RESULTS OF OPERATIONS

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

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

Consolidated operating revenues were $277.1 million for the three months ended September 30, 2012 compared to $282.4 million for the three months ended September 30, 2011. Operating income was $21.3 million for the three months ended September 30, 2012 compared to operating income of $18.0 million for the three months ended September 30, 2011. The Company recorded diluted earnings per share from continuing operations of $0.05 for the three months ended September 30, 2012 compared to $0.20 for the three months ended September 30, 2011 and total diluted earnings per share of $0.05 for the three months ended September 30, 2012 compared to $0.17 for the three months ended September 30, 2011.

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 September 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:

       Intersegment
       Eliminations (in            Three Months Ended       Three Months Ended
       thousands)                  September 30, 2012       September 30, 2011
       Operating Revenues:
        Electric                  $                 46     $                 54
        Nonelectric                                115                      443
       Cost of Goods Sold                          148                      461
       Other Nonelectric
       Expenses                                     13                       36



                                    Electric

                                              Three Months Ended
                                                 September 30,                          %
 (in thousands)                                2012          2011       Change       Change
 Retail Sales Revenue                       $   74,622     $ 73,766     $   856          1.2
 Wholesale Revenue - Company Generation          5,347        6,107        (760 )      (12.4 )
 Net Revenue - Energy Trading Activity             241          592        (351 )      (59.3 )
 Other Revenue                                   8,354        4,707       3,647         77.5
 Total Operating Revenues                   $   88,564     $ 85,172     $ 3,392          4.0
 Production Fuel                                20,622       19,080       1,542          8.1
 Purchased Power - System Use                    8,138        7,488         650          8.7
 Other Operation and Maintenance Expenses       28,717       27,323       1,394          5.1
 Depreciation and Amortization                  10,504       10,046         458          4.6
 Property Taxes                                  2,833        2,601         232          8.9
 Operating Income                           $   17,750     $ 18,634     $  (884 )       (4.7 )



                                                  Three Months Ended
                                                     September 30,                             %
Electric kwh Sales (in thousands)                     2012          2011      Change         Change
Retail kilowatt-hour (kwh) Sales                 1,002,921       965,414        37,507            3.9
Wholesale kwh Sales - Company Generation           170,589       168,579         2,010            1.2
Wholesale kwh Sales - Purchased Power Resold        15,202        13,877         1,325            9.5

The $0.9 million increase in retail sales revenue reflects the following:

? a $1.4 million increase in revenues related to a 3.9% increase in retail kwh sales, mainly to commercial customers,

? a $1.4 million increase in revenue for the recovery of fuel and purchased power costs incurred to serve retail customers related to the increase in retail kwh sales,

? a $0.5 million increase in transmission cost recovery rider revenues as a result of increased investment in transmission assets,

offset by:

? a $2.4 million decrease in revenue mainly related to rate design changes implemented in October 2011, in conjunction with Otter Tail Power Company's (OTP) 2010 Minnesota general rate case, that shifted recovery of a portion of annual revenue requirements from summer to winter, reducing the amount of a seasonal rate differential in effect prior to October 2011.

Wholesale electric revenues from company-owned generation decreased $0.8 million as a result of a 13.5% decrease in the price per kwh sold.

Other electric operating revenues increased $3.6 million, as a result of a $2.3 million increase in transmission tariff revenues, mainly related to recovery of CapX2020 transmission project investments, and a $1.1 million increase in revenue from shared use of transmission facilities with another regional transmission provider under an integrated transmission agreement.

Fuel costs increased $1.5 million as a result of a 6.9% increase in kwhs generated from OTP's steam-powered and combustion turbine generators, mainly at the Big Stone Plant, combined with a 1.1% increase in the cost of fuel per kwh generated. The cost of purchased power for retail sales increased $0.7 million as a result of a 33.5% increase in kwhs purchased, partially offset by an 18.6% decrease in the cost per kwh purchased.

Electric operating and maintenance expenses increased $1.4 million due to a $0.9 million increase in transmission service charges related to investments in transmission facilities by Midwest Independent Transmission System Operator (MISO) member companies, and a $0.5 million increase in labor and benefit expenses mainly due to increases in pension and retirement health benefit costs resulting from a reduction in the discount rate related to projected benefit obligations.

The $0.5 million increase in Electric segment depreciation expense is mainly related to 2011 transmission plant additions. The $0.2 million increase in property taxes is due to higher taxes on electric distribution property and increased investments in transmission and distribution property.

                                  Wind Energy

                                        Three Months Ended
                                           September 30,                          %
      (in thousands)                     2012          2011        Change      Change
      Revenues                        $   55,025     $ 52,595     $  2,430         4.6
      Cost of Goods Sold                  49,326       48,945          381         0.8
      Operating Expenses                   2,182        2,294         (112 )      (4.9 )
      Exit and Disposal Costs - DMI        4,400           --        4,400          --
      Depreciation and Amortization          742        2,822       (2,080 )     (73.7 )
      Operating Loss                  $   (1,625 )   $ (1,466 )   $   (159 )     (10.8 )

Revenues at DMI Industries Inc.'s (DMI) U.S. plants increased $9.4 million as a result of higher revenue per tower offset slightly by fewer towers produced on a quarter over quarter basis, while cost of goods sold increased by $8.0 million at those locations. Revenues and cost of goods sold at DMI's Canadian plant were down $7.0 million and $7.6 million, respectively, as a result of idling the plant in the fourth quarter of 2011 due to a reduction in tower orders. A decrease in operating expenses at DMI's idled Canadian plant of $0.7 million was mostly offset by a $0.6 million increase in expenses related to selling DMI's fixed assets. Exit and Disposal Costs - DMI include $3.6 million in employee termination benefits and $0.8 million in costs to terminate a wind tower production contract. Depreciation expense decreased mainly as a result of DMI writing down its assets by $45.6 million to an indicated market value of $20.0 million in the second quarter of 2012.

                                 Manufacturing

                                       Three Months Ended
                                          September 30,                          %
     (in thousands)                     2012          2011        Change      Change
     Operating Revenues              $   53,567     $ 55,625     $ (2,058 )      (3.7 )
     Cost of Goods Sold                  41,835       42,977       (1,142 )      (2.7 )
     Operating Expenses                   5,797        6,049         (252 )      (4.2 )
     Depreciation and Amortization        3,270        3,228           42        1.3
     Operating Income                $    2,665     $  3,371     $   (706 )     (20.9 )

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

? Revenues at BTD Manufacturing, Inc. (BTD), our metal parts stamping and fabrication company, decreased $0.5 million due to a reduction in sales to energy related customers and less revenue from scrap-metal sales as a result of lower prices due to reduced demand for steel.

? Revenues at T.O. Plastics, Inc. (T.O. Plastics), our manufacturer of thermoformed plastic and horticultural products, decreased by $0.2 million.

? Revenues at ShoreMaster, Inc. (ShoreMaster), our waterfront equipment business, decreased $1.4 million mainly due mainly to a decrease in sales of commercial products.

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

? Cost of goods sold at BTD decreased $0.4 million mainly as a result of decreased material costs related to lower steel prices and reduction in tooling costs for new products.

? Cost of goods sold at T.O. Plastics decreased $0.6 million mainly as a result of improved productivity and efficiencies and more selective bidding practices, but also due to a decrease in costs associated with the decrease in sales.

? Cost of goods sold at ShoreMaster decreased $0.1 million.

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

? Operating expenses at BTD decreased $0.4 million due to reductions in incentive compensation and promotional expenses.

? 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
                                           September 30,                           %
      (in thousands)                     2012          2011        Change       Change
      Operating Revenues              $   37,931     $ 53,247     $ (15,316 )     (28.8 )
      Cost of Goods Sold                  36,184       49,740       (13,556 )     (27.3 )
      Operating Expenses                   3,105        3,063            42        1.4
      Depreciation and Amortization          550          523            27         5.2
      Operating Loss                  $   (1,908 )   $    (79 )   $  (1,829 )        --

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 $20.1 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 $4.8 million mainly as a result of an increase in electrical transmission, distribution and substation work in the oil patch region of western North Dakota.

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

? Cost of goods sold at Foley Company decreased $16.3 million. The decrease reflects reductions in material and subcontractor costs due to a decrease in work volume, partially offset by the recognition of additional costs of $3.1 million in the third quarter of 2012 and $1.6 million in the third quarter of 2011, resulting from increases in estimated costs on certain projects in excess of previous period estimates under percentage-of-completion accounting.

? Cost of goods sold at Aevenia increased $2.8 million as a result of the increase in electrical transmission, distribution and substation work. Improved performance resulted in an increase gross margin between the quarters at Aevenia.

                                    Plastics

                                        Three Months Ended
                                           September 30,                         %
      (in thousands)                     2012          2011       Change      Change
      Operating Revenues              $   42,217     $ 36,231     $ 5,986        16.5
      Cost of Goods Sold                  31,506       29,956       1,550         5.2
      Operating Expenses                   2,869        1,757       1,112        63.3
      Depreciation and Amortization          764          850         (86 )     (10.1 )
      Operating Income                $    7,078     $  3,668     $ 3,410        93.0

Operating revenues for the Plastics segment increased as result of a 21.4% increase in pounds of polyvinyl chloride (PVC) pipe sold, partially offset by a 4.0% decrease in the price per pound of pipe sold. The increase in pounds sold is primarily due to increased demand for PVC pipe across the markets this segment served compared to last year's third quarter. The increase in costs of goods sold was related to the increase in pounds of pipe sold, but was mitigated by a 13.4% decrease in the cost per pound of PVC pipe sold as a result of a reduction in resin costs between the quarters. The increase in operating expenses in the Plastics segment is due to increased 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
                                          September 30,                           %
     (in thousands)                     2012          2011        Change       Change
     Operating Expenses              $    2,498      $ 5,987     $ (3,489 )      (58.3 )
     Depreciation and Amortization          121          135          (14 )      (10.4 )

The decrease in corporate operating expenses is mainly related to the incurrence of termination benefits associated with the resignation of our former chief executive officer in the third quarter of 2011.

On July 13, 2012 we prepaid in full our outstanding $50 million, 8.89% Senior Unsecured Note due November 30, 2017 (the Cascade Note). The price to prepay the Cascade Note was $63,031,000, which included the principal amount of the Cascade Note plus accrued interest of $531,000 and a negotiated prepayment premium of $12,500,000. On repayment, $606,000 in unamortized debt expense related to this note was immediately recognized as expense along with the $12,500,000 negotiated prepayment premium. The $13,106,000 ($7,864,000 net-of-tax) loss on early retirement of debt had a negative impact on third quarter 2012 diluted earnings per share of $0.22.

Interest charges decreased $0.8 million in the third quarter of 2012 compared with the third quarter of 2011, mainly as a result of the early retirement of the Cascade Note on July 13, 2012.

Income tax benefit - continuing operations was $0.9 million in the three months ended September 30, 2012 compared with income tax expense - continuing operations of $2.4 million for the three months ended September 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 September 30, 2012 and 2011:

                                                                  Three Months Ended September 30,
(in thousands)                                                      2012                     2011
Income Before Income Taxes - Continuing Operations             $        1,020           $        9,718
Add Back Canadian Losses not Subject to Income Tax Benefits             3,072                    2,174
Income Before Income Taxes - Continuing Operations, Subject
to Taxes                                                                4,092                   11,892
Income Tax Expense Computed at the Company's Net Composite
Federal and State Statutory Rate (39%)                                  1,596                    4,638
Increases (Decreases) in Tax from:
Federal Production Tax Credits (PTCs)                                  (1,239 )                 (1,394 )
North Dakota Wind Tax Credit Amortization - Net of Federal
Taxes                                                                    (297 )                   (220 )
Medicare Part D Subsidy                                                  (196 )                   (165 )
Employee Stock Ownership Plan Dividend Deduction                         (190 )                   (192 )
Investment Tax Credit                                                    (180 )                   (214 )
Corporate Owned Life Insurance                                           (118 )                     85
Section 199 - Domestic Production Activities Deduction                     --                     (178 )
Accrual of Interest on Cost Capitalization Audit Issue                     --                      275
Other Items - Net                                                        (234 )                   (253 )
Income Tax (Benefit) Expense - Continuing Operations           $         (858 )         $        2,382
Effective Income Tax Rate - Continuing Operations                       (84.1 )%                  24.5 %

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 September 30, 2012 and 2011:

                                                  For the Three Months
                                                   Ended September 30,
           (in thousands)                       2012             2011
           Operating Revenues                  $    --       $      33,385
           Operating Expenses                        7              34,255
           Operating Loss                           (7 )              (870 )
           Interest Charges                         --                  12
           Other Income                             --                  61
           Income Tax Benefit                       (2 )              (307 )
           Net Loss from Operations                 (5 )              (514 )
           Loss on Disposition Before Taxes         --                (756 )
           Income Tax Benefit on Disposition        --                (302 )
           Net Loss on Disposition                  --                (454 )
           Net Loss                            $    (5 )     $        (968 )

Comparison of the Nine Months Ended September 30, 2012 and 2011

Consolidated operating revenues were $838.4 million for the nine months ended September 30, 2012 compared to $814.8 million for the nine months ended September 30, 2011. Operating income was $15.1 million for the nine months ended September 30, 2012 compared to operating income of $47.0 million for the nine months ended September 30, 2011. The Company recorded diluted earnings per share from continuing operations of ($0.17) for the nine months ended September 30, 2012 compared to $0.47 for the nine months ended September 30, 2011 and total diluted earnings per share of ($0.24) for the nine months ended September 30, 2012 compared to $0.83 for the nine months ended September 30, 2011.

Asset Impairment Charge-We entered into a nonbinding letter of interest in June 2012 to sell the fixed assets of DMI for $20 million, while retaining DMI's net working capital-approximately $66 million on June 30, 2012. 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

We entered into a definitive agreement to sell DMI's fixed assets in September 2012. The sale of DMI's Canadian and West Fargo assets were completed in September 2012 and October 2012, respectively, and the sale of DMI's Tulsa assets is expected to be completed in November 2012. Under the terms of the definitive agreement, DMI must complete its current backlog of towers ordered for delivery in 2012 before final 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.

Intersegment Eliminations-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, 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:

      Intersegment Eliminations       Nine Months Ended       Nine Months Ended
      (in thousands)                 September 30, 2012      September 30, 2011
      Operating Revenues:
       Electric                      $               165     $               177
       Nonelectric                                 1,875                   1,694
      Cost of Goods Sold                           1,923                   1,561
      Other Nonelectric Expenses                     117                     310



                                    Electric

                                               Nine Months Ended
                                                 September 30,                           %
 (in thousands)                               2012          2011         Change       Change
 Retail Sales Revenue                       $ 224,763     $ 224,371     $    392          0.2
 Wholesale Revenue - Company Generation         9,454        12,406       (2,952 )      (23.8 )
 Net Revenue - Energy Trading Activity          1,214         1,570         (356 )      (22.7 )
 Other Revenue                                 22,099        16,452        5,647         34.3
 Total Operating Revenues                   $ 257,530     $ 254,799     $  2,731          1.1
 Production Fuel                               48,501        55,737       (7,236 )      (13.0 )
 Purchased Power - System Use                  34,624        27,759        6,865         24.7
 Other Operation and Maintenance Expenses      91,137        84,718        6,419          7.6
 Asset Impairment Charge                          432            --          432           --
 Depreciation and Amortization                 31,351        30,105        1,246          4.1
 Property Taxes                                 8,120         7,427          693          9.3
 Operating Income                           $  43,365     $  49,053     $ (5,688 )      (11.6 )



                                         Nine Months Ended
                                           September 30,                               %
 Electric kwh Sales (in
 thousands)                            2012            2011           Change        Change
 Retail kwh Sales                     3,115,055       3,223,064       (108,009 )        (3.4 )
 Wholesale kwh Sales - Company
 Generation                             337,344         414,635        (77,291 )       (18.6 )
 Wholesale kwh Sales - Purchased
 Power Resold                            80,234         106,610        (26,376 )       (24.7 )

The $0.4 million increase in retail sales revenue reflects the following:

? a $2.6 million increase in transmission costs recovery rider revenue as a result of increased investment in transmission assets,

? a $2.3 million increase in revenue mainly related to rate design changes . . .