OREANDA-NEWS. Fitch Ratings has downgraded the following Basin Electric Power Cooperative (Basin) ratings to 'A' from 'A+':

--$250 million first mortgage notes, 2015 series A;

--$285 million first mortgage notes, 2015 series B;

--$40 million first mortgage notes, 2015 series BK;

--$925 million first mortgage notes, 2015 series C;

--$200 million first mortgage bonds 2006 series A;

--$150 million Campbell County, WY revenue bonds 2009 series A.

In addition, Fitch affirms the following ratings:

--$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 revised to Negative from Stable.

SECURITY

The first mortgage debt is 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

CONSOLIDATED BUSINESS RISK: The rating downgrade reflects Fitch's view that Basin's consolidated business risk, which is driven by exposure to commodity price-sensitive businesses including synthetic gas production (DGC) and coal mining (DCC), is no longer consistent with the 'A+' rating category. Weaker liquidity and financial results in 2015 and 2016 due to lower than projected energy sales and larger than anticipated losses at DGC evidence the pronounced business risk.

SUPPORTIVE UTILITY OPERATIONS: The strength of Basin's electric operations, which provide contracted power supply to member cooperatives serving approximately 2.9 million consumers across a nine-state region, continues to support consolidated credit quality. Fitch views the recent decision to implement a 12.2% intra-year wholesale rate increase to bolster performance and achieve targeted coverage metrics as supportive, and consistent with its expectations. Wholesale electric rates to members' remain reasonable at around $64 per megawatt-hour (MWh) despite the increase. No further rate actions are currently planned.

FORECAST RISKS REMAIN: The Negative Outlook reflects the material risks to Basin's forecast, including expectations for the recovery of natural gas and other commodity prices, as well as continued energy sales growth. Farming and agriculture are cornerstones of the regional economy, but the explosive growth in oil and natural gas development in the Williston Basin has declined along with market prices. Near-term projected losses at DGC remain sizable.

WEAKENING LIQUIDITY: The cooperative's liquidity position is adequate but has weakened in recent years, reflecting interim funding for capital needs and collateral posting requirements. Liquidity is supported by cash on hand and $1.3 billion of available credit facilities to support two commercial paper programs and fund working capital needs. However, cash requirements have reduced total liquidity to 148 days from 297 days in 2012. The 'F1' short-term rating reflects Basin's internal liquidity sources and its 'A' long-term rating.

CAPITAL PROGRAM MODERATING: A major capital expenditure program to diversify Basin's power generation mix away from coal and support members' high load growth is ending. With most major projects now complete and slower growth anticipated, near-term capital and financing needs should lessen considerably.

RATING SENSITIVITIES

ABILITY TO STABILIZE BUSINESS RISK: Resolution of Basin Electric Power Cooperative's negative Outlook is predicated on its ability to stabilize its operating performance, liquidity and consolidated business risk in the wake of weakened commodity markets. The deployment of stronger excess cash flow from its utility operations to reduce leverage and improve liquidity, together with improved earnings at Dakota Gasification Company (DGC), could stabilize the rating. Conversely, weaker consolidated earnings, cash flow and liquidity due to larger than anticipated losses at DGC or the failure to sustain strong electric operations would result in a downgrade.

FURTHER STRAINS ON LIQUIDITY: The failure of Basin to moderate its reliance on short-term borrowing and restore cash balances to levels consistent with its historical performance and rating category medians would likely result in a downgrade of both the short-term and long-term ratings.

CREDIT PROFILE

Basin is one of the largest G&T cooperatives in the U. S. in terms of total assets, megawatt-hours (MWh) generated and service area. It provides wholesale electric service, under long-term contracts, to about 137 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 four coal-fired base-load generating stations. With recent plant additions, planned generation and transmission projects, wind contracts membership in the Southwest Power Pool (SPP), members' energy requirements look to be well supported.

SIGNIFICANT LOSSES AT DGC; REDUCED ENERGY SALES

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.

Performance at DGC through 2015 and into 2016 has been particularly weak driven by declining commodity prices. DGC's realized prices for natural gas fell to $2.80/Mcf in 2015 and $1.90/Mcf through early 2016, and ammonia prices fell near the lowest level in a decade.

The underlying strength and financial flexibility of Basin's electric operations have historically balanced the performance of DGC and the other subsidiaries. In years of strong nonutility performance, utility rate increases and earnings were typically moderated, whereas during years of weak nonutility performance, utility earnings and cash flow were available to support consolidated credit quality.

However, lower than expected energy sales during the fourth quarter of 2015 and through the first quarter of 2016 as a result of a slowdown in oil and gas development and an extraordinarily warm winter throughout Basin's service area weakened utility performance. Whereas earnings from electric operations would have traditionally buffered the impact of poor performance at DGC, lower utility earnings resulted in consolidated net margins of just $8 million in 2015 and net losses of $56 million through May 2016.

DGC's projected performance remains weak and includes sizable losses in 2017 and 2018.

RATE INCREASE PROVIDES SUPPORT

The approval of a mid-year rate increase by the Basin board of directors is viewed positively by Fitch and is expected to bolster the cooperative's projected performance. The increase, which became effective Aug. 1, 2016, increased the wholesale rate to roughly $64 per MWh and is designed (together with the realization of previously deferred revenue) to achieve Basin's targeted 3% margin for the year ended 2016. The full-year effect of the increase is projected to produce stronger performance in 2017-2019, despite continued weak results at DGC.

Although the extraordinary rate increase will push member power costs higher, the resulting rate remains competitive with other regional power suppliers and low by national standards. Basin's latest forecast does not include any further rate increases.

FINANCIAL RESULTS STEADY

The wholesale rate increase is expected to stabilize performance through the remainder in 2016. Funds available for debt service (FADS) are projected to rise slightly from $365 million to $381 million in 2016. Lower debt service in 2016 should result in solid coverage of approximately 1.6x, but total debt to FADS will remain elevated at over 14.0x.

Basin's base case consolidated performance is projected to strengthen in 2017 and 2018 based on the full year effect of the rate increase, a modest recovery in natural gas and ammonia prices, and the commencement of urea production. Although DGC is still projecting net losses, strong net earnings at Basin's utility operations should boost consolidated net margins to $92-$131 million. FADS are projected to grow meaningfully to $555 million in 2018 generating debt service coverage above 1.7x and lowering total debt to FADS to 9.8x. Projected performance thereafter is strong but relies on a solid recovery of commodity prices.

Basin's forecasted performance faces material risks as a prolonged period of lower natural gas and ammonia prices, the delayed delivery of urea or unexpected weakness in Basin's electric operations would likely require additional rate support from the utility and could test the cooperative's willingness to support the operations of DGC. Even so, observations of even greater consolidated business risk or weaker than projected financial performance could trigger further downward rating action. Rating stability will be prefaced on Basin's ability to limit losses at DGC, reduce consolidated leverage and maintain sufficient liquidity to cushion cash flow volatility.

WEAKENING LIQUIDITY

Short-term and interim funding relies heavily on bank and CP borrowings, with longer-term financing using the public and private debt markets. Basin has maintained adequate and well diversified liquidity support through a series of long-term revolving credit agreements, cash and members' investments. However, increased reliance on short-term borrowings, particularly during a period of financial strain, is a concern that could weigh on Basin's rating.

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 commercial paper 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.