2014 Attachment O True-Up Presentation Presenter: David Grover Manager, Transmission Pricing July 8, 2015
Presentation Purpose Discuss the 2014 Annual True-Up posting Walk through the timeline and mechanics of how the Attachment O True-Up is calculated Discuss key drivers of True-Up results Describe the next steps for Stakeholders 2
2014 True-Up Documents Posted On June 1, 2015, ITC Midwest posted its preliminary 2014 True-Up package on the MISO and OASIS websites. The documents posted include: Workable populated 2014 Attachment O Formula Rate Template and underlying work-papers Top Sheet showing calculations of the 2014 True-Up Preliminary support for Actual Interest on True-Up Monthly peak loads and 13-month averages for plant in service, depreciation, debt and equity Attachment GG and Attachment MM with its related True-Up* Schedule 1 Expense Recovery and True-Up Relevant accounting disclosures * The Attachment GG True-Up will be posted on or before August 1, 2015. 3
Forward Looking Attachment O Timeline Formula Rate Posting Dates* 9/1/2013 Post Projected Rates for 2014 6/1/2014 Post Actual 2013 True-Up 9/1/2014 Post Projected Rates for 2015 6/1/2015 Post Actual 2014 True-Up 9/1/2015 Post Projected Rates for 2016 6/1/2016 Post Actual 2015 True-Up 9/1/2016 Post Projected Rates for 2017 1/1/13 1/1/14 1/1/15 1/1/16 1/1/17 Annual Customer Rate 2014 RATE 1/1/14 12/31/14 Projected 2014 RR +/- 2012 True-Up + Interest 2015 RATE 1/1/15 12/31/15 Projected 2015 RR +/- 2013 True-Up + Interest 2016 RATE 1/1/16 12/31/16 Projected 2016 RR +/- 2014 True-Up + Interest * Preliminary True-Ups and Projected Rates are posted or before 06/01 and 09/01 respectively; (or the following business day when dates fall on a weekend or a holiday 4
Steps to Derive Actual 2014 Net Revenue Requirement Step 1 2014 Actual Rate Base $ 1,627,692,136 Weighted Average Cost of Capital 9.19% = Step 2 Allowed Return * $ 149,629,075 + Operating Expenses + Income Tax $ 202,055,432 = Step 3 Gross Revenue Requirement * (Before Revenue Credits/Offsets) $ 351,684,507 Revenue Credits/Offsets** $ 37,340,943 = Step 4 Actual 2014 Revenue Requirement* (After Revenue Credits/Offsets) 2012 True Up Adjustment $ 314,343,564 + $ (5,639,724) Under/(Over) Recovery = Step 5 Net Revenue Requirement * (Includes 2012 True-Up adjustment) $ 308,703,840 * Totals may not reconcile due to rounding. ** Represent revenue credits/offsets for Schedules 26, 26A, PTP revenues, and rents. *** Includes (a) the 2012 True-Up adjustment and (b) a FERC refund per docket no. PA10-13-000 5
Calculation of 2014 True-Up adjustment - Preliminary Description $ Amount Actual 2014 Net Revenue Requirement and 2012 True Up Adjustment (before Discount) 308,703,840 Less: 2012 True-Up Under/(Over) Recovery (5,639,724) Actual 2014 Net Revenue Requirement 314,343,564 Less Discount * 4,125,000 Actual 2014 Revenue Requirement (after Discount) 310,218,564 Less: Actual 2014 Network Revenues** 314,371,645 2014 True-Up Principal Under/(Over) Recovery (4,153,081) Monthly Interest Rate *** 0.27% Number of Months 24 Interest (269,120) True-Up Principal & Interest Under/(Over) Recovery Preliminary (4,422,201) Notes: * The rate discount is pursuant to pre-filed rebuttal testimony of J. L Welch, page 6, filed in Iowa Docket No. SPU-07-11, and similar testimony filed in MPUC Docket No. E001/PA-07-540 OAH Docket No. 15-2500-19025-2. In that testimony ITC Midwest, LLC agreed to provide a rate discount of $4,125,000 to its customers in each of eight years, beginning in the year customers experience an increase in transmission charges following consummation of the Transaction. ** Actual network revenues are for the year-ended 2014 as shown on the footnote to page 328-330, line 6, column n of ITC Midwest s FERC Form No. 1, and excludes revenues for the 2012 true-up adjustment, which were accrued as revenue in 2012 and refunded to customers in 2014. *** Preliminary interest rate; final interest rate based on 19 months ending July 2015 and will be posted by September 1. See exhibit on the appendix for calculations. 6
2014 True-Up Summary of Key Drivers Description $ Amount Higher Return on Rate Base 585,044 Higher Operating Expenses plus income taxes 1,211,633 Higher Credits/Offsets (Sch. 26, 26A, PTP revenues, rents) (5,086,072) Higher load than Anticipated (863,687) Total 2014 True-Up Adjustment Principal Under/(Over) Recovery* (4,153,081) Interest (269,120) Total 2014 True-Up Principal & Interest Under/(Over) Recovery* (4,422,201) * Totals may not reconcile due to rounding. 7
Accuracy of Projections over time 80% 60% 40% 20% 0% -20% -40% -60% Net Plant in Service O & M (transmission) A & G Materials & Supplies Taxes other than Income Revenue Credits -80% 2010 2011 2012 2013 2014 ITC Midwest s trends on Revenue Requirement components (projected vs. actual) show: Some key components approaching a zero variance over time True-Up being affected by items outside of ITC Midwest control; i.e. point to point revenue included in revenue credits 8
Key Drivers of 2014 True-Up ITC Midwest s 2014 Attachment O True-Up amount (excluding interest) is an under/(over) Recovery of ~ ($4.2 MM) Return on Rate Base Overall return on rate base was higher than projected by ~ $ 0.6 MM, which represents a 0.4% change over the projected return on rate base. Operating Expenses + Income Taxes Overall operating expenses plus income taxes were higher than projected by ~$ 1.2 MM, primarily driven by: Higher Transmission operating and maintenance expenses, partially offset by Lower depreciation expenses Credits and Offsets Revenue credits & other offsets were higher than projected by ~ ($ 5.1 MM), primarily driven by: Higher point-to-point revenues, rental revenues, and Schedule 26 revenue requirement, partially offset by Lower Schedule 26A (MVP) revenue requirement. Load Load was higher than projected which led to an over-collection of ~ $ (0.9 MM), primarily driven by: Warmer than normal weather in May, September, and November, partially offset by Lower economic activity in 4 th Quarter of 2014 and a slightly cooler than average summer 9
Peak Load (MW) ITC Midwest Load Forecast Vs. Actual 4,000 3,500 ITC Midwest Load Forecast vs. Actual 3,000 2,500 2,000 1,500 Network Forecast Network Actual 1,000 500 - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Overall actual load for ITC Midwest was 0.10% higher than forecast due to: Warmer weather in May, September and November, partially offset by, Slower economic activity in Q4, and a slightly cooler than average summer 10
Next Steps Information Exchange Process: Interested parties to submit information requests no later than December 1, 2015 ITC Midwest will make a good faith effort to respond within fifteen (15) business days of receipt of such requests Any request for information must be submitted in writing to: misoformularates@itctransco.com All questions and answers will be distributed by email to the parties who asked and will be posted on the OASIS website ITC Midwest will post projected rates for 2016 by September 1, 2015* * Posting occurs on next business day if September 1 falls on a weekend or a holiday. 11
Questions? Thank you A Vision Forward 12
APPENDIX 13
- Step 1 2014 Calculation of Actual Rate Base Rate Base Item 2014 Actual Amount 2014 Projected Amount Variance Gross Plant in Service $ 2,089,555,597 $ 2,104,685,575 $ (15,129,978) - Accumulated Depreciation 364,637,860 393,484,312 (28,846,452) = Net Plant in Service $ 1,724,917,737 $ 1,711,201,263 $ 13,716,474 + Deferred Taxes (139,073,181) (144,931,905) 5,858,724 + Materials & Supplies 31,965,174 40,867,303 (8,902,129) + Prepayments 1,489,618 2,106,970 (617,351) + Working Capital 8,392,788 8,043,452 349,336 = Total Rate Base $ 1,627,692,136 $ 1,617,287,083 $ 10,405,053 * Totals may not reconcile due to rounding. 14
- Step 1 (Cont.) 2014 Major Project Additions to Plant In-Service Reliability-System Capacity Improvements Heron Lake to Lakefield 161kV Rebuild Creston Substation Project Dubuque 8 th Street 161-69kV Transformers Gen Interconnect/Network upgrade G612 Network Upgrades Reliability-Infrastructure Improvements Wood Pole Replacement Program Breaker Replacements 34.5kV to 69kV Conversion Phase 1 Storm Restoration NERC Alert Ratings Analysis Grand JCT-Boone Line Project The total 2014 Actual Capital Additions to Plant In-Service is $230.6 million. However, the list of projects included here is limited to major projects only and is only a portion of total capital additions. 15
- Step 1 & 2 2014 Calculations of Actual Rate of Return & Actual Allowed Return Cost of Capital Weight Actual Cost 2014 Actual WACC 2014 Projected WACC Equity 60% 12.38% 7.43% 7.43% Debt 40% 4.41% 1.76% 1.79% Rate of Return* 9.19% 9.22% Allowed Return 2014 Actual Amount 2014 Projected Amount Variance Rate Base $ 1,627,692,136 $ 1,617,287,083 $ 10,405,053 x Rate of Return (above) 9.19% 9.22% Allowed Return* $ 149,629,075 $ 149,044,031 $ 585,044 * Totals may not reconcile due to rounding. 16
- Steps 2 & 3 2014 Actual Operating Expenses & Gross Revenue Requirement Operating Expense plus Income Taxes 2014 Actual Amount 2014 Projected Amount Variance Operation & Maintenance Expenses $ 33,392,496 $ 30,913,553 $ 2,478,943 Administrative & General Expenses 33,749,809 33,434,066 315,743 Depreciation and Amortization Expense 38,564,840 40,379,416 (1,814,576) Taxes Other Than Income Taxes 10,716,094 11,028,841 (312,747) Income Taxes 85,632,193 85,087,923 544,270 Total Operating Expenses Plus Income Taxes* $ 202,055,432 $ 200,843,798 $ 1,211,633 Actual Gross Revenue Requirement 2014 Actual Amount 2014 Actual Allowed Return (from previous slide) $ 149,629,075 + Actual Operating Expenses + Income Taxes (above) 202,055,432 2014 Actual Gross Revenue Requirement before Revenue Credits & Offsets* $ 351,684,507 * Totals may not reconcile due to rounding. 17
- Step 4 2014 Revenue Requirement after Revenue Credits & Offsets 2014 Actual 2014 Projected Gross Revenue Requirement After Revenue Credits & Offsets Variance Amount Amount Gross Revenue Requirement before Revenue Credits & Offsets $ 351,684,507 $ 349,887,830 $ 1,796,677 Less: Attachment GG Revenue Requirement (Sch. 26) 26,603,493 25,499,858 1,103,635 Less: Attachment MM Revenue Requirement (Sch. 26A) 2,468,573 2,845,070 (376,497) Less: Point-to-Point/Other Transmission Service Revenues 6,305,038 2,807,959 3,497,078 Less: Rental Revenues 1,963,840 1,101,984 861,856 Subtotal Credits/Offsets* 37,340,943 32,254,871 5,086,072 Gross Revenue Requirement after Revenue Credits & Offsets * (before True-Up) $ 314,343,564 $ 317,632,958 $ (3,289,395) (Increase)/Decrease in Load (863,687) 2014 True-Up Adjustment Principal Under/(over) Recovery $ (4,153,081) * Totals may not reconcile due to rounding. 18
- Step 5 2014 Calculation of Actual Net Revenue Requirement Actual Net Revenue Requirement Actual 2014 Revenue Requirement after Revenue Credits & Offsets $314,343,564 + 2012 True-up Adjustment under/(over) Recovery (5,639,724) Actual 2014 Net Revenue Requirement plus 2012 True-up Adjustment* $308,703,840 * Excludes discount 19
2014 Interest Requirements for True-up Adjustment Interest on any over-recovery of the net revenue requirement shall be determined based on the Commission s regulations at 18 C.F.R 35.19a. Per the ITC Midwest Attachment O Tariff, interest on any under-recovery of the net revenue requirement shall be determined using the weightedaverage interest rate of borrowings under ITC Midwest s actual revolving credit agreement capped at the applicable FERC refund interest rate. Since ITC Midwest over-collected in 2014, the interest rate will be based on the Commission s regulations at 18 C.F.R 35.19a. The interest payable shall be calculated using the average of the interest rates used to calculate the time value of money for the twenty-four (24) months during which the over/under-recovery of the net revenue requirement exists. The simple interest rate to be applied to the over/under-recovery of the net revenue requirement will be determined using the average rate for the nineteen (19) months preceding August of the current year. The preliminary interest rate shown on slides 6 & 21 will be updated when the interest rate components for May, June, & July 2015 are available and the final True-up will be posted on MISO and OASIS websites. 20
2014 Preliminary True-up Adjustment Interest Calculation (a) (b) (c) (d) (e) (f) (g) (h) (i) ITCMW Revolving Credit FERC Refund Agreement Rate Rate Line No. Year Month ITCMW Revolving Credit Agreement Rate adjusted for months with zero balance Note 2 Note Reference ITCMW Revolving Credit Agreement Rate adjusted for months with zero balance Monthly Rate ITCMW Interest Rate on Under Recovery Note 1 Note 3 1 2015 July TBD TBD TBD 2 2015 June TBD TBD 0.27% 3 2015 May TBD TBD 0.28% 4 2015 Apr 1.14% Note 2 0.10% 0.27% 0.10% 5 2015 Mar 1.14% 1.14% 0.10% 0.28% 0.10% 6 2015 Feb 1.14% 1.14% 0.10% 0.25% 0.10% 7 2015 Jan 1.14% 1.14% 0.10% 0.28% 0.10% 8 2014 Dec 1.13% 1.13% 0.09% 0.28% 0.09% 9 2014 Nov 1.13% 1.13% 0.09% 0.27% 0.09% 10 2014 Oct 1.12% 1.12% 0.09% 0.28% 0.09% 11 2014 Sep 1.19% 1.19% 0.10% 0.27% 0.10% 12 2014 Aug 1.12% 1.12% 0.09% 0.28% 0.09% 13 2014 July 1.13% 1.13% 0.09% 0.28% 0.09% 14 2014 June 1.15% 1.15% 0.10% 0.27% 0.10% 15 2014 May 1.15% 1.15% 0.10% 0.28% 0.10% 16 2014 Apr 1.15% 1.15% 0.10% 0.27% 0.10% 17 2014 Mar 1.15% 1.15% 0.10% 0.28% 0.10% 18 2014 Feb 1.15% 1.15% 0.10% 0.25% 0.10% 19 2014 Jan 1.16% 1.16% 0.10% 0.28% 0.10% 20 Total 0.0492 0.0155 21 Count 18 16 22 Average monthly rate 0.27% 0.10% 23 24 Notes: 25 26 Note 1: Weighted-average interest rate of ITCMW borrowings under revolving credit agreement at month-end. For description of revolving credit facilities, see ITCMW 2014 Form 1, page 123.10 Note 2: Interest rate for months with zero revolver credit agreement balance at month-end based on most recent prior month if data is available or most recent following month if data are not available. 27 Note 3: FERC refund interest rate 18 CFR 35.19a [http://www.ferc.gov/legal/acct-matts/interest-rates.asp] 21