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SOUTHWEST POWER POOL

FINANCE COMMITTEE MEETING

April 27, 2020

Teleconference

MINUTES

AGENDA ITEM 1 – ADMINISTRATIVE ITEMS

SPP Chair Graham Edwards called the meeting to order at 8:00 a.m. The following members

were in attendance or represented by proxy:

Graham Edwards SPP Director

Susan Certoma SPP Director

Sandra Bennett AEP

Sarah Stafford OG&E

Mike Wise Golden Spread Electric Coop

Laura Kapustka Lincoln Electric System

Others in attendance:

Julian Brix SPP Director

Chad Moore BKD, LLC

Carrie Dixon Xcel Energy

Denise Buffington Evergy

Jeffrey Parkison City Utilities – Springfield, MO

Dennis Reed Midwest Regulatory Consulting, LLC

Mark Holler Tenaska Power Services

Rob Janssen Dogwood Energy

Holly Carias NextEra Energy Resources, LLC

Jim Jacoby American Electric Power-PSO

Patrick Clarey Federal Energy Regulatory Commission

Ray Bergmeier Sunflower Electric Power Corp.

Robert Pick NPPD

Ruta Skucas Pierce Atwood LLP

Seth Cochran DC Energy

Terri Wendlandt Evergy Companies

Tom Hestermann Sunflower Electric Power Corp

Jim Gilligan Evergy Companies

Mike Higley Evergy Companies

Maeve Tibbetts Pierce Atwood, LLP

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Antoine Lucas SPP

Barbara Sugg SPP

Lanny Nickell SPP

Dianne Branch SPP

Jared Barker SPP

Scott Smith SPP

Tom Dunn SPP

Keith Collins SPP

Emily Pennel SPP

Will Vestal SPP

Tony Green SPP

A quorum was present. Minutes from the January 17, 2020 meeting were reviewed. Mike Wise

made a motion to accept the minutes. The motion was seconded by Sarah Stafford and

approved by unanimous voice vote with one abstention.

AGENDA ITEM 2 – CREDIT POLICY WORKING GROUP

Scott Smith, SPP’s director of treasury and risk management, presented three enhancements to

the SPP Credit Policy recommended by the Credit Practices Working Group (“CPWG”). The

recommendations included i) establishing a minimum collateral requirement for TCR portfolios

equal to $0.10/MWh; ii) enhanced credit application, updated annually, seeking additional

information on principal, historical financial health, and regulatory enforcement actions, among

others; and iii) increased minimum capitalization requirements to participate in the SPP markets

with a carve out of lower capitalization for virtual energy participants.

During discussion a question was asked regarding the applicability of the increased minimum

capitalization requirements to entities part of a joint owned generating unit. The Committee

sought insights from CPWG Chair, Mark Hollar, on the acceptability of applying the increased

capitalization requirements solely to TCR participants. Mark Hollar stated that was acceptable.

Sandra Bennett made a motion to approve the recommendation of the CPWG, amended to

apply the minimum capitalization requirements to TCR participants. The motion was seconded

by Susan Certoma and approved by unanimous voice vote.

Jim Gilligan and Mike Higley from Evergy provided an informational presentation on changes to

the employment of surety bonds as a form of financial security. Following the presentation and

discussion, the Committee directed the CPWG to resume its work on determining if and how to

allow surety bonds as a form of financial assurance in the SPP markets.

Laura Kapustka also requested the CPWG to review changes to the letter of credit form

proposed by Lincoln Electric. These changes are intended to reduce the probability of

fraudulent draws on letters of credit. The Committee agreed to instruct the CPWG to review

those changes.

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AGENDA ITEM 3 – ENGINEERING STAFFING UPDATE

SPP staff provided a first quarter 2019 update on its assimilation of new staff in engineering and

results in lowering overall costs of providing engineering study services. Current forecast is

$342,000 in annual savings.

AGENDA ITEM 4 – POST-RETIREMENT HEALTHCARE PLAN

SPP staff advised the Committee that the SPP Human Resources Committee was receiving a

recommendation to partially terminate the post-retirement healthcare plan. Upon the partial

termination, current retirees would continue to receive monthly benefits while non-vested active

employees would receive a lump-sum payout of projected monthly benefits.

AGENDA ITEM 5 – 2020 BENEFIT PLAN FUNDING

The committee received a recommendation from SPP staff to contribute $5.00 million to the SPP

Retirement Plan in 2020 and to contribute $0 to the SPP Post-retirement Healthcare Plan in

2020.

Mike Wise made the following motion: Approve 2020 funding of the SPP Retirement Plan of

$5.00 million. Approve 2020 funding of the SPP Post-retirement Healthcare Plan of $0. The

motion was seconded by Sandra Bennett and approved by unanimous voice vote.

AGENDA ITEM 6 – VATF ASSIGNMENT UPDATE

Tom Dunn and Susan Certoma advised the Committee on progress on the VATF

recommendations through the first three months of 2020.

AGENDA ITEM 7 – 2019 FINANCIAL AUDIT

Dianne Branch and Chad Moore presented the results of the 2019 financial audit. Dianne

Branch covered highlights on the financial statements and related footnotes. Chad Moore

presented the audit opinion letter and the management letter. The audit opinion was

unqualified and no exceptions were noted in the management letter.

Laura Kapustka made the following motion: Recommend the SPP Board of Directors accept in

its entirety the 2019 audit report and findings of BKD, LLC. The motion was seconded by Sarah

Stafford and approved by unanimous voice vote.

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Following review of upcoming meetings and brief comments on SPP’s financial performance

year to date and impacts from COVID-19, the meeting was adjourned. A brief executive session

was convened with the Committee members and Chad Moore of BKD,

Respectfully Submitted,

Tom Dunn

Secretary

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SOUTHWEST POWER POOL, INC. FINANCE COMMITTEE MEETING

April 27, 2020 (8:00 am – 12:00 pm CDT)

WebEx

AGENDA

1. Administrative Items…………………………………………………………………………………Graham Edwards

2. Credit Practices Working Group Report (45 minutes)

a. Credit Policy Changes **Action**…………………………………………………Scott Smith, SPP

b. Surety Bonds……………………………………………………………………………..Jim Gilligan, Evergy

3. Engineering Staffing Update (20 minutes)…………………………………………………….Antoine Lucas

4. Post-retirement Healthcare Plan (10 minutes)…………………………………………………….Tom Dunn

5. 2020 Benefit Plan Funding **Action** (15 minutes)…………………………………………..Tom Dunn

6. VATF Assignment Update (10 minutes)………………………………………………………………Tom Dunn

7. 2019 Financial Audit **Action** (55 minutes)………..Chad Moore, BKD; Dianne Branch, SPP

8. Future Meetings

9. Written Reports

a. 1Q’20 Financial Report

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SOUTHWEST POWER POOL FINANCE COMMITTEE MEETING

January 17, 2020 Teleconference

MINUTES

AGENDA ITEM 1 – ADMINISTRATIVE ITEMS

SPP Chair Bruce Scherr called the meeting to order at 7:30 a.m. The following members were in attendance or represented by proxy:

Bruce Scherr SPP Director Susan Certoma SPP Director Sandra Bennett AEP Sarah Stafford OG&E Mike Wise Golden Spread Electric Coop

Others in attendance: Jason Regehr City Utilities – Springfield, MO Denise Buffington Evergy Jeffrey Parkison City Utilities – Springfield, MO Jason Chaplin Oklahoma Corporation Commission Mark Holler Tenaska Power Services Rob Janssen Dogwood Energy Rodney Massman Missouri Public Service Commission Nick Brown SPP Barbara Sugg SPP Jared Barker SPP Scott Smith SPP Tom Dunn SPP Keith Collins SPP John LuAllen SPP Will Vestal SPP Patrick Clarey FERC

A quorum was present. Minutes from the October 14, 2019 meeting were reviewed. Susan Certoma made a motion to accept the minutes. The motion was seconded by Mike Wise and approved by unanimous voice vote.

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AGENDA ITEM 2 – CREDIT POLICY ENHANCEMENT ACTIVITIES

Scott Smith, SPP’s director of treasury and risk management, presented material describing the efforts of the Credit Practices Working Group (“CPWG”) to develop enhancements to SPP’s credit policy to better protect market participants from uplifted default losses. The CPWG is nearing completion of its work to enhance SPP’s credit application, increase capitalization requirements to qualify as a market participant, and enhance transmission congestion rights exposure calculation to better collateralize riskier holdings. The CPWG expects to work on even more enhancements once the ones currently under development are implemented. The future enhancements are expected to include forward-looking reference pricing based on transmission system changes, position limits based on capitalization, and mark to auction methodology, to name a few.

AGENDA ITEM 3 – ACTUARY ASSUMPTIONS

SPP staff discussed its recommendations for the four primary assumptions required for pension accounting and valuation: i) discount rate – staff recommended a discount rate of 4.50% in accordance with SPP’s process for determining the discount rate assumption; ii) investment rate of return – staff recommends remaining at 7.00% long-term rate of return; iii) rate of compensation change – staff recommends remaining at 4.00% iv) staff recommended utilizing the current IRS mortality tables in accordance with Finance Committee directives from December 2015. These assumptions were reviewed by Steve Osborn of Osborn, Carreiro & Associates, the actuary for SPP’s pension plan; Mr. Osborn agreed with the recommended assumptions.

Susan Certoma made a motion to accept the assumptions presented by staff. The motion was seconded by Sandra Bennett and approved by unanimous voice vote.

AGENDA ITEM 4 – 2019 FINANCIAL AUDIT

Bruce Scherr advised the committee members that he visited with the auditors in December 2019 to discuss any known areas of fraud and focus areas for the audit. The three areas the auditors intend to focus on are revenue recognition, regulatory matters (specifically related to the impact regulatory orders may have on SPP’s outstanding debt), and SPP’s activities in the western interconnection.

AGENDA ITEM 5 – ORG GROUP EFFECTIVENESS

Materials from SPP’s organization group effectiveness survey, which were specific to the finance committee, were presented. Bruce Scherr noted the quantitative scores were generally among the highest in the organization and were essentially unchanged from prior periods. Noted in the

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comments section of the survey were comments that the meetings felt rushed and that the meeting to review and approve the budget may deserve additional time.

There being no further business, the meeting was adjourned at 9:20am.

Respectfully Submitted,

Tom Dunn

Secretary

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SOUTHWEST POWER POOL, INC. CREDIT PRACTICES WORKING GROUP

RECOMMENDATION TO THE FINANCE COMMITTEE

April 27, 2020 Credit Policy Enhancements

ORGANIZATIONAL ROSTER

The following persons are members of the Credit Practices Working Group (“CPWG”):

Malcolm Booker Oklahoma Municipal Power Authority Mark Breese Xcel Energy Caleb Head Northeast Texas Electric Cooperative, Inc. Tom Hestermann Sunflower Electric Power Corporation Mark Holler (Chair) Tenaska Power Services Company Mary Meier Omaha Public Power District Jeffrey Parkison City Utilities of Springfield Matthew Simon Basin Electric Power Cooperative

Terri Wendlandt (Vice Chair) Evergy Companies

BACKGROUND

In June 2018, a thinly capitalized trading firm, GreenHat Energy, was declared in default of PJM Interconnection’s tariff. GreenHat had acquired an 890 million MWh long-term TCR portfolio in PJM’s energy market with a collateral requirement of less than $1 million. In short order, transmission upgrades had eroded the perceived value of the portfolio, resulting in an approximate default of $200 million which was socialized among PJM’s utilities and other market participants. The principals of GreenHat Energy had previously worked for JP Morgan where they were specifically identified in a market manipulation case which settled in 2013 with FERC for $410 million.

Beginning in May 2019, the CPWG has worked to identify and improve upon certain provisions within SPP’s Credit Policy (Attachment X of SPP’s OATT), some of which were evident in the PJM default. Led by SPP stakeholders, two subgroups were formed to focus on qualitative and quantitative components of the Credit Policy. An exhaustive review of policy, data, analytics, and options transpired which resulted in three immediate enhancement proposals and a short list of secondary policy initiatives.

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ANALYSIS

Recommendation 1: $0.10 Minimum Portfolio Requirement

The greatest deficiency in SPP’s Credit Policy, with respects to TCR trading, is that certain portfolios acquired in an auction can require little to no collateral to obtain and hold. This can occur when the estimate to settle the position (derived from historically positive settlement data) outruns the cost incurred to acquire the position. In these instances, changes to historical congestion flows, as seen in the GreenHat default, can result in portfolios with heavily degraded values. If expected losses from individual portfolios are more than the collateral held, there may be no incentive for the credit holder to satisfy payment obligations.

To address this deficiency, the proposed $0.10 minimum portfolio requirement will set a floor of $0.10/MWh for the TCR holder’s entire portfolio of owned TCRs. In practice, the minimum portfolio requirement will be compared to SPP’s existing TCR collateral estimations and the methodology requiring the most collateral will be used. This $0.10 minimum portfolio requirement would reduce the risk of under-collateralization when changes in congestion patterns occur as described above. APPENDIX #1 below demonstrates both the mechanics of the proposed methodology and the effectiveness of addressing instances where significant portfolios can be under-collateralized.

The proposed $0.10 minimum portfolio requirement has been back-tested on portfolio data from the 2018-2019 annual auction. In that auction, a total of 77 credit holders acquired 311 million MWh of TCRs requiring $80.4 million in collateral. 31 of the 77 credit holders obtained 140 million MWh, or 45% of all TCRs, with no collateral requirement. Using the proposed $0.10 minimum portfolio methodology would have resulted in collateral requirements of $14 million (140 million MWh x $0.10). This would lessen the risk of an under-collateralized loss. APPENDIX #2 below displays the aggregated results of the back-testing and the appropriateness of the proposal.

The CPWG analyzed two other alternatives to this $0.10 minimum portfolio requirement. The first would have added acquisition costs to the $0.10 minimum floor, resulting in approximately $151 million in collateral requirements for the 2018-2019 auction results. The second would have used the $0.10 floor but would have changed the existing Credit Policy methodology, resulting in approximately $33 million in collateral requirements for the 2018-2019 auction results. While both alternatives had merit, the CPWG adopted the expressed proposal as the more appropriate solution to the existing Credit Policy deficiency. In adopting this proposal, the CPWG has also committed to developing forward-looking metrics that should bring more efficiency to estimated collateral requirements.

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Recommendation 2: Increase Minimum Capitalization Requirements

A lesson learned from the PJM default is that undercapitalized credit holders represent significant risk to energy markets; particularly in times of stress or changes in electric system economics. These credit holders minimally meet the current capitalization requirements, but are unable to demonstrate the ability to absorb losses beyond their calculated collateral requirements. APPENDIX #3 below is an example of a thinly capitalized trading firm who meets the minimal current capitalization criteria. To address this deficiency, this proposal would increase minimum capitalization requirements for all credit holders.

Minimum capitalization requirements are currently consistent among all ISO/RTOs requiring either $10 million in total assets or $1 million in tangible net worth. If these requirements cannot be evidenced through audited financials, a potential market participant can either deposit $200 thousand plus post two-times the amount of collateral needed for their daily estimated exposure, or alternatively obtain a guarantee from an affiliate who meets capitalization minimums. If these criteria cannot be satisfied, the potential market participant may contract with a credit holder who meets the minimum requirements to administer their trading activities.

SPP’s requirements were adopted in 2011 in compliance with FERC Order 741, a landmark order requiring all jurisdictional ISO/RTOs to adopt certain credit-related tariff and process enhancements. At the time of the order, SPP operated an energy imbalance market where $646 million in energy purchases was collected from load-serving utilities and then remitted to generating utilities. Both parties of each transaction were physically reliant upon the energy imbalance market to fulfill their regulatory obligations. In other words, they had “skin in the game”. Today, SPP operates a more robust and complex day-ahead energy market with congestion hedging which settles over $20 billion annually.

This market has introduced two new trading products that do not require physical connection to the bulk electric system in order to trade. This has introduced a new type of participant into the energy market; one which only trades in a speculative manner (i.e. does not take possession or title to energy or have “skin in the game”) and is minimally capitalized. However, they meet the minimum capitalization requirements of the tariff and can trade within the confines of the Credit Policy’s collateral requirements. GreenHat was a prime example of this type of speculative trading firm. From review of the PJM default findings, it appears that GreenHat had assets of $1.01 million dollars (likely pledged as collateral deposits with PJM) with no liabilities, resulting in $1.01 million tangible net worth and meeting PJM’s capitalization requirements. SPP has a handful of trading firms similarly structured to protect other assets of their investors in cases of economic downturn or default.

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To reduce the risk of potential default from these undercapitalized firms, the CPWG is recommending to increase the minimum capitalization requirements as follows:

1. Increase total asset requirement from $10 million to $20 million

2. Increase tangible net worth from $1 million to $10 million

3. Increase the alternative minimum deposit from $200 thousand to $2 million

4. Exclude trading collateral balances held at any ISO/RTOs from both total assets and tangible net worth calculations

The recommended asset and tangible net worth balances ($20/$10 million) were reviewed and analyzed by the CPWG. The group determined that these amounts would not adversely eliminate asset owning utilities (particularly cooperatives, municipals, and state organizations) but would provide a demonstration of a credit holder’s ability to satisfy market losses; especially when removing collateral held at other ISO/RTOs from consideration.

Firms trading only in virtual energy would only be required to meet the standards of $10 million in assets and $1 million in tangible net worth or deposit $500 thousand as an alternative. Virtual energy trading can only be traded up to 7 days in advance of an operating day which significantly reduces their risk; especially given the conservative nature of SPP’s virtual energy collateral requirements. The CPWG was mindful that SPP’s virtual energy trading market might be significantly impaired if all smaller firms were unable to trade.

Recommendation 3: Revise SPP’s Credit Application and Require Annual Submissions

Similar to capitalization requirements, SPP’s Credit Application (Appendix A of Attachment X of the OATT) has not been materially enhanced since well before the establishment of SPP’s Integrated Marketplace. The existing application was developed to provide administrative understanding of transmission customers and did not contemplate the complexities of an energy market with non-utility customers engaged in speculative trading. Additionally, the application is only required when a potential market participant is seeking entry into the market.

The proposed revisions seek to gain a better understanding of all counterparties so that SPP can build a better credit profile for each credit holder. Similar to the “know your customer” regulations required of commercial banks, the enhancements proposed to SPP’s application focus on entity control/ownership and prior history of loss contingencies and judgements. APPENDIX #4 below provides the questions required for response related to loss contingencies and judgements.

The CPWG is not expecting that particular answers to these disclosures would result in denial of market entry, though it could be possible under certain circumstances. Instead, it would help staff prioritize its attention to higher-risk credit holders. The proposal will also require that the

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application is completed and submitted annually, which will help to indicate positive or negative movements with the credit holders risk profile.

RECOMMENDATION

The Credit Practices Working Group recommends the Finance Committee approve the three proposals above in order to reduce the risk of default and to enhance the knowledge of SPP’s counterparties.

Approved: Credit Practices Working Group

Recommendation #1 passed unopposed April 2, 2020

with Evergy abstaining

Recommendation #2 & #3 passed unopposed February 20, 2020

Action Requested: Approve the recommendations to:

1) Establish a $0.10 minimum portfolio requirement

2) Increase the minimum capitalization requirements

3) Revise the Credit Application and require annual submissions by all credit holders

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APPENDIX 1 – EXAMPLE OF PROPOSED METHODOLOGY ON TOP 10 AND BOTTOM 10 PORTFOLIOS BY MWH

A B C D = A x $0.10

Lesser of C or D

MP

MWh Acquired in 2018/19

Auction

Cost to Acquire Portfolio of

TCRs Current Tariff Requirements

$0.10 Minimum Portfolio Req.

Proposed Methodology for

Collateral FO1 35,440,786 ($15,718,804) ($4,793,632) ($3,544,079) ($4,793,632) FO2 28,015,688 ($11,429,719) ($17,787,016) ($2,801,569) ($17,787,016) AO1 22,825,685 ($109,352) $0 ($2,282,568) ($2,282,568) AO2 21,874,989 ($10,228) ($1,261,325) ($2,187,499) ($2,187,499) FO3 19,175,026 ($4,961,030) $0 ($1,917,503) ($1,917,503) AO3 15,588,334 $0 $0 ($1,558,833) ($1,558,833) AO4 13,716,364 ($2,771,691) $0 ($1,371,636) ($1,371,636) FO4 11,098,409 ($10,460,637) ($6,493,269) ($1,109,841) ($6,493,269) AO5 9,878,785 $0 $0 ($987,878) ($987,878) FO5 9,795,172 ($6,725,105) ($2,335,432) ($979,517) ($2,335,432)

: : : : : : : : : : : :

AO34 99,646 $0 $0 ($9,965) ($9,965) FO35 83,003 ($41,591) ($352,529) ($8,300) ($352,529) FO36 79,165 ($22,919) ($7,916) ($7,916) ($7,916) AO35 72,679 $0 ($238,539) ($7,268) ($238,539) FO37 50,774 ($37,094) ($67,594) ($5,077) ($67,594) FO38 33,600 ($55,436) $0 ($3,360) ($3,360) FO39 30,202 ($29,104) $0 ($3,020) ($3,020) FO40 27,080 $0 ($105,499) ($2,708) ($105,499) AO36 12,728 $0 $0 ($1,273) ($1,273) FO41 5,304 ($2,912) ($34,485) ($530) ($34,485)

• This example demonstrates how the proposal will determine the amount of collateral required to hold a TCR portfolio using data from the May 2018 annual auction

• Collateral requirements are expressed as negative numbers (i.e. liabilities) so the most negative requirement would be used for collateral to be posted with SPP

• Typically, asset owning utilities (AO) acquire a significant amount of their TCRs through conversion of Auction Revenue Rights; which do not result in acquisition costs (B above)

• Typically, financial only (FO) trading firms must participate in the open auctions to acquire TCRs which generally result in acquisitions costs from bidding on TCR positions

• Acquisition costs are settled over the life of the TCR and are netted with proceeds from the TCR position settlement (i.e. source/sink)

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APPENDIX #2 – AGGREGATES OF PROPOSED METHODOLOGY

Millions of Dollars A B C D

Lesser of C or D

MPs #

MWh Acquired in

2018/19 Auction %

Cost to Acquire

Portfolio of TCRs

Current Tariff Requirements

$0.10 Minimum Portfolio

Req.

Proposed Methodology for Collateral

AO = 0 19 83,272,060 27% ($6.1) $0.0 ($8.3) ($8.3) FO = 0 12 56,327,448 18% ($19.4) $0.0 ($5.6) ($5.6) AO > 0 17 45,005,039 14% ($8.1) ($19.4) ($4.5) ($20.9) FO > 0 29 126,175,656 41% ($68.5) ($61.0) ($12.6) ($61.4)

77 310,780,203 100% ($102.1) ($80.4) ($31.1) ($96.3)

• These amounts are aggregated by asset owning utilities and financial only trading firms with no collateral requirements and some collateral requirements

• For example: 19 asset owning utilities acquired 83.3 million MWhs for an acquisition cost of $6.1 million and no collateral requirements per the current credit methodology

• The majority of the portfolios came from converting Auction Revenue Rights into TCRs resulting in no acquisition costs

• The proposal would require an overall increase in collateral of $15.9 million ($80.4 to $96.3) and would be concentrated to those market participants who have portfolios requiring no collateral (top two lines)

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APPENDIX #3 – EXAMPLE OF THINLY CAPITALIZED TRADING FIRM

• This screenshot of a balance sheet is from a credit holder who participated in the 2018-2019 annual TCR auction

• The credit holder meets current minimum capitalization requirements through $1.2 million in tangible net worth; minimum requirement is $1.0 million

• Satisfaction of minimum capitalization criteria primarily comes from $3.9 million in security deposits held with two ISO/RTOs

• It is questionable that any losses experienced above the outstanding security deposits can be absorbed by this entity

• The proposed increase in minimum capitalization requirements would require this entity to increase capital, find a trading surrogate, or withdraw from SPP’s market

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APPENDIX #4 – EXAMPLES NEW CREDIT APPLICATION DISCLOSURES

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SouthwestPowerPool SPPorg southwest-power-poolHelping our members work together to keep the lights on... today and in the future.

CREDIT PRACTICES WORKING GROUPRECOMMENDATION OF CREDIT POLICY ENHANCEMENTS

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SouthwestPowerPool SPPorg southwest-power-poolHelping our members work together to keep the lights on... today and in the future. 2

SCOPE OF ACTIVITIES

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3

CREDIT PRACTICES WORKING GROUP

SPP and its stakeholders recognize there are potential deficiencies in SPP’s credit policy and business processes that could have an adverse effect on market efficiency in the form of credit defaults or reduced confidence in market operations.

A recent default in a neighboring RTO resulted in an exhaustive review that helped to provide a roadmap for practical enhancements to that RTOs policies and processes. SPP’s Credit Practices Working Group has reviewed and used this roadmap to address specific enhancements in an effort to strengthen its policies and procedures.

Led by member-stakeholders, the working group created two subgroups to address both the quantitative and qualitative aspects of credit protections. The following information is the result of those efforts and contain three recommendations for immediate action and additional ideas to continue research and vetting for future enhancements.

Mark Holler (Chair) Tenaska

Terri Wendlandt (Vice Chair) Evergy

Malcolm Booker OMPA

Mark Breese Xcel

Caleb Head NTEC

Tom Hestermann Sunflower

Mary Meier OPPD

Jeffrey Parkison City Utilities

Matthew Simon Basin

Members

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4

BACKGROUND ON PJM CREDIT DEFAULT

• GreenHat default estimate: $200MM

• Acquired 890 million MWh long-term TCR portfolio• Less than $1MM in collateral required by tariff• Transmission upgrades eroded portfolio value

• Kittell & Bartholomew (JPMorgan): FERC market manipulation settlement of $410MM in 2013

• Speculative trading firm with minimal capitalization:

Mill

ions

of D

olla

rs Plus: $1.01 Total Assets

Less: $0 Liabilities

Equals: $1.01 Net Worth21 of 156


RECOMMENDATIONS

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6

RECOMMENDATION #1: $0.10 MINIMUM PORTFOLIO REQUIREMENT

To Address: “Acquired 890 million MWh long-term TCR portfolio (Less than $1MM collateral requirement)”

Recommend: Establish a $0.10 Minimum Portfolio Requirement

• Calculation: Total MWh x $0.10• To be used in conjunction with existing

methodology• ‘Most negative’ of the two calculations to be used

Pros:• Addresses zero collateral

portfoliosCons:• Does not address

forward-looking risk

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RECOMMENDATION #1: MECHANICS

A – Portfolio awarded in auction

B – Acquisition costs are settled over life of TCR

C – Current tariff methodology for collateral requirements

D – Recommendation #1

• Collateral requirements are expressed as negative (liability) so the most negative of C or D would be required for each MP

A B C D = C x $0.10 Lesser of C or D

MP


AuctionCost to Acquire

Portfolio of TCRsCurrent Tariff Requirements

$0.10 Minimum Portfolio Req.


CollateralFO1 35,440,786 ($15,718,804) ($4,793,632) ($3,544,079) ($4,793,632)FO2 28,015,688 ($11,429,719) ($17,787,016) ($2,801,569) ($17,787,016)AO1 22,825,685 ($109,352) $0 ($2,282,568) ($2,282,568)AO2 21,874,989 ($10,228) ($1,261,325) ($2,187,499) ($2,187,499)FO3 19,175,026 ($4,961,030) $0 ($1,917,503) ($1,917,503)AO3 15,588,334 $0 $0 ($1,558,833) ($1,558,833)AO4 13,716,364 ($2,771,691) $0 ($1,371,636) ($1,371,636)FO4 11,098,409 ($10,460,637) ($6,493,269) ($1,109,841) ($6,493,269)AO5 9,878,785 $0 $0 ($987,878) ($987,878)FO5 9,795,172 ($6,725,105) ($2,335,432) ($979,517) ($2,335,432)

: : : : : :: : : : : :

AO34 99,646 $0 $0 ($9,965) ($9,965)FO35 83,003 ($41,591) ($352,529) ($8,300) ($352,529)FO36 79,165 ($22,919) ($7,916) ($7,916) ($7,916)AO35 72,679 $0 ($238,539) ($7,268) ($238,539)FO37 50,774 ($37,094) ($67,594) ($5,077) ($67,594)FO38 33,600 ($55,436) $0 ($3,360) ($3,360)FO39 30,202 ($29,104) $0 ($3,020) ($3,020)FO40 27,080 $0 ($105,499) ($2,708) ($105,499)AO36 12,728 $0 $0 ($1,273) ($1,273)FO41 5,304 ($2,912) ($34,485) ($530) ($34,485)

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RECOMMENDATION #1: AGGREGATE VIEW

• Clearly addresses the zero collateral issue• Does not cover acquisition costs for FO=0 in aggregate

• Assumes value of positions are distinctly positive• Alternative proposals were deemed excessive

Millions of Dollars A B C D Lesser of C or D

MPs #


Auction %

Cost to Acquire Portfolio of

TCRsCurrent Tariff Requirements

$0.10 Minimum

Portfolio Req.


Collateral

Alternative Methodology

1

Alternative Methodology

2AO = 0 19 83,272,060 27% ($6.1) $0.0 ($8.3) ($8.3) ($8.3) ($10.2)FO = 0 12 56,327,448 18% ($19.4) $0.0 ($5.6) ($5.6) ($5.6) ($22.2)AO > 0 17 45,005,039 14% ($8.1) ($19.4) ($4.5) ($20.9) ($5.2) ($25.0)FO > 0 29 126,175,656 41% ($68.5) ($61.0) ($12.6) ($61.4) ($13.8) ($93.3)

77 310,780,203 100% ($102.1) ($80.4) ($31.1) ($96.3) ($32.9) ($150.7)

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RECOMMENDATION #2: INCREASE CAPITALIZATION REQUIREMENTS

To Address: “Speculative trading firm with minimal capitalization”

Recommend: Increase Capitalization Requirements• Increase to $20MM assets• Increase to $10MM net worth• Increase Alternative Collateral Requirement• Virtual Trading Only ($10 / $1 / $0.5MM)• Remove collateral from assets & equity

$10MM assets

$1MM net worth

Investment grade credit

rating

Guarantee

$200k non-tradable deposit

Current Tariff Requirements(must meet one)

Pros: Demonstrates ability to absorb losses

Cons: Some MPs may choose not to participate 26 of 156

10

RECOMMENDATION #3: ENHANCE SPP’S CREDIT APPLICATION

To Address: “Kittell & Bartholomew (JPMorgan): FERC market manipulation settlement of $410MM in 2013”

Recommend: Increase Capitalization Requirements• Current application is stale and does not provide for effective

credit profile• Potential Enhancements: Pros: More timely and

accurate information

Cons: No assurance against fraudulent activity

Affiliates in all RTOs

Board, Shareholder,

OwnerCompliance

Adverse Regulatory

Actions

All RTO Collateral

Adverse Civil Actions or Bankruptcy 27 of 156


PHASE II ENHANCEMENT OPPORTUNITIES

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PHASE II ENHANCEMENT OPPORTUNITIES

• Forward-looking reference prices based upon economic studies of transmission upgrades

• Position limits based upon an MPs capitalization

• Mark to Auction methodology• Would require significant changes to overall TCR market

methodology and processes

• Use electrically equivalent values for new settlement locations (proxy prices)

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Public

Surety Bond OverviewSPP Finance Committee - April 2020

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Agenda

• What is a Surety Bond• Comparing a Surety Bond and a Letter of Credit• Evolution of the Surety Bond within ISOs• Pro’s and Con’s of a Surety Bond• Example Surety Bond Language• Questions

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A surety bond is a contract between three

parties—the principal (Utility), the surety

(Bonding / Insurance Company) and

the obligee (SPP)—in which the surety

financially guarantees to an obligee that the

principal will act in accordance with the

terms established by an underlying contract.

3

What is a Surety Bond?

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Comparing a Surety Bond and a Letter of Credit (LOC)

Source – “Excelon’s PJM Surety Bond Education” presentation 2/12/20184 33 of 156

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Evolution of the Surety Bond within ISOsWhere were we?

• Early 2000’s surety bonds were acceptable form of financial assurance in some ISO markets due to a number of factors• Less complexity• Fewer market participants• Smaller collateral obligations

• Similarly timed JPM Chase suit regarding Enron surety bonds put them in “at risk” category• https://www.projectfinance.law/publications/surety-bonds-compared-to-lcs

Where are we now?• Some ISO’s (ie ERCOT, NYISO) allow use of surety bonds as financial assurance to cover credit exposure• Surety bond language over the years has become more aligned with letters of credit• Surety companies are willing to underwrite structured bond language

Where are we going?• With the shift in the ISO’s and surety landscape, surety bonds have emerged as an additional option for assurance• As market participants/ISO’s, and surety companies become more informed on surety bonds and energy obligations

respectively, there will be a growing desire to utilize this instrument moving forward

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https://www.projectfinance.law/publications/surety-bonds-compared-to-lcs

Public

Pros and Cons of a Surety Bond

Source – Commercial Surety, 3rd Edition 20176

Pros of a Surety Bond clearly outweigh the cons

• Pros• Since the 2008 financial crisis and agreement of Basel III, the cost of Letter of Credit have increased while

surety premiums have remained stagnant• Evergy example – Letter of Credit cost 1.25%, Surety Bond cost 0.35% - 1.00% based on exposure

• The more robust underwriting process an insurance company goes through allows them to more competitively price bonds

• Increasing collateral optionality enhances market participants ability to strategically manage their collateral portfolios to align with their needs

• The use of surety bonds frees up liquidity capacity and can be viewed as a credit enhancement to utility• Accepting surety bonds will mitigate SPP’s concentration exposure with banks

• Cons• Risk: non-payment or delay in payment • Mitigant: Structure bond payment terms similar to Letter of Credit

• Risk: Limited market of insurance companies willing to underwrite ISO bonds • Mitigant: Educating the sureties on low risk nature of the obligations

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• Payment language is key to minimize risk of delay in payment to SPP and should meet the same requirements as current SPP payment language of a Letter of Credit

• Only high credit quality insurers should be allowed to provide Surety Bonds to reduce non-payment exposure

Source – “Excelon’s PJM Surety Bond Education” presentation 2/12/20187

Example Surety Bond Language

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Questions

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SouthwestPowerPool SPPorg southwest-power-poolHelping our members work together to keep the lights on... today and in the future.

1

ENGINEERING STAFFING FINANCIAL IMPACT UPDATE APRIL 27, 2020

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EXECUTIVE SUMMARY

• 2020 GI Net Revenue forecast offsets 2020 costs associated with 2019 GI headcount• $517k 2020 Net Revenue Increase

• Q1 Actual: $131k• Q2-4 Forecast: $386k

• Total System Planning Expense increase minimized by reduced consulting cost• Net Cost Increase of $175k

• Net Expense reduction for 2019 headcount additions• 2020 Net Expenses Reduced by $342k*

* Within 12% of original net expense reduction of $387k projected in June 201939 of 156

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HEADCOUNT PLACEMENT

2019 Additional Headcount -11 staff requested• 10 placed 4th Q 2019, 1 placed 1st Q 2020

• Included both external hires and internal transfers• 14 new external hires

• New positions and backfill for open positions • Quick ramp up for 2020 positions

• 4 June 1 hires in place• 3 offers extended

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GENERATOR INTERCONNECTION REVENUE

2019 Actual 2020 Actual & ProjectedAnnual GI Net Revenue $ 885,770 $ 1,403,400

Annual GI Net Revenue Comparison

$885,770

$1,403,400

$-

$200,000.00

$400,000.00

$600,000.00

$800,000.00

$1,000,000.00

$1,200,000.00

$1,400,000.00

$1,600,000.00

Annual GI Net Revenue

2019 Actual 2020 Actual & Proj

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NET EXPENSE ANALYSISSystem Planning Total Expense Comparison

Salary & Benefits$4,986,066

Salary & Benefits$5,729,923

Outside Services$919,433

Outside Services$350,895

$-

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

2019 2020

2019 Actual 2020 Actual & Projected ChangeSalary & Benefits $ 4,986,066 $ 5,729,923 $ 743,858 Outside Services $ 919,433 $ 350,895 $ (568,538)

Total Expense $ 5,905,498 $ 6,080,818 $ 175,320

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NET EXPENSE ANALYSISNet Expense Impact

2019 Actual 2020 Actual & Projected ChangeSystem Planning Total Expense $ 5,905,498 $ 6,080,818 $ 175,320

GI Net Revenue $ (885,770) $ (1,403,400) $ (517,629) Net Expense $ 5,019,728 $ 4,677,419 $ (342,309)

$4,677,419

$(1,403,400)

$6,080,818

$5,019,728

$(885,770)

$5,905,498

$(2,000,000) $(1,000,000) $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 $6,000,000 $7,000,000

Net Expense

GI Net Revenue

System Planning Total Expense

Net Expense

2019 2020

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ADDITIONAL BENEFITS

Additional benefits from staff additions• Improved staff morale• Improved work-life balance for existing staff• Reduction in staff turnover• Increased Agility- movement within department• Bench strength building in key knowledge and processes• Training program to leverage for future hires• 2020 resources all hired and in place by 6/1/2020

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CONTACT

Tony GreenManager, Engineering [email protected]

Antoine LucasVP Engineering [email protected]

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mailto:[email protected]


Southwest Power Pool, Inc. FINANCE COMMITTEE

Recommendation to the Board of Directors April 28, 2020

2020 Funding for Pension and Post-retirement Healthcare Plans

Organizational Roster The following persons are members of the Finance Committee:

Graham Edwards Susan Certoma Sarah Stafford Sandra Bennett Laura Kapustka Mike Wise

SPP Director SPP Director OG&E American Electric Power Lincoln Electric Golden Spread

Background The SPP Finance Committee is charged with reviewing reports from the plan’s actuary, establishing funding policies, and recommending annual funding levels for the plans to the SPP Board of Directors. SPP engaged Osborn, Carreiro & Associates (“the Actuary”) to prepare actuarial valuation reports of the SPP Defined Benefit Retirement Plan and SPP Post-retirement Benefits Plan as of January 1, 2020.

Analysis SPP Defined Benefit Retirement Plan

The report identifies 2020 accounting expense for this plan as well as minimum and maximum contributions for the plan. The Actuary determined 2020’s minimum contribution level to be $0.00 and suggested level to be $5.00. SPP’s 2020 budget anticipated contributions to the defined benefit pension plan of $5.50.

The schedule below illustrates the historical funding of the SPP Defined Benefit Retirement Plan:

2016 2017 2018 2019 2020

Maximum Contribution (tax deductible) $50.29 $61.01 $69.18 $86.13 $89.66 Minimum Contribution $0.00 $0.00 $0.00 $0.00 $0.00 Actuary Suggested Contribution 5.38 5.20 4.59 5.44 5.00 Actual Contribution 5.38 5.20 4.50 5.44 Projected Benefit Obligation (PBO) $76.97 $85.89 $96.52 $115.55 Accumulated Benefit Obligation (ABO) 64.48 68.96 78.42 93.60 Fair Value of Plan Assets 57.74 70.18 71.59 87.66 Discount Rate 5.00% 5.00% 5.00% 4.50%

Plan Assets vs. PBO -$19.23 -$15.71 -$24.93 -$27.89 Plan Assets vs. ABO -3.74 -1.22 -6.83 -5.94 Total Participants 764 796 819 824 Benefits Paid $0.71 $0.79 $0.94 $3.34

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SPP Defined Benefit Retirement Plan Fund Status as of December 31, 2019

The fund had total assets of $87.66 versus an Accumulated Benefit Obligation of $93.60, Projected Benefit Obligation of $115.55 and termination value of approximately $94.00. The Actuary estimates participants active on January 1, 2020 will accrue $8.30 in benefits during fiscal year 2020. Finally, the value of the early retirement feature of the Defined Benefit Retirement Plan is estimated to be $3.00.

SPP Post-retirement Benefits Plan

In 1995, the Board of Directors approved retiree medical coverage for all SPP employees who retire at their Normal Retirement Date as defined in the SPP Defined Benefit Retirement Plan. The Board also awarded benefits under this plan to those employees of record on January 1, 1996 who retire between the ages of 55 - 65. The SPP Board acted in 2006 to limit benefits from this plan to only those employees hired prior to June 1, 2006. As of January 1, 2020 SPP had 96 active employees covered by this plan and 24 retirees.

The Actuary estimated 2020 net periodic post-retirement benefit cost to be $1.10. This computation is based on a 4.50% discount rate and retirement at age 65. The health care cost trend was assumed to increase 9% next year, 8% the year after and so on down to 5% and remain there thereafter.

If the plan were a funded plan and the assets SPP has set aside to cover benefits were considered in the actuarial calculations; the actuary would suggest SPP fund an additional $0.00 during 2020. SPP’s 2020 budget allocates $0.00 in funding for post-retirement benefits. Assets SPP has set aside to cover benefits exceeded the accumulated benefit obligation as of year-end 2019 by approximately $2.61.

2016 2017 2018 2019 2020

Actual Contribution $0.25 $0.00 $0.00 $0.00 Pension Cost $1.21 $1.11 $1.02 $1.05 $1.10 Accumulated Benefit Obligation (ABO) $9.43 $9.47 $10.34 $11.48 Fair Value of Plan Assets1 10.44 11.96 11.58 14.09 Funded Status vs. ABO 1.01 2.49 1.24 2.61 Plan Participants – Active 111 105 100 96 Plan Participants – Retired 18 22 23 24

Recommendation Approve 2020 funding of the SPP Retirement Plan of $5.00

Approve 2020 funding of the SPP Post-retirement Healthcare Plan of $0.00

Approved: SPP Finance Committee April 27, 2020

Action Requested: Approve Recommendation

1 The Post-retirement Healthcare plan is an unfunded plan and therefore has no plan assets. The plan sponsor has set aside specific assets with the intent to use those assets to pay benefits under the plan.

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Southwest Power Pool, Inc. FINANCE COMMITTEE

Recommendation to the Board of Directors April 28, 2020

2019 Financial Audit Acceptance

Organizational Roster The following persons are members of the Finance Committee:

Graham Edwards Susan Certoma Sarah Stafford Laura Kapustka Sandra Bennett Mike Wise

SPP Director SPP Director OG&E Lincoln Electric AEP Golden Spread

Background SPP annually engages a Certified Public Accounting firm to audit its financial statements and accounting controls. SPP has engaged BKD, LLC to perform audits of its financial reports since fiscal year 2004. SPP last performed a request for proposal for the financial audit engagement in July 2013.

Analysis BKD, LLC has completed and published its audit of SPP’s 2019 financial statements. The Finance Committee, at its April 27, 2020 meeting met with representatives of BKD, LLC and discussed their findings, specifically focusing on: 1) adequacy of SPP’s accounting policies and procedures, 2) adequacy of internal control procedures and the extent tested, and 3) any areas of weakness or concern that SPP should address going forward.

BKD’s opinion will be unqualified. No issues or material/significant weaknesses were noted during the audit. BKD informed the Committee of upcoming changes in accounting standards.

Recommendation

The Finance Committee recommends the SPP Board of Directors accept in its entirety the 2019 audit report and findings of BKD, LLC.

Approved: SPP Finance Committee April 27, 2020

Action Requested: Approve Recommendation

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Southwest Power Pool, Inc. Independent Auditor’s Report and Financial Statements

December 31, 2019 and 2018

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Southwest Power Pool, Inc. December 31, 2019 and 2018

Contents

Independent Auditor’s Report ............................................................................................... 1 Financial Statements

Balance Sheets .................................................................................................................................... 3

Statements of Income ......................................................................................................................... 4

Statements of Members’ Deficit ......................................................................................................... 5

Statements of Cash Flows .................................................................................................................. 6

Notes to Financial Statements ............................................................................................................ 8

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Independent Auditor’s Report

Board of Directors Southwest Power Pool, Inc. Little Rock, Arkansas We have audited the accompanying financial statements of Southwest Power Pool, Inc., which comprise the balance sheets as of December 31, 2019 and 2018, and the related statements of income, members’ deficit, and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

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Board of Directors Southwest Power Pool, Inc. Page 2

Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Southwest Power Pool, Inc. as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.

Little Rock, Arkansas April 27, 2020

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Southwest Power Pool, Inc. Balance Sheets (in Thousands)


See Notes to Financial Statements

Assets

2019 2018Current Assets

Cash and cash equivalents 48,694$ 93,593$ Restricted cash deposits 401,478 344,904 Accounts receivable, net 74,285 65,542 Prepaid expenses and other 11,714 12,456

Total current assets 536,171 516,495

Property and Equipment, at CostLand 4,812 4,812 Building and improvements 68,373 67,811 Furniture and fixtures 10,328 10,352 Equipment and machinery 56,025 48,608 Software 185,622 181,065 Software in development 7,081 6,573 Equipment under capital lease - 4,876

332,241 324,097 Less accumulated depreciation and amortization 258,151 246,606

74,090 77,491

Investments (Note 2 ) 35,276 25,239

Other Assets, Net 6,349 6,842

651,886$ 626,067$

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Liabilities and Members’ Deficit

2019 2018Current Liabilities

Accounts payable 60,811$ 77,645$ Customer deposits 401,478 344,904 Current maturities of long-term debt (Note 4 ) 22,596 22,281 Current maturities of obligations under capital lease (Note 5 ) - 1,966 Accrued expenses 79,569 97,246 Deferred revenue 5,203 187

Total current liabilities 569,657 544,229

Line of Credit (Note 3) 12,760 340

Long-term Debt (Note 4 ) 169,603 192,199 Less unamortized debt issuance costs (613) (708)

168,990 191,491

Other Long-term Liabilities 44,241 40,101

Members’ Deficit (143,762) (150,094)

651,886$ 626,067$

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Southwest Power Pool, Inc. Statements of Income (in Thousands)

Years Ended December 31, 2019 and 2018

See Notes to Financial Statements 4

2019 2018Operating Income

Tariff fees and member assessments $ 188,518 192,451$ Other member services 7,171 7,062

195,689 199,513 Operating Expenses

Salaries and benefits 101,221 96,109 Employee travel 1,907 1,895 Administrative 4,865 4,602 Regulatory assessment 20,591 21,060 Meetings 933 919 Communications system 4,449 3,840 Maintenance 16,308 17,180 Consulting services 14,909 12,370 Depreciation 16,930 18,163

182,113 176,138

Operating Income 13,576 23,375

Other Income (Expense)Investment income 665 355 Interest expense (8,550) (9,268) Change in fair market value of interest rate swaps (322) 725 Other expense (744) (1,014)

(8,951) (9,202)

Income Before Unrealized Gain (Loss) and Change in FundedStatus of Employee Benefit Plans 4,625 14,173

Unrealized Gain (Loss) on Investments 2,552 (528)

Change in Funded Status of Employee Benefit Plans (845) (7,018)

Net Income 6,332$ 6,627$

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Southwest Power Pool, Inc. Statements of Members’ Deficit (in Thousands)

Years Ended December 31, 2019 and 2018


2019 2018

Balance, Beginning of Year (150,094)$ (156,721)$

Net income 6,332 6,627

Balance, End of Year (143,762)$ (150,094)$

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Southwest Power Pool, Inc. Statements of Cash Flows (in Thousands) Years Ended December 31, 2019 and 2018


As Adjusted-Note 1

2019 2018Operating Activities

Net income 6,332$ 6,627$ Items not requiring cash

Depreciation and amortization 17,036 18,263 Change in funded status of employee benefit plans 845 7,018 Unrealized loss (gain) on investments (2,552) 528 Loss on disposal of fixed assets 46 - Change in fair market value of interest rate swaps (322) (725)

Changes in assets and liabilitiesAccounts receivable, net (8,743) 8,849 Prepaid expenses and other 743 (3,917) Other assets 288 (1,348) Accounts payable (16,495) 2,223 Accrued expenses and other liabilities (12,519) (5,482) Other current liabilities 56,573 4,292 Other long-term liabilities 3,617 1,506

Net cash provided by operating activities 44,849 37,834

Investing ActivitiesAcquisition of property and equipment (14,056) (16,116) Purchase of investments (55,859) (42,222) Proceeds from investment maturities 47,042 40,808 Proceeds from sale of investments 1,526 103

Net cash used in investing activities (21,347) (17,427)

Financing ActivitiesRepayments of long-term debt (22,281) (21,469) Repayments of capital lease obligation (1,966) (1,890) Repayment of borrowings under lines of credit (76,583) (13,600) Borrowings under lines of credit 89,003 13,940

Net cash used in financing activities (11,827) (23,019)

Increase (Decrease) in Cash, Cash Equivalents, and Restricted Cash 11,675 (2,612)

Cash, Cash Equivalents, and Restricted Cash, Beginning of Year 438,497 441,109

Cash, Cash Equivalents, and Restricted Cash, End of Year 450,172$ 438,497$

Supplemental Cash Flows Information

Interest paid on long-term debt (net of interest capitalizedof $209 and $122 in 2019 and 2018, respectively) 8,474$ 9,180$

Property and equipment purchases in accounts payable and accrued liabilities 2,431$ 2,912$

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Southwest Power Pool, Inc. Statements of Cash Flows (in Thousands) Years Ended December 31, 2019 and 2018


2019 2018

Cash and cash equivalents 48,694$ 93,593$ Restricted cash deposits 401,478 344,904

Total cash, cash equivalents and restricted cashshown on the balance sheet 450,172$ 438,497$

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Southwest Power Pool, Inc. Notes to Financial Statements (in Thousands)


8

Note 1: Nature of Operations and Summary of Significant Accounting Policies

Nature of Operations

Southwest Power Pool, Inc. (the Company) is a not-for-profit entity formed in 1941 and incorporated in 1994. The Company is a Federal Energy Regulatory Commission (FERC)-approved regional transmission organization (RTO) serving more than 18 million ultimate customers across all or parts of 14 states. The Company’s membership consists of investor-owned utilities, municipal systems, generation and transmission cooperatives, state authorities, federal agencies, independent power producers, contract participants, power marketers and independent transmission companies.

Major services provided by the Company to its members and customers include tariff administration, reliability coordination, regional scheduling, market operations and regional transmission expansion planning. Market operations encompass day-ahead and real-time markets, transmission congestion rights, reliability unit commitment, operating reserve market and consolidated balancing authority.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents and Deposits

The Company considers all highly liquid interest-earning investments with stated maturities and coupon rate reset dates of no more than three months to be cash equivalents. At December 31, 2019 and 2018, the Company’s cash and cash equivalents, including restricted deposits, are invested primarily in money market funds, mutual funds and commercial paper. These investments are typically revalued to the market each day. The Company’s cash and cash equivalents consist primarily of funds accumulated for general operating purposes. Restricted cash deposits consist primarily of customer security deposits, amounts deposited for engineering studies and funds set aside for disputed invoices.

Investments

The Company’s investments include equity and fixed income mutual funds and government securities. These investments are recorded at fair value, with unrealized gains and losses reported as nonoperating income. Dividends, interest income and realized gains and losses are reported as investment income. The Company’s investments are intended to be utilized in funding benefits associated with the Company’s postretirement health care plan and 457f deferred compensation plan in addition to maintaining collections under Schedule 12 to be utilized for the annual FERC assessment.

Income Taxes

The Company is exempt from income taxes under Section 501c(6) of the Internal Revenue Code and a similar provision of state law. However, the Company is subject to federal income tax on any unrelated business taxable income.

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9

Accounts Receivable

Accounts receivable are stated at the amount of consideration from members, customers, and others of which the Company has an unconditional right to receive plus any accrued and unpaid interest. The Company provides an allowance for doubtful accounts, which is based upon a review of outstanding receivables, historical collection information and existing economic conditions. Accounts that are unpaid after the due date are subject to interest at a rate set by FERC. During the years ended December 31, 2019 and 2018, impairment losses on doubtful accounts receivable, where collectability is not reasonably assured, were $0 and $626, respectively.

Property and Equipment

Property and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful life of each asset. The estimated useful lives are as follows:

Building 20 years Building improvements Shorter of useful life or remaining life of building Furniture and fixtures 5 years Vehicles 5 years Equipment and machinery 3 years Software 3 years

The Company capitalizes interest cost incurred on funds used to construct property, plant and equipment. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. Interest cost capitalized was $209 and $122 in 2019 and 2018, respectively.

The Company capitalizes development costs, including interest, for internal use software costs. These costs are included in software in development. Management of the Company is of the opinion that all costs capitalized in association with the software in development are fully recoverable over the anticipated life of the asset.

Long-Lived Asset Impairment

The Company evaluates the recoverability of the carrying value of long-lived assets whenever events or circumstances indicate the carrying amount may not be recoverable. If a long-lived asset is tested for recoverability and the undiscounted estimated future cash flows expected to result from the use and eventual disposition of the asset is less than the carrying amount of the asset, the asset cost is adjusted to fair value and an impairment loss is recognized as the amount by which the carrying amount of a long-lived asset exceeds it fair value.

No asset impairment was recognized during the years ended December 31, 2019 and 2018.

Revenue Recognition

Revenues, consisting of member assessments, tariff administrative fees, contract services and miscellaneous revenues are recognized when performance obligations are satisfied, and expenses are recognized when incurred.

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10

Customer Deposits

Customers may be required to make deposits with the Company prior to the performance of transmission services, market transactions and engineering studies. An offsetting liability equal to the deposit balance is recorded in current liabilities. Funds set aside for disputed invoices are also recorded as customer deposits under current liabilities.

Tariff Fees and Member Assessments

An administrative charge is applied to all transmission service under the Company’s Open Access Transmission Tariff (tariff) to cover the expenses related to its administration. The charge is calculated in accordance with the terms of the Company’s tariff. The administrative rate used for the calculation is established by the board of directors.

Members are assessed monthly based on their prior year average 12-month peak demand multiplied by the total hours in a month and by the monthly assessment rate as established by the board of directors.

A member’s monthly assessment is offset dollar for dollar for qualifying tariff administrative fees collected from a member in any given assessment period.

The Company collects a membership fee from each member annually. The amount of the membership fee is established by the board of directors of the Company. For 2019 and 2018, all members paid a $6 membership fee.

The Company also bills transmission customers a charge under Schedule 12 on all energy delivered under point-to-point transmission service and network integration transmission service. This provides a mechanism for recovering the annual charges the Company pays to FERC.

Deferred Revenue

Revenues for contract services received in advance are recognized over the periods to which the revenues relate.

Other Member Services

The Company provides reliability, tariff administration and scheduling for non-members on a contract basis. The Company also provides engineering study services for long-term transmission service and generation interconnection requests.

Withdrawing Members

Prior to December 2019, members wishing to withdraw their membership from the Company must provide 24 months’ written notice and were responsible for their portion of the Company’s existing obligations as defined in the bylaws, which included unpaid membership fees, any assessments imposed prior to the effective withdrawal date, any costs or expenses imposed upon the Company as a direct consequence of the member’s withdrawal and the member’s share of long-term obligations and related interest. Additionally, withdrawing members were responsible for all financial obligations incurred and costs allocated to its load for transmission facilities approved prior to their withdrawal. As a result of a complaint, FERC ordered the Company in its ruling dated December 19, 2019 to revise its membership agreement and bylaws to eliminate for non-transmission owners the membership exit fee comprised of member’s share of long-term obligations and related interest. FERC also ordered the Company to revise its exit fee formula to ensure that the

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11

Company’s debt is fully covered by the continued application of the exit fee to transmission-owning members. As of December 31, 2019, the Company had not been notified by any member of their intent to withdraw their membership from the Company.

Concentration of Credit Risk

The Company is exposed to credit risk primarily through accounts receivable and uninsured cash balances. During 2019 and 2018, the Company maintained cash balances, including transaction accounts and short-term investment accounts that are not insured by the Federal Deposit Insurance Corporation. At December 31, 2019 and 2018, the Company did not have transaction accounts exceeding federal insurance limits. The Company’s investment accounts were primarily invested in highly liquid short-term investments such as money market funds, mutual funds, and commercial paper. The Company also requires the financial institutions holding its cash balances to be rated A or better by nationally recognized rating agencies.

The Company considers its accounts receivable to be highly probable of collection. No allowance for doubtful accounts was recorded at December 31, 2019. The Company had recorded an allowance of $626 at December 31, 2018.

The Company requires its customers to meet certain minimum standards of financial condition and creditworthiness to receive unsecured credit from the Company. If these standards cannot be met by a customer, the Company requires the posting of defined financial security instruments to cover potential liabilities.

Changes in Accounting Principles

Revenue

In 2014, FASB issued Accounting Standards Codification (ASC) 606, Revenue from Contracts with Customers, replacing the existing accounting standard and industry-specific guidance for revenue recognition with a five-step model for recognizing and measuring revenue from contracts with customers. The underlying principle of the standard is to recognize revenue to depict the transfer of goods or services to customers at the amount expected to be collected. For non-public entities, ASC 606 is effective for annual reporting periods beginning after December 15, 2018, and the Company adopted it using the modified retrospective method applied to open contracts and only to the version of contracts in effect as of January 1, 2019.

In accordance with the modified retrospective method, the Company’s previously issued financial statements have not been restated to comply with ASC 606 and the Company did not have a cumulative-effect adjustment to retained earnings. Under the new guidance, revenue is to be recognized when performance obligations are satisfied. The Company has historically recognized billed and unbilled revenues as services were provided in accordance with the Company’s tariff and various contracts with customers. This practice is consistent with the new revenue recognition guidance. As a result, the adoption of ASC 606 had no significant impact on the timing of revenue recognition compared to previously reported results. The guidance requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and the related cash flows arising from contracts with customers, which are included in Note 7. Comparative prior period information has not been adjusted and continues to be reported in accordance with previous revenue recognition guidance in ASC Topic 605 – Revenue Recognition.

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The Company elected the following practical expedient with implementation of ASC 606:

Measuring Progress for Revenue Recognized Over Time (606-10-55-18). The Company elected to use the right to invoice practical expedient. This practical expedient allows an entity to recognize revenue in the amount of consideration to which the entity has the right to invoice when the amount that the entity has the right to invoice corresponds directly to the value transferred to the customer.

Restricted Cash

In 2019, the Company changed its method of accounting for restricted cash and restricted cash equivalents by adopting the provisions of Accounting Standards Update (ASU) 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The new accounting guidance in ASU 2016-18 requires balances generally described as restricted cash or restricted cash equivalents to be included with cash and cash equivalents when reconciling beginning and end of the period balances on the accompanying statements of cash flows. This change was applied retrospectively to all periods presented, which resulted in the following changes within the statement of cash flows:

2018As Reported

As Previously Under Current Effect ofReported Method Change

Changes in other current liabilities -$ 4,292$ 4,292$ Net cash provided by operating activities 33,542 37,834 4,292 Increase (Decrease) in Cash, Cash Equivalents, and

Restricted Cash (6,904) (2,612) 4,292 Cash, Cash Equivalents, and Restricted Cash, Beginning of Year 100,496 441,109 340,613 Cash, Cash Equivalents, and Restricted Cash, End of Year 93,593 438,497 344,904

2019 2018

Cash and cash equivalents 48,694$ 93,593$ Restricted cash deposits 401,478 344,904

Total cash, cash equivalents and restricted cashshown on the balance sheet 450,172$ 438,497$

The adoption of ASU 2016-18 had no effect on the previously reported net income. The financial statement lines in the statement of cash flows previously titled cash and cash equivalents, beginning of the year and cash and cash equivalents, end of year have been modified to include restricted cash in the current year presentation as a result of the adoption of the standard.

Pension Cost

In 2019, the Company adopted the provisions of ASU 2017-07, Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The new accounting guidance provided for in ASU 2017-07 requires the service cost component of net periodic pension cost and net periodic postretirement benefit cost to be presented with other compensation costs arising from services rendered by employees during the year. Among other things, it requires enhanced disclosures for the presentation of net periodic pension cost and net periodic postretirement cost in the notes to the financial statements. This change was applied retrospectively using the practical expedient for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement cost in the statement of income.

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Note 2: Investment and Investment Returns

Investments at December 31 consisted of the following:

2019 2018Mutual Funds

Equity 10,354$ 8,571$ Fixed income 3,737 4,173

Total mutual funds 14,091 12,744

U.S. Government Securities

Treasury Notes 21,185 12,495 Total Government Securities 21,185 12,495

35,276$ 25,239$

Total investment return is comprised of the following:

2019 2018

Interest and dividends reported at fair value 665$ 355$ Unrealized gains (losses) on

investments reported at fair value 2,552 (528)

3,217$ (173)$

Interest, dividends and realized gains and losses are reported as investment income, while unrealized gains and losses are reported separately in the Statements of Income.

Note 3: Lines of Credit

The Company has a $30,000 revolving line of credit with a commercial bank expiring in 2021. At December 31, 2019 and 2018, no amounts were borrowed against this line. The agreement has a variable interest rate equal to the 2019 and 2018 London Interbank Offered Rate (LIBOR) plus a 1.00% and 1.25% credit margin, respectively. The interest rate at December 31, 2019, was 2.75%. The Company’s line of credit requires compliance with certain financial and non-financial covenants as well as periodic reporting requirements. The Company was in compliance with the covenant and reporting requirements throughout and at December 31, 2019.

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The Company has a $80,000 revolving line of credit expiring in 2023. At December 31, 2019 and 2018, $12,760 and $340, respectively, was borrowed against this line. The agreement has a variable interest rate equal to London Interbank Offered Rate (LIBOR) plus a 1.5 % credit margin. The interest rate at December 31, 2019, was 3.19%. The Company’s line of credit requires compliance with certain financial and non-financial covenants as well as periodic reporting requirements. The Company was in compliance with the covenant and reporting requirements throughout and at December 31, 2019.

Note 4: Long-term Debt and Interest Rate Swaps

Long-term Debt

2019 2018

Variable Rate Term Note due 2027 (A) 2,519$ 2,725$ 4.82% Series 2010-A and B Senior Notes due 2042 (B) 56,930 58,255 3.55% Series 2010-C Senior Notes due 2024 (C) 29,750 36,750 3.00% Series 2012-D-1 Senior Notes due 2024 (D) 21,250 26,250 3.25% Series 2012-D-2 Senior Notes due 2024 (E) 23,750 28,750 3.80% Series 2014-E Senior Notes due 2025 (F) 37,000 37,000 Floating Series Note - 2024 (G) 21,000 24,750

192,199 214,480

Less unamortized debt issuance costs 613 708 Less current maturities 22,596 22,281

168,990$ 191,491$

(A) Due February 1, 2027; principal and interest are payable quarterly based on a 25-year amortization. Payments commenced on May 1, 2007. The interest rate adjusts quarterly based on LIBOR plus 0.85%. At December 31, 2019 and 2018, the interest rate was 2.81% and 3.44%, respectively. The note is secured by a first mortgage on the Company’s operation facility.

(B) Due December 30, 2042; principal and interest are payable quarterly based on a 32-year amortization. Principal payments commenced on March 30, 2013. The interest rate is fixed at 4.82%. The notes are unsecured.

(C) Due March 30, 2024; principal and interest are payable quarterly based on a 13-year amortization. Principal payments commenced on June 30, 2014. The interest rate is fixed at 3.55%. The notes are unsecured.

(D) Due March 30, 2024; principal and interest are payable quarterly based on a 10-year amortization. Principal payments commenced on June 30, 2014. The interest rate is fixed at 3.00%. The notes are unsecured.

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(E) Due September 30, 2024; principal and interest are payable quarterly based on a 10-year amortization. Principal payments commenced on December 30, 2014. The interest rate is fixed at 3.25%. The notes are unsecured.

(F) Due December 30, 2025; principal and interest are payable quarterly based on an 11 year and 9 months amortization. Principal payments commence on March 30, 2024. The interest rate is fixed at 3.80%. The notes are unsecured.

(G) Due March 30, 2024; principal and interest are payable monthly based on an eight-year amortization. Payments commenced on June 30, 2016. The interest rate adjusts monthly based on LIBOR plus 1.75%. At December 31, 2019 and 2018, the interest rate was 3.46% and 4.10%, respectively. The note is unsecured.

Aggregate annual maturities of long term debt at December 31, 2019, are:

2020 22,596$ 2021 23,414 2022 23,735 2023 24,560 2024 25,139 Thereafter 72,754

192,199$

Certain of the Company’s term notes require compliance with financial and nonfinancial covenants, as well as periodic reporting requirements. The Company was in compliance with the covenant and reporting requirements throughout and at December 31, 2019.

In an April 2019 Order, Federal Energy Regulatory Commission (FERC) directed the Company to eliminate the membership exit fee from non-transmission owners and revise the exit fee formula to ensure that the continued application to transmission owners ensures that the Company’s debt is fully secured. In August 2019, the Company submitted a Section 206 compliance filing to FERC, which amends the Company’s Membership Agreement and Bylaws to clearly establish an exit fee that only applies to transmission owning members in compliance with the FERC order.

The Company notified its debt holders of a potential event of default under the agreements as a result of the April 2019 Order. The Company received waivers from its commercial lenders and a limited waiver from the Senior Note holders. The limited waiver temporarily waived any defaults or events of default until the earlier of (a) January 31, 2020 or (b) sixty days from the date when FERC issues its final order associated with the April 2019 Order and such order is not subject to further rehearing or appeal. As FERC’s process has yet to be completed, the Limited Waiver expired on January 31, 2020. Subsequent to year end, the Company executed amendments to all of its note agreements to bring the terms of the agreements in line with the requirements imposed on the Company by the FERC, thereby eliminating the potential event of default.

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Variable-to-Fixed Interest Rate Swap

As a strategy to maintain acceptable levels of exposure to the risk of changes in future cash flows due to interest rate fluctuations, the Company enters into interest rate swap agreements. On September 15, 2006, the Company entered into an interest rate swap agreement with U.S. Bank National Association. The agreement provides for the Company to receive interest from the counterparty at LIBOR and to pay interest to the counterparty at a fixed rate of 5.51% on notional amounts of $2,499 and $2,703 at December 31, 2019 and 2018, respectively. Under the agreement, the Company pays or receives the net interest amount quarterly, with the quarterly settlements included in interest expense. The swap was established to hedge interest rate risk on its floating rate debt obligation (Loan A).

The Company entered into another interest rate swap agreement on March 10, 2014, with Regions Bank. The agreement provides for the Company to receive interest from the counterparty at LIBOR and to pay interest to the counterparty at a fixed rate of 3.225% on notional amounts of $21,000 and $24,750 at December 31, 2019 and 2018, respectively. Under the agreement, the Company pays or receives the net interest amount monthly, with the monthly settlements included in interest expense. The swap was established to hedge interest rate risk on its floating rate debt obligation (Loan G).

The table below presents certain information regarding the Company’s interest rate swap agreements.

2019 2018

Fair value of interest rate swap agreements 1,314 992$ Balance sheet location of fair value amounts Other Long-term

LiabilitiesOther Long-term

Liabilities

Gain (loss) recognized in statement of income (322)$ 725$ Location of gain (loss) recognized in statement of inc

Change in Fair Market Value of

Interest Rate Swaps

Change in Fair Market Value of

Interest Rate Swaps

Note 5: Capital Lease Obligation

The Company entered into a capital lease obligation on February 1, 2015, in the amount of $6,901 to finance data storage equipment. The term of the financing was five years and expired on November 1, 2019. At December 31, 2019 and 2018, accumulated depreciation for equipment purchased under the capital lease was $4,876.

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Note 6: Employee Benefit Plans

Pension and Other Postretirement Benefit Plans

The Company has a noncontributory defined benefit pension plan covering all employees meeting eligibility requirements. The Company’s funding policy is to make the minimum annual contribution that is required by applicable regulations, plus such amounts as the Company may determine to be appropriate from time to time. The Company expects to contribute approximately $5,000 to the plan in 2020.

The Company has a noncontributory defined benefit postretirement health care plan covering eligible retirees, including those retiring between the ages of 55–65 and hired prior to January 1, 1996. Employees hired after June 1, 2006, are not eligible to participate in the noncontributory defined postretirement health care plan. Eligible retirees are provided monies through a tax-free health reimbursement account to pay for individual Medicare supplemental health insurance plans or other eligible health care expenses.

The Company uses a December 31 measurement date for the plans. Information about the plans’ funded status is as follows:

2019 2018 2019 2018

Benefit obligation 115,547$ 96,516$ 11,476$ 10,339$ Fair value of plan assets 87,657 71,578 - -

Funded status (27,890)$ (24,938)$ (11,476)$ (10,339)$

PostretirementHealth Care BenefitsPension Benefits

Amounts recognized in the balance sheets:

2019 2018 2019 2018

Other long-term liabilities (27,890)$ (24,938)$ (11,476)$ (10,339)$

Pension Benefits Health Care BenefitsPostretirement

Amounts recognized in members’ deficit not yet recognized as components of net periodic benefit cost as of December 31, 2019 and 2018, consist of:

2019 2018 2019 2018

Net loss 21,291$ 20,500$ 4,553$ 4,406$ Prior service credit (25) (24) (1,157) (1,240) Transition obligation 16 33 4 9

21,282$ 20,509$ 3,400$ 3,175$


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The accumulated benefit obligation for the defined benefit pension plan was $93,595 and $78,417 at December 31, 2019 and 2018, respectively.

Other significant balances and costs are:

2019 2018 2019 2018

Employer contributions 5,400$ 4,500$ -$ -$ Benefits paid 3,341 941 139 138 Benefit costs 7,633 6,560 1,050 1,020

Postretirement Pension Benefits Health Care Benefits

No amounts for the postretirement plan were funded by the Company into the investment account intended to be utilized in providing benefits for eligible retirees in 2019 and 2018.

The following amounts have been recognized in the Statements of Income for the years ended December 31, 2019 and 2018:

2019 2018 2019 2018Amounts arising during the period

Net gain (loss) 8,757$ (5,738)$ 677$ 323$ Amounts recognized as benefit components of net periodic cost of the period

Net loss 775 338 187 197 Net prior service cost (credit) 1 1 (83) (83) Net transition obligation 16 16 4 4

Pension BenefitsPostretirement

Health Care Benefits

The components of net periodic benefit cost other than the service cost component are included in the line item Other Expense in the statements of income and shown below:

2019 2018 2019 2018778$ (103)$ 642$ 610$


The estimated net loss, prior service cost and transition obligation for the defined benefit pension plan that will be amortized from members’ equity into net period benefit credit over the next fiscal year are $695, $1 and $16, respectively. The estimated net loss, prior service credit and net obligation for the defined benefit postretirement health care plan that will be amortized from members’ equity into net periodic benefit cost over the next fiscal year are $200, $83 and $4, respectively.

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Weighted-average assumptions used to determine benefit obligations and costs:

2019 2018 2019 2018

Discount rate benefit obligation 4.5% 5.0% 4.5% 5.0%

Expected return on plan assets 7.0% 7.0% N/A N/A

Rate of compensation increase 4.0% 4.0% N/A N/A

Health Care BenefitsPostretirement

Pension Benefits

The Company has estimated the long-term rate of return on plan assets based primarily on historical returns on plan assets, adjusted for changes in target portfolio allocations and recent changes in long-term interest rates based on publicly available information.

For measurement purposes, a 9% annual rate of increase in the per capita cost of covered health care benefits in the next year was assumed for 2019 and 2018. The rate was assumed to decrease gradually to 5% by the year 2023 and remain at that level thereafter.

The following benefit payments, which reflect expected future service, as appropriate, are expected to be paid as of December 31:

PostretirementPension Health Care Benefits Benefits

2020 1,254$ 179$ 2021 1,503 221 2022 1,785 262 2023 2,042 306 2024 2,444 355 2025-2029 20,334 2,365

The Company’s investment strategy is based on an expectation that equity securities will outperform fixed income securities over the long term. Accordingly, the composition of the Company’s plan assets is broadly characterized as a 70/30 allocation between equity and fixed income securities. The strategy utilizes indexed and actively managed mutual fund instruments as well as direct investment in individual equity and fixed income securities. Investments in the plan must adhere to the Investment Policy Statement developed by the Company. The Investment Policy Statement limits investments in foreign securities to 20% of the total fair value of plan assets. The Investment Policy Statement is reviewed annually.

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At December 31, 2019 and 2018, plan assets by category are as follows:

2019 2018

Fixed income securities 30% 32%Equity securities 65 56Cash and equivalents 5 12

100% 100%

Pension Plan Assets

Pension Plan Assets

Following is a description of the valuation methodologies used for the pension plan assets measured at fair value on a recurring basis and recognized in the accompanying balance sheets, as well as the general classification of the assets pursuant to the valuation hierarchy.

Where quoted market prices are available in an active market, plan assets are classified within Level 1 of the valuation hierarchy. Level 1 plan assets include cash, money market accounts, closed-end mutual funds and common and foreign company stock. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of plan assets with similar characteristics or discounted cash flows. Level 2 plan assets include open-end mutual funds, corporate debt obligations, foreign corporate debt obligations and foreign government securities.

In certain cases where Level 1 or Level 2 inputs are not available, plan assets are classified within Level 3 of the hierarchy. At December 31, 2019 and 2018, the Company does not hold any plan assets valued using Level 3 inputs.

The fair values of the Company’s pension plan assets at December 31, 2019 and 2018, by asset category are as follows:

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Quoted Prices inActive Markets for Significant Other SignificantIdentical Assets Observable Inputs Unobservable

2019 (Level 1) (Level 2) (Level 3)

Money market mutual funds 3,987$ 3,987$ -$ -$ Mutual funds

Equity funds 45,828 30,342 15,486 - Fixed income funds 23,314 16,878 6,436 - Other Funds 523 - 523 -

69,665 47,220 22,445 - Domestic common stock

Financials 4,170 4,170 - - Healthcare 2,146 2,146 - - Industrials 2,271 2,271 - - Telecommunications 632 632 - - Other 765 765 - - Energy 1,294 1,294 - -

11,278 11,278 - -

Corporate debt obligations 2,727 - 2,727 -

Total 87,657$ 62,485$ 25,172$ -$

Fair Value Measurements Using

Fair Value

Quoted Prices in Active Markets for

Identical AssetsSignificant Other

Observable Inputs

Significant Unobservable

Inputs2018 (Level 1) (Level 2) (Level 3)

Money market mutual funds 8,455$ 8,455$ -$ -$ Mutual funds

Equity funds 34,061 22,940 11,121 - Fixed income funds 14,846 10,035 4,811 - Other funds 3,066 279 2,787 -

51,973 33,254 18,719 - Domestic common stock

Financials 2,019 2,019 - - Healthcare 1,958 1,958 - - Industrials 923 923 - - Telecommunications 240 240 - - Energy 695 695 - -

5,835 5,835 - -

Corporate debt obligations 5,315 - 5,315 -

Total 71,578$ 47,544$ 24,034$ -$


Fair Value

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Defined Contribution Plans

The Company has a 401(k) defined contribution plan covering substantially all employees. The Company matches contributions at 4.75% for those employees deferring 6% of compensation, with the match fluctuating from 1% to 4.75% for each percentage of compensation contributed under 6%. Contributions to the plan were $3,035 and $2,804 for 2019 and 2018, respectively.

The Company has a 457(b) non-qualified tax-deferred compensation plan. This plan is an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees and, therefore, is intended to be exempt from the participation, vesting, funding and fiduciary requirements of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). Accumulated contributions and earnings of $3,561 and $2,585 are recorded in other long-term liabilities at December 31, 2019 and 2018, respectively. The Company also offers a 457(f) non-qualified tax-deferred compensation plan to a select group of executive management. The 457(f) plan was intended to be exempt from the participation, vesting, funding and fiduciary requirements of Title I of ERISA and serves to further supplement benefits lost due to IRS limits on compensation and benefits. There were accrued benefits of $554 and $1,246 recorded in other long-term liabilities for the 457(f) plan participants December 31, 2019 and 2018, respectively.

Note 7: Revenue from Contracts with Customers

In 2019 and 2018, the Company’s revenues were derived from a number of sources including tariff administration fees, FERC fees, North American Reliability Corporation (NERC) revenues, engineering studies, contract services, and other miscellaneous income sources. The table below presents a complete breakdown of the Company’s revenues:

2019 2018

Tariff administration fees (Schedule 1A) 157,997$ 164,968$ FERC fees (Schedule 12) 29,927 21,581 NERC revenues - 5,319 Engineering studies 4,902 3,968 Contract services 669 856 Membership dues 594 582 Virtual market participation fees 691 503 Other miscellaneous income 909 1,736

195,689$ 199,513$

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The Company recovers its costs of operating through the Schedule 1-A tariff administration fee that is billed to transmission customers on a monthly basis. With this fee, the Company seeks to recover the costs associated with providing tariff administration, reliability coordination, regional scheduling, expansion planning, and integrated marketplace services. A per MWh fee is charged based on each customer’s prior year average 12 month peak demand multiplied by the total hours in a month. The fee is established by the board of directors annually. The Company also bills transmission customers a charge under Schedule 12 to recover the annual fees the Company pays to FERC. The rate is determined by the Company annually and applied monthly to all energy delivered under point-to-point transmission service and network integration transmission service. Revenues are recognized, customers are billed, and payments are collected on a monthly basis for both Schedule 1A and Schedule 12 revenues. The Company collected revenues from NERC which represented costs of operations of the Southwest Power Pool Regional Entity (SPP RE), an independent and functionally separate division of the Company created according to a delegation agreement signed with NERC in 2007, responsible for developing regional reliability standards, monitoring and enforcing compliance, and assessing and evaluating the reliability of the bulk power system. SPP RE was dissolved in 2018. The Company recognized revenues on a monthly basis based on actual costs of operations of the SPP RE, and billed and collected payments from NERC on a quarterly basis. The Company performs engineering studies for its customers, mainly for long-term transmission service and generator interconnection requests. Prior to commencement of studies, customers sign contracts with the Company and are responsible for actual costs of the study which are generally comprised of staff time of internal and external resources. The Company recognizes revenues on a monthly basis as costs are incurred for such resources. Deposits are required from customers when they register for the studies. Actual costs are applied against such deposits at the conclusion of studies and customers are refunded their excess deposits. Customers will be invoiced at the end of or during a study if their deposit is not sufficient to cover the actual costs. The Company provides reliability, tariff administration, scheduling and other administrative and billing services for non-members on a contract basis. Similar to engineering studies, revenues are determined based on actual costs of providing such services and recognized on a monthly basis evenly over the service period which is usually one year. Customers are generally billed and payments collected from customers prior to the service period. The Company collects a membership fee from each member annually. The amount of the membership fee is established by the board of directors. For 2019 and 2018, all members paid a $6 fee which is billed and recognized in January of each year. The Company charges financial-only market participants a transaction fee of $0.05 per virtual energy bid and virtual energy offer in the day-ahead market. Invoicing, settlements, and revenue recognition occur on a weekly basis. Other miscellaneous income is comprised of various pass-thru costs, purchase and tax rebates, small administrative service fees, and sales of maps.

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Note 8: Related Party Transactions

General disbursements of the Company are apportioned to members based on the formula described in the bylaws of the Company (see Note 1). The Company’s receivables from members totaled $23,756 and $11,296 as of December 31, 2019 and 2018, respectively. The Company recognized revenues $146,574 and $143,645, including assessments and tariff administrative fees, from members for the years ended December 31, 2019 and 2018, respectively.

The Southwest Power Pool Regional State Committee (RSC) was incorporated on April 7, 2004, in the state of Arkansas. The RSC is comprised of commissioners from public service commissions or equivalent, having regulatory authority over Company members. FERC, in its February 20, 2004 order regarding the Company’s RTO application, stated, “the RSC should have primary responsibility for determining regional proposals and the transition process for funding of regional transmission enhancements, rate structure for a regional access charge and allocation of transmission rights.” The RSC prepares budgets annually for the expected costs of its operations. This budget is submitted to the Company’s board of directors for approval. The Company includes in its annual budget funds sufficient to cover 100% of the operating costs of the RSC. During 2019 and 2018, the Company incurred $301and $220, respectively, in expenses attributable to the RSC operations. Management of the Company expects such expenditures for 2020 to be approximately $528.

Note 9: Open Access Transmission and Market Operations

The Company provides short- and long-term firm and non-firm point-to-point transmission services and network integration transmission service across 46 providers in 14 states. The Company is responsible for the billing of the transmission customers for the respective services and the remittance of the subsequent collections to the transmission owners on a monthly basis. Billings for these transmission services are not included in the statements of income. The Company receives a fee for facilitating the transmission process, which is recorded as tariff fees in the Company’s Statements of Income.

For the years ended December 31, 2019 and 2018, the Company billed transmission customers $2,325,085 and $2,515,785, respectively. For the years ended December 31, 2019 and 2018, the Company remitted to transmission owners $2,086,986 and $2,269,671, respectively. At December 31, 2019 and 2018, the Company was due to collect from customers and remit to owners transmission service charges of $172,920 and $183,425, respectively.

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The Company’s Integrated Marketplace includes a day-ahead market with transmission congestion rights, a reliability unit commitment process, a real-time balancing market, an operating reserve market and a consolidated balancing authority. Weekly settlements of market participants’ energy transactions are not reflected in the Company’s Statements of Income since they do not represent revenues or expenses of the Company, as the Company merely acts as an intermediary in the settlement process. In this role, the Company receives and disburses funds to/from market participants on a weekly basis. At December 31, 2019 and 2018, the Company held $35,494 and $52,894, respectively, in cash collections from the settlement of auction revenue rights in accordance with terms of the Company’s tariff. These funds are disbursed annually in June for collections from the previous twelve months. A corresponding liability is reflected in accrued expenses on the Balance Sheets.

Note 10: Commitments and Contingencies

Litigation and Regulatory Matters

The Company is engaged in various legal and regulatory proceedings at both the federal and state levels. The Company is also subject to claims and lawsuits that arise primarily in the ordinary course of business.

It is the opinion of management that the disposition or ultimate resolution of such proceedings, claims and lawsuits will not have a material adverse effect on the financial position, results of operations and cash flows of the Company.

Note 11: Disclosures About Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurements, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3 Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities

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Quoted Prices in Active

Markets for Identical Assets

Significant Other

Observable Inputs


Inputs(Level 1) (Level 2) (Level 3)

December 31, 2019

Mutual fundsEquity $ 10,354 $ - $ 10,354 $ - Fixed income 3,737 - 3,737 -

U.S. Government SecuritiesTreasury Notes 21,185 21,185 - -

Interest rate swap agreements (1,314) - (1,314) -


Fair Value

Quoted Prices in Active

Markets for Identical Assets

Significant Other

Observable Inputs


Inputs(Level 1) (Level 2) (Level 3)

December 31, 2018

Cash equivalents 1,398$ 1,398$ -$ -$ Mutual funds

Equity 8,571 - 8,571 - Fixed income 4,173 - 4,173 -

U.S. Government SecuritiesTreasury Notes 12,495 12,495 - -

Interest rate swap agreements (992) - (992) -


Fair Value

Following is a description of the valuation methodologies used for assets and liabilities measured at fair value on a recurring basis and recognized in the accompanying Balance Sheets, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy. There have been no significant changes in the valuation techniques during the year ended December 31, 2019.

Investments

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy. At December 31, 2019 and 2018, the Company does not hold any assets valued using Level 3 inputs.

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Interest Rate Swap Agreements

The fair value is estimated using forward-looking interest rate curves and discounted cash flows that are observable or that can be corroborated by observable market data and, therefore, are classified within Level 2 of the valuation hierarchy.

Cash Equivalents

The fair value of money market mutual funds included in cash equivalents is estimated using quoted prices in active markets for identical assets and, therefore, is classified within Level 1 of the valuation hierarchy.

The Company has no assets or liabilities measured and recognized in the accompanying Balance Sheets on a nonrecurring basis.

The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying Balance Sheets at amounts other than fair value.

Restricted Cash Deposits

For these short-term instruments, the carrying amount is a reasonable estimate of fair value.

Customer Deposits

The carrying amount is a reasonable estimate of fair value.

Line of Credit

The carrying amount is a reasonable estimate of fair value.

Long-term Debt and Capital Lease Obligations

Fair value is estimated based on the borrowing rates currently available to the Company for bank loans with similar terms and maturities.

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The following table presents estimated fair values of the Company’s financial instruments at December 31, 2019 and 2018:

Fair Fair Value Value

Financial assets

Cash and cash equivalents 48,694$ 48,694$ 93,593$ 93,593$ Restricted cash deposits 401,478$ 401,478$ 344,904$ 344,904$ Investments 35,276$ 35,276$ 25,239$ 25,239$

Financial liabilities

Customer deposits 401,478$ 401,478$ 344,904$ 344,904$ Line of credit 12,760$ 12,760$ 340$ 340$ Capital lease obligations -$ -$ 1,966$ 1,977$ Long-term debt 192,199$ 199,412$ 214,480$ 214,825$ Swap agreements 1,314$ 1,314$ 992$ 992$

2019 2018Carrying Amount

Carrying Amount

Note 12: Subsequent Events

Subsequent events have been evaluated through April 27, 2020, which is the date the financial statements were available to be issued.

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Finance Committee and Board of Directors Southwest Power Pool, Inc. Little Rock, Arkansas As part of our audit of the financial statements of Southwest Power Pool, Inc. (the Company) as of and for the year ended December 31, 2019, we wish to communicate the following to you. AUDIT SCOPE AND RESULTS Auditor’s Responsibility Under Auditing Standards Generally Accepted in the United States of America

An audit performed in accordance with auditing standards generally accepted in the United States of America is designed to obtain reasonable, rather than absolute, assurance about the financial statements. In performing auditing procedures, we establish scopes of audit tests in relation to the financial statements taken as a whole. Our engagement does not include a detailed audit of every transaction. Our engagement letter more specifically describes our responsibilities. These standards require communication of significant matters related to the financial statement

audit that are relevant to the responsibilities of those charged with governance in overseeing the financial reporting process. Such matters are communicated in the remainder of this letter or have previously been communicated during other phases of the audit. The standards do not require the auditor to design procedures for the purpose of identifying other matters to be communicated with those charged with governance. An audit of the financial statements does not relieve management or those charged with governance of their responsibilities. Our engagement letter more specifically describes your responsibilities. Qualitative Aspects of Significant Accounting Policies and Practices Significant Accounting Policies The Company’s significant accounting policies are described in Note 1 of the audited financial statements.

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Finance Committee and Board of Directors Southwest Power Pool, Inc. Page 2

ASC 606, Revenue from Contracts with Customers Effective January 1, 2019, the Company adopted ASC 606, Revenue from Contracts with Customers, as further discussed in the Alternative Accounting Treatments section below. ASC 606 applies to all contracts with customers other than those within the scope of other standards, such as leases, insurance, financing arrangements, financial instruments and guarantees (other than product or service warranties). The new revenue recognition standard eliminates the transaction- and industry-specific revenue recognition guidance under legacy generally accepted accounting principles (GAAP) and replaces it with a principle-based approach for determining revenue recognition. The core principle of the revenue recognition standard is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In implementing ASC 606, the Company was required to re-evaluate all contracts within the scope of the standard (other than those excluded under practical expedients elected) under a five-step model for revenue recognition. While certain entities were affected more than others, all entities are subject to extensive new disclosure requirements. Alternative Accounting Treatments We had discussions with management regarding alternative accounting treatments within accounting principles generally accepted in the United States of America for policies and practices for material items, including recognition, measurement and disclosure considerations related to the accounting for specific transactions as well as general accounting policies, as follows:

In connection with the adoption of ASC Topic 606, Revenue from Contracts with Customers, management has elected the following accounting policies and transition practical expedients: 1. Use of the modified retrospective approach and elected to apply guidance

to open contracts not completed at the date of initial adoption

2. Right to invoice – For performance obligations satisfied over time, revenue is recognized in the amount of consideration to which the Company has the right to invoice when it corresponds directly to the value transferred to the customer

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Management Judgments and Accounting Estimates Accounting estimates are an integral part of financial statement preparation by management, based on its judgments. The following areas involve significant estimates for which we are prepared to discuss management’s estimation process and our procedures for testing the reasonableness of those estimates:

Pension and postretirement health benefits liabilities

Interest rate swaps Financial Statement Disclosures The following areas involve particularly sensitive financial statement disclosures for which we are prepared to discuss the issues involved and related judgments made in formulating those disclosures:

Pension and other postretirement benefit plans

Fair value

Commitments and contingencies Audit Adjustments No matters are reportable. Auditor’s Judgments About the Quality of the Entity’s Accounting Principles No matters are reportable. Significant Issues Discussed with Management Prior to Retention No matters are reportable. During the Audit Process No matters are reportable.

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Other Material Communications Listed below are other material communications between management and us related to the audit:

Management representation letter (attached) We orally communicated to management a deficiency in internal control identified

during our audit that is not considered a material weakness or significant deficiency. FUTURE ACCOUNTING PRONOUNCEMENTS Over the course of the next few years, Southwest Power Pool will be required to implement several new accounting standards that could have a significant impact on the audited financial statements, both in presentation as well as measurement and disclosure. We have previously mentioned these new standards, but wanted to provide a recap of the implementation dates and the most significant elements of each of the upcoming Accounting Standards Updates (ASU). FASB Issues New Lease Accounting Standard On February 25, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842), the long-awaited new standard on lease accounting. Under the new ASU, lessees will recognize lease assets and liabilities on their balance sheet for all leases with terms of more than 12 months. The new lessee accounting model retains two types of leases and is consistent with the lessee accounting model under existing GAAP. One type of lease (finance leases) will be accounted for in substantially the same manner as capital leases are accounted for today. The other type of lease (operating leases) will be accounted for (both in the income statement and statement of cash flows) in a manner consistent with today’s operating leases. Lessor accounting under the new standard is fundamentally consistent with existing GAAP. Lessees and lessors would be required to provide additional qualitative and quantitative disclosures to help financial statement users assess the amount, timing, and uncertainty of cash flows arising from leases. These disclosures are intended to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an organization’s leasing activities.

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For public business entities, the final leases standard was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. For all other entities, the final leases standard will be effective for fiscal years beginning after December 15, 2020, and interim periods thereafter. Early application is permitted. This communication is intended solely for the information and use of management, the finance committee and the board of directors and is not intended to be and should not be used by anyone other than these specified parties. April 27, 2020 Enclosure

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Memorandum To: Finance Committee Members

From: Tom Dunn

CC: Shaun Scott

Date: April 28, 2020

Re: 2020 Meeting Schedule

Detailed below is a schedule for meetings of the Finance Committee for 2020 along with suggested agenda items to be covered at the meetings. Meeting Date Time Location Agenda Jan 17, 2020 7:30 – 10:30 Teleconference Liability Insurance, Actuary Assumptions Apr 27, 2020 8 – 12:00 Teleconference 2019 Financial Audit, Benefit Plan Funding, Auditor Engagement Jul 13, 2020 10 – 3:30 Little Rock Mid-year Review, 2021 Operating Plan Oct 12, 2020 10 – 5:00 Little Rock 2021 Operating and Capital Budgets

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CONSOLIDATED FINANCE COMMITTEE REPORTAPRIL 27, 2020

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2

PROJECT OVERVIEW

8 0 1ACTIVE PROJECTS DEFERRED,

CONTINGENT, OR DECLINED PROJECTS

COMPLETED PROJECT

Reliability Assurance Enhance Member Value& Affordability2 1

LINK TO STRATEGIC PLAN

Enhance & Optimize Interdependent Systems5

Maintain an Economical, Optimized Transmission System

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3

TTSE DTS UPGRADE – PHASE 2B

OWNER DESCRIPTION BUDGET STATUSRew Enhancement to the Dispatcher

Training Simulator (DTS) to construct an integrated simulator for training scenarios that simulate the interactions between the EMS and MOS.Allows simultaneous training of reliability and market operators.

• Approved: $2.2M• Estimated cost at

completion: $2.2M

Active

Strategic Plan Link: Reliability Assurance

Remaining milestones: Requirements and Design - 05/31/20

Comments: Finalizing the requirements and design with vendor. Vendor's resource constraints delayed the start of requirements and design, however, dedicated resources have now been assigned to complete this milestone.

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4

RAMP CAPABILITY PRODUCT

OWNER DESCRIPTION BUDGET STATUSRew A market-based approach for

ramp management leveraging existing operational experiences to (1) systematically pre-position resources with ramp capability to manage net load variations and uncertainties and (2) provide transparent price signals to incent resource flexibility and economic investment


completion: $0.2M

Active

Strategic Plan Link: Enhance Member Value and Affordability

Remaining milestones: Requirements Review Complete - 04/22/20

Comments: Reviewing final draft of requirements.

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5

FERC ORDER 841

OWNER DESCRIPTION BUDGET STATUSRew FERC Order 841 was issued to

remove barriers to participation of electric storage resources (ESRs) in the capacity, energy and ancillary service markets. Phase 1 - Tariff changes have been filed that establish a participation model consisting of market rules that facilitate ESR participation. The remaining Phase 2 work, required by August 2021, will update modeling and dispatch software to implement the tariff provisions.


completion: $0.4M

Re-initialized

Strategic Plan Link: Enhance and Optimize Interdependent Systems

Remaining milestones: TBDComments: On 2/27/20, FERC directed SPP to meet an effective date of 8/5/21 for complying with new required tariff provisions per Order 841. SPP requested a deferral pending the February 2020 go-live of SPP’s settlements management system (SMS) needed to effectuate Order 841. The SMS is now in place.

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6

IDENTITY & ACCESS MANAGEMENT

OWNER DESCRIPTION BUDGET STATUSEllis Re-initialize the effort to

install the SailPoint IIQ tool, which was originally funded in 2017 but never fully deployed due to foundational process gaps for managing user access. The tool will enable user access certification campaigns and support provisioning and de-provisioning of access.


completion: $0.5M

Active


Remaining milestones: TBD; project not yet baselined

Comments: Fundamental identity and access management (IAM) processes are now in place, along with a team to support them. The software purchased in 2017 and installed in lower environments (not production) will form the basis for this solution.

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7

DATA LAKE PHASE 3

OWNER DESCRIPTION BUDGET STATUSEllis Reduce complexity and

minimize costs for storage via the Data Lake solution. Improvements include:- Combine Isilon Capacity- Stop Netezza data offload process- Reduce number of environments- Decommission 21 physical servers - Upgrade Hortonworks Data Platform to 3.x- Remove BigSQL


completion: $0

Active


Remaining milestones: Preparing for project closeout

Comments: Timeline was extended until 4/17/20 while SPP evaluated technical alternatives, which resulted in not using the allocated dollars.

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8

TAGIT/SCERT REWRITE

OWNER DESCRIPTION BUDGET STATUSLucas Creation of a new

TAGIT/SCERT platform that would allow operators to focus on data analysis, remove potential barriers for additional operators to cross-train, and improve data integrity. These changes will help streamline the tools and provide more consistent and higher quality NTC letters and project tracking reports.


completion: $0.3M

Active


Remaining milestones: Requirements and development of use cases – 4/17/20

Comments: Final review sign-off on requirements by 5/1/2020. Contracting outside developer who will augment the internal development group and be dedicated to this project. 129 of 156

9

ENERGY STORAGE RESOURCE

OWNER DESCRIPTION BUDGET STATUSLucas As a result of FERC Order

841, Energy Storage Resources (ESRs) will be submitted for integrated transmission planning. The SPP solution will model and study ESRs as generation or as load, or as generation and load. This project will develop policy and revision request language that allows SPP to select ESRs.


completion: $0.1M

Active

Strategic Plan Link: Maintain an Economical, Optimized Transmission System

Remaining milestones: TBD; project has not been baselined.

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10

HUMAN RESOURCES MGMT SYSTEM

OWNER DESCRIPTION BUDGET STATUSSee UltiPro software will replace

Sage as the SPP HR management system. The current system has ongoing compatibility and maintenance issues because multiple components from multiple vendors comprise the total HR software system. The issues result in inefficient work flows and ongoing IT support for patches and updates..

• No capital expendituresassociated with this project

• Annual license expense: $0.2M

Active


Remaining milestones: TBD; project not been baselined.

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11

SETTLEMENTS REPLACEMENT

OWNER DESCRIPTION BUDGET STATUSDunn Replacement of the current

Market and Transmission Settlement Systems with a custom designed single high performance scalable system solution..


completion: $5.9M

Closed

Strategic Plan Link: Reliability Assurance

Remaining milestones: None; project is closed.

Comments: Project in Green status at closure due to re-baseline of project schedule and cost. Original budget was $5.3mm. Out of budget approved for additional $599k.

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12

QUESTIONS?

Please contact Terry Rhoades, [email protected], if you need additional information.

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M o n t h l y F i n a n c i a l R e p o r t i n g P a c k a g e

M a r c h 2 0 2 0 2 0 1 9 P r e l i m i n a r y & U n a u d i t e d

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SPP Executive Summary – March

2020 Over / (Under) Recovery

Compensation and Outside Services Expenses

Page 1 135 of 156

2020 FY 2020 FY Fav/(Unfav)

Forecast Budget Variance

Revenues $213,693 $210,944 $2,749 1.3%

Expenses 207,900 209,085 1,185 0.6%

Net Income/(Loss) $5,793 $1,859 $3,934 (211.6%)

2020 FY 2020 FY Fav/(Unfav)

Forecast Budget Variance

Tariff Administration Service $172,926 $172,298 $629 0.4%

FERC Fees 25,373 23,035 2,338 10.1%

Engineering Studies 6,522 6,695 (173) (2.6%)

Contract Services 5,993 5,649 344 6.1%

Miscellaneous 2,283 2,619 (336) (12.8%)

Annual Non-Load Dues 594 648 (54) (8.3%)

Total Revenue $213,693 $210,944 $2,749 1.3%

9

10

Summary

Revenue

Southwest Power Pool2020 Financial Commentary

March 31, 2020(in thousands)

FERC Fees & Assessments revenue reflects the actual rate to be charged under Schedule 12 for 2020, which is $0.083 as compared to $0.073 assumed in the budget.

Miscellaneous Income primarily includes revenues associated with various revenue sources such as FERC Order 1000 pass-thru consulting costs, IM virtual fees, joint operating agreement fees, miscellaneous rebates, reserve sharing, and circuit reimbursements.

Contract Services Revenue for the Western Interconnection reliability coordination contract (RC West) is favorable to budget due to higher billing units for load serving utilities. The 2020 billing is based on 2018 NEL (net energy for load) whereas the most current data available during the budgeting process was 2016 NEL.

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Fav/(Unfav)

SPP West Services Total SPP SPP West Services Total SPP Variance

Salary & Benefits $100,415 $3,771 $104,186 $100,637 $3,922 $104,560 $374 0.4%

Assessments & Fees 22,418 - 22,418 22,418 - 22,418 () (0.0%)

Communications 4,275 570 4,845 4,292 600 4,892 47 1.0%

Maintenance 17,736 274 18,010 18,108 1,198 19,306 1,296 6.7%

Outside Services & RSC 17,326 1,294 18,620 18,375 1,359 19,734 1,114 5.6%

Administrative 5,529 2 5,531 5,546 1 5,547 16 0.3%

Travel & Meetings 2,072 123 2,195 2,754 131 2,885 690 23.9%

Depreciation 18,830 495 19,325 19,174 373 19,547 223 1.1%

Interest Expense 8,324 253 8,577 8,377 412 8,788 211 2.4%

Other (Income)/Expenses 4,192 - 4,192 1,408 - 1,408 (2,784)Total Expense $201,118 $6,782 $207,900 $201,088 $7,997 $209,085 $1,185 0.6%

Expense

2020 FY Forecast 2020 FY Budget

Southwest Power Pool2020 Financial Commentary


The favorable variance in Maintenance is mainly driven by timing of items budgeted for Western Energy Imbalance Service (WEIS) such as maintenance on storage, software and enhancements. In addition, the cost sharing agreement between SPP and California ISO related to the RC function was budgeted under maintenance but is recorded as a service agreement under outside services. This contributes to the favorable variance in maintenance and is reflected as an unfavorable variance in outside services expense for RC West.

The variance in Outside Services is primarily related to legal expense associated with zonal placement litigation trailing budget year-to-date. It is unknown at this time whether these costs will ramp up to the budgeted amount. Additionally, the budget inadvertently assumed the new HR system would be implemented at the beginning of the year and therefore included a full year of cost for the hosted services. A decrease in Outside Services is reflected since the HR system is not expected to be in service until October. The favorable variance is partially offset by the cost sharing agreement for RC West that was budgeted in maintenance.

The Travel and Meetings forecast reflects lower costs as a result of the Coronavirus pandemic measures limiting expected travel and meetings through the end of May.

Other (Income)/Expenses include swap valuation, investment income, unrealized gain/loss on investments, and other miscellaneous income and expense amounts. The most significant portion is related to unrealized gains on investments held for the retiree healthcare and 457b plans. These expense and income items are highly unpredictable and therefore are not included in the budget except for certain expenses related to pension costs.

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Actual Actual Actual Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast Forecast FY 2020 FY 2020 Variance FY 2019 VarianceJan-20 Feb-20 Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20 Sep-20 Oct-20 Nov-20 Dec-20 Forecast Budget Fav/(Unfav) Actual Fav/(Unfav)

IncomeTariff Administrative Service $14,488 $14,286 $14,325 $14,058 $14,500 $14,228 $14,735 $14,813 $14,159 $14,608 $14,167 $14,560 $172,926 $172,298 $629 $157,997 $14,930FERC Fees 3,243 2,725 2,604 1,646 1,711 1,904 2,279 2,291 2,082 1,782 1,788 1,910 25,967 23,683 2,284 30,521 (4,554)Contract Services 487 490 488 490 490 490 490 612 490 490 490 490 5,993 5,649 344 669 5,324Engineering Studies Income 308 351 842 558 558 558 558 558 558 558 558 558 6,522 6,695 (173) 4,866 1,657Miscellaneous 101 319 125 132 117 212 162 307 202 202 202 202 2,283 2,619 (336) 1,637 647

Total Income 18,626 18,171 18,385 16,884 17,375 17,392 18,224 18,581 17,491 17,639 17,205 17,720 213,693 210,944 2,749 195,689 18,004

ExpenseSalary & Benefits 8,654 8,449 9,549 8,604 8,500 8,701 8,657 8,639 8,589 8,551 8,520 8,773 104,186 104,560 374 101,221 (2,965)Employee Travel 123 158 87 11 14 116 172 178 174 185 171 165 1,555 2,015 460 1,907 352Administrative 264 359 288 644 311 497 1,207 298 234 801 298 330 5,531 5,547 16 4,866 (666)Assessments & Fees 1,812 1,873 1,873 1,873 1,873 1,873 1,873 1,873 1,873 1,873 1,873 1,873 22,418 22,418 () 20,591 (1,828)Meetings 13 137 14 11 30 40 99 44 88 83 41 40 640 870 230 934 293Communications 393 387 396 408 408 408 408 408 408 408 408 408 4,845 4,892 47 4,449 (396)Maintenance 1,167 1,314 1,234 1,297 1,451 1,467 1,449 1,475 1,619 1,496 1,563 2,476 18,010 19,306 1,296 16,308 (1,703)Services 995 1,024 1,595 1,324 1,616 1,336 1,731 1,870 1,490 1,954 1,745 1,564 18,245 19,206 961 14,685 (3,561)Regional State Committee 9 28 21 - - 53 38 56 38 53 43 38 374 528 153 224 (151)Depreciation 1,463 1,454 1,656 1,639 1,639 1,639 1,639 1,639 1,639 1,639 1,639 1,639 19,325 19,547 223 16,930 (2,394)

Total Expense 14,894 15,183 16,714 15,812 15,841 16,130 17,273 16,481 16,151 17,044 16,301 17,307 195,131 198,889 3,759 182,114 (13,017)

Other Income/(Expense)Investment Income 36 76 131 - - - - - - - - - 244 - 244 665 (421)Interest Expense (703) (700) (709) (713) (719) (725) (714) (721) (724) (712) (717) (720) (8,577) (8,788) 211 (8,759) 182Capitalized Interest - - - - - - - - - - - - - - - 209 (209)Change in Valuation of Swap - - (634) - - - - - - - - - (634) - (634) (322) (312)Other Income/Expense (72) (384) (507) (99) (129) (129) (129) (129) (129) (129) (129) (129) (2,097) (1,408) (690) (744) (1,353)Unrealized Gain on Investment 38 (752) (990) - - - - - - - - - (1,704) - (1,704) 2,552 (4,256)

Net Other Income (Expense) (701) (1,759) (2,709) (812) (849) (855) (844) (850) (853) (841) (846) (849) (12,769) (10,196) (2,573) (7,245) (5,524)

Net Income (Loss) $3,031 $1,229 ($1,039) $260 $685 $408 $107 $1,250 $486 ($246) $58 ($436) $5,793 $1,859 $3,934 $6,331 ($538), ,2020 Headcount

Approved Budgeted Positions 656 656 656 656 656 656 656 656 656 656 656 656 656 656 625 Actual Headcount (Incl. Vacancy) 626 629 627 627 627 632 632 632 632 632 632 632 632 620 Actual Positions (Excl. Vacancy) 659 659 659 659 659 659 659 659 659 659 659 659 659 637

Headcount Vacancy Run rate 5.0% 4.6% 4.9% 4.9% 4.9% 4.1% 4.1% 4.1% 4.1% 4.1% 4.1% 4.1% 4.1% 3.5%

NRR Over / (Under) Recovery $3,612 $2,374 ($4,827) $2,318 $2,402 ($4,056) $1,629 $2,456 ($4,112) $1,825 $1,745 ($4,894) $2,471

Southwest Power PoolMonthly Financial Overview


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FY 2020 FY 2020 Variance FY 2020 FY 2020 Variance FY 2020 FY 2020 Variance

Forecast Budget Fav/(Unfav) Forecast Budget Fav/(Unfav) Forecast Budget Fav/(Unfav)

IncomeTariff Administrative Service $172,926 $172,298 $629 - - - $172,926 $172,298 $629Fees & Assessments 25,967 23,683 2,284 - - - 25,967 23,683 2,284Contract Services Revenue 58 62 (4) 5,935 5,587 348 5,993 5,649 344Miscellaneous Income 8,806 9,314 (508) - - - 8,806 9,314 (508)

Total Income $207,758 $205,357 $2,400 $5,935 $5,587 $348 $213,693 $210,944 $2,749

ExpenseSalary & Benefits 100,415 100,637 222 3,771 3,922 152 104,186 104,560 374Employee Travel 1,439 1,891 452 116 124 8 1,555 2,015 460Administrative 5,529 5,546 17 2 1 (1) 5,531 5,547 16Assessments & Fees 22,418 22,418 () - - - 22,418 22,418 ()Meetings 633 863 230 7 7 () 640 870 230Communications 4,275 4,292 17 570 600 30 4,845 4,892 47Maintenance 17,736 18,108 371 274 1,198 924 18,010 19,306 1,296Services 16,952 17,847 895 1,294 1,359 66 18,245 19,206 961Regional State Committee 374 528 153 - - - 374 528 153Depreciation 18,830 19,174 344 495 373 (121) 19,325 19,547 223

Total Expense 188,602 191,304 2,702 6,529 7,586 1,057 195,131 198,889 3,759

Other Income/(Expense)Investment Income 244 - 244 - - - 244 - 244Interest Expense (8,324) (8,377) 52 (253) (412) 158 (8,577) (8,788) 211Capitalized Interest - - - - - - - - - Change in Valuation of Swap (634) - (634) - - - (634) - (634)Other Income/Expense (2,097) (1,408) (690) - - - (2,097) (1,408) (690)Unrealized Gain on Investment (1,704) - (1,704) - - - (1,704) - (1,704)Chg in Emp Benefit Plan Funded - - - - - - - - -

Net Other Income (Expense) (12,516) (9,784) (2,732) (253) (412) 158 (12,769) (10,196) (2,573)

Net Income (Loss) $6,640 $4,269 $2,370 ($847) ($2,410) $1,564 $5,793 $1,859 $3,934

2020 Headcount 626 623 (3) 33 33 - 659 656 (3)

SPP Western Services Total SPP

Southwest Power PoolWestern Services Breakout


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Mar-2020 Mar-2020 Variance Mar-2020 Mar-2020 Variance FY 2020 FY 2020 VarianceActual Forecast Fav/(Unfav) Actual Budget Fav/(Unfav) Forecast Budget Fav/(Unfav)

IncomeTariff Administrative Service $14,325 $15,308 ($984) $43,098 $43,074 $24 $172,926 $172,298 $629 0%FERC Fees 2,604 2,573 31 8,572 8,534 38 25,967 23,683 2,284 10%Contract Services 488 490 (1) 1,465 1,382 83 5,993 5,649 344 6%Engineering Studies 842 558 284 1,501 1,674 (173) 6,522 6,695 (173) -3%Miscellaneous 125 202 (77) 545 606 (61) 2,283 2,619 (336) -13%

Total Income 18,385 19,131 (746) 55,182 55,270 (88) 213,693 210,944 2,749 1%

ExpenseSalary & Benefits 9,549 9,034 (515) 26,651 26,599 (52) 104,186 104,560 374 0%Employee Travel 87 166 79 368 487 119 1,555 2,015 460 23%Administrative 288 364 76 911 1,035 124 5,531 5,547 16 0%Assessments & Fees 1,873 1,873 - 5,559 5,605 46 22,418 22,418 () 0%Meetings 14 43 29 164 240 76 640 870 230 26%Communications 396 408 11 1,176 1,223 47 4,845 4,892 47 1%Maintenance 1,234 1,289 54 3,716 4,822 1,105 18,010 19,306 1,296 7%Services 1,595 1,479 (115) 3,614 4,839 1,224 18,245 19,206 961 5%Regional State Committee 21 38 17 58 131 73 374 528 153 29%Depreciation 1,656 1,639 (17) 4,573 4,887 314 19,325 19,547 223 1%

Total Expense 16,714 16,332 (382) 46,791 49,867 3,075 195,131 198,889 3,759 2%

Other Income/(Expense)Investment Income 131 - 131 244 - 244 244 - 244Interest Expense (709) (725) 16 (2,112) (2,217) 105 (8,577) (8,788) 211 -2%Capitalized Interest - - - - - - - - - Change in Valuation of Swap (634) - (634) (634) - (634) (634) - (634)Other Income/Expense (507) (99) (408) (963) (352) (611) (2,097) (1,408) (690)Unrealized Gain on Investment (990) - (990) (1,704) - (1,704) (1,704) - (1,704)

Net Other Income (Expense) (2,709) (824) (1,884) (5,169) (2,569) (2,601) (12,769) (10,196) (2,573)

Net Income (Loss) ($1,039) $1,974 ($3,013) $3,221 $2,835 $386 $5,793 $1,859 $3,934

Headcount 627 632 5 627 656 29 659 656 (3)

Southwest Power PoolCurrent Month Financial Overview


Current Month Compared to Forecast YTD Actual Compared to YTD Budget FY Actual Compared to FY Budget

Page 6 140 of 156

3/31/2020 12/31/2019 Net Change

ASSETSCurrent Assets

Cash & Equivalents $96,312 $48,694 $47,618Restricted Cash Deposits 423,076 401,478 21,598Accounts Receivable (net) 26,406 74,285 (47,879)Other Current Assets 18,806 11,714 7,092

Total Current Assets $564,600 $536,171 $28,429

Total Fixed Assets 71,935 74,090 (2,154)Total Other Assets 3,062 6,349 (3,286)Investments 12,154 35,276 (23,122)

Total Assets $651,751 $651,884 ($133)

LIABILITIES & EQUITYLiabilities

Current LiabilitiesAccounts Payable $18,811 $60,811 (42,000)Customer Deposits 421,632 401,478 20,154Current Maturities of LT Debt 22,612 22,596 17Other Current Liabilities 94,820 79,569 15,251Deferred Revenue 4,132 5,203 (1,071)

Total Current Liabilities 562,007 569,656 (7,649)

Line of Credit 21,904 12,760 9,144

Long Term LiabilitiesLong-Term Debt 163,377 168,990 (5,613)Other Long Term Liabilities 45,005 44,241 763

Total Long Term Liabilities 208,381 213,231 (4,850)

Net Income 3,221 6,331 (3,110)Members' Equity (143,763) (150,093) 6,331

Total Members' Equity (140,542) (143,763) 3,221

TOTAL LIABILITIES & EQUITY $651,751 $651,884 (133)

Southwest Power PoolBalance SheetMarch 31, 2020

(in thousands)

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Current Month Actual vs. Budget Year End Actual vs. BudgetActual Budget Over/(Under) 2020 2020 Over/(Under)Mar-20 Mar-20 Budget Forecast Budget Budget

Information Technology 162 169 (7) 168 169 (1)

Operations 114 113 1 117 113 4

Engineering 139 157 (18) 154 157 (3)

Process Integrity 55 57 (2) 56 57 (1)

Administration 51 50 1 50 50 0

Corporate Services 32 30 2 30 30 0

Regulatory Policy & General Counsel 25 27 (2) 27 27 0

Market Monitoring 16 16 0 16 16 0

Communications & Gov't Affairs 8 8 0 8 8 0

Contract Services 25 33 (8) 33 33 0

Budgeted Attrition 0 (4) 4 0 (4) 4

Total Positions 627 656 (29) 659 656 3

Vacancy Estimate (27) (23) (4)

Headcount Including Vacancy Estimate 632 633 (1)4.1% 3.5%

Headcount summary2020

Forecast2020

Budget

2019 Total positions at year-end 638 6382020 Contract services positions (WEIS) 13 132020 Incremental positions 9 9Position eliminated (1) (1)2020 Budgeted attrition (TBD) (4)

2020 Headcount 659 656

Southwest Power PoolHeadcount Analysis

March 31, 2020

Page 8 142 of 156

Unbudgeted Report2020 YTD

As of April 16, 2020

PO Number Project Name Vendor Name Scope of Work/Item Description Total Amount Budgeted UnbudgetedPO2020‐1242 2020 Foundation General The Strategic Offsites Group, Inc. Work Order 1 for Strategic Planning Consulting 450,000$ ‐$ $450,000PO2020‐1168 2020 Foundation General LaHarpe's Office Furniture Additional cubicles for Engineering and IT staff 145,018$ ‐ $145,018

$595,018 ‐$ $595,018

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C a p i t a l S p e n d i n g R e v i e w

M a r c h 3 1 , 2 0 2 0

P r e p a r e d b y : A c c o u n t i n g D e p a r t m e n t

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SOUTHWEST POWER POOL, CAPITAL SPENDING REVIEW, MARCH 31, 2020 PAGE 1

Project and Foundation Investments as of March 31, 2020

Note: Dollar amounts presented in the tables throughout the report are in $000s

x Budget (a)

Forecast Variance

DTS Upgrade Phase 2B 2,187$ 2,187$ -$

Identity and Access Management (IAM) Deployment 500 500 -

FERC Order 841: Electric Storage 423 423 -

Data Lake Phase 3 350 - 350

Transmission & Generation Implementation Tracking

(TAGIT), Standardized Cost Estimation Reporting Template

(SCERT) Rewrite 250 250 -

Ramping Capability 200 200 -

Energy Storage Resource (ESR) 50 50 -

Energy Management System (EMS) Centralized Modeling

Tool (CMT) Markets Software Upgrade 5,700 5,700 -

Total Projects 9,660$ 9,310$ 350$

Western Energy Imbalance Service (WEIS) Market 3,370$ 3,314$ 56$

Carryover Project (b)Prior Year

Budget Actual Variance

Settlement Systems Replacement 5,292$ 5,906$ (614)$

Foundation - 2020 (c)Budget Forecast Variance

Information Technology 8,100$ 8,116$ (16)$

Operations 2,494 2,419 75

Engineering 1,835 811 1,024

Settlements 300 300 -

Facilities 50 221 (171)

Other Departments 100 100 -

Total Foundation - 2020 12,879$ 11,967$ 912$

(a) Budget amounts are per the 2020 capital projects budget approved by the board unless otherwise noted.

(c) Foundation projects are reforecast annually. Unused funds do not carry over to the following year.

(b) The project was originally expected to be completed in 2019 however the completion date had to be moved

to February 2020 due to project delays.

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Multi-Year Capital Projects Over $1 Million

DTS Upgrade Phase 2B

This final phase of the multi-year Dispatcher Training Simulator (DTS) project includes the build and

integration of simulation software for market functionality to create a Markets and Reliability Training

Simulator (MRTS). It will consist of the following three phases of work:

o Phase 2B-1: Requirements, system design, and implementation of some of the core

infrastructure that is required for Phase 2B. During 2019, a statement of work for Phase 2B-1 was

signed for $0.4M and the vendor provided the initial

requirements & system overview documentation which

were reviewed by the project team in 1Q’20. The vendor

has recently begun work on the Delta Design Notes (DDNs)

for eight different areas of functionality. Completion and

review of the DDNs, which will complete this phase, is

expected in Q3’20.

o Phase 2B-2: Design, installation, testing, and

implementation of a basic MRTS.

o Phase 2B-3: Design and implementation of functionality that will provide SPP instructors with the

ability to simulate additional subsystems such as automation features that make the creation of

scenarios easier.

Budget

2019

Actual

2020

Forecast

Total

Forecast Variance

Actual

Spend to

Date

Capital Expense 2,187$ 60$ 2,127$ 2,187$ -$ 74$

Key Completion Dates

Phase 2B-1

3Q/2020

Phase’s 2B-2 & 2B-3 TBD upon completion of

Phase 2B-1

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Capital Projects Less Than $1 Million

Identity Access Management (IAM) Deployment

This project will install the IAM solution in production to run user access certification campaigns and support

provisioning and de-provisioning of access for a defined set of targets in a phased approach. The solution will

also establish a support model to accommodate ongoing development needs across all environments,

including on-boarding of access to additional applications and systems.

Project is expected to start in 2Q’20 and implementation planned to take place in 4Q’20.

FERC Order 841: Electric Storage

The vendor began work on requirements and design activities for market system enhancements in late 4Q’18

with an expected delivery date of March 2019. However, updates to the settlements system are also required

as part of the project. Due to the delay in the settlement systems replacement project, a decision was made to

place this project on hold until after the new settlements system goes live. In 4Q’19 SPP submitted a filing with

FERC specifying a precise effective date of no later than nine months after the implementation of the new

settlement system. FERC has mandated an implementation date of August 1, 2021, and the project is expected

to resume in 2020.

Budget

2018

Actual

2019

Actual

2020

Forecast

2021

Forecast

Total

Forecast Variance

Actual

Spend to

Date

Identity and Access Management

(IAM) Deployment 500$ -$ -$ 300$ 200$ 500$ -$ -$

FERC Order 841: Electric Storage 423$ 17$ 14$ 391$ 423$ -$ 32$

Data Lake Phase 3 350$ -$ -$ 350$ -$ -$ 350$ -$

TAGIT/SCERT Rewrite 250$ -$ -$ 83$ 167$ 250$ -$ -$

Ramping Capability 200$ -$ -$ 200$ -$ 200$ -$ -$

Energy Storage Resource 50$ -$ -$ 50$ -$ 50$ -$ -$

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Data Lake Phase 3

During 1Q’20, further investigation and testing were performed with potential solutions to provide “real-

time” updates directly to Data Lake and serve as an Informatica Data Replication (IDR) replacement, however

the identified solutions did not sufficiently meet requirements. The project team concluded that “real-time”

update capability was not needed until there is a ramp-up effort to start offloading more data to Data Lake. As

a result, it has been decided to close out the Data Lake Phase 3 project. A new project will be submitted for

consideration in the 2021 -2023 budget cycle to find an IDR replacement solution.

Transmission and Generation Implementation Tracking (TAGIT), Standardized Cost

Estimation Reporting Template (SCERT) Rewrite

The goal of this project is to enhance the TAGIT/SCERT platform in a way that would allow operators to focus

on data analysis, remove potential barriers for additional operators to cross-train, and improve data integrity.

During 1Q’20, internal resources started gathering requirements and developing use cases. In 2Q’20, the

design phase will be completed and vendor development will commence. Implementation is expected in

1Q’21.

Ramping Capability Project

This project will address the impact that resource ramp shortages in the market cause with respect to short-

term spikes in market prices by designing methods to better anticipate the need for responsive resources in

the market.

The goal of a ramping product is to provide a market-based approach for ramp management that leverages

existing operational experiences to systematically pre-position resources with ramp capability to manage net

load variations and uncertainties and to provide transparent price signals to incent resource flexibility and

economic investment.

During 1Q’20, staff has been engaged in requirements development. The project schedule is expected to be

finalized during 2Q, with an expected implementation date in 1Q’21.

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Energy Storage Resource (ESR) Project

As a result of FERC Order 841 and the associated operations project, ESRs are being submitted as detailed

project proposals (DPPs) in the 2019 Integrated Transmission Planning (ITP) assessment. SPP’s engineering

department will need to scope and implement a solution that can model and study ESRs as generation, load,

or as generation and load. This project will also develop policy and revision request language that allows SPP

to select ESRs as viable transmission solutions and enforce issuance of notice to construct (NTC) for qualifying

ESR solutions.

Staff was engaged in research for the project in 2019. Requirements development is expected to commence in

Q2’20.

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Future Projected Capital Projects

Energy Management System (EMS) Centralized Modeling Tool (CMT) Markets

Software Upgrade

This project addresses the hardware refresh and software upgrade required to continue operations of the

EMS, CMT, and Markets applications. Both the system software and the hardware (included in IT Foundation

Capital) used for the systems are due for refresh by December 2022. SPP will replace the time frequency

device in conjunction with this project no later than September 2022, which is the timeline for this project.

The EMS and Markets systems are essential critical infrastructure protection (CIP) applications that require

continual patch source and vendor support to operate SPP’s reliability and market functions.

2021 2022

Total

Forecast

EMS CMT Markets Software Upgrade 2,850$ 2,850$ 5,700$

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Western Energy Imbalance Service (WEIS) Market

SPP will provide market administrative services for Basin Electric Power Cooperative, Tri-State

Generation and Transmission Association, and Western Area Power Administration (WAPA) that is

scheduled to launch in February 2021. The market will centrally dispatch energy from participating

resources throughout the region every five minutes, enhancing both the reliability and affordability of

electricity delivered from western utilities to their customers.

The signatories to the contract will fund the implementation of imbalance market functionality and take

service from the WEIS market for up to eight years. Similar to the western RC service contracts, SPP will

recover the approximate 16-month implementation costs through the production revenue rate. These

services will generate approximately $5.0M in revenues annually beginning in 2021. SPP will fund staffing

and capital expenditures through acquisition of debt resulting in no impact to SPP’s NRR during the

project implementation.

Total capital spend during 1Q’20 was $0.5M and included the following items:

o Enhancements to the existing Market Operations Systems (MOS), Centralized Modeling Tool

(CMT), and the Energy Management System (EMS) that will allow Energy Imbalance Services

(EIS) in the west

o Enhancements to SPP’s webTrans Scheduling system to allow Balancing Areas (BAs) to be added

to the system

Budget

2019

Actual

2020

Forecast

2021

Forecast

Total

Forecast Variance

Actual

Spend to

Date

Capital Expense 3,370$ 201$ 3,113$ 3,314$ 56$ 654$

Operating Expense 6,141 408 4,626 376 5,410 731 1,216

Total Project 9,511$ 609$ 7,739$ 376$ 8,724$ 787$ 1,870$

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Carryover Capital Project

Settlement Systems Replacement

Project had commenced in April 2017 with an initial expected completion date of May 2019 and included

five milestones. Between 2Q’17 and 4Q’18, four of the five milestones were completed, which included

the following:

o Milestone 1 – Delivery and implementation of the

formula builder (July 2017)

o Milestone 2 – Largest of all milestones, the core

calculation engine development (March 2018)

o Milestone 3 – User interface functionality required

to support day-to-day settlement operations (June

2018)

o Milestone 4 – Included all remaining development items, in addition to workflow and audit

processes (October 2018)

Milestone 5 which included internal testing and defect fixes, along with transition of system support

from the vendor to internal staff had commenced in January 2019, but issues with system performance,

accuracy, and functionality led to delays and resulted in the go-live date being moved to February 2020.

Following the completion of Milestone 5 in 4Q’19, cutover activities were completed as planned and the

system went live in February 2020. All market and transmission settlement data are now being processed

and reports are being posted out of the new system.

No additional costs were incurred in 2020 to complete the project.

Budget

Actual

2017

Actual

2018

Actual

2019

Total

Actual Variance

Capital Expense 5,292$ * 1,951$ 3,348$ 607$ 5,906$ (614)$

Operating Expense

(Inception Workshop) -$ 26$ -$ -$ 26$ (26)$

* Original approved budget for the project was $5.1M. The revised budget as reflected in the table

reflects the out of budget spend of $0.2M that occurred in 2018. The final variance to budget reflects

the out of budget spend of $0.6M that occurred in 2019.

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Foundation Capital Expenditures

The following sections discuss foundational capital expenditures for information technology, operations,

settlements, and facilities for the current year. Although foundational spend is presented for the upcoming

three years during each annual budget cycle, foundational budgets are re-forecast every budget cycle for the

upcoming year. The following table shows the 3-year projection for foundation capital spend that was presented

in the 2020 budget.

2020 2021 2022 Total

Information Technology 8,100$ 8,200$ 8,400$ 24,700$

Operations 2,494$ 2,259$ 2,195$ 6,948$

Engineering Department 1,835$ 635$ 635$ 3,105$

Settlements 300$ -$ -$ 300$

Facilities 50$ 50$ 50$ 150$

Other Corporate Departments 100$ 100$ 100$ 300$

Total 12,879$ 11,244$ 11,380$ 35,503$

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Foundation Expenditures: Information Technology

The budget for IT Foundation for 2020 is $8.1M, which is relatively flat compared to the 2019 budget of

$8.2M. The IT Foundation budget captures corporate-wide hardware and software requirements to support

SPP’s business applications and systems and is managed in two broad categories:

Infrastructure Refresh: This category includes upgrades and/or replacements of existing infrastructure

to support the ongoing requirements of existing systems and services.

New Initiatives: This category is for incremental hardware, software, and/or development services to

support new IT and/or Corporate projects and services.

The total spend during 1Q’20 was $1.3M and included the following items:

Replacement of aged servers supporting corporate systems – Infrastructure Refresh

Additional storage to meet the needs of SPP’s data retention and long-term archival policies -

Infrastructure Refresh

Aside from the IT Foundation budget, a separate budget of $0.1M exists to support IT capital requirements for

approximately 10 departments (H/R, Regulatory, Internal Auditing, etc.).

IT Foundation (IT Dept. only)

2020

Budget

2020

Forecast Variance

2020 YTD

Spend

Infrastructure Refresh 7,600$ 7,616$ (16)$ 1,343$

New Initiatives 500$ 500$ -$ -$

Total 8,100$ 8,116$ (16)$ 1,343$

Included with the IT Foundation

Budget

2020

Budget

2020

Forecast Variance

2020 YTD

Spend

Other Corporate Departments 100$ 100$ -$ -$

154 of 156


Foundation Expenditures: Operations, Engineering, Facilities &

Settlements

The following foundation budgets reflect capital spend for enhancements to operations, engineering, and

settlements systems, and for various upgrades/improvements to SPP’s physical facilities.

Operations Marketplace Enhancements

Total spend during 1Q’20 was $0.3M and included the following items:

Implementation of MOS Release 1.30 (member impacting) included the following:

o Markets/Credit Management System interface enhancements

o Market Operator Interface (MOI) enhancements and fixes

o RR352 – Day-Ahead Reliability Unit Commitment Process Timing

o RR365 – Day-Ahead Market Timeline enhancement

o Defect fixes

The next MOS release will be 2.0 and the timeline is in discussion. This release will contain:

Market Clearing Engine (MCE) optimization parameters

Markets Database (MDB) schema changes

Defect fixes

Other Foundation 2020 Budget 2020 Forecast Variance

2020 YTD

Spend

Operations - MOS Enhancements 2,000$ 2,000$ -$ 316$

Operations - Legacy Systems 494$ 419$ 75$ 36$

Engineering 1,835$ 811$ 1,024$ 49$

Facilities 50$ 221$ (171)$ 171$

Settlements 300$ 300$ -$ 31$

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Operations Legacy System Enhancements include energy management system (EMS), control-room operations

window (CROW), open access same-time information system (OASIS), dispatch training simulator (DTS),

centralized modeling tool (CMT) and various other applications supporting the operations division. The total

spend in 1Q’20 was $0.04M and included the following items:

CMT, DTS & EMS system enhancements

Network & Native Load (NNL) enhancement

Engineering Enhancements - Total spend during 1Q’20 was $0.05M and included additional Geographic

Information System (GIS) licenses. The 2020 forecast for engineering foundation was reduced as a result of

delays in testing for PROMOD X enhancements due to resource constraints associated with the pandemic.

Facilities Enhancements - Total spend during 1Q’20 was $0.2M which included an unbudgeted expenditure to

install additional cubicles for new employees in corporate office building.

Settlements Enhancements – Total spend during 1Q’20 was $0.03M and included enhancements to the

Settlement Management System (SMS). The enhancements will implement all JOU Settlements calculations

under MRR266.

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