●

Consolidated operating revenues were $212.1 million compared with $203.5 million for the second quarter of 2016.

●

Consolidated net income and diluted earnings from continuing operations totaled $16.7 million and $0.42 per share, respectively, compared with $15.6 million and $0.41 per share for the second quarter of 2016.

●

Given our strong first half 2017 results we are raising our 2017 consolidated earnings guidance range to $1.65 - $1.80 per diluted share from $1.60 - $1.75 per diluted share.

Three Months ended June 30,

2017

2016

Heating Degree Days

80.9%

87.7%

Cooling Degree Days

90.6%

125.5%

Three Months ended June 30,

2017 vs Normal

2016 vs Normal

2017 vs 2016

Effect on Diluted Earnings Per Share

$ (0.01)

$ 0.00

($ 0.01)

●

A $3.4 million increase in retail revenue related to the recovery of increased fuel and purchased power costs due to an increase in the price per kwh purchased and an increase in fuel costs per kwh generated to serve retail customers.

●

A $0.9 million increase in revenue due to increased kwh sales to commercial and industrial customers.

●

A $1.5 million net decrease in retail revenue primarily due to an increase in the interim rate refund accrual in the second quarter of 2017 related to the final order in Otter Tail Power Company’s 2016 Minnesota general rate case.

●

A $0.8 million decrease in Environmental Costs Recovery rider revenue mainly due to a reduction in the unrecovered balance of environmental upgrades due to depreciation.

●

A $0.6 million negative price variance related to increased sales of electricity to customers with lower rate tariffs.

●

A $0.6 million decrease in Transmission Cost Recovery rider revenue due to a reduction in transmission services and costs from another regional transmission provider.

●

A $0.4 million decrease in revenue related to decreased consumption due to milder weather in the second quarter of 2017, evidenced by a 7.7% decrease in heating degree days and a 27.8% decrease in cooling degree days between the quarters.

●

A $0.1 million decrease in North Dakota Renewable Resource Adjustment rider revenue mainly due to an increase in Production Tax Credits that reduces rider revenue requirements.

●

A $1.2 million reduction in external service costs mostly due to a decrease in costs related to a maintenance shutdown at Coyote Station in April and May of 2016 in conjunction with the Coyote Creek Coal Mine tie-in project.

●

A $0.6 million decrease in Southwest Power Pool and MISO transmission service charges, with the MISO decrease mainly related to a decrease in the return on equity component of the MISO tariff from 12.38% to 10.82%.

●

A $0.3 million increase in labor costs mainly related to work required to respond to storm outages.

●

A $0.3 million increase in filing expenses related to the 2016 Minnesota general rate case.

2016 EPS by

2017 Guidance

February 6, 2017

2017 Guidance

May 1, 2017

2017 Guidance

August 7, 2017

 Diluted Earnings Per Share

Low

High

Low

High

Low

High

 Electric

$1.29

$1.31

$1.34

$1.31

$1.34

$1.31

$1.34

 Manufacturing

$0.15

$0.17

$0.21

$0.17

$0.21

$0.17

$0.21

 Plastics

$0.27

$0.26

$0.30

$0.26

$0.30

$0.31

$0.35

 Corporate

($0.11)

($0.14)

($0.10)

($0.14)

($0.10)

($0.14)

($0.10)

 Total – Continuing Operations

$1.60

$1.60

$1.75

$1.60

$1.75

$1.65

$1.80

 Return on Equity

   9.8%

   9.3%

10.2%

   9.3%

10.2%

   9.7%

 10.5%

●

We expect 2017 Electric segment net income to be higher than 2016 segment net income based on:

o

Normal weather for the remainder of 2017. Milder than normal weather in 2016 negatively impacted diluted earnings per share by $0.07. Milder than normal weather has negatively impacted diluted earnings per share by $0.03 through the six months ended June 30, 2017.

o

A full year of increased rates compared with 8.5 months in 2016. In March 2017, the Minnesota Public Utilities Commission granted Otter Tail Power Company a revenue increase of approximately 6.2% with a 9.41% return on equity.

o

Rider recovery increases primarily from transmission riders related to the Electric segment’s continuing investments in its share of the Multi-Value Transmission Projects in South Dakota.

o

Expected increases in sales to industrial and commercial customers.

o

Increased operating and maintenance expenses of $0.04 per share due to inflationary increases and increasing benefit costs. Included is an increase in pension costs as a result of a decrease in the discount rate from 4.76% to 4.60% and a decrease in the assumed long-term rate of return on plan assets from 7.75% to 7.50%.

o

Higher property tax expense due to large capital projects being put into service.

o

Lower Conservation Improvement Program (CIP) incentives of $0.03 per share in Minnesota as a result of program changes made by the Minnesota Department of Commerce that reduced the CIP incentive cap by 32.5% compared to 2016.

o

Increased costs related to contractual price increases in certain capacity agreements.

●

We expect 2017 net income from our Manufacturing segment to increase over 2016 due to:

o

A slight increase in sales at BTD due to higher lawn and garden end market sales offset by lower end market recreational vehicle sales, capturing new business with existing customers and higher scrap sales.

o

Improved margins on parts and tooling sales at BTD combined with lower interest costs as a result of the refinancing of long-term debt at a lower interest rate in the fourth quarter of 2016.

o

An increase in earnings from T.O. Plastics mainly driven by year-over-year sales growth in our horticulture, life science and industrial markets and lower interest costs as a result of the refinancing of long-term debt at a lower interest rate in the fourth quarter of 2016.

o

Backlog for the manufacturing companies of approximately $84 million for 2017 compared with $81 million one year ago.

●

We are raising our 2017 net income expectations from the Plastics segment to be higher than our original plan, primarily due to our strong second quarter results. The Plastics segment also benefits from lower interest costs as a result of the refinancing of long-term debt completed in the fourth quarter of 2016.

●

Corporate costs in 2017 are expected to be in line with 2016 costs.

●

Federal and state environmental regulation could require us to incur substantial capital expenditures and increased operating costs.

●

Volatile financial markets and changes in our debt ratings could restrict our ability to access capital and increase borrowing costs and pension plan and postretirement health care expenses.

●

We rely on access to both short- and long-term capital markets as a source of liquidity for capital requirements not satisfied by cash flows from operations. If we are unable to access capital at competitive rates, our ability to implement our business plans may be adversely affected.

●

Disruptions, uncertainty or volatility in the financial markets can also adversely impact our results of operations, the ability of customers to finance purchases of goods and services, and our financial condition, as well as exert downward pressure on stock prices and/or limit our ability to sustain our current common stock dividend level.

●

We could be required to contribute additional capital to the pension plan in the future if the market value of pension plan assets significantly declines, plan assets do not earn in line with our long-term rate of return assumptions or relief under the Pension Protection Act is no longer granted.

●

Any significant impairment of our goodwill would cause a decrease in our asset values and a reduction in our net operating income.

●

Declines in projected operating cash flows at BTD or the Plastics segment may result in goodwill impairments that could adversely affect our results of operations and financial position, as well as financing agreement covenants.

●

The inability of our subsidiaries to provide sufficient earnings and cash flows to allow us to meet our financial obligations and debt covenants and pay dividends to our shareholders could have an adverse effect on us.

●

We rely on our information systems to conduct our business and failure to protect these systems against security breaches or cyber-attacks could adversely affect our business and results of operations. Additionally, if these systems fail or become unavailable for any significant period of time, our business could be harmed.

●

Economic conditions could negatively impact our businesses.

●

If we are unable to achieve the organic growth we expect, our financial performance may be adversely affected.

●

Our plans to grow and realign our business mix through capital projects, acquisitions and dispositions may not be successful, which could result in poor financial performance.

●

We may, from time to time, sell assets to provide capital to fund investments in our electric utility business or for other corporate purposes, which could result in the recognition of a loss on the sale of any assets sold and other potential liabilities. The sale of any of our businesses could expose us to additional risks associated with indemnification obligations under the applicable sales agreements and any related disputes.

●

Significant warranty claims and remediation costs in excess of amounts normally reserved for such items could adversely affect our results of operations and financial condition.

●

We are subject to risks associated with energy markets.

●

Changes in tax laws, as well as judgments and estimates used in the determination of tax-related asset and liability amounts, could materially adversely affect our business, financial condition, results of operations and prospects.

●

We may experience fluctuations in revenues and expenses related to our electric operations, which may cause our financial results to fluctuate and could impair our ability to make distributions to our shareholders or scheduled payments on our debt obligations, or to meet covenants under our borrowing agreements.

●

Actions by the regulators of our electric operations could result in rate reductions, lower revenues and earnings or delays in recovering capital expenditures.

●

Otter Tail Power Company’s operations are subject to an extensive legal and regulatory framework under federal and state laws as well as regulations imposed by other organizations that may have a negative impact on our business and results of operations.

●

Otter Tail Power Company’s electric transmission and generation facilities could be vulnerable to cyber and physical attack that could impair its ability to provide electrical service to its customers or disrupt the U.S. bulk power system.

●

Otter Tail Power Company’s electric generating facilities are subject to operational risks that could result in unscheduled plant outages, unanticipated operation and maintenance expenses and increased power purchase costs.

●

Changes to regulation of generating plant emissions, including but not limited to carbon dioxide emissions, could affect our operating costs and the costs of supplying electricity to our customers.

●

Competition from foreign and domestic manufacturers, the price and availability of raw materials, prices and supply of scrap or recyclable material and general economic conditions could affect the revenues and earnings of our manufacturing businesses.

●

Our plastics operations are highly dependent on a limited number of vendors for PVC resin and a limited supply of resin. The loss of a key vendor, or any interruption or delay in the supply of PVC resin, could result in reduced sales or increased costs for this segment.

●

We compete against a large number of other manufacturers of PVC pipe and manufacturers of alternative products. Customers may not distinguish the pipe companies’ products from those of our competitors.

●

Changes in PVC resin prices can negatively affect our plastics business.

Otter Tail Corporation

Consolidated Balance Sheets

Assets

in thousands

(not audited)

Otter Tail Corporation

Consolidated Balance Sheets

Liabilities and Equity

in thousands

(not audited)

Otter Tail Corporation

Consolidated Statements of Cash Flows

In thousands

(not audited)