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

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

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 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:

 

 

OTTER TAIL CORPORATION

INDEX

						Page No.
Part I. Financial Information
		Item 1.		Financial Statements
				Consolidated Balance Sheets – March 31, 2006 and December 31, 2005 (not audited)		2 & 3
				Consolidated Statements of Income - Three Months Ended March 31, 2006 and 2005 (not audited)		4
				Consolidated Statements of Cash Flows - Three Months Ended March 31, 2006 and 2005 (not audited)		5
				Notes to Consolidated Financial Statements (not audited)		6-19
		Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		20-32
		Item 3.		Quantitative and Qualitative Disclosures about Market Risk		32-35
		Item 4.		Controls and Procedures		35
Part II. Other Information
		Item 1.		Legal Proceedings		36
		Item 1A.		Risk Factors		36
		Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		36
		Item 6.		Exhibits		36
Signatures						37
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

(not audited)
-Assets-

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

See accompanying notes to consolidated financial statements

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

		March 31,				December 31,
		2006				2005
		(Thousands of dollars)
Current liabilities
Short-term debt		$	45,181			$	16,000
Current maturities of long-term debt			3,354				3,340
Accounts payable			111,730				106,570
Accrued salaries and wages			18,470				24,326
Accrued federal and state income taxes			12,996				8,776
Other accrued taxes			12,014				12,620
Other accrued liabilities			14,135				14,975
Liabilities of discontinued operations			330				372
Total current liabilities			218,210				186,979
Pensions benefit liability			22,716				23,216
Other postretirement benefits liability			27,476				26,982
Other noncurrent liabilities			17,454				18,683
Deferred credits
Deferred income taxes			113,183				113,737
Deferred investment tax credit			9,040				9,327
Regulatory liabilities			60,004				61,624
Other			1,305				1,500
Total deferred credits			183,532				186,188
Capitalization
Long-term debt, net of current maturities			257,553				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 — 29,446,952 and 2005 — 29,401,223			147,235				147,006
Premium on common shares			95,402				96,768
Unearned compensation			—				(1,720	)
Retained earnings			234,832				228,515
Accumulated other comprehensive loss			(6,201	)			(6,139	)
Total common equity			471,268				464,430
Total capitalization			745,579				739,448
Total		$	1,214,967			$	1,181,496

See accompanying notes to consolidated financial statements

Otter Tail Corporation

Consolidated Statements of Income
(not audited)

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

See accompanying notes to consolidated financial statements

Otter Tail Corporation

Consolidated Statements of Cash Flows
(not audited)

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

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 months ended March 31, 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 Financing 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:

		March 31,				December 31,
(in thousands)		2006				2005
Costs incurred on uncompleted contracts		$	203,332			$	194,076
Less billings to date			(201,441	)			(203,862	)
Plus estimated earnings recognized			25,636				22,834
		$	27,527			$	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:

		March 31,				December 31,
(in thousands)		2006				2005
Costs and estimated earnings in excess of billings on uncompleted contracts		$	35,618			$	21,542
Billings in excess of costs and estimated earnings on uncompleted contracts			(8,091	)			(8,494	)
		$	27,527			$	13,048

Adjustments and Reclassifications

The Company’s income statement and statement of cash flows for the three months ended March 31, 2005 reflect the reclassifications of the operating results, assets and liabilities of Chassis Liner Corporation (CLC) to discontinued operations as a result of a second quarter 2005 decision to sell CLC. The Company reached an agreement to sell CLC in the fourth quarter of 2005. The reclassifications had no impact on the Company’s total consolidated net income or cash flows for the three months ended March 31, 2005.

Inventories

Inventories consist of the following:

		March 31,				December 31,
(in thousands)		2006				2005
Finished goods		$	48,623			$	38,928
Work in process			7,521				7,146
Raw material, fuel and supplies			50,314				42,603
		$	106,458			$	88,677

Goodwill and Other Intangible Assets

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

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

		March 31, 2006												December 31, 2005
		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		$	2,198			$	1,549			$	649			$	2,338			$	1,620			$	718
Customer relationships			10,572				691				9,881				10,575				583				9,992
Other intangible assets including contracts			2,634				1,618				1,016				2,785				1,680				1,105
Total		$	15,404			$	3,858			$	11,546			$	15,698			$	3,883			$	11,815
Non-amortized intangible assets:
Brand/trade name		$	9,345			$	—			$	9,345			$	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 $266,000 for the three months ended March 31, 2006 compared to $254,000 for the three months ended March 31, 2005. The estimated annual amortization expense for these intangible assets for the next five years is: $1,004,000 for 2006, $901,000 for 2007, $758,000 for 2008, $636,000 for 2009 and $507,000 for 2010.

Comprehensive Income

		Three months ended
		March 31,
(in thousands)		2006				2005
Net income		$	14,960			$	9,971
Other comprehensive income (net-of-tax)
Foreign currency translation (loss)			(55	)			(83	)
Unrealized (loss) on available-for-sale securities			(7	)			(22	)
Total other comprehensive income			(62	)			(105	)
Total comprehensive income		$	14,898			$	9,866

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, we 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 statement 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.

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 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 month periods ended March 31, 2006 and 2005 and total assets by business segment as of March 31, 2006 and December 31, 2005 are presented in the following tables.

Operating Revenue

		Three months ended
		March 31,
(in thousands)		2006				2005
Electric		$	82,584			$	73,483
Plastics			38,105				32,155
Manufacturing			68,257				55,529
Health services			32,076				27,798
Food ingredient processing			9,350				9,255
Other business operations			49,250				34,897
Intersegment eliminations			(844	)			(984	)
Total		$	278,778			$	232,133

Income (Loss) Before Income Taxes

		Three months ended
		March 31,
(in thousands)		2006				2005
Electric		$	14,695			$	11,805
Plastics			7,656				4,407
Manufacturing			3,771				1,691
Health services			588				1,349
Food ingredient processing			(1,651	)			1,198
Other business operations			(1,527	)			(3,755	)
Total		$	23,532			$	16,695

Total Assets

		March 31,				December 31,
(in thousands)		2006				2005
Electric		$	648,993			$	654,175
Plastics			95,643				76,573
Manufacturing			208,035				177,969
Health services			66,046				67,066
Food ingredient processing			96,995				96,023
Other business operations			98,274				107,373
Discontinued operations			981				2,317
Total		$	1,214,967			$	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
		March 31,
(in thousands)		2006				2005
United States of America			97.2	%			98.1	%
Canada			1.4	%			0.9	%
All other countries			1.4	%			1.0	%

Rate and Regulatory Matters

In December 2005 the Minnesota Public Utilities Commission (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 are currently active in this effort and expect to provide a final report to the MPUC in June 2006. In addition, the 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 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.

In September 2004, a letter was provided to the 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 the next 60 to 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 a revised Regulatory Compliance Plan in April 2006 and will file an updated Corporate Cost Allocation Manual and documentation of the definitions of its chart of accounts in May 2006. The electric utility also agreed to file a general rate case in Minnesota on or before September 30, 2007.

On April 25, 2006 the Federal Energy Regulatory Commission (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 (TEMT) going back to the commencement of MISO Day 2 markets in April 2005. The Company recorded $12.7 million in net revenues in 2005 and $1.0 million in net revenues in the first quarter of 2006 related to virtual transactions. As of the date of this report, the Company is not able to determine the financial impact of this order on its operations.

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 performance-based ratemaking plan expired on December 31, 2005. While the electric utility has applied to the NDPSC for a three year extension with certain modifications, the NDPSC has taken no action on the application.

In a letter from the 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 the Division of Operation Audits of the OMOI had not completed its audit.

Regulatory Assets and Liabilities

As a regulated entity the Company and the electric utility account for the financial effects of regulation in accordance with SFAS No. 71, Accounting for the Effect of Certain Types of Regulation. This accounting standard allows for the recording of a regulatory asset or liability for costs that will be collected or refunded in the future as required under regulation.

The following table indicates the amount of regulatory assets and liabilities recorded on the Company’s consolidated balance sheet:

		March 31,				December 31,
(in thousands)		2006				2005
Regulatory assets:
Deferred income taxes		$	16,869			$	16,724
Accrued cost-of-energy revenue			10,620				10,400
Reacquisition premiums			2,918				2,995
Deferred marked-to-market losses			999				1,423
Deferred conservation program costs			613				1,064
Accumulated ARO accretion/depreciation adjustment			234				209
Plant acquisition costs			185				196
Total regulatory assets		$	32,438			$	33,011
Regulatory liabilities:
Accumulated reserve for estimated removal costs		$	52,852			$	52,582
Deferred income taxes			5,778				5,961
Deferred marked-to-market gains			1,219				2,925
Gain on sale of division office building			155				156
Total regulatory liabilities		$	60,004			$	61,624
Net regulatory liability position		$	27,566			$	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 16.3 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 4.2 years. Accrued cost-of-energy revenue included in Accrued utility revenues will be recovered over the next nine months. All deferred marked-to-market gains and losses are related to forward purchases and

sales of energy scheduled for delivery prior to September 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.

Share-based Payments

No new stock awards were granted in the first quarter of 2006. As of March 31, 2006, the total remaining unrecognized compensation expense related to stock-based compensation was approximately $2.5 million (before income taxes) which will be amortized over a weighted-average period of 1.5 years.

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 will record 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 nonvested on the effective date will be recognized over the remaining service period using the compensation cost estimated for the SFAS No. 123 pro forma disclosures. Additionally, the adoption of SFAS No. 123(R) resulted in the transfer of $798,000 in credits related to outstanding restricted share-based compensation for employees from equity on the Company’s consolidated balance sheet to a liability on January 1, 2006 because of income tax withholding provisions in the share-based award agreements. The adoption of SFAS 123(R) also resulted in the elimination of Unearned compensation (contra-equity account) from the equity section of the Company’s consolidated balance sheet on January 1, 2006 by netting the account balance of $1,720,000 against Premium on common shares.

The Company has five share-based payment programs. The effect of the adoption of SFAS No. 123(R) accounting on each of these programs is explained in the following paragraphs.

1999 Employee Stock Purchase Plan, as Amended (Purchase Plan)
The Purchase Plan allows employees through payroll withholding to purchase shares of the Company’s common stock at a 15% discount from the average market price on the last day of a six month investment period. Under APB No. 25, the Company was not required to record compensation expense related to the 15% discount. Under SFAS 123(R) the Company is required to record compensation expense related to the 15% discount. Based on the participants’ current level of withholdings, the Company estimates that the 15% discount will amount to approximately $240,000 in 2006. Accordingly, the Company recorded $60,000 in compensation expense for the three month period ended March 31, 2006 related to the Purchase Plan. The 15% discount is not taxable to the employee and is not a deductible expense for tax purposes for the Company. The shares to be purchased by employees participating in the Purchase Plan are not considered dilutive for the purpose of calculating diluted earnings per share during the investment period. At the discretion of the Company, shares purchased under the Purchase Plan can be either new issue shares or shares purchased in the open market. Currently, the Company intends to purchase shares for the Purchase Plan in the open market.

Stock Options granted under the 1999 Stock Incentive Plan, as Amended (Incentive Plan)
Since the inception of the Incentive Plan in 1999, the Company has granted 2,041,500 options for the purchase of the Company’s common stock. Of the options granted, 1,860,438 had vested or were forfeited and 181,062 were not vested as of March 31, 2006. The exercise price of

the options granted has been the average market price of the Company’s common stock on the grant date. These options were not compensatory under APB No. 25 accounting rules. Under SFAS No.123(R) accounting, compensation expense will be recorded based on the estimated fair value of the options on their grant date using a fair-value option pricing model. Under SFAS No. 123(R) accounting, the fair value of the options granted will be recorded as compensation expense over the requisite service period (the vesting period of the options). The estimated fair value of all options granted under the Incentive Plan has been based on the Black-Scholes option pricing model.

Under the modified prospective application of SFAS No.123(R) accounting requirements, the difference between the intrinsic value of nonvested options and the fair value of those options of $362,000 ($217,000 net-of-tax) on January 1, 2006 is being recognized on a straight-line basis as compensation expense over the remaining vesting period of the nonvested options, which, for nonvested options outstanding on January 1, 2006, will be from January 1, 2006 through April 30, 2007. Accordingly, the Company recorded $68,000 ($41,000 net-of-tax) in compensation expense for the three month period ended March 31, 2006 related to nonvested options issued under the Incentive Plan.

Had compensation expense for stock options been determined based on estimated fair value at the award date, as prescribed by SFAS No. 123, the Company’s net income for three months ended March 31, 2005 would have decreased as presented in the table below.

		Three months ended
(in thousands)		March 31, 2005
Net income
As reported		$	9,971
Total stock-based employee compensation expense determined under fair value based method for all awards net of related tax effects			(106	)
Pro forma		$	9,865
Basic earnings per share
As reported		$	0.34
Pro forma		$	0.33
Diluted earnings per share
As reported		$	0.33
Pro forma		$	0.33

For the purpose of calculating diluted earnings per share, the underlying shares of all vested and nonvested in-the-money options (options where the reporting date market price of underlying shares exceeds the exercise price of the options) are considered dilutive.

Presented below is a summary of the stock options activity for the three months ended March 31, 2006:

										Aggregate
						Average				intrinsic
						exercise				value
		Options				price				(000’s)
Outstanding, January 1, 2006			1,237,164			$	25.58
Granted			—
Exercised			45,218			$	22.98			$	321
Forfeited			—
Outstanding, March 31, 2006			1,191,946			$	25.68			$	4,105
Exercisable, March 31, 2006			1,050,054			$	25.25			$	3,986

The aggregate intrinsic value in the preceding table represents the total intrinsic value (before income taxes), based on the average market price of the Company’s common stock on March 31, 2006, which would have been received by the option holders had all option holders exercised their options on that date.

The following table summarizes information about options outstanding as of March 31, 2006:

Options outstanding														Options exercisable
						Weighted-
						average				Weighted-								Weighted-
		Outstanding				remaining				average				Exercisable				average
Range of		as of				contractual				exercise				as of				exercise
exercise prices		3/31/06				life (yrs)				price				3/31/06				price
$18.80-$21.94			286,497				3.7			$	19.48				286,497			$	19.48
$21.95-$25.07			62,850				9.3			$	24.93				62,850			$	24.93
$25.08-$28.21			604,975				6.1			$	26.54				517,475			$	26.41
$28.22-$31.34			237,624				6.1			$	31.21				183,232			$	31.17

The Company received cash of $1,039,000 for options exercised in the first quarter of 2006.

Restricted Stock granted to Directors
Under the Incentive Plan, restricted shares of the Company’s common stock have been granted to members of the Company’s Board of Directors as a form of compensation. Under APB No. 25 accounting rules, the Company had recognized compensation expense for these restricted stock grants, ratably, over the four-year vesting period of the restricted shares based on the market value of the Company’s common stock on the grant date. Under the modified prospective application of SFAS No.123(R) accounting requirements, compensation expense related to nonvested restricted shares outstanding will be recorded based on the estimated fair value of the restricted shares on their grant dates using the Black-Scholes fair-value option pricing model. The amount of compensation expense recorded related to nonvested restricted shares granted to directors under SFAS No. 123(R) for the three month period ended March 31, 2006 was $71,000 ($43,000 net-of-tax). The amount of compensation expense recorded related to nonvested restricted shares granted to directors based on the intrinsic value of the restricted stock grants under APB No. 25 for the three month period ended March 31, 2005 was $53,000 ($32,000 net-of-tax). Nonvested restricted shares granted to directors are considered dilutive for the purpose of calculating diluted earnings per share but are considered contingently returnable and not outstanding for the purpose of calculating basic earnings per share.

Presented below is a summary of the status of Directors’ restricted stock awards for the three months ended March 31, 2006:

						Weighted average
						grant-date
		Shares				fair value
Nonvested, January 1, 2006			27,900			$	22.37
Granted			—
Vested			—
Forfeited			—
Nonvested, March 31, 2006			27,900			$	22.37

Restricted Stock granted to Employees
Under the Incentive Plan, restricted shares of the Company’s common stock have been granted to employees as a form of compensation. Under APB No. 25 accounting rules, the Company had recognized compensation expense for these restricted stock grants, ratably, over the vesting periods of the restricted shares based on the market value of the Company’s common stock on the grant date. Because of income tax withholding provisions in the restricted stock award agreements related to restricted stock granted to employees, the value of these grants is considered variable, which, under SFAS No. 123(R), will require the offsetting credit to compensation expense to be recorded as a liability. Under the modified prospective application of SFAS No.123(R) accounting requirements and accounting rules for variable awards, compensation expense related to nonvested restricted shares granted to employees will be recorded based on the estimated fair value of the

restricted shares on their grant dates and adjusted for the estimated fair value of any nonvested restricted shares on each subsequent reporting date. The reporting date fair value of nonvested restricted shares under this program will be based on the average market value of the Company’s common stock on the reporting date.

The amount of compensation expense recorded related to nonvested restricted shares granted to employees based on the estimated fair value of the restricted stock grants under SFAS No. 123(R) for the three month period ended March 31, 2006 was $291,000 ($175,000 net-of-tax). The amount of compensation expense recorded related to nonvested restricted shares granted to employees based on the intrinsic value of the restricted stock grants under APB No. 25 for the three month period ended March 31, 2005 was $271,000 ($163,000 net-of-tax). The equity account, Unearned Compensation, was credited when compensation expense was recorded related to these shares under APB No. 25 accounting. Under SFAS 123(R) accounting, a current liability account is credited when compensation expense is recorded. Accumulated liabilities related to nonvested restricted shares issued to employees under this program will be reversed and credited to the Premium on common shares equity account as the shares vest. Nonvested restricted shares granted to employees are considered dilutive for the purpose of calculating diluted earnings per share but are considered contingently returnable and not outstanding for the purpose of calculating basic earnings per share.

Presented below is a summary of the status of Employee’s restricted stock awards for the three months ended March 31, 2006:

						Weighted average
						reporting-date
		Shares				fair value
Nonvested, January 1, 2006			71.525			$	27.99
Granted			—
Vested (fair value: $29,000)			996			$	28.47
Forfeited			—
Nonvested, March 31, 2006			70,529			$	27.97

Stock Performance Awards granted to Executive Officers
The Compensation Committee of the Company’s Board of Directors has approved stock performance award agreements under the Incentive Plan for the Company’s executive officers. Under these agreements, the officers could be awarded shares of the Company’s common stock based on the Company’s total shareholder return relative to that of its peer group of companies in the Edison Electric Institute (EEI) Index over a three-year period beginning on January 1 of the year the awards are granted. The number of shares earned, if any, will be awarded and issued at the end of each three-year performance measurement period. The participants have no voting or dividend rights under these award agreements until the shares are issued at the end of the performance measurement period. Under APB No. 25 accounting, these awards were valued based on the average market price of the underlying shares of the Company’s common stock on the award grant date, multiplied by the estimated probable number of shares to be awarded at the end of the performance measurement period with compensation expenses recorded ratably over the related three-year measurement period. Compensation expense recognized was adjusted at each reporting date subsequent to the grant date of the awards for the difference between the market value of the underlying shares on their grant date and the market value of the underlying shares on the reporting date. Under the modified prospective application of SFAS No.123(R) accounting requirements, the amount of compensation expense that will be recorded subsequent to January 1, 2006 related to awards outstanding on March 31, 2006 will be based on the estimated fair value of the awards on their grant dates as determined under the Black-Scholes option pricing model, multiplied by the estimated number of shares ultimately expected to be awarded.

The amount of compensation expense related to the executive stock performance awards outstanding for the three month period ended March 31, 2006 was $141,000 ($85,000 net-of-tax). No compensation expense was recorded under APB No. 25 related to the executive stock

performance awards outstanding during the three month period ended March 31, 2005 because the Company estimated that no shares were probable of issuance under the program at that time based on the Company’s total shareholder return relative to the total shareholder returns of the companies in its EEI peer group. For the purpose of calculating diluted earnings per share, shares expected to be awarded are considered dilutive. Currently, the Company intends to purchase shares on the open market for executive stock performance awards earned.

A summary of activity under the performance award agreements as of and for the three months ended December 31, 2006 and 2005 is as follows:

		Maximum								Amount of expense
		shares								during the three
Performance		subject				Shares				months ended
period		to award				expected to be awarded				March 31,
										2006				2005
2005-2007			75,150				50,872			$	94,000				—
2004-2006			70,500				23,500			$	47,000				—

Common Shares and Earnings per Share

In the first quarter of 2006 the Company issued 45,218 common shares for stock options exercised and 579 common shares for director’s compensation and retired 68 common shares for tax withholding purposes related to 996 restricted shares that vested in March 2006.

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 excluding any nonvested restricted shares outstanding during the period. Diluted earnings per common share are calculated by adjusting outstanding shares, assuming conversion of all potentially dilutive stock options and vesting of all nonvested restricted shares outstanding and including contingently issuable shares under the Company’s 2004 and 2005 performance award agreements with its executive officers. Stock options with exercise prices greater than the market price are excluded from the calculation of diluted earnings per common share.

Pension Plan and Other Postretirement Benefits

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

		Three months ended
		March 31,
(in thousands)		2006				2005
Service cost—benefit earned during the period		$	1,210			$	1,034
Interest cost on projected benefit obligation			2,544				2,448
Expected return on assets			(3,065	)			(2,996	)
Amortization of prior-service cost			186				241
Amortization of net actuarial loss			378				—
Net periodic pension cost		$	1,253			$	727

The Company made a $2.0 million discretionary contribution to its pension plan in March 2006. An additional $2.0 million discretionary contribution was made in April 2006.

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
		March 31,
(in thousands)		2006				2005
Service cost—benefit earned during the period		$	106			$	92
Interest cost on projected benefit obligation			326				316
Amortization of prior-service cost			18				18
Recognized net actuarial loss			118				104
Net periodic pension cost		$	568			$	530

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
		March 31,
(in thousands)		2006				2005
Service cost—benefit earned during the period		$	334			$	311
Interest cost on projected benefit obligation			637				666
Amortization of transition obligation			187				187
Amortization of prior-service cost			(76	)			(77	)
Amortization of net actuarial loss			133				156
Effect of Medicare Part D expected subsidy			(293	)			(201	)
Net periodic postretirement benefit cost		$	922			$	1,042

Discontinued Operations

In 2005, the Company completed the sales of Midwest Information Systems, Inc. (MIS), St. George Steel Fabrication, Inc. (SGS) and Chassis Liner Corporation (CLC). Discontinued operations includes the operating results of MIS, SGS and CLC and an after-tax loss on the expected disposal of SGS of $1.6 million for the three months ended March 31, 2005. SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets requires that MIS, SGS and CLC be classified and reported separately as discontinued operations.

The results of discontinued operations for the three months ended March 31, 2005 are summarized as follows:

		Three months ended
		March 31, 2005
(in thousands)		MIS				SGS				CLC				Total
Operating revenues		$	2,044			$	4,870			$	1,705			$	8,619
Impairment loss			—				(2,627	)			—				(2,627	)
Income/(loss) before income taxes			1,270				(3,011	)			(56	)			(1,797	)
Income tax expense/(benefit)			508				(1,204	)			(22	)			(718	)

At March 31, 2006 and December 31, 2005 the major components of assets and liabilities of the discontinued operations were as follows:

		March 31, 2006												December 31, 2005
(in thousands)		SGS				CLC				Total				SGS				CLC				Total
Current assets		$	463			$	518			$	981			$	857			$	1,455			$	2,312
Investments and other assets			—				—				—				—				5				5
Assets of discontinued operations		$	463			$	518			$	981			$	857			$	1,460			$	2,317
Current liabilities		$	274			$	56			$	330			$	328			$	44			$	372
Liabilities of discontinued operations		$	274			$	56			$	330			$	328			$	44			$	372

The remaining assets and liabilities of SGS and CLC consist of accounts receivable, accounts payable and inventory at estimated fair market value that were not settled or disposed of as of March 31, 2006.

Subsequent Events

On April 9, 2006 the Compensation Committee of the Company’s Board of Directors granted performance-based stock incentive awards to the Company’s executive officers under the Incentive Plan. Under these awards, the Company’s executive officers could earn up to an aggregate of 88,050 common shares based on the Company’s total shareholder return relative to the total shareholder return of the companies that comprise the EEI Index over the performance period of January 1, 2006 through December 31, 2008. The aggregate target share award is 58,700 shares. Actual payment may range from zero to 150 percent of the target amount. The executive officers have no voting or dividend rights related to these shares until the shares, if any, are issued at the end of the performance period. Under SFAS 123(R) accounting, the Company will be required to estimate the number of shares ultimately expected to be issued under these agreements for the purpose of estimating the fair value of the awards on the date of grant and recording compensation expense over the performance period.

On April 9, 2006, the Compensation Committee of the Company’s Board of Directors granted 47,340 restricted stock units to key employees under the Incentive Plan payable in common shares upon vesting according to the following schedule:

		Number of
Vesting date		shares vesting
April 10, 2006			7,450
April 8, 2007			3,850
June 27, 2007			1,000
April 8, 2008			3,850
January 9, 2009			1,000
January 16, 2009			500
April 8, 2009			3,850
May 1, 2009			500
April 8, 2010			25,340

On April 9, 2006 the Compensation Committee of the Company’s Board of Directors granted 19,800 shares of restricted stock to the directors under the Incentive Plan. The restricted shares vest 25% per year on April 8 of each year in the period 2007 through 2010.

On April 10, 2006, the Company’s shareholders approved amendments to the Incentive Plan increasing the number of common shares available under the Incentive Plan from 2,600,000 common shares to 3,600,000 common shares, extending the term of the Incentive Plan from December 13, 2008 to December 13, 2013 and making certain other changes to the terms of the Incentive Plan.

On April 10, 2006, the Company’s shareholders approved an amendment to the Purchase Plan increasing the number of common shares available under the Purchase Plan from 400,000 common shares to 900,000 common shares.

On April 26, 2006 the Company renewed its line of credit with U.S. Bank National Association, JPMorgan Chase Bank, N.A., Wells Fargo Bank, National Association, Harris Nesbitt Financing, Inc., Keybank National Association, Union Bank of California, N.A., Bank of America, N.A., Bank Hapoalim B.M., and Bank of the West and increased the amount available under the line from $100 million to $150 million. The renewed agreement expires on April 26, 2009. The terms of the renewed line of credit are essentially the same as those in place prior to the renewal. However, outstanding letters of credit issued by the Company can reduce the amount available for borrowing under the line by up to $30 million and the Company can increase its commitments under the renewed line of credit up to $200 million. Borrowings under the line of credit bear interest at LIBOR plus 0.4%, subject to adjustment based on the ratings of the Company’s senior unsecured debt. This line is an unsecured revolving credit facility available to support borrowings of the Company’s nonelectric operations. The Company anticipates that the electric utility’s cash requirements through April 2009 will be provided for by cash flows from electric utility operations or through other borrowing arrangements. The Company’s obligations under this line of credit are guaranteed by a 100%-owned subsidiary that owns substantially all of the Company’s nonelectric companies. As of March 31, 2006, $45.2 million of the $100 million line of credit in place at that date was in use and $14.4 million was restricted from use to cover outstanding letters of credit.

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

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2006 and 2005

Consolidated operating revenues were $278.8 million for the three months ended March 31, 2006 compared with $232.1 million for the three months ended March 31, 2005. Operating income was $27.6 million for the three months ended March 31, 2006 compared with $21.1 million for the three months ended March 31, 2005. The Company recorded diluted earnings per share from continuing operations of $0.50 for the three months ended March 31, 2006 compared to $0.37 for the three months ended March 31, 2005 and total diluted earnings per share from continuing and discontinued operations of $0.50 for the three months ended March 31, 2006 compared to $0.33 for the three months ended March 31, 2005.

Following is a more detailed analysis of our operating results by business segment for the quarters ended March 31, 2006 and 2005, followed by our outlook for the remainder of 2006 and a discussion of changes in our financial position during the quarter ended March 31, 2006.

Amounts presented in the segment tables that follow for operating revenues, cost of goods sold and other nonelectric operating expenses for the three month periods ended March 31, 2006 and 2005 will not agree with amounts presented in the consolidated statements of income due to the elimination of intersegment transactions. The amounts of intersegment eliminations by income statement line item are listed below:

		March 31,				March 31,
(in thousands)		2006				2005
Operating revenues		$	844			$	984
Cost of goods sold			319				511
Other nonelectric expenses			525				473

Electric

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

The increase in retail electric revenue is due mainly to a $9.5 million increase in fuel clause adjustment (FCA) revenues related to increases in fuel and purchased power costs for system use, but also includes $1.9 million related to the reversal of the refund provision established in December 2005 relating to Midwest Independent Transmission System Operator (MISO) costs. In December 2005, the Minnesota Public Utilities Commission (MPUC) issued an order denying recovery of certain MISO related costs through the FCA in Minnesota retail rates and requiring a refund of amounts previously collected. In February 2006 the MPUC reconsidered its order and eliminated the refund requirement. The remaining $0.5 million increase in retail revenues resulted from a 1.4% increase in retail megawatt-hours (mwh) sold between the periods reflecting increased sales to industrial customers partially offset by decreased sales to residential and commercial customers. Industrial mwh sales increased 25.2% between the quarters mainly due to increased consumption by pipeline customers as higher oil prices have led to an increase in volume of product being transported from Canada and the Williston basin. A 9.2% decrease in heating degree-days was the main factor contributing to 3.2% decrease in residential mwh sales and a 0.5% decrease in commercial mwh sales between the periods.

Wholesale sales revenue from company-owned generation increased $1.2 million in the three months ended March 31, 2006 compared to the three months ended March 31, 2005 as a result of a 15.3% increase in mwhs sold combined with an 11.3% increase in the price per mwh sold between the periods. Advance purchases of electricity in anticipation of normal winter weather resulted in increased wholesale electric sales in January of 2006 due to unseasonably mild weather. Wholesale sales from company-owned generation were curtailed in February and March 2006 as generation levels were restricted due to coal supply constraints. Net revenue from the resale of purchased power combined with net mark-to-market losses on forward energy contracts were ($0.6) million for the quarter ended March 31, 2006 compared with a combined

$0.8 million in net revenue on purchased power resold and net mark-to-market gains on forward energy contracts for the quarter ended March 31, 2005. Of the $2.9 million in net mark-to-market gains recognized on open forward energy contracts at December 31, 2005, $1.9 million was realized and $0.5 million was reversed in the first quarter of 2006 as market prices on forward electric contracts declined in response to decreased demand for electricity due, in part, to regional winter weather that was milder than expected.

The decrease in other electric operating revenues for the three months ended March 31, 2006 compared to the three months ended March 31, 2005 is mainly due to a reduction in transmission services revenue related to the initiation of the MISO Day 2 market in April 2005. Certain revenues that were billed separately prior to inception of the MISO Day 2 market are now included in revenue from wholesale energy sales or reflected as a reduction in purchased power costs.

The decrease in fuel costs for the three months ended March 31, 2006 compared with the three months ended March 31, 2005 reflects a 6.8% reduction in mwhs generated partially offset by a 4.7% increase in the cost of fuel per mwh generated. Generation used for wholesale electric sales increased 15.3% while generation for retail sales decreased 9.8% between the periods. Fuel costs per mwh increased at all three of our coal-fired generating plants as a result of increases in coal and coal transportation costs between the periods. Much of the increase in coal and coal transportation costs is directly related to higher diesel fuel prices. Approximately 90% of the fuel cost increases 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 — system use (to serve retail customers) is due to a 57.8% increase in mwhs purchased combined with a 2.9% increase in the cost per mwh purchased. An increase in mwh purchases for system use was necessary to make up for reductions in generation levels caused by delayed coal shipments to Big Stone and Hoot Lake Plants in February and March of 2006. The increase in purchased power costs reflects a general increase in fuel and purchased power costs across the Mid-Continent Area Power Pool (MAPP) region related to increased coal mining and transportation costs mainly as a result of higher fuel prices between the periods.

The decrease in other operation and maintenance expenses for the three months ended March 31, 2006 compared with the three months ended March 31, 2005 is mainly due to an increase in capitalized labor and other expenses related to more construction and storm repair work completed in the first quarter of 2006 than in the first quarter of 2005. Required storm repairs and mild weather resulted in the completion of more construction work than normal in the first quarter of 2006. Much of the storm repairs required replacement of damaged poles and power lines resulting in capitalization of removal and replacement costs.

Depreciation expense increased in the three months ended March 31, 2006 compared with the three months ended March 31, 2005 as a result of a $20.6 million increase in electric plant in service in 2005. The decrease in property taxes between the periods is a result of slightly lower utility property valuations in Minnesota in 2005.

Plastics

		Three months ended
		March 31,												%
(in thousands)		2006				2005				Change				Change
Operating revenues		$	38,105			$	32,155			$	5,950				18.5
Cost of goods sold			28,180				25,417				2,763				10.9
Operating expenses			1,448				1,509				(61	)			(4.0	)
Depreciation and amortization			730				591				139				23.5
Operating income		$	7,747			$	4,638			$	3,109				67.0

Operating revenues for the plastics segment increased between the periods mainly as result of a 32.9% increase in the price per pound of polyvinyl chloride (PVC) pipe sold offset by a 15.3% decrease in pounds of PVC pipe sold. The increase in revenue reflects the effect of an increase in PVC resin prices between the periods. The increase in cost of goods sold was directly related to the increase in resin prices. The resin cost per pound of PVC pipe shipped increased 25.1% between the quarters. The increase in depreciation and amortization expense is the result of $3.6 million in capital expenditures in 2005, mainly for production equipment.

Manufacturing

		Three months ended
		March 31,												%
(in thousands)		2006				2005				Change				Change
Operating revenues		$	68,257			$	55,529			$	12,728				22.9
Cost of goods sold			54,399				45,359				9,040				19.9
Operating expenses			6,215				5,422				793				14.6
Depreciation and amortization			2,569				2,205				364				16.5
Operating income		$	5,074			$	2,543			$	2,531				99.5

The increase in revenues in our manufacturing segment relates to the following:

	•		Revenues at DMI Industries, Inc. (DMI) increased $10.4 million due to an increase in production and sales activity due in part to plant additions and continued improvements in productivity and capacity utilization.
	•		Revenues at ShoreMaster increased $1.5 million between the quarters mainly due to the acquisition of Southeast Floating Docks in May 2005.
	•		Revenues at BTD Manufacturing, Inc. (BTD) increased $0.5 million mainly as a result of higher prices received for goods manufactured. The number of units sold at BTD decreased 8.7% between the quarters while the revenue per unit sold increased 18.0%. Increased revenues from tooling activities enhanced by the acquisition of Performance Tool & Die in January of 2005, contributed as well to BTD’s revenue increase.
	•		Revenues at T.O. Plastics, Inc. increased $0.4 million between the quarters as a result of a 7.5% increase in unit sales.

The increase in cost of goods sold in our manufacturing segment relates to the following:

	•		DMI’s cost of goods sold increased $8.0 million between the quarters, including $6.4 million in material costs increases. The increase in cost of goods sold is directly related to DMI’s increase in production and sales activity.
	•		Cost of goods sold at ShoreMaster increased $0.8 million between the quarters as a result of increase in labor and benefit costs, mainly related to the acquisition of Southeast Floating Docks in May 2005.
	•		Cost of goods sold at BTD decreased $0.6 million between the quarters mainly due to decreases in production labor costs related to a decrease in production employees and a decrease in overtime pay between the quarters. Productivity gains at BTD were achieved through efforts to better utilize and allocate available labor resources.
	•		Cost of goods sold at T.O. Plastics increased $0.7 million, reflecting $0.5 million in material cost increases and $0.2 million in increased labor and benefit costs between the quarters.

Operating expenses at DMI increased $0.6 million as a result of increases in labor, professional services and maintenance expenses. ShoreMaster’s operating expenses increased $0.2 million as a result of increases in wage and benefit expenses mainly related to the May 2005 acquisition on Southeast Floating Docks. Depreciation expense increased between the quarters as a result of the Southeast Floating Docks acquisition and 2005 capital additions at all four manufacturing companies.

Health Services

		Three months ended
		March 31,												%
(in thousands)		2006				2005				Change				Change
Operating revenues		$	32,076			$	27,798			$	4,278				15.4
Cost of goods sold			24,822				20,292				4,530				22.3
Operating expenses			5,514				4,913				601				12.2
Depreciation and amortization			957				1,067				(110	)			(10.3	)
Operating income		$	783			$	1,526			$	(743	)			(48.7	)

The increase in health services operating revenues for the three months ended March 31, 2006 compared with the three months ended March 31, 2005 reflects a $3.7 million increase in imaging revenues combined with a $0.6 million increase in revenues from sales and servicing of diagnostic imaging equipment. On the imaging side of the business, $2.2 million of the $3.7 million increase in revenue came from imaging services where the revenue per scan increased 18.4% between the quarters while the number of scans completed decreased 1.4%. Revenues from rentals and interim installations of scanning equipment along with providing technical support services for those rental and interim installations increased $1.4 million between the quarters. The increase in health services revenue was mostly offset by the increase in health services cost of goods sold, reflecting increased equipment rental and labor costs related to an increase in imaging and interim services activity and maintenance and sublease costs related to units that were out of service in the first quarter of 2006. The increase in revenue from sales and servicing of equipment was more than offset by increases in costs and operating expenses in these operations, resulting in a $0.8 million decrease in operating income from sales of supplies and sales and servicing of diagnostic medical equipment. The increase in operating expenses is mainly due to higher labor, benefits, travel and insurance expenses. The decrease in depreciation and amortization expense is the result of certain assets reaching the ends of their depreciable lives. When these assets are replaced, they are generally replaced with assets leased under operating leases.

Food Ingredient Processing

		Three months ended
		March 31,												%
(in thousands)		2006				2005				Change				Change
Operating revenues		$	9,350			$	9,255			$	95				1.0
Cost of goods sold			9,318				6,685				2,633				39.4
Operating expenses			685				543				142				26.2
Depreciation and amortization			919				825				94				11.4
Operating (loss) income		$	(1,572	)		$	1,202			$	(2,774	)			(230.8	)

The increase in food ingredient processing revenues reflects a 14.8% increase in revenue per pound of product sold offset by a 12.0% decrease in pounds sold between the periods. The food ingredient processing segment has been negatively impacted by raw product supply shortage in Idaho and Prince Edward Island. This shortage has caused production to be curtailed at these two plants contributing to the 12.0% decrease in pounds of product sold. Higher than expected raw product costs related to the supply shortage have resulted in a 58.4% increase in the cost per pound of product sold. The increase in operating expenses between the quarters is due to an increase in compensation expenses.

Other Business Operations

		Three months ended
		March 31,												%
(in thousands)		2006				2005				Change				Change
Operating revenues		$	49,250			$	34,897			$	14,353				41.1
Cost of goods sold			36,674				26,392				10,282				39.0
Operating expenses			12,979				10,827				2,152				19.9
Depreciation and amortization			692				597				95				15.9
Operating loss		$	(1,095	)		$	(2,919	)		$	1,824				(62.5	)

The increase in revenues in the other business operations segment relates to the following:

	•		Revenues at Foley Company increased $7.3 million in the first quarter of 2006 compared to the first quarter of 2005 due to an increase in the volume and dollar value of jobs in progress.
	•		Revenues at Otter Tail Energy Services Co. (OTESCO) increased $4.9 million between the quarters mainly as a result of increases in natural gas prices.
	•		Revenues at Midwest Construction Services, Inc. (MCS) increased $1.3 million between the quarters as a result of an increase in work in progress.
	•		Revenues at E.W. Wylie Corporation (Wylie) increased $0.8 million between the quarters mainly due to a 2.8% net increase in miles driven by owner-operated and company-operated trucks. Miles driven by owner-operated trucks increased 48.8% while miles driven by company-operated trucks decreased 12.8% between the quarters. Wylie’s increased revenues also reflect increased fuel costs recovered through fuel surcharges between the quarters.

The increase in cost of goods sold in the other business operations segment relates to the following:

	•		Foley Company’s cost of goods sold increased $6.3 million mainly in the areas of materials and subcontractor costs as a result of increased construction activity and jobs in progress.
	•		Cost of goods sold at OTESCO increased by a $4.7 million as a result of increases in natural gas costs.
	•		Cost of goods sold at MCS decreased $0.7 million mainly due to a reduction in subcontractor costs between the quarters.

The increase in operating expenses in the other business operations segment is due to the following:

	•		Wylie’s revenue increase was more than offset by a $0.9 million increase in operating expenses, mainly contractor costs related to the increase in miles driven by owner-operated trucks between the periods.
	•		MCS operating expenses increased $0.3 million between the quarters, mainly as a result of increases in salary and benefit expenses.
	•		Operating expenses in this segment also increased $1.1 million due to increases in health and other insurance costs and other employee benefit costs not allocated to the other operating segments.

Income Taxes — Continuing Operations

The $2.9 million (51.9%) increase in income taxes — continuing operations between the quarters is primarily the result of a $6.8 million (40.9%) increase in income from continuing operations before income taxes for the three months ended March 31, 2006 compared with the three months ended March 31, 2005. The effective tax rate for continuing operations for the three months ended March 31, 2006 was 36.4% compared to 33.8% for the three months ended March 31, 2005. The increase in the effective tax rate is related to a change in estimate in the reversal of regulatory deferred tax liabilities at the electric utility and an increase in taxable income relative to a fixed level of tax credits between the quarters.

Discontinued Operations