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 September 30, 2005

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

For the transition period from                      to                     

Commission file number 0-368

OTTER TAIL CORPORATION

(Exact name of registrant as specified in its charter)

Minnesota		41-0462685
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
215 South Cascade Street, Box 496, Fergus Falls, Minnesota		56538-0496
(Address of principal executive offices)		(Zip Code)

866-410-8780

(Registrant’s telephone number, including area code)

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

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

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

Indicate 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:

 

 

 

OTTER TAIL CORPORATION

INDEX

		Page No.
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets — September 30, 2005 and December 31, 2004 (not audited)			2 & 3
Consolidated Statements of Income — Three and Nine Months Ended September 30, 2005 and 2004 (not audited)			4
Consolidated Statements of Cash Flows — Nine Months Ended September 30, 2005 and 2004 (not audited)			5
Notes to Consolidated Financial Statements (not audited)			6-20
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20-38
Item 3. Quantitative and Qualitative Disclosures about Market Risk			38-41
Item 4. Controls and Procedures			41
Part II. Other Information
Item 6. Exhibits			42
Signatures			42
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-

		September 30,				December 31,
		2005				2004
		(Thousands of dollars)
Current assets
Cash and cash equivalents		$	—			$	—
Accounts receivable:
Trade—net			121,822				116,141
Other			10,790				9,872
Inventories			83,361				72,504
Deferred income taxes			4,942				4,852
Accrued utility revenues			17,598				15,344
Costs and estimated earnings in excess of billings			18,103				18,145
Other			23,289				7,800
Assets of discontinued operations			4,817				30,937
Total current assets			284,722				275,595
Investments and other assets			38,406				42,650
Goodwill—net			98,879				92,196
Other intangibles—net			21,383				19,600
Deferred debits
Unamortized debt expense and reacquisition premiums			6,597				7,291
Regulatory assets and other deferred debits			17,604				16,692
Total deferred debits			24,201				23,983
Plant
Electric plant in service			898,665				890,200
Nonelectric operations			223,481				208,311
Total plant			1,122,146				1,098,511
Less accumulated depreciation and amortization			456,005				436,856
Plant—net of accumulated depreciation and amortization			666,141				661,655
Construction work in progress			24,910				18,469
Net plant			691,051				680,124
Total		$	1,158,642			$	1,134,148

See accompanying notes to consolidated financial statements

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

		September 30,				December 31,
		2005				2004
		(Thousands of dollars)
Current liabilities
Short-term debt		$	33,000			$	39,950
Current maturities of long-term debt			4,493				6,016
Accounts payable			74,324				84,433
Accrued salaries and wages			17,949				17,330
Accrued federal and state income taxes			5,854				3,700
Other accrued taxes			10,802				11,391
Other accrued liabilities			17,123				10,417
Liabilities of discontinued operations			1,536				8,585
Total current liabilities			165,081				181,822
Pensions benefit liability			18,984				16,703
Other postretirement benefits liability			26,402				25,053
Other noncurrent liabilities			13,826				11,874
Deferred credits
Deferred income taxes			122,376				121,301
Deferred investment tax credit			9,613				10,477
Regulatory liabilities			60,333				56,909
Other			3,135				1,662
Total deferred credits			195,457				190,349
Capitalization
Long-term debt, net of current maturities			258,981				261,805
Class B stock options of subsidiary			1,258				1,832
Class B stock of subsidiary			745				—
Cumulative preferred shares authorized 1,500,000 shares without par value; outstanding 2005 and 2004 — 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 2005 — 29,330,191 and 2004 — 28,976,919			146,651				144,885
Premium on common shares			94,779				87,865
Unearned compensation			(1,998	)			(2,577	)
Retained earnings			224,243				199,427
Accumulated other comprehensive loss			(1,267	)			(390	)
Total common equity			462,408				429,210
Total capitalization			738,892				708,347
Total		$	1,158,642			$	1,134,148

See accompanying notes to consolidated financial statements

Otter Tail Corporation

Consolidated Statements of Income
(not audited)

		Three months ended								Nine months ended
		September 30,								September 30,
		2005				2004				2005				2004
		(In thousands, except share								(In thousands, except share
		and per share amounts)								and per share amounts)
Operating revenues		$	272,658			$	214,719			$	761,169			$	617,759
Operating expenses
Production fuel			14,485				12,477				40,211				38,267
Purchased power — system use			13,295				10,050				44,737				30,875
Electric operation and maintenance expenses			23,383				19,158				72,635				62,637
Cost of goods sold (excludes depreciation; included below)			147,196				118,690				410,872				332,648
Other nonelectric expenses			26,485				20,667				74,946				62,498
Goodwill impairment loss			1,003				—				1,003				—
Depreciation and amortization			11,720				10,882				34,658				31,918
Property taxes — electric operations			2,735				2,722				7,816				7,570
Total operating expenses			240,302				194,646				686,878				566,413
Operating income			32,356				20,073				74,291				51,346
Other income			1,073				114				1,482				880
Interest charges			4,657				4,582				14,064				13,291
Income from continuing operations before income taxes			28,772				15,605				61,709				38,935
Income taxes — continuing operations			10,692				4,936				21,612				12,200
Income from continuing operations			18,080				10,669				40,097				26,735
Discontinued operations
(Loss)/income from discontinued operations net of taxes of ($334); $234; ($97) and $387 for the respective periods			(504	)			357				(156	)			582
Net gain on disposition of discontinued operations — net of taxes of $17 and $5,786 for the three and nine months ended September 30, 2005			27				—				9,937				—
Net income from discontinued operations			(477	)			357				9,781				582
Net income			17,603				11,026				49,878				27,317
Preferred dividend requirements			185				184				552				552
Earnings available for common shares		$	17,418			$	10,842			$	49,326			$	26,765
Basic earnings per common share:
Continuing operations (net of preferred dividend requirement)		$	0.61			$	0.40			$	1.36			$	1.01
Discontinued operations		$	(0.01	)		$	0.02			$	0.33			$	0.02
		$	0.60			$	0.42			$	1.69			$	1.03
Diluted earnings per common share:
Continuing operations (net of preferred dividend requirement)		$	0.61			$	0.40			$	1.35			$	1.01
Discontinued operations		$	(0.02	)		$	0.02			$	0.33			$	0.02
		$	0.59			$	0.42			$	1.68			$	1.03
Average number of common shares outstanding — basic			29,245,640				26,010,252				29,176,625				25,898,244
Average number of common shares outstanding — diluted			29,441,410				26,121,911				29,289,438				26,019,550
Dividends per common share		$	0.280			$	0.275			$	0.840			$	0.825

See accompanying notes to consolidated financial statements

Otter Tail Corporation

Consolidated Statements of Cash Flows
(not audited)

		Nine months ended
		September 30,
		2005				2004
		(Thousands of dollars)
Cash flows from operating activities
Net income		$	49,878			$	27,317
Adjustments to reconcile net income to net cash provided by operating activities:
Net gain from sale of discontinued operations			(9,937	)			—
Loss /(income) from discontinued operations			156				(582	)
Depreciation and amortization			34,658				31,918
Deferred investment tax credit			(864	)			(864	)
Deferred income taxes			(1,854	)			2,548
Change in deferred debits and other assets			4,313				460
Discretionary contribution to pension plan			(4,000	)			(4,000	)
Change in noncurrent liabilities and deferred credits			4,466				3,767
Allowance for equity (other) funds used during construction			(601	)			(573	)
Change in derivatives net of regulatory deferral			(2,766	)			1,756
Other — net			2,234				1,399
Cash (used for) provided by current assets and current liabilities:
Change in receivables			(5,962	)			1,030
Change in inventories			(7,682	)			(6,815	)
Change in other current assets			(9,344	)			(13,781	)
Change in payables and other current liabilities			(9,771	)			(18,240	)
Change in interest and income taxes payable			(4,175	)			4,169
Net cash provided by continuing operations			38,749				29,509
Net cash provided by discontinued operations			3,493				2,336
Net cash provided by operating activities			42,242				31,845
Cash flows from investing activities
Capital expenditures			(42,150	)			(34,183	)
Proceeds from disposal of noncurrent assets			3,923				3,406
Acquisitions—net of cash acquired			(11,223	)			(69,069	)
Increases in other investments			3,369				(8,483	)
Net cash used in investing activities — continuing operations			(46,081	)			(108,329	)
Net proceeds from the sales of discontinued operations			33,685				—
Net cash provided by (used in) investing activities — discontinued operations			559				(592	)
Net cash used in investing activities			(11,837	)			(108,921	)
Cash flows from financing activities
Change in checks written in excess of cash			1,970				5,685
Net short-term borrowings			(6,950	)			85,757
Proceeds from issuance of common stock, net of issuance expenses			8,266				7,796
Payments for retirement of common stock			(365	)			(349	)
Proceeds from issuance of long-term debt, net of issuance expenses			339				540
Payments for retirement of long-term debt			(5,304	)			(6,431	)
Dividends paid and other distributions			(25,060	)			(21,910	)
Net cash (used in) provided by financing activities — continuing operations			(27,104	)			71,088
Net cash used in financing activities — discontinued operations			(2,996	)			(1,801	)
Net cash (used in) provided by financing activities			(30,100	)			69,287
Effect of foreign exchange rate fluctuations on cash			(305	)			79
Net change in cash and cash equivalents			—				(7,710	)
Cash and cash equivalents at beginning of period			—				7,710
Cash and cash equivalents at end of period		$	—			$	—
Supplemental cash flow information
Cash paid during the year from continuing operations for:
Interest (net of amount capitalized)		$	11,354			$	9,844
Income taxes		$	26,740			$	8,557
Cash paid during the year from discontinued operations for:
Interest (net of amount capitalized)		$	85			$	85
Income taxes		$	2,178			$	467

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, 2004, 2003 and 2002 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Because of seasonal and other factors, the earnings for the three and nine-month periods ended September 30, 2005 should not be taken as an indication of earnings for all or any part of the balance of the year.

Acquisitions

On January 3, 2005 the Company’s wholly-owned subsidiary, BTD Manufacturing, Inc. (BTD), acquired the assets of Performance Tool & Die, Inc. (Performance Tool) of Lakeville, Minnesota, for $4.1 million in cash. Performance Tool specializes in manufacturing mid to large progressive dies for customers throughout the Midwest, East and West Coasts, and the southern United States. Performance Tool’s revenues for the year ended December 31, 2004 were $4.1 million. The Company expects this acquisition to provide expanded growth opportunities for both BTD and Performance Tool.

Also, on January 3, 2005 the Company’s wholly-owned subsidiary, ShoreMaster, Inc. (ShoreMaster), acquired the common stock of Shoreline Industries, Inc. (Shoreline), of Pine River, Minnesota, and associated assets for $2.4 million in cash. Shoreline is a manufacturer of boatlift motors and other accessories for lifts and docks with sales throughout the United States, but primarily in Minnesota and Wisconsin. Shoreline’s revenues for the year ended December 31, 2004 were $2.1 million. The acquisition of Shoreline secures a source of components and expands potential markets for ShoreMaster products.

On May 31, 2005 ShoreMaster acquired the assets of Southeast Floating Docks, Inc., of St. Augustine, Florida for $4.0 million in cash. Southeast Floating Docks is a leading manufacturer of concrete floating dock systems for marinas. They have designed custom floating systems and conducted installations mainly in the southeast United States and the Caribbean. Southeast Floating Docks had revenues of $4.5 million in 2004. This acquisition enables ShoreMaster to offer a wider range of products to its customers and expands its geographic reach in the southeast region of the United States.

Disclosure of pro forma information related to the results of operations of the acquired entities for the periods presented in this report is not required due to immateriality.

Below, are condensed balance sheets, at the date of the business combinations, disclosing the preliminary allocation of the purchase price assigned to each major asset and liability category of the acquired companies:

		Performance				Shoreline				Southeast
(in thousands)		Tool				Industries				Floating Docks
Assets
Current assets		$	748			$	457			$	2,437
Plant			1,396				260				415
Goodwill			1,794				1,509				2,804
Other intangible assets			800				557				1,150
Total assets		$	4,738			$	2,783			$	6,806
Liabilities and equity
Current liabilities		$	324			$	86			$	318
Deferred revenue			—				—				2,520
Deferred income taxes			—				295				—
Long-term debt			298				—				—
Total liabilities		$	622			$	381			$	2,838
Cash paid		$	4,116			$	2,402			$	3,968

Goodwill and other intangible assets related to the Performance Tool acquisition are deductible for income tax purposes over 15 years. Other intangible assets related to the Performance Tool acquisition includes $239,000 for a nonamortizable trade name and $561,000 in other intangible assets being amortized over 3 to 15 years for book purposes. Goodwill and other intangible assets related to the Shoreline acquisition are not deductible for income tax purposes, except for a $171,000 noncompete agreement being amortized over 15 years for income tax purposes. Other intangible assets related to the Shoreline acquisition includes $149,000 for a nonamortizable brand name and $408,000 in other intangible assets being amortized over 5 to 20 years for book purposes. Goodwill and other intangible assets related to the Southeast Floating Docks acquisition are deductible for income tax purposes over 15 years. Other intangible assets related to the Southeast Floating Docks acquisition includes $1,000,000 for a nonamortizable brand name.

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 and the energy services company’s forward natural gas swap transactions, 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 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:

		September 30,				December 31,
(in thousands)		2005				2004
Costs incurred on uncompleted contracts		$	156,247			$	99,213
Less billings to date			(161,826	)			(96,413	)
Plus estimated earnings recognized			17,000				12,469
		$	11,421			$	15,269

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

		September 30,				December 31,
(in thousands)		2005				2004
Costs and estimated earnings in excess of billings on uncompleted contracts		$	18,103			$	18,145
Billings in excess of costs and estimated earnings on uncompleted contracts			(6,682	)			(2,876	)
		$	11,421			$	15,269

The percent of revenue recognized under the percentage-of-completion method compared to total consolidated revenues was 20.0% for the nine months ended September 30, 2005 compared with 21.4% for the nine months ended September 30, 2004.

Stock-based compensation

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

Had compensation costs for the stock options issued been determined based on estimated fair value at the award dates, as prescribed by SFAS No. 123, the Company’s net income for three and nine month periods ended September 30, 2005 and September 30, 2004 would have decreased as presented in the table below. This may not be representative of the pro forma effects for future periods if additional options are granted.

		Three months ended								Nine months ended
		September 30,								September 30,
(in thousands)		2005				2004				2005				2004
Net income
As reported		$	17,603			$	11,026			$	49,878			$	27,317
Total stock-based employee compensation expense determined under fair value based method for all awards net of related tax effects			(213	)			(330	)			(497	)			(874	)
Pro forma		$	17,390			$	10,696			$	49,381			$	26,443
Basic earnings per share
As reported		$	0.60			$	0.42			$	1.69			$	1.03
Pro forma		$	0.59			$	0.40			$	1.67			$	1.00
Diluted earnings per share
As reported		$	0.59			$	0.42			$	1.68			$	1.03
Pro forma		$	0.58			$	0.40			$	1.67			$	1.00

Adjustments and Reclassifications

Certain prior year amounts reported on the Company’s consolidated balance sheet have been reclassified to conform to 2005 presentation. On the Company’s consolidated balance sheets, regulatory assets and other deferred debits, previously disclosed on separate lines, have been combined on a single line. December 31, 2004 balance sheet amounts reflect the reclassification of certain assets and liabilities of both St. George Steel Fabrication, Inc. (SGS) and Chassis Liner Corporation (CLC) from continuing operations to discontinued operations as a result of the status of efforts to sell these businesses in 2005. The Company’s income statement for the three and nine months ended September 30, 2004 reflects the reclassifications of the operating results to discontinued operations of Midwest Information Systems, Inc. (MIS) and SGS because these companies have been sold, and of CLC because its sale is pending. Such reclassifications had no impact on total consolidated assets, net income or shareholders’ equity.

On the Company’s consolidated statement of cash flows for the nine months ended September 30, 2004 the change in the amount of checks issued in excess of cash, included in accounts payable on the Company’s consolidated balance sheet, was reclassified from change in payables and other current liabilities under cash flows from operating activities to change in checks written in excess of cash under cash flows from financing activities. This reclassification decreased cash flows from operating activities of continuing operations and increased cash flows from financing activities of continuing operations by $5,685,000 for the nine months ended September 30, 2004.

Inventories

Inventories consist of the following:

		September 30,				December 31,
(in thousands)		2005				2004
Finished goods		$	32,234			$	34,081
Work in process			4,677				3,733
Raw material, fuel and supplies			46,450				34,690
		$	83,361			$	72,504

Goodwill and Other Intangible Assets

Goodwill increased $6,683,000 in the first nine months of 2005, net of a $1,003,000 impairment write-off of goodwill at the Company’s energy services subsidiary included in the other business operations segment. The increase in goodwill is primarily due to the acquisitions of Performance Tool, Shoreline and Southeast Floating Docks in the manufacturing segment, but also includes a $1,833,000 increase in goodwill for adjustments related to the 2004 acquisition of Idaho Pacific Holdings, Inc. (IPH) in the food ingredient processing segment.

In light of rising natural gas prices and greater volatility in natural gas futures prices, the Company reassessed the value of recorded goodwill of its energy services subsidiary as of September 30, 2005, based on the present value of expected future cash flows from the operation of this business. As a result of this assessment, the Company determined the entire amount of goodwill related to this business was impaired and recorded a goodwill impairment loss of $1,003,000 in September 2005.

The following table summarizes the components of the Company’s intangible assets at September 30, 2005 and December 31, 2004.

		September 30, 2005												December 31, 2004
		Gross								Net				Gross								Net
		carrying				Accumulated				carrying				carrying				Accumulated				carrying
(in thousands)		amount				amortization				amount				amount				amortization				amount
Amortized intangible assets:
Covenants not to compete		$	2,338			$	1,569			$	769			$	1,966			$	1,334			$	632
Customer relationships			10,575				473				10,102				10,045				148				9,897
Other intangible assets including contracts			2,802				1,618				1,184				2,523				1,387				1,136
Total		$	15,715			$	3,660			$	12,055			$	14,534			$	2,869			$	11,665
Non-amortized intangible assets:
Brand/trade name		$	9,328			$	—			$	9,328			$	7,935			$	—			$	7,935

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 $855,000 for the nine months ended September 30, 2005 compared to $493,000 for the nine months ended September 30, 2004. The estimated annual amortization expense for these intangible assets for the next five years is: $1,116,000 for 2005, $1,027,000 for 2006, $914,000 for 2007, $763,000 for 2008 and $612,000 for 2009.

New Accounting Standards

SFAS No. 151, Inventory Costs an amendment of ARB No. 43, Chapter 4, was issued in November 2004 to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges. This statement also requires that allocation of fixed production overheads to the costs of converting materials into finished products be based on the normal capacity of the production facilities. The provisions of this statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005 with earlier application permitted. The early application of this standard by the Company did not have a material effect on its consolidated net income, financial position or cash flows.

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 APB Opinion No. 25, Accounting for Stock Issued to Employees. The Company currently reports its stock-based compensation under the requirements of APB Opinion No. 25 and furnishes related pro forma footnote information required under SFAS No. 123. Under SFAS No. 123(R), the Company will be required to record its 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 effective date for application of SFAS No. 123(R) for the Company is January 2006 with early adoption allowed. The Company will adopt SFAS No. 123(R) in January 2006. The application of SFAS No. 123(R) reporting requirements will have the effect of reducing 2006 net income by $163,000 for currently outstanding options.

FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, (FIN 47) issued in March 2005, clarifies that the term “conditional asset retirement obligation” as used in SFAS No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. However, the obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. FIN 47 requires that the uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation be factored into the measurement of the liability when sufficient information exists. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN 47 is effective for fiscal years ending after December 15, 2005. Retroactive application of interim financial information is permitted, but not required. The Company is evaluating the impact of this interpretation, but does not expect it to have a material effect on the Company’s consolidated net income, financial position or cash flows.

SFAS No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, was issued in December 2004. This Statement addresses the measurement of exchanges of nonmonetary assets. It eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an exception for exchanges that do not have commercial substance. This Statement specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this statement shall be effective and applied prospectively for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005 with earlier application permitted. The early application of this standard by the Company did not have a material effect on its consolidated net income, financial position or cash flows.

SFAS No. 154, Accounting for Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3, was issued in May 2005. This Statement provides guidance on the accounting for and reporting of accounting changes and error corrections. It establishes, unless impracticable, retrospective application as the required method for reporting a change in accounting principle in the absence of explicit transition requirements specific to the newly adopted accounting principle. This Statement also provides guidance for determining whether retrospective application of a change in accounting principle is impracticable and for reporting a change when retrospective application is impracticable. This Statement shall be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with early adoption permitted. The Company does not expect the application of the requirements of SFAS No. 154 to have a material effect on the Company’s consolidated net income, financial position or cash flows.

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 (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, 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 natural gas marketing 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 and natural gas marketing 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 nine month periods ended September 30, 2005 and 2004 and total assets by business segment as of September 30, 2005 and December 31, 2004 is presented in the following tables.

Operating Revenue

		Three months ended								Nine months ended
		September 30,								September 30,
(in thousands)		2005				2004				2005				2004
Electric		$	85,770			$	62,640			$	233,403			$	195,944
Plastics			45,462				27,574				113,621				86,646
Manufacturing			59,803				52,373				183,190				144,586
Health services			30,653				27,741				89,775				80,014
Food ingredient processing			9,808				4,803				27,297				4,803
Other business operations			42,276				40,255				116,880				107,676
Intersegment eliminations			(1,114	)			(667	)			(2,997	)			(1,910	)
Total		$	272,658			$	214,719			$	761,169			$	617,759

Income (Loss) Before Income Taxes

		Three months ended								Nine months ended
		September 30,								September 30,
(in thousands)		2005				2004				2005				2004
Electric		$	24,351			$	9,820			$	43,906			$	32,037
Plastics			4,873				1,944				13,230				6,843
Manufacturing			1,459				4,120				10,678				8,308
Health services			1,898				1,601				5,282				2,125
Food ingredient processing			505				367				2,114				367
Other business operations			(4,314	)			(2,247	)			(13,501	)			(10,745	)
Total		$	28,772			$	15,605			$	61,709			$	38,935

Identifiable Assets

		September 30,				December 31,
(in thousands)		2005				2004
Electric		$	640,974			$	634,433
Plastics			78,527				67,574
Manufacturing			177,587				150,800
Health services			65,650				66,506
Food ingredient processing			96,282				92,392
Other business operations			94,805				91,506
Discontinued operations			4,817				30,937
Total		$	1,158,642			$	1,134,148

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. For the three months ended September 30, 2005, 97.9 % of the Company’s consolidated revenue came from sales within the United States, 0.8% came from sales in Canada and the remaining 1.3% came from sales in various foreign countries around the world. For the three months ended September 30, 2004, 99.4% of the Company’s consolidated revenue came from sales within the United States and the remaining 0.6% came from sales in various foreign countries around the world.

For the nine months ended September 30, 2005, 98.0% of the Company’s consolidated revenue came from sales within the United States, 0.9% came from sales in Canada and the remaining 1.1% came from sales in various foreign countries around the world. For the nine months ended September 30, 2004, 96.8% of the Company’s consolidated revenue came from sales within the United States, 2.6% came from sales in Canada and the remaining 0.6% came from sales in various foreign countries around the world.

Discontinued Operations

In the second quarter of 2005, the Company completed the sales of MIS and SGS. Discontinued operations includes the operating results of SGS and CLC for the three and nine month periods ended September 30, 2005 and 2004, and the operating results of MIS for the three month period ended September 30, 2004 and the nine month periods ended September 30, 2005 and 2004. Discontinued operations also includes an after-tax gain on the sale of MIS of $11.9 million, an after-tax loss on the sale of SGS of $1.8 million and an estimated after-tax loss related to the anticipated sale of CLC of $0.2 million for the nine month period ended September 30, 2005 based on the expected sales price and the costs of disposition. MIS, SGS and CLC meet requirements to be reported as discontinued operations in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.

The results of discontinued operations for the three and nine months ended September 30, 2005 and 2004 are summarized as follows:

		Three months ended																Three months ended
		September 30, 2005																September 30, 2004
(in thousands)		MIS				SGS				CLC				Total				MIS				SGS				CLC				Total
Operating revenues		$	—			$	213			$	1,868			$	2,081			$	2,157			$	3,807			$	1,580			$	7,544
Income/(loss) before income taxes			—				(161	)			(677	)			(838	)			882				(164	)			(127	)			591
Gain/(loss) on disposition - pretax			—				44				—				44				—				—				—				—
Income tax expense/(benefit)			—				(47	)			(270	)			(317	)			352				(65	)			(53	)			234

		Nine months ended																Nine months ended
		September 30, 2005																September 30, 2004
(in thousands)		MIS				SGS				CLC				Total				MIS				SGS				CLC				Total
Operating revenues		$	3,773			$	6,542			$	5,640			$	15,955			$	6,227			$	10,386			$	5,684			$	22,297
Income/(loss) before income taxes			2,167				(1,724	)			(696	)			(253	)			2,451				(1,253	)			(229	)			969
Gain/(loss) on disposition - pretax			19,025				(3,002	)			(300	)			15,723				—				—				—				—
Income tax expense/(benefit)			7,975				(1,890	)			(396	)			5,689				980				(500	)			(93	)			387

     The results of discontinued operations for the quarter ended December 31, 2004 are as follows:

		Quarter Ended December 31, 2004
(in thousands)		MIS				SGS				CLC				Total
Operating revenues		$	2,512			$	6,823			$	2,069			$	11,404
Income before income taxes			1,247				322				65				1,634
Income tax expense			503				129				21				653

At September 30, 2005 and December 31, 2004 the major components of assets and liabilities of the discontinued operations were as follows:

		September 30, 2005												December 31, 2004
(in thousands)		SGS				CLC				Total				MIS				SGS				CLC				Total
Current assets		$	2,183			$	2,305			$	4,488			$	275			$	9,344			$	3,092			$	12,711
Investments and other assets			—				5				5				2,270				—				5				2,275
Goodwill—net			—				—				—				5,925				—				—				5,925
Other intangibles—net			—				38				38				—				18				74				92
Net plant			—				286				286				7,960				1,618				356				9,934
Assets of discontinued operations		$	2,183			$	2,634			$	4,817			$	16,430			$	10,980			$	3,527			$	30,937
Current liabilities		$	1,002			$	500			$	1,502			$	2,920			$	2,228			$	837			$	5,985
Deferred credits			—				33				33				581				271				33				885
Long-term debt			—				1				1				1,710				—				5				1,715
Liabilities of discontinued operations		$	1,002			$	534			$	1,536			$	5,211			$	2,499			$	875			$	8,585

The remaining assets of SGS consist of accounts receivable, accounts payable and inventory at estimated fair market values that were not settled or disposed of as of September 30, 2005.

Class B Stock Options and Class B Stock of Subsidiary

In June and July 2005, option holders exercised 357 IPH class B common stock options, resulting in the issuance of 357 IPH class B common shares. Total cash paid to IPH on exercise of the options and issuance of the class B common shares was $171,000. On issuance, the class B common shares were immediately put back to IPH and will be redeemed by IPH 181 days after issuance for $745,000, the value of the shares on the date of issuance.

Common Shares and Earnings per Share

In January 2005, 175,000 common shares were issued as a result of the underwriters exercising a portion of their over-allotment option in connection with the Company’s December 2004 public offering. The proceeds to the Company of $24.50 per share were used to pay down debt borrowed to finance the acquisition of IPH. In addition, during the first nine months of 2005, the Company issued 190,365 common shares for stock options exercised and 1,874 common shares for director’s compensation.

On April 11, 2005 the Company’s Board of Directors granted 74,900 stock options to key employees and 17,700 shares of restricted stock to the directors and certain key employees under the 1999 Stock Incentive Plan (the 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 September 30, 2005 a total of 1,304,764 vested and unvested options were outstanding and a total of 232,134 shares of restricted stock had been issued under the Plan. The Company currently accounts for the Plan under APB Opinion No. 25.

On April 11, 2005 the Company’s Board of Directors approved performance award agreements under the Plan for the Company’s executive officers. Under these agreements, the officers could be awarded up to 75,150 common shares 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, 2007. The number of shares earned, if any, would be issued at the end of the three year performance measurement period. The participants have no voting or dividend rights under these agreements until the shares are issued at the end of the performance measurement period.

In the first nine months of 2005, the Company retired 14,547 common shares for tax withholding purposes related to restricted shares that vested and also retired 17,120 common shares related to the return to the Company of stock that was held in escrow for performance contingencies that were not achieved in a health services acquisition.

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. Stock options with exercise prices greater than the market price are excluded from the calculation of diluted earnings per common share.

Comprehensive Income

		Three months ended								Nine months ended
		September 30,								September 30,
(in thousands)		2005				2004				2005				2004
Net income		$	17,603			$	11,026			$	49,878			$	27,317
Other comprehensive income (net-of-tax)
Minimum pension liability adjustment			—				—				(1,263	)			—
Foreign currency translation gain (loss)			666				49				407				49
Unrealized (loss) on available-for-sale securities			(15	)			13				(21	)			(7	)
Total other comprehensive income			651				62				(877	)			42
Total comprehensive income		$	18,254			$	11,088			$	49,001			$	27,359

The minimum pension liability adjustment is associated with the Company’s Executive Survivor and Supplemental Retirement Plan. The foreign currency translation adjustments are associated with the Canadian operations of IPH.

Rate and Regulatory Matters

On November 30, 2004, Otter Tail Power Company filed a Report with the Minnesota Public Utilities Commission (MPUC) responding to claims of allegedly improper regulatory filings brought to the attention of the Company by certain individuals. In May and June 2005, the Energy Division of the Minnesota Department of Commerce, the Residential Utilities Division of the Office of Attorney General and the claimants filed comments in response to the report. On July 15, 2005, the Company filed reply comments. A hearing before the MPUC is scheduled for December 2005. The Company cannot predict whether the results of the hearing will have any impact on the Company’s consolidated net income, financial position or cash flows.

In a letter from the Federal Energy Regulatory Commission (FERC) Office of Market Oversight and Investigations (OMOI) dated September 27, 2005, Otter Tail Power Company was informed that the Division of Operation Audits of the OMOI would be commencing an audit of Otter Tail Power Company to determine whether and how the Company’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 Company’s waivers from the requirements of Order No. 889 and Order No. 2004 restricts access to transmission information that would benefit the Company’s off-system sales. The audit will cover the period from January 1, 2003 through August 31, 2005. This is a routine audit to which all FERC jurisdictional utilities are subject. FERC has completed twenty-five of these audits since they began conducting these audits two years ago, auditing six utilities at a time and completing about twelve in a year. The audit is expected to take approximately six months to complete. The Company believes it is in compliance with applicable FERC rules, regulations and tariff requirements related to the audit. Given the preliminary nature of this audit, the Company is not able to determine whether the audit will result in any material changes to the Company’s operations or have any material effect on the Company’s consolidated net income, financial position or cash flows.

The Energy Policy Act of 2005 (the “2005 Energy Act”) was signed into law in August 2005. The 2005 Energy Act is comprehensive legislation that will substantially affect the regulation of energy companies. The 2005 Energy Act amends federal energy laws and provides the FERC with new oversight responsibilities. Among the important changes to be implemented as a result of this legislation are the following:

	•		The Public Utility Holding Company Act of 1935 (PUHCA) will be repealed effective February 8, 2006. PUHCA significantly restricted mergers and acquisitions in the electric utility sector.
	•		The FERC will appoint and oversee an electric reliability organization to establish and enforce mandatory reliability rules regarding the interstate electric transmission system.

	•		The FERC will establish incentives for transmission companies, such as performance based rates, recovery of costs to comply with reliability rules and accelerated depreciation for investments in transmission infrastructure.
	•		The Price Anderson Amendments Act of 1988, which provides the framework for nuclear liability protection, will be extended by twenty years to 2025.
	•		Federal support will be available for certain clean coal power initiatives, nuclear power projects and renewable energy technologies.

The implementation of the 2005 Energy Act requires proceedings at the state level and the development of regulations by the FERC and the Department of Energy, as well as other federal agencies. The Company cannot predict when these proceedings and regulations will commence or be finalized.

The Company is still studying the legislation and its effect and cannot predict with certainty the impact on its electric 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:

		September 30,				December 31,
(in thousands)		2005				2004
Regulatory assets:
Deferred income taxes		$	15,364			$	14,526
Debt expenses and reacquisition premiums			3,096				3,424
Deferred conservation program costs			967				1,203
Plant acquisition costs			207				240
Deferred marked-to-market losses			878				331
Accrued cost-of-energy revenue			8,491				3,348
Accumulated ARO accretion/depreciation adjustment			188				114
Total regulatory assets		$	29,191			$	23,186
Regulatory liabilities:
Accumulated reserve for estimated removal costs		$	51,882			$	49,823
Deferred income taxes			6,176				6,727
Deferred marked-to-market gains			2,118				197
Gain on sale of division office building			157				162
Total regulatory liabilities		$	60,333			$	56,909
Net regulatory liability position		$	31,142			$	33,723

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 16.8 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 4.7 years. Accrued cost-of-energy revenue included in accrued utility revenues will be recovered over the next nine months. All deferred marked-to-market gains and losses are related to forward purchases and sales of energy scheduled for delivery prior to May 2006. 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.

Pension Plan and Other Postretirement Benefits

Effective July 1, 2005, the Company remeasured its pension and other postretirement benefit plan obligations using the RP-2000 mortality table in place of the 1983 Group Annuity Mortality table (GAM ‘83) it used to measure its obligations and determine its annual costs under these plans in January 2005. The reason for the remeasurement was to update the mortality table to more accurately reflect current life expectancies of current employees and retirees included in the plans. Generally accepted accounting principles require that all assumptions used to measure plan obligations and determine annual plan costs be revised as of a remeasurement date. The following actuarial assumptions were updated as of the July 1, 2005 remeasurement date:

		January 1, 2005 through				July 1, 2005 through
Key assumptions and data		June 30, 2005				December 31, 2005
Discount rate			6.00%				5.25%
Long-term rate of return on plan assets			8.50%				8.50%
Social Security wage base			4.00%				3.50%
Rate of inflation			3.00%				2.50%
Rate of withdrawal		1% per year through age 54				2% per year through age 54
Mortality table		GAM ‘83				RP-2000 projected to 2006
Market value of assets — beginning of period		$	141,685,000			$	142,547,832

Remeasuring the Company’s pension and other postretirement benefit plan obligations as of July 1, 2005, under the revised assumptions had the effect of increasing the Company’s 2005 projected pension plan costs by $1,372,000, increasing its 2005 projected Executive Survivor and Supplemental Retirement Plan costs by $123,000 and increasing its 2005 projected costs for postretirement benefits other than pensions by $137,000.

Pension Plan—Components of net periodic pension benefit cost of the Company’s noncontributory funded pension plan are as follows:

		Three months ended								Nine months ended
		September 30,								September 30,
(in thousands)		2005				2004				2005				2004
Service cost—benefit earned during the period		$	1,313			$	1,247			$	3,381			$	3,047
Interest cost on projected benefit obligation			2,413				2,393				7,309				7,093
Expected return on assets			(3,040	)			(3,314	)			(9,032	)			(9,314	)
Amortization of prior-service cost			805				223				1,286				673
Net periodic pension cost		$	1,491			$	549			$	2,944			$	1,499

Cash Flows: The Company made $4.0 million in discretionary contributions to its pension plan during each of the nine month periods ended September 30, 2005 and 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								Nine months ended
		September 30,								September 30,
(in thousands)		2005				2004				2005				2004
Service cost—benefit earned during the period		$	111			$	205			$	295			$	615
Interest cost on projected benefit obligation			318				372				950				1,116
Amortization of prior-service cost			17				37				53				111
Recognized net actuarial loss			145				170				353				510
Net periodic pension cost		$	591			$	784			$	1,651			$	2,352

On January 31, 2005 the Board of Directors of the Company amended and restated the Otter Tail Corporation Executive Survivor and Supplemental Retirement Plan (the ESSRP). The amendments to the ESSRP provide for reduced future benefits effective January 1, 2005, which resulted in reduced expense to the Company.

Effective January 1, 2005 new participants in the ESSRP will accrue benefits under a new formula. The new formula is the same as the formula used under the Company’s qualified defined benefit pension plan but includes bonuses in the computation of covered compensation and is not subject to statutory compensation and benefit limits. Individuals who became participants in the ESSRP before January 1, 2005 will receive the greater of the old formula or the new formula until December 31, 2010. On December 31, 2010, their benefit under the old formula will be frozen. After 2010, they will receive the greater of their frozen December 31, 2010 benefit or their benefit calculated under the new formula. The amendments to the ESSRP also provide for increased service credits for certain participants and eliminate certain distribution features.

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								Nine months ended
		September 30,								September 30,
(in thousands)		2005				2004				2005				2004
Service cost—benefit earned during the period		$	342			$	299			$	964			$	876
Interest cost on projected benefit obligation			574				645				1,906				1,935
Amortization of transition obligation			187				184				561				561
Amortization of prior-service cost			(76	)			(74	)			(230	)			(228	)
Amortization of net actuarial loss			215				182				527				525
Effect of Medicare Part D expected subsidy			(424	)			(189	)			(826	)			(567	)
Net periodic postretirement benefit cost		$	818			$	1,047			$	2,902			$	3,102

Subsequent Events

The MPUC is in the process of reviewing certain expenses related to the operations of the Midwest Independent Transmission System Operator (MISO) to determine if those expenses will be subject to recovery through the Company’s fuel cost recovery component of retail rates. A final decision on which MISO related expenses will be recoverable through the fuel cost recovery component is expected by the end of November 2005. Preliminary indications from meetings held in the first week of November are that certain MISO costs that have been included in the Company’s fuel cost recovery component of retail rates since the inception of MISO Day 2 Markets in April 2005 will not be allowed to be recovered through fuel cost recovery component of retail rates. If recovery of these costs through the fuel cost recovery component of retail rates is not allowed, the Company estimates that it would result in a reduction of approximately $0.3 million in net income in 2005.

The sale of the assets and liabilities of Chassis Liner Corporation reported as discontinued operations was completed on November 4, 2005.

In November of 2005, DMI Industries, Inc. (DMI), our manufacturer of wind towers, formed a Canadian corporation that will own and operate a wind tower manufacturing plant in Fort Erie, Ontario, Canada. The addition of the Canadian facility positions DMI to better serve wind energy customers in Canada and the Northeastern United States.

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

RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2005 and 2004

Consolidated operating revenues were $272.7 million for the three months ended September 30, 2005 compared with $214.7 million for the three months ended September 30, 2004. Operating income was $32.4 million for the three months ended September 30, 2005 compared with $20.1 million for the three months ended September 30, 2004. The Company recorded diluted earnings per share from continuing operations of $0.61 for the three months ended September 30, 2005 compared to $0.40 for the three months ended September 30, 2004 and diluted earnings/(losses) per share from discontinued operations of ($0.02) for the three months ended September 30, 2005 compared to $0.02 for the three months ended September 30, 2004.

Following is a more detailed analysis of our operating results by business segment for the three and nine month periods ended September 30, 2005 and 2004, followed by our outlook for the remainder of 2005 and a discussion of changes in our financial position during the nine months ended September 30, 2005.

Amounts presented in the segment tables below for the three month periods ended September 30, 2005 and 2004 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: $1,114,000 in operating revenues, $710,000 in cost of goods sold and $404,000 in other nonelectric expenses for the three months ended September 30, 2005; and $667,000 in operating revenues, $49,000 in cost of goods sold and $618,000 in other nonelectric expenses for the three months ended September 30, 2004.

Electric

		Three months ended
		September 30,												%
(in thousands)		2005				2004				Change				Change
Retail sales revenues		$	61,481			$	51,926			$	9,555				18.4
Wholesale revenues			17,467				7,854				9,613				122.4
Net marked-to-market gains/(losses)			2,406				(931	)			3,337				—
Other revenues			4,416				3,791				625				16.5
Total operating revenues		$	85,770			$	62,640			$	23,130				36.9
Production fuel			14,485				12,477				2,008				16.1
Purchased power — retail use			13,295				10,050				3,245				32.3
Other operation and maintenance expenses			23,383				19,158				4,225				22.1
Depreciation and amortization			6,084				6,014				70				1.2
Property taxes			2,735				2,722				13				0.5
Operating income		$	25,788			$	12,219			$	13,569				111.0

The increase in retail electric revenue is due to a combination of two factors: an 8.3% increase in retail megawatt-hour (mwh) sales and a $4.5 million increase in cost-of-energy adjustment revenues related to the recovery of increased fuel and purchase power costs in the third quarter of 2005. A 62.2% increase in cooling degree-days between the quarters was a factor contributing to the increase in retail mwh sales. Residential mwh sales increased 13.4% and commercial mwh sales increased 8.9% between the quarters. Industrial mwh sales decreased 1.9% between the quarters.

Wholesale mwh sales from company-owned generation decreased 11.9% in the three months ended September 30, 2005, compared to the three months ended September 30, 2004 while the revenue per mwh sold increased 27.0%, resulting in an increase in revenue from sales off company-owned generation of $0.8 million between the periods. The increase in prices for company-owned generation resold is commensurate with general increases in fuel and purchased power costs across the Mid-Continent Area Power Pool (MAPP) region between the periods. The increased prices are partially due to warmer weather in the MAPP region between the quarters and partially due to a decrease in available electricity from hydro-generation in the region due to lower water levels in Upper-Missouri River reservoirs resulting from a prolonged drought in the Upper-Missouri River basin. Higher costs for fuel used to generate electricity also contributed to the increase in wholesale electric prices between the periods. Net margins on purchased power resold and the purchase and sale of financial transmission rights increased $8.9 million between the quarters as rising energy prices in the third quarter of 2005 provided opportunities for increased profits from wholesale energy trading activities.

The increase in net marked-to-market gains on forward purchases and sales of electricity is related to rising prices in forward energy markets in the MAPP region in the third quarter of 2005 in reaction to rising fuel and fuel transportation costs for coal and rising prices for natural gas. On September 30, 2005, the electric utility had recognized but unrealized gains of $3.2 million on forward contracts for the purchase of 305,600 mwhs of electricity and the sale of 304,000 mwhs of electricity through April of 2006, and for a 50 megawatt capacity purchase through April of 2006.

The increase in other electric operating revenues for the three months ended September 30, 2005 compared to the three months ended September 30, 2004 includes $0.7 million in revenue from transmission permitting work performed for a regional transmission organization.

The increase in fuel costs for the three months ended September 30, 2005 compared with the three months ended September 30, 2004 reflects a 1.6% increase in mwhs generated and a 14.2% increase in the cost of fuel per mwh generated between the periods. Generation for retail sales increased 4.7% while generation used for wholesale electric sales decreased 11.9% between the quarters. Fuel costs per mwh of generation increased at all three of our coal-fired generating plants as a result of increases in coal and coal transportation costs between the periods. Approximately 90% of the fuel cost increase associated with generation to serve retail electric customers is subject to recovery through the fuel cost recovery component of retail rates.

The increase in purchased power expense for energy purchased for system use (sale to retail customers) is due to an increase in mwhs purchased for system use. Mwh purchases increased to meet the increased demand for electricity mainly due to warmer weather in the third quarter of 2005 compared to the third quarter of 2004.

The increase in other operation and maintenance expenses for the three months ended September 30, 2005 compared with the three months ended September 30, 2004 reflects $1.8 million in increased labor expenses due to an increase in employee benefit costs, general wage and salary increases averaging approximately 3.6%, increased benefit costs primarily related to the remeasurement of pension and post-retirement costs in the third quarter of 2005 and an increase in overtime pay between the quarters. Material and operating supply expenses increased $0.7 million between the periods, most of which is attributable to increased maintenance costs at Big Stone Plant. Third quarter 2005 operating expenses include $0.5 million in costs related to transmission permitting work performed for a regional transmission organization and $0.2 million in other costs related to work performed for others. External service costs and costs to repair damages caused by storms and other events increased $0.5 million between the quarters.

Plastics

		Three months ended
		September 30,												%
(in thousands)		2005				2004				Change				Change
Operating revenues		$	45,462			$	27,574			$	17,888				64.9
Cost of goods sold			37,684				23,401				14,283				61.0
Operating expenses			1,974				1,466				508				34.7
Depreciation and amortization			629				569				60				10.5
Operating income		$	5,175			$	2,138			$	3,037				142.0