proposed standard been applicable in 2005, the Company would have recorded a $30.6 million decrease in equity on its December 31, 2005 consolidated balance sheet.

Segment Information

The Company’s businesses have been classified into six segments based on products and services and reach customers in all 50 states and international markets. The six segments are: electric, plastics, manufacturing, health services, food ingredient processing and other business operations.

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 consist of businesses producing polyvinyl chloride and polyethylene 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, material and handling trays and horticultural containers; contract machining; and metal parts stamping and fabrication. These businesses are located primarily in the Upper Midwest and Missouri.

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, diagnostic imaging, 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.

Food ingredient processing consists of IPH, which owns and operates potato dehydration plants in Ririe, Idaho; Center, Colorado and Souris, Prince Edward Island, Canada, producing dehydrated potato products that are sold in the United States, Canada, Europe, the Middle East, the Pacific Rim and Central America.

Other business operations consists of businesses involved in residential, commercial and industrial electric contracting industries; fiber optic and electric distribution systems; waste-water, water and HVAC systems construction; transportation; energy services; and the portion of corporate general and administrative expenses that are 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 six Canadian provinces.

The Company’s electric operations, including wholesale power sales, are operated as a division of Otter Tail Corporation, and the Company’s energy services operations are operated as a subsidiary of Otter Tail Corporation. Substantially all of the other businesses are owned by a wholly owned subsidiary of the Company.

The Company evaluates the performance of its business segments and allocates resources to them based on earnings contribution and return on total invested capital. Information on continuing operations for the business segments for three and six month periods ended June 30, 2006 and 2005 and total assets by business segment as of June 30, 2006 and December 31, 2005 are presented in the following tables.

Operating Revenue

		Three months ended								Six months ended
		June 30,								June 30,
(in thousands)		2006				2005				2006				2005
Electric		$	73,518			$	74,150			$	156,102			$	147,633
Plastics			52,685				36,004				90,790				68,159
Manufacturing			81,631				67,858				149,888				123,387
Health services			32,833				31,324				64,909				59,122
Food ingredient processing			9,811				8,234				19,161				17,489
Other business operations			30,379				29,128				58,658				47,976
Intersegment eliminations			(953	)			(899	)			(1,797	)			(1,883	)
Total		$	279,904			$	245,799			$	537,711			$	461,883

Income (Loss) Before Income Taxes

		Three months ended								Six months ended
		June 30,								June 30,
(in thousands)		2006				2005				2006				2005
Electric		$	5,281			$	7,750			$	19,976			$	19,555
Plastics			8,149				3,950				15,805				8,357
Manufacturing			6,932				7,528				10,703				9,219
Health services			913				2,035				1,501				3,384
Food ingredient processing			(1,737	)			410				(3,388	)			1,609
Other business operations			(1,843	)			(5,456	)			(3,544	)			(9,169	)
Total		$	17,695			$	16,217			$	41,053			$	32,955

Total Assets

		June 30,				December 31,
(in thousands)		2006				2005
Electric		$	657,129			$	654,175
Plastics			94,548				76,573
Manufacturing			223,620				177,969
Health services			67,784				67,066
Food ingredient processing			98,861				96,023
Other business operations			90,559				95,989
Discontinued operations			600				13,701
Total		$	1,233,101			$	1,181,496

No single external customer accounts for 10% or more of the Company’s revenues. Substantially all of the Company’s long-lived assets are within the United States except for a food ingredient processing dehydration plant in Souris, Prince Edward Island, Canada and a wind tower manufacturing plant in Fort Erie, Ontario, Canada.

The following table presents the percent of consolidated sales revenue by country:

		Three months ended								Six months ended
		June 30,								June 30,
(in thousands)		2006				2005				2006				2005
United States of America			97.2	%			98.1	%			97.1	%			98.0	%
Canada			1.7	%			1.1	%			1.6	%			1.1	%
All other countries			1.1	%			0.8	%			1.3	%			0.9	%

Rate and Regulatory Matters

On December 29, 2000 the North Dakota Public Service Commission (NDPSC) approved a performance-based ratemaking plan that links allowed earnings in North Dakota to seven defined performance standards in the areas of price, electric service reliability, customer satisfaction and employee safety. The plan was in place through 2005. The electric utility’s 2005 rate of return was within the allowable range defined in the plan, so no refunds or recoveries were ordered under the plan for 2005. The electric utility had applied to the NDPSC for a three year extension of the performance-based ratemaking plan with certain modifications. In May 2006, the NDPSC indicated that it did not wish to continue performance-based ratemaking at this time and the electric utility requested that its application be withdrawn.

In September 2004, a letter was provided to the Minnesota Public Utilities Commission (MPUC) summarizing issues and conclusions of an internal investigation completed by the Company related to claims of allegedly improper regulatory filings brought to the attention of the Company by certain individuals. On November 30, 2004 the electric utility filed a report with the MPUC responding to these claims. In 2005, the Energy Division of the Department of Commerce (DOC), the Residential Utilities Division of the Office of Attorney General and the claimants filed comments in response to the report, to which the Company filed reply comments. A hearing before the MPUC was held on February 28, 2006. As a result of the hearing, the electric utility agreed that within 90 days it would file a revised Regulatory Compliance Plan, an updated Corporate Cost Allocation Manual and documentation of the definitions of its chart of accounts. The electric utility filed these documents with the MPUC in the second quarter of 2006. The Company has received comments on its filings from the DOC and the claimants and expects to file reply comments in August 2006. The electric utility also agreed to file a general rate case in Minnesota on or before September 30, 2007.

In a letter from the Federal Energy Regulatory Commission (FERC) Office of Market Oversight and Investigations (OMOI) dated September 27, 2005 the electric utility was informed that the Division of Operation Audits of the OMOI would be commencing an audit of the electric utility. The purpose of the audit is to determine whether and how the electric utility’s transmission practices are in compliance with the FERC’s applicable rules and regulations and tariff requirements and whether and how the implementation of the electric utility’s waivers from the requirements of Order No. 889 and Order No. 2004 restricts access to transmission information that would benefit the electric utility’s off-system sales. As of the date of this report on Form 10-Q, the Division of Operation Audits of the OMOI had not completed its audit.

In December 2005 the MPUC issued an order denying the electric utility’s request to allow recovery of certain Midwest Independent Transmission System Operator (MISO)-related costs through the fuel clause adjustment (FCA) in Minnesota retail rates and requiring a refund of amounts previously collected pursuant to an interim order issued in April 2005. A $1.9 million reduction in revenue and a refund payable was recorded in December 2005 by the electric utility to reflect the refund obligation. On February 9, 2006 the MPUC decided to reconsider its December 2005 order. The Commission’s final order was issued on February 24, 2006. In the order the MPUC ordered jurisdictional investor-owned utilities in the state to participate with the Minnesota Department of Commerce and other parties in a proceeding that will evaluate suitability of recovery of certain MISO Day 2 energy market costs through the FCA. The Minnesota utilities and other parties submitted a final report to the MPUC in July 2006. As of the date of this report on Form 10-Q, the MPUC had not reached a decision on the future treatment of certain MISO-related costs within the FCA or responded to the report submitted by the Minnesota utilities and other parties. In addition, the February 24, 2006 order eliminated the refund provision from the December 2005 order, and allowed that any MISO-related costs not recovered through the FCA may be deferred for a period of 36 months, with possible recovery through base rates in the electric utility’s next general rate case which, for Otter Tail Power Company, is expected to be filed on or before September 30, 2007. As a result of this order, the electric utility recognized $1.9 million in revenue and reversed the refund payable in February 2006 and expects to recover all MISO-related costs through the FCA or to seek recovery, in a rate case, of any MISO-related costs not recoverable through the FCA.

On April 25, 2006 the FERC issued an order requiring MISO to refund to customers, with interest, amounts related to real-time revenue sufficiency guarantee (RSG) charges that were not allocated to day-ahead virtual supply offers in accordance with MISO’s Transmission and Energy Markets Tariff going back to the commencement of MISO Day 2 markets in April 2005. On May 17, 2006, the FERC issued a Notice of Extension of Time permitting the MISO to delay compliance with the directives contained in its April 2006 order, including the requirement to refund customers the amounts due, with interest, from April 1, 2005 and the requirement to submit a compliance filing. The Notice stated that the order on rehearing would provide the appropriate guidance regarding the timing of compliance filing. The Company recorded $12.7 million in net revenues in 2005 and $1.0 million in net revenues in the first six months of 2006 related to virtual transactions. As of the date of this report on Form 10-Q, the Company is not able to assess what financial impact, if any, this order will have on its operations.

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)		2006				2005
Regulatory assets:
Deferred income taxes		$	15,387			$	16,724
Accrued cost-of-energy revenue			15,410				10,400
Reacquisition premiums			2,843				2,995
Deferred marked-to-market losses			1,486				1,423
Deferred conservation program costs			337				1,064
Accumulated ARO accretion/depreciation adjustment			256				209
Plant acquisition costs			174				196
Total regulatory assets		$	35,893			$	33,011
Regulatory liabilities:
Accumulated reserve for estimated removal costs		$	52,812			$	52,582
Deferred income taxes			5,595				5,961
Deferred marked-to-market gains			2,000				2,925
Gain on sale of division office building			153				156
Total regulatory liabilities		$	60,560			$	61,624
Net regulatory liability position		$	24,667			$	28,613

The regulatory assets and liabilities related to deferred income taxes result from changes in statutory tax rates accounted for in accordance with SFAS No. 109, Accounting for Income Taxes. Reacquisition premiums included in Unamortized debt expense 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 16.1 years. Deferred conservation program costs represent mandated conservation expenditures recoverable through retail electric rates over the next 1.5 years. Plant acquisition costs will be amortized over the next 3.9 years. Accrued cost-of-energy revenue included in Accrued utility revenues will be recovered over the next 13 months. All deferred marked-to-market gains and losses are related to forward purchases and sales of energy scheduled for delivery prior to January 2007. The accumulated reserve for estimated removal costs is reduced for actual removal costs incurred. The remaining regulatory assets and liabilities are being recovered from, or will be paid to, 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.

Share-based Payments

On January 1, 2006 the Company adopted the accounting provisions of SFAS No. 123(R) (revised 2004), Share-Based Payment, on a modified prospective basis. SFAS No. 123(R) is a revision of SFAS No. 123, Accounting for Stock-based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. Under SFAS No. 123(R), the Company records stock-based compensation as an expense on its income statement over the period earned based on the estimated fair value of the stock or options awarded on their grant date. The Company elected the modified prospective method of adopting SFAS No. 123(R), under which prior periods are not retroactively revised. The valuation provisions of SFAS No. 123(R) apply to awards granted after the effective date. Estimated stock-based compensation expense for awards granted prior to the effective date but that remain

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