Fitch Ratings said Feb. 11 that it has affirmed the ratings on various Basin Electric Power Cooperative bonds, and that the Rating Outlook is “Stable.”
Basin’s long-term debt is secured under its indenture, which includes a mortgage lien on substantially all of the cooperative’s tangible and certain intangible assets. The assets of subsidiaries Dakota Gasification Co. (DGC) and Dakota Coal Co. (DCC) are not pledged under the mortgage indenture.
“Basin is one of the largest generation and transmission (G&T) cooperatives in the nation,” Fitch noted. “It serves approximately 2.9 million consumers across a nine-state region in the Midwest and Western U.S. Farming and agriculture are cornerstones of the regional economy, but explosive growth in oil and natural gas development throughout the Williston Basin (Bakken) has become increasingly important to several of the members’ service areas.
“Basin’s consolidated financial results incorporate the performance of its significant non-electric subsidiaries, DGC and DCC. Financial forecasts assume predictable operating results for the core electric business, with limited profitability and no dividend payments from the more volatile non-utility businesses. While this is viewed favorably, non-electric results are hard to predict, and could add volatility to Basin’s consolidated numbers and ratios.
“A major capital expenditure program has been going on to diversify Basin’s power generation mix away from coal and to support members’ high load growth. Major generation projects are now complete, with two large transmission projects still underway. The recent decline in oil prices is expected to slow the rate of member energy sales, which should push out future power projects and further lessen near-term capital needs.”
Reliance on shale oil development and DGC commodity-based businesses is likely to add greater volatility to year-over-year financial performance, and thus to Basin’s consolidated results, Fitch wrote. DGC runs a plant in North Dakota that processes lignite into a syngas, which is sold on the market along with other gasification process byproducts.
Basin operates a substantial power supply system with an increasingly diversified generation portfolio, reflecting the addition of new renewable and natural gas generation, to supplement its ownership interests in three coal-fired baseload stations. With recent plant additions, planned generation and transmission projects, wind contracts, and plans to become a member of the Southwest Power Pool (SPP) in October 2015, members’ energy requirements look to be well supported, Fitch wrote.
Coal still a dominant part of the cooperative’s power mix
At year-end 2014, Basin’s estimated maximum winter capability (MW) totaled approximately 5,478 MW, with fuel diversification consisting of coal (58.6%), natural gas (17.1%), wind (13%), hydro (5.8%), oil (3.3%), nuclear (1.4%) and other (0.8%). Total capability remains well in excess of peak demand (3,558 MW).
In addition to the above-mentioned assets, Basin owns and operates several direct and indirect subsidiaries, two of which are quite meaningful to its consolidated operations, DGC and DCC. DGC is a wholly-owned, for-profit subsidiary that owns and operates the Great Plains Synfuels Plant. DCC’s principal function is to consolidate the activities related to supplying lignite coal to the synfuels plant and coal-fired stations.
“While management views the operations of DGC and DCC as ‘core’ elements of its power supply program, because of the inherently riskier nature of these commodity based businesses, Basin has worked aggressively to find more predictable business channels for these products and has decided not to include related forecasted revenues in its financial projections for the electric system,” Fitch said. “To further diversify its product mix, Basin is in the process of building a new urea project, which is expected to come online in early 2017 at an estimated capital cost of $402 million. Financing options for the project are currently being evaluated, and are expected to include a Basin guaranty.”
Basin’s electric capital expenditures for the period 2015-2024 are forecast at $2.8bn. This includes about $700m for two large transmission projects, potential new generation facilities and possible expenditures for regional haze complaince, along with general system improvements. DGC capital expenses are estimated at $661m for the next 10 years, with larger outlays expected in 2015 and 2016 related to the urea plant. A delay of certain expenditures is likely, given the fall in oil prices and resultant slower KWh sales growth, Fitch added.