As I stand on this stage a year into this job, I can’t tell you how fortunate I feel to be in the position I am in. I have told many of you and others how impressed I have been with Basin Electric throughout my career, and now that I work amongst the people who lead and operate this cooperative every day, I am even more aware of the immense responsibility it is. The employees of Basin Electric are a motivated, talented, well-trained, hard-working team, and I wanted to make sure to give my colleagues their kudos right away today.
Last year when we met, we spoke about a number of things but didn’t address a very important topic: SAFETY.
Safety must be a priority for our employees and it is our number one strategic objective, one that you can never be satisfied is complete. Overall, we are not where we want to be - we must demand better of ourselves. As a result, we are bringing focus back to our safety culture. With help from our new senior vice president and chief human resources officer Miles McGrew, and a newly hired director of safety, all our employees will be thinking, acting, and working in the safest way possible.
We will always strive to maintain a safe and compliant work environment that is amongst the best in our industries.
I expect and we promise to deliver positive progress on the SAFETY front next year at this time.
Today I would like to focus on three key topics.
First, building upon last year’s focus on how our cooperative is well - and I would actually argue - uniquely - positioned for success based on our key strengths - and how those strengths delivered value, reduced risk, and enhanced our financial position.
Second, I will weave into our story the criticality of maintaining our courage and commitment to our diversity of resources - our all-of-the-above strategy - that provides a tremendous volatility shock absorber for our membership, in contrast to what many are facing as winter approaches, particularly in Germany.
Finally, we’ll touch on how and why these key strengths have provided and must continue to provide opportunities for economic development and community resilience for our membership and rural America - across our service territory that feeds and fuels a nation.
The geographic diversity of our service territory, the operational scale of our generation fleet and transmission system, and the financial strength our cooperative and membership has built all work together to bring value to our membership.
Today the Basin Electric margin is $65 million over our budgeted margin. While $65 million is absolutely a lot of money, that represents a 2% variance when you look at our total revenue.
A majority of that over budgeted margin of $65 million resulted from the intense cooperation between our Marketing and Operations Teams. Efforts which have resulted in record levels of surplus sale.
The marketing teams’ insights and strategies created value by optimizing the members’ assets — generation, transmission, and DC ties. This was coupled with our All-of-the-Above generation fleet — which performed extremely well this year, particularly during periods of high market stress.
All this benefited our members, provided overall grid stability and allowed us to capitalize on high power prices in the Western markets. These high prices were driven by heat waves and drought conditions impacting the availability of hydro resources on which the Western markets depend. You will learn more about this collaboration during the How We Serve Panel this afternoon.
Turning to Dakota Gas, through September, Dakota Gas has outperformed its budget by $122 million and is on track for a record year of financial performance. This positive budget variance is due to two primary factors. First, the tailwind of high commodity prices. Second, Dakota Gas has had strong operational performance throughout 2022 —operating near record capacity levels. We’ll hear more about that as well later in the How We Serve panel.
Our financial strength has been bolstered this year by our operational excellence, disciplined risk management practices, and surging commodity prices. These factors were only amplified by a series of record-setting demand levels from our membership. Basin Electric continues to forecast stable rates for the next decade, and as our board chair Wayne Peltier just announced, we have returned more than $263 million to our members since last year’s Annual Meeting. Our board is very pleased we have been able to do this during a time when all of our key inputs — commodities, capital, and people — face inflationary cost pressures not seen for almost 40 years. The volatility and risks we face in the industries we operate is only heightened. Despite these pressures, we have maintained our “A” credit ratings.
It is incumbent upon us as stewards of our members’ capital to ensure that we do not squander the opportunity to create an even more stable and sustainable foundation for success. We are well-positioned to deliver on our membership’s top two goals - affordability and reliability.
Overall, when we look at our performance in 2022 versus our budget, we’ve had an exceptional year.
But I keep asking our team to consider -- what are we doing today that we can replicate, that we can sustain, that we can scale? Where can we focus our time and energy that will provide us the leverage to deliver incremental value and absorb more risk for our membership in future years?
We can be grateful this financial performance comes at a time when we are on the cusp of a capital expenditure program of more than $2 billion in our memberships’ generation and transmission system.
This year, the Board of Directors initiated these efforts across two key investments. First, by approving the addition of Pioneer Generation Station Phase 4 — 580 megawatts of natural gas-fueled generation to be built in western North Dakota. We are building this generation quickly because we need it quickly to meet our members’ demand projections. I am proud to say we have the team it takes to get this job done on time and on budget even during these extraordinary times.
We have also announced we are building more than a half-billion dollars of transmission projects in the next five years. This transmission strengthens the reliability of the grid and provides economic value to our membership through our transmission tariff.
Basin Electric and our membership are in the enviable position of sustained growth in most areas, and incredible growth in other areas.
I remain optimistic about Basin Electric and our future, but that optimism is tinged with reality. There are warning signs that exist today globally and here at home. Globally, especially Great Britain and Europe, appear to be on the precipice of a recession driven by inflationary pressures, and as I’ll get to in a minute, their own policy choices that have exacerbated the energy crises following Russia’s invasion of Ukraine.
The United States and our service territory are facing these same pressures, especially when coupled with the Federal Reserve’s determined efforts to abate inflation through ongoing interest rate increases. These rate hikes continue to put pressure on the economy.
We cannot ignore nor think that we as a Basin Electric membership are immune from those forces, plus ongoing commodity price volatility, labor shortages, and supply chain disruptions. The blessing is that our cooperative business model shields us from the extremes of these forces. In addition, the board and management remain focused on preparing for the next downturn in commodity prices, as we have done at Dakota Gas and the impacts it would have there.
We have strategically expanded the scope of Dakota Gas’ hedging program to capitalize on the current strong commodity pricing environment, but everyone in this room whose livelihood depends on commodity markets can understand that the ups and downs of these markets can be unpredictable.
2022’s financial performance has the ability to create a sustainable and scalable path for generation and transmission to drive reliable and affordable electricity for our membership. This can be done if deployed with a view to the future, while rewarding the past and current member at the end of the line.
This is an approach we have deployed successfully in the past and is in stark contrast to the results of Germany’s Energewiende, or Energy Transition.
Germany has been a leading industrial nation for decades much like the United States, but Germany’s rushed approach to an energy transition has had negative economic repercussions. And this year, energy and food security has become a part of the discourse as we see the impacts Russia’s invasion of Ukraine has had on both energy and food supply around the world.
I would like to spend the next few minutes discussing their Energy Transition as a warning sign for us all.
First let me introduce you to someone.
Torben Baumann is the production manager of HiPer Ceramics, a business founded in Germany by his parents-in-law. They are members of Iowa Lakes Electric Cooperative in Spirit Lake, Iowa. Torben started this second location for the business in Iowa rather than Germany due to rising energy costs. His business makes parts of advanced technical ceramics for industrial and medical uses.
He talks about the rising price of electricity his family encountered in Germany.
Moving to the Basin Electric service area, Torben found reliable, affordable electricity within our membership family, and also found a path out of the high risk situation he faced in Germany with a lack of diversity of resources and fuel choices.
Germany’s Energy Transition was officially adopted as a national policy in 2010. Its main goals are greenhouse gas reductions, increased renewable energy production, and the closure of coal and nuclear power.
Germany shut down their eight oldest nuclear units in 2011 when a tsunami destroyed the Fukushima, Japan, nuclear plant. Fear heavily influenced policy, with the result that Germany shut down eight-and-a-half gigawatts of electricity in one year.
In addition to shutting down their dispatchable generation, Germany has remained steadfast in its commitment to increase renewable energy and reduce emissions. In short, the country has un-diversified its resource portfolio.
Vladimir Putin is using strong arm tactics against Ukraine and others in Europe who depend on natural gas via Russian pipelines. It has become apparent that European energy strategy over the last decade has resembled a house of cards supported only by greater and greater dependence on Russian natural gas, the fragility of which has been revealed by current geopolitics.
As concerns ramped up over Putin’s threats, Germany actually chose to restart coal-fueled power plants they had previously shut down. Germany is also in discussions to keep several of its nuclear plants online into next year. Meanwhile, Germany and other European nations continue to issue warnings of looming energy shortages.
I don’t think any of us would ever want to have our member-consumers facing fear of a winter with not enough energy to stay warm.
It’s human nature to look for parallels, to seek out what we have in common with those around us. As we examine the arc of Germany’s energy transition, I have compared it to Basin Electric’s evolution.
I think we can pinpoint why we are in a manageable position so far. Let’s take a look at Basin Electric’s own energy transition over the past 20 years and compare our story to Germany’s.
Basin Electric’s generation portfolio, like Germany, was centered on coal due to its abundance, lack of price volatility, and being a local resource that provides jobs and benefits to the communities we serve.
We started entering into power purchase agreements for wind projects incrementally, at rates that were considered economical at the time. But here is where we did something different than Germany. We also invested in our coal generation with environmental controls to ensure the dispatchable generation could continue to operate and keep electricity reliable. We added the coal-based Dry Fork Station in Wyoming to our fleet.
We also made sure our non-dispatchable megawatts had back-up generation for when the wind did not blow. We started building natural-gas fueled combustion turbines across our service area, in places like Groton, South Dakota, and Culbertson, Montana. These turbines provided the necessary dispatchable generation to backstop intermittent non-dispatchable renewable resources.
As we have in the past, we need to ensure that we apply our key strengths to drive economic opportunity and resiliency in our membership and our communities.
I will highlight three distinct examples where this has been demonstrated in recent years and across our membership.
Let’s look at the growth in the Powder River Basin in Wyoming, the advent of the ethanol industry which served as a catalyst for satellite industry growth in rural America, and the Bakken oil region boom that continues to rumble to this day in western North Dakota and eastern Montana.
Taking a Basin Electric family-wide look, the investments these industries have been able to make across our service area totals in the billions. Let’s talk about the economic impacts of each of these in a little more detail.
Wyoming is home to one-third of all the coal reserves in the United States, and in 2018, 40% of the coal mined in the United States came from Wyoming. The state exports 12 times more energy than it consumes, making it the leading exporter of energy in the nation. According to the Wyoming Mining Association, in 2021, the industry delivered $480 million to state and local government.
The ethanol industry built 109 ethanol plants across the states we serve — 33 of which are served by Basin Electric member co-ops. According to the Renewable Fuels Association, the ethanol industry has created nearly 218,000 jobs across six states of our service territory. Of all the ethanol produced in the United States, those states contribute 60% of U.S. production.
I’d like to introduce you to Todd Yackley, a member of Oahe Electric Cooperative and living near Onida, South Dakota. He has farmed his whole life; in fact his farm has been in his family for five generations. When ethanol came into the picture, his community and their local economy benefitted. He began serving on the board of Ringneck Ethanol in June.
Todd touched on the economic development and community support electric cooperatives have developed in his area.
The oil and gas industry in North Dakota had a $40.2 billion economic impact in 2019 alone, according to North Dakota State University. There are 59,100 jobs in oil and gas in the state. The industry paid $2.8 billion in taxes and fees to North Dakota.
We had a chance to talk with Blu Hulsey, the senior vice president of Health, Safety, and Environment, and Government Relations and Regulatory Affairs at Continental Resources. He told us what the cooperative family’s commitment to service and reliability meant for the Bakken oil boom.
Continental Resources was one of the pioneers of fracking and has been able to succeed due to the reliable and affordable electricity of our membership family, and also supportive energy policy.
All through this massive load growth, Basin Electric stuck to our all-of-the-above energy strategy.
As we have added wind, recovered energy generation, natural gas, and economic market purchases, we have diversified the sources you rely on for electricity generation. And in that diversification, we have made our electricity more reliable and affordable; in fact, we have built resiliency and strength into our system for the benefit of our membership. Our coal fleet are mine-to-mouth plants or located near coal mines with access to transportation options. Our gas fleet resides in or near the increasingly natural gas-heavy Bakken region. In addition, today we have the largest wind portfolio of any generation and transmission cooperative in the nation, and we have done so without sacrificing affordability or reliability.
The seven most dangerous words in business are “that’s the way we’ve always done things” — we’ve done things differently over the last dozen years and with the support of the membership have had the financial strength to withstand pressures that would prematurely shut down dispatchable facilities. We are blessed to have our generation resources in states that value an all-of-the-above resource strategy.
When you look at Germany’s transition from 2002 to 2021, you can see that while we have diversified, they have done the opposite.
Germany and Basin Electric look very similar in 2002.
At Basin Electric, we diversified to about one-third of our generation in non-dispatchable resources. Germany is the exact opposite, with about two-thirds of their generation in non-dispatchable resources. They also do not have the dispatchable resources to back up their renewables.
It’s worth noting that our carbon intensity has fallen on pace with Germany’s, as you can see in this chart. As we have grown, we have added less carbon-intensive resources; all the while, Germany has taken their carbon-zero resources like nuclear offline.
At this point, I could just let the results speak for themselves. While Germany has effectively destabilized its energy security with little progress made in terms of decarbonization, we have been able to demonstrate that emissions intensity reductions do not need to be at the expense of reliability and affordability.
And Germany’s affordability has suffered, while Basin Electric’s affordability and reliability have not. Today, the average wholesale rate for electricity in Germany jumped more than 300% from last year. Compare that to Basin Electric’s rate, which you all know has been quite stable.
There’s an old saying, “History does not repeat, but it rhymes.” Given Germany’s example, we know what history we do not want to repeat — as an electric system with uncertain reliability and sky-rocketing costs.
We will highlight our carbon intensity progress in our Sustainability Report, a report we have published for the first time on our website, and will print and send with our Annual Report this spring. The Sustainability Report tells the story of our commitment to the environment, our people, and cooperative governance.
Our all-of-the-above energy strategy helps ensure reliability and affordability and in some respects our efforts rhyme with Germany’s aspirations. As detailed in our Sustainability Report, the carbon intensity of our system has decreased by nearly 32% since 2005.
I believe our cooperative is an environmental success story. From voluntarily requiring coal mine reclamation to restore the land, to becoming a part of the largest carbon sequestration project in the world, to being a first mover in the renewable space, we have demonstrated a continuous commitment to environmental stewardship.
As we look into the future, we have major member growth expectations to meet — our construction cycle over the next five to ten years will rival what we built over the past 15 years. Many talk about the concept of energy independence, but few can lay claim to delivering on it the way Basin Electric and our membership has, and will continue to do.
As we embark on these endeavors our efforts are informed and inspired by our membership and former colleagues and current and former Board members. Basin Electric assets are the engines of commerce for a service territory that feeds and fuels a nation. We aspire to provide our members with reliable and affordable electricity produced in a safe and environmentally responsible manner.
This cooperative’s key strengths and our Courage, Commitment, and Cooperation — these are the reasons why I wanted to come to work for Basin Electric’s membership.
I ask you to continue looking out toward the horizon. After watching bad policy play out in other parts of the world, I’m even more confident we have the correct strategy; commitment to one another; and cooperation among cooperatives to avoid the same mistakes and continue to manage a strong Basin Electric for our membership and rural America.