OVERVIEW

Otter Tail Corporation and its subsidiaries form a diverse group of businesses with operations classified into four segments: Electric, Manufacturing, Construction and Plastics. Our primary financial goals are to maximize earnings and cash flows and to allocate capital profitably toward growth opportunities that will increase shareholder value. Meeting these objectives enables us to preserve and enhance our financial capability by maintaining desired capitalization ratios and a strong interest coverage position and preserving investment grade credit ratings on outstanding securities, which, in the form of lower interest rates, benefits both our customers and shareholders.

Our strategy is to continue to grow our largest business, the regulated electric utility, which will lower our overall risk, create a more predictable earnings stream, improve our credit quality and preserve our ability to fund the dividend. Over time, we expect the electric utility business will provide approximately 75% to 85% of our overall earnings. We expect our manufacturing and infrastructure businesses will provide 15% to 25% of our earnings, and will continue to be a fundamental part of our strategy.

Reliable utility performance along with rate base investment opportunities over the next five years will provide us with a strong base of revenues, earnings and cash flows. We also look to our manufacturing and infrastructure companies to provide organic growth as well. Organic, internal growth comes from new products and services, market expansion and increased efficiencies. We expect much of our growth in these businesses in the next few years will come from utilizing expanded plant capacity from capital investments made in previous years. We will also evaluate opportunities to allocate capital to potential acquisitions in our Manufacturing segment. We are a committed long-term owner and therefore we do not acquire companies in pursuit of short-term gains. However, we will divest operating companies that no longer fit into our strategy and risk profile over the long term.

We have worked to realign our portfolio of businesses and refocus our capital investment in the electric utility. In 2011 and 2012 we sold several businesses in execution of our announced strategy. In 2011 we sold Idaho Pacific Holdings, Inc. (IPH), our Food Ingredient Processing segment business, and E.W. Wylie Corporation (Wylie), our trucking company which was included in our Wind Energy segment. In January 2012 we sold the assets of Aviva Sports, Inc. (Aviva), a recreational equipment manufacturer and wholly owned subsidiary of ShoreMaster, Inc. (ShoreMaster), our waterfront equipment manufacturer. In February 2012 we sold DMS Health Technologies, Inc. (DMS), our Health Services segment business. In November 2012 we completed the sale of the assets of DMI Industries, Inc. (DMI), our manufacturer of towers for wind turbines and exited the wind tower manufacturing business. In December 2012 we entered into negotiations to sell substantially all of the assets of ShoreMaster and completed the sale on February 8, 2013. As a result of these 2011, 2012 and 2013 transactions, our business structure no longer includes Wind Energy, Health Services or Food Ingredient Processing segments, and now includes the remaining four segments listed above.

In evaluating our portfolio of operating companies, we look for the following characteristics:

? a threshold level of net earnings and a return on invested capital in excess of our weighted average cost of capital,

? a strategic differentiation from competitors and a sustainable cost advantage,

? a stable or growing industry,

? an ability to quickly adapt to changing economic cycles, and

? a strong management team committed to operational excellence.

Major growth strategies and initiatives in our future include:

? Planned capital budget expenditures of up to $906 million for the years 2013 through 2017, of which $811 million are for capital projects at Otter Tail Power Company (OTP), including $247 million for OTP's share of a new air quality control system at Big Stone Plant and $348 million for anticipated expansion of transmission capacity including $253 million for MVPs and $45 million for CapX2020 transmission projects, excluding $20 million for the Brookings to Southeast Twin Cities CapX2020 MVP project, included in the $253 million above. The remainder of the 2013-2017 anticipated capital expenditures is for asset replacements, additions and improvements across OTP's generation, transmission, distribution and general plant. See "Capital Requirements" section for further discussion.

? Utilization of existing and potentially expanded plant capacity from capital investments made in our manufacturing and infrastructure businesses.

? Continued investigation and evaluation of organic growth opportunities and evaluation of opportunities to allocate capital to potential acquisitions in our Manufacturing segment.

In 2012:

? Our net cash from continuing and discontinued operations was $233.5 million.

? Our Plastics segment net income increased 142.9% to $14.1 million.

? Our Manufacturing segment net income increased 29.7% to $10.7 million.

? Our Electric segment net income of $38.3 million decreased slightly from $38.9 million in 2011.

? Our Construction segment recorded a net loss of $7.7 million compared with a net loss of $2.2 million in 2011. Net income from Aevenia, Inc. (Aevenia), our electrical design and construction services company, increased $2.2 million while Foley Company (Foley), our mechanical and prime contractor on industrial projects, recorded a net loss increase of $7.7 million as a result cost overruns on several large jobs.

The following table summarizes our consolidated results of operations for the years ended December 31:

       (in thousands)                                    2012          2011
       Operating Revenues:
       Electric                                        $ 350,679     $ 342,633
       Manufacturing and Infrastructure                  508,560       497,536
       Total Operating Revenues                        $ 859,239     $ 840,169
       Net Income (Loss) From Continuing Operations:
       Electric                                        $  38,341     $  38,886
       Manufacturing and Infrastructure                   17,100        11,836
       Corporate                                         (16,473 )     (15,812 )
       Total Net Income From Continuing Operations:    $  38,968     $  34,910

Revenue increases in our Plastics, Manufacturing and Electric segments were partially offset by a decrease in revenues from our Construction segment, resulting in a 2.3% increase in consolidated revenues in 2012 compared with 2011. Revenues from our Plastics segment increased $26.8 million as a result of a combination of increased sales volume and higher prices per pound of polyvinyl chloride (PVC) pipe sold. Revenues from our Manufacturing segment increased $19.5 million as a result of higher sales volume due to improved customer demand for the products and services provided by our manufacturing companies. Revenues from our Electric segment increased $8.0 million as a result of: (1) a $4.3 million increase in retail revenue, reflecting increases in transmission cost recovery revenues and revenues from Minnesota customers following implementation of new rates in October 2011, and (2) a $3.6 million increase in Midwest Independent Transmission System Operator (MISO) Schedule 26 transmission tariff revenues, driven in part by returns on, and recovery of, CapX2020 investment costs and operating expenses. Revenues from our Construction segment decreased $35.6 million as Foley's job volume and revenues recognized on a percentage-of-completion basis declined.

The following table sets forth actual 2012 consolidated diluted earnings per share results against the last forecast we provided for 2012 on a GAAP basis, and also shows the effect on a non-GAAP basis of the early retirement of our $50 million, 8.89% Senior Unsecured Note due 2017 (the Cascade Note).

                   2012 Earnings Per Share
               Guidance Range November 5, 2012                   2012              2012
                                                                 GAAP     2012   Non-GAAP
                                                               Earnings   Non-   Earnings
                                                                 Per      GAAP      Per
                                                 Low    High    Share    Items     Share
Electric                                        $1.01   $1.06   $1.06      --      $1.06
Manufacturing (without ShoreMaster)             $0.26   $0.30   $0.29      --      $0.29
Net Loss from ShoreMaster                      ($0.08) ($0.07)    --       --       --
Construction                                   ($0.23) ($0.18) ($0.21)     --     ($0.21)
Plastics                                        $0.32   $0.37   $0.39      --      $0.39
Corporate - Recurring Costs                    ($0.22) ($0.17) ($0.26)   $0.04    ($0.22)
Subtotal                                        $1.06   $1.31   $1.27    $0.04     $1.31
Corporate - Premium Paid on Debt
Extinguishment                                 ($0.22) ($0.22) ($0.22)   $0.22      --
Total - Continuing Operations                   $0.84   $1.09   $1.05    $0.26     $1.31
Discontinued Operations:
Net Losses from Discontinued Operations        ($1.00) ($0.95) ($1.22)     --     ($1.22)
Premium Paid on Debt Extinguishment in
Connection with DMI Disposition1                 --      --       --    ($0.22)   ($0.22)
2012 Interest Expense on Debt Extinguished in
Connection with DMI Disposition1                 --      --       --    ($0.04)   ($0.04)
Total - Discontinued Operations                ($1.00) ($0.95) ($1.22)  ($0.26)   ($1.48)
Total                                          ($0.16)  $0.14  ($0.17)     --     ($0.17)

1We retired early the Cascade Note from proceeds generated in connection with the divestiture of DMI. Generally Accepted Accounting Principles require that in order for debt retirement premiums and related interest expense to be reported as discontinued operations, a company must be required by the lender to repay the related debt as a result of the disposition. Although we were not legally obligated to repay the aforementioned note, we believe it is appropriate to associate the 2012 debt prepayment premium and interest expense with our discontinued operations to provide a better indication of future earnings.

Following is a more detailed analysis of our operating results by business segment for the three years ended December 31, 2012, 2011 and 2010, followed by a discussion of our financial position at the end of 2012 and our outlook for 2013.

RESULTS OF OPERATIONS

This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes. See note 2 to our consolidated financial statements for a complete description of our lines of business, locations of operations and principal products and services.

Intersegment Eliminations-Amounts presented in the following segment tables for 2012, 2011 and 2010 operating revenues, cost of goods sold and other nonelectric operating expenses 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 thousands)    2012      2011      2010
           Operating Revenues:
           Electric                                   $  86     $  94     $ 115
           Nonelectric                                   14       249       606
           Cost of Goods Sold                            68       122       (57 )
           Other Nonelectric Expenses                    32       221       778

                                    ELECTRIC

The following table summarizes the results of operations for our Electric
segment for the years ended December 31:

                                                    %                              %
(in thousands)                      2012          change           2011          change           2010
Retail Sales Revenues             $ 308,530              1       $ 304,181             --       $ 305,146
Wholesale Revenues - Company
Generation                           12,951            (11 )        14,518            (28 )        20,053
Net Revenue - Energy Trading
Activity                              1,426            (39 )         2,319            (26 )         3,144
Other Revenues                       27,858             28          21,709             35          16,036
Total Operating Revenues          $ 350,765              2       $ 342,727             --       $ 344,379
Production Fuel                      66,284             (4 )        69,017             (6 )        73,102
Purchased Power - System Use         49,184             13          43,451             (3 )        44,788
Other Operation and Maintenance
Expenses                            121,069              4         115,863              3         112,174
Asset Impairment                        432             (8 )           470             --              --
Depreciation and Amortization        42,051              4          40,283             --          40,241
Property Taxes                       10,720              5          10,190              9           9,364
Operating Income                  $  61,025             (4 )     $  63,453             (2 )     $  64,710




Electric kilowatt-hours (kwh)                         %                                %
Sales (in thousands)                 2012           change            2011           change            2010
Retail kwh Sales                    4,240,789             (1 )       4,291,637              1         4,262,748
Wholesale kwh Sales - Company
Generation                            476,637             (7 )         510,978            (18 )         624,153
Wholesale kwh Sales - Purchased
Power Resold                           88,637            (28 )         122,430            (64 )         336,875

2012 compared with 2011
Retail sales revenues increased by $4.3 million as a result of:

? a $2.6 million increase in transmission cost recovery revenues as a result of increased investment in transmission assets,

? a $1.8 million interim rate refund recorded in 2011 related to amounts collected under interim rates in Minnesota in 2010,

? a $1.5 million increase in revenue mainly related to rate design changes implemented in Minnesota in October 2011 on finalization of OTP's 2010 general rate case, and

? a $0.9 million increase in retail revenue related to the recovery of increased fuel and purchased power costs,

offset by:

? a $2.3 million decrease in revenues related to a 1.2% reduction in retail kwh sales between the periods due to an 11% reduction in heating-degree days resulting from significantly milder weather in the first half of 2012 compared to the first half of 2011, partially offset by a 19.6% increase in cooling-degree days in the summer of 2012 compared with the same period in 2011, and

? a $0.2 million reduction in accrued conservation program cost recovery revenues and incentives.

Wholesale electric revenues from company-owned generation decreased $1.6 million due to a 6.7% decline in wholesale kwh sales in combination with a 4.4% decrease in the average price per wholesale kwh sold. This was related to an 8.7% reduction in kwh generation mainly as a result of two major shutdowns of OTP's lowest-cost baseload resource, Coyote Station, in 2012. The first occurred in the second quarter of 2012 for seven weeks of scheduled maintenance, and the second occurred on November 27, 2012, when an electrical fault caused major damage to the station's generator, which needed to be moved offsite for repairs estimated to take 10 to 12 weeks. Lower demand in wholesale markets and low natural gas prices for alternative generation also contributed to the reduction in wholesale electric sales.

Net revenue from energy trading activities, including net mark-to-market gains on forward energy contracts, decreased $0.9 million mainly as a result of a decrease in mark-to-market gains on open energy contracts, along with a reduction in trading activity.

Other electric operating revenues increased $6.1 million as a result of:

? a $3.6 million increase in MISO Schedule 26 transmission tariff revenues, driven in part by returns on, and recovery of, CapX2020 investment costs and operating expenses,

? a $1.5 million increase in revenues earned under agreements for shared use of transmission facilities with other regional transmission providers,

? $0.9 million in MISO Schedule 26A revenue, new in 2012, mainly related to investments in MISO designated MVPs,

? $0.8 million in revenue earned under a contract to upgrade a distribution system for another regional electric service provider, and

? a $0.7 million increase in MISO Schedule 1 transmission tariff revenues due to 2011 and 2012 changes in the calculation methodology used to determine Schedule 1 revenues,

offset by:

? a $1.3 million reduction in revenue related to payments received in 2011 from a transmission cooperative to Otter Tail Energy Services Company (OTESCO) for access rights to construct a high voltage transmission line through a wind farm site where OTESCO owned development rights, and for assistance in obtaining easements from landowners.

The $2.7 million decrease in production fuel costs resulted from a 9.0% decrease in kwhs generated from OTP's steam-powered and combustion turbine generators, partially offset by a 5.5% increase in the cost of fuel per kwh generated. The decrease in kwh generation was due to the two major maintenance shutdowns of Coyote Station in 2012. The cost of purchased power for retail sales increased $5.7 million as a result of a 28.2% increase in kwhs purchased for system use, partially offset by an 11.7% decrease in the cost per kwh purchased. The increase in kwh purchases was driven by the need to buy replacement power after Coyote Station went off-line in November 2012.

Electric operating and maintenance expenses increased $5.2 million due to the following:

? a $3.4 million increase in MISO transmission service charges, mainly MISO Schedule 26 charges related to increased investment in transmission facilities by MISO member companies,

? a $2.2 million increase in labor and benefit expenses mainly due to increases in pension and retiree health benefit costs resulting from a reduction in the discount rate applied to projected benefit obligations,

? a $1.1 million increase in maintenance expenses at Coyote Station related to its second quarter 2012 seven-week scheduled major maintenance shutdown,

? a $0.4 million increase in wind farm maintenance service costs, and

? a $0.3 million increase in maintenance costs at Big Stone Plant,

offset by:

? a $1.7 million reduction in material and supply costs related to costs incurred in conjunction with a major overhaul of Big Stone Plant in the fourth quarter of 2011, and

? a $0.4 million reduction in incurred conservation program costs, commensurate with a reduction in accrued revenues related to the future recovery of those costs.

OTESCO recorded asset impairment charges of $0.4 million in the first quarter of 2012 and $0.5 million in the fourth quarter of 2011 related to its wind farm development rights at its Sheridan Ridge and Stutsman County sites in North Dakota, based on market indicators of the value of those assets.

The $1.8 million increase in depreciation expense is related to 2011 property additions, mainly transmission assets.

Property taxes increased $0.5 million due to higher taxes on electric distribution property and increased investments in transmission property.

2011 compared with 2010
Retail sales revenues decreased by $1.0 million as a result of:

? a $3.1 million reduction in fuel cost recovery revenues related to lower fuel and purchased power costs,

? a $0.8 million decrease in accrued and recovered conservation improvement program revenues and incentives, and

? a $0.6 million reduction in Minnesota retail revenues related to an increase in rates that was more than offset by a refund of excess amounts collected under interim rates in effect from June 2010 through September 2011.

These decreases in retail revenue were mostly offset by:

? a $2.0 million increase in revenue related to a 0.7% increase in kwh sales,

? a $0.8 million increase in revenues related to the recovery of the North Dakota portion of Big Stone II plant abandonment costs, and

? a $0.7 million increase in renewable resource and transmission cost recovery revenues related to an increase in transmission costs eligible for recovery under Minnesota and North Dakota transmission cost recovery riders.

Wholesale electric revenues from company-owned generation decreased $5.5 million due to an 18.1% decline in wholesale kwh sales combined with an 11.6% decrease in the average price per wholesale kwh sold. This was the result of an 8.2% reduction in kwh generation at OTP's generating units related to a scheduled major maintenance shutdown at Big Stone Plant, lower demand in wholesale markets and low natural gas prices. Net gains from energy trading activities, including net mark-to-market gains on forward energy contracts, decreased $0.8 million mainly as a result of a decrease in mark-to-market gains on open energy contracts, in part due to a reduction in trading activity.

Other electric operating revenues increased $5.7 million as a result of: (1) a $3.5 million increase in transmission tariff revenues as a result of increased use of company-owned transmission assets by others, (2) $1.1 million payment received by OTESCO in the first quarter of 2011 for the sale of access rights through an OTESCO wind farm development site, and (3) a $1.1 million refund in 2010 of revenues collected from OTP's Big Stone II project partners in years prior to 2010.

The $4.1 million decrease in fuel costs reflects a 10.7% decrease in kwhs generated from OTP's steam-powered and combustion turbine generators, partially offset by a 5.7% increase in the cost of fuel per kwh generated. The decrease in kwh generation was due to a scheduled major maintenance shutdown of Big Stone Plant in fall 2011. The cost of purchased power for retail sales decreased $1.3 million as a result of a 13.7% decrease in the cost per kwh purchased, despite a 12.4% increase in kwhs purchased for system use.

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

? a $1.7 million increase in transmission tariff charges related to the increase in kwhs purchased from other generators to serve retail customers,

? a $1.0 million increase in labor costs related to increased health benefit costs,

? a $1.0 million increase in generation plant maintenance costs related to the Big Stone Plant overhaul in fall 2011 and increased maintenance costs at the Langdon wind farm and Coyote Station,

? a $0.9 million increase in expense related to the amortization of the North Dakota portion of Big Stone II plant abandonment costs, which OTP began recovering in August 2010,

? a $0.8 million increase in Minnesota Conservation Improvement Program (MNCIP) costs related to mandated increases in conservation expenditures in Minnesota, and

? a $0.7 million increase in transportation costs related to increases in gasoline and diesel fuel prices.

These increases in expenses were partially offset by an increase of $2.4 million in administrative and general expenses charged to capital projects in 2011, which decreases expenses charged to operations.

OTESCO recorded a $0.5 million asset impairment charge in the fourth quarter of 2011 related to its wind farm development rights at its Sheridan Ridge and Stutsman County sites in North Dakota, based on market indicators of the value of those assets.

Property taxes increased $0.8 million due to valuation increases and increases in local property tax rates on Minnesota property.

                                 MANUFACTURING

The following table summarizes the results of operations for our Manufacturing
segment for the years ended December 31:

                                                  %                          %
 (in thousands)                    2012         change        2011         change        2010
 Operating Revenues              $ 208,965          10      $ 189,459          32      $ 143,072
 Cost of Goods Sold                157,437           9        144,987          37        106,114
 Other Operating Expenses           18,233          10         16,524          15         14,343
 Depreciation and Amortization      12,208            1        12,116            6        11,430
 Operating Income                $  21,087          33      $  15,832          42      $  11,185

2012 compared with 2011
The increase in revenues in our Manufacturing segment in 2012 compared with 2011 relates to the following:

? Revenues at BTD Manufacturing, Inc. (BTD), our metal parts stamping and fabrication company, increased $17.7 million (11.8%) as a result of higher sales volume due to improved customer demand for products and services.

? Revenues at T.O. Plastics, Inc. (T.O. Plastics) our manufacturer of thermoformed plastic and horticultural products, increased by $1.8 million (4.6%) mainly as a result of increased sales of industrial and medical products.

The increase in cost of goods sold in our Manufacturing segment in 2012 compared with 2011 consists of the following:

? Cost of goods sold at BTD increased $12.4 million mainly as a result of increased sales volume.

? Cost of goods sold at T.O. Plastics increased $0.1 million. An increase in costs related to the increase in sales of industrial and medical products was mostly offset by productivity improvements from the use of different blends of plastics and improved operating efficiencies along with more selective bidding practices.

The increase in other operating expenses in our Manufacturing segment in 2012 compared with 2011 relates to the following:

? Operating expenses at BTD increased $1.7 million mainly due to increased benefit expenses related to employee incentives, but also due to increased salary and benefit expenses related to workforce expansion and increases in expenditures for contracted services.

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

2011 compared with 2010
The increase in revenues in our Manufacturing segment in 2011 compared with 2010 relates to the following:

? Revenues at BTD increased $44.7 million (42.1%) as a result of higher sales volume due to improved customer demand for products and services.

? Revenues at T.O. Plastics increased by $1.7 million (4.6%) mainly as a result of increased sales of horticultural products.

The increase in cost of goods sold in our Manufacturing segment in 2011 compared with 2010 consists of the following:

? Cost of goods sold at BTD increased $37.3 million mainly as a result of increased sales volume.

. . .