2016 ATTACHMENT OCUSTOMER MEETINGOCTOBER 30, 2015

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AGENDA

• Meeting Purpose

• Otter Tail Power Company Profile

• Attachment O Calculation

• Capital Projects

• Budget Risks

• Pending Updates to the Formula Template

• Question/Answer

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LEGAL DISCLOSURE

All numeric data provided in this presentation is preliminary and subject to change.

All information will be finalized by 12/31/15.

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MEETING PURPOSE

• To provide an informational forum regarding Otter Tail’s forecasted Attachment O for 2016.

• The forecasted Attachment O for 2016 is calculated using the FERC Form 1 Attachment O template under the MISO Tariff with a projected net revenue requirement and projected load.

• Rates become effective on January 1, 2016 for the joint pricing zone comprised of Otter Tail, Great River Energy, and Missouri River Energy Services, Benson Municipal Utilities, Detroit Lakes Public Utilities, and Alexandria Light & Power.

NORTH DAKOTA

SOUTH DAKOTA

Garrison

Rugby

LANGDON WIND ENERGY CENTER

COYOTESTATION

Jamestown

LEGEND

Headquarters

Customer service center

HOOT LAKE PLANT

Fergus FallsWahpeton

Oakes

Morris

LAKE PRESTONCOMBUSTION TURBINE

BIG STONE PLANT

LUVERNE WIND FARM

ASHTABULA WIND ENERGY CENTER

ASHTABULA III

Milbank

SOLWAY COMBUSTION

TURBINE

Crookston

Devils Lake

Bemidji

JAMESTOWNCOMBUSTION

TURBINE

• 70,000 Square miles

• 130,200 Customers

• 422 Communities

• Avg. population about 400

• 785 Employees

• 495 Minnesota

• 200 North Dakota

• 90 South Dakota

• About 800 MW owned generation

• About 245 MW wind generation

• About 5,400 miles of transmission lines

SERVICE AREA

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6

FORWARD LOOKING ATTACHMENT O

• Forward Rate Requirements

• Rate Base

• Operating Expenses

• Revenue Requirement and Rate

• Network Rate Summary

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FORWARD RATE REQUIREMENTS

• By June 1 of each year, Otter Tail will post on OASIS all information regarding any Attachment O True-up Adjustments for the prior year.

• By September 1 each year, Otter Tail will post on OASIS its projected Net Revenue Requirement including the True-Up Adjustment and load for the following year, and associated work papers.

• Otter Tail will hold a customer meeting by October 31 each year to explain its formula rate input projections and cost detail.

RATE BASERate Base Item 2016

Projected2015

Projected $ Change % Change Explanation

Gross Plant in Service $ 429,186,735 $ 386,778,026 $ 42,408,709 11.0%The increase is primarily due to NERC work, Brookings being finished and other system improvements.

Accumulated Depreciation $ 118,546,386 $

112,631,484 $ 5,914,902 5.3%

The increase is primarily due to Fargo Phase III and the remainder of Brookings in service all of 2016.

Net Plant in Service $ 310,640,349 $ 274,146,542 $ 36,493,807 13.3% = Gross Plant - A/D

Adjustments to Rate Base $ (62,249,278) $ (62,362,196) $ 112,918 (0.2%)

CWIP for CON Projects $ 69,953,095 $ 40,886,235 $ 29,066,860 71.1%Upcoming construction of Brookings to Big Stone and Big Stone to Ellendale; both are classified as MVP projects.

Land Held for Future Use $ 9,038 $ 9,038 $ -

0.0%  

Working Capital $ 6,995,332 $ 5,894,170

$ 1,101,162 18.7% Higher CWC related to higher O&Ms.

Rate Base $ 325,348,536 $ 258,573,789 $ 66,774,747 25.8% = Net Plant + Adj + CWIP + Land + Working Capital

Note: The above numbers are Transmission only 8

OPERATING EXPENSES

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Expense Item

2016 Projected

2015 Projected $ Change % Change Explanation

O&M $ 16,746,015 $ 14,024,094 $ 2,721,921 19.4% The increase is mainly due to higher Schedule 26 and 26A expenses.

Depreciation Expense $ 7,875,761 $ 7,140,892 $ 734,869 10.3% More plant is in service with the energization of Fargo

III and remainder of Brookings.

Taxes Other than Income $ 3,358,563 $ 3,133,563 $ 225,000 7.2% An increase in Total Company Property Tax Expense

as a result of higher assessed values.

Income Taxes $ 11,938,039 $ 9,822,603 $ 2,115,436 21.5% Higher rate base results in a higher return and subsequently more income tax expense.

Operating Expense $ 39,918,378 $ 34,121,152 $ 5,797,226 17.0% = O&M + A&G + Depreciation + Taxes

Note: The above numbers are Transmission only

REVENUE REQUIREMENT AND RATE

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  2016 Projected

2015 Projected

$ Change % Change Explanation

Long Term Debt 46.68% 48.35%   (1.67%) Haven’t had a need to increase our LT Debt from year over year.

Common Stock 53.32% 51.65%   1.67%

Total 100.00% 100.00%     = Debt + Equity

Weighted Cost of Debt 5.56% 5.54%   0.02% Close to last year.

Cost of Common Stock 12.38% 12.38%   0.00% Unchanged

Rate of Return 9.19% 9.07%   0.12% = (LTD*Cost)+(Preferred Stock*Cost)+(Common Stock*Cost)

Rate Base $ 325,348,536 $ 258,573,789 $ 66,774,747 25.82% From "Rate Base" Calculation

Allowed Return $ 29,914,500 $ 23,465,923 $ 6,448,577 27.48% = Rate of Return * Rate Base

Operating Expenses $ 39,918,378 $ 34,121,152 $ 5,797,226 16.99% From "Operating Expense" Calculation

Attachment GG Adjustments $ 18,550,354 $ 18,208,328 $ 342,026 1.88% Close to last year.

Attachment MM Adjustments $ 13,285,520 $ 6,603,848 $ 6,681,672 101.18% Upcoming construction of CAPX Brookings and Big Stone to Ellendale; both are classified as MVP projects.

Gross Revenue Requirement $ 37,997,004 $ 32,774,899 $ 5,222,105 15.93% = Return + Expenses - Adjustments

Revenue Credits $ 6,509,939 $ 6,283,694 $ 226,245 3.60% Close to last year.

2014/2013 True-up (Including Interest)

$ (3,117,851) $ (1,181,325) $ (1,936,526) 163.93%

Net Revenue Requirement $ 28,369,215 $ 25,309,881 $ 3,059,334 12.09% = Gross Revenue Requirement - Revenue Credits + True-up

RATE SUMMARY

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$0.25 or 8.4% increase

2015

Pro

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Rate

Base

Opera

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Attach

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Attach

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Depre

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2016

Pro

ject

ed A

TRR($1.00)($0.50)$0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 $3.50

$2.99

($0.10)

$0.08

$1.03

$0.32

($0.04)

($0.79)

$0.12

($0.23) ($0.10) ($0.04)

$3.24

$/kw

-mo

nth

TOTAL TRANSMISSION REVENUE REQUIREMENT BREAKDOWN

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Total Rev. Req. =

$60,205,088

Net Attch. O ATRR =

$28,369,214

Attch. GG Rev. Req. = $18,550,354

Attch. MM Rev. Req. = $13,285,520

2016 TRANSMISSION PROJECTS

ATTACHMENT O CAPITAL PROJECTS: TRANSMISSION LINE PROJECTS > $200K

Project VoltageIn Service

Date

2016 Forecasted Spend

(with AFUDC)Description of Project

Repair/Replace Existing Transmission Structures ≥ 115 kV 12/31/2016 $ 252,000 Replace existing 230 kV and 115 kV

transmission structures due to water damage.

Proactive-Worst Performing 41.6 kV Lines

41.6 kV 12/30/2016 $ 321,000 Enhancements and/or rebuild of worst performing 41.6 kV lines.

Relocate Colgate 41.6 kV Line 41.6 kV 12/31/2016 $ 302,000 Relocate existing 41.6 kV line near Colgate, ND due to rising water in existing ROW.

Martin – Anamoose 41.6 kV Line Reroute 41.6 kV 12/20/2016 $ 201,000

Relocate existing 41.6 kV line between Martin – Anamoose in ND due to rising water in existing ROW.

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ATTACHMENT O CAPITAL PROJECTS: TRANSMISSION LINE PROJECTS > $200K

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Project VoltageIn Service

Date

2016 Forecasted Spend

(with AFUDC)Description of Project

Rebuild Harvey – Rugby 115 kV Line 115 kV 12/31/2021 $ 268,000

Rebuild existing line by replacing structures due to age and condition using new framing with shield wire.

Upgrade Max – Ryder 41.6 kV Line 41.6 kV 12/31/2018 $ 399,000 Reconductor and rebuild existing transmission line due to age and condition.

Substation Security (CIP Ver. 5) ≥ 115 kV 12/31/2017 $ 255,000 Install necessary security equipment at applicable substations to comply with NERC standards.

Clearbrook Area 115 kV Line 115 kV 10/31/2018 $ 2,500,000

Construct a new, approximately 16-18 mile 115 kV transmission line in the Clearbrook area of north central MN with new 230/115 kV substation near Bagley.

ATTACHMENT O CAPITAL PROJECTS: TRANSMISSION LINE PROJECTS > $200K

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Project VoltageIn Service

Date

2016 Forecasted Spend

(with AFUDC)Description of Project

NERC Facility Ratings Alert ≥ 115 kV 12/31/2016 $ 4,100,000Line upgrades to numerous transmission facilities across the OTP service territory that violate NESC clearance requirements.

Rolette 230/69/41.6 kV Substation

230 kV 7/31/2017 $ 692,000 Install a new 230/69/41.6 kV substation near Rolette, ND.

Voltaire 115/41.6 kV Substation 115 kV 12/31/2016 $ 3,600,000 Install a new 115/41.6 kV substation near Minot, ND.

Rugby 41.6 kV Switching Station 41.6 kV 6/30/2017 $ 2,200,000 Install a new 41.6 kV switching station near Rugby, ND.

ATTACHMENTS GG AND MM CAPITAL PROJECTS: TRANSMISSION LINE PROJECTS > $200K

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Project VoltageIn Service

Date

2016 Forecasted Spend

(with AFUDC)Description of Project

Attachment GG

J262/J263 Courtenay Wind Farm Interconnection Project 345 kV 10/31/2016 $ 4,700,000

Expand Jamestown 345/115 kV Substation and replace two existing 345/115/41.6 kV transformers to accommodate Generator Interconnection Project J262/J263.

Buffalo 345/115 kV Transformer (Buffalo – Casselton Line) 345 kV 4/30/2017 $ 3,500,000

Underlying System improvements for 115 kV line from Casselton – Buffalo. Add more transformer capacity at Buffalo, ND.

J290 Border Winds Generator Interconnection Project 230 kV 12/31/2015 $ 204,000

Expand Rugby 230/115 kV Substation and add a second 230/115 kV transformer to accommodate Generator Interconnection Project J290.

Attachment MM

Big Stone South – Brookings Line 345 kV 9/30/2017 $ 53,400,000 Build new 345 kV line from Big Stone South – Brookings with Big Stone South Substation in SD.

Big Stone South – Ellendale Line 345 kV 9/30/2019 $ 37,400,000 Build new 345 kV line from Big Stone South – Ellendale in SD and ND.

RevenueDemand/Weather

Regulatory Filings Financing

OutagesTiming of Capital Projects

Tight Budgets

BUDGET RISKS

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PENDING UPDATES TO FORMULA TEMPLATE

• Otter Tail anticipates making a change to its Attachment O rate template concerning the treatment of accumulated deferred income taxes (“ADIT”) based on recent IRA Private Letter Rulings.

• The revisions modify the method used to calculate average ADIT balances.• Otter Tail is working with other MISO Transmission Owners to file an updated

formula template with FERC and will request this update become effective January 1, 2016.

• Otter Tail is still working through the calculations and does not have a final impact at this time.

• Otter Tail will post the updated 2016 revenue requirements for Attachment O, GG and MM on OASIS once the calculation is completed and the template change request filing has been filed with FERC.

• The information in this presentation is based on the currently effective rate template.

QUESTIONS?

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If you have any additional questions after the meeting, please submit via e-mail to:

Stacie Hebert

shebert@otpco.com

Questions and answers will be posted on Otter Tail’s OASIS website (http://www.oasis.oati.com/OTP/index.html) within two weeks from the

date of inquiry.