NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the following Basin Electric Power Cooperative's (Basin) ratings:
--$200 million first mortgage bonds 2006 series A at 'A+';
--$150 million Campbell County, WY revenue bonds 2009 series A at 'A+';
--$500 million taxable commercial paper (CP) notes at 'F1';
--$129.9 million Mercer County, ND 2009 tax-exempt series one at 'F1';
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 Company (DGC) and Dakota Coal Company (DCC) are not pledged under the mortgage indenture. The tax-exempt and taxable CP notes are general unsecured obligations of the cooperative.
KEY RATING DRIVERS
RAPID LOAD GROWTH: Basin is one of the largest generation and transmission (G&T) cooperatives in the nation. 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.
NON-ELECTRIC BUSINESS ADDS VOLATILITY: 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.
CAPITAL PROGRAM EXPECTED TO MODERATE: 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.
ELECTRIC RATES REASONABLE: Wholesale electric rates to members continue to be reasonable at around 5.4 cents per kilowatt-hour (KWh) in calendar 2014, generally in line with previous years. By 2020, wholesale rates are forecast to rise to around 6.1 cents per KWh.
FINANCIAL RATIOS STABILIZED: Basin's financial ratios weakened from historical levels, with capital expenditures rising dramatically and debt service coverage and cash reserves declining. However, a revised business plan, rate adjustments, and cost efficiency have resulted in improved and more stable financial ratios in recent years.
GOOD LIQUIDITY: The cooperative's financial liquidity is strong, with approximately $1 billion of available credit facilities to support two CP programs and fund working capital needs. Liquidity on hand approximated 230 days in calendar 2013. The 'F1' short-term rating reflects Basin's internal liquidity sources, a wide range of funding options, and its 'A+' long-term rating.
COMMODITY PRICE UNPREDICTABILITY: 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. Consistently poor performance from the non-electric business which is not offset by growing electric sales would introduce higher business risk that could put downward pressure on the rating.
Basin is one of the largest G&T cooperatives in terms of total assets, MWh generated and service area. It provides wholesale electric service, under long-term contracts, to 138 members, who directly or indirectly serve approximately 2.9 million people throughout a diverse service area that includes nine states in the Midwest and Western U.S.
The service areas are largely rural, with several seeing increased growth in energy-related industries. Economic indicators have improved in recent years, particularly in North Dakota, reflecting growth of higher-paying energy jobs. While growth will be reduced from earlier forecasts, due to a decline in oil prices and production, longer-term KWh sales should be supported by a healthy farm economy and additional energy development, which is now expected to increase by around 2% a year.
BROAD-BASED POWER SUPPLY
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 base-load generating 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.
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).
FOCUS ON IMPROVING DGC PROFITABILITY
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. 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.
FINANCIAL RESULTS STEADY
Basin implemented a plan to bolster its financial position in 2011 following a period of historically weaker financial performance. The plan included several key initiatives, including no subsidization of electric rates with DGC earnings and budgeting for electric net margins of at least 3%. As a result, Basin reported much healthier consolidated after-tax net margins in recent years.
Profitability for 2013 was satisfactory and preliminary 2014 results show consolidated net margins estimated at $49.7 million (after a $15 million revenue deferral), which should produce acceptable coverage protection. Basin's 10-year financial model shows net margins (based only on electric operations producing MFI coverage of about 1.3x; above its legal 1.1x requirement). With the recent significant change in oil prices, Basin is now in the process of updating its 10-year financial forecast and underlying assumptions.
CAPITAL EXPENDITURES PEAK
Basin's electric capital expenditures for the period 2015-2024 are forecast at $2.8 billion. This incorporates approximately $700 million for two large transmission projects, potential new generation facilities and possible expenditures for regional haze, along with general system improvements. DGC capital expenses are estimated at $661 million 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.
In addition to operating cash flow, funding for Basin's capital projects comes from a variety of sources. Short-term and interim funding relies heavily on bank and CP borrowings, with longer-term financing using the public and private debt markets and the Rural Utilities Service loan program.
Basin relies on two CP programs equal to $500 million and $130 million, respectively. Basin has in place a five-year CP liquidity facility totaling $500 million with 10 banks, extending through Nov. 14, 2019, which is used to support the taxable CP program. A $130 million tax-exempt credit facility with National Rural Utilities Cooperative Finance Corporation (CFC), which extends to March 18, 2018, supports the tax-exempt notes pursuant to a financing agreement with Mercer County, ND. Basin also has a $400 million liquidity facility that expires on Nov. 6, 2018.
Basin's funding strategy is to use its lower-cost CP programs, along with other short-term borrowings, to help fund project capital expenditures, with periodic longer-term loans then issued to refund these borrowings.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'U.S. Public Power Peer Study -- June 2014' (June 13, 2014);
--'U.S. Public Power Peer Study Addendum - June 2014' (June 13, 2014);
--'U.S. Public Power Rating Criteria' (March 18, 2014);
--'2014 Outlook: U.S. Public Power and Electric Cooperative Sector' (Dec. 12, 2013).
--'Rating U.S. Public Finance Short-Term Debt' (January 7, 2015).
Applicable Criteria and Related Research:
Rating U.S. Public Finance Short-Term Debt
2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)
U.S. Public Power Peer Study Addendum - June 2014