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MRES Transmission Services Meeting Agenda December 14, 2011

Manager Terry Wolf leads a meeting discussing MRES' Attachment O forecast for 2012, including rates and projects like CapX and renewable energy sources. Financial details on rate base, capital projects, and budget risks are reviewed, along with FERC activities and rate requirements for the upcoming year.

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MRES Transmission Services Meeting Agenda December 14, 2011

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  1. December 14, 2011 Terry Wolf, Manager of Transmission Services

  2. Agenda Meeting Purpose MRES Profile Attachment O Calculation Capital Projects Budget Risks Question/Answer

  3. Meeting Purpose  To provide an informational forum regarding the MRES forecasted Attachment O for 2012.  The forecasted Attachment O for 2012 is calculated using the Midwest ISO’s EIA Form 412 Attachment O- MRES template with a projected net revenue requirement and projected load.  Rates become effective on January 1, 2012 for joint pricing zone comprised of Otter Tail Power Company, Great River Energy, and MRES.  Attachment GG, and Attachment MM are planned to be effective January 1, 2012.

  4. - 61 Members served - Transmission: ~239 miles - Generation: ~740 MW - Renewable: ~84 MW Missouri River Energy Services Rugby Wind Project Fort Peck Dam ITA Garrison Dam Canyon Ferry Dam Big Horn River CapX Fargo Yellowtail Dam CapX Brookings Oahe Dam Watertown Power Plant Irv Simmons Point Beach Nuclear Plant Marshall Wind Project Big Bend Dam Gavin’s Point Dam Odin Wind Project Fort Randall Dam Worthington Wind Project Laramie River Station MBPP MRES Member Exira Station MRES Generation Resource Red Rock Hydroelectric Plant Planned MRES Generation Resource Federal Hydroelectric Dam Transmission Projects (MBPP, Irv Simmons, ITA, CapX (Fargo, Brookings)

  5. MRES FERC Activities Transmission facilities are owned by Western Minnesota Municipal Power Agency (WMMPA) FERC Declaratory Order (EL08-22, 12/08) combines financial statements for ATRR Attach O effect 6/1/11 Incentive filing (EL11-45, 6/11)  CapX; Fargo P2 & P3, and Brookings  CWIP, Abandon Plant, Hypothetical cap structure 205 filing (ER12-351, 11/11)

  6. Forward Looking Attachment O Forward Rate Requirements Rate Base Operating Expenses Revenue Requirement and Rate Network Rate Summary

  7. Forward Rate Requirement  By June 1 of each year, MRES will post on OASIS all information regarding any Attachment O True-up Adjustments for the prior year.  2012 Forward Looking Attachment O will be trued-up by June 2013.  Beginning 2012 and each year thereafter, MRES will post on OASIS its projected Net Revenue Requirement including the True-Up Adjustment and load for the following year, and associated work papers in October.  Beginning in 2011 and each year thereafter, MRES will hold a customer meeting to explain its formula rate input projections and cost detail.

  8. Total Rate Base 2012 Projected (Monthly Average) Projected 12/31/11 % Rate Base Item $ Change Explanation Change The increase is due mainly to the capitalization (approximately $10M) of CAPX Fargo Phase I in December 2011. Gross Plant in Service $ 73,564,991 $ 71,839,919 $1,725,072 2.4% Accumulated Depreciation Annual Depreciation Expense combined with projected additions and retirements. $ 35,220,891 $ 34,678,374 $ 542,517 1.6% Net Plant in Service $38,344,101 $ 37,161,545 $ 1,182,556 3.2% The increase is due to CapX Fargo Phases 2 and 3 ($11.5M) and CapX Brookings ($5.5M). CWIP $ 24,768,664 $ 7,748,114 $17,020,550 219.7% Working Capital $1,320,795 $ 1,269,018 $ 51,777 4.1% Total Rate Base $ 64,433,560 $ 46,178,677 $ 18,254,883 39.5% Net Plant + CWIP + Working Capital Note: The above numbers are transmission only and general and intangible plant allocated to transmission.

  9. Rate Base Earning Hypothetical Capital Structure Return 2012 Projected (Monthly Average) Projected 12/31/11 % Rate Base Item $ Change Explanation Change Gross Plant in Service $ - $ - $ - - % Accumulated Depreciation $ - $ - $ - - % Net Plant in Service $ - $ - $ - - % CWIP Projects included in Rate Base $ 7,748,114 $ 17,020,550 219.7%Projected costs for CWIP projects $ 24,768,664 requested to be included in rate base. Working Capital $ - $ - $ - - % Rate Base- Hypothetical Capital Structure $ 24,768,664 $ 7,748,114 $ 17,020,550 219.7% Net Plant + CWIP + Working Capital Note: The above numbers are transmission only and general and intangible plant allocated to transmission.

  10. Operating Expenses % Expense Item 2012 Projected 2011 Projected $ Change Explanation Change O&M $ 5,221,403 $ 4,807,181 $ 414,222 8.6% Depreciation Expense Increase in Depreciation Expense due to projected plant additions. $1,082,864 $ 840,295 $ 242,569 28.9% Increased is due to a projected increase in total company property tax expense and a projected increase in the transmission GP allocation percentage from 2011 to 2012. Taxes Other than Income $290,268 $ 253,161 $ 37,107 14.7% Operating Expense $6,594,534 $ 5,900,637 $ 693,897 11.8% O&M + Depreciation + Taxes Note: The above numbers are transmission only and A&G expenses, general plant depreciation and taxes allocated to transmission.

  11. Return on Rate Base (Actual Capital Structure) 2012 Projected 2011 Projected % $ Change Explanation Change Decrease due to no additional debt expected in 2012, scheduled principal payments and projected higher equity. Increase due to projected net surplus for 2012 combined with lower long- term debt. ( 2%) Long Term Debt 72% 74% 2% Proprietary Capital 28% 26% Total 100.00% 100.00% Cost of debt is expected to remain constant from 2011 to 2012. Equity return approved for MISO Transmission Owners. (LTD*Cost of Debt) + (Proprietary Capital * MISO Equity Return) Cost of Debt 5.91% 5.91% 0.00% MISO Equity Return 12.38% 12.38% 0.00% Rate of Return 7.73% 7.59% -0.47% Total Rate Base $ 64,433,560 $ 46,178,677 $ 18,254,883 39.5% From Rate Base Calculation Increase largely due to additional transmission investment. See Rate Base slide for additional detail. Allowed Return -Actual Capital Structure $ 4,978,834 $ 2,916,880 $ 2,061,954 70.7%

  12. Return on Rate Base (Hypothetical Capital Structure) 2012 Projected 2011 Projected Comments Long Term Debt 55% N/A Capital Structure requested in docket EL 11-45-000. Proprietary Capital 45% N/A Total 100.00% N/A Weighted Cost of Debt 5.91% N/A See previous slide. MISO Equity Return Rate of Return- Hypothetical Capital Structure Rate of Return- Actual Capital Structure Difference between Hypothetical and Actual Capital Structure 12.38% N/A 55% * Cost of Debt plus 45% * 12.38% 8.823% N/A 7.727% N/A From previous slide. 1.096% N/A $ 24,768,664 Rate Base- Hypothetical Capital Structure N/A Hypothetical and actual capital structure difference * Hypothetical Capital Structure Rate Base Additional Return –Hypothetical Capital Structure $ 271,558 N/A A forward looking test year will be effective January 1, 2012 for MRES. Therefore, a hypothetical capital structure calculation for prior years in not applicable.

  13. Revenue Requirements 2012 Projected 2011 Projected $ Change % Change Return -Actual Capital Structure Additional Return– Hypothetical Capital Structure Explanation $ 4,978,834 $ 2,916,880 $ 2,061,954 70.7% $ 271,558 - $ 271,558 Operating Expense $ 6,594,534 $ 5,900,637 $ 693,897 11.8% Total Revenue Requirement Attachment GG Adjustments Attachment MM Adjustments Attachment O Revenue Requirement Before credits $ 11,844,926 $ 8,817,517 $ 3,027,409 34.3% Projected credit for the CapX Fargo Project. Projected credit for the CapX Brookings Project. ($ ($ 4,067,684) - 4,067,684) ($ 819,435) - ($ 819,435) $ 6,957,807 $ 8,817,517 ($ 1,859,710) (21.1%) Revenue credits assumed to remain unchanged from 2011 to 2012. Revenue Requirement before credits less Revenue Credits Revenue Credits $ 135,156 $ 135,156 - Net Attachment O Revenue Requirement $ 6,822,651 $ 8,682,361 ($ 1,859,710) (21.1%)

  14. Capital Projects: Transmission Line Projects > $100K Estimated In-Service Date Forecasted 2012 Capital Addition Project Voltage Project Description Brookings – Twins Cities 345 kV Line 345 kV $ 10,976,012 Build new 345 kV line from St. Cloud (Quarry) to Alexandria to Fargo (Bison) (MN/ND) (190 miles), includes Alexandria substation. Fargo – St. Cloud 345 kV Line 345 kV $ 23,065,087

  15. Rate Summary $1.00 $0.84 $0.82 $0.80 $0.62 $0.60 $0.40 $0.20 $(0.02) $- $0.03 $(0.10) $(0.20) $(0.40) $(0.50) $(0.60) Return- Actual Capital Structure Additional Return- Hypothetical Capital Structure Operating Expenses Attachment GG Adjustment Attachment MM Adjustment Revenue Credits 2012 Projected ATRR

  16. Budget Risks Demand/ Weather Regulatory Findings Revenue Timing of Capital Projects Tight Budgets Financing

  17. Questions If you have any additional questions after the meeting, please submit via e-mail to Terry Wolf: twolf@mrenergy.com All questions and answers will be distributed by e-mail to all attendees. Additionally, the questions and answers will be posted on the MRES OASIS website (http://oasis.midwestiso.org/OASIS/MRET) within two weeks from the date of inquiry.

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