2013 SEPC annual report - … · Sun owe rElec tricP ow er C orpo ration is a no t-for-proﬁt w ho lesa le elec tricgen eration an d tran sm ission utility www. sun ower. ne t. 2

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www.sunfl ower.net

2013 ANNUAL REPORTSunfl ower Electric Power Corporation301 W. 13th Street

Hays, KS 67601

2013 SEPC cover 4.indd 12013 SEPC cover 4.indd 1 5/2/2014 2:44:49 PM5/2/2014 2:44:49 PM

Sunfl ower Electric Power Corporation is a not-for-profi t, wholesale, electric generation and transmission utility owned and governed by six Member distribution cooperatives.

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

By 1957, faced with a rapidly growing demand for electricity, six distribution cooperatives joined to form Sunfl ower Electric Cooperative, Inc., later changing its name to Sunfl ower Electric Power Corporation. At that time, the peak load was 44 MW and the generating capacity was 13.4 MW, with the balance purchased from other wholesale power suppliers. One of the fi rst actions taken by the Sunfl ower Board of Directors was the construction of a new 22 MW power plant to provide wholesale energy to its Members.

During the last 56 years, Sunfl ower’s generation portfolio has grown to 655 MW using coal, natural gas, and wind to meet consumer needs. Power is delivered to Sunfl ower’s Members via 1,374 miles of transmission lines and numerous substations.

Sunfl ower’s Members serve members in 32 western Kansas counties and provide wholesale power supply to numerous communities.

This institution is an equal opportunity provider and employer.

www. sunfl ower. net

Sunflower Electric Power Corporation is a not-for-profit wholesale electric generation and transmission utility

www. sunfl ower. net

2 Member Built , Member Focused

2013 can be considered a paradoxical year for Sunfl ower Electric Power Corporation, a year succinctly captured by the well-known saying “The more things change, the more they remain the same.” While our Members continued doing what they do best—delivering reliable electricity to approximately 200,000 Kansans—numerous regulations and policy changes at both the state and federal level continue to dramatically affect the cost of that service.

The myriad of regulations creating challenges and impacting cost are apparent to those whose mission it is to provide reliable energy at the lowest possible cost. The changing landscape of environmental regulations has been a concern for several years, and 2013 brought even more complexity to the electric utility terrain: changes were made to the Mercury and Air Toxic Standards (MATS) for new generation units; the Environmental Protection Agency (EPA) proposed greenhouse gas limits on proposed fossil-fueled units; and numerous other agencies adopted rules that impact the operation—and the rates—of electric utilities.

The Kansas Supreme Court issued an opinion regarding the Holcomb Expansion Project (HL2) construction air permit, remanding the permit to the Kansas Department of Health and Environment (KDHE) for review of two facets. Although not insurmountable, complying with the requirements of the remand was yet another hurdle in our 12-year endeavor to proceed with the project.

Other regional initiatives were also addressed in 2013. Efforts began to implement FERC Order 1000, requiring competitive bidding for transmission projects. Utilities also completed fi nal plans to transition to the Southwest Power Pool’s (SPP) Integrated Market (IM), scheduled to go live in March 2014.

What did not change is Sunfl ower’s commitment to our Members and our mission to serve them. For more than fi ve decades Sunfl ower has focused on providing our Members with wholesale power and transmission services at a competitive price, while continuing to develop strategies that will poise Sunfl ower to meet their energy demand well into the future. Signifi cant efforts were made to manage new risks and provide increased responsiveness and fl exibility. Two accomplishments in 2013 included fi nancial strategies that resulted in a 10 percent increase in equity and fi ling for a formula-based transmission rate to effi ciently recover costs associated with transmission development, both of which will help stabilize Member rates.

We appreciate the expertise and guidance provided by the Sunfl ower Board of Directors—those who are leaving us and those who are now part of the team. We also appreciate the support and confi dence our Members have shown in us as we manage their wholesale needs. Though the future remains uncharted, our Members can be confi dent in knowing that we will never forget that we are “Member Built,” and we will remain “Member Focused.”

Executive Report

STUART LOWRY

President & CEOCHARLES AYERS

Chairman

PU

PCP

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Member Built , Member Focused 3

Pioneer Electric Cooperative, Inc., was formed in 1944 and is headquartered in Ulysses, Kansas. Pioneer is guided by CEO Steve Epperson and nine trustees.

Lane-Scott Electric Cooperative, Inc., was formed in 1941 and is headquartered in Dighton, Kansas. Lane-Scott is guided by General Manager Ed Wiltse and nine trustees.

Prairie Land Electric Cooperative, Inc., originally formed as Norton-Decatur Cooperative Electric Company in 1938, is headquartered in Norton, Kansas. Prairie Land is guided by General Manager Allan Miller and 12 trustees.

The Victory Electric Cooperative Assn., Inc., was formed in 1945 and is headquartered in Dodge City, Kansas. Victory is guided by CEO Shane Laws and 12 trustees.

Western Cooperative Electric Assn., Inc., was formed in 1945 and is headquartered in WaKeeney, Kansas. Western is guided by General Manager Darrin Lynch and nine trustees.

Wheatland Electric Cooperative, Inc., was formed in 1948 and is headquartered in Scott City, Kansas. Wheatland is guided by CEO Bruce Mueller and 12 trustees.


Jim Imel Vice Chairman

VictoryDodge City

1 Year

Stephen EppersonDirectorPioneerUlysses3 years

Larry EvansDirectorWestern

WaKeeney19 Years

Charles AyersChairmanWheatlandScott City14 Years

Shane LawsDirectorVictory

Dodge City1 Year

Robert JohnsonDirector

Prairie LandNorton

30 years

Allan MillerDirector

Prairie LandNorton

25 years

Bruce MuellerDirector

WheatlandScott City2 years

Perry RubartDirectorPioneerUlysses29 years

Darrin LynchDirectorWestern

WaKeeney1 year

Paul Seib, Jr.Director

Lane-ScottDighton35 years

Ed WiltseDirector

Lane-ScottDighton2 years

Board of Directors


Former Sunfl ower Chairman Loren Ochs is shown attending the 2010 dedication of the Loren Ochs Energy Center Substation located near Dodge City. Loren retired in May after serving 35 years on the Sunfl ower Board and 43 years on the Victory Board.

Director Dave Schneider poses for a picture with Touchstone Energy’s mascot CFL Charlie. Cooperatives often enlist the help of CFL Charlie at community events. Dave retired in May after serving 24 years on the Sunfl ower Board and serving Western for 35 years.

Director Terry Janson speaks with Senator Garrett Love and Gary Gillespie, Victory trustee, at Victory’s headquarters. Terry retired in August after serving 14 years on the Sunfl ower Board and serving Victory for 42 years.


Generation Sunfl ower has provided reliable energy to its Members since 1957. In 2013, the Sunfl ower system total net production was 2,219,835 MWh with Holcomb 1 (HL1) producing 2,166,075 MWh of the total. While HL1 remains a mainstay in Sunfl ower’s diverse generation fl eet, the deep penetration of renewable resources created favorable market conditions on which Sunfl ower chose to capitalize in 2013. Sunfl ower’s natural gas assets provided 54,062 MWh, and the Power Purchase Agreements with Smoky Hills Wind Farm contributed 184,907 MWh to the Sunfl ower system.

The Sunfl ower hourly system peak was 562 MW, occurring on June 27, and was 4 MW lower than the hourly peak set in 2012.

Transmission Sunfl ower continued its strong working relationship with Mid-Kansas and ITC Great Plains to develop, operate, and maintain transmission facilities in Kansas. During 2013, ITC Great Plains made progress on the construction of its section of the Kansas “V-Plan” transmission project, which is on schedule to be completed by the end of 2014. The project, entailing approximately 122 miles of double-circuit 345 kV lines, connects Sunfl ower’s Spearville Substation to eastern Kansas.

Renewable energy continued to have signifi cant impact on Sunfl ower, with wind generation facilities injecting approximately 2.7 million MWh of energy into the Sunfl ower transmission system during 2013. By comparison Sunfl ower’s Members consumed approximately 2.4 million MWh. Although renewable development in the region was not as robust as experienced in recent years, Sunfl ower worked with wind developers whose projects will connect to the system in the future and began transmission projects to support future wind development.

FinancialsSunfl ower achieved a Net Margin of $45 million in 2013 and increased its equity position to $108 million. Equity as a percentage of total assets grew from 16% in 2012 to 26% in 2013.

The increase in Net Margin and equity position was driven by Sunfl ower nearing the end of its debt cycle. Most of Sunfl ower’s debt matures in 2016, and much of Net Margin is used to pay principal. In addition to the increased regulatory requirements and costs—environmental, safety, transmission, reliability, and fi nancial—being experienced by the industry, Sunfl ower’s primary lender, the United States Department of Agriculture Rural Utilities Service (RUS), has been reluctant to approve new debt for Sunfl ower; as a result, all expenditures, both operational and capital, must be funded with cash. To build and maintain cash for 2013, Sunfl ower increased Member rates by 4% from 2012. Coupled with a 1% increase in net power supply charges, this resulted in a 5% increase in Member Power Sales revenue over 2012. Member MWh sales were unchanged from 2012. Fuel and purchased power costs were up over the prior year by 7%, after declining 2% from 2011 to 2012. However, margins earned on sales of excess energy over the prior year offset the increases in fuel and purchased power costs, reducing the impact to Member rates and Sunfl ower’s Net Margin. The average fuel and purchased power rate rose from $22.92 in 2012 to $24.13 in 2013.

In addition to raising Member rates to build cash, Sunfl ower instituted cost reductions during 2013 that resulted in a 2% decrease in operating expenses from the prior year.

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Year in Review


Kyle Nelson, senior vice president and COO, gives James Brungardt, regulatory affairs administrator, a tour of Holcomb Station. New employees are encouraged to tour Sunfl ower’s facilities to better understand the operations of Sunfl ower.

Sunfl ower purchased a new bucket truck in 2013. At full extension, the bucket reaches 125 feet in the air and is capable of supporting 2,100 pounds.

Sunfl ower line crews install aerial markers on a 115 kV line near the Washington County Memorial Airport. The markers ensure that pilots can clearly see the transmission line, making the area a safer place.


In 2013, Sunfl ower proposed a plan to extend the maturity of non-RUS debt, reduce annual principal payments, and stabilize Member rates. This plan was approved by Sunfl ower’s non-RUS lenders and is awaiting approval from RUS.

Formula-Based RateOn October 31, the Sunfl ower formula-based rate, which will keep Member rates as low as possible, was approved by the Kansas Corporation Commission and is effective January 1, 2014.

Holcomb Expansion ProjectBelieving in the importance of a diverse generation portfolio, Sunfl ower—along with its project partner—kept HL2 on the table as a future generation option. On Oct. 4, the Kansas Supreme Court issued its opinion in the Sierra Club versus KDHE case and remanded the Prevention of Signifi cant Deterioration construction air permit for HL2 back to KDHE.

In ordering the remand, the Supreme Court addressed sections of the permit issued by KDHE, specifi cally instructing the Agency to apply the new one-hour ambient air quality standards for nitrogen dioxide (published in March 2013) and sulfur dioxide (published in June 2010). From the time Sunfl ower updated the permit application in late 2009 to the time the permit was issued by KDHE in December 2010, these new standards were made fi nal by EPA.

The Court’s remand also specifi cally instructed KDHE to include the updated MATS for new power plants in the permit, standards that were published in April 2013. Though the standards were applicable upon publication in the Federal Register, the Court required the Agency to specifi cally identify MATS as applicable to HL2 in the air permit.

The action of the Court sent these matters back to KDHE for further review and a decision regarding the inclusion of these limitations within the permit that is consistent with the Court’s decision. Work has begun with KDHE to address the directives of the Supreme Court on remand.

Changing of the Guard Democratic member control is one of the seven cooperative principles—a principle so central to the cooperative business model that without it cooperatives would cease to exist. Those elected by their local distribution cooperatives to serve on the Sunfl ower Board understand and value this fundamental difference between cooperatives and investor-owned electric utilities. Decisions are not always easy, but the Board’s level of expertise and passion for the cooperative way of doing business ensure that all decisions made are in best interest of Sunfl ower’s Members and those they serve. Since the beginning, the Sunfl ower Board has had a rich history of working together for the common good, which is why it is bittersweet when a Board member decides to step down.

In 2013, Chairman Loren Ochs and Director Terry Janson, both from Victory Electric Cooperative Association, Inc.; and Director Dave Schneider, Western Cooperative Electric Association, Inc., retired from the Sunfl ower Board of Directors. We are grateful of the service of these directors whose combined 70 years of tenure played a part in some or all of the following: constructing Holcomb Station; assisting in important fi nancial decisions; researching and implementing renewable energy; forming Mid-Kansas Electric Company, LLC; being a voice for Sunfl ower’s Members about state and federal issues; and planning and promoting the Holcomb Expansion Project.

Others have been elected to fi ll their vacancies, guaranteeing that those served by Sunfl ower’s Members will have representation at the Board table. Sunfl ower welcomes new Board members—Jim Imel and Shane Laws, representing Victory; and Darrin Lynch, representing Western—knowing that they, too, will take great pride in being “Member Built” and continue to guide Sunfl ower in being “Member Focused.”



Regulatory and Policy Though planning for the future in an uncertain regulatory environment is challenging at best, Sunfl ower worked on several initiatives to maintain the system infrastructure to provide reliable service to its Members, meet changing markets, enable increasing renewable wind penetration, and comply with ever-increasing regulatory mandates. In 2013, Sunfl ower invested more than $5 million in capital maintenance to meet the needs of the system.

Sunfl ower supports a reasonable approach to environmental regulations and has engaged policymakers and legislators at both the state and federal levels, encouraging them to consider the impact of regulations on both reliability and cost to the consumer. In April, EPA issued the updated emission limits for new power plants under MATS. In June, President Obama issued a statement calling for greenhouse gas emission limits on existing coal-based units as well as new units. EPA also reproposed a modifi ed New Source Performance Standards (NSPS) regulation for fossil-fueled units. The proposed regulations identify HL2 as a project that is unique due to the signifi cant work done to date; thus, the application of the proposed NSPS is not likely.

Considerable time and energy was spent in 2013 analyzing and contributing to the development of the SPP’s regional response to FERC Order 1000, issued by the Federal Energy Regulatory Commission. The objective of FERC Order 1000 is to correct defi ciencies with previous rules in respect to the transmission planning process and cost allocation methods. FERC Order 1000 will also bolster competition in the development of the electric transmission grid competition through the inclusion of non-incumbent utilities. Sunfl ower staff will continue to take necessary steps for Sunfl ower to be successful in the new transmission paradigm. Deployment of Sunfl ower’s generation assets will change in 2014 when the SPP launches the IM, the next stage of the Regional Transmission Organization (RTO). The function of generating and serving load will be more complicated, and Sunfl ower devoted time and resources during 2013 educating employees and Members to capitalize on this new method for meeting energy demand. Scheduled to go live on March 1, 2014, the IM—which comprises the Day-Ahead Market, Real-Time Balancing Market, and Congestion Hedging Markets—is expected to realize up to $100 million in annual net benefi ts to the SPP RTO region.

With the deployment of the IM, Sunfl ower will no longer deliver energy directly to meet Member needs, a fundamental change in how Sunfl ower will provide for the needs of its Members. Instead, Sunfl ower will bid its generation resources into the IM on a day-ahead basis along with Member load. The SPP will determine the most reliable and economical combination of generation resources to serve the load and will dispatch generation to meet real-time load. Utilities that generate electricity for the Marketplace will be compensated, and consumers will pay based on a calculated location-based marginal price (LMP). The LMP will include the marginal cost of generation to serve the load plus congestion and loss cost. To mitigate risk and take advantage of opportunities in the IM, Sunfl ower will continue to update risk management tools of hedging for fuel, energy and transmission congestion.

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Lynn Ballinger; Dave Schneider, Western’s outgoing general man-ager; Stuart Lowry, president and CEO; and Larry Evans, Western’s board president, gather prior to the 2013 Western annual meeting.

Stuart Lowry, president and CEO, gives an update at Wheatland’s annual meeting about challenges and changing regulatory policies impacting the electric industry.

A student driver prepares for the beginning of the race at the Touchstone Energy ElectroRally. The Beloit event was particularly cold, creating unique challenges for the electric cars that the student drivers had to overcome.


KPMG LLP Suite 1000 1000 Walnut Street Kansas City, MO 64106-2162

KPMG LLP is a Delaware limited liability partnership, the U.S. member firm of KPMG International Cooperative (“KPMG International”), a Swiss entity.

Independent Auditors’ Report

The Board of Directors Sunflower Electric Power Corporation:

Report on the Financial Statements

We have audited the accompanying combined financial statements of Sunflower Electric Power Corporation and Sunflower Electric Holdings, Inc. and subsidiaries, which comprise the combined balance sheets as of December 31, 2013 and 2012, and the related combined statements of operations – comprehensive income, members’ equity, and cash flows for the years then ended, and related notes to the combined financial statements (hereinafter referred to as the combined financial statements).

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with U.S. generally accepted accounting principles; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the combined 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 combined 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 combined financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Member Built , Member Focused. 13

2

Opinion

In our opinion, the combined financial statements referred to above present fairly in all material respects, the combined financial position of Sunflower Electric Power Corporation and Sunflower Electric Holdings, Inc. and subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance with U.S. generally accepted accounting principles.

Other Reporting Required by Government Auditing Standards

In accordance with Government Auditing Standards, we have also issued a report dated March 14, 2014, on our consideration of Sunflower Electric Power Corporation and Sunflower Electric Holdings, Inc. and subsidiaries’ internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering Sunflower Electric Power Corporation and Sunflower Electric Holdings, Inc. and subsidiaries’ internal control over financial reporting and compliance.

/s/ KPMG LLP

Kansas City, Missouri March 14, 2014


SUNFLOWER ELECTRIC POWER CORPORATIONAND SUBSIDIARIES

Combined Balance Sheets

December 31, 2013 and 2012

Assets, Pledged 2013 2012

Net utility plant, at cost $ 270,155,568 275,858,283 Land held for future use 3,193,843 3,193,843 Construction work in progress 3,942,998 751,720

Total utility plant, net 277,292,409 279,803,846

Investments and other assets:Capital term certificates of the National Rural Utilities

Cooperative Finance Corporation 13,638,231 16,386,912 Investments in associated organizations 5,959,439 5,687,450 Escrowed funds 6,844,605 7,337,895

Total investments and other assets 26,442,275 29,412,257

Current assets:Cash and cash equivalents 43,431,800 14,375,715 Accounts receivable:

Member 11,989,092 11,479,253 Affiliate 10,229,225 5,666,233 Other 5,405,477 4,766,703

27,623,794 21,912,189 Inventories:

Fuel 4,524,848 5,285,956 Materials and supplies 8,115,723 8,897,819

12,640,571 14,183,775

Prepayments and other current assets 3,756,545 2,092,703

Total current assets 87,452,710 52,564,382

Deferred charges 33,382,195 34,405,024 Total assets $ 424,569,589 396,185,509



Combined Balance Sheets


Capitalization and Liabilities 2013 2012

Capitalization:Long-term obligations, less current maturities $ 186,334,247 215,759,992 Obligations under capital leases, less current portion 20,929,662 17,919,715

Members’ equity:Memberships 890 890 Donated capital 4,852,989 4,852,989 Accumulated surplus 105,504,508 60,632,436 Accumulated other comprehensive loss (1,882,078) (1,807,515)

Total member and patron equity 108,476,309 63,678,800

Total capitalization 315,740,218 297,358,507

Current liabilities:Current maturities of long-term obligations 33,370,779 32,323,992 Current portion of obligations under capital leases 1,032,908 726,380 Accounts payable 13,899,368 7,393,512 Accounts payable – affiliates 1,405,572 508,548 Accrued liabilities:

Taxes other than income taxes 5,205,503 5,350,437 Other 4,368,966 3,827,950

Total current liabilities 59,283,096 50,130,819

Deferred credits 41,528,833 40,830,768 Other long-term liabilities 8,017,442 7,865,415

Total capitalization and liabilities $ 424,569,589 396,185,509

See accompanying notes to combined financial statements.



Combined Statements of Operations – Comprehensive Income

Years ended December 31, 2013 and 2012

2013 2012

Operating revenue:Member power sales $ 174,084,563 165,193,466 Nonmember power sales 39,093,803 39,427,094 Affiliate power sales 26,795,059 15,947,140 Other operating revenue 19,784,765 21,695,120

Total operating revenue 259,758,190 242,262,820

Operating expenses:Operations:

Production and other power supply 129,336,650 123,306,461 Transmission 31,743,720 27,097,400

Maintenance:Production 17,734,843 21,367,408 Transmission 2,438,781 2,313,523

Administrative and general 11,883,130 13,453,335 Depreciation and amortization 11,889,636 11,626,590

Total operating expenses 205,026,760 199,164,717

Electric operating margin 54,731,430 43,098,103

Interest expense (11,178,460) (12,644,383) Other deletions, net (327,015) (526,976)

Operating margins 43,225,955 29,926,744

Nonoperating margins:Investment income 662,317 756,115 Other, net 983,800 1,467,516

Total nonoperating margins 1,646,117 2,223,631

Net margins 44,872,072 32,150,375

Other comprehensive loss – postretirement benefit plan (74,563) (1,956,474) Total comprehensive income $ 44,797,509 30,193,901




Combined Statements of Members’ Equity


Accumulatedother

Donated Accumulated comprehensiveMemberships capital surplus income (loss) Total

Balance, December 31, 2011 $ 890 4,852,989 28,482,061 148,959 33,484,899

Comprehensive loss:Net margins — — 32,150,375 — 32,150,375 Other comprehensive loss

postretirement benefit plan — — — (1,956,474) (1,956,474)

Balance, December 31, 2012 890 4,852,989 60,632,436 (1,807,515) 63,678,800

Comprehensive loss:Net margins — — 44,872,072 — 44,872,072 Other comprehensive loss

postretirement benefit plan — — — (74,563) (74,563) Balance, December 31, 2013 $ 890 4,852,989 105,504,508 (1,882,078) 108,476,309




Combined Statements of Cash Flows


2013 2012

Cash flows from operating activities:Net margins $ 44,872,072 32,150,375 Adjustments to reconcile net margins to net cash provided by

operating activities:Depreciation and amortization 11,889,636 11,626,590 Amortization of capital leased assets included in rent expense 775,391 673,642 Amortization of deferred charges 1,328,065 1,328,554 Patronage credits earned from investments (271,989) (331,584) Accretion of residual value notes 3,945,035 3,806,425 Other, net 166,635 — Changes in assets and liabilities:

Accounts receivable (565,770) 667,031 Due to/from affiliate (3,665,968) (3,403,894) Inventories 1,219,627 (1,119,440) Prepayments and other current assets (1,663,842) (302,689) Accounts payable 5,503,668 (155,185) Accrued liabilities 396,085 192,399 Long-term liabilities 77,464 (227,628)

Net cash provided by operating activities 64,006,109 44,904,596

Cash flows from investing activities:Utility plant expenditures (5,170,519) (23,100,317) Federal and state disaster proceeds — 602,663 Proceeds from sale of short-term investments 2,748,681 1,957,016 Change in escrowed funds related to development 493,290 (14,279) Proceeds from Holcomb development projects 272,496 307,449 Proceeds from other development projects 2,323,434 7,815,484 Payments for development costs (2,567,033) (9,996,196)

Net cash used in investing activities (1,899,651) (22,428,180)

Cash flows from financing activities:Principal payments under capital lease obligations (726,380) (673,642) Principal payments on long-term obligations (32,323,993) (29,694,416)

Net cash used in financing activities (33,050,373) (30,368,058)

Net increase (decrease) in cash and cash equivalents 29,056,085 (7,891,642)

Cash and cash equivalents, beginning of year 14,375,715 22,267,357 Cash and cash equivalents, end of year $ 43,431,800 14,375,715

Supplemental information:Sunflower paid $7,233,425 and $8,837,958 in cash for interest during 2013 and 2012, respectively.Sunflower had capital expenditures within payables of $1,062,361 and $11,070 at December 31, 2013and 2012, respectively.



SUNFLOWER ELECTRIC POWER CORPORATION AND SUBSIDIARIES

Notes to Combined Financial Statements


(1) Nature of Operations and Summary of Significant Accounting Policies

(a) Nature of Operations and Liquidity

Sunflower Electric Power Corporation (Sunflower or the Company) is an electric generation and transmission corporation. Sunflower is responsible for the electric power requirements of its six distribution cooperative members (Members) operating within western Kansas: Lane-Scott Electric Cooperative, Inc.; Pioneer Electric Cooperative, Inc.; Prairie Land Electric Cooperative, Inc.; The Victory Electric Cooperative Association, Inc.; Western Cooperative Electric Association, Inc.; and Wheatland Electric Cooperative, Inc. Power supply rates to Sunflower’s Members are subject to approval by the board of directors and the Rural Utilities Service (RUS). Transmission rates are subject to the approval by the Kansas Corporation Commission (KCC). In accordance with this regulation, Sunflower has applied the provisions of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 980, Regulated Operations.

Sunflower’s primary resource for supplying the electric power needs of its Members is Holcomb Station. Holcomb Station is a coal-fired generating facility with a net rating of 349 megawatts. Sunflower’s accredited generation with the Southwest Power Pool totals 653 megawatts, and includes all generation assets available. Sunflower purchases its coal through Western Fuels Association, Inc. (Western Fuels), a not-for-profit cooperative that provides coal to consumer-owned utilities, and from DTE Coal Services. During 2013 and 2012, Sunflower purchased approximately $42.1 million and $37.2 million, respectively, for coal and coal transportation. Because Western Fuels is a consumer-owned entity, representatives from Sunflower’s board of directors and management are also members of Western Fuels’ board of directors.

At December 31, 2013, Sunflower had working capital, current assets less current liabilities, of approximately $28.2 million, and $6.8 million of cash in escrowed funds that can be used to make capital purchases or pay for development costs incurred by Sunflower on a current basis. Sunflower is dependent on cash flows from member and nonmember long-term power supply contracts to meet its current obligations.

(b) The Financial Reporting Entity

On November 26, 2002, Sunflower Electric Holdings, Inc. (SEHI) completed negotiations to restructure its debt and signed the Agreement and Consent to Sunflower Restructuring, dated as of September 30, 2002, by and among Sunflower, SEP, Holcomb Common Facilities, LLC (HCF), the Government, CFC, Co Bank, and Other Creditors (the Consent Agreement). The Consent Agreement transferred all assets and liabilities, except for the long-term debt and certain assets discussed below, from SEHI to SEP Corporation in exchange for certain debt issued by SEP Corporation as noted in note 5. SEP Corporation legally changed its name to Sunflower Electric Power Corporation in March 2003. Sunflower is operated on a cooperative basis. The ownership of Sunflower is in the same proportion as that of SEHI. Substantially all of Sunflower’s assets, contracts, and revenue are pledged as security under the mortgage provided for in the Consent Agreement.





Sunflower has six wholly owned subsidiaries: SEPC, LLC; Sunflower Rail Company, LLC (Sunflower Rail); Holcomb 2, LLC (H2); Holcomb 3, LLC (H3); Holcomb 4, LLC (H4); and HCF (Holcomb Common Facilities, effective July 2007). Sunflower Rail, H2, H3, and H4 were created for future activities and currently do not hold any assets or liabilities. SEPC, LLC was formed to purchase and lease communication towers. HCF holds the common facilities located at Holcomb Station; these facilities would be common to multiple generation units developed on the Holcomb Station site.

The accompanying combined financial statements include the combined transactions of the above entities, collectively referred to as Sunflower. Intercompany balances and transactions have been eliminated in combination.

(c) Basis of Presentation

The accompanying combined financial statements have been prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America. The Company has evaluated subsequent events through March 14, 2014, for inclusion in this report.

(d) Use of Estimates

The preparation of combined 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 combined financial statements and the reported amounts of operating revenue, expenses, and other items during the reporting period. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, recoverability of deferred tax assets, derivatives, asset retirement obligations, and key inputs to actuarial calculations of postretirement obligations. Actual results could differ significantly from those estimates.

(e) Utility Plant

Utility plant is stated at cost and expenditures for replacement of property units are recorded as utility plant. The cost of units retired in the normal course of business, including cost of removal, net of any salvage value, is charged to accumulated depreciation. The cost of maintenance and repairs, including renewals of minor items, is charged to operating expenses.

The costs of homogeneous units of property, plant, and equipment are aggregated to form groups of assets that are depreciated on a straight-line basis over the estimated remaining useful life established for each specific group. Estimates and assumptions used in establishing the depreciation rates associated with each group are based on management’s best estimate of useful lives considering input from external studies. Generally, changes in depreciation rates are effected through changes in the remaining depreciable lives of the applicable group assets and are considered a change in accounting estimate.





The average annual depreciation rates from the depreciation study dated January 1, 2009, and in effect for 2013 and 2012 were as follows:

Steam production plant 1.50%Other production plant 1.42Transmission plant 1.74General plant 3.33

(f) Long-Lived Assets

Long-lived assets, such as property, plant, and equipment, and purchased intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If circumstances require a long-lived asset or asset group be tested for possible impairment, Sunflower first compares undiscounted cash flows expected to be generated by that asset or asset group to its carrying value. If the carrying value of the long-lived asset or asset group is not recoverable on an undiscounted cash flow basis, an impairment is recognized to the extent that the carrying value exceeds its fair value. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values, and third-party independent appraisals, as considered necessary. For the years ended December 31, 2013 and 2012, there have been no impairments of Sunflower’s long-lived assets.

(g) Investments

Investments in associated organizations are stated at cost plus Sunflower’s share of patronage capital credits allocated and reduced by distributions received. Sunflower’s ownership percentage in these associated organizations is less than 20%. Book value approximates fair value due to the nature of these investments.

Capital term certificates and escrowed funds are carried at cost. Cost is estimated to approximate fair value due to the nature of the certificates and the underlying short-term investments held in escrow.

(h) Cash and Cash Equivalents

Cash and cash equivalents include cash deposits in banks and short-term investments with original maturities of three months or less. Included in short-term investments are overnight repurchase agreements and commercial paper.

(i) Inventories

Fuel inventory is recorded and recognized at cost. Materials and supplies inventory is recorded at cost and recognized on an average-cost basis.





(j) Derivative Instruments

The Company recognizes all derivative instruments as either assets or liabilities in the combined balance sheets at their respective fair values. The Company’s coal purchase contracts generally meet the definition of a derivative; however, the Company’s coal contracts are designated as normal purchases, and as such are not recorded in the combined financial statements at fair value. In 2013 and 2012, all coal purchases qualified as normal purchases.

(k) Deferred Charges

As of December 31, 2013 and 2012, deferred charges consist of:

2013 2012Gross Gross

carrying Accumulated carrying Accumulatedamount amortization amount amortization

Financing costs $ 2,267,414 1,731,373 2,267,414 1,552,856 Major maintenance costs 11,495,479 8,621,609 11,495,479 7,472,062 Holcomb development costs 28,887,692 — 28,290,183 — Other deferred costs 1,084,592 — 1,376,866 —

$ 43,735,177 10,352,982 43,429,942 9,024,918

Deferred financing costs include legal and filing fees incurred to refinance Secured “A” notes, as defined in note 5, Long-Term Debt, in 2004. These charges are amortized over the life of the refinanced notes.

The major maintenance costs are repair and maintenance charges incurred in connection with periodic, planned, major maintenance activities that benefit future periods greater than 12 months. These operations require shutdown of the entire facility to perform planned, major repair and maintenance activities on the generating unit. The frequency of such repair and maintenance activities is predictable and scheduled and typically ranges from 10 to 15 years. In order to recognize the repair and maintenance activities in the period benefited from the maintenance activities, Sunflower capitalizes the actual cost of the major maintenance and amortizes those costs to the next overhaul. The 2006 Holcomb Station major maintenance outage was completed in July 2006, and those costs are being amortized over a 10-year period.

Deferred development costs include legal and engineering fees incurred by Sunflower for studies and the potential construction of new electric power generating stations to be adjacent to Holcomb Station and are being capitalized as project costs associated with the acquisition, development, and construction of the real estate. All charges relating to the construction of new electric generating stations are expected to be recovered through payments from entities participating in the development, except for the development costs related to the proportional share of the units that Sunflower will own which will be capitalized as a cost of the new electric generating station. See further information on associated deferred credits in note 1(n).





(l) Member and Patron Equity

All net margins are required to first offset any losses incurred during the current or any prior fiscal year. Remaining net margins, if any, are allocated to Members based on each member’s relative percentage revenue contribution to fixed costs and margins. In 2010 and prior, no amounts were allocated to the Members, since in those years there were deficits. At December 31, 2013 and 2012, accumulated surplus was allocated as follows:

2013 2012

Lane-Scott $ 4,636,711 2,651,562 Pioneer 40,268,917 23,228,487 Prairie Land 11,572,985 6,458,903 Victory 1,492,531 759,646 Western 7,337,927 4,204,475 Wheatland 40,195,437 23,329,363

$ 105,504,508 60,632,436

Under provisions of the mortgage with RUS, patronage capital cannot be distributed without approval from certain long-term creditors.

(m) Income Taxes

Sunflower is a taxable cooperative. Income taxes generally apply to Sunflower to the extent that income or losses are allocated to nonpatron activity. Sunflower accounts for income taxes attributable to nonpatron activity under the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the combined financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income from nonpatron sales in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.

The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.





(n) Deferred Credits

Deferred credits consist of funds received for participation in the development of the Holcomb site and unearned revenue from contracts with power customers as follows:

2013 2012

Holcomb development $ 39,206,719 38,980,768 Capacity agreements 1,850,000 1,850,000 Project agreements 472,114 —

$ 41,528,833 40,830,768

During 2013 and 2012, Sunflower received cost reimbursements of $0.3 million and $0.3 million, respectively, from one company participating in the development of the Holcomb site. Of the amount shown above, $6.5 million remains in an escrowed fund account on December 31, 2013 to be used for future years cash needs. With RUS approval, this cash is available to pay for current capital improvements and Holcomb site development costs incurred by Sunflower as well as other specifically identified needs. The payments received are shown as a deferred credit on Sunflower’s combined balance sheets.

(o) Other Long-Term Liabilities

Other long-term liabilities consist of accrued postretirement benefit obligations, measured at each fiscal year-end, and asset retirement obligations for the estimated costs for legally required removal of certain assets.

(p) Postretirement Plans

Sunflower allows eligible retirees to purchase medical insurance from the plan in which Sunflower participates. The premium payments are calculated on an average of both active and retiree participants. Sunflower will incur additional costs as the premium payments of active participants paid by Sunflower will increase due to the retirees’ participation in the plan. Additionally, Sunflower allows eligible retirees to purchase $20 thousand of term life insurance available over the lifetime of the retiree, through the Company’s term life insurance plan. These premiums are paid by the retired employee at the group term rates, not the full age-adjusted premium costs for the coverage. These obligations represent a liability to Sunflower. Sunflower retains the right, subject to existing agreements, to change or eliminate these benefits. In order for retirees to be eligible for these benefits, the participant must pay the premium cost associated with the coverage.

The Company records annual amounts relating to its postretirement plans based on calculations that incorporate various actuarial and other assumptions, including discount rates, mortality, turnover rates, and healthcare cost trend rates. The Company reviews its assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends when it is appropriate. The effect of modifications to those assumptions is recorded in accumulated other comprehensive income and amortized to net periodic cost over future periods using the corridor method. The net periodic





costs are recognized as employees render the services necessary to earn the postretirement benefits. The Company believes that the assumptions utilized in recording its obligations under its plans are reasonable based on its experience and market conditions.

The Company recognizes the unfunded status of the postretirement plan as a liability, and changes in that unfunded status in the year in which the changes occur through other comprehensive income to the extent those changes are not included in the net periodic cost.

(q) Revenue and Fuel Expense Recognition

Electric energy sales and the related fuel expenses are recorded at the time electric energy is generated and delivered.

(2) New Accounting Pronouncements

Upon issuance of exposure drafts or final pronouncements, Sunflower reviews new accounting literature to determine the relevance, if any, to its business. The following represents a summary of pronouncements that Sunflower has determined relate to its operations:

(a) Employer’s Participation in a Multiemployer Plan Disclosures

In September 2011, the FASB issued authorized guidance that requires employers to disclose quantitative and qualitative information about their participation in multiemployer pension plans and multiemployer other postretirement benefit plans. This guidance is effective for nonpublic entities for the fiscal years ending after December 15, 2012. Sunflower adopted this guidance for the year ended December 31, 2012, which required additional disclosures but did not have a material impact on Sunflower’s financial condition or results of operation.

(b) Presentation of Comprehensive Income

In February 2013, the FASB issued guidance on the presentation of reclassifications out of accumulated other comprehensive income. Publicly held and nonpublic entities will be required to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount is being reclassified in its entirety to net income. For other amounts that are not reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. generally accepted accounting principles that provide additional detail about those amounts. This guidance is effective for nonpublic entities for the fiscal years ending after December 15, 2013. The adoption of this guidance will require additional disclosures, but is not expected to have a material impact on Sunflower’s financial condition or results of operations.

(c) Fair Value Measurement and Disclosures

In May 2011, the FASB issued additional guidance on fair value measurement and disclosure. The purpose of the additional guidance is to align the fair value measurement and disclosure requirements between U.S. generally accepted accounting principles and International Financial Reporting Standards. The amendment allows entities to assess the fair value of financial instruments held in a portfolio as a net asset or liability. Additionally, entities should use a premium or discount





when assessing the fair value of assets or liabilities classified as Level 2 or Level 3 within the fair value hierarchy. Entities are required to supply additional disclosures about the valuation process and the sensitivity of the unobservable inputs used in the fair value measurement for assets or liabilities classified as Level 3 with the fair value hierarchy. Entities should disclose the use of a nonfinancial asset if that asset has been measured for fair value or when its fair value is disclosed on the basis of its highest and best use and is not used in such a manner. Lastly, entities should disclose the fair value hierarchy of assets or liabilities that are not valued as such in the statement of position, but for which fair value disclosure is required under the FASB guidance of other presentation matters for financial instruments. This guidance is effective for nonpublic entities for the annual periods beginning after December 15, 2011. Sunflower adopted this guidance for the year ended December 31, 2012. In February 2013, the FASB issued a clarification of the fair value disclosure requirements for non-public entities. Non-public entities are not required to provide the disclosure of the level of the fair value hierarchy within which the fair value measurements are categorized in their entirety at Level 1, 2, or 3, for items disclosed at fair value but not measured at fair value in the combined financial statements. The adoption of this guidance did not have a material impact on Sunflower’s financial condition or results of operations.

(3) Related Parties

In 2005, Sunflower’s Members formed Mid-Kansas Electric Company, LLC (Mid-Kansas) to purchase all of the Kansas electric assets and operations of Aquila, Inc. Mid-Kansas is owned by five distribution cooperatives that are also owners of Sunflower, and one corporation operating cooperatively that is a subsidiary of a Sunflower owner. The Mid-Kansas and Sunflower ownership percentages are different for each entity. Upon Mid-Kansas closing the acquisition on April 1, 2007, Sunflower was contracted by Mid-Kansas to operate the generation and transmission assets of Mid-Kansas. The distribution assets of Mid-Kansas are operated by the Members. Sunflower has no ownership interest in Mid-Kansas. In addition to the relationship between Mid-Kansas’ Members and Sunflower’s Members, the same individual serves as the Chief Executive Officer of both entities.

Sunflower bills to Mid-Kansas all direct and indirect operating costs as well as a portion of Sunflower’s administrative and general costs as agreed upon in the Service and Operation Agreement between Mid-Kansas and Sunflower. These allocation methodologies are reviewed annually and approved by the Mid-Kansas and Sunflower boards. In addition to the expense allocation and reimbursement arrangement, Sunflower has been directed by the Mid-Kansas and Sunflower boards to jointly dispatch the generation resources of Mid-Kansas and Sunflower in the most efficient and cost effective manner. To do this, a joint dispatch model was developed and utilized on a monthly basis to allocate power costs between the two entities. This model is designed to prevent Sunflower from absorbing any additional costs from this dispatch arrangement yet recognizing that in most months, there are benefits that are allocated to each entity, thus lowering the cost of operating each entities’ generation resources separately. In 2013 and 2012, Sunflower allocated indirect costs to Mid-Kansas of approximately $18 million and $14 million, respectively. In 2013 and 2012, Sunflower sold approximately $27 million and $16 million, respectively, of power to Mid-Kansas and purchased approximately $17 million and $12 million, respectively, of power from Mid-Kansas.





Sunflower entered into an operating lease with Mid-Kansas for the Rhoades to Phillipsburg transmission line. Sunflower pays Mid-Kansas approximately $1 million annually. Sunflower entered into an operating lease with Mid-Kansas for the Holcomb to Pioneer Tap transmission line. Sunflower pays Mid-Kansas approximately $0.8 million annually.

Sunflower’s financial interest in Mid-Kansas’ operations is limited solely to the items described above. Mid-Kansas is a separate legal entity and Sunflower does not guarantee any debt of Mid-Kansas. Consequently, Sunflower does not consolidate Mid-Kansas.

As of December 31, 2013 and 2012, Sunflower had accounts receivable from Mid-Kansas of $10.2 million and $5.7 million, respectively. Additionally, Sunflower owed Mid-Kansas $1.4 million and $0.5 million as of December 31, 2013 and 2012, respectively.

(4) Utility Plant

Utility plant balances by major class of asset are as follows at December 31, 2013 and 2012:

2013 2012

Steam production plant $ 506,050,343 506,062,894 Other production plant 18,622,540 18,455,903 Transmission plant 121,615,668 121,454,257 General plant 42,662,079 41,034,818 Capital leases 21,962,569 18,646,095

Total in service utility plant 710,913,199 705,653,967

Less accumulated depreciation (440,759,300) (429,799,675) Completed construction not classified 1,669 3,991

Net in service utility plant 270,155,568 275,858,283

Land held for future use 3,193,843 3,193,843 Construction work in progress 3,942,998 751,720

Total utility plant, net $ 277,292,409 279,803,846

On December 16, 2008, the Kansas Corporation Commission (KCC) ordered Sunflower to use depreciation rates presented in Docket No. 08-SEPE-257 DRS, Exhibit TBD-2 for rate recovery purposes. The KCC depreciation rates differ from the March 3, 2003 depreciation study rates approved by RUS. For financial reporting purposes depreciation and accumulated depreciation have been presented using the KCC depreciation rates. This difference in rates results in a cumulative difference of $15 million, which is reported as a reduction of accumulated depreciation in the combined financial statements as of December 31, 2013. The difference in depreciation rates causes a reduction of depreciation expense of $3.1 million and $3.1 million in 2013 and 2012, respectively.

In April 2011, Sunflower obtained a new depreciation study based upon electric plant, transmission and related general plant assets as of December 31, 2009. The depreciation study, with revised depreciation





rates, was submitted to RUS for approval. Upon approval from RUS, Sunflower will then seek approval ofthe revised rates from the KCC. As of December 31, 2013, RUS had not approved the revised depreciationrates.

(5) Long-Term Debt

(a) Outstanding Notes Payable

The outstanding note balances are as follows as of December 31, 2013 and 2012:

2013 2012

Secured “A-2” Notes, interest ranging from 5.30%to 5.50%, due in quarterly principal and interestinstallments through 2016 $ 64,637,800 85,237,801

Unsecured “A” Participation Notes, 8.00% interest,due in quarterly principal and interest installmentsthrough 2016 17,464,242 23,022,833

Secured “B” Notes, bearing no stated interest rate,quarterly installments applied 2 for 1, effectiveinterest rate of 3.80% through 2016 8,898,156 11,647,011

Residual Value Notes, bearing no stated interest rate,lump-sum payment due December 31, 2016, effectiveinterest rate of 3.59% 112,281,841 108,336,806

Unsecured “B” Notes, bearing no stated interest rate,due in quarterly installments through 2027, effectiveinterest rate of 5.30% 7,186,245 7,659,051

National Rural Utilities Cooperative Finance CorporationLoan Capital Term Certificate (LCTC) Notes, interestranging from 5.30% to 5.50%, due in quarterlyprincipal and interest installments through 2016 9,236,742 12,180,482

219,705,026 248,083,984

Less current maturities of long-term obligations (33,370,779) (32,323,992)

Long-term obligations, less currentmaturities $ 186,334,247 215,759,992

On April 22, 2004, Sunflower completed a refinancing of the original outstanding Secured “A”Notes, primarily to reduce the interest rate. The Secured “A” Note debt was refinanced with theproceeds from the issuance of the Secured “A-1” and Secured “A-2” Notes. Upon the refinancing, alloutstanding Secured “A” Note debt was extinguished.





The Secured “A-2” Notes, issued in the amount of $138.3 million, consisted of 13 separate notes, with one note due each year beginning March 31, 2005, through March 31, 2016, and the final remaining note due on December 31, 2016. The Secured “A-2” Notes bore interest ranging from 2.80% to 5.50%.

The Unsecured “A” Participation Notes were issued in November 2002 in the amount of $60.5 million bearing 8% interest with principal and interest payments payable quarterly through 2016.

The Secured “B” Notes were issued in November 2002, in the amount of $90 million, without a stated interest rate. The quarterly principal payments are applied to reduce the outstanding note balance on a 2 for 1 basis; for every $1 paid, the outstanding note balance is reduced by $2, resulting in expected future cash outflows of $9.5 million as of December 31, 2013. For financial statement reporting purposes, the expected future quarterly payments have been discounted assuming an effective interest rate of 3.80%, resulting in carrying amounts of $8.9 million and $11.6 million as of December 31, 2013 and 2012, respectively.

The Residual Value Notes were issued for the greater of $125 million, or 43% of the fair value of Holcomb Station on December 31, 2016, without a stated interest rate, payable in one lump-sum amount on December 31, 2016. The Residual Value Note Agreement dated October 1, 2002, provides the terms for determining the fair value of 43% of Holcomb Station upon the December 31, 2016, appraisal date. The Residual Value Notes contain a prepayment provision that is to be used upon prepayment of the notes or upon the sale of the Holcomb Unit 1 facility. Under the prepayment provision, the $125 million could increase to as much as $148 million. For financial statement reporting purposes, the note is reflected at an accreted carrying amount originally equivalent to the beginning Stipulated Value of $75.8 million, fully accreting to $125 million as of December 31, 2016. This results in an effective interest rate of 3.59% per year. Any amount that might be paid on this note in excess of $125 million has been treated as a contingent amount and, as such, is not currently recognized due to the uncertainties of prepayment, sale of the Holcomb Unit 1 facility, or appraised fair value of Holcomb Station as of December 31, 2016.

Unsecured “B” Notes were issued in November 2002, totaling $18 million, without a stated interest rate, payable in quarterly installments through June 30, 2027. For financial statement reporting purposes, the expected future quarterly payments have been discounted assuming an effective interest rate of 5.30%, resulting in carrying amounts of $7.2 million and $7.7 million as of December 31, 2013 and 2012, respectively.

The LCTC Notes were issued in the amount of $19.8 million, or 14.29%, of the Secured “A-2” Notes, as part of the 2004 refinancing to the Cooperative Finance Corporation (CFC). Like the Secured “A-2” Notes, there were 13 separate notes, with one note due each year beginning March 31, 2005, through March 31, 2016. The last note is due on December 31, 2016. The LCTC Notes bore interest ranging from 2.80% to 5.50%. Required as part of CFC loan policy, Sunflower purchased an equity interest in CFC. The proceeds from these notes were used solely to purchase CFC capital term certificates in an amount originally equivalent to the LCTC Note balance. The equity term certificates are reflected as Capital term certificates of the National Rural Utilities





Cooperative Finance Corporation on Sunflower’s combined balance sheets. CFC repays the capital term certificates to Sunflower as Sunflower’s outstanding Secured “A-2” Notes and LCTC Notes are repaid. Quarterly payments on the LCTC Notes, like the original borrowing, are equivalent to 14.29% of the quarterly payments made on the Secured “A-2” Notes.

At December 31, 2013, scheduled maturities of the long-term debt are as follows:

Year ending December 31:2014 $ 33,370,779 2015 34,917,957 2016 145,807,467 2017 410,749 2018 432,960 Thereafter 4,765,114

$ 219,705,026

Financial covenants require the Company to maintain an average times interest earned ratio (TIER) of not less than 1.25 in two best years out of the three most recent calendar years. Financial covenants also require an average debt service coverage ratio (DSC) of not less than 1.05 in two out of the three most recent calendar years, provided that in no year shall DSC be less than 1.0. As of December 31, 2013 and 2012, the Company was in compliance with these financial covenants.

Sunflower currently maintains a $20 million hybrid facility with CFC for purposes of managing seasonal fluctuations in cash flow and to issue various letters of credit necessary in the normal operations of the Company. The facility may be used for any combination of letters of credit or cash so long as the total does not exceed $20 million. As of December 31, 2013, Sunflower had outstanding letters of credit to Southwest Power Pool (SPP), Midwest Independent System Operator (MISO), Tenaska, and Omaha Public Power District (OPPD) for approximately $8 million. These securities were issued in the ordinary course of business. Sunflower is current with regard to all purchases, and accordingly, no draw was or has been made on those letters of credit. The hybrid facility expires July 1, 2014. Sunflower also maintains a separate $20 million line of credit facility with CFC for purposes of managing seasonal fluctuations in cash flow. This credit facility expires on October 2, 2014. As of December 31, 2013 there were no outstanding draws on this facility.

As part of the 2004 refinancing, RUS required Sunflower to issue a $3.1 million letter of credit for its benefit, through the earlier of January 15, 2017 or the date upon which Sunflower satisfies its Secured “B” Note obligation to the government. Sunflower is in compliance with the terms of the government’s note and no amounts have been drawn on the letter of credit as of December 31, 2013.

As part of a tax benefit transfer transaction entered into in the early 1980s, Sunflower was required to maintain a letter of credit for the benefit of the tax lessor in the unlikely event that Sunflower’s actions might give rise to the potential loss of benefits sold. Sunflower obtained a letter of credit agreement with CoBank to satisfy this requirement. As of December 31, 2013, the maximum amount that could be drawn upon the letter of credit was $7.2 million. Further, events have not occurred that





might give rise to the potential loss of benefits sold, and accordingly, no draw has been made. This letter expires on September 8, 2018.

(b) Contingent Notes

The November 26, 2002 Consent Agreement modified the Sunflower reporting entity. The Consent Agreement transferred assets and liabilities, except for SEHI long-term debt and the legal title to the Holcomb Common Facilities (Common Facilities) and Retained Infrastructure, to SEP Corporation in exchange for debt issued by Sunflower. The Common Facilities and Retained Infrastructure included property necessary to operate one or more additional units if built on the Holcomb Station site. If additional generation units are constructed, rental payments for use of the Common Facilities and Retained Infrastructure were to be paid to HCF. Under terms of the 1988 credit agreement outstanding for SEHI, the proceeds would then flow to the creditors of SEHI since HCF was a wholly owned subsidiary of SEHI.

By transferring HCF to Sunflower, Sunflower will now be the recipient of any rental payments for use of the Common Facilities and Retained Infrastructure used by any additional generating units. Management estimates annual rental payments of $10 million from the owners of the three planned generating units over a minimum of 19 years.

An Unsecured “B” Contingent Note was issued by Sunflower to one creditor in connection with the November 26, 2002 transaction. The note is payable upon receipt by Sunflower of cash flows from the lease of property that would be used to build additional generating units on the Holcomb Station site if the site is ever to be developed. The amount of the lease payments has not been established; thus, the amount of the note is contingent upon determining an agreed upon lease payment.

Holcomb 3 Contingent Notes, totaling $3.1 million, were issued in connection with the November 26, 2002 transaction. These are contingent notes bearing no interest through January 1, 2008, and accruing interest at 5% thereafter until paid. Interest attributable to these notes as of December 2013 is $1.1 million. The principal and accrued interest are payable in full upon the commercial operation date of a third unit (Holcomb Unit 3) located on the Holcomb Station site. The amounts are not considered a liability until financial close of the respective unit. If commercial operation does not commence prior to December 31, 2021, or if Sunflower is not an owner or operator of Holcomb Unit 3, the notes, including accrued interest, are canceled.

In July 2007, Sunflower reached agreement with the RUS regarding Holcomb site development. The agreement transferred the membership certificate of HCF from SEHI to Sunflower. Sunflower issued contingent notes Holcomb 2, Holcomb 3-B, and Holcomb 4 for $52 million, $23 million, and $16 million, respectively. These are contingent notes bearing 5% interest beginning January 1, 2008, through the payment date. Interest attributable to these notes as of December 2013 is $17.7 million, $7.8 million, and $5.4 million. The principal and accrued interest are payable upon commercial operation of the respective units; as such, the amounts are not considered a liability until financial close of the respective unit. If commercial operation does not commence prior to December 31, 2021, the notes and interest are canceled.





In July 2007, Sunflower issued contingent Holcomb 2 notes to CoBank and CFC. These contingent notes bear no interest. Annual payment amounts are $12.5 thousand and $50 thousand, respectively, for 35 years. The principal is payable on the last business day of December beginning with the first year of commercial operation of the Holcomb 2 unit; as such, the amounts are not considered a liability until financial close of the respective unit. If commercial operation does not commence prior to December 31, 2021, the notes are canceled.

Although efforts to develop the plant site continue, no construction activities for additional generating units have begun as of December 31, 2013; thus, Sunflower’s contingent long-term debt agreements discussed above are not considered a liability until commercial operation and financial close of the additional generating units and, accordingly, are not reflected in the accompanying combined financial statements.

(6) Income Taxes

Sunflower is a taxable cooperative. For the years ended December 31, 2013 and 2012, Sunflower reported net operating losses for income tax purposes. Income taxes generally apply to Sunflower to the extent that income or losses are allocated to nonpatron activity. During 2013 and 2012, Sunflower incurred no current or deferred income tax expense. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 2013 and 2012, are presented below:

2013 2012

Deferred tax assets:Property and equipment, principally due to safe harbor

leasing transactions $ 10,962,529 11,322,657 Property and equipment, principally due to differences

in depreciation — 10,120 Accrued vacation and other 927,505 895,863 Investment in SEHI notes 1,266,442 1,200,328 Investment in Holcomb 2, LLC 1,578,303 1,580,451 Net operating loss carryforwards 109,778,113 108,206,044

Total gross deferred tax assets 124,512,892 123,215,463

Less valuation allowance (86,560,843) (86,531,027)

Deferred tax assets, less allowance 37,952,049 36,684,436

Deferred tax liabilities:Debt, principally due to differences in effective

interest rates 36,077,767 35,375,592 Property and equipment, principally due to differences

in depreciation 524,438 — Other 1,349,844 1,308,844

Total gross deferred tax liabilities 37,952,049 36,684,436 Net deferred tax assets $ — —





Although the table above presents the deferred tax assets and liabilities on a combined basis, SEHI and Sunflower each file separate income tax returns. As of December 31, 2013, Sunflower has approximately $49 million, and SEHI has approximately $233 million of net operating loss carry forwards for regular and alternative minimum tax purposes that, if not utilized, begin to expire from 2020 through 2034.

Management believes that it is more likely than not that the net deferred tax assets will not be utilized; accordingly, it has provided a valuation allowance to reduce the net deferred tax assets to zero.

There are no unrecognized tax benefits to be accrued or disclosed, and thus, no interest and penalties to accrue thereon.

(7) Leases

Sunflower is obligated under various leases for transmission plant that are accounted for as capital leases. At December 31, 2013 and 2012, the net amount of plant and equipment under capital leases was $21.9 million and $18.6 million, respectively.

Amortization of assets held under capital leases is included within the operations-transmission expense line item. Rental expense incurred for capital leases amounted to $2.3 million and $2.2 million for the years ended December 31, 2013 and 2012, respectively. Interest costs associated with capital leases amounted to $1.5 million and $1.5 million for the years ended December 31, 2013 and 2012, respectively. Amortization of leased assets in association with capital leases amounted to $0.8 million and $0.7 million for the years ended December 31, 2013 and 2012, respectively.

Sunflower has several types of operating leases, including leases of transmission lines and substations and leases with Western Fuels for the use of aluminum railcars. One 128-car set, leased by Western Fuels to Sunflower, the Board of Public Utilities of Kansas City, Sikeston Board of Municipal Utilities, and Southern Minnesota Municipal Power Agency on a shared basis, is referred to as the “Pool” train, and expires in May 2026. Sunflower is invoiced by Western Fuels monthly at the rate of $27.730 per car, per day. Western Fuels has leased to Sunflower beginning August 2010 one 128-car set, referred to as the “CIT Train,” which will expire in August 2015. Sunflower is charged $295 per car, per month for the months January through August and is charged $350 per car, per month for the months of September through December, for a total annual lease amount of $0.5 million.

Minimum rent payments under operating leases are recognized on a straight-line basis over the term of the lease including any periods of free rent. Total expense associated with operating leases was $7.5 million and $6.5 million for the years ended December 31, 2013 and 2012, respectively.





Future minimum lease payments under noncancelable operating leases and capital leases as of December 31, 2013 are as follows:

Capital Operatingleases leases

Year ending December 31:2014 $ 2,748,358 4,732,386 2015 2,700,467 4,567,611 2016 2,694,104 4,150,633 2017 2,694,104 4,169,402 2018 2,532,428 4,188,734 Thereafter 27,087,969 23,704,210

40,457,430 $ 45,512,976

Less amount representing interest 18,494,860

Present value of minimum lease payments 21,962,570

Less current portion 1,032,908 Long-term obligations under capital leases $ 20,929,662

(8) Pension Plan

All Sunflower employees are covered by a defined benefit pension plan that is funded through participation in the National Rural Electric Cooperative Association (NRECA) Retirement Security Plan (RS Plan). The RS Plan is a defined benefit pension plan qualified under Section 401 and tax-exempt under Section 501(a) of the Internal Revenue Code. It is a multiemployer plan under the accounting standards. The plan sponsor’s Employer Identification Number is 53-0116145 and the Plan Number is 333.

A unique characteristic of a multiemployer plan compared to a single employer plan is that all plan assets are available to pay benefits of any plan participant. Separate asset accounts are not maintained for participating employers. This means that assets contributed by one employer may be used to provide benefits to employees of other participating employers.

Sunflower’s contributions to the RS Plan in 2013 and 2012 represented less than 5% of the total contributions made to the plan by all participating employers. Contributions are required by a collective bargaining agreement which expires on September 30, 2016. Sunflower made contributions to the plan for the years ended December 31, 2013 and 2012, of approximately $9.4 million and $8.1 million, respectively. There have been no significant changes that affect the comparability of 2013 and 2012 contributions. A portion of these contributions were allocated to Mid-Kansas as part of the agreed-upon allocation and reimbursement of costs. See note 3 for an explanation of the allocation and reimbursement agreement.





In the RS Plan, a “zone status” determination is not required, and therefore not determined, under the Pension Protection Act (PPA) of 2006. In addition, the accumulated benefit obligations and plan assets are not determined or allocated separately by individual employer. In total, the RS Plan was between 65% and 80% funded at January 1, 2013 and January 1, 2012 based on the PPA funding target and PPA actuarial value of assets on those dates.

Because the provisions of the PPA do not apply to the RS Plan, funding improvement plans and surcharges are not applicable. Future contribution requirements are determined each year as part of the actuarial valuation of the plan and may change as a result of plan experience.

(9) Postretirement Benefit Obligations

Sunflower allows eligible retirees to purchase medical insurance from the multiple employer plan in which Sunflower participates. In order for retirees to be eligible for healthcare benefits, the retiree must pay the premium cost associated with the coverage. Sunflower pays a portion of current employees’ premiums and is reimbursed by retirees for their premium cost. The premium payments are calculated on an average of both active and retiree participants. As such, Sunflower will incur additional costs for the premium payments of active participants due to the retirees’ participation in the plan. This obligation represents a liability to Sunflower. Sunflower retains the right, subject to existing agreements, to change or eliminate these benefits.

The Company recognizes the obligation as a liability on its combined balance sheets as there are no plan assets. Actuarial gains and losses are generally amortized subject to the corridor method, over the average remaining service life of the Company’s active employees.

The Company measured its benefit obligations as of December 31 of each year. Plan amendment changes include increases in retiree deductible and out of pocket limits. The following table sets forth the plan’s benefit obligations recognized in the combined balance sheets and related benefit cost at December 31, 2013 and 2012:

Postretirement benefitsDecember 31

2013 2012

Change in accumulated benefit obligation:Accumulated benefit obligation, beginning of year $ 7,129,794 5,449,711 Service cost 438,640 306,500 Interest cost 299,776 246,764 Actuarial loss 1,577,099 1,401,429 Plan amendment (1,999,250) — Net benefits paid (137,174) (274,610) Accumulated benefit obligation, end of year $ 7,308,885 7,129,794





Postretirement benefitsDecember 31

2013 2012

Funded status:Accumulated benefit obligation $ (7,308,885) (7,129,794) Plan assets — —

Net liability recognized $ (7,308,885) (7,129,794)

Net periodic benefit cost:Service cost $ 438,640 306,500 Interest cost 299,776 246,764 Amortization of transition obligation — — Amortization of prior service credit (1,126,187) (1,126,187) Recognized net actuarial loss 629,473 571,142

Total net periodic benefit cost $ 241,702 (1,781)

Amounts recognized in the balance sheets consist of:Current liability $ 181,000 185,000 Noncurrent liability 7,127,885 6,944,794 Accumulated other comprehensive loss (1,882,078) (1,807,515)

The net loss (income) and prior service cost (credit) for the postretirement plan that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $0.7 million and $(1.4) million, respectively. Weighted average assumptions used to determine benefit obligations and cost for 2013 and 2012 were as follows:

Postretirement benefits2013 2012

Discount rate – obligation 4.99% 4.01%Discount rate – cost 4.01 4.83Healthcare cost trend rate 7.0%–5.0% 8.0%–5.0%

For measurement purposes at December 31, 2013, a 7% annual rate of increase in the per capita cost of covered healthcare benefits was assumed for 2014. The rate was assumed to decrease gradually to 5.0% for 2022 and remain at that level thereafter. If the annual rate increased (decreased) by 1.0% point, the effect on the accumulated benefit obligation would be $1.3 million/$(1.0) million.





The following table summarizes benefits paid during 2013 and 2012:

2013 2012

Gross benefits paid $ 457,170 561,337 Retiree contributions (319,996) (286,727)

Net benefits paid $ 137,174 274,610

The benefits expected to be paid, net of retiree contributions, from the postretirement benefit plan are as follows:

Year ending December 31:2014 $ 181,000 2015 231,000 2016 284,000 2017 297,000 2018 304,000 Five years ending 2023 2,156,000

$ 3,453,000

The expected benefits are based on the same assumptions used to measure the Company’s benefit obligation at December 31 and include estimated future employee service.

(10) Fair Value Measurements

(a) Fair Value of Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2013 and 2012. The fair value of a financial instrument is the amount 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:

2013 2012Carrying Carryingamount Fair value amount Fair value

Financial assets:Investments in associated

organizations $ 5,959,439 5,959,439 5,687,450 5,687,450 Capital term certificates

in NRUCF 13,638,231 13,638,231 16,386,912 16,386,912

Financial liabilities:Debt $ 219,705,026 225,687,407 248,083,984 259,030,253





The carrying amounts shown in the table are included in the combined balance sheets.

The fair values of the financial instruments shown in the above table as of December 31, 2013 and 2012 represent management’s best estimates of the amounts that would be received to sell those assets or that would be paid to transfer those liabilities in an orderly transaction between market participants at that date. Those fair value measurements maximize the use of observable inputs. However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and cash equivalents, accounts receivable, investments and certificates, escrowed funds, and accounts payable approximate the fair value as December 31, 2013 and 2012. The method used to estimate the fair value of the Company’s long-term debt is based on quoted market prices for the same or similar issues or on the current rates offered to the Cooperative for the debt of the same maturity.

(b) Fair Value Hierarchy

The Company has adopted standards for fair value measurements of financial assets and liabilities that establish a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 inputs are unobservable inputs for the asset or liability.

The level in the fair value hierarchy within which a fair measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

At December 31, 2013, the Company had no assets or liabilities that are measured at fair value on a recurring basis.

(11) Commitments and Contingencies

Sunflower has entered into various multiyear contracts with third parties through December 31, 2016, to acquire and transport coal for Holcomb Station. Under these contracts, the Company estimates it will pay $22.2 million in 2014, $18.4 million in 2015, and $8.9 million in 2016.





Sunflower has commitments to provide power to its member cooperatives through 2038. Likewise, the member cooperatives are committed to purchase all of their power requirements from Sunflower through the same period. Sunflower is also party to a number of other electricity contracts that expire in various future years.

Sunflower has a commitment to purchase the output from Smoky Hills Wind Farm. Sunflower does not have fixed cost obligations and pays only for the energy produced. These purchases are set at a contracted price for 20 years from inception of the contract. Sunflower purchased wind power at a cost of $7.8 million and $7.7 million in 2013 and 2012, respectively.

In relation to the Holcomb site development, the Kansas Department of Health and Environment (KDHE) issued an air permit for the construction of an 895 MW coal-fired generating unit on the existing Holcomb Plant site in December 2010. In January 2011, an environmental group filed suit against KDHE, challenging the air permit. In October 2013, the Kansas Supreme Court issued its opinion in the Holcomb 2 permit appeal. The action taken by the Court remanded the permit to KDHE to address two points, specifically requiring KDHE to apply the regulations relating to one-hour national ambient air standards limits for nitrogen dioxide and sulfur dioxide and the inclusion of Hazardous Air Pollutants (HAP) limits.

KDHE issued a draft addendum to the 2010 permit that was responsive to the Supreme Court’s remand on January 16, 2014. Public notice of the addendum was given, and comments on the draft were received on the addendum until February 19, 2014. Sunflower expects KDHE will issue a final addendum to the permit that incorporates the changes advertised in the draft. The requirements of the addendum will not require additional controls or changes to those controls originally planned for the project. The permit changes will not materially impact the project viability.

In 2007, the Sierra Club challenged RUS’ approval of certain Sunflower transactions, including the 2002 corporate restructuring and the 2007 consent to an option to Tri-State for development of up to two coal-fired units at Sunflower’s Holcomb Station.

In January 2012, the judge issued his final ruling, enjoining RUS from issuing “any approvals or consents for agreements or arrangements directly related to the Holcomb Expansion Project” or taking “any other major federal actions in connection with the Holcomb Expansion Project” until it has prepared an Environmental Impact Statement (EIS), but expressly declining to enjoin Sunflower’s development activities or to invalidate past RUS approvals. Sunflower filed an appeal, and in May 2013 the DC Circuit Court of Appeals ruled that the decision of the District Court cannot be appealed because the Court’s remand of the case back to RUS makes the court decision “nonfinal”. Only final agency actions may be appealed.

The District Court refused to enjoin construction of the Holcomb expansion and refused to order Sunflower to get approval of the 2009 Settlement Agreement with the State. Instead, it ordered that RUS perform an Environmental Impact Statement before granting any additional approvals directly related to the project. In effect, all approvals already granted are not at issue and are not impacted by the decision; future approvals directly related to the expansion project require an EIS.





Should further RUS approvals be required to proceed, the estimated costs of completing an EIS could range from $2 million to $3 million and could take two years to complete.

Sunflower is a defendant in other litigation matters and a party to various claims arising from its normal activities. In management’s opinion, based on advice from legal counsel, these actions will not result in a material adverse effect on the financial position, results of operations, or liquidity of Sunflower.

(12) Subsequent Events

In December 2012, Wheatland Electric Cooperative, Inc. (Wheatland), a Sunflower Member, received a notice of termination effective December 31, 2013, of a wholesale power supply contract with one of its customers. Under an all-requirements contract, Sunflower provides Wheatland with all of its power supply, including the power supply for this specific customer. Effective January 1, 2014, Wheatland’s former customer has contracted with another power supplier. Sunflower will provide transmission service to the new power supplier for this customer. During 2013, Sunflower sales to Wheatland included approximately $21 million for service related to this former customer.

Documents

2013 SEPC annual report - … · Sun owe rElec tricP ow er C orpo ration is a no t-for-proﬁt w ho lesa le elec tricgen eration an d tran sm ission utility www. sun ower. ne t. 2