Fitch Rates Basin Electric Cooperative's, (ND) First Mortgage Notes, Ser 2015A 'A+'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned an 'A+' rating to a potential $1 billion of first mortgage notes, series 2015A to be offered by Basin Electric Power Cooperative, ND (Basin).

The series 2015A notes are expected to be privately placed next month. Basin intends to use the proceeds, together with monies previously deposited with the U.S. Treasury and funds from other sources to prepay Federal Financing Bank (FFB) debt, that is Rural Utilities Service (RUS) guaranteed, and pay prepayment penalties and premiums and offering expenses.

In addition, Fitch affirms the following 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 notes at 'F1';

--$129.9 million Mercer County, ND 2009 tax-exempt series one at 'F1'.

The Rating Outlook is Stable.

SECURITY

The first mortgage notes will be on parity with other Basin debt secured under its indenture, by 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 commercial paper (CP) notes are general unsecured obligations of the cooperative.

KEY RATING DRIVERS

MAJOR DEBT REFINANCING: Basin is in the process of refinancing approximately $1.4 billion of FFB debt to extend the maturity of a portion of its debt to better match the useful life of its assets as well as provide greater flexibility. The refinancing has the potential to smooth out annual debt service and cash flow. Basin's use of RUS borrowings will end after the refinancing. Fitch views the refinancing as being credit neutral.

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 rapid growth in oil and natural gas development throughout the Williston Basin (Bakken) has become increasingly meaningful to several of the members' service areas.

NON-ELECTRIC BUSINESS ADDS VOLATILITY: Basin's consolidated financial results incorporate the performance of its 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 ongoing 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 year 2014; generally in line with previous years. By 2020, wholesale rates are forecasted to rise to around 6.1 cents per KWh.

FINANCIAL RATIOS STABILIZE: Basin's financial ratios previously 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 commercial paper programs and fund working capital needs. Liquidity on hand approximated 178 days in calendar year 2014. The 'F1' short-term rating reflects Basin's internal liquidity sources, a wide range of funding options and its 'A+' long-term rating.

RATING SENSITIVITIES

COMMODITY PRICE UNPREDICTABILITY: Reliance on shale oil development and DGC commodity-based businesses is likely to add greater volatility, in year over year financial performance, 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.

CREDIT PROFILE

Basin is one of the largest G&T cooperatives in terms of total assets, megawatt-hours (MWh) generated and service area. It provides wholesale electric service, under long-term contracts, to about 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.

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.

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, due to 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 April 2017.

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, two being 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. With the recent significant change in oil prices, Basin is 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 forecasted 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 deferral of certain expenditures is likely, given the fall in oil prices and resultant slower KWh sales growth.

AMPLE LIQUIDITY

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. Basin relies on two CP programs amounting to $500 million (taxable) and $130 million (tax-exempt), respectively. Basin has in place a five-year CP liquidity facility totaling $500 million, with seven 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' (Jan. 7, 2015).

Applicable Criteria and Related Research:

U.S. Public Power Peer Study -- June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749789

U.S. Public Power Peer Study Addendum - June 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=750283

U.S. Public Power Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=864007

2014 Outlook: U.S. Public Power and Electric Cooperative Sector (Calm Under Pressure)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=725447

Rating U.S. Public Finance Short-Term Debt

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=846969

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985041

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Contacts

Fitch Ratings
Primary Analyst
Alan Spen
Senior Director
+1 212-908-0594
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1 212-908-0738
or
Committee Chairperson
Chris Hessenthaler
Managing Director
+1 212-908-0773
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Alan Spen
Senior Director
+1 212-908-0594
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Dennis Pidherny
Managing Director
+1 212-908-0738
or
Committee Chairperson
Chris Hessenthaler
Managing Director
+1 212-908-0773
or
Media Relations:
Elizabeth Fogerty, +1 212-908-0526
elizabeth.fogerty@fitchratings.com