RESULTS OF OPERATIONS
Following is an analysis of our operating results by business segment for the three and nine months ended September 30, 2009 and 2008, followed by our outlook for the remainder of 2009 and a discussion of changes in our consolidated financial position during the nine months ended September 30, 2009. Comparison of the Three Months Ended September 30, 2009 and 2008 Consolidated operating revenues were $257.4 million for the three months ended September 30, 2009 compared with $352.9 million for the three months ended September 30, 2008. Operating income was $17.5 million for the three months ended September 30, 2009 compared with $19.7 million for the three months ended September 30, 2008. The Company recorded diluted earnings per share of $0.29 for the three months ended September 30, 2009 compared with $0.31 for the three months ended September 30, 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 September 30, 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:

                                     Three Months Ended      Three Months Ended
       (in thousands)                September 30, 2009      September 30, 2008

       Operating Revenues:
       Electric                       $            47          $          62
       Nonelectric                              1,214                    492
       Cost of Goods Sold                       1,202                    535
       Other Nonelectric Expenses                  59                     19


                                    Electric

                                                Three Months Ended
                                                  September 30,                          %
  (in thousands)                                2009          2008        Change      Change

  Retail Sales Revenues                       $ 66,067     $ 64,539     $  1,528         2.4
  Wholesale Revenues                             3,388        9,876       (6,488 )     (65.7 )
  Net Marked-to-Market Gain                        956           65          891           -
  Other Revenues                                 3,142        8,403       (5,261 )     (62.6 )

  Total Operating Revenues                    $ 73,553     $ 82,883     $ (9,330 )     (11.3 )
  Production Fuel                               13,172       18,732       (5,560 )     (29.7 )
  Purchased Power - System Use                  11,112       10,456          656         6.3
  Other Operation and Maintenance Expenses      23,327       33,091       (9,764 )     (29.5 )
  Depreciation and Amortization                  9,015        7,864        1,151        14.6
  Property Taxes                                 2,194        2,227          (33 )      (1.5 )

  Operating Income                            $ 14,733     $ 10,513     $  4,220        40.1

The main factors contributing to the increase in retail sales revenues are:
(1) a $0.8 million increase in North Dakota interim rates, (2) a $0.7 million increase in South Dakota rates, and (3) $0.4 million in accrued revenues related to transmission asset investments subject to recovery in Minnesota under a rate rider, partially offset by a decrease in revenues related to a 3.7% reduction in retail kilowatt-hour (kwh) sales. Mild summer weather in 2009, which resulted in a 37.5% decrease in cooling-degree days between the quarters, was the main factor contributing to the reduction in retail kwh sales. On November 4, 2008 Otter Tail Power Company (OTP) filed for a general rate increase of 5.1% or $6.0 million in North Dakota. An interim rate increase of 4.1% or $4.8 million was granted effective January 1, 2009. OTP has entered into a proposed

settlement agreement which is subject to approval by the North Dakota Public Service Commission. The settlement includes a proposed increase in North Dakota retail electric rates of $3.9 million or approximately 3.3%. Interim rates will remain in effect for all North Dakota customers until final, approved rates go into effect. As of September 30, 2009, OTP had reserved $0.7 million for revenues collected under interim rates in excess of the rate increase agreed to in the proposed settlement, which will be credited to North Dakota customers after final rates have been approved.
Wholesale electric revenues from company-owned generation were $3.2 million for the quarter ended September 30, 2009 compared with $9.1 million for the quarter ended September 30, 2008. A 34.1% decrease in wholesale kwh sales due to reduced plant availability and lower wholesale demand, combined with a 47.5% decrease in revenue per kwh sold due to lower wholesale prices, resulted in the decrease in wholesale electric revenues. Net gains from energy trading activities, including net mark-to-market gains on forward energy contracts, were $1.2 million for the quarter ended September 30, 2009 compared with net gains of $0.8 million for the quarter ended September 30, 2008. Other electric operating revenues decreased $5.3 million as a result of a decrease in revenues from construction work completed for other entities on regional energy projects.
The decrease in fuel costs reflects a 24.9% decrease in kwhs generated from OTP's fossil fuel-fired plants, combined with a 6.4% decrease in the cost of fuel per kwh generated at those plants. The decrease in kwhs generated was related to a reduction in plant availability, partly due to an unplanned outage for generator repairs at Coyote Station. Lower diesel fuel prices in 2009 have resulted in lower costs to transport coal by rail and lower operating costs at the mine that supplies coal to Coyote Station, resulting in lower fuel costs per kwh generated at OTP's coal burning plants. Generation for retail sales decreased 15.0% and generation used for wholesale electric sales decreased 34.1% between the quarters.
The increase in purchased power - system use was due to a 78.1% increase in kwhs purchased to make up for the reduction in the availability of company-owned generation. Despite the 78.1% increase in kwh purchases to serve retail customers, purchased power costs increased by only 6.3% as a result of a 40.3% decrease in the cost per kwh purchased. Decreases in natural gas prices, increased output from regional hydroelectric plants, increased efficiency in wholesale electric markets and a decline in industrial demand for electricity are factors that have contributed to a significant decline in wholesale electric prices in 2009.
The decrease in other electric operating and maintenance expenses reflects the following: (1) a $4.5 million decrease in costs associated with construction work completed for other entities on regional energy projects, commensurate with a $5.3 million decrease in related revenue, (2) recognition, in the third quarter of 2008, of $1.5 million in costs eligible for recovery through the Minnesota Resource Recovery Rider that had been deferred pending approval of the rider, (3) a $1.2 million reduction in external services expenses for power-plant maintenance and tree trimming, (4) a $1.0 million reduction in employee incentive expenses, (5) a $0.5 million reduction in travel expenses related to decreased fuel costs and decreased vehicle usage for operations and reductions in employee training expenses, and (6) a $0.5 million decrease in material and operating supply expenses mainly related to boiler maintenance expenses incurred in the third quarter of 2008. The increase in depreciation expense mainly is due to the addition of 32 wind turbines at the Ashtabula Wind Energy Center to utility plant in service at the end of 2008.

                                    Plastics

                                          Three Months Ended
                                            September 30,                          %
       (in thousands)                     2009          2008        Change      Change

       Operating Revenues               $ 27,353     $ 36,690     $ (9,337 )     (25.4 )
       Cost of Goods Sold                 23,066       32,189       (9,123 )     (28.3 )
       Operating Expenses                  1,248          672          576        85.7
       Depreciation and Amortization         667          733          (66 )      (9.0 )

       Operating Income                 $  2,372     $  3,096     $   (724 )     (23.4 )

Operating revenues and operating income for the plastics segment decreased as result of a 28.3% decrease in the price per pound of pipe sold partially offset by a 4.0% increase in pounds sold. Beginning in 2008, significant reductions in new home construction in markets served by the plastic pipe companies have resulted in reduced demand and lower prices for polyvinyl chloride (PVC) pipe products. Costs per pound of pipe sold decreased 31.1% between the quarters. The increase in operating expenses reflects a $0.8 million reduction in multi-year accrued bonus incentives in the third quarter of 2008 related to a significant decrease in plastics segment pipe sales and profits in 2008.

                                 Manufacturing

                                          Three Months Ended
                                            September 30,                           %
       (in thousands)                     2009         2008         Change       Change

       Operating Revenues              $ 75,928     $ 127,778     $ (51,850 )     (40.6 )
       Cost of Goods Sold                60,339       105,965       (45,626 )     (43.1 )
       Operating Expenses                 8,071        12,725        (4,654 )     (36.6 )
       Plant Closure Costs                    -           883          (883 )         -
       Depreciation and Amortization      5,778         5,146           632        12.3

       Operating Income                $  1,740     $   3,059     $  (1,319 )     (43.1 )

The decrease in revenues in our manufacturing segment relates to the following:
• Revenues at DMI Industries, Inc. (DMI) decreased $28.6 million as a result of lower volumes of wind towers being sold related to the 2009 slowdown of installed megawatts of wind energy.

• Revenues at BTD Manufacturing, Inc. (BTD) decreased $14.5 million as a result of decreases of $10.3 million from reduced sales volume, $3.2 million from lower prices and $1.0 million from scrap sales due to lower steel prices and less scrap.

• Revenues at ShoreMaster, Inc. (ShoreMaster) decreased $6.6 million. The decrease mainly reflects revenues recognized on a commercial construction project in the third quarter of 2008 along with a reduction in sales of residential products between the quarters.

• Revenues at T.O. Plastics, Inc. (T.O. Plastics) decreased $2.1 million due to a decline in sales volumes.

The decrease in cost of goods sold in our manufacturing segment relates to the following:
• Cost of goods sold at DMI decreased $28.3 million as a result of reductions in production and sales of wind towers. Also, cost of goods sold in the third quarter of 2008 included $1.5 million in costs associated with start-up inefficiencies at DMI's Oklahoma plant.

• Cost of goods sold at BTD decreased $9.1 million as a result of reduced sales volume.

• Cost of goods sold at ShoreMaster decreased $6.7 million mainly related to costs incurred on a commercial construction project in the third quarter of 2008 but also due to a decrease in sales of residential products.

• Cost of goods sold at T.O. Plastics decreased $1.6 million as a result of a decrease in volume of products sold.

The net decrease in operating expenses in our manufacturing segment is due to the following:
• Operating expenses at DMI decreased $1.8 million, reflecting decreases in most expense categories as a result of initiatives taken to reduce expenses in response to the recent economic downturn.

• Operating expenses at BTD decreased $1.4 million mostly due to a reduction in incentive compensation directly related to decreased sales, but also reflecting a $0.2 million decrease in expenses for outsourced services.

• Operating expenses at ShoreMaster decreased $1.2 million, excluding the $0.9 million in plant closure costs incurred in the third quarter of 2008, mainly as a result of reductions in payroll costs related to termination costs incurred in the third quarter of 2008, professional services and insurance expense.

• Operating expenses at T.O. Plastics decreased by less than $0.2 million between the quarters.

The $0.9 million in plant closure costs in the third quarter of 2008 includes employee-related termination obligations, asset impairment costs and a reserve for additional expenses incurred related to the closing of ShoreMaster's production facility in California following the completion of a major marina project in the state in 2008.
Depreciation expense increased as a result of capital additions at DMI and BTD in 2008.

                                Health Services

                                          Three Months Ended
                                            September 30,                          %
       (in thousands)                     2009          2008        Change       Change

       Operating Revenues               $ 27,053     $ 31,139     $ (4,086 )      (13.1 )
       Cost of Goods Sold                 22,260       24,779       (2,519 )      (10.2 )
       Operating Expenses                  4,841        4,726          115          2.4
       Depreciation and Amortization         972        1,020          (48 )       (4.7 )

       Operating (Loss) Income          $ (1,020 )   $    614     $ (1,634 )     (266.1 )

Revenues from scanning and other related services were down $2.9 million and revenues from equipment sales and servicing decreased $1.2 million for the three months ended September 30, 2009 compared with the three months ended September 30, 2008. The decrease in cost of goods sold was directly related to the decreases in sales revenue, but was negatively impacted by higher-than-expected service and maintenance costs. The increase in operating expenses reflects a $0.6 million gain on the sale of fixed assets in the third quarter of 2008 which more than offset expense reductions in the third quarter of 2009. 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
                                            September 30,                          %
       (in thousands)                     2009          2008        Change      Change

       Operating Revenues               $ 18,691     $ 15,333     $  3,358        21.9
       Cost of Goods Sold                 13,432       15,380       (1,948 )     (12.7 )
       Operating Expenses                    993          540          453        83.9
       Depreciation and Amortization       1,205        1,057          148        14.0

       Operating Income (Loss)          $  3,061     $ (1,644 )   $  4,705       286.2

The increase in food ingredient processing revenues is due to a 16.3% increase in the price per pound of product sold, combined with a 4.8% increase in pounds of product sold. Conversely, cost of goods sold decreased as a result of a 16.7% decrease in the cost per pound of product sold as increased production and sales have decreased overhead absorption costs per pound of product produced and sold and raw material and energy costs were higher in the third quarter of 2008.

                           Other Business Operations

                                         Three Months Ended
                                           September 30,                           %
      (in thousands)                     2009          2008        Change        Change

      Operating Revenues               $ 36,123     $ 59,650     $ (23,527 )      (39.4 )
      Cost of Goods Sold                 23,423       36,221       (12,798 )      (35.3 )
      Operating Expenses                 12,307       15,194        (2,887 )      (19.0 )
      Depreciation and Amortization         616          609             7          1.1

      Operating (Loss) Income          $   (223 )   $  7,626     $  (7,849 )     (102.9 )

The decrease in revenues in the other business operations segment relates to the following:
• Revenues at Foley Company decreased $10.3 million due to a decrease in volume of jobs in progress related to the recent economic recession and increased competition for available work.

• Revenues at Aevenia, Inc. (Aevenia) decreased $9.2 million as a result of a decrease in jobs in progress, especially wind-energy projects, related to the recent economic recession and tight credit.

• Revenues at E.W. Wylie Corporation (Wylie) decreased $4.0 million as a result of the effect of lower diesel fuel prices being passed through to customers and a 9.2% reduction in miles driven by company-owned trucks directly related to the recent economic recession. Also, increased competition for fewer loads has driven down shipping rates.

The decrease in cost of goods sold in the other business operations segment relates to the following:
• Cost of goods sold at Foley Company decreased $8.3 million as a result of decreases in construction activity and jobs in progress.

• Cost of goods sold at Aevenia decreased $4.5 million as a result of a reduction of jobs in progress.

The decrease in operating expenses in the other business operations segment is due to the following:
• Operating expenses at Wylie decreased $2.3 million between the quarters. Fuel costs decreased $2.5 million as a result of a 41.8% decrease in fuel costs per gallon combined with the 9.2% decrease in miles driven by company-owned trucks. Subcontractor expenses decreased $0.5 million as a result of the decrease in fuel costs per gallon. The decreases in fuel costs were partially offset by an increase in equipment repair expenses of $0.5 million and an increase in rent expenses of $0.2 million, mainly related to additional equipment leases.

• Operating expenses at Aevenia decreased $0.5 million between the quarters as a result of reductions in incentives directly related to less profitability 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
                                             September 30,                        %
        (in thousands)                      2009         2008       Change     Change

        Operating Expenses               $  3,075      $ 3,384     $ (309 )      (9.1 )
        Depreciation and Amortization          92          134        (42 )     (31.3 )

The decrease in corporate operating expenses reflects reductions in insurance costs.

Comparison of the Nine Months Ended September 30, 2009 and 2008 Consolidated operating revenues were $781.5 million for the nine months ended September 30, 2009 compared with $976.8 million for the nine months ended September 30, 2008. Operating income was $32.3 million for the nine months ended September 30, 2009 compared with $47.1 million for the nine months ended September 30, 2008. The Company recorded diluted earnings per share of $0.48 for the nine months ended September 30, 2009 compared with $0.69 for the nine months ended September 30, 2008.
Amounts presented in the segment tables that follow for operating revenues, cost of goods sold and other nonelectric operating expenses for the nine month periods ended September 30, 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:

                                      Nine Months Ended      Nine Months Ended
        (in thousands)                September 30, 2009     September 30, 2008

        Operating Revenues:
        Electric                        $           162        $           235
        Nonelectric                               3,300                  1,676
        Cost of Goods Sold                        3,228                  1,600
        Other Nonelectric Expenses                  234                    311


                                    Electric

                                                Nine Months Ended
                                                  September 30,                           %
 (in thousands)                                2009          2008         Change       Change

 Retail Sales Revenues                      $ 206,395     $ 209,228     $  (2,833 )      (1.4 )
 Wholesale Revenues                            11,423        19,681        (8,258 )     (42.0 )
 Net Marked-to-Market Gain                      2,130         2,284          (154 )      (6.7 )
 Other Revenues                                12,809        17,946        (5,137 )     (28.6 )

 Total Operating Revenues                   $ 232,757     $ 249,139     $ (16,382 )      (6.6 )
 Production Fuel                               43,585        53,444        (9,859 )     (18.4 )
 Purchased Power - System Use                  40,362        39,598           764         1.9
 Other Operation and Maintenance Expenses      79,216        87,591        (8,375 )      (9.6 )
 Depreciation and Amortization                 27,001        23,378         3,623        15.5
 Property Taxes                                 6,939         7,414          (475 )      (6.4 )

 Operating Income                           $  35,654     $  37,714     $  (2,060 )      (5.5 )

The main reason for the decline in retail sales revenue was a $10.5 million decrease in fuel cost recovery revenues mainly related to a decrease in costs per kwh for fuel and purchased power between the periods and a $0.5 million increase in a Minnesota interim rate refund payable in the first quarter of 2009. These revenue decreases were partially offset by: (1) a $5.5 million increase in Minnesota and North Dakota resource recovery rider revenues, (2) $2.9 million in revenues related to a North Dakota effective interim rate increase of 3.3% in 2009 (reduced from 4.1% in June 2009), and (3) $0.8 million from a general rate increase in South Dakota that went into effect in May 2009. Wholesale electric revenues from sales from company-owned generation were $10.2 million for the nine months ended September 30, 2009 compared with $18.2 million for the nine months ended September 30, 2008 as a result of a 39.7% decrease in the average price per kwh sold, combined with a 7.3% decrease in wholesale kwh sales. Fuel costs related to wholesale sales decreased $2.4 million between the quarters as a result of the decrease in wholesale kwh sales combined with reductions in fuel costs and generation at OTP's combustion turbine peaking plants. Reductions in industrial consumption of electricity, declining natural gas prices, increased efficiency in wholesale electric markets 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 $3.4 million for the nine months

ended September 30, 2009 compared with $3.8 million for the nine months ended September 30, 2008 as a result of a reduction in margins on energy trades between the periods. Other electric operating revenues decreased $4.5 million as a result of a decrease in revenues from construction and permitting work completed for other entities on regional energy projects and $0.6 million due to a decrease in transmission service related revenues.
The decrease in fuel costs reflects an 18.2% decrease in kwhs generated from OTP's fossil fuel-fired plants. Fuel costs were also reduced as a result of wind turbines owned by OTP providing 9.9% of total kwh generation in the first nine months of 2009 compared with 3.2% in the first nine months of 2008. Generation for retail sales decreased 12.5% while generation used for wholesale electric sales decreased 7.3% between the periods.
The increase in purchased power - system use is due to a 68.8% increase in kwhs purchased, mostly offset by a 39.6% reduction in the cost per kwh purchased. The increase in kwh purchases for system use is related to a reduction in the availability of company-owned generation resulting from maintenance outages at Big Stone and Hoot Lake Plants, a six-week scheduled maintenance shutdown of Coyote Station in the second quarter of 2009 and an unplanned outage for . . .