Basin Electric's strategic focus on ratings

At the end of 2020, Basin Electric’s finance team geared up for three days of meetings with ratings agencies in New York City. This did not include a trip to the Big Apple, however. Because of the COVID-19 global pandemic, these important meetings were done via video conferencing.

The meetings with ratings agencies Fitch Ratings, Moody’s Investors Service, and S&P Global Ratings are conducted twice a year to keep the agencies up to date on the cooperative’s finances. Steve Johnson, Basin Electric chief financial officer and senior vice president, and Susan Sorensen, Basin Electric vice president and treasurer, talk about the process and its value.

Susan Sorensen
Susan Sorensen explains why ratings agency visits are strategically important.

Basin Electric is a cooperative. Why do we need to be rated by outside agencies?

Steve Johnson: Basin Electric has been evaluated by ratings agencies for four decades. I found that we have been rated by Moody’s since at least 1979, and Fitch Ratings began releasing the ratings they assessed for us in 2007. When I checked with our analyst at S&P Global, he said he is aware of Basin Electric ratings in the mid-1990s. So, it’s not a new thing.

Banks and lenders use the work done by ratings agencies in assessing the creditworthiness of the entities they’re considering lending money to. So, as long as we have needed cash outside of Rural Utilities Service (Basin Electric bought out of Rural Utilities Service in 2015 but had been additionally borrowing outside the service for years), it has been in our best interest to be evaluated by ratings agencies. The lenders do their own credit review but also rely on ratings agencies’ independent assessments.

How do you prepare for the meetings?

Susan Sorensen: We do a lot of note-taking during the presentations every year, and through that, we get a good feel for what the agencies are going to be asking and some of their key areas of concern. We’ve also worked closely with the agencies over the past few years to understand the calculation and drivers of the financial metrics they use to rate us. 

We tailor the presentation to accentuate our positive points up front. Moody’s publishes their rating methodology on their website as a very transparent look into how they conduct their ratings. While less transparent, we know the key points of interest from the other agencies, as well. Our presentation then becomes universal so it focuses on all the key points we know the agencies are interested in.

The Basin Electric board wants the cooperative to maintain a solid ‘A’ rating. What does that mean?

Johnson: The highest rating possible is ‘AAA+.’ It would take margins and metrics far greater than what we have to get there, and there are only two or three ‘AAA’ rated entities left in the entire United States. There is no need for Basin Electric to be ‘AAA’ because the metrics we would need to achieve that level of rating would put undue pressure on the membership. Better coverage ratios, a larger margin, higher equity-to-capitalization; all those would come into play to get an even higher rating than we have, and it’s not necessary.

We have what is considered a ‘split rate,’ in that both Fitch and S&P have given us an ‘A,’ and Moody’s has given us ‘A3,’ which works out to be the equivalent of an ‘A-.’ All three agencies currently have our outlook as ‘Stable.’ This means we have a solid ‘A’ rating today.

A high rating garners a lower interest rate. A one-notch change in our rating, from ‘A’ to ‘A-‘ is somewhere between 12.5 and 25 basis points (or .125 - .25% interest), based on the market and what is happening financially. If you are borrowing $100 million over 30 years, an adder of .125 - .25% becomes fairly significant.

Sorensen: It’s important to remember that the agencies are looking at us on a consolidated basis. So they’re not looking at Basin Electric stand-alone, they are looking at consolidated numbers, which include Dakota Gas and Dakota Coal.

Is there an aspect of the cooperative’s business that is challenging to explain?

Johnson: Dakota Gas. It is one piece that has negative credit implications given the losses for the last number of years and the projected losses going forward.

We end up doing a lot of education with new analysts. Analysts in the investor community get very familiar with investor-owned utilities and the metrics associated with that business model. A good example is the equity-to-capitalization ratio. They are used to investor-owned utilities having equity of 40-50%. Here comes this co-op with somewhere between 20-25% equity on a good day. So they’re saying, “What’s the difference? Why would I invest in a co-op?” It’s our job to explain the difference.

In a perfect world, we and other generation and transmission co-ops would each be in the markets once a year. That way investors would get familiar with the co-op business model. (The last time Basin Electric went into the market and borrowed on a long-term basis was 2017.)

What are the ESG factors we hear about?

Sorensen: ESG is the new buzzword in the investor world. It stands for Environmental, Social, and Governance. We’ve dedicated a section in our presentation to focus more on ESG. It’s important for us to highlight how the culture at Basin Electric has always been, and continues to be, focused on ESG factors. We do a lot as it relates to these factors and want to make sure the agencies and investors are aware of it.

How do we stack up as they look at those factors?

Johnson: One area of focus we are really seeing is a dependence on coal. If you look at the ESG factors, that is the one that is at the forefront. If you read Moody’s review on Basin Electric, they make reference to our large carbon footprint. We tell them that we are fortunate that our dependence on coal in our generation fleet has decreased significantly over the past few years. (Basin Electric’s coal generation capability in the winter months has dropped from 84.5% in 2000 to 44.1% by end of year 2019.)

Because we are growing, we have been able to add gas, wind, and solar to decrease our dependence, where most other utilities have had to do that by retiring coal units. That’s been great for us and the membership. Others won’t think that’s so great, but the thing is that other utilities have had to deal with stranded costs where we have not had to.

Sorensen: Cooperatives are a meaningful business model as far as social impact. Our rates are projected to be constant into the future, and our employees volunteer thousands of hours in their communities, for example. I think what analysts are looking at is whether you are good corporate citizens. It’s one thing to take good care of the environment because Basin Electric has always done that, but we also want to highlight that we are taking care of people too. We show what we do for our members and the communities we serve.

Johnson: Of the three factors, the environmental factor is undoubtedly the most prevalent. Socially, we have a good story to tell. Governance through the democratic cooperative business model is great, but currently everybody is going to gravitate to the environment.

You mentioned that Basin Electric has done a lot for the environment. What are you referring to?

Sorensen: Basin Electric has a strong history of commitment to the environment. When they say, “What are you doing today?,” not only can we show compliance but also investment in future technology. We can talk about research at the Wyoming Integrated Test Center and the CarbonSAFE project at our Dry Fork Station, and that does make a difference.

The Integrated Test Center is looking into carbon capture technology using the flue gas from a working coal-based power plant, something that hasn’t been done before. The CarbonSAFE project is analyzing the geology near Dry Fork Station to see if carbon dioxide could be feasibly stored there. (Learn more about the Wyoming Integrated Test Center and CarbonSAFE projects at:

We are leaders in wind generation, having built the two largest wind projects owned solely by a cooperative, and having added more than 1,700 megawatts of wind to our portfolio. And we started diving into large-scale solar generation last year, which further diversifies us.

Johnson: We can clearly show what we have done for years, the billions spent on environmental controls on existing facilities, and also what we have done at Dakota Gas. We just sequestered our 40 millionth metric ton of carbon dioxide this year, something that has been going on since 2000.

Why is it important that members of the board of directors attend the meetings with the ratings agencies?

Johnson: We have analysts who have gotten to know us, and they acknowledge the fact that our board is so engaged and knowledgeable about not only the cooperative but the utility sector in general. A lot of times, the analysts will just ask them about what they are hearing from the membership, what they are seeing from a relationship standpoint. What are the members saying about rates? So, they can hear it from us, but if they hear it from the guys who are really in the trenches at the end of the line, they are interested in getting that perspective.

Sorensen: After these analysts visit our board, we consistently see in their write-ups how engaged our board is, how in-tune they are, how interactive they are. Visits give the analysts an opportunity to see just how involved our board members are. They are in the board room for two or more days every month, they ask challenging and thought-provoking questions, and consistently demonstrate their contemplation and engagement outside of the boardroom.

Johnson: It’s good for our board members, especially when they are fairly new to the board. I think taking them with and exposing them to the process helps not only as they sit around the board table, but as they go back home to their co-ops so they can defend why we need a rating and why it matters to our members.