2016 Attachment O Projected Net Revenue Requirements Customer Meeting October 29, 2015.

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2016 Attachment O Projected Net Revenue Requirements Customer Meeting

October 29, 2015

Agenda

◦ Welcome & Introductions◦ Meeting Purpose◦ Disclosure◦ 2014-2016 Rate Comparison◦ 2015-2016 AC Detailed Revenue Requirement Comparison◦ 2015-2016 DC Detailed Revenue Requirement Comparison◦ Questions

2016 Projected Customer Meeting

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Present 2016 Attachment O, GG, and ZZ revenue requirements for 2016

Compare 2015 & 2016 Attachment O, GG and ZZ formula rate calculation cost components

Comply with the Formula Rate Protocols

2016 Projected Meeting Purpose

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◦ Minnesota Power’s 2016 projected transmission rates are subject to change pending review by MISO and other Interested Parties. Information in this presentation is based upon Minnesota Power’s 2016 Projected Attachment O, filed at MISO on October 27, 2015.

◦ The dates and schedules represent Minnesota Powers best estimates for projects to be initiated and completed. Please be aware that many factors could alter those schedules, including regulatory approvals, availability of materials or construction resources, weather, and other unforeseen events.

2016 Disclosure

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◦ Submitted and posted on MISO’s website on October 27, 2015

◦ MISO has completed its review of Minnesota Power’s 2014 True-Up Attachment O. The 2014 true-up amount, plus any interest will be applied to the annual 2016 Attachment O revenue requirement and rates.

◦ MISO has completed its review of 2016 Attachments O, GG, and ZZ and corresponding documentation.

Minnesota Power 2016 Projected Attachment O, GG, & ZZ Formula Rate

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Comparison of Monthly Rates* 2014 through 2016

($kW/Mo) AC DC

2014 $2.00 $2.31 2015 $2.37 $2.142016 $2.41 $2.03

* The rates shown are based upon Minnesota Power Revenue Requirements. This is not the MP zonal rate. The MP zonal rate includes both Minnesota Power and Great River Energy revenue requirements and load. MISO calculates the zonal rate.

Minnesota Power MISO Transmission Rates2014-2016

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Comparison - 2015 to 2016 AC Revenue Requirement

Attachment O Net Revenue Requirement 2015 44,260,890$

Cost Drivers in 2016: 2015 2016 Increase in Return Requirement 21,500,388$ 26,158,244$ 4,657,856$ Increase in Operating Costs 50,230,391$ 57,504,909$ 7,274,518$ Decrease in Revenue Credits 5,992,317$ 933,629$ 5,058,688$ Decrease in Annual True-Up 11,501,492$ (2,276,809)$ (13,778,301)$ Increase in Attachment GG Revenue Requirement 24,295,580$ 25,607,995$ (1,312,415)$ Increase in Attachment ZZ Revenue Requirement 8,683,485$ 12,520,525$ (3,837,040)$


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Comparison - 2015 to 2016 Revenue Requirement




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Comparison - 2015 to 2016 Return Requirement

Return Requirement = Rate Base x Weighted Cost of Capital

Change in Rate Base

Total Rate Base - 2015 246,124,527$

Cost Drivers in 2016: 2015 2016 Increase in Net Plant in Service 260,086,039$ 358,751,560$ 98,665,521$ Decrease in CWIP 42,312,245$ -$ (42,312,245)$ Decrease in Accumulated Deferred Taxes (61,925,282)$ (73,914,047)$ (11,988,765)$ Increase in Other Working Capital 5,651,525$ 6,327,057$ 675,532$ Net Increase in Rate Base 45,040,043$

Total Rate Base - 2016 291,164,571$

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Change in Cost of Capital


Weighted Cost of Capital

D/E Ratio Cost D/E Ratio Cost

Long Term Debt 46% 2.07% 43% 1.98%Equity 54% 6.67% 57% 7.00%

8.74% 8.98%

2015 2016

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Reconciliation of Change in Return Requirement


Change in Rate Base $45,040,043 x 8.98% 4,046,400$ Previous Year Projected Rate Base x Increase in WCC $246,124,527 x 0.24% 611,455$

Net Change in Return Requirement 4,657,856$

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Reconciliation of Change in Operating Costs

2015 Operating Costs 50,230,391$ 2015 2016

Increase in Income Taxes 11,394,453$ 14,193,715$ 2,799,262$ Increase in Depreciation 11,026,897$ 13,940,924$ 2,914,027$ Increase in Taxes Other Than Income Taxes 5,161,264$ 6,030,014$ 868,750$ Increase in Operating & Maintenance 22,647,777$ 23,340,256$ 692,479$ Net Increase in Operating Costs 7,274,518$

2016 Operating Costs 57,504,909$

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Reconciliation of Change in Revenue Credits

2015 Revenue Credits 5,992,317$ 2015 2016

Increase in Account 454 (Rents) 543,748$ 557,973$ 14,225$ Decrease in Account 456 (Transmission of Electricity 5,448,569$ 375,656$ (5,072,913)$

by Others) Net Decrease in Revenue Credits (Increases Revenue Requirement) 5,058,688$

2016 Revenue Credits 933,629$

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Reconciliation of Change in True-up

2015 True-up (from 2013 Actual Attachment O) 11,501,492$ 2015 2016

Decrease in Revenue Requirement Component 8,297,257$ (1,816,696)$ (10,113,953)$ Decrease in Divisor Component 2,889,748$ (321,153)$ (3,210,901)$ Decrease in Interest Component 314,487$ (138,960)$ (453,447)$ Net Decrease in True-up 11,501,492$ (2,276,809)$ (13,778,301)$

2016 True-up (from 2014 Actual Attachment O) (2,276,809)$

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2016 Projects Included in Attachment GG - $123,668,656 total project costs

In-Service Badoura (MTEP project 277) Boswell/Bemidji (MTEP279) Fargo Phase 1 (MTEP 286-1) Fargo Phase 2 (MTEP 286-2)

In Progress - CWIP Fargo Phase 3 (MTEP 286-3) - ISD 12/2015 9 Line Upgrade (MTEP 3373) - ISD 7/2015

In Progress - no CWIP Savanna (MTEP 2674) - ISD 12/2016

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Reconciliation of Change in Attachment GG Revenue Requirement

2015 Attachment GG Revenue Requirements ($119,020,548 gross plant) 24,295,580$

Revenue Requirement Components 2015 2016 Decrease in Annual Expense Charge 8,796,574$ 8,379,761$ (416,813)$ Increase in Annual Return Charge 13,449,036$ 14,141,321$ 692,285$ Increase in Project Depreciation Expense 2,049,970$ 3,086,913$ 1,036,943$ Net Increase in Attachment GG Rev Req 1,312,415$

(applied as credit against Attachment O Rev Req)

2016 Attachment GG Revenue Requirements ($123,668,656 gross plant) 25,607,995$

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2016 AC Projects Included in Attachment ZZ - $59,450,920 total estimated project costs

In-Service Medium Priority AC - 230 kV (MTEP project 4293)

In Progress Low Priority AC - 115 kV (MTEP project 4294)

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Reconciliation of Change in AC Attachment ZZ Revenue Requirement

2015 AC Attachment ZZ Revenue Requirements ($40,520,497 gross plant) 8,683,485$

Revenue Requirement Components 2015 2016 Increase in Annual Expense Charge 2,994,790$ 4,028,381$ 1,033,591$ Increase in Annual Return Charge 4,675,222$ 6,987,862$ 2,312,640$ Increase in Project Depreciation Expense 1,013,472$ 1,504,282$ 490,810$ Net Increase in Attachment ZZ Rev Req 3,837,041$


2016 AC Attachment ZZ Revenue Requirements ($59,450,920 gross plant) 12,520,525$

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Comparison - 2015 to 2016 DC Revenue Requirement


Cost Drivers in 2016: 2015 2016 Increase in Return Requirement 5,880,838$ 6,208,610$ 327,772$ Decrease in Operating Costs 11,350,198$ 11,125,576$ (224,622)$ Increase in Revenue Credits -$ 1,599,531$ (1,599,531)$ Increase in Annual True-Up (1,666,261)$ (956,432)$ 709,829$ Decrease in Attachment ZZ Revenue Requirement 1,412,404$ 1,407,340$ 5,064$


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Return Requirement = Rate Base x Weighted Cost of Capital

Change in Rate Base

Total Rate Base - 2015 67,320,572$

Cost Drivers in 2016: 2015 2016 Increase in Net Plant in Service 81,036,070$ 81,141,289$ 105,219$ Increase in Accumulated Deferred Taxes (15,129,265)$ (13,316,436)$ 1,812,829$ Decrease in Other Working Capital 1,413,768$ 1,282,508$ (131,260)$ Net Increase in Rate Base 1,786,788$

Total Rate Base - 2016 69,107,361$

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Change in Cost of Capital


Weighted Cost of Capital

D/E Ratio Cost D/E Ratio Cost

Long Term Debt 46% 2.07% 43% 1.98%Equity 54% 6.67% 57% 7.00%

8.74% 8.98%

2015 2016

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Reconciliation of Change in Return Requirement


Change in Rate Base $1,786,788 x 8.98% 160,525$ Previous Year Projected Rate Base x Increase in WCC $67,320,572 x 0.24% 167,247$

Net Change in Return Requirement 327,772$

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Reconciliation of Change in Operating Costs

2015 Operating Costs 11,350,198$ 2015 2016

Increase in Income Taxes 3,166,483$ 3,413,052$ 246,569$ Increase in Depreciation 3,895,386$ 3,972,325$ 76,939$ Increase in Taxes Other Than Income Taxes 1,096,786$ 1,215,503$ 118,717$ Decrease in Operating & Maintenance 3,191,544$ 2,524,696$ (666,848)$ Net Decrease in Operating Costs (224,623)$

2016 Operating Costs 11,125,576$

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Reconciliation of Change in Revenue Credits

2015 Revenue Credits -$ 2015 2016

Decrease in Account 456 (Transmission of Electricity -$ (1,599,531)$ (1,599,531)$ by Others)

Net Decrease in Revenue Credits (Increases Revenue Requirement) (1,599,531)$

2016 Revenue Credits 1,599,531$

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Reconciliation of Change in True-up

2015 True-up (from 2012 Actual Attachment O) (1,666,261)$ 2015 2016

Increase in Revenue Requirement Component (1,564,564)$ 1,539,806$ 3,104,370$ Decrease in Divisor Component -$ (2,437,864)$ (2,437,864)$ Increase in Interest Component (101,697)$ (58,374)$ 43,323$ Net Increase in True-up (1,666,261)$ (956,432)$ 709,829$

2016 True-up (from 2013 Actual Attachment O) (956,432)$

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2016 DC Projects Included in Attachment ZZ - $8,098,605 total estimated project costs

In-Service Medium Priority DC - 230 kV (MTEP project 4293)

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Reconciliation of Change in DC Attachment ZZ Revenue Requirement

2015 DC Attachment ZZ Revenue Requirements ($8,098,605 gross plant) 1,412,404$

Revenue Requirement Components 2015 2016 Decrease in Annual Expense Charge 291,695$ 253,125$ (38,570)$ Increase in Annual Return Charge 918,244$ 947,157$ 28,913$ Increase in Project Depreciation Expense 202,465$ 207,058$ 4,593$ Net Decrease in Attachment ZZ Rev Req (5,064)$


2016 DC Attachment ZZ Revenue Requirements ($8,098,605 gross plant) 1,407,340$

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Questions?

2016 Transmission Customer Meeting

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Contacts:Jeanne [email protected](218) 355-2648

Kara [email protected](218) 355-2869

2016 Transmission Customer Meeting

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Date post:	17-Jan-2016
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2016 Attachment O Projected Net Revenue Requirements Customer Meeting October 29, 2015.

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