NorthWestern Energy South Dakota Electric Revenue Requirement Model Description. Statement K

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1 NorthWestern Energy South Dakota Electric Revenue Requirement Model Description Statement K 20:10:13:88. Statement K -- Income taxes. Statement K shall show for the test period income taxes computed on the basis of the rate of return claimed applied to the overall utility rate base and separated between federal and state taxes. If the rate base claimed includes adjustments other that book figures for the test period 13-month average, the income taxes shall be computed separately for claimed rate base and for the 13-month average rate base per books for the test period. All tax adjustments shall be completely described and the amounts shown separately. Amounts of deferred taxes debited and credited shall be shown separately. The amounts and basis of assignment of income taxes attributed to other utility departments and nonutility operations shall be shown, together with all tax savings affecting the total tax liability. If the filing public utility joins in a consolidated tax return, the total estimated tax savings, expressed as a percentage, resulting from the filing of a consolidated return shall be given, as well as a full explanation of the method of computing the tax savings. Any abnormalities such as nonrecurring income, gains, losses, and deductions affecting the income tax for the test period shall be explained and the tax effect set forth. Items required by 20:10:13:89 to 20:10:13:93, inclusive, shall be submitted as a part of statement K. Source:2 SDR 90, effective July 7, 1976; 12 SDR 151, 12 SDR 155, effective July 1, General Authority: SDCL 49-34A-4. Law Implemented: SDCL 49-34A-10, 49-34A-12, 49-34A-41.

2 NorthWestern Corporation, dba NorthWestern Energy Statement K South Dakota Electric Rate Case Page 1 of 1 Computation of Federal and State Income Taxes Adjustments Base Period to Reflect Line Not Normalizing Requested Test Period No. Description Reference Normalized Adjustments Normalized Return Total (a) (b) (c) (d) (e) (f) (g) $ $ $ $ $ 1 Operating Income before Income Taxes Stmt M 20,179,297 (3,792,367) 16,386,930 26,469,794 42,856,724 2 Less Interest Expense Line 63 (6,990,243) (3,747,312) (10,737,555) 0 (10,737,555) 3 4 Subtotal before Tax Adjustments 13,189,054 (7,539,679) 5,649,375 26,469,794 32,119, Tax Adjustments - Permanent Differences 7 Lobbying Expenses 42, , ,274 8 Meals & Entertainment 82, , ,704 9 Officers Life Insurance 71, , , Total Permanent Differences 196, , , Tax Adjustments - Temporary Differences 14 AFUDC net of Capitalized Interest (913,689) 0 (913,689) 0 (913,689) 15 Bad Debts 107, , , Bonuses & Compensation (503,661) 0 (503,661) 0 (503,661) 17 Capitalized Overheads 25,317,488 (25,317,488) Contributions in Aid of Construction 175, , , Deferred Interest 2, , , Deferred Power Costs (1,443,002) 0 (1,443,002) 0 (1,443,002) 21 Deferred Revenue (57,504) 0 (57,504) 0 (57,504) 22 Environmental Liability (939,806) 0 (939,806) 0 (939,806) 23 FAS 106 & 112 Liability 368, , , Future SISP (546,006) 0 (546,006) 0 (546,006) 25 Injuries & Damages (183,612) 0 (183,612) 0 (183,612) 26 Loss on Reacquired Debt 8, , , Miscellaneous 520, , , Non-Qualified Retirement Comp & Benefits 1,729, ,729, ,729, Pension Liability (5,059,095) 0 (5,059,095) 0 (5,059,095) 30 Property Taxes 24, , , Regulatory Asset-FERC Order 472 (1,526) 0 (1,526) 0 (1,526) 32 Regulatory Asset-Pension 5,318, ,318, ,318, Removal Costs net of Salvage (2,503,232) 0 (2,503,232) 0 (2,503,232) 34 Repairs (8,270,025) 0 (8,270,025) 0 (8,270,025) 35 Retirements (440,694) 0 (440,694) 0 (440,694) 36 Sec. 174 Research & Experimental Expenses (78,606) 0 (78,606) 0 (78,606) 37 Accelerated Tax Depreciation - Flow Thru Sch K-2, Ln 5 2,544, ,006 3,262, ,262, Accelerated Tax Depreciation - Deferred Sch K-2, Ln 12 (29,633,237) (3,223,366) (32,856,603) 0 (32,856,603) 39 Vacation Pay 25, , , Total Temporary Differences (14,428,409) (27,822,848) (42,251,257) 0 (42,251,257) Taxable Income / (NOL) (1,042,506) (35,362,527) (36,405,034) 26,469,794 (9,935,240) 44 Net Operating Loss Carryforward 1,042,506 35,362,527 36,405,034 (26,469,794) 9,935, Taxable Income Federal Tax Rate 35% 35% 35% 35% 35% Federal Income Tax - Current before Credits/Adjmts Deferred Income Tax 1,495,547 (2,387,586) (892,039) 9,264,428 8,372, R & D Tax Credit (1,424) 0 (1,424) 0 (1,424) 52 Investment Tax Credit Amortization (232,326) 0 (232,326) 0 (232,326) 53 Prior Year True-Up Adjustments 660,924 (660,924) Total Federal Income Tax - Operating 1,922,721 (3,048,509) (1,125,788) 9,264,428 8,138, Computation of Interest Expense Net Rate Base Stmt M, Sch 9, L21 296,638, ,759, ,397, ,397, Interest Component of Cost of Capital Stmt G, Pg1, Ln % % % % % Interest Expense 6,990,243 3,747,312 10,737, ,737,555

3 NorthWestern Energy South Dakota Electric Revenue Requirement Model Description Schedule K-1 20:10:13:89. Schedule K-1 -- Working papers for federal income taxes. In support of federal income taxes, the utility shall submit a complete reconciliation of the book net income with taxable net income as reported to the federal Internal Revenue Service for the most recent year for which a tax return was filed and for the three previous years. A complete explanation of all items in the reconciliation shall be submitted. If the tax allowances claimed give effect to omission of items appearing or inclusion of items not appearing in the reconciliations for the most recent tax return, the reasons for such omissions or inclusions shall be submitted. All items in the reconciliation shall be referenced specifically to the elements of the cost of service to which they refer. Source:2 SDR 90, effective July 7, 1976; 12 SDR 86, effective November 24, 1985; 12 SDR 151, 12 SDR 155, effective July 1, General Authority: SDCL 49-34A-4. Law Implemented: SDCL 49-34A-10, 49-34A-12, 49-34A-41.

4 NorthWestern Corporation, dba NorthWestern Energy Schedule K-1 Computation of Federal and State Income Taxes Page 1 of 5 Reconciliation of Income Per Books to Income Per Tax Reconciliations of Book Income to Taxable Income For NorthWestern are attached for the Tax Years 2013, 2012, 2011, & 2010.

5 NorthWestern Corporation, dba NorthWestern Energy Schedule K-1 Reconciliation of Income Per Books to Income Per Tax Page 2 of 5 Net Income/(Loss) before Income Tax per Books 26,458,501 Tax Adjustments - Permanent Differences Lobbying Expenses 74,940 Meals & Entertainment 139,228 Officers Life Insurance 126,089 Total Permanent Differences 340,257 Tax Adjustments - Temporary Differences AFUDC net of Capitalized Interest (1,189,948) Bad Debts 189,263 Bonuses & Compensation (996,722) Capitalized Overheads 70,893,914 Contributions in Aid of Construction 183,336 Deferred Interest 4,748 Deferred Power Costs (3,185,114) Deferred Revenue (2,162,593) Environmental Liability (1,345,300) FAS 106 & 112 Liability 349,055 Future SISP (263,947) Injuries & Damages (42,473) Loss on Reacquired Debt 14,836 Miscellaneous (237,079) Non-Qualified Retirement Comp & Benefits 5,963,182 Pension Liability (10,745,503) Property Taxes 61,382 Regulatory Asset-FERC Order 472 (5,070) Regulatory Asset-MGPs 1,420,826 Regulatory Asset-Pension 9,551,094 Removal Costs net of Salvage (1,643,814) Repairs (9,605,828) Retirements (676,256) Sec. 174 Research & Experimental Expenses (1,367,436) Accelerated Tax Depreciation - Flow Thru 2,487,955 Accelerated Tax Depreciation - Deferred (70,407,853) Vacation Pay 144,455 Total Temporary Differences (12,610,888) Taxable Income / (NOL) 14,187,870

6 NorthWestern Corporation, dba NorthWestern Energy Schedule K-1 Reconciliation of Income Per Books to Income Per Tax Page 3 of 5 Net Income/(Loss) before Income Tax per Books 24,834,009 Tax Adjustments - Permanent Differences Lobbying Expenses 69,648 Meals & Entertainment 121,112 Officers Life Insurance (3,235) Total Permanent Differences 187,524 Tax Adjustments - Temporary Differences AFUDC net of Capitalized Interest (2,355,261) Bad Debts (121,545) Bonuses & Compensation 1,747,659 Capitalized Overheads 62,831,469 Contributions in Aid of Construction 511,827 Deferred Interest 4,748 Deferred Power Costs 2,562,959 Deferred Revenue 1,433,405 Environmental Liability 246,000 FAS 106 & 112 Liability 27,955 Future SISP (723,491) Injuries & Damages 170,164 Loss on Reacquired Debt 14,836 Miscellaneous 34,976 Non-Qualified Retirement Comp & Benefits 2,397,214 Pension Liability 2,257,523 Property Taxes 548,143 Regulatory Asset-FERC Order 472 5,070 Regulatory Asset-MGPs 379,613 Regulatory Asset-Pension (769,870) Removal Costs net of Salvage (2,225,158) Repairs (6,233,131) Retirements 645,817 Sec. 174 Research & Experimental Expenses (1,111,221) Accelerated Tax Depreciation - Flow Thru 1,778,285 Accelerated Tax Depreciation - Deferred (32,586,031) Vacation Pay 154,112 Total Temporary Differences 31,626,067 Taxable Income / (NOL) 56,647,600

7 NorthWestern Corporation, dba NorthWestern Energy Schedule K-1 Reconciliation of Income Per Books to Income Per Tax Page 4 of 5 Net Income/(Loss) before Income Tax per Books 25,476,539 Tax Adjustments - Permanent Differences Lobbying Expenses 120,103 Meals & Entertainment 128,791 Officers Life Insurance 25,192 Total Permanent Differences 274,086 Tax Adjustments - Temporary Differences AFUDC net of Capitalized Interest (320,386) Bad Debts (41,895) Bonuses & Compensation (1,127,092) Capitalized Overheads 43,784,230 Contributions in Aid of Construction 290,623 Deferred Interest 4,748 Deferred Power Costs (2,418,862) Deferred Revenue 2,393,434 Environmental Liability (340,704) FAS 106 & 112 Liability 354,060 Future SISP (220,425) Injuries & Damages (238,217) Loss on Reacquired Debt 14,836 Miscellaneous (597,036) Non-Qualified Retirement Comp & Benefits 2,641,937 Pension Liability 531,642 Property Taxes (295,492) Regulatory Asset-FERC Order 472 (6,012) Regulatory Asset-MGPs (431,727) Regulatory Asset-Pension (1,725,055) Removal Costs net of Salvage (784,355) Repairs (6,420,320) Retirements 581,499 Sec. 174 Research & Experimental Expenses - Accelerated Tax Depreciation - Flow Thru 3,699,517 Accelerated Tax Depreciation - Deferred (47,327,731) Vacation Pay 244,934 Total Temporary Differences (7,753,850) Taxable Income / (NOL) 17,996,774

8 NorthWestern Corporation, dba NorthWestern Energy Schedule K-1 Reconciliation of Income Per Books to Income Per Tax Page 5 of 5 Net Income/(Loss) before Income Tax per Books 28,504,523 Tax Adjustments - Permanent Differences Lobbying Expenses 64,203 Meals & Entertainment 121,794 Officers Life Insurance 33,636 Total Permanent Differences 219,633 Tax Adjustments - Temporary Differences AFUDC net of Capitalized Interest (135,275) Bad Debts (32,895) Bonuses & Compensation 3,554,948 Capitalized Overheads 35,675,520 Contributions in Aid of Construction 125,624 Deferred Interest 4,748 Deferred Power Costs (3,071,063) Deferred Revenue 1,848,403 Environmental Liability (1,708,476) FAS 106 & 112 Liability 417,631 Future SISP (526,655) Injuries & Damages 104,156 Loss on Reacquired Debt 14,836 Miscellaneous (471,662) Non-Qualified Retirement Comp & Benefits 1,505,299 Pension Liability 4,543,078 Property Taxes 270,058 Regulatory Asset-FERC Order 472 6,012 Regulatory Asset-MGPs (1,303,010) Regulatory Asset-Pension (3,729,730) Removal Costs net of Salvage (300,362) Repairs (5,774,729) Retirements 451,138 Sec. 174 Research & Experimental Expenses - Accelerated Tax Depreciation - Flow Thru 3,481,270 Accelerated Tax Depreciation - Deferred (35,718,331) Vacation Pay 217,201 Total Temporary Differences (552,267) Taxable Income / (NOL) 28,171,890

9 NorthWestern Energy South Dakota Electric Revenue Requirement Model Description Schedule K-2 20:10:13:90. Schedule K-2 -- Differences in book and tax depreciation. If tax depreciation differs from book depreciation, the utility shall file schedule K-2 showing the computation of the tax depreciation which will indicate the differences between book and tax depreciation on a straightline basis, and differences arising from class life (ADR) depreciation, and the excess of liberalized depreciation and amortization of emergency facilities over straightline depreciation for tax purposes for the taxable year or years. Source:2 SDR 90, effective July 7, 1976; 12 SDR 151, 12 SDR 155, effective July 1, General Authority: SDCL 49-34A-4. Law Implemented: SDCL 49-34A-10, 49-34A-12, 49-34A-41.

10 NorthWestern Corporation, dba NorthWestern Energy Schedule K-2 Computation of Federal and State Income Taxes Page 1 of 1 Difference Between Book and Tax Depreciation Adjustments Base Period to Reflect Not Normalizing Requested Test Period Line No. Description Normalized Adjustments Normalized Return Total (a) (b) (c) (d) 1 Tax Depreciation on a Straight-Line Basis (Flow-Thru) 15,512,685 2,677,534 18,190,218-18,190, Book Depreciation 18,057,445 3,395,540 21,452,985-21,452, Difference Between Straight-Line Basis Tax Depreciation and Book Depreciation (2,544,760) (718,006) (3,262,767) - (3,262,767) Tax Depreciation 45,145,922 5,900,900 51,046,822-51,046, Tax Depreciation on a Straight-Line Basis (Flow-Thru) 15,512,685 2,677,534 18,190,218-18,190, Excess of Tax Depreciation over Straight-Line Basis Tax Depreciation 29,633,237 3,223,366 32,856,603-32,856,603

11 NorthWestern Energy South Dakota Electric Revenue Requirement Model Description Schedule K-3 20:10:13:91. Schedule K-3 -- Working papers for consolidated federal income tax. If the utility joins in the filing of a consolidated federal income tax return, schedule K-3 shall be submitted showing the net taxable income or loss for each company in the consolidation, including an adjustment to effect the exclusion of excess of liberalized depreciation and amortization of emergency facilities over straightline depreciation for each company involved. There shall also be submitted with the statement of taxable net income or tax loss of each individual company participating in the consolidated returns, the details of consolidating adjustments and a computation of the system tax liability based on the consolidated net income for the last tax year ending within or immediately prior to the test period for which a tax return was filed. In addition, there shall be included a computation showing the percentage of tax savings arising from consolidation for the taxable year or years covered by the test period. Only one copy of schedule K-3 need be supplied by the utility. Source:2 SDR 90, effective July 7, 1976; 12 SDR 86, effective November 24, 1985; 12 SDR 151, 12 SDR 155, effective July 1, General Authority: SDCL 49-34A-4. Law Implemented: SDCL 49-34A-10, 49-34A-12, 49-34A-41.

12 NorthWestern Corporation, dba NorthWestern Energy Schedule K-3 Computation of Federal and State Income Taxes Page 1 of 1 Consolidated Federal Income Tax (Based Upon 2013 Tax Return) Allocation of Taxable Consolidated Line No. Company Income/(Loss) Taxes (a) (b) (c) 1 Northwestern Corporation - Parent (289,583,881) 1,311, Northwestern Public Service 14,187, Risk Partners Assurance, Ltd. (1,013,384) TOTAL (276,409,395) 1,311, Income 35% - 10 Alternative Minimum Tax 1,311, Total Consolidated Tax Liability 1,311,159

13 NorthWestern Energy South Dakota Electric Revenue Requirement Model Description Schedule K-4 20:10:13:92. Schedule K-4 -- Working papers for an allowance for current tax greater than tax calculated at consolidated rate. If the utility claims an allowance for current tax in its cost of service which would be greater than the federal income tax calculated at the consolidated tax rate or taxes as a percentage of total taxable income of individual companies with positive taxable income, full disclosure thereof shall be made, including the allocation among utility and nonutility departments of the tax payable and the assignment of deductions or tax benefits relied upon, or both. Source:2 SDR 90, effective July 7, 1976; 12 SDR 151, 12 SDR 155, effective July 1, General Authority: SDCL 49-34A-4. Law Implemented: SDCL 49-34A-10, 49-34A-12, 49-34A-41.

14 NorthWestern Corporation, dba NorthWestern Energy Schedule K-4 Computation of Federal and State Income Taxes Page 1 of 1 Working Papers for an Allowance for Current Tax Greater Than Tax Calculated at Consolidated Rate The "Stand-Alone" Method is used to compute the Income Tax Expense or Benefit to Northwestern Public Service. Northwestern Public Service pays to its Parent the amount of Tax which equals but does not exceed the amount of Tax it would have paid had it filed separate "Stand-Alone" Tax Returns.

15 NorthWestern Energy South Dakota Electric Revenue Requirement Model Description Schedule K-5 20:10:13:93. Schedule K-5 -- Working papers for claimed allowances for state income taxes. In support of the claimed allowances for income taxes paid state governments, the utility shall submit schedule K-5 showing the income tax paid each state in the current or previous year covered by the test period, including the effect of liberalized depreciation on the taxes paid. Source:2 SDR 90, effective July 7, 1976; 12 SDR 151, 12 SDR 155, effective July 1, General Authority: SDCL 49-34A-4. Law Implemented: SDCL 49-34A-10, 49-34A-12, 49-34A-41.

16 NorthWestern Corporation, dba NorthWestern Energy Schedule K-5 Computation of Federal and State Income Taxes Page 1 of 1 Claimed Allowance for State Income Tax This Schedule is not applicable as no State Income Taxes are claimed for South Dakota Cost of Service.

ATTACHMENT NO POPULATED FORMULA RATE

ATTACHMENT NO POPULATED FORMULA RATE ATTACHMENT NO. 1 2008 POPULATED FORMULA RATE Attachment No. 1 Page 1 of 27 ATTACHMENT H13A Commonwealth Edison Company Formula Rate Appendix A Notes FERC Form 1 Page # or Instruction Shaded cells are input