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NSP Companies Transmission Customer Meeting: Attachment O 2019 Review

Discussing the NSP Companies' projected revenue requirements for 2019 and comparing them with 2018 figures. Analyzing cost components and rate calculations, with insights into key drivers for the upcoming year.

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NSP Companies Transmission Customer Meeting: Attachment O 2019 Review

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  1. Northern States Power Companies(NSP-MN & NSP-WI) MISO Attachment O – NSP Transmission Customer Meeting October 17, 2018 Discussion: Attachment O 2019 Projected Revenue Requirements

  2. Legal Disclosure This document contains certain statements that describe the NSP Companies management’s beliefs concerning future business conditions and prospects, growth opportunities and the outlook for the electric transmission industry based upon information currently available. Such statements are “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of 1995. Wherever possible, NSP Companies has identified these forward-looking statements by words such as “anticipates”, “believes”, “intends”, “estimates”, “expects”, “projects” and similar phrases. These forward-looking statements are based upon assumptions management believes are reasonable. Such forward-looking statements are subject to risks and uncertainties which could cause actual results, performance and achievements to differ materially from those expressed in, or implied by, these statements.

  3. Meeting Purpose / Objective • The purposes of today’s meeting are to: • Present the projected Attachment O, GG and MM revenue requirements for the rates that will be effective January 1 through December 31, 2019. These revenue requirements were calculated using the NSP Companies Tariff templates using projected revenue requirement inputs and projected load. • Review the 2019 Attachment O, GG and MM formula rate calculation cost components relative to the 2018 rates currently in effect. The dates and schedules, and even the projects themselves, represent our best estimates for projects to be initiated and completed. Please be aware that many factors could alter those schedules, including regulatory approvals, construction resources, availability of materials, weather, and other unforeseen events.

  4. Attachment O, GG & MM Formula Rate for 2019 • Originally filed with MISO and posted on OASIS on August 31, 2018 • Update was filed with MISO and posted on OASIS on October 3, 2018 • MISO review of the Company’s: • Attachment O, GG and MM with 2017 Actuals – Completed • Attachment O, GG and MM projected 2019 – In Process • The information currently on OASIS is incorporated in this presentation.

  5. Attachment O-NSP Budgeted Rate Effective 1/1/2019 Based upon total Revenue Requirements Submitted to MISO This is not the NSP Zone Rate. MISO calculates Zonal Rate.

  6. Attachment O Net Revenue Requirement 2018$338.2M • Cost Drivers in 2019: • Increase in Operating Costs $ 18.0M • Increase in Return Requirement $ 14.7M • Decrease in Annual True-up $ 21.9M • Decrease in Revenue Credits $ 3.1M • Increase in Attachment GG & MM Rev Req $ (15.5M) • Attachment O Net Revenue Requirement 2019$380.4M Comparison of 2019 Revenue Requirement to 2018 Revenue Requirement

  7. Attachment O Net Revenue Requirement 2018$338.2M • Cost Drivers in 2019: • Increase in Operating Costs $ 18.0M • Increase in Return Requirement $ 14.7M • Decrease in Annual True-up $ 21.9M • Decrease in Revenue Credits $ 3.1M • Increase in Attachment GG & MM Rev Req $ (15.5M) • Attachment O Net Revenue Requirement 2019$380.4M Comparison of 2019 Revenue Requirement to 2018 Revenue Requirement

  8. Operating costs in 2018 Rate $ 293.4M Increase in depreciation $ 12.2M Increase in O&M costs (Transmission and A&G) $ 2.3M Increase in income taxes $ 3.6M Decrease in taxes other than income $ (0.1M) Net increasein Operating Costs $ 18.0M Operating costs in 2019 Rate $ 311.4M Change in Operating Costs Detail

  9. Attachment O Net Revenue Requirement 2018$338.2M • Cost Drivers in 2019: • Increase in Operating Costs $ 18.0M • Increase in Return Requirement $ 14.7M • Decrease in Annual True-up $ 21.9M • Decrease in Revenue Credits $ 3.1M • Increase in Attachment GG & MM Rev Req $ (15.5M) • Attachment O Net Revenue Requirement 2019$380.4M Comparison of 2019 Revenue Requirement to 2018 Revenue Requirement

  10. Annual Return Requirement Determination Function of: Rate Base x Weighted Cost of Capital

  11. Total Rate Base – 2018$2,678.6M Net plant in service increase$ 241.6M No change in CWIP$ 0.0M Increase in accumulated deferred taxes $ (27.9M) Decreasein other working capital$ (0.7M) Net increasein rate base$ 213.0M Total Rate Base – 2019$2,891.6M Change in Rate Base

  12. Change in Cost of Capital Weighted Cost of Capital 20192018 D/E Ratio Cost D/E Ratio Cost LTD47.4% 2.15% 46.4% 2.12% Equity52.6%5.69%53.6% 5.80% 7.85%7.92% 2019 ROE = 10.82% (10.32% per Opinion 551 + 50 Basis Point RTO Adder)

  13. Reconciliation of Change in Return for 2019 Change in Rate Base $ 213.0M x 7.85%$ 16.7M PY Rate base x decrease in WCC $2,678.6M x (0.07%)$ (2.0M) Net change in return $ 14.7M The increase in the return is driven by the increase in Rate Base for 2019. Actual calculation performed on whole values

  14. Attachment O Net Revenue Requirement 2018$338.2M • Cost Drivers in 2019: • Increase in Operating Costs $ 18.0M • Increase in Return Requirement $ 14.7M • Decrease in Annual True-up $ 21.9M • Decrease in Revenue Credits $ 3.1M • Increase in Attachment GG & MM Rev Req $ (15.5M) • Attachment O Net Revenue Requirement 2019$380.4M Comparison of 2019 Revenue Requirement to 2018 Revenue Requirement

  15. 20192018Change Prior Year Annual True-up ATRR Component $ (5.2M) $ (21.3M) Divisor Component $ 5.0M $ 0.7M Interest on True-up $ (0.0M)$ (1.5M) Total $ (0.2M) $ (22.1M)$ 21.9M 2017 Actual 2016 Actual True-Up Calculation

  16. Attachment O Net Revenue Requirement 2018$338.2M • Cost Drivers in 2019: • Increase in Operating Costs $ 18.0M • Increase in Return Requirement $ 14.7M • Decrease in Annual True-up $ 21.9M • Decrease in Revenue Credits $ 3.1M • Increase in Attachment GG & MM Rev Req $ (15.5M) • Attachment O Net Revenue Requirement 2019$380.4M Comparison of 2019 Revenue Requirement to 2018 Revenue Requirement

  17. Change in Net Revenue Credits Revenue Credits Estimated in 2018 Rate$ (12.5M) Lower Projected PTP Service $ 3.3M Higher Projected Transmission Rent $ (0.2M) Decrease in 2019 Revenue Credits $ 3.1M Revenue Credits Estimated in 2019 Rate $ (9.4M) A decrease in Revenue Credits will increase the Attachment O Revenue Requirements

  18. Attachment O Net Revenue Requirement 2018$338.2M • Cost Drivers in 2019: • Increase in Operating Costs $ 18.0M • Increase in Return Requirement $ 14.7M • Decrease in Annual True-up $ 21.9M • Decrease in Revenue Credits $ 3.1M • Increase in Attachment GG & MM Rev Req $ (15.5M) • Attachment O Net Revenue Requirement 2019$380.4M Comparison of 2019 Revenue Requirement to 2018 Revenue Requirement

  19. Components of Attachment GG & MM Attachment GG Attachment MM • Rev Req for 2018 $ 71.8M$ 60.9M • Operating expenses (1)$ (0.4M)$ 0.6M • Depreciation expense$ 0.8M $3.2M • Taxes other $(0.4M) $ 1.2M • Income taxes$(0.3M) $ 2.4M • Return $ (0.8M)$ 8.7M • Rev Req for 2019(Attachment O Deduct) $ 70.7M$ 77.5M • Delta 2019 versus 2018 $ (1.1M) $ 16.6M $15.5M Attachment GG & MM revenue requirements are deducted from Attachment O revenue requirements (1) Includes Common & General depreciation calculation

  20. The following RECB project costs were included in the Attachment GG: • In service • Cannon Falls (MTEP 1456) • Yankee (Colville) Station (MTEP 1366) • Ulik Wind (MTEP 2765) • St. Cloud – Sauk River (MTEP 1953) • Nobles Gen Station (MTEP 1457) • Upgrades for G349 (MTEP 1458) • Upgrades for G809 (MTEP 2109) • Upgrades for G417 (MTEP 2119) • Pleasant Valley-Byron (MTEP 2178) • Glenco-West Waconia (MTEP 1285) 11. MN Valley Kerkhoven (MTEP 3312) 12. Kohlman Lake Goose Lake (MTEP 3317) 13. Coudry Osprey (MTEP 3375) 14. Wilmarth Sub (MTEP 3104) 15. CAPX202-Bemidji-Grand Rapids 230Kv line (MTEP 279) 16. CAPX2020-Fargo- St. Cloud 345Kv line (MTEP 286) 17. CAPX2020-Rochester-Lacrosse 345Kv line (MTEP 1024) 18. GIP 826 Crandal (MTEP 9523) 19. Hawks Nest (MTEP 11645) MTEP Projects Included in Attachment GG Calculation • CWIP • No CWIP included at this time; however the Company can request FERC authorization to allow CWIP • recovery in the formula rate on a project by project basis. • Total project costs included in Attachment GG : $580.4M

  21. MTEP Projects Included in Attachment MM Calculation • The following RECB project costs were included in the Attachment MM: • In service • CAPX2020-Brookings (MTEP 1203) • Big Stone – Brookings (MTEP 2221) • Lacrosse – Madison (MTEP 3127) • CWIP • No CWIP included at this time; however the Company can request FERC authorization to allow CWIP recovery in the formula rate on a project by project basis • Total project costs included in Attachment MM : $678.3M

  22. Total Revenue Requirements Attachment GG & MM Attachment GG Attachment MM • 2019 Annual Revenue Requirements $ 70.7M $ 77.5M • True-Up Adjustment $ (0.4M) $ 6.9M • Total 2019 MISO Billings $ 70.3M $ 84.4M

  23. Open Issues: • Elimination of Double Averaging the ADIT Pro-rate – Pending FERC action after MISO TO filing • Treatment of TCJA related excess ADIT - TBD

  24. Questions? Thank you all for attending today’s meeting Contacts: Carolyn M Wetterlin Sr. RTO Manager 612-330-6599 Thomas E Kramer Principal Rate Analyst 612-330-5866

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