Even before 2015 ended, it was clear commodity prices in energy and agriculture were in a lengthy downward trend. Then, a combination of negative events hit the cooperative in rapid succession and extremely mild weather spread across the membership.
The combination is rare and unexpected. When electricity sales are budgeted conservatively with normalized weather and the entirety of the cooperative’s service area experiences well above normal temperatures in the winter months and cooler than normal temperatures along with abundant precipitation during the summer, the impact on the bottom line can be significant.
In response, the cooperative revised budgets, and initiated a task force to update the current state, develop a plan for moving forward and implement change. The team investigated every possible opportunity to cut costs and save money. They included expense reductions, a freeze on hiring new employees, delays in filling open positions, and the optimization of plant operations to name a few.
It was undoubtedly a lengthy and extremely involved process, but employees committed to the austerity measures put in place, and the board made a tough decision to implement an intra-year rate increase of 7 mills beginning Aug. 1, 2016, and into 2017.
With the changes, the cooperative is in a strong financial position moving forward.
A few other financial events took significant effort in 2016. First, the high-speed wind gusts in early July leveled the storage building for the Dakota Gasification Company Great Plains Synfuels Plant urea project. The insurance coverage for the urea project includes a deductible for property damage of $250,000 for each loss. Given the severity of the damage, the cooperative is collecting under that policy.
As the Synfuels Plant works through its challenges, it’s worth reiterating how intricately connected the business, facilities, and operations are with the whole of the cooperative. The gasification plant cannot be considered a facility or resource that stands on its own.
The annual benefit to Basin Electric of operating the Synfuels Plant is projected to provide an average yearly benefit to the membership of about $90 million during the 2017-2026 timeframe, which is the equivalent of about three and three-quarter mills. In addition, the operation of the Synfuels Plant contributes to the economy of the state and region.
Another large project Financial Services and others were involved with during the year was the material inventory process at the Laramie River Station. The objective was to consolidate materials from across multiple storage locations at Laramie River Station and improve the inventory process and increase efficiency prior to the warehouse demolition.
In the last 10 years of its 55-year history, Basin Electric has grown its total consolidated assets from $2.9 billion in 2006 to over $7.3 billion – an increase of over two and a half times.
Financing these investments takes a strong financial condition and associated credit worthiness. And, the foundation of the cooperative’s strength is the commitment shown by members through the extension of wholesale power contracts.
The strength of the cooperative today and well into the future foundationally stands on sticking together – uniting and supporting each other when challenges arise.
2016 financing activities
Electric rates – Beginning Jan. 1, 2016, the average Class A rate was 59.2 mills per kilowatt-hour before a depreciation credit, and 57.2 mills per kilowatt-hour net through July 2016. In June 2016, the board approved an intra-year rate increase of an average 7 mills per kilowatt-hour beginning August 2016 through the year. The 2016 average Class A member rate was 60.5 mills per kilowatt hour. In August 2016, Basin Electric’s board approved the Class A member rate package for 2017 to meet the member revenue requirement of $1.58 billion. Beginning Jan. 1, 2017, the average Class A rate will be 64.2 mills per kilowatt-hour.
Senior Secured Bond ratings – Fitch Ratings downgraded its A+ rating to an A with an outlook change from stable to negative. Though Standard & Poor’s affirmed its A rating of Basin Electric, the agency also changed its outlook for the cooperative from stable to negative. While Moody’s gave Basin Electric a stable outlook, they downgraded the cooperative two notches, from A-1 to A-3.
Short-term ratings – Basin Electric’s short-term ratings are F1 from Fitch Ratings, A-1 from Standard & Poor’s Rating Services and P-2 from Moody’s Investors Service. Basin Electric uses short-term commercial paper as a source of bridge financing until it can secure long-term financing.
Consolidated results – Basin Electric’s financial statements are consolidated with those of its subsidiaries. For the year ended Dec. 31, 2016, the consolidated net margin and earnings was $54.6 million. This is $46.5 million more than the 2015 consolidated net margin and earnings of $8.1 million.
Electric – Basin Electric’s total utility operating revenue for 2016 was $1.6 billion, an increase of $116.0 million from 2015. Revenue from member systems totaled $1.4 billion in 2016, an increase of $189.3 million from 2015. Revenue from non-member sales totaled $139 million, a decrease of $77.9 million from 2015. Total utility operating expenses plus interest and other charges before income taxes for 2016 were $1.5 billion, which is $24.6 million more than in 2015. Basin Electric’s utility margin before income taxes, combined with Basin Cooperative Services’ net operating results, yielded a combined margin of $140.8 million to be allocated to members.
Subsidiary earnings – Dakota Gas had a net loss of $94.1 million during 2016. Dakota Gas did not declare or pay any dividends to Basin Electric in 2016; however, since 2007, Dakota Gas has paid $198.5 million in dividends to Basin Electric.
Assets – The total assets of Basin Electric and its subsidiaries as of Dec. 31, 2016, were $7.3 billion, an increase of more than $229.6 million from a year earlier.
Cash position – The consolidated cash balance, including restricted cash, as of Dec. 31, 2016, was $237.6 million.
Member Investment Program – Basin Electric’s Member Investment Program ended the year with $180.8 million. The program offers members an additional investment source and a competitive rate of return while providing Basin Electric with an additional source of capital.
Debt – As of Dec. 31, 2016, Basin Electric had approximately $5.0 billion of debt outstanding including Member Investment Program obligations, at a weighted average interest rate of 4.05 percent.
Equity position – At year-end 2016, Basin Electric had total equity of $1.3 billion, an increase of $42.1 million from 2015. At the end of 2016, equity represented 24.1 percent of Basin Electric’s total capitalization on its balance sheet. Basin Electric has an equity-to-asset ratio of 18.3 percent.
Capital credit allocations and retirements – In March 2016, Basin Electric allocated $49.4 million to its patrons. Since 1966 Basin Electric allocated more than $871.6 million in capital credits to its members. Basin Electric retired $224.6 million over the history of the cooperative.
Return of cash to members – Since 2000, Basin Electric returned nearly $633.4 million to the membership through patronage capital retirements, bill credits, and power cost adjustments.