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SPP Presentation. Credit Policy Tutorial. August 1, 2006. Overview. The intent of Southwest Power Pool’s Credit Policy is to establish a transparent and non-discriminatory process for extending credit by SPP to its Credit Customers

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  1. SPP Presentation

  2. Credit PolicyTutorial August 1, 2006

  3. Overview • The intent of Southwest Power Pool’s Credit Policy is to establish a transparent and non-discriminatory process for extending credit by SPP to its Credit Customers • The existing Credit Policy was created by SPP’s Credit Task Force, made up of member representatives from a cross-section of industry segments SPP serves • For credit evaluation purposes, Credit Customers have been segmented to allow for different scoring models based on common financial characteristics • Each Credit Customer is scored based on the model designed for its industry group. The score translates into a percentage of the Credit Customer’s tangible net worth – a suggested Unsecured Credit Allowance with SPP • SPP staff track service taken and projected to be taken (combined these are referenced as “Total Potential Exposure”) from SPP. On a daily basis the exposure level of each Credit Customer is compared to its unsecured credit limit • If a Credit Customer’s Total Potential Exposure exceeds its Unsecured Credit Allowance with SPP then it must provide additional financial assurance to SPP – cash deposit, letter of credit, guarantee by an affiliated third party

  4. Overview (cont) • Credit Customers are invoiced on a monthly basis for all Tariff related services, including transmission service. • Energy Imbalance services will be invoiced on a weekly basis. • An Event of Default includes those actions or the failure to act on the part of a Credit Customer that places SPP and its other Credit Customers at a higher risk of loss, and would include: • Failure to pay invoices in full when due • Failure to cure a Total Potential Exposure violation • Failure to cure a request for credit information in a timely manner • Bankruptcy filing by the Credit Customer • An Event of Default will trigger suspension of the member/customer’s unsecured credit limit for a period of 90 days • Additional remedies available to SPP include termination of service (upon FERC approval)

  5. Initial Credit Evaluation – required informationCredit Policy Article 3, Section 3.1 • Entities seeking to become a Credit Customer of SPP must submit a completed application and provide the following information which staff will use to determine the amount, if any, of unsecured credit to be provided to the entity • Annual and interim financial statements • Trade and bank references • Rating agency reports • Qualitative information from annual filings and the Not-For-Profit Additional Information Questionnaire • Litigation and other contingencies • Other information as appropriate

  6. Ongoing Evaluation – required informationCredit Policy Article 3, Section 3.2 • Periodically, and at least annually, SPP will reevaluate each Credit Customer to determine the appropriate level of unsecured credit to be provided to each. Information used in SPP’s ongoing evaluation will include: • Annual Financial Statements • Quarterly Financial Statements • Qualitative data from annual filings • Statistical rating agency reports • Litigation and other contingencies • Other information as appropriate

  7. Scoring MethodologyCredit Policy Article 4, Sections 4.2.1, 4.2.2, and 4.2.3 • The credit evaluation performed by SPP staff is comprised of Qualitative and Quantitative (Financial) analysis. Each analysis is then weighted as reflected at right, resulting in a total Composite Score. Definitions of the Industry Segments are shown below. • Large Company: For profit companies with net fixed assets greater than $250 million • Small Company: For profit companies with net fixed assets less than $250 million • Not-For-Profit: Electric cooperatives, State and Federal Agencies, Municipalities • Each factor reviewed is scored on a scale of 1 to 6, with 1 being the “best”

  8. Credit Scoring Model – Large CompanyQuantitative Criteria – Credit Policy Article 4, Section 4.2.1.1 • Financial statements are scored using the Quantitative criteria shown in the above table • The score for each criteria is then weighted using the “Weight” shown above • The weighted scores are added to arrive at a total Quantitative score • Definitions for the Quantitative criteria are contained with the SPP Credit Policy and may be accessed on the SPP website at http://www.spp.org/Publications/SPP_CREDIT_POLICY_AttachmentX_051606.pdf

  9. Credit Scoring Model – Small CompanyQuantitative Criteria – Credit Policy Article 4, Section 4.2.2.1 • Financial statements are scored using the Quantitative criteria shown in the above table • The score for each criteria is then weighted using the “Weight” shown above • The weighted scores are added to arrive at a total Quantitative score • Definitions for the Quantitative criteria are contained with the SPP Credit Policy and may be accessed on the SPP website at http://www.spp.org/Publications/SPP_CREDIT_POLICY_AttachmentX_051606.pdf

  10. Credit Scoring Model – Not-For-ProfitQuantitative Criteria – Credit Policy Article 4, Section 4.2.3.1 • Financial statements are scored using the Quantitative criteria shown in the above table • The score for each criteria is then weighted using the “Weight” shown above • The weighted scores are added to arrive at a total Quantitative score • Definitions for the Quantitative criteria are contained with the SPP Credit Policy and may be accessed on the SPP website at http://www.spp.org/Publications/SPP_CREDIT_POLICY_AttachmentX_051606.pdf

  11. Qualitative CriteriaCredit Policy Article 4, Sections 4.2.1.2, 4.2.2.2, and 4.2.3.2 Qualitative Criteria utilized to score an SPP customer includes the following: • The Credit Customer’s ability to set rates without seeking regulatory approval; • The number and composition of members or customers of the entity; • The exposure to energy price risk for load served by the Credit Customer; • Rating agency ratings assigned to unsecured debt of the Credit Customer; • Tenure and quality of Credit Customer management; • Terms of the Credit Customer’s wholesale power contracts, if any; • The extent that the customer is exposed to commodity price fluctuations • The Credit Customer’s payment record with SPP, if any; • Other non-financial measures of creditworthiness; • Based on a review of the above factors, SPP will assign an Analyst’s Opinion of the Qualitative Score for each respective Credit Customer using a scale of 1 – 6, with being the best rating.

  12. Assigning Unsecured CreditCredit Policy Article 4, Section 4.3 • Qualitative and Quantitative weighted scores are added to arrive at a Composite Score for the Credit Customer • The Composite Score equates to a percentage of the Credit Customer’s tangible net worth that is assigned as an Unsecured Credit Allowance with SPP • Maximum Unsecured Credit Limit under the SPP Credit Policy is $25,000,000 • Minimum Unsecured Credit Limit for a Not-For-Profit under the SPP Credit Policy is $50,000

  13. Assigning Unsecured Credit – Revenue BondsCredit Policy Article 3, Sections 3.1.3, 3.2.5; Article 4, Section 4.3.1 • A Not-For-Profit Credit Customer may request that its suggested Unsecured Credit Allowance calculation reflect as equity the outstanding balance of any revenue bonds it has issued • Such revenue bonds must have been issued solely in support of the Not-For-Profit Credit Customer’s role as power supply agent for not-for-profit electric distribution utilities • To be considered in this manner, the request must be supported by management’s representations in writing that debt service on the bonds is payable only after operating expenses are paid and further that amounts paid to SPP under its OATT are operating expenses for purposes of the revenue bonds • The request must further be supported by an attorney’s opinion reflecting that the power supply contracts supporting the revenue bonds are enforceable; that debt service on the bonds is payable only after operating expenses are paid and further that amounts paid to SPP under its OATT are operating expenses for purposes of the revenue bonds; and other representations as indicated in Section 3.1.3 of the Credit Policy • The bonds must carry a minimum rating from Standard & Poor's of BBB+ or from Moody’s Investor Services of Baa1

  14. Credit Scoring Model – Large Company

  15. Credit Scoring Model – Not-For-Profit

  16. Credit Scoring Model – Not-For-ProfitRevenue Bonds Outstanding of $100,000,000

  17. Total Potential ExposureCredit Policy Article 5, Sections 5.1, 5.2 • On a daily basis SPP will calculate a customer’s Total Potential Exposure (TPE) • Total Potential Exposure (TPE) is calculated as follows: TPE = TSPE + ME Where: TSPE = Transmission Service Potential Exposure ME = Market (Energy Imbalance) Exposure

  18. Total Potential Exposure (cont)Credit Policy Article 5, Sections 5.1, 5.2 • TSPE is calculated as follows: TSPE = ITSC + CTSC + METE Where: ITSC = (Invoiced Transmission Service Charges) All invoiced and unpaid transmission service CTSC = (Calculated Transmission Service Charges) All transmission service taken but not yet invoiced METE = (Maximum Estimated Transmission Exposure) An estimate of the transmission charges for the next 75 days from date of calculation • ME is calculated as follows: ME = IMSC + CMSC + MEME Where: IMSC = (Invoiced Market Settlement Charges) All invoiced and unpaid energy imbalance service CMSC = (Calculated Market Settlement Charges) All energy imbalance service taken but not yet invoiced MEME = (Maximum Estimated Market Exposure) An estimate of market charges looking forward through any cure period required – based on historic usage

  19. Acceptable Forms of Financial Security Credit Policy Articles 6, 7 • In the event a Credit Customer’s Total Potential Exposure exceeds its Total Credit Limit (the sum of its Unsecured Credit Allowance and any Financial Security posted), it will be required to provide additional Financial Security for the difference • Acceptable forms of financial security include: • Cash Deposit • Letter of Credit • Guaranty from an affiliated third party • Credit Customers which are required to posted Financial Security will execute a security agreement in form and substance equivalent to Appendix B to SPP’s Credit Policy. • Letters of Credit must be issued or confirmed by a financial institution with a minimum unsecured debt rating of A- from Standard and Poor's or Fitch, or A3 from Moody’s • The form of letter of credit must conform to that posted as Appendix C to SPP’s Credit Policy

  20. Acceptable Forms of Financial SecurityCredit Policy Articles 6, 7 • The Letter of Credit must automatically renew at least 90 days prior to its expiration date. If the financial institution elects not to renew, an alternative form of financial security must be provided to SPP at least 87 days prior to the expiration of the Letter of Credit • Cash deposits serving as financial security are held in a segregated account and will earn a market rate of interest. Accrued interest will be paid to the customer on a quarterly basis • Guarantors will be subject to the same credit evaluation process as the Credit Customer the guaranty purports to support • The form of guaranty must conform to that posted as Appendix D to SPP’s Credit Policy

  21. Invoicing Schedule • Transmission service will be invoiced by the third (3rd) business day of each month. Payments are due within 15 calendar days of the date of the invoice. To be considered paid, a payment must have been received by SPP at its offices or deposited electronically in SPP accounts. • Energy Imbalance service will be invoiced each Thursday by 8:00 am Central Time. Payments will be due by 5:00 pm Central Time on the following Wednesday after the invoice date.

  22. Events of DefaultCredit Policy Article 8 • An Event of Default under the SPP Credit Agreement is defined as follows: • Failure to post any Financial Security required in the time periods specified • Failure to pay any amount payable under the SPP’s OATT • Failure to provide financial information within the time periods specified • Bankruptcy filing on the part of the customer • Other circumstances as outlined in Article 8 of the SPP Credit Policy • Upon the occurrence of an Event of Default, the unsecured credit limit with SPP of the defaulting Credit Customer will be suspended for a period of 90 days • Other remedies available to SPP include, but are not limited to, termination of service in accordance with the OATT and applicable law

  23. Credit Events – Failure to pay invoice by due dateCredit Policy Article 8 • Failure to make a payment when it is due is considered an “Event of Default” under SPP’s Credit Policy • Upon the occurrence of an Event of Default, a Credit Customer’s unsecured credit limit will be suspended for a period of 90 days • If financial security has already been posted, SPP will liquidate all or a portion of the financial security to make the payment • If no financial security has previously been posted, the Credit Customer will be notified verbally and in writing (email) of its right to cure the default within the time period specified in SPP’s Credit Policy. It will further be notified of the suspension of its unsecured credit limit • If the Credit Customer does not cure the payment default within the time period allotted in the Credit Policy, SPP will begin filing procedures necessary with the FERC to terminate service to that Credit Customer

  24. Credit Events – Failure to pay invoice by due dateCredit Policy Article 8 • Suspension of the Credit Customer’s unsecured credit limit will require that it post financial security for its entire Total Potential Exposure until its Unsecured Credit Allowance is restored. • Interest will accrue on any unpaid balance until the invoice is paid. Interest charges will be calculated in accordance with the methodology specified for interest on refunds in the FERC regulations at 18 C.F.R. § 35.19a(a)(2)(iii).

  25. Credit Events – Total Potential ExposureViolationCredit Policy Article 5, Section 5.3 • On a daily basis a Credit Customer’s Total Potential Exposure (TPE) will be compared to its unsecured credit limit with SPP. If the TPE exceeds the unsecured limit, the Credit Customer will be required to post financial security • A Credit Customer will be notified of the credit limit violation (referenced in the Credit Policy as a TPE violation) on the date it occurs and will have three (3) business days to either reduce its exposure by satisfying an unpaid invoice or posting additional financial security • Failure to cure the TPE violation within the three (3) business day period is considered an Event of Default and will result in the Credit Customer’s Unsecured Credit Allowance being suspended for a period of 90 days • Upon suspension of the Credit Customer’s Unsecured Credit Allowance, it will be required to post Financial Security for all TPE • As with other Events of Default, SPP remedies include termination of service in accordance with the OATT and applicable law

  26. Credit Events – Failure to Provide Credit InformationCredit Policy Article 8 • SPP credit customers are required to provide information to SPP on an ongoing basis • Submission of annual audited financial statements to SPP are due each year within 120 days of the Credit Customer’s fiscal year end • Changes to a Credit Customer’s debt rating by a Statistical Rating Agency are to be submitted to SPP within five (5) business days of its effective date • Quarterly financial statements for the Credit Customer are to be provided to SPP within 10 days of the quarter-end. If a Not-For-Profit Credit Customer does not produce quarterly financial statements, SPP will consider other information as a substitute • A Credit Customer with an Unsecured Credit Allowance must give SPP notice of any Material Change in its financial condition (and, as applicable, the financial condition of its Guarantor) within five (5) Business Days of the occurrence of the Material Change • Other requirements as outlined in Section 3.2 of the SPP Credit Policy • Failure on the part of a Credit Customer to provide any of the credit information as outlined in Section 3.2 of the SPP Credit Policy and such failure is not cured within three (3) business days of notice from SPP shall constitute an Event of Default

  27. Credit Events – Failure to Provide Credit InformationCredit Policy Article 8 • Upon the occurrence of an Event of Default, a Credit Customer’s unsecured credit limit will be suspended for a period of 90 days • Upon suspension of the Credit Customer’s Unsecured Credit Allowance, it will be required to post Financial Security for all TPE • As with other Events of Default, SPP remedies include termination of service in accordance with the OATT and applicable law

  28. In Conclusion… • This Credit Tutorial is meant to serve as a user friendly summary of the SPP Credit Policy. Any summary inevitably omits certain details which may be important to the user • All SPP Credit Customers are strongly encouraged to review the complete SPP Credit Policy available on the SPP website at http://www.spp.org/Publications/SPP_CREDIT_POLICY_AttachmentX_051606.pdf • The SPP Credit Task Force will continue to review and make adjustments to the Credit Policy, subject to FERC approval, which it deems necessary to maintain a viable and robust energy market • Credit Customers are encouraged to become active in the Credit Task Force by contacting SPP Credit Staff. A list of staff and their contact information is included on the following page

  29. Credit Contacts • Kevin Walden (501) 607-1364 kwalden@spp.org • Phil McCraw (501) 614-3243 pmccraw@spp.org • Elizabeth Solano (501) 614-3323 esolano@spp.org

  30. Contact SPP http://www.spp.org General Inquiries: 501-614-3200

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