Building for the Future - minnkota.com

1 Building for the Future2017 ANNUAL REPORT2 017On the coverTop left: Crews use a bucket truck to complete work on the Fargo 115-kV transmission line upgrade right: The Milton R. Young Station generated the second-most net kilowatt-hours in its history in left: The new Minnkota cooperative campus was substantially completed in 2017. Bottom right: Minnkota crews finish the installation of the switch at the new Woodside substation near Erskine, 2017 Minnkota Annual ReportContentsCooperative Profile 4 Report to the Members 6 Board of Directors and Officers 7 Class A, B, C and D Members 8 2017 Year in Review 18 Executive Staff and Senior Management 19 Operating Statistics 20 Treasurer s Report 22 Financial Statements 27 Independent Auditor s Report 28 Notes to Financial Statements 32 Associated Cooperative Boards and Management 34 Associated Cooperative Statistics Minnkota Power Cooperative is a generation and transmission (G&T) cooperative headquartered in Grand Forks, Through 11 member-owner distribution cooperatives, three in eastern North Dakota and eight in northwestern Minnesota, Minnkota provides valuable electric energy to more than 136,000 residential, commercial and industrial primary source of generation is the Milton R.

2 Young Station, which consists of two lignite coal-based generators located 35 miles northwest of Bismarck, Minnkota s energy portfolio also includes significant wind energy resources from North Dakota facilities located near the towns of Langdon, Valley City and Center. Additionally, hydropower is obtained from the Garrison Dam in central North also serves as operating agent for the Northern Municipal Power Agency (NMPA), headquartered in Thief River Falls, Minn. NMPA is an association of 12 municipal utilities located in the same 35,000-square-mile service area as the Minnkota member cooperatives. NMPA owns a 30 percent share of the Coyote Station, a lignite-based power plant located near Beulah, Together, the Minnkota/NMPA Joint System serves approximately 150,000 consumer power delivery crews work to rebuild the Sand Hill substation near Fosston, Minn. The project helps improve reliability and power quality in the Minnkota Annual Report 34 2017 Minnkota Annual ReportWhen looking back on 2017, the reliable operation of the Milton R.

3 Young Station is one of our major achievements. The two-unit coal-based facility had its best annual availability rating and second-highest net generation level ever. Building an electric cooperative of the Future takes more than concrete, steel and wire. It starts with a solid foundation of member support. The board of directors then develops a blueprint to enhance service, improve efficiency and mitigate long-term risks. Our employees are responsible for deliver-ing on the board s vision, which aims to establish our energy as the best value in the this basic structure, Minnkota Power Cooperative had a highly successful 2017. Quality performance throughout all areas of our business helped us end the year in excellent financial condition. Although member energy sales were below budget due mostly to mild weather, reduced expenses in virtually every major category pushed our margins well ahead of budget. The additional funds received during the year will be carried forward into 2018 as part of our revenue deferral plan approved by the Rural Utilities Service.

4 We believe this fund will help stabilize our rate curve and reduce the impact of projected expense increases in upcoming years. Rate stability for our members remains a key looking back on 2017, the reliable opera-tion of the Milton R. Young Station is one of our major achievements. The two-unit coal-based facility had its best annual availability rating and second-highest net generation level ever. In addition to the outstanding production totals, employees at the plant recorded one of their best years of safety and continued to meet all compli-ance requirements for land, water and air quality. It is clear that the investments made in the facility and our staff are paying of our most significant risks at the Young Station is the potential of adverse regulations. In 2017, we were supportive of the Environmental Protection Agency s decision to reconsider and rewrite the Clean Power Plan an effort to regulate carbon dioxide (CO2) emissions from existing coal-based facilities.

5 Report to the MembersThe rule, finalized in 2015, had stringent targets and aggressive timelines that put many of North Dakota s facilities at risk. When the new version of the Clean Power Plan is proposed in 2018, it will likely go through another round of legal and technical challeng-es. We remain hopeful that common sense will prevail and Future regulations will not impair our industry s ability to has taken a leadership role in evalu-ating breakthrough technologies to capture and utilize CO2 emissions from our facilities. In 2017, we continued research efforts related to Project Tundra a potential CO2 capture project at the Young Station. Early indications are that the project would pair well with either enhanced oil recovery or safe, permanent geologic storage. Project Tundra continues to receive robust support at the state and federal levels. At year-end, we were in the process of securing grant funding to begin the initial design, engineering, testing and economic addition to coal, wind has become an increas-ingly important resource in Minnkota s generation portfolio.

6 In January 2017, Minnkota began purchas-ing the output from the new 100-megawatt (MW) Oliver III wind farm located near Center, The project brings Minnkota s wind resource capacity to 459 MW or about 34 percent of our overall generation the power delivery side of our business, 2017 was one of the most productive project years in recent memory. An accelerated effort to address blink outages on our 69-kilovolt (kV) transmission system reached full stride during the year. About 420 miles of this 2,100-mile system was equipped with technologies in 2017 to reduce the impacts of these brief outages. It is anticipated that by 2019, nearly 800 miles of the most impacted areas of our system will have been addressed. Early indications are that the projects have significantly improved the reliability of the continues to make prudent investments in growing areas of our service territory. The coopera-tive is in the midst of a $30 million effort to improve 2017 Minnkota Annual Report 5 Collin JensenMac McLennanCollin Jensen Chairman of the Boardreliability and support load growth in the Fargo region.

7 Over the last decade, demand for energy in that area has increased by almost 50 percent. To meet these demands and foster continued economic viability, Minnkota is upgrading its area substations and power line infrastructure from 69-kV to 115-kV. These proj-ects began in 2015 and will continue through of the Fargo, Grand Forks and Bemidji ar-eas, most of Minnkota s service territory is experienc-ing limited load growth. One potential area to increase energy sales is through beneficial electrification, which encourages the use of electricity for heating, water heating and transportation. Minnkota has programs in place that provide incentives to members and participating municipals to help their consumers install qualifying equipment and systems. Electric vehicles present a substantial opportunity to the Minnkota membership and efforts are being planned to fully realize these benefits in the near end of 2017 marked the start of a new era for Minnkota.

8 Our Grand Forks-based employees moved into the cooperative s first new headquarters and op-erations center since the 1940s. The 252,000-square-foot facility will give us greatly improved security, better workplace efficiency and much-needed room to store and manage our vehicles and large equipment. One of the most notable upgrades is in the Energy Control Center, which serves as the nerve center of Minnkota s electric grid. The room now includes advanced safeguards to protect employees, infrastruc-ture and data from potential importantly, the investment in this facility rep-resents the membership s belief in Minnkota and our long-term value as their wholesale energy provider. The challenge of preparing for the Future is excit-ing and it is daunting. We are embracing the rapid changes in our industry by going back to our roots and Building stronger connections with our members. Following the successes of 2017, one thing is clear: Minnkota is an organization that is built to McLennan President & CEO6 2017 Minnkota Annual ReportCollin JensenChairmanRoseau Electric CooperativeJeffrey FollandSecretary/TreasurerPKM Electric CooperativeDonald SkjervheimCavalier Rural Electric CooperativeColette KujavaRed Lake Electric CooperativeLes WindjueNodak Electric CooperativeMac McLennanPresident & CEOR oger KrostueRed River Valley Cooperative Power AssociationRick CoeBeltrami Electric CooperativeLeroy RiewerClearwater-Polk Electric CooperativeGerad PaulGeneral Counsel and Assistant Secretary Board of Directors and Officers2017 Minnkota Annual Report 7 Russell OkesonVice ChairmanWild Rice Electric CooperativeSteve ArnesenNorth Star Electric CooperativeSid BergCass County Electric CooperativeRoger KrostueRed River Valley Cooperative Power Association1.

9 Beltrami Electric Cooperative, Inc. Bemidji, Minnesota2. Cass County Electric Cooperative, Inc. Fargo, North Dakota3. Cavalier Rural Electric Cooperative, Inc. Langdon, North Dakota4. Clearwater-Polk Electric Cooperative, Inc. Bagley, Minnesota5. Nodak Electric Cooperative, Inc. Grand Forks, North Dakota6. North Star Electric Cooperative, Inc. Baudette, Minnesota 7. PKM Electric Cooperative, Inc. Warren, Minnesota 8. Red Lake Electric Cooperative, Inc. Red Lake Falls, Minnesota 9. Red River Valley Cooperative Power Association Halstad, Minnesota10. Roseau Electric Cooperative, Inc. Roseau, Minnesota11. Wild Rice Electric Cooperative, Inc. Mahnomen, Minnesota Class A Members Basin Electric Power Cooperative Bismarck, North Dakota Central Iowa Power Cooperative Cedar Rapids, Iowa Dairyland Power Cooperative LaCrosse, Wisconsin Interstate Power Company Dubuque, Iowa Lincoln Electric System Lincoln, Nebraska Manitoba Hydro Winnipeg, Manitoba, Canada MidAmerican Energy Davenport, Iowa Midcontinent Independent Transmission System Operator (MISO)

10 Carmel, Indiana Minnesota Power Duluth, Minnesota Montana-Dakota Utilities Company Bismarck, North DakotaClass B, C and D Members Nebraska Public Power District Columbus, Nebraska Northern Municipal Power Agency Thief River Falls, Minnesota NorthWestern Corporation Sioux Falls, South Dakota Omaha Public Power District Omaha, Nebraska Otter Tail Power Company Fergus Falls, Minnesota Department of the Air Force Grand Forks Air Force Base, North Dakota Western Area Power Administration Billings, Montana Wisconsin Power and Light Madison, Wisconsin Xcel Energy Minneapolis, Minnesota2017 in Review 9 Built to last 10 Building effective policy 12 Building a reliable, resilient system 14 Demand response in the Future 16 A new home8 2017 Minnkota Annual ReportLine crews construct about miles of 115-kV transmission line in conjunction with the new Laporte substation. The project is primarily needed to serve a large industrial Minnkota Annual Report 9 The Milton R.