RESULTS OF OPERATIONS

Following is an analysis of our operating results by business segment for the three and six month periods ended June 30, 2012 and 2011, followed by a discussion of changes in our consolidated financial position during the six months ended June 30, 2012 and our business outlook for the remainder of 2012.

Comparison of the Three Months Ended June 30, 2012 and 2011

Consolidated operating revenues were $283.7 million for the three months ended June 30, 2012 compared with $283.3 million for the three months ended June 30, 2011. Operating loss was $23.6 million for the three months ended June 30, 2012 compared with operating income of $13.4 million for the three months ended June 30, 2011. The Company recorded diluted earnings per share from continuing operations of ($0.48) for the three months ended June 30, 2012 compared to $0.14 for the three months ended June 30, 2011 and total diluted earnings per share of ($0.49) for the three months ended June 30, 2012 compared to $0.51 for the three months ended June 30, 2011.

Asset Impairment Charge-We entered into a nonbinding letter of interest in June 2012 to sell the property, plant and equipment of DMI Industries, Inc. (DMI) for $20 million, while retaining DMI's net working capital-approximately $66 million on June 30, 2012. The transaction is expected to close no later than January 3, 2013. The market value for DMI's assets has been significantly impacted by reduced demand for wind towers due to adverse market conditions affecting the industry, including uncertainty regarding renewal or extension of the Federal Production Tax Credit (PTC) for investments in renewable energy resources, which is set to expire at the end of 2012. Based on our second quarter 2012 decision to divest DMI's assets and the price for the fixed assets agreed to in the nonbinding letter of interest, DMI recorded a noncash asset impairment charge of $45.6 million ($27.5 million net-of-tax), or $0.76 per share, in the second quarter of 2012 broken down as follows:

             (in thousands)
             Long-Lived Assets                              $  90,846
             Accumulated Depreciation - Long-lived Assets     (45,561 )
             Goodwill                                             288
              Total Asset Impairment Charge                 $  45,573

Under the terms of the nonbinding letter of interest, DMI must complete its current backlog of towers ordered for delivery in 2012 before closing can occur. Under these circumstances, accounting rules require that DMI's assets and results of operations continue to be reported as continuing operations. However, on completion of all remaining tower orders, DMI's assets will be considered available for immediate sale and we expect DMI's results and any remaining assets will be reported as discontinued operations at the end of 2012. Should the transaction not be completed, we plan to close DMI's plants in West Fargo, North Dakota and Tulsa, Oklahoma and sell DMI's fixed assets, after DMI finishes its backlog of orders for 2012.

Intersegment Eliminations-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 June 30, 2012 and 2011 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
Intersegment Eliminations (in thousands)      June 30, 2012            June 30, 2011
Operating Revenues:
 Electric                                  $                 54     $                 53
 Nonelectric                                                823                      531
Cost of Goods Sold                                          830                      557
Other Nonelectric Expenses                                   47                       27

                                    Electric

                                              Three Months Ended
                                                   June 30,                              %
 (in thousands)                                2012          2011        Change       Change
 Retail Sales Revenue                       $   68,719     $ 67,702     $  1,017          1.5
 Wholesale Revenue - Company Generation          2,028        3,563       (1,535 )      (43.1 )
 Net Revenue - Energy Trading Activity             561          750         (189 )      (25.2 )
 Other Revenue                                   7,655        6,016        1,639         27.2
 Total Operating Revenues                   $   78,963     $ 78,031     $    932          1.2
 Production Fuel                                12,455       17,080       (4,625 )      (27.1 )
 Purchased Power - System Use                   12,328        7,894        4,434         56.2
 Other Operation and Maintenance Expenses       32,407       28,687        3,720         13.0
 Depreciation and Amortization                  10,447       10,020          427          4.3
 Property Taxes                                  2,670        2,417          253         10.5
 Operating Income                           $    8,656     $ 11,933     $ (3,277 )      (27.5 )



                                        Three Months Ended
                                             June 30,                               %
     Electric kwh Sales (in
     thousands)                            2012          2011      Change        Change
     Retail kilowatt-hour (kwh)
     Sales                              907,529       951,527       (43,998 )        (4.6 )
     Wholesale kwh Sales - Company
     Generation                          71,364       147,799       (76,435 )       (51.7 )
     Wholesale kwh Sales -
     Purchased Power Resold              58,632        29,481        29,151          98.9

The $1.0 million increase in retail sales revenue reflects the following:

? a $1.8 million increase in revenue mainly related to rate design changes implemented in Minnesota in October 2011 on finalization of Otter Tail Power Company's (OTP) 2010 general rate case,

? a $1.0 million increase in revenue related to the recovery of an increase in the average cost of fuel and purchased power per kwh incurred to serve retail customers, and

? a $0.7 million increase in transmission costs recovery rider revenue as a result of increased investment in transmission assets,

offset by:

? a $2.5 million decrease in revenue, mainly due to a 4.6% reduction in retail kwh sales primarily resulting from significantly milder weather in the second quarter of 2012 as heating degree days were down 28.0% compared with the second quarter of 2011.

Wholesale electric revenue from company-owned generation decreased $1.5 million as a result of a 51.7% decrease in wholesale kwh sales. Lower wholesale demand due to milder weather drove wholesale prices down, reducing opportunities to sell competitively in wholesale markets. Additionally, OTP's plant availability was reduced in the second quarter of 2012 as Coyote Station, OTP's lowest fuel-cost plant, was shut down for seven weeks of scheduled maintenance and Big Stone Plant had a 10-day spring maintenance outage, resulting in a 34.9% reduction in kwhs generated from OTP's steam-powered and combustion turbine generators.

Other electric operating revenue increased $1.6 million mainly as a result of an increase in transmission tariff revenues, due, in part, to revenues from CapX2020 transmission project investments.

Fuel costs decreased $4.6 million as a result of the 34.9% decrease in kwhs generated from OTP's steam-powered and combustion turbine generators, partially offset by a 12.0% increase in the cost of fuel per kwh generated. Generation levels decreased in response to lower demand due to mild weather and because of scheduled plant maintenance outages. The cost of purchased power for retail sales increased $4.4 million as a result of a 121% increase in kwhs purchased, partially offset by a 29.2% decrease in the cost per kwh purchased. The increase in kwhs purchased was mainly due to the reduced availability of OTP's steam-powered generators.

Electric operating and maintenance expenses increased $3.7 million due to the following:

? a $1.8 million increase in generation plant maintenance costs mainly related to the seven-week scheduled maintenance shutdown of Coyote Station in the second quarter of 2012,

? a $1.2 million increase in employee benefit expenses mainly due to increases in postretirement benefit costs resulting from a reduction in the discount rate related to projected benefit obligations, and

? a $0.7 million increase in Midwest Independent Transmission System Operator (MISO) Schedule 26 transmission service charges.

The $0.4 million increase in Electric segment depreciation expense is related to 2011 property additions. The $0.3 million increase in property taxes is due to higher taxes on electric distribution property along with increased investments in transmission property.

                                  Wind Energy

                                       Three Months Ended
                                            June 30,                              %
     (in thousands)                     2012          2011        Change        Change
     Revenues                        $   62,618     $ 55,025     $   7,593         13.8
     Cost of Goods Sold                  51,990       56,012        (4,022 )       (7.2 )
     Operating Expenses                   2,209        3,116          (907 )      (29.1 )
     Asset Impairment Charge             45,573           --        45,573           --
     Depreciation and Amortization        2,073        2,798          (725 )      (25.9 )
     Operating Loss                  $  (39,227 )   $ (6,901 )   $ (32,326 )     (468.4 )

Revenues at DMI's U.S. plants increased $16.7 million due to an 8.8% increase in towers produced at those facilities, while cost of goods sold increased by only $6.8 million at those locations as a result of productivity improvements, cost controls and the implementation of quality control measures that eliminated the need for outsourced quality assurance staffing. Revenues and cost of goods sold at DMI's Canadian plant were down $9.1 million and $10.8 million, respectively, as a result of the idling of plant in the fourth quarter of 2011 due to a reduction in tower orders. DMI's operating expenses decreased $0.6 million at its idled Canadian plant. At DMI's other locations, operating expenses decreased $0.3 million as a result of lower salary and benefit expenses, due to staff reductions, and reduced maintenance expenses. As described above, DMI recorded a noncash asset impairment charge of $45.6 million in the second quarter of 2012 as a result of writing down its fixed assets to an indicated market value of $20.0 million. Depreciation expense decreased mainly as a result of the impairment of assets in Canada in 2011.

                                 Manufacturing

                                        Three Months Ended
                                             June 30,                            %
      (in thousands)                     2012          2011       Change      Change
      Operating Revenues              $   63,581     $ 57,320     $ 6,261        10.9
      Cost of Goods Sold                  48,203       42,458       5,745        13.5
      Operating Expenses                   6,805        6,051         754        12.5
      Depreciation and Amortization        3,219        3,232         (13 )      (0.4 )
      Operating Income                $    5,354     $  5,579     $  (225 )      (4.0 )

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

? Revenues at BTD Manufacturing, Inc. (BTD), our metal parts stamping and fabrication company, increased $7.1 million as a result of higher sales volume due to improved customer demand.

? Revenues at T.O. Plastics, Inc. (T.O. Plastics), our manufacturer of thermoformed plastic and horticultural products, increased by $0.8 million due to increased sales of industrial and medical packaging products.

? Revenues at ShoreMaster, Inc. (ShoreMaster), our waterfront equipment business, decreased $1.6 million, reflecting a $1.3 million decrease in commercial sales and a $0.3 million decrease in residential sales.

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

? Cost of goods sold at BTD increased $6.3 million mainly as a result of increased sales volume.

? Cost of goods sold at T.O. Plastics increased $0.6 million as a result of costs associated with the increase in sales of industrial and medical packaging products, offset by a $0.3 million decrease in costs related to improved productivity and efficiencies and more selective bidding practices.

? Cost of goods sold at ShoreMaster decreased $0.8 million as a result of a $0.4 million decrease in costs related to the reduction in product sales combined with $0.4 million in productivity losses mainly related to costs incurred to relocate ShoreMaster's commercial production operations in Camdenton, Missouri to its Fergus Falls, Minnesota and St. Augustine, Florida locations.

The increase in operating expenses in our Manufacturing segment is due to the following:

? Operating expenses at BTD increased $0.7 million mainly due to increased benefit expenses related to employee incentives.

? Operating expenses at T.O. Plastics were unchanged between the quarters.

? Operating expenses at ShoreMaster increased $0.1 million between the quarters.

                                  Construction

                                       Three Months Ended
                                            June 30,                              %
     (in thousands)                     2012          2011        Change        Change
     Operating Revenues              $   37,934     $ 49,133     $ (11,199 )      (22.8 )
     Cost of Goods Sold                  36,992       45,108        (8,116 )      (18.0 )
     Operating Expenses                   3,030        3,015            15          0.5
     Depreciation and Amortization          470          495           (25 )       (5.1 )
     Operating (Loss) Income         $   (2,558 )   $    515     $  (3,073 )     (596.7 )

The decrease in revenues in our Construction segment relates to the following:

? Revenues at Foley Company, a mechanical and prime contractor on industrial projects, decreased $15.4 million due to a decrease in work volume and the effect of cost overruns on estimated revenues recognized under percentage-of-completion accounting.

? Revenues at Aevenia, Inc. (Aevenia), our electrical design and construction services company, increased $4.2 million as a result of an increase in electrical transmission, distribution and substation work facilitated by better weather and improved access to construction sites in the second quarter of 2012 compared with the second quarter of 2011.

The decrease in cost of goods sold in our Construction segment relates to the following:

? Cost of goods sold at Foley Company decreased $11.0 million, mainly in material and subcontractor costs due to a decrease in work volume.

? Cost of goods sold at Aevenia increased $2.9 million between the quarters as a result of the increase in electrical transmission, distribution and substation work completed in the second quarter of 2012.

                                    Plastics

                                        Three Months Ended
                                             June 30,                             %
      (in thousands)                     2012          2011        Change      Change
      Operating Revenues              $   41,490     $ 44,373     $ (2,883 )      (6.5 )
      Cost of Goods Sold                  31,257       36,220       (4,963 )     (13.7 )
      Operating Expenses                   2,328        1,436          892        62.1
      Depreciation and Amortization          785          864          (79 )      (9.1 )
      Operating Income                $    7,120     $  5,853     $  1,267        21.6

Operating revenues for the Plastics segment decreased as result of a 12.3% decrease in pounds of polyvinyl chloride (PVC) pipe sold, partially offset by a 6.6% increase in the price per pound of pipe sold. The decrease in costs of goods sold was related to the decrease in pounds of pipe sold in combination with a 1.6% decrease in the cost per pound of PVC pipe sold between the quarters. The increase in operating expenses in the Plastics segment is mainly due to increased benefit expenses for employee incentives related to improved operating results.

                                   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
                                             June 30,                             %
      (in thousands)                     2012          2011       Change       Change
      Operating Expenses              $    2,864      $ 3,423     $  (559 )      (16.3 )
      Depreciation and Amortization          124          143         (19 )      (13.2 )

The decrease in corporate operating expenses reflects reductions in salary and benefit costs and expenditure for external services, insurance and public relations between the quarters.

Interest charges decreased $0.7 million in the second quarter of 2012 compared with the second quarter of 2011, mainly as a result of a $65.9 million decrease in the average daily balance of short-term debt outstanding between the quarters.

                      Income Taxes - Continuing Operations

Income tax benefit - continuing operations increased $14.4 million in the three
months ended June 30, 2012 compared with the three months ended June 30, 2011.
The following table provides a reconciliation of income tax expense calculated
at the Company's net composite federal and state statutory rate on income from
continuing operations before income taxes and income tax expense for continuing
operations reported on the Company's consolidated statements of income for the
three month periods ended June 30, 2012 and 2011:

                                                                  Three Months Ended June 30,
(in thousands)                                                      2012                 2011
(Loss) Income Before Income Taxes - Continuing Operations      $      (31,379 )      $      5,040
Add Back Canadian Losses not Subject to Income Tax Benefits               917               3,283
(Loss) Income Before Income Taxes - Continuing Operations,
Subject to Taxes                                                      (30,462 )             8,323
Income Tax (Benefit) Expense Computed at the Company's Net
Composite Federal and State Statutory Rate (39%)                      (11,880 )             3,246
Increases (Decreases) in Tax from:
Federal Production Tax Credits (PTCs)                                  (1,831 )            (1,929 )
Corporate Owned Life Insurance                                            (13 )              (178 )
North Dakota Wind Tax Credit Amortization - Net of Federal
Taxes                                                                    (149 )              (265 )
Medicare Part D Subsidy                                                  (194 )              (169 )
Employee Stock Ownership Plan Dividend Deduction                         (191 )              (190 )
Investment Tax Credit                                                    (180 )              (214 )
Other Items - Net                                                         (55 )              (386 )
Income Tax (Benefit) - Continuing Operations                   $      (14,493 )      $        (85 )
Effective Income Tax Rate - Continuing Operations                        46.2 %              (1.7 )%

Due to cumulative losses in the Canadian operations of DMI, we have no tax liability from taxable income in Canada to offset with income tax benefits on losses, therefore, we record no tax benefit related to the losses of our Canadian operations. Federal PTCs 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.

In the second quarter of 2011, we sold Idaho Pacific Holdings, Inc. (IPH), our food ingredient processing company, and in the fourth quarter of 2011 we sold E.W. Wylie Corporation (Wylie), our trucking business. On January 18, 2012 ShoreMaster completed the sale of the assets of its wholly owned subsidiary, Aviva Sports, Inc. (Aviva), and on February 29, 2012 we completed the sale of DMS Health Technologies Inc. (DMS), our health services business. The financial position, results of operations and cash flows of IPH, Wylie, Aviva and DMS are reported as discontinued operations in our consolidated financial statements. Following are summary presentations of the results of discontinued operations for the three months ended June 30, 2012 and 2011:

                                                       For the Three Months
                                                          Ended June 30,
       (in thousands)                                  2012            2011
       Operating Revenues                            $      --       $  41,282
       Operating Expenses                                   26          41,799
        Operating Loss                                     (26 )          (517 )
       Interest Charges                                     --              11
       Other Income                                         --           1,259
       Income Tax (Benefit) Expense                        (11 )           280
        Net (Loss) Income from Operations                  (15 )           451
       (Loss) Gain on Disposition Before Taxes            (490 )        16,767
       Income Tax (Benefit) Expense on Disposition         (35 )         3,515
        Net (Loss) Gain on Disposition                    (455 )        13,252
         Net (Loss) Income                           $    (470 )     $  13,703

Comparison of the Six Months Ended June 30, 2012 and 2011

Consolidated operating revenues were $561.3 million for the six months ended June 30, 2012 compared with $532.4 million for the six months ended June 30, 2011. Operating loss was $6.2 million for the six months ended June 30, 2012 compared with operating income of $29.0 million for the six months ended June 30, 2011. The Company recorded diluted earnings per share from continuing operations of ($0.22) for the six months ended June 30, 2012 compared to $0.28 for the six months ended June 30, 2011 and total diluted earnings per share of ($0.29) for the six months ended June 30, 2012 compared to $0.66 for the six months ended June 30, 2011.

Asset Impairment Charge-The DMI second quarter 2011 asset impairment described above resulted in a $45.6 million noncash asset impairment charge ($27.5 million, net-of-tax benefits), or $0.76 per share, in the six month period ended June 30, 2012.

Intersegment Eliminations-Amounts presented in the segment tables that follow for operating revenues, cost of goods sold and other nonelectric operating expenses for the six month periods ended June 30, 2012 and 2011 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:

                                             Six Months Ended       Six Months Ended
 Intersegment Eliminations (in thousands)     June 30, 2012          June 30, 2011
 Operating Revenues:
  Electric                                  $              119     $              123
  Nonelectric                                            1,760                  1,251
 Cost of Goods Sold                                      1,775                  1,100
 Other Nonelectric Expenses                                104                    274



                                    Electric

                                               Six Months Ended
                                                   June 30,                              %
 (in thousands)                               2012          2011         Change       Change
 Retail Sales Revenue                       $ 150,141     $ 150,605     $   (464 )       (0.3 )
 Wholesale Revenue - Company Generation         4,107         6,299       (2,192 )      (34.8 )
 Net Revenue - Energy Trading Activity            973           978           (5 )       (0.5 )
 Other Revenue                                 13,745        11,745        2,000         17.0
 Total Operating Revenues                   $ 168,966     $ 169,627     $   (661 )       (0.4 )
 Production Fuel                               27,879        36,657       (8,778 )      (23.9 )
 Purchased Power - System Use                  26,486        20,271        6,215         30.7
 Other Operation and Maintenance Expenses      62,420        57,395        5,025          8.8
 Asset Impairment Charge                          432            --          432           --
 Depreciation and Amortization                 20,847        20,059          788          3.9
 Property Taxes                                 5,287         4,826          461          9.6
 Operating Income                           $  25,615     $  30,419     $ (4,804 )      (15.8 )



                                          Six Months Ended
                                              June 30,                                  %
 Electric kwh Sales (in thousands)          2012            2011       Change        Change
 Retail kwh Sales                      2,112,134       2,257,650       (145,516 )        (6.4 )
 Wholesale kwh Sales - Company
 Generation                              166,755         246,056        (79,301 )       (32.2 )
 Wholesale kwh Sales - Purchased
 Power Resold                             65,032          92,733        (27,701 )       (29.9 )

The $0.5 million decrease in retail sales revenue reflects the following:

? a $5.7 million decrease in revenue, mainly due to a 6.4% reduction in retail kwh sales resulting from significantly milder weather in the first half of . . .