ALL IN ALL OUT - Sunflower Electric Power Corporation, Inc. · Delivering Energy for Life Sunﬂ...

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Sunfl ower Electric Power Corporati onAnnual Report 2015

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Delivering Energy for Life

Sunfl ower Electric Power Corporati on, headquartered in Hays, Kansas, is a not-for-profi t, wholesale electric generati on and transmission uti lity owned and governed by six Member distributi on cooperati ves. Our mission is to provide reliable, long-term power supply and transmission services to our Member-Owners at the lowest possible cost consistent with sound business and cooperati ve principles.

Rural Kansans have a long history of working together to help one another. In the 1930s, urban areas were electrifi ed, but rural areas were not because the high cost of serving rural areas was not profi table. With the same vision and work ethic used in making western Kansas their home, rural Kansans formed rural electric cooperati ves to serve sparsely sett led areas of the state where service was not available from other uti liti es.

By 1957, faced with a rapidly growing demand for electricity, six distributi on cooperati ves joined to form Sunfl ower Electric Cooperati ve, Inc., later changing its name to Sunfl ower Electric Power Corporati on. Since that ti me, Sunfl ower has grown to more than 1,200 miles of transmission line and 658 megawatt s* of generati on capacity, using coal, natural gas, hydro, and wind to meet consumer demands.

Sunfl ower’s Members now serve approximately 200,000 members in 32 western Kansas counti es and provide a wholesale power supply to numerous communiti es. Sunfl ower also sells electricity to other uti liti es. *Based on nameplate rati ngs

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2 Executi ve Reports

4 Board of Directors

5 Year in Review

9 Auditors’ Report

LEFT: Generati on technicians Chris Swan (left ) and Brandon Smith (right) study drawings of water wells and their electrical details near Holcomb Stati on. The pair were helping engineering staff determine underground electrical locati ons for a future installati on.

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Stuart LowryPresident & CEO

Noti ng that his perseverance was the main driver in his success in creati ng the light bulb, Thomas Edison once said," Genius is one percent inspirati on and 99 percent perspirati on."

Since its incepti on in 1957, Sunfl ower has been blessed to have a Board and staff that are both visionary and skilled. As important, and some might say even more so, are the hard work and dedicati on that drive our Board and staff each and every day. Sunfl ower staff are, as always, committ ed to being “All In” and going “All Out” in providing wholesale generati on and transmission services to our Members.

As part of our commitment, Sunfl ower rolled out a new safety campaign in 2015, ti tled “All In, All Out.” The program emphasizes two concepts. First, all Sunfl ower employees work safely, and at the end of the day, return home to their families. Second, all employees, no matt er their work situati ons, are committ ed to following sound safety practi ces to keep the public safe. While the new campaign emphasizes the importance of safety at Sunfl ower, it also speaks to the eff ort and experti se our Board and staff consistently contribute to our “All In, All Out”mission to serve our Members as eff ecti vely as possible and poise the company for conti nued success well into the future.

Many 2015 endeavors illustrate our “All In” atti tude and our “All Out” approach to serving our Members. For example, staff working within the Southwest Power Pool’s Integrated Market improved strategies that maximized power-cost savings while extending the service life of our generati on assets. Employees engaged in transmission policy-making to ensure that proposed transmission projects are based on actual need and do not burden our Members with costs from unnecessary line upgrades or constructi on in the region. We also spoke out against unnecessary environmental regulati ons to raise awareness of the consequences of these regulati ons on the industry. Looking to the future, Sunfl ower piloted a demand-side-management program and created new load incenti ves to att ract or retain customers long term. Also, intent on keeping our Members’ rates competi ti vely priced, Sunfl ower developed strategies to positi on the company for conti nued success.

While the industry is experiencing challenging ti mes, I conti nue to be inspired by the cooperati ve principles embraced by our Board, Members, and staff . Adversiti es, though diffi cult, are approached as opportuniti es, and we conti nue to learn from each endeavor. Kansans are known for their strong work ethic, integrity, and determinati on —qualiti es that are foundati onal at Sunfl ower. I am proud to work with people who have and will conti nue to go “All In” and “All Out” in our mission to deliver to our Members reliable, aff ordable electricity at the lowest possible cost.

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Charles McK. AyersChairman

It was not too many years ago when the electric uti lity industry began to face serious succession challenges driven by an aging workforce and reti rements.

This trend is evident in the makeup of the Sunfl ower Board, which has seen many new faces in the last several years. Despite the diverse backgrounds of the Board, there are, as always, a common purpose and commitment to Sunfl ower and an “All In, All Out” engagement to lead Sunfl ower in the days ahead.

Changes in the industry led to major adjustments in Sunfl ower’s operati ons. Perhaps one of the greatest challenges was the seismic shift created by Southwest Power Pool’s Integrated Market. Staff roles and job responsibiliti es changed, uti lizati on of generati on capacity changed, and Sunfl ower’s fuel mix changed due to the regional dispatch of generati on resources and environmental policies. There were also new ways to understand power costs and hedge the energy market. These industry dynamics connected us in new ways and made us realize that successful management involves “All In” long-term strategies.

The Board addressed other issues in 2015. Transmission projects driven by congesti on, accelerated wind farm installati ons in the system, and FERC Order 1000 changed the nature of the work and asset management. There were new rate pressures driven by previous changes in the industry and increased reliability and compliance mandates.

To address the ongoing pressures and future industry concerns, the Board and staff took steps to implement a long-range strategic plan. The strategic plan, which was shaped over an extended period of ti me, was designed with specifi c focus areas but will allow for fl exibility in its executi on in the years ahead. Such a design assumes the full and ongoing parti cipati on of the Board to stay connected with the issues before Sunfl ower and engaged with the opportuniti es that may arise. The commitment to the strategy reaffi rms the dedicati on of Sunfl ower’s Board going “All Out” to make the company even stronger.

In the past year, the Board of Sunfl ower has worked hard at taking on these challenges. As Chairperson, I am most comfortable representi ng the Board that is going “All In, All Out” to provide eff ecti ve leadership in these vibrant ti mes.

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Charles McK. AyersChairman

WheatlandScott City16 Years

Jim ImelVice Chairman

VictoryDodge City

3 Years

Larry EvansDirectorWestern

WaKeeney21 Years

Stephen EppersonDirectorPioneerUlysses5 Years

Perry RubartDirectorPioneerUlysses31 Years

Bruce MuellerDirector

WheatlandScott City

4 Years

Paul Seib, Jr.Director

Lane-Scott Dighton37 Years

Ed WiltseDirector

Lane-Scott Dighton4 Years

Shane LawsDirectorVictory

Dodge City3 Years

Robert JohnsonDirector

Prairie LandNorton

32 Years

Allan MillerDirector

Prairie LandNorton

27 Years

Darrin LynchDirectorWestern

WaKeeney3 Years

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ABOVE: Posing for a safety poster, Kathie Leighty, administrati ve assistant at Fort Dodge Stati on, shows one of her reasons for wanti ng to return home safely.

For Sunfl ower employees, the word safety means more than “freedom from harm or danger." It means working together to protect colleagues, loved ones, and the public. That is the message of Sunfl ower's newly launched "All In, All Out" safety brand, which has enhanced the organizati on's safety program.

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INTEGRATED MARKETPLACE Sunfl ower staff conti nued to build market knowledge through experience gained in 2015, the fi rst full year of the Southwest Power Pool’s (SPP) Integrated Market (IM). Sunfl ower was able to purchase market energy from a blend of generati on resources across the 14-state SPP footprint. This allowed Sunfl ower to reserve its generators while using Holcomb as a hedge against market price volati lity. Low natural gas prices and high wind producti on led to low market energy prices in western Kansas, which allowed Sunfl ower to achieve an annual average Energy Cost Adjustment that was $4.87/MWh (or 19%) below the prior year.

For the year, Holcomb Stati on’s output sold into the market equated to 56%, the contract for Smoky Hills Wind Farm output equated to 7%, and Sunfl ower’s natural-gas-fueled resources equated to 4% of Sunfl ower’s total energy needs. Sunfl ower took advantage of low market prices and purchased its remaining energy from the market.

RESOURCE PLANNINGSunfl ower met its required capacity obligati ons using diverse generati on resources and conti nued to assess ways to best meet the future needs of its Members. In 2015, a demand-side-management (DSM) pilot study showed a relati vely high potenti al for peak-load reducti on through peak-ti me rebate programs. The pilot study included volunteer parti cipati on of Members' customers and provided insight into customers’ preferences associated with a DSM program.

FERC ORDER 1000 FERC Order 1000 created considerable challenges for the electric industry including requiring Regional Transmission Organizati ons (RTO) to remove federal Right of First Refusal (ROFR) rules from their FERC-approved Open Access Transmission Tariff s on regionally funded projects. At SPP, regionally funded transmission projects greater than100 kV needed more than three years from approval are competi ti vely bid. Implementati on of Order 1000 and the process for the selecti on of a transmission owner for the fi rst and only Order 1000 project in the SPP footprint is currently underway.

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▪ Coal ▪ Gas ▪ Wind ▪ Hydro

*Based on nameplate rati ng of 658 MW

S4Capacity: 71 Megawatt sFuel: Natural GasType: PeakingPlaced into Service: 1976



Holcomb 1Capacity: 349 Megawatt sFuel: PRB CoalType: BaseloadPlaced into Service: 1983

Smoky Hills Wind FarmPPA: 50 Megawatt sFuel: WindType: Intermitt entPlaced into Service: 2008

S2Capacity: 98 Megawatt sFuel: Natural GasType: IntermediatePlaced into Service: 1973

Our Generation PortfolioOur Generation PortfolioOur Generation Portfolio

ABOVE: A crane is uti lized to help a Sunfl ower transmission crew replace the top secti on of a 345 kV latti ce tower northwest of Ingalls, Kansas. Crews repaired three towers damaged by an early July storm.

OPERATIONSSeveral storms damaged system transmission assets in 2015. Strong storms in July and November caused signifi cant damage requiring Sunfl ower crews to respond quickly and eff ecti vely to restore system integrity. Most repairs were completed within several hours to a few days of the storms and were even used as part of a crew practi cal training initi ati ve.

FINANCIALIn 2015, Sunfl ower reduced base ratesby more than 6.5%. When coupled with lower overall energy prices, the average Member rate declined 12% from 2014. Total fuel and purchased power costs declined from 2014 by 18%, aft er declining 2.4% from 2013 to 2014, and the average fuel and purchased power rate per MWh also fell from $26.57 in 2014 to $22.80 in 2015.

Aft er reducing operati ng expenses in 2014 by 3%, operati ng expenses increased 9% in 2015 as maintenance deferred from prior years was addressed. Sunfl ower’s Net Margin needs were signifi cantly reduced aft er the United States Department of Agriculture Rural Uti liti es Service (RUS) approved a plan to extend the maturity of non-RUS debt, allowing Sunfl ower to reduce annual principal payments and stabilize Member rates. The reducti on in base rates occurred for the fi rst ti me in more than 10 years.

Sunfl ower achieved a Net Margin of $15 million in 2015 and increased its equity positi on to $160 million. Equity, as a percentage of total assets, grew from 33% in 2014 to 36% in 2015.

Renewable energy conti nued to have a signifi cant impact on Sunfl ower, with wind generati on faciliti es injecti ng approximately 3 million MWh of energy into the Sunfl ower transmission system during 2015. Sunfl ower purchased 187,000 MWh of wind energy, representi ng almost 9% of the nearly 2.2 million MWh of energy consumed by its Members during the year.

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7.5%

53%39%

.5%

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Sunfl ower Transmission Facts

Line Type Miles Service Territory

345 kV 222 20,570 sq. miles

115 kV 984

Total 1,206

ABOVE: Transmission staff , (from right) John Edmonds, Derek Hahn, and Chad Dockter, use bull pins to line up holes in splice plates so they can insert and ti ghten bolts on the Holcomb-Buckner 345 kV line, one of the three towers that went down on July 3. The crew set the bott om secti on fi rst and then fl ew the top secti on up to att ach it to the bott om secti on.

For several years, one of the top ten risks identi fi ed by generati on and transmission cooperati ves has been the risk of customer load loss. This risk can come from economic shift s for key customers, com-peti ti on from energy supply alternati ves, or energy effi ciency exceeding growth. In 2015, Sunfl ower

embraced several projects to make its rates more understandable and to incent and retain loads. One of these projects was the off ering of economic development rates that give Sunfl ower’s Members the fl exibility to encourage new loads to locate in their service territories. Another project assists Sunfl ower’s Members in encouraging large customers with high load factors to expand operati ons.

ADVOCATING FOR OUR MEMBERSSunfl ower conti nued to be engaged in multi ple eff orts on the state, regional, and nati onal levels to miti gate consequences of environmental regulati ons that greatly impacted its Members’ access to aff ordable and reliable generati on resources.

The Clean Power PlanThe Clean Power Plan (CPP) is the most onerous environmental regulati on ever proposed by the Environmental Protecti on Agency (EPA). If implemented, the CPP would reduce carbon emissions from electric generati ng units in several increments with the fi nal and most severe limit imposed in 2030. Electric cooperati ves from across the nati on voiced strong concern regarding the CPP’s impact to reliability and cost. Sunfl ower’s leadership met with EPA offi cials to explain the detrimental impacts of the CPP and were acti vely involved in passing legislati on that directs the Kansas Department of Health and Environment (KDHE) and the Kansas Corporati on Commission (KCC) to balance cost and reliability when developing the Kansas compliance plan.

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The Lesser Prairie Chicken In March 2014, the U.S. Fish and Wildlife Service (USFWS) listed the Lesser Prairie Chicken (LPC) as a threatened species. In order to minimize the rule’s cost impact on electric ratepayers, Sunfl ower collaborated with other uti liti es and the Western Associati on of Fish and Wildlife Agencies (WAFWA)—fi sh and wildlife offi cials in fi ve states covering the LPC habitat—to develop a Range-wide Conservati on Plan (RCP) as a miti gati on strategy that shields the Sunfl ower system from potenti al Endangered Species Act fi nes.

Waters of the U.S. In June 2015, the Environmental Protecti on Agency (EPA) and the U.S. Army Corps of Engineers signed the fi nal rule for the Waters

of the U.S. (WOTUS), a rule that would signifi cantly expand the reach of EPA’s jurisdicti on and would impact many agricultural and industrial acti viti es causing more uncertainty, more delay, and higher costs. A federal district court in North Dakota granted a preliminary injuncti on blocking WOTUS. With liti gati on proceeding in a myriad of federal district and appellate courts, EPA is wrestling with how to respond to a nati onwide stay of the rule, and Congress is debati ng legislati on to block or overhaul the regulati on. Electric cooperati ves from across the nati on requested that the agencies withdraw the fi nal rule and consult with stakeholders prior to the anti cipated reproposal of WOTUS.

Mercury and Air Toxics Standards In 2011, the EPA issued the Mercury and Air Toxics Standards (MATS), aimed at limiti ng mercury and other hazardous air-pollutant (HAP) emissions from electric generati ng units. Sunfl ower installed mercury control technology on the Holcomb unit in 2015 with full implementati on scheduled for early 2016. The cost of regulati on, esti mated at $9.6 billion1 annually for the electric industry, is much higher than the benefi ts achieved by controlling HAPs.

In order to limit the cost impact of environmental regulati ons on Member rates, this case, along with the others discussed, clearly demonstrates the importance of Sunfl ower’s role in protecti ng its Members’ interests. 1 NERA Economic Consulti ng, Energy and Consumer Impacts of EPA’s Clean Power Plan, Nov. 5, 2015

Sean Kyle, industry service director for the Western Association of Fish & Wildlife Agency’s Lesser Prairie Chicken (LPC) Initiative, updates electric cooperative representatives at Holcomb Station. WAFWA has made progress on behalf of utility companies in areas where the LPC lives.

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ALL IN ALL OUT - Sunflower Electric Power Corporation, Inc. · Delivering Energy for Life Sunﬂ...

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