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Rating Action:

Moody's confirms Otter Tail's utility ratings; assigns Baa3 to new holding company

24 Jun 2009

Approximately $175 million of debt securities affected

New York, June 24, 2009 -- Moody's Investors Service confirmed its ratings for the senior unsecured debt obligations of Otter Tail Corporation (OTC: A3 senior unsecured) that, post transition to a holding company structure, will be owned by its utility subsidiary, Otter Tail Power Company (OTP). Moody's also assigned a rating of Baa3 to the senior unsecured (guaranteed by non-regulated subsidiaries) notes of OTC that, post restructuring, will be held at its parent holding company. OTC today announced they anticipate the transition will be completed on July 1, 2009. Post transition, the parent company will be named Otter Tail Corporation, but is referred to herein as Otter Tail Corporation (New) or OTC New. The rating outlook for OTC (which will become OTP) and OTC (New) (which will become OTC) is stable.

The rating actions conclude the review for possible downgrade that began January 14, 2009 following the Minnesota Public Utilities Commission approval, with conditions, of the planned restructuring of OTC to establish a separate subsidiary corporation to conduct its utility operations. The review was also utilized to consider the impact of the current economic downturn, which has reduced earnings, but has had a more modest impact on cash flow, and cash flow credit metrics. Following today's announcement, we anticipate a relatively near-term closing of the OTC restructuring. To the extent the transaction does not close as anticipated, the senior unsecured ratings for the debt at OTC would be revised to a rating lower than A3, and the Baa3 rating assigned to debt at OTC (New) would be revised to be the same as the rating assigned to OTC's other senior unsecured debt obligations.

The A3 rating for the debt that will be held at OTC's utility subsidiary, OTP, reflects the historically stable and predictable nature of the cash flows from its regulated operations, and the reasonably supportive regulatory environment in which the company operates. The A3 rating considers historical pro-forma financial metrics that are appropriate for electric utilities rated A3. For example, for the past three calendar years, OTP's pro-forma ratio of cash from operations excluding changes in working capital items to adjusted debt, calculated in accordance with Moody's standard analytical adjustments, has been in the range of 20-25%; going forward, as the utility proceeds to make significant investment in its infrastructure, we anticipate this metric will remain in the low 20% range. The A3 rating also considers provisions that are intended to meaningfully separate OTC's utility operations from its higher risk non-regulated operations.

The Baa3 rating assigned to senior unsecured (guaranteed) notes to be held at parent company OTC (New) recognizes their structurally subordinate position vis-à-vis the debt to be held at OTP, and also recognizes the significant business risk and cash flow volatility associated with OTC's non-regulated operations which are held by its first tier subsidiary, Varistar Corporation (Varistar). The Baa3 rating for the OTC (New) notes considers that approximately half of consolidated OTC's cash flows are expected to be generated by OTP, with the remaining half to be generated by the Varistar subsidiaries. In our opinion, the higher risk, more volatile nature of Varistar's business operations, in combination with their pro-forma financial metrics, could be viewed as appropriate for diversified global manufacturing companies rated in the Ba range. As the OTC (New) notes are to be guaranteed by the majority of the Varistar subsidiaries, structural subordination is not a factor with respect to the Varistar cash flows.

The stable outlooks for OTC (which will become OTP) and OTC (New) (which will become OTC), reflect our expectation that the company's regulated cash flows, as well as its diverse, somewhat uncorrelated, non-regulated cash flows will remain relatively stable resulting in fairly consistent cash flow credit metrics for both the utility and the consolidated entity. The stable outlook recognizes the degree of flexibility inherent in the business plans and capital expenditure programs of OTC's non-regulated operations, and assumes the company will take a balanced approach with respect to the financing of its regulated investments and in both cases with the goal of maintaining its current financial position.

Moody's last rating action on OTC occurred January 14, 2009, when the ratings were placed under review for possible downgrade.

The principal methodology used in rating the debt to be held at OTP was Rating Methodology: Global Regulated Electric Utilities. It can be found and www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodology subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

OTC's ratings were assigned by evaluating factors believed to be relevant to the credit profile, such as i) the business risk and competitive position of OTC versus others within its industry or sector, ii) the capital structure and financial risk of OTC, iii) the projected performance of OTC over the near to intermediate term, and iv) OTC's history of achieving consistent operating performance and meeting financial plan goals. These attributes were compared against other issuers both within and outside of OTC's core peer group and OTC's ratings are believed to be comparable to ratings assigned to other issuers of similar credit risk.

Otter Tail Corporation has interests in diversified operations that include an electric utility, manufacturing, health services, food ingredient processing and infrastructure businesses which include plastics, construction and transportation. Corporate offices are located in Fergus Falls Minnesota, and Fargo, North Dakota.

New York
Laura Schumacher
Vice President - Senior Analyst
Global Infrastructure Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
William L. Hess
Managing Director
Global Infrastructure Finance
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's confirms Otter Tail's utility ratings; assigns Baa3 to new holding company
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