OREANDA-NEWS. August 31, 2015. Fitch Ratings has affirmed the long-term Issuer Default Rating (IDR) of Southwest Power Pool (SPP) at 'A' with a Stable Rating Outlook. Additionally, Fitch affirmed SPP's short-term IDR at 'F1'. Approximately \\$267 million of debt is affected by today's rating action. A full list of rating actions follows at the end of this press release.

KEY RATING DRIVERS

SPP operates under a Federal Energy Regulatory Commission (FERC)-approved Open Access Transmission Tariff (OATT) that provides for the full recovery of all costs, including scheduling, transmission and monitoring activities. Fitch expects FERC will continue to permit tariffs as necessary to recover SPP's operating costs, as has been the case historically.

SPP's ratings and Stable Outlook reflect the essential role and services performed by SPP in managing and maintaining system reliability and advancing energy policy, the predictability and sustainability of cash flows derived from regulated tariffs and service contracts, the relatively low business risk of its transmission operations, the solid investment-grade credit worthiness of its members, and a supportive federal regulatory environment at the Federal Energy Regulatory Commission (FERC).

Clean Power Plan: SPP is advocating a regional approach to compliance under the clean power for member states plan after concluding that a regional approach could result in nearly 40% lower annual compliance costs than an individual state by state approach. SPP recently completed its final analysis of the plan and found that regional compliance would cost an estimated \\$2.4 billion annually in new generation and environmental investments as compared to \\$3.3 billion annually under the state by state approach. SPP determined that coordinating individual state by state compliance plans in a regional market where energy flows between state boundaries is inherently less efficient and could cause up to 15GW of additional coal-fired capacity retirements by 2020. The EPA issued final carbon emission regulations for existing power plants in August that targets a nationwide wide reduction in carbon emissions of 32% from 2005 levels by 2030.

Addition of New Members: SPP meaningfully expanded its real time energy market in June 2015 with the addition of the Integrated System (IS), a high-voltage transmission grid in the upper Great Plains region of the U.S., composed of The Western Area Power Administration (WAPA), Basin Electric (Basin) and Heartland Power District (Heartland), to its membership. The IS adds more than 5000MW of peak demand and 9,500 miles of high-voltage transmission lines in eastern Montana, North Dakota and South Dakota to SPP's footprint and integrates WAPA's hydropower and Basin Electric's thermal resources. The integration is expected to be completed in October and is expected to leverage existing generation and transmission resources across SPP's footprint and reduce costs for all members. SPP projects benefits totaling \\$334.1 million over a 10-year period for its members from the inclusion of the IS. Notably, WAPA will become the first federal agency to join a regional transmission organization.

The voluntary nature of SPP's membership is a modest credit concern, in Fitch's opinion. Transmission services costs, which are largely fixed costs, would be borne by the remaining members, on a pro rata basis, should an SPP member leave. However, the risk of departure of a member is mitigated by the requirement that the exiting member pay a fee equal to its share of SPP's outstanding debt and other committed expenses as an 'exit charge'. Similarly, SPP's exposure to a market participant's payment default is minimized by the collateral requirements as well as bylaws that allow for costs of the default to be spread among the remaining market participants.

IEM: SPP's new integrated energy market (IEM) went live in March of last year and includes a real time balancing market, a day-ahead market with congestion hedging, and a related operating reserves market to increase market efficiencies and lower power costs for respective members. The IEM will help incorporate renewable generation and generated roughly \\$131 million in annual net savings for members during its first year of operation. Notably, with the rollout of the IEM, SPP became the primary balancing authority in its footprint by incorporating 16 balancing authorities.

Declining Capex: SPP's plans to spend \\$64 million on capex through 2017, a notable decrease of 58% when compared to the prior three year period. The expected capex reduction is primarily due to the completion of the IEM in March of 2014. Capital spending will primarily focus on Phase II of the IEM which includes FERC and member mandated service enhancements designed to improve the coordination of next-day generation across the region to maximize cost-effectiveness, provide greater access to reserve energy, improve regional balancing of electricity supply and demand, and facilitate the integration of renewable resources. Last year, SPP issued \\$37 million of unsecured notes and obtained a \\$33 million unsecured term note facility to help prefund capital expenditures through 2016.

Sufficient Summer Reserve Margin: SPP expects to have a healthy reserve margin of 32% this summer, more than double the 13.6% annual reserve margin requirement including 1,868MW of new wind and 305MW of new natural gas generation.

SPP is focused on improving transmission reliability by undertaking an integrated approach with members to identify new transmission projects. Investment in these projects is the responsibility of its members and therefore not a credit concern for SPP, since it is not responsible for funding the new transmission projects. In 2014, SPP members completed 148 transmission expansion projects totaling more than \\$1.9 billion. The transmission expansion projects help to increase regional efficiency and help facilitate the integration of renewable generation, specifically wind, to SPP's footprint. New wind generation will help SPP's member states meet their respective RPS requirements.

Going forward, SPP has identified the need for new transmission upgrades totaling approximately \\$273 million through 2024. Projects in the plan include new lines, line rebuilds and upgrades, reactive devices, transformers, substation upgrades and voltage conversions.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for SPP include:

--Timely recovery of all operating costs under FERC-approved Open Access Transmission Tariff;
--Debt maturities of \\$24 million in 2015, \\$24 million in 2016, and \\$21 million in 2017;
--Capital Expenditures of \\$24 million in 2015, \\$23 million in 2016, and \\$17 million in 2017.

RATING SENSITIVITIES

Positive Rating Action: No positive rating actions are expected at this time.

Future developments that may, individually or collectively, lead to a negative rating action includes:
--An unexpected change in the rate design of the FERC-approved OATT tariff;
--A cybersecurity event;
--A large departure of members from SPP's service territory.

LIQUIDITY
SPP's current liquidity position is sufficient with \\$62 million of available liquidity as of June 30, 2015 including a \\$30 million unsecured revolving line of credit facility that expires in June 2016 and approximately \\$43 million of unrestricted cash and cash equivalents. As of June 30, \\$11 million was outstanding under the facility. Debt maturities over the next five years are manageable and are as follows: \\$24 million in 2015, \\$24 million in 2016, \\$21 million in 2017, \\$21 million in 2018, and \\$22 million in 2019. Maturing debt is expected to be funded by a mix of internally generated cash and cash on hand.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

Southwest Power Pool
--IDR at 'A';
--Senior secured debt at 'A+';
--Senior unsecured debt at 'A';
--Short-term IDR at 'F1'.

The Rating Outlook is Stable.