Midcontinent

Independent System
Operator, Inc.
Financial Statements as of and for the
Years Ended December 31, 2019 and 2018, and
Independent Auditors’ Report
INDEPENDENT AUDITORS’ REPORT

To the Board of Directors

Midcontinent Independent System Operator, Inc.
Carmel, Indiana

We have audited the accompanying financial statements of Midcontinent Independent

System Operator, Inc. (the “Company”), which comprise the balance sheet as of
December 31, 2019, and the related statement of operations and changes in net assets, and
statement of cash flows for the year then ended, and the related notes to the financial
statements.

Management’s Responsibility for the Financial Statements

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

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the
United States of America. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free from material
misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and
disclosures in the financial statements. The procedures selected depend on the auditor’s
judgment, including the assessment of the risks of material misstatement of the financial
statements, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the Company’s preparation and fair presentation of the
financial statements in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control. Accordingly, we express no such opinion. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of
significant accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements.

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

In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Midcontinent Independent System Operator, Inc. as of
December 31, 2019, and the results of its operations and its cash flows for the year then
ended in accordance with accounting principles generally accepted in the United States of
America.

Predecessor Auditors’ Opinion on 2018 Financial Statements

The financial statements of the Company as of and for the year ended December 31, 2018
were audited by other auditors whose report, dated March 12, 2019, expressed an
unmodified opinion on those statements.

March 13, 2020

-2-
 Midcontinent Independent System Operator, Inc.

Balance Sheets
(In Thousands)
December 31
Assets 2019 2018
Current assets:
Cash and cash equivalents (Note 5) $ 606,946 523,846
Restricted cash (Note 5) 703,722 717,318
Investments (Note 6) 35,139 142,771
Accounts receivable (Note 7) 25,674 28,731
Deferred regulatory assets (Note 4) 2,223 1,978
Prepayments 11,051 11,411
Total current assets 1,384,755 1,426,055

Fixed assets:
Fixed assets (Note 8) 209,901 194,560
Accumulated depreciation and amortization (143,341) (124,852)
66,560 69,708

Projects in development 5,968 13,321

Net fixed assets 72,528 83,029

Other assets:
Intangible assets 77,202 74,915
Prepayments and other assets 10,389 9,607
Deferred regulatory assets (Note 4) 1,205 1,284
Total assets $ 1,546,079 1,594,890

Liabilities

Current liabilities:
Accounts payable $ 4,632 8,286
Accrued liabilities (Note 9) 514,698 536,864
Accrued interest 5,364 5,857
Restricted deposits 589,009 575,622
Market participant liability 68,624 97,075
FERC assessment liability 25,262 25,374
Current portion of capitalized leases (Note 13) 1,577 1,446
Deferred regulatory liability (Note 4) 1,867 5,514
Deferred revenue 3,493 3,526
Total current liabilities 1,214,526 1,259,564

Long-term liabilities:
Accrued liabilities 17,503 16,093
Restricted deposits 20,250 20,400
Capitalized leases, net of current portion (Note 13) 276 1,854
Deferred revenue 19,282 22,775
Notes payable, net unamortized debt issuance costs (Note 15) 274,242 274,204
Total long-term liabilities 331,553 335,326
Total liabilities $ 1,546,079 1,594,890

See accompanying notes.

 Midcontinent Independent System Operator, Inc.

Statements of Operations and Changes in Net Assets

(In Thousands)

Year Ended December 31

2019 2018
Revenues:
Cost recovery adder $ 303,928 $ 307,236
FERC assessment 53,986 57,190
Other tariff services revenue 117 2,265
Engineering studies income 16,166 11,791
Grant revenue 231 850
Other 1,019 1,009
Total revenues 375,447 380,341

General and administrative expenses:

Salaries and benefits 173,810 166,989
Depreciation and amortization 40,209 44,606
Outside services 57,885 52,543
Occupancy/telecommunications 15,397 15,501
Insurance 2,051 2,162
FERC assessment 53,986 57,190
Computer maintenance 22,095 21,465
Other 16,283 16,537
Total general and administrative expenses 381,716 376,993

Other income (expense):

Interest income 28,180 19,660
Interest expense (26,308) (18,528)
Other expense (64) (700)
Total other income 1,808 432

Deferral of regulatory asset (liability), net 4,461 (3,780)

Change in net assets $ - $ -

See accompanying notes.

 Midcontinent Independent System Operator, Inc.

Statements of Cash Flows

(In Thousands)

Year Ended December 31

2019 2018
Operating activities
Change in net assets $ - $ -
Adjustments to reconcile change in net assets to net cash, cash equivalents
and restricted cash provided by operating activities:
Depreciation and amortization 40,209 44,606
Deferral of regulatory assets, net (4,461) 3,780
Deferred revenue (3,526) (3,999)
Decrease (increase) in operating assets:
Accounts receivable 3,057 (863)
Prepayments and other assets (423) (2,843)
(Decrease) Increase in operating liabilities:
Accounts payable (3,653) 2,627
Accrued liabilities (21,371) 119,803
Accrued interest (493) 2,301
FERC assessment liability (112) 4,304
Net cash, cash equivalents, and restricted cash provided by operating activities 9,227 169,716

Investing activities
Capital expenditures (31,380) (38,185)
Purchase of investments (75,024) (206,192)
Sales, redemptions and maturities of investments 183,304 198,958
Net cash, cash equivalents, and restricted cash provided by (used in) investing activities 76,900 (45,419)

Financing activities
Change in restricted deposits 13,237 35,762
Change in market participant liability (28,451) 47,243
Payments on notes and capital leases (1,409) (1,288)
Net cash, cash equivalents, and restricted cash (used in) provided by financing activities (16,623) 81,717

Net increase of cash, cash equivalents and restricted cash 69,504 206,014
Cash, cash equivalents, and restricted cash beginning of period 1,241,164 1,035,150
Cash, cash equivalents, and restricted cash end of period $ 1,310,668 $ 1,241,164

Supplemental cash flow information

Noncash capital expenditures 1,986 1,371
Cash paid during the period for interest $ 26,800 $ 16,227

See accompanying notes.

 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements

(Dollars In Thousands)

Years Ended December 31, 2019 and 2018

1. Organization and Significant Developments

On December 19, 2001, Midcontinent Independent System Operator, Inc. (MISO or the Company)
became the nation’s first Regional Transmission Organization approved by the Federal Energy
Regulatory Commission (the FERC or the Commission). As a Regional Transmission
Organization, MISO provides transmission service on behalf of its members that own transmission
assets. In addition, MISO is a North American Electric Reliability Corporation (NERC) certified
reliability coordinator. In that capacity, MISO monitors the flow of electricity over the
transmission systems of its members that own transmission assets.

MISO was incorporated as a Delaware non-stock, nonprofit corporation in March 1998. The
Company is governed by an independent Board of Directors. Membership in MISO is open to
owners of electric transmission facilities, as well as other participants in the electric energy market.
Fifty-two transmission owners with more than 71,800 miles of transmission lines, 193,000
megawatts of electric generation, and approximately $38 billion in transmission assets are
currently participating in MISO.

On December 15, 2001, the Company began providing reliability coordination services to the
transmission-owning members of MISO and their customers. On the same date, MISO also began
providing operations planning, generation interconnection, maintenance coordination, long-term
regional planning, market monitoring, and dispute resolution services. The Company commenced
substantially all operations on February 1, 2002, the date MISO began providing regional
transmission service under its FERC-accepted Open Access Transmission and Energy Markets
Tariff (the Tariff).

On April 1, 2005, MISO formally began operating a market-based, congestion management

system, which features the day-ahead energy market, real-time energy market, and financial
transmission rights market. The day-ahead and real-time energy markets are designed to reliably
make the most efficient use of all generation and transmission resources within the region based
on bids and offers submitted by market participants. The day-ahead and real-time energy markets
price transmission system congestion through the use of Locational Marginal Pricing algorithms.
The financial transmission rights market provides a means of hedging Locational Marginal
Pricing-based congestion costs.

On January 6, 2009, MISO began operating a market for ancillary services, which integrates the
procurement and use of regulation and contingency reserves with the existing real-time energy
market. MISO also became a NERC-certified Balancing Authority on January 6, 2009.
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in accordance with generally accepted
accounting principles in the United States of America (U.S. GAAP).

Regulation

MISO is subject to regulation by the FERC and accounts for the effects of regulation in its financial
statements in accordance with Accounting Standards Codification (ASC) 980, Regulated
Operations. This statement sets forth the application of generally accepted accounting principles
for those companies whose rates are established by, or are subject to approval by, an independent
third-party regulator. Under ASC 980, regulated companies defer costs and credits on the balance
sheets as regulatory assets and liabilities when it is probable that those costs and credits will be
recognized in the rate-setting process in a period different from the period in which they would
have been reflected in income and expense by an unregulated company. These deferred regulatory
assets and liabilities are then reflected in the statements of operations and changes in net assets in
the period in which the same amounts are reflected in rates charged for service.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of ninety days or less from
the date of purchase to be cash equivalents. Cash and cash equivalents consist of checking
accounts, money market accounts, money market mutual funds, and certificates of deposit with a
maturity date of ninety days or less. The carrying values of cash and cash equivalents approximate
the fair market value. Certificates of deposit, commercial paper, corporate notes and corporate
bonds with a maturity date of more than ninety days from the date of purchase are classified
separately as investments on the balance sheet.
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

2. Summary of Significant Accounting Policies (continued)

Concentration of Credit Risk

Financial instruments that subject the Company to credit risk consist primarily of accounts
receivable and uninsured cash balances. The Company maintained cash balances in excess of
insured Federal Deposit Insurance Corporation limits at December 31, 2019 and 2018, and from
time to time through December 31, 2019. No allowance has been recorded for accounts receivable
at December 31, 2019 and 2018, as management considers all accounts receivable reported in these
financial statements to be probable of collection. Furthermore, MISO, per the Tariff, limits
distribution of funds owed to market participants to the amount received from market participants.
As such, MISO is not exposed to nonpayment for Tariff services.

Investments

Investment securities may consist of investments in U.S. Treasuries, various U.S. governmental
agency debt securities, corporate bonds, certificates of deposit, and other fixed income securities
that have initial maturities of greater than ninety days from date of purchase. Management
classifies the Company’s investments as available-for-sale. Such securities are carried at fair value
based upon prices for identical or similar items on the last day of the fiscal period, with any
unrealized gains or losses reported as a deferred regulatory asset or liability, and realized gains
and losses included in the statement of operations and changes in net assets. Dividend and interest
income is recognized as interest income when earned. Management uses the specific identification
method to determine the cost of securities sold.

Intangible Assets

Intangible assets primarily include capitalized software of $437,250 and $430,285 and its
corresponding amortization of $360,048 and $355,370, as of December 31, 2019 and 2018,
respectively. Amortization expense was $19,900 and $20,037 for the years ended December 31,
2019 and 2018, respectively. The estimated remaining amortization period for these assets is 2.5
years. Costs incurred prior to the determination of feasibility of developed software and following
the in-service date of developed software are expensed.

Fixed Assets

Fixed assets, consisting primarily of telecommunications equipment, computer equipment,

buildings, leasehold improvements, and furniture and fixtures, are recorded at cost and are
depreciated on a straight-line basis over the estimated useful lives of the assets. The major classes
and lives include the following: buildings and improvements, 20 years; computer hardware, 3 years
or 6 years; furniture and fixtures, 7 years; and telecommunications equipment, 7 years. Cost
consists of materials and supplies, labor, related taxes, and capitalized interest.
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

2. Summary of Significant Accounting Policies (continued)

There was $1,303 and $1,355 of interest capitalized in fixed assets for the years ended December
31, 2019 and 2018, respectively. The depreciation policy for leaseholds is the shorter of the life of
the asset or the remaining term of the lease. Maintenance and repair costs are charged to expense
when incurred. Effective January 31, 2015, the Company received approval from the FERC to
amortize the cost of land on straight-line basis over a five-year period.

Leases

MISO applies the provisions of ASC 840, Leases, to all transactions that qualify for lease
accounting.

Pension

MISO accounts for its defined benefit pension plan (the MISO floor offset plan) in accordance
with ASC 715, Retirement Benefits. This standard requires employers to fully recognize the
obligations associated with single-employer, defined benefit pension, retiree health care, and other
postretirement plans in their financial statements. Rate-regulated entities may recognize
regulatory assets or liabilities as a result of timing differences between the recognition of costs and
costs recovered through the rate-making process.

Fair Value Measurements

The Company uses a three-tier fair value hierarchy in accordance with ASC 820, Fair Value
Measurement, which prioritizes the inputs used in measuring fair value. Hierarchical levels, as
defined in FASB guidance and explained in the following paragraphs, are directly related to the
amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities.

Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets or liabilities
that the reporting entity can access at the measurement date. The Company’s investments
associated with its pension plan and Supplemental Executive Retirement Plan, along with its
investments in U.S. treasuries are categorized as Level 1.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset
or liability, either directly or indirectly. The Company holds investments that consist of certificates
of deposit, corporate bonds and other fixed income securities and are categorized as Level 2.

Level 3 – Unobservable inputs for the asset or liability, which include management’s own
assumption about the assumptions market participants would use in pricing the asset or liability,
including assumptions about risk. The Company did not hold any investments in Level 3 securities
as of December 31, 2019 and 2018, respectively.
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

2. Summary of Significant Accounting Policies (continued)

Fair values of investments are estimated using public market prices, quotes from investments and
other available information. The estimated fair value of investments is discussed in Note 6, while
notes payable is discussed in Note 15.

Revenue Recognition

Pursuant to the Tariff, MISO recognizes as revenue amounts both billed and unbilled for which
MISO has incurred costs as of the period-end. The Schedule 10 – ISO Cost Recovery Adder,
Schedule 16 – Financial Transmission Rights Administrative Service Cost Recovery Adder, and
Schedule 17 – Energy Market Support Administrative Service Cost Recovery Adder of the Tariff
provide for recovery of all costs, including capital and operating expenses, of MISO. MISO also
recognizes as revenue amounts billed to participants for initial membership, training, and annual
dues. Performance obligations are satisfied over time as Transmission and Administrative
Services are delivered, with billings generally occurring monthly and related payments due within
seven days.

MISO records revenue and an offsetting expense for the annual FERC Assessment Fee (the
Assessment Fee). The annual fee is assessed on the megawatt hours of transmission usage for each
transmission provider as reported on FERC Form 582.

The FERC generally invoices transmission providers in July of each year, and payment is due in
August. MISO bills the Assessment Fee monthly in advance based on an estimated rate per
megawatt hour applied to each individual transmission customer’s actual megawatt hours of
transmission usage for that month. MISO recognizes the revenue and an offsetting expense each
month as the Assessment Fee is billed. Assessment Fee revenue of $53,986 and $57,190 was
recorded in 2019 and 2018, respectively.

MISO performs engineering studies on behalf of its customers. MISO is reimbursed for its costs
of performing the studies and recognizes revenue as the costs are incurred, subject to a
recoverability assessment. The amounts of $16,166 and $11,791 were recognized as revenue from
engineering studies for the years ended December 31, 2019 and 2018, respectively.

MISO has been awarded a number of economic development grants by the state of Indiana, as well
as a United States Department of Energy (DOE) grant. Revenue is recognized on these grants
based on the terms of the agreement, which generally are based on a percentage of program costs
incurred. MISO recognized revenue associated with these programs of $231 and $850 in 2019
and 2018, respectively.
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

2. Summary of Significant Accounting Policies (continued)

The Company recorded deferred revenue associated with withdrawal obligations paid by
transmission owners that have withdrawn from MISO. Each transmission owner can receive
credits for service up to the amount of the original exit fee until the year expiring, noted in the
table below. Amounts are amortized ratably over the period from the year of withdrawal through
expiration. The table also notes the exit fees and remaining balances in the current and prior years.

Balance as of Balance as of
Year of Year Original December 31, December 31,
Company Withdrawal Expiring Exit Fee 2019 2018
American
Transmission
Systems, Inc. 2011 2026 38,116 16,305 18,846
Duke Energy 2011 2026 13,794 6,437 7,357
Total $ 51,910 $ 22,742 $ 26,203

The Company has an additional $33 and $98 recorded as current deferred revenue at December
31, 2019 and 2018, respectively. This balance consists primarily of grant revenue and amounts
billed in advance for annual member dues.

Subsequent Events

Management has evaluated events and transactions occurring since December 31, 2019. There are
no events or transactions that have occurred that require disclosure in these financial statements
after December 31, 2019 through March 13, 2020, the date the financial statements were available
to be issued.

Recently Adopted Accounting Guidance

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic
606). The ASU and all subsequently issued clarifying ASUs replaced most existing revenue
recognition guidance in U.S. GAAP. The ASU also required expanded disclosures relating to the
nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with
customers. The Company adopted the new standard effective January 1, 2019 using the modified
retrospective method.
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

2. Summary of Significant Accounting Policies (continued)

The Company has reviewed its revenue recognition policies to ensure compliance with the
requirements of the guidance and has determined adoption did not have a material impact on the
amount or timing of revenue recognized. The Company’s operating revenues are derived primarily
from recovery of administrative costs under the Tariff, with no defined contractual term. Under
the new guidance, revenue is to be recognized when performance obligations are satisfied. The
Company historically recognized operating revenue as services were provided, recognizing
performance obligation amounts both billed and unbilled under the Company’s Tariff rate
schedules. This historical practice is consistent with the new revenue guidance.

The Company applied certain practical expedients, including utilizing the portfolio approach to
aggregate similar contracts for purposes of analysis, ignoring the effects of a significant financing
when the period between transfer of the good or service and payment is one year or less, and
recognizing revenues for certain contracts under the invoice practical expedient which allows
revenue recognition to be consistent with invoiced amounts (including unbilled) provided certain
criteria are met, including consideration of whether the invoiced amounts reasonably represent the
value provided to customers. For additional information, see “Revenue Recognition” above.

In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial
Assets and Financial Liabilities, which will significantly revise an entity’s accounting related to
the classification and measurement of investments in equity securities and the presentation of
certain fair value changes for financial liabilities measured at fair value. The standard is effective
for nonpublic entities for annual reporting periods beginning after December 15, 2018. The
Company has adopted the provisions of ASU 2016-01 on its financial statements, which resulted
in no material impact on The Company’s financial position, results of operations, or cash flows.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows – Classification of
Certain Cash Receipts and Cash Payments (Topic 230), which reduce diversity in practice in how
certain cash receipts and cash payments are presented and classified in the statement of cash flows.
This standard is effective for fiscal years beginning after December 15, 2018. The Company has
adopted the provisions of ASU 2016-15 and it did not have a material impact on its accounting
and disclosures.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows – Restricted
Cash (Topic 230), which requires that a statement of cash flows explain the change during the
period in the total of cash, cash equivalents, and amounts generally described as restricted cash or
restricted cash equivalents. Therefore, amounts generally described as restricted cash and
restricted cash equivalents should be included with cash and cash equivalents when reconciling
the beginning-of-period and end-of-period total amounts shown on the statement of cash flows.
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

2. Summary of Significant Accounting Policies (continued)

The Company implemented the standard in fiscal 2019 and retrospectively applied the standard in
the comparative periods. Adoption of ASU 2016-18 did not have a material impact on the
Company’s financial position, results of operations or disclosures. However, for the year ended
December 31, 2018, cash provided by financing activities increased by $90,000, and cash provided
by operations and investing activities was unchanged. As a result of including restricted cash with
cash and cash equivalents when reconciling the beginning of fiscal year and end of fiscal period
total amounts presented in the accompanying Statement of Cash Flows, the totals increased by
$627,000 and $717,000 as of December 31, 2017 and 2018 respectively.

New Accounting Guidance

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which replaces the existing
lease accounting guidance in ASC 840, “Leases.” The new standard aims to increase transparency
and comparability among organizations by requiring lessees to recognize right-of-use assets and
lease liabilities on their balance sheets. Unlike current accounting guidance, which requires only
capital leases to be recognized on the balance sheet, the new accounting guidance will result in
nearly all leases being recognized on the balance sheet. In addition, the new standard will require
disclosures to help investors and other financial statement users better understand the amount,
timing, and uncertainty of cash flows arising from leases.

The dual model for income statement classification is maintained under the new standard and as a
result is expected to limit the impact of the changes on the income statement and statement of cash
flows.

This standard is now effective for nonpublic entities for annual reporting periods beginning after
December 15, 2020, and interim periods beginning after December 15, 2021. Early adoption is
permitted. ASU 2016-02 required entities to adopt the new leases standard using a modified
retrospective method and initially apply the related guidance at the beginning of the earliest period
presented in the financial statements. During July 2018, the FASB issued ASU 2018-11, which
allows for an additional and optional transition method under which an entity would record a
cumulative-effect adjustment at the beginning of the period of adoption. The Company is currently
evaluating and assessing the impact the standard will have on the Company and its financial
statements, and anticipates recognition of additional assets and corresponding liabilities related to
leases on the balance sheet.

In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial
Instruments (Topic 326), which amends the Board’s guidance on the impairment of financial
instruments.
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

2. Summary of Significant Accounting Policies (continued)

Subsequently, the FASB has issued additional Account Standard Updates (“ASU”) which further
clarify this guidance. The ASU adds to GAAP an impairment model that is based on expected
losses rather than incurred losses, which is known as the current expected credit loss (“CECL”)
model. The CECL model applies to most debt instruments (other than those measured at fair
value), trade and other receivables, financial guarantee contracts, and loan commitments. For
public business entities that are SEC filers, ASU 2016-13 is effective for fiscal years beginning
after December 15, 2019, including interim periods within those fiscal years. For all other entities,
ASU 2016-13 is effective for fiscal years beginning after December 31, 2022. The Company is
evaluating the effect of adopting this new accounting guidance, but does not expect adoption will
have a material impact on the Company’s financial position or results of operations.

3. Members’ Preservation of Withdrawal Notice

Some members provide a notice of withdrawal to MISO in accordance with the terms of the MISO
Transmission Owners Agreement. Such notices allow these companies to preserve their options
with respect to withdrawal of their facilities from MISO. Should these companies withdraw, they
would then be responsible to pay their proportionate share of certain outstanding financial
obligations of MISO and for certain other obligations as required by the terms of the MISO
Transmission Owners Agreement and the Tariff. Below is a listing of members that provided a
notice of withdrawal.

Member Date Status of Withdrawal Load %

Southern Illinois Power December 19, Preserving withdrawal option Less than
Cooperative 2019 1%
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

4. Regulatory Assets and Liabilities

The following regulatory assets and liabilities were included in the deferred regulatory assets and
liabilities lines on the balance sheets:

Current South Region

Transmission: Schedule 10 Schedule 10 Total
December 31, 2017 $ 1,110 $ 3,837 $ 4,947
Amortization (3,837) (3,837)
Current Year Deferral 330 330
December 31, 2018 $ 1,440 $ - $ 1,440
Amortization -
Current Year Deferral (3,197) (3,197)
December 31, 2019 $ (1,757) $ - $ (1,757)

Current Current
Market Costs Market Costs South Region
Markets/Other: Sch. 16 Sch. 17 Other Sch. 16 & 17 Total
December 31, 2017 $ (185) $ (1,237) $ 1,654 $ 1,852 $ 2,084
Amortization (1,852) (1,852)
Current Year Deferral 181 (4,273) 168 (3,924)
December 31, 2018 $ (4) $ (5,510) $ 1,822 $ - $ (3,692)
Amortization -
Current Year Deferral 117 7,620 (727) 7,010
December 31, 2019 $ 113 $ 2,110 $ 1,095 $ - $ 3,318

2019 Regulatory Current Liability Current Non-Current Total

Assets/Liabilities Total: Asset Asset
Transmission $ (1,757) $ (1,757)
Markets 2,223 2,223
Other (110) 1,205 1,095
Total $ (1,867) $ 2,223 $ 1,205 $ 1,561

2018 Regulatory Current Liability Current Non-Current Total

Assets/Liabilities Total: Asset Asset
Transmission $ - $ 1,440 $ - $ 1,440
Markets (5,514) - - (5,514)
Other - 538 1,284 1,822
Total $ (5,514) $ 1,978 $ 1,284 $ (2,252)
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

4. Regulatory Assets and Liabilities (continued)

The Current Schedule 10, 16 and 17 rates are based on forecasted billing units and expenditures.
Differences between revenue collected and actual costs for the month are included in subsequent
months’ rate calculations. These costs are classified as deferred regulatory assets and will be
recovered in a subsequent period.

The operating costs associated with integrating the South Region, including Entergy Corporation
and additional entities located within the Entergy and MISO footprint, are being deferred in order
to align the recovery of costs associated with the integration effort with those that benefit from the
integration of the South Region. The deferred cost of the integration was $28,440, consisting of
internal and external operational staff, extended regulatory proceedings travel, and customer
outreach. MISO fully recovered the deferred integration costs under appropriate Schedules 10,
16, and 17 through the period ended December 31, 2018.

5. Cash, Cash Equivalents and Restricted Cash

The Company considers all highly liquid investment instruments that mature within ninety days
or less to be cash equivalents. Cash, cash equivalents and restricted cash had the following
balances, which approximate fair value, as of December 31:

2019 2018

Cash and cash equivalents $ 606,946 $ 523,846

Restricted cash:
Market funds 2,399 73,619
Market participant customer payments 66,224 23,456
Bond Interest Reserve 2,049 -
Collateral deposits 611,923 599,179
Collection on the FERC Assessment Fee 21,127 21,064
Total restricted cash 703,722 717,318

Total $ 1,310,668 $ 1,241,164

Restricted cash for market funds consists of activity for two funds: the Day-Ahead Excess
Congestion Fund and the Financial Transmission Rights Auction Residual Fund. The Day-Ahead
Excess Congestion Fund consists of excess cash received after the funding of Financial
Transmission Rights. The Financial Transmission Rights Auction Residual Fund represents
excess payments received for Financial Transmission Rights sold in the monthly and annual
auctions. Both funds are accumulated during the calendar month and distributed to market
participants per formulas in the Tariff after the end of each calendar month.
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

5. Cash, Cash Equivalents and Restricted Cash (continued)

As of December 31, 2019 and 2018, the Company had collected $66,224 and $23,456,
respectively, in market participant payments due to other market participants and/or MISO
transmission owners. These funds are scheduled to be paid in a subsequent period.

The cash collateral deposits represent funds from customers that provide cash collateral as a form
of financial assurance to secure the customers’ performance under the terms and conditions of the
Tariff related to the purchase of transmission service, market services, ancillary services, and
related products or services.

Interest earned on the deposits is paid to the customer quarterly on January 31, April 30, July 31,
and October 31 of each year. At December 31, 2019 and 2018, $611,923 and $599,179,
respectively, were held in security for customer deposits, which include interest payable of $2,663
and $3,156, respectively.

MISO bills to its market participants the Assessment Fee monthly and accumulates the cash in a
segregated account for use in paying the annual Assessment Fee in August of each year. As of
December 31, 2019 and 2018, the amount restricted for this use was $21,127 and $21,064,
respectively.

All restricted cash items are offset by liabilities on the balance sheets. The cash and cash
equivalent collateral deposits less interest are offset in restricted deposits. Collection on the
Assessment Fee is offset by the FERC assessment liability. The remainder of restricted cash and
cash equivalents is offset in the market participant liability.

6. Investments

Investment securities consists of the following:

December 31, 2019

Quoted Prices in Active Significant Other Significant Unobservable TOTALS
Markets for Identical Assets Observable Inputs (Level 3)
(Level 1) (Level 2)
Fair Value Cost Fair Value Cost Fair Value Cost Fair Value Cost
Certificates of deposit $ - $ - $ 10,397 $ 10,393 $ - $ - $ 10,397 $ 10,393
Commercial paper - - - - - - - -
Corporate bonds - - 2,439 2,441 - - 2,439 2,441
Treasury bonds 21,603 21,492 - - - - 21,603 21,492
Other fixed income - - 700 703 - - 700 703
Total $ 21,603 $ 21,492 $ 13,536 $ 13,537 $ - $ - $ 35,139 $ 35,029
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

6. Investments (continued)

December 31, 2018

Quoted Prices in Active Significant Other Significant Unobservable TOTALS
Markets for Identical Assets Observable Inputs (Level 3)
(Level 1) (Level 2)
Fair Value Cost Fair Value Cost Fair Value Cost Fair Value Cost
Certificates of deposit $ 20,497 $ 20,535 $ - $ - $ - $ - $ 20,497 $ 20,535
Commercial paper 49,523 49,523 - - - - 49,523 49,523
Corporate bonds 5,538 5,601 - - - - 5,538 5,601
Treasury bonds 53,589 54,015 - - - - 53,589 54,015
Other fixed income 13,624 13,635 - - - - 13,624 13,635
Total $ 142,771 $ 143,309 $ - $ - $ - $ - $ 142,771 $ 143,309

The Company has classified all of its investment securities, which are available-for-sale, including
those with maturities beyond one year, as current assets on the balance sheets based on the highly
liquid nature of the investment securities and because these investment securities are considered
available for use in current operations. For the years ended December 31, 2019 and 2018, the
Company had unrealized gain/(losses) of $110 and ($538), respectively. As of December 31, 2019
and 2018, the Company held $6,017 and $28,026, respectively, of available-for-sale investment
securities with contractual maturity dates more than one year.

7. Accounts Receivable

Unbilled revenues are recognized by applying tariffed rates to the usage incurred but not yet billed.
The accrual for unbilled revenues is reversed in the subsequent accounting period when customers
are billed. MISO’s receivables at December 31, 2019 and 2018, consist of the following:

2019 2018
Billed:
Schedules 10/16/17 $ 3,576 $ 2,755
Grant receivable 97 41
Other Tariff services receivable 27 7
Interest receivable 408 979
Other receivables 473 518
4,581 4,300

Unbilled:
Schedules 10/16/17 $ 16,932 $ 20,084
FERC Assessment Fee 4,161 4,347
21,093 24,431
$ 25,674 $ 28,731
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

8. Fixed Assets

Fixed assets at December 31, 2019 and 2018, consist of the following:

2019 2018

Land $ 4,383 $ 4,383

Buildings and improvements 105,563 98,488
Computer hardware 78,292 73,012
Furniture and fixtures 14,515 11,512
Telecommunication and network equipment 7,148 7,165
209,901 194,560
Less accumulated depreciation and amortization (143,341) (124,852)
$ 66,560 $ 69,708

Total depreciation and amortization expense related to fixed assets was $20,309 and $18,880 for
2019 and 2018, respectively. At December 31, 2019 and 2018, the balance of projects in
development was $5,968 and $13,321, respectively. These amounts included funds expended to
develop projects to improve internal business processes, improve IT infrastructure, and enhance
operations systems.

9. Current Accrued Liabilities

Current accrued liabilities at December 31, 2019 and 2018, consist of the following:

2019 2018

Engineering study deposits $ 483,469 $ 506,891

Employee benefits 21,229 22,036
Employee vacation 2,722 2,700
Property taxes 1,065 1,046
Other accrued liabilities 6,213 4,191
Total $ 514,698 $ 536,864

Market participants that request a generation interconnection or facility upgrade study must pay
the costs incurred to perform an impact assessment study. Furthermore, a deposit is required
before the study is undertaken. At December 31, 2019 and 2018, the engineering study deposits
balance was comprised of $483,469 and $506,891, respectively, for generation interconnection
studies and facility upgrade studies. These balances are held within various accounts as cash and
cash equivalents and short-term investments. As expenses are incurred, revenue is recognized and
deducted from the deposits, and liabilities, for services performed by MISO for these impact
assessment studies.
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

10. Medical Plan

MISO has a self-funded employee health care plan that offers health benefits to all eligible full-
time employees. MISO established a Voluntary Employee Beneficiary Association trust to which
the Company contributes funds in amounts that are expected to be required to provide the plan
with sufficient funds to pay benefits and administration expenses. The balance in the trust was
$526 and $1,002 as of December 31, 2019 and 2018, respectively.

11. Retirement Plans

The Company offers a defined contribution 401(k) retirement plan for all full-time employees as
of their date of hire. The Company currently matches 50% of the first 6% of the employee
contribution. For December 31, 2019 and 2018, the Company match was $3,603 and $3,322,
respectively. Employees are 100% vested in the employer’s contribution after two years of
employment.

The Company also has a defined contribution retirement plan covering all full-time employees.
The Company contributes an amount equal to 6% of an employee’s salary into the plan for the
employee’s retirement. For December 31, 2019 and 2018, the cost of this plan was $6,404 and
$6,072, respectively. Contributions are subject to a vesting schedule. Employees are 100% vested
after five years of employment.

The Company has a Supplemental Executive Retirement Plan for officers and a plan under Section
457(b) of the Internal Revenue Code. Benefits payable under these plans are based upon the
participant’s salary and age. The investment balance at December 31, 2019 and 2018, is $8,146
and $7,298, respectively, and is recorded in other assets. An offsetting liability is also recorded in
accrued liabilities. Expense relating to the Supplemental Executive Retirement Plan of $1,144 and
$1,249 was recorded for the years ended December 31, 2019 and 2018, respectively.

MISO assumed a defined benefit pension plan (the MISO Floor Offset Plan) established for Mid-
Continent Area Power Pool (MAPPCOR) employees who became employees of MISO under the
terms and conditions of an asset purchase agreement completed in November 2001. Effective
April 15, 2006, the MISO Floor Offset Plan was frozen. The pension plan as of December 31,
2019 and 2018 had an unfunded status of $586 and $693, respectively, which consisted of a
projected benefit obligation of $3,434 and $3,576, respectively, offset by plan assets with a fair
value of $2,847 and $2,883, respectively. The unfunded status matches that of the accrued benefit
cost recognized as of December 31, 2019 and 2018. Additionally, the accumulated benefit
obligation is equal to the projected benefit obligation as a result of the plan freeze in 2006.
Furthermore, the components of net periodic (income)/cost included in the statements of
operations for the years ended December 31, 2019 and 2018 were $1 and $(54), respectively.
MISO plans to contribute $250 to the plan during the calendar year 2019.
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

12. Income Taxes

The Company has received approval for its not-for-profit status under Section 501(a) of the
Internal Revenue Code and is tax-exempt as an organization described in Internal Revenue Code
Section 501(c)(4). MISO has incurred no unrelated business tax.

13. Leases

Capital Leases

The Company has a lease agreement for a facility for which the capitalized costs are $15,777 and
are included in fixed assets. Accumulated amortization on all leased assets is $14,791 and $14,002
at December 31, 2019 and 2018, respectively. Amortization from capital leases is included in
depreciation and amortization expense in the statements of operations and changes in net assets.

The following is a schedule of minimum lease payments for each of the next five years and
thereafter:

2020 $ 1,677
2021 278
2022 -
2023 -
2024 -
Thereafter -
Total minimum lease payments 1,955
Less amount representing interest (102)
Present value of net minimum capital lease payments 1,853
Less current portion (1,577)
Long-term portion $ 276

Operating Leases

The Company leases office space and equipment under non-cancelable operating leases. Total
expense incurred under all operating leases was $3,326 and $3,496 for the years ended December
31, 2019 and 2018, respectively.
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

13. Leases (continued)

Future minimum lease payments under non-cancelable operating leases are as follows:

2020 $ 5,046
2021 4,970
2022 4,978
2023 3,486
2024 3,224
Thereafter 8,542
Total $ 30,246

14. Bank Line of Credit

The Company has a credit agreement with PNC Bank and JPMorgan Chase Bank, N.A. The credit
agreement is set to expire on June 13, 2021. The maximum amount available under the line was
$50,000 at December 31, 2019. There was no outstanding balance at December 31, 2019 or 2018.
Borrowings are payable on demand. Advances bear interest at either the floating rate or Eurodollar
rate. The line of credit contains certain restrictive financial and other covenants, including
limitations on indebtedness, participation in mergers, sale of assets, investments, acquisitions,
liens, and prepayment of indebtedness.
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

15. Long-Term Notes

Long-term debt consisted of the following:

December 31
2019 2018
Unamortized Unamortized
Debt Issuance Debt Issuance
Principal Costs Principal Costs

2033 notes payable, bear interest

semiannually at 3.96%, with
defined principal payments,
maturing on March 26, 2033 $ 100,000 $ 273 $ 100,000 $ 293

2047 notes payable, bear interest

semiannually at 3.91%, with
defined principal payments,
maturing on October 5, 2047 175,000 485 175,000 503
275,000 758 275,000 796
Less current portion - - - -

Total long-term debt $ 275,000 $ 758 $ 275,000 $ 796

Maturities of long-term debt are as follows:

Year ended December 31

2020 $ -
2021 -
2022 -
2023 -
2024 -
Thereafter 275,000
$ 275,000
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

15. Long-Term Notes (continued)

On March 26, 2013, the Company issued notes with a face value of $100,000 to a group of
institutional lenders. The notes are unsecured senior obligations of the Company that mature on
March 26, 2033, with mandatory principal payments of $20,000 payable beginning on March 26,
2029, and on each March 26 thereafter, up to and including March 26, 2033, and bear interest at
3.96% per annum, payable semiannually on March 26 and September 26 of each year,
commencing September 26, 2013. The notes have no mandatory sinking fund requirement but are
redeemable, in whole or in part, at the option of the Company. The notes contain certain restrictive
covenants, including limitations on payments, liens, leases, distributions, purchases, and certain
investments. The Company incurred note offering fees aggregating $412.

On October 5, 2017, the Company issued notes with a face value of $175,000 to a group of
institutional lenders. The notes are unsecured senior obligations of the Company that mature on
October 5, 2047, with mandatory principal payments of $17,500 payable beginning on October 5,
2038, and on each October 5 thereafter, up to and including October 5, 2047, and bear interest at
3.91% per annum, payable semiannually on April 5 and October 5 of each year, commencing April
5, 2018. The notes have no mandatory sinking fund requirement but are redeemable, in whole or
in part, at the option of the Company. The notes contain certain restrictive covenants, including
limitations on payments, liens, leases, distributions, purchases, and certain investments. The
Company incurred note offering fees aggregating $525.

Note offering fees are deferred and amortized as a component of interest expense over the term of
the notes. The net proceeds were utilized in part to fund the debt service pre prepayment of
$62,520 on the 2020 notes payable in 2017, with the remaining funds being used to fund the
deferral of costs otherwise recoverable and complete other tasks associated with the normal
business of MISO.

Management has estimated the fair value of each of the notes payable based on the trading prices
of similarly rated securities at December 31, 2019 and 2018. The fair values for each note payable
are presented in the following table:

December 31, 2019 December 31, 2018

Carrying Carrying
Value Fair Value Value Fair Value

2047 notes $175,000 $207,937 $175,000 $210,946

2033 notes 100,000 110,079 100,000 111,865
Total $ 275,000 $ 318,016 $ 275,000 $ 322,811
 Midcontinent Independent System Operator, Inc.

Notes to Financial Statements (continued)

(Dollars In Thousands)

16. Commitments and Contingencies

There are various claims against the Company incident to its operations. It is the opinion of
management that, while unable to predict the outcome of these matters, the ultimate resolution of
these matters will not have a material adverse effect on the Company’s financial position or results
of operations.

The Company has self-reported noncompliance with the North American Electric Reliability
Corporation Standards in 2019. In management’s opinion, these self-reports will not result in a
material impact to the financial statements.