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Dakota Gasification Company on Track to Exceed 2021 Budget, Exploring Potential Sale
Basin Electric is in stable financial condition. Dakota Gas has provided tremendous benefit to the membership in the past, while recent impacts of low commodity prices have put downward pressure on profitability. Recently, however, Dakota Gas is on track to exceed budget in 2021.
Dakota Gas and Where We Came From
Dakota Gasification Company, a wholly-owned subsidiary of Basin Electric Power Cooperative, was created in 1988 to operate the Synfuels Plant near Beulah, North Dakota. The relationship began long before that when in the late 1970s, plans were made to build an energy complex, which included the Antelope Valley Station, the Freedom Mine, and the Synfuels Plant. In 1988, the purchase for $85 million was made based on a unanimous vote by the membership to make an offer to the Department of Energy. Many would consider this purchase a defensive move to help maintain lower costs of coal and to ensure load levels were maintained during a time when membership loads were far less than previously forecasted.
The plant was originally designed to produce synthetic natural gas from coal, but is now diversified into 13 marketable products to help mitigate the fluctuations of the natural gas market. From 1988-2014, Dakota Gas invested $845 million in capital improvements. All of these investments were funded with self-generated cash. When purchased, over 95% of the revenue from Dakota Gas was from the sale of natural gas produced by the plant. Today, natural gas makes up less than 30% of the revenue at Dakota Gas. The capital investment of the urea plant, which went operational in 2018, is helping to offset the losses from historically low natural gas prices and put a source of fertilizer production in the heart of the membership’s territory.
For much of its life, Dakota Gas has helped keep rates low for the membership and has paid $213 million in dividends back to Basin Electric. Over $85 million of the cash from these dividends was used to fund the construction of the Dry Fork Station, Basin Electric’s newest coal generation plant.
As recently as 2008 and 2011, Basin Electric also relied on Dakota Gas to avoid a mid-year rate increase that would have otherwise been required to avoid default on debt covenants at the Basin Electric level. Because of Dakota Gas’ ability to dividend to Basin Electric, the membership was not called on to provide additional revenue to Basin Electric through increased rates.
Dakota Gas was purchased for the synergies it has with Basin Electric’s generation fleet. These synergies are the cost savings to the membership of operating the plant and equate to a benefit to Basin Electric of about $71 million every year. Through 2020, Dakota Gas has provided over $800 million of benefit to the Basin Electric membership and has served the membership through lower rates and bill credits. With higher commodity prices, Dakota Gas is on track to exceed budget in 2021.
Dakota Gas Losses and the Future Plan
Commodity prices have fluctuated greatly in recent years along with changes in oil fracking technology impacting Dakota Gas.
Basin Electric has taken serious actions to minimize financial losses including a 23% reduction in employees, slashed capital costs at Dakota Gas, and trimmed costs by over $170 million at Dakota Gas from 2016 to 2020.
Since 2015, Dakota Gas has posted an operating loss; however, this loss has been offset by the operating synergies that Dakota Gas brings to the electric generation fleet. Recently those losses have surpassed the benefits. In 2020, Dakota Gas losses impacted the average residential member with a 1500 kWh/month usage by $1.40 per month. Those impacts resulted in $0.15 cents per month in 2019. Recently commodity prices have been rising and through July 2021, Dakota Gas has beat budget by over $20 million.
Basin Electric’s Board of Directors and Management are concerned about the current situation and have taken significant strategic steps to pursue an avenue for Dakota Gas that will minimize impacts to the membership. An immediate shutdown of the plant is not feasible and would lead to a large negative financial impact to the membership. The Basin Electric Board of Directors assembled a plan which has been shared with the membership. This plan entailed a three pronged approach including selling the plant, retooling the fertilizer facility and additional revenue through 45Q tax credits by capturing carbon dioxide. Currently negotiations are underway for the potential sale of the plant to Bakken Energy and Mitsubishi whom plan to convert the facility for hydrogen production. The ultimate goal is to protect the membership from rate impacts and preserve rate stability.
In the meantime, Basin Electric decreased its average member rate in 2020 to 61.5 mills ($.0615 kWh) and has forecasted to hold that rate steady through the next 10 years. As Basin Electric and the membership together move forward as a Cooperative family, we focus on the areas that you, the membership, told us were most important: affordability and reliability. Together we can accomplish these goals and continue on a spirit of cooperation that sprouted in 1961. The future is bright for Basin Electric and its members.