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Rating Action:

Moody's affirms Basin Electric Power Cooperative at A3 for senior secured debt; outlook stable

29 Oct 2021

Approximately $2.35 billion of debt securities affected

New York, October 29, 2021 -- Moody's Investors Service (Moody's) affirmed all of the long-term and short-term ratings of Basin Electric Power Cooperative (Basin), including its ratings for senior secured pollution control revenue bonds (PCRBs) supported by Basin, and first mortgage bonds at A3, issuer rating at Baa1, PCRBs supported by Basin in the commercial paper mode at Prime-2, and rating for the cooperative's commercial paper program at Prime-2. The outlook remains stable.

Affirmations:

..Issuer: Basin Electric Power Cooperative

.... Issuer Rating, Affirmed Baa1

....Senior Secured First Mortgage Bonds, Affirmed A3

....Underlying Senior Secured First Mortgage Bonds, Affirmed A3

....Senior Unsecured Commercial Paper, Affirmed P-2

..Issuer: Campbell (County of) WY

....Senior Secured Revenue Bonds, Affirmed A3

..Issuer: Mercer (County of) ND

....Senior Unsecured Commercial Paper, Affirmed P-2

Outlook Actions:

..Issuer: Basin Electric Power Cooperative

....Outlook, Remains Stable

RATINGS RATIONALE

"Today's rating actions reflect the strong performance by Basin's core electric generation and transmission (G&T) operations as it transitions in a credit neutral manner to regulation by the Federal Energy Regulatory Commission (FERC) for wholesale power rates and pursues an investment in the Nemadji Trail Energy Center (NTEC) in Wisconsin to add to its owned natural gas-fired generation capacity", said Vice President-Senior Analyst, Kevin Rose. "Basin also benefits from the strong member relationships it maintains under long-term wholesale power contracts (WPCs), a revenue deferral program and good liquidity, while also following strict cost controls and effectively managing its capital spending owing in part to cyclical demand growth in the Bakken region" Rose added.

These credit supportive factors and Basin's strong consolidated financial metrics help balance its credit risks, including the riskier nature of some of its very large, nonpower related subsidiary businesses, especially at Dakota Gasification Company (DGC). The sizable nonpower subsidiary indebtedness that is guaranteed by Basin on an unsecured basis is an incremental risk for the cooperative that weighs heavily on its credit profile and constrains its rating. Much of the nonutility subsidiary debt was incurred to finance DGC's construction of a urea and diesel exhaust fluid production plant at its Great Plains Synfuels Plant, which ultimately entailed an investment in excess of $700 million. The depressed global commodity market has hurt prices for virtually all of the commodities marketed by DGC, borne out by the six consecutive years of net losses the subsidiary experienced during 2015-2020. While the losses at DGC are persisting to date in 2021, the losses have been reduced owing to upgrade trends in certain commodity prices. Nevertheless, losses are likely to continue for several years despite the price improvements and strategic cost saving measures throughout the business.

Basin's consolidated financial metrics for 2018-2020 reflect the benefits from the significant intra-year rate increase implemented in August 2016, a conservative strategy for managing returns of patronage capital (akin to common dividends), strategic cost control measures, and delaying non-essential capital projects. Basin's FY 2020 funds from operations (FFO) to debt, FFO to interest and debt service coverage (DSC) ratios were generally in line with FY 2019 at 5.1%, 2.3x, and 1.6x respectively. While the FFO to debt and FFO to interest metrics were stronger in 2018, the difference is largely attributable to accounting effects for the asset impairment at DGC in 2018, including the recognition of $117.9 million of previously deferred revenue. During the next few years, Basin's financial strategies are likely to produce FFO to debt, FFO to interest and DSC ratios in the range of 6%-8%, 2.4x-2.7x and 1.6x-1.8x, respectively, consistent with or better than its target ranges.

With past debt financing for capital spending largely completed in 2017, Basin's consolidated equity to total capitalization ratio reflects some moderate improvement during the past three years and at December 31, 2020 stood at 23.5%, even with annual returns of patronage capital to members in each of the fiscal years. As Basin continues to benefit from margin and cash flow supported by the 2016 intra-year rate increase, we anticipate that it will continue to undertake initiatives to provide sustained support for its consolidated business activities and keep the equity to capitalization ratio above 20%.

Basin's original budget of slightly more than $890 million of combined utility and non-utility capital spending for 2022-26 will likely increase owing to the estimated $260 million investment it plans to make by acquiring and owning a 30% interest in the NTEC project, a proposed 600-megawatt combined cycle power plant, which will be located in Superior, Wis. Basin is purchasing the ownership stake from ALLETE, Inc. which will retain a 20% share of NTEC, while Dairyland Power Cooperative retains its 50% share of NTEC. The planned investments in the utility's core electric G&T business continue to represent more than half of the planned consolidated capital spending. Aside from the planned NTEC investment, much of the core utility capital spending in 2022-26 will be for existing base load system and transmission system upgrades and new transmission projects.

During 2022-26, Basin expects capital spending for its primary non-utility subsidiaries, DGC and DCC to comprise about 29% and 11%, respectively, of the consolidated capital spending plan. The amounts at DCC are levels consistent with normal maintenance and enhancements of existing DCC infrastructure. The aggregate amount at DGC represents a sizable increase from the prior forecast as spending in 2023-25 will be about $80 million annually assuming the reformer project currently under consideration moves forward. Adding a primary reformer at the synfuels plant would allow the facility to continue fertilizer production with or without the continuation of the coal gasification process. Even without the coal gasification operation, in addition to urea and anhydrous ammonia, certain other products at the facility could continue to be produced.

As Basin proceeds with its various strategies, it maintains an overall good liquidity profile to backstop its commercial paper program and provide for other short-term working capital requirements. At June 30, 2021 Basin had about $316.5 million of unrestricted cash, $230.0 million of restricted and designated cash relating to its revenue deferral program and about $776.4 million of unused capacity under its good quality external revolving bank credit agreements. Maintaining good liquidity is an integral part of Basin's credit profile in a commodity market downturn, particularly as its collateral posting requirements under interest rate hedging and other contractual arrangements at its core utility operations and DGC are more in play under rating trigger provisions when the cooperative's credit quality declines.

RATING OUTLOOK

Basin's stable rating outlook incorporates the pressure to maintain stronger consolidated credit metrics as it transitions to FERC regulation, asserts defenses in certain Class C member disputes and considers alternative strategies to address the riskier business profile stemming from the effects that its investments in DGC are having on consolidated financial results. The outlook also incorporates mitigating factors for some of these credit challenges, including Basin's size relative to its peers, good liquidity, and the likelihood for maintaining strong financial results at the core electric G&T operations in line with the performance achieved during the last five years.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

What Could Change the Rating -- Up

- Basin's ratings are not likely to be upgraded during the next few years owing to its volatility and capital requirements of substantial non-utility platform

- In the longer term, positive rating action could occur if Basin improves its consolidated business risk profile by reducing or eliminating exposures to DGC or increases its equity to total capitalization cushion to more than 25%, while demonstrating an ability to keep both its funds from operations (FFO) to interest and debt levels in excess of 2.0x and 8%, respectively, for a sustained period

What Could Change the Rating -- Down

- Basin's ratings could be downgraded if its future financing activities, wholesale power rate changes, strategic cost controls, revenue deferral program and capital rotation policy fail to counterbalance its incremental consolidated debt burden and riskier consolidated business profile

- Unexpected difficulties while transitioning to FERC stated rate setting and adding to owned generation capacity which leads to competitive challenges

- Weaker financial metrics, especially if on a consolidated basis FFO to interest and debt decline to less than 1.8x and 5%, respectively, or if equity to total capitalization decreases to less than 20% for an extended period of time

- Additional support of DGC by Basin's core electric G&T operations could also lead to negative ratings pressure at Basin

Basin Electric Power Cooperative is one of the largest electric generation and transmission cooperatives in the United States, which provides wholesale electric power sales to its 131 member rural electric systems who are its owners spread among nine states. Basin Electric Power Cooperative, which also has several non-utility subsidiaries, maintains its headquarters in Bismarck, North Dakota.

The principal methodology used in these ratings was US Electric Generation & Transmission Cooperatives published in August 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130742. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Kevin Rose
Vice President - Senior Analyst
Project Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

A.J. Sabatelle
Associate Managing Director
Project Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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