Otter Tail Corporation (Otter Tail) has reported total operating revenues of $1.31 billion for the year-end 2008, compared with the total operating revenues of $1.23 billion in the previous year. It also reported total net income of $35.1 million for the year-end 2008, compared with the total net income of $53.9 million in the previous year.

CEO Overview

By most any financial or economic measure, 2008 proved to be a difficult year and our financial results reflect that reality, said John Erickson, president and chief executive officer of Otter Tail. Like most companies, we are experiencing the effects of a weakened and unpredictable economy. Many of our nonelectric businesses, which as a group posted record years in 2006 and 2007, serve end markets that were significantly affected by the sweeping economic decline in 2008. Additionally, one of our businesses, DMI Industries, faced operational challenges that can accompany rapid expansion as it prepared for wind-industry growth. Erickson continued, We are encouraged that Otter Tail Corporation’s core electric business, Otter Tail Power Company, posted solid results in 2008. During the year, we aggressively invested in major organic growth opportunities in wind energy projects, such as Otter Tail Power Company’s construction of 32 wind turbines at the Ashtabula Wind Center in North Dakota, and DMI Industries’ expansion of wind tower manufacturing plants in North Dakota and Oklahoma.

Despite the difficult year our balance sheet is healthy. We maintain a strong capital structure, are compliant with all of our debt covenants, and have sufficient liquidity under our existing credit facilities to provide for working capital requirements and help fuel future growth initiatives.

Clearly, not knowing the duration of the current recession makes it difficult to forecast earnings. We expect 2009 will be a challenging year, requiring continued discipline on managing costs and capital expenditures. Recognizing we are in a time of continuing economic uncertainty, our current estimate of 2009 earnings is in the range of $1.10 to $1.50 per diluted share.

Segment Performance Summary

Electric

Electric segment revenues was $340.0 million and net income $33.2 million in 2008 compared with $323.5 million and $24.5 million in the previous year. The increase in electric revenues was due to a $10.7 million increase in retail revenues, a $4.2 million increase in other electric revenues and a $1.6 million net increase in wholesale and energy trading revenues.

The increase in retail revenues reflects $8 million in 2008 Minnesota and North Dakota Renewable Resource Cost Recovery Rider revenue. An approved increase in Minnesota retail electric rates of about 2.9% resulted in a $3.6 million increase in retail revenues in 2008. These revenue increases were augmented by a 2.9% increase in retail kilowatt-hour (kwh) sales resulting from a 7.8% increase in heating degree days between the years, but offset by a $6.7 million reduction in fuel-cost recovery revenues in 2008 related to a reduction in kwhs purchased for system use in 2008.

The increase in other electric revenues includes a $3.6 million increase in revenues from contracted construction work completed for other entities on regional wind power projects and a $0.8 million increase in revenues from steam sales to an ethanol plant near the Big Stone plant site, offset by a $0.2 million reduction in revenues from shared use of transmission facilities. Wholesale electric revenues from company-owned generation increased to $23.7 million in 2008 compared with $20.3 million in 2007 as a result of a 28.4% increase in wholesale kwh sales partially offset by a 9.2% decrease in the price per kwh sold. Net gains from energy trading activities, including net mark-to-market gains and losses on forward energy contracts, were $3.5 million in 2008 compared with $5.3 million in 2007.

Fuel and purchased-power costs to serve retail and wholesale electric customers decreased $6.9 million between the years. Fuel costs for generation for retail customers increased $8.3 million as a result of a 12.1% increase in generation for system use combined with a 3.4% increase in fuel costs per kwh generated for system use. Purchased power costs to serve retail customers decreased $18.4 million as a result of a 23.8% decrease in kwhs purchased combined with a 1.0% decrease in the cost per kwh purchased for system use. Fuel costs for wholesale sales increased $3.2 million due to a 28.4% increase in wholesale kwh sales combined with a 7.1% increase in the cost of fuel per kwh generated for wholesale sales. Overall fuel costs per kwh generated increased 8.8%, but electricity from zero-fuel-cost wind turbines mitigated the increase in fuel costs per kwh from generation used to serve retail customers. An increase of $7.8 million in electric operating and maintenance expenses includes: (1) $3.1 million in increased costs related to contracted construction work completed for other entities on regional wind power projects, (2) $1.7 million in turbine repair costs at Hoot Lake Plant in 2008, (3) $0.9 million in higher wage and benefit expenses related to a general wage increase, (4) $0.6 million in wind turbine related expenses, and a net increase of $1.5 million in other operating expenses. Depreciation expenses increased $5.7 million as a result of recent capital additions, including 27 wind turbines at the Langdon wind energy center.

Plastics

Plastics segment revenues was $116.5 million and net income $1.9 million in 2008 compared with $149.0 million and $8.3 million in the previous year. The decrease in revenues and net income reflect a 26% reduction in pounds of polyvinyl chloride (PVC) pipe sold due to sluggish housing and construction markets in 2008.

Manufacturing

Manufacturing segment revenues and net income were $470.5 million and $5.3 million, respectively, in 2008 compared with $381.6 million and $15.6 million in the previous year.