Summary of OTTER TAIL CORP

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
Following is an analysis of our operating results by business segment for the three months ended March 31, 2009 and 2008, followed by our outlook for the remainder of 2009 and a discussion of changes in our consolidated financial position during the three months ended March 31, 2009. Comparison of the Three Months Ended March 31, 2009 and 2008 Consolidated operating revenues were $277.2 million for the three months ended March 31, 2009 compared with $300.2 million for the three months ended March 31, 2008. Operating income was $8.6 million for the three months ended March 31, 2009 compared with $17.1 million for the three months ended March 31, 2008. The Company recorded diluted earnings per share of $0.12 for the three months ended March 31, 2009 compared to $0.27 for the three months ended March 31, 2008. 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, 2009 and 2008 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:

           (in thousands)                March 31, 2009      March 31, 2008

           Operating Revenues:
           Electric                       $        62         $        85
           Nonelectric                            938                 486
           Cost of Goods Sold                     840                 466
           Other Nonelectric Expenses             160                 105


                                    Electric

                                                Three Months Ended
                                                    March 31,                            %
  (in thousands)                                2009          2008        Change      Change

  Retail Sales Revenues                       $ 79,055     $ 87,300     $ (8,245 )      (9.4 )
  Wholesale Revenues                             4,763        3,584        1,179        32.9
  Net Marked-to-Market Gain                      1,034        2,250       (1,216 )     (54.0 )
  Other Revenues                                 3,689        4,456         (767 )     (17.2 )

  Total Operating Revenues                    $ 88,541     $ 97,590     $ (9,049 )      (9.3 )
  Production Fuel                               18,659       19,904       (1,245 )      (6.3 )
  Purchased Power - System Use                  17,373       18,986       (1,613 )      (8.5 )
  Other Operation and Maintenance Expenses      26,930       26,743          187         0.7
  Depreciation and Amortization                  8,988        7,708        1,280        16.6
  Property Taxes                                 2,490        2,624         (134 )      (5.1 )

  Operating Income                            $ 14,101     $ 21,625     $ (7,524 )     (34.8 )

The main reason for the decline in retail sales revenue was a $9.7 million decrease in fuel cost recovery revenues mainly related to a decrease in costs per kilowatt-hour (kwh) for fuel and purchased power between the quarters. Other items affecting retail sales revenue were a reduction in Minnesota retail revenues of $1.5 million related to adjustments to final rate components and a final Minnesota rate increase of 2.9% in effect in the first quarter of 2009 compared to an interim rate increase of 5.4% in effect in the first quarter of 2008, and a 10.6% decrease in kwh sales to industrial customers due to reduced demand by pipeline customers as a result of declining oil and natural gas prices. These retail sales revenue decreases were partially offset by a $1.5 million increase in revenues related to increases in kwh sales to residential and commercial customers, increases in renewable resource recovery rider revenues totaling $1.5 million and a 4.1% interim rate increase in North Dakota implemented in the first quarter of 2009.

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Wholesale electric revenues from sales from company-owned generation were $4.4 million for the quarter ended March 31, 2009 compared with $4.1 million for the quarter ended March 31, 2008 as a result of a 97.5% increase in wholesale kwh sales offset by a 46.2% decrease in the average price per kwh. Fuel costs related to wholesale sales increased $0.4 million between the quarters as a result of the increase in wholesale kwh sales. Reductions in industrial consumption of electricity, declining natural gas prices and increased generation from renewable wind and hydroelectric resources have driven down prices for electricity in the wholesale market. Net gains from energy trading activities, including net mark-to-market gains on forward energy contracts, were $1.4 million for the quarter ended March 31, 2009 compared with $1.7 million for the quarter ended March 31, 2008. The $0.8 million decrease in other electric operating revenues includes a $0.6 million decrease in revenues from contracted services and a $0.2 million reduction in transmission services related revenue. The decrease in fuel costs reflects an 8.0% decrease in kwhs generated from the electric utility's fuel-fired plants, partially offset by a 1.9% increase in the cost of fuel per kwh generated. A 9.6% increase in the average cost of fuel per kwh of generation at the electric utility's coal-fired plants was partially offset by a 39.1% decrease in the average cost of fuel per kwh of generation at the electric utility's natural gas and fuel-oil-fired combustion turbines. Fuel costs were also reduced as a result of wind turbines owned by the electric utility providing 9.0% of total kwh generation in the first quarter of 2009. Generation for retail sales decreased 6.8% while generation used for wholesale electric sales increased 97.5% between the quarters.
The decrease in purchased power - system use is due to a 36.5% reduction in the cost per mwh purchased offset by a 44.1% increase in mwhs purchased. The increase in mwh purchases for system use is, in part, related to a decrease in mwhs generated at company-owned plants but is also partly due to the dramatic decreases in wholesale electric prices. The decrease in the cost per kwh of purchased power reflects a significant decrease in fuel and purchased power costs across the Mid-Continent Area Power Pool region as a result of recent reductions in industrial consumption of electricity related to the current economic recession, declining natural gas prices and the availability of increased generation from renewable wind and hydroelectric.
Electric operating and maintenance expenses were essentially unchanged between the quarters. Depreciation expenses increased $1.3 million as a result of 2008 capital additions, including 32 new wind turbines at the Ashtabula Wind Energy Center.

                                    Plastics

                                          Three Months Ended
                                              March 31,                            %
       (in thousands)                     2009          2008        Change       Change

       Operating Revenues               $ 13,530     $ 22,350     $ (8,820 )      (39.5 )
       Cost of Goods Sold                 15,352       18,936       (3,584 )      (18.9 )
       Operating Expenses                  1,375        1,438          (63 )       (4.4 )
       Depreciation and Amortization         716          795          (79 )       (9.9 )

       Operating (Loss) Income          $ (3,913 )   $  1,181     $ (5,094 )     (431.3 )

Operating revenues for the plastics segment decreased as result of an 18.8% decrease in pounds of pipe sold combined with a 25.2% decrease in polyvinyl chloride (PVC) pipe prices. The decrease in costs of goods sold was due to the decrease in pounds of pipe sold. The lower profitability between the quarters was also impacted by the sell-off of higher priced finished goods inventory which adversely impacted operating margins. Significant reductions in new home construction in markets served by the plastic pipe companies have resulted in reduced demand and lower prices for PVC pipe products.

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                                 Manufacturing

                                           Three Months Ended
                                               March 31,                            %
     (in thousands)                        2009          2008        Change       Change

     Operating Revenues                  $ 96,019     $ 97,595     $ (1,576 )       (1.6 )
     Cost of Goods Sold                    79,535       82,848       (3,313 )       (4.0 )
     Operating Expenses                    10,046       10,323         (277 )       (2.7 )
     Product Recall and Testing Costs       1,766            -        1,766            -
     Depreciation and Amortization          5,358        3,749        1,609         42.9

     Operating (Loss) Income             $   (686 )   $    675     $ (1,361 )     (201.6 )

The decrease in revenues in our manufacturing segment relates to the following:
• Revenues at DMI Industries, Inc. (DMI) increased $1.7 million as a result of increased production of tower units at its Tulsa plant, which began production in the first quarter of 2008.

• Revenues at BTD Manufacturing, Inc. (BTD) increased $3.8 million. The increase reflects first quarter 2009 revenues of $5.2 million from Miller Welding, acquired in May 2008, offset by a $0.7 million decrease in sales volume and a $0.6 million decrease in scrap sales revenue related to a decrease in steel prices.

• Revenues at T.O. Plastics, Inc. (T.O. Plastics) decreased $4.6 million due to a decrease in horticultural product sales as customers utilized existing inventory in the channel.

• Revenues at ShoreMaster, Inc. (ShoreMaster) decreased $2.5 million mainly due to decreased sales of residential products related to current economic uncertainty and credit restraints resulting in reduced orders from dealers.

The decrease in cost of goods sold in our manufacturing segment relates to the following:
• DMI's cost of goods sold decreased $2.5 million as a result of productivity improvements at DMI's Tulsa plant and a reduction in costs at the Fort Erie plant. Included in cost of goods sold for the quarter ended March 31, 2008 were costs of $0.8 million associated with the start up of DMI's Tulsa plant and $3.2 million in additional labor and material costs on a production contract at the Fort Erie plant.

• Cost of goods sold at BTD increased $4.7 million. The increase reflects first quarter 2009 costs of $3.9 million at Miller Welding, acquired in May 2008 and sales of higher cost items from inventory produced in 2008.

• Cost of goods sold at T.O. Plastics decreased $3.8 million as a result of decreased sales of horticultural products.

• Cost of goods sold at ShoreMaster decreased $1.7 million mainly due to the decrease in sales of residential products partially offset by $0.9 million in additional costs on a large marina project.

The net increase in operating expenses, including product recall and testing costs, in our manufacturing segment is due to the following:
• Operating expenses at DMI increased $0.3 million, mainly as a result of first quarter 2009 fees and expenses related to DMI's accounts receivable sales agreement initiated in the second quarter of 2008.

• BTD's operating expenses increased $0.2 million mainly as a result of the acquisition of Miller Welding in May 2008.

• ShoreMaster's operating expenses, including product recall and testing costs, increased $1.1 million as a result of the recognition of $1.4 million in costs related to the recall of certain trampoline products and $0.4 million in costs to test imported products for lead/phthalate content, offset by reductions of $0.5 million in labor and benefit expenses and $0.2 million in expenditures for professional services.

• T.O. Plastics operating expenses were down $0.1 million between the quarters.

Depreciation expense increased as a result of capital additions at DMI and the acquisition of Miller Welding in May 2008.

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                                Health Services

                                          Three Months Ended
                                              March 31,                            %
       (in thousands)                     2009          2008        Change      Change

       Operating Revenues               $ 28,167     $ 29,265     $ (1,098 )      (3.8 )
       Cost of Goods Sold                 22,137       23,291       (1,154 )      (5.0 )
       Operating Expenses                  5,089        5,925         (836 )     (14.1 )
       Depreciation and Amortization         990          982            8         0.8

       Operating (Loss)                 $    (49 )   $   (933 )   $    884        94.7

Revenues from scanning and other related services were down $0.9 million and revenues from equipment sales and servicing decreased $0.2 million for the three months ended March 31, 2009 compared with the three months ended March 31, 2008. The decrease in cost of goods sold was directly related to the decreases in sales revenue. Measures taken to control and reduce operating expenses have resulted in the reduction in operating losses in the health services segment between the quarters. The imaging side of the business continues to be affected by less than optimal utilization of certain imaging assets.

                           Food Ingredient Processing

                                           Three Months Ended
                                               March 31,                          %
        (in thousands)                     2009          2008       Change      Change

        Operating Revenues               $ 20,086     $ 15,898     $ 4,188       26.3
        Cost of Goods Sold                 15,982       12,319       3,663       29.7
        Operating Expenses                    812          813          (1 )     (0.1 )
        Depreciation and Amortization       1,041        1,073         (32 )     (3.0 )

        Operating Income                 $  2,251     $  1,693     $   558       33.0

The increase in food ingredient processing revenues is due to a 7.6% increase in pounds of product sold, combined with a 17.4% increase in the price per pound of product sold. Cost of goods sold increased as a result of the increase in sales and a 20.5% increase in the cost per pound of product sold.

                           Other Business Operations

                                          Three Months Ended
                                              March 31,                            %
       (in thousands)                     2009          2008        Change      Change

       Operating Revenues               $ 31,895     $ 38,110     $ (6,215 )     (16.3 )
       Cost of Goods Sold                 20,795       28,295       (7,500 )     (26.5 )
       Operating Expenses                 10,861       12,013       (1,152 )      (9.6 )
       Depreciation and Amortization         624          461          163        35.4

       Operating Loss                   $   (385 )   $ (2,659 )   $  2,274        85.5

The decrease in revenues in the other business operations segment relates to the following:
• Revenues at Midwest Construction Services, Inc. (MCS) decreased $2.7 million as a result of a decrease in jobs in progress, especially wind-energy projects, related to the current economic recession and tight credit.

• Revenues at Foley Company decreased $1.4 million due to a decrease in volume of jobs in progress.

• Revenues at E.W. Wylie Corporation (Wylie) decreased $2.1 million due to a 30.1% reduction in miles driven by company-owned trucks and a 4.5% decrease in miles driven by owner-operated trucks directly related to the current economic recession.

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The decrease in cost of goods sold in the other business operations segment relates to the following:
• Cost of goods sold at MCS decreased $4.2 million, mainly due to decreases in material, subcontractor and labor costs related to a reduction of jobs in progress.

• Foley Company's cost of goods sold decreased $3.3 million, including decreases of $2.5 million in material costs and $0.7 million in subcontractor costs, as a result of decreased construction activity and jobs in progress.

The decrease in operating expenses in the other business operations segment is due to the following:
• Wylie's operating expenses decreased $1.3 million between the quarters. Fuel costs decreased $1.1 million as a result of the decrease in miles driven by company-owned trucks. Subcontractor expenses decreased $0.5 million as a result of the decrease in miles driven by owner-operated trucks. Equipment rental costs increased by $0.2 million due to the leasing of additional equipment.

• MCS's operating expenses increased $0.3 million between the quarters mainly due to increased labor expenses.

• Operating expenses at Foley Company were flat between the quarters.

Corporate Corporate includes items such as corporate staff and overhead costs, the results of our captive insurance company and other items excluded from the measurement of operating segment performance. Corporate is not an operating segment. Rather it is added to operating segment totals to reconcile to totals on our consolidated statements of income.

                                          Three Months Ended
                                              March 31,                            %
       (in thousands)                      2009         2008        Change      Change

       Operating Expenses               $  2,610      $ 4,340     $ (1,730 )     (39.9 )
       Depreciation and Amortization         100          145          (45 )     (31.0 )

The decrease in corporate operating expenses reflects reductions for salaries and benefits and professional and contracted services.

Interest Charges Interest charges decreased $0.4 million in the first three months of 2009 compared with the first three months of 2008 as a result of decreases in short-term debt interest rates and a decrease in average long-term debt outstanding between the quarters.
Other Income Other income decreased $0.3 million in the first three months of 2009 compared with the first three months of 2008 as a result of a decrease in allowance for funds used during construction (AFUDC) at the electric utility.
Income Taxes The $4.5 million decrease in income taxes between the quarters is primarily the result of an $8.3 million (73.5%) decrease in income before income taxes for the three months ended March 31, 2009 compared with the three months ended March 31, 2008. The effective tax rate for the three months ended March 31, 2009 was (46.0%) compared with 27.5% for the three months ended March 31, 2008. The reduction from the federal statutory rate mainly reflects the benefit of federal production tax credits and North Dakota wind energy credits related to the electric utility's wind projects of approximately $2.1 million in the first quarter of 2009 compared with $0.6 million in the first quarter of 2008. Federal production tax credits are recognized as wind energy is generated based on a per kwh rate prescribed in applicable federal statutes. North Dakota wind energy credits are based on dollars invested in qualifying facilities and are being recognized on a straight-line basis over 25 years.

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2009 EXPECTATIONS
The statements in this section are based on our current outlook for 2009 and are subject to risks and uncertainties described under "Forward Looking Information
- Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995." We are revising our 2009 earnings guidance to be in a range of $0.80 to $1.20 per diluted share from our previously announced range of $1.10 to $1.50. The earnings guidance revision is reflective of our expectations that difficult economic conditions will continue for the balance of the year. The revised earnings guidance is subject to risks and uncertainties given current global economic conditions and the other risk factors outlined below. Contributing to the earnings guidance for 2009 are the following items:
• Our expectations for earnings from our electric segment have been revised downward due to the negative impact from continuing softness in demand from commercial and industrial customers and lower volumes and margins from wholesale energy sales. Declining demand along with the lowest natural gas prices in years is having a dramatic impact on the volume and price that can be realized from sales of excess generation into the marketplace. As a result, we now expect earnings from our electric segment to be lower in 2009 than in 2008. We still expect increased levels of retail revenue from the electric segment in 2009 as a result of a 4.1% interim rate increase in North Dakota and increases in resource recovery rider revenue related to the Ashtabula Wind Energy Center that was placed in service in late 2008. The interim rate increase is part of a rate case filed with the North Dakota Public Service Commission (NDPSC) in November 2008 requesting a general annual rate increase of approximately $6.1 million, or 5.1%. Interim rates remain in effect for all North Dakota customers until the NDPSC makes a final determination on the electric utility's request, which is expected to occur by August 1, 2009. Expectations in 2009 also reflect a request for an increase in revenues in South Dakota. A final decision on the request is expected from the South Dakota Public Utilities Commission in mid-summer 2009 with an interim rate increase going into effect in May 2009.

• We expect the plastics segment's 2009 performance to be below 2008 earnings given continued poor economic conditions. Previously announced capacity expansions are not expected to be brought on line until the economy improves and demand for PVC pipe increases.

• We now expect earnings from the manufacturing segment to decline in 2009 as a result of the following:

o BTD saw unanticipated declines in customer demand in the first quarter of 2009 and expects the soft demand to continue for the rest of the year resulting in lower earnings compared with 2008.

o While the economy is expected to reduce the amount of spending on waterfront products, earnings are expected to improve at ShoreMaster compared with 2008 given the restructuring that has occurred in its business. While there continues to be uncertainty on the level of spending on residential products, ShoreMaster has implemented significant cost reductions across the organization, reduced capital spending and reorganized its business units for more efficient operations.

o At DMI, we expect a decline in earnings in 2009 due to wind developers' limited access to financing which has resulted in delays or suspension of orders across the industry. Industry forecasts for megawatt installations of wind power in 2009 indicate a decrease of between 25 to 50 percent from 2008.

o T. O. Plastics' earnings are expected to remain flat between the years. While it expects economic challenges, T.O. Plastics has implemented cost reductions and efficiency projects to maintain profitability.

o Backlog in place in the manufacturing segment to support revenues for the remainder of 2009 is approximately $152 million compared with $280 million one year ago.

• We expect increased net income from our health services segment in 2009 as it focuses on improving its mix of imaging assets and asset utilization rates and has implemented cost reductions across the segment.

• We expect increased net income from our food ingredient processing business in 2009 based on expectations of higher sales volumes, strong pricing for products, lower energy costs and higher production levels in 2009 compared with 2008.

• We expect our other business operations segment to have a similar level of earnings in 2009 compared with 2008. Backlog in place for the construction businesses is $85 million for the remainder of 2009 compared with $83 million one year ago.

• We expect corporate general and administrative costs to decrease in 2009.

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FINANCIAL POSITION
The following table presents the status of our lines of credit as of March 31,
2009 and December 31, 2008:

                                                            In Use on         Restricted due to          Available on          Available on
                                                            March 31,            Outstanding              March 31,            December 31,
(in thousands)                          Line Limit            2009            Letters of Credit              2009                  2008

Varistar Credit Agreement               $ 200,000          $ 116,747           $        14,445          $     68,808          $     77,706
Electric Utility Credit Agreement         170,000             32,316                         -               137,684               142,935

Total                                   $ 370,000          $ 149,063           $        14,445          $    206,492          $    220,641

We believe we have the necessary liquidity to effectively conduct business operations for an extended period if current market conditions continue. Despite the continuing economic recession, our balance sheet is strong and we are in compliance with our debt covenants. Our dividend payout ratio for the year ended December 31, 2008, was 109% compared to 66% and 68% for the years ended December 31, 2007 and 2006, respectively. Our current indicated annual dividend would result in a dividend per share of $1.19 in 2009. The determination of the amount of future cash dividends to be declared and paid will depend on, among other things, our financial condition, cash flows from operations, the level of our capital expenditures, restrictions under our credit facilities and our future business prospects.
Financial flexibility is provided by operating cash flows, unused lines of credit, strong financial coverages, solid credit ratings, and alternative financing arrangements such as leasing. We believe our financial condition is strong and that our cash, other liquid assets, operating cash flows, existing lines of credit, access to capital markets and borrowing ability because of solid credit ratings, when taken together, provide adequate resources to fund ongoing operating requirements and future capital expenditures related to expansion of existing businesses and development of new projects. Equity or debt financing will be required in the period 2009 through 2013 given the expansion plans related to our electric segment to fund construction of new rate base investments, in the event we decide to reduce borrowings under our lines of credit, refund or retire early any of our presently outstanding debt or . . .