FINANCIAL FUTURE BRIGHTENS FOR DAKOTA GASIFICATION

1999 has proven to be pivotal for Dakota Gasification Company (DGC), as detailed in the Basin Electric Power Corporation 1999 Annual Report. The turnaround has been the result of achievements in a long-term strategic plan developed by the DGC management team.

A major part of that strategy was reducing plant expenses. DGC employees achieved more than $20 million in savings in 1999 compared to 1998, without jeopardizing the reliability of the Synfuels Plant.

Another significant part of DGC’s overall strategy has been to hedge the pricing for the natural gas produced by the Synfuels Plant.

Natural gas prices strengthened through the end of 1999. However, like other commodities, natural gas goes through market pricing cycles. To achieve more financial stability, DGC has been employing a financial transaction called hedging. Through hedging, DGC is able to ensure a price for a portion of its natural gas, foregoing the benefits of high prices but avoiding the revenue drop when prices fall.

In 1999 hedging activities produced $3.5 million for the company. In 2000 DGC has hedged more than half of its natural gas production at a price of nearly $2.80 per dekatherm. For 2001 about one-third of the production has been hedged at nearly $2.60 per dekatherm.

Currently DGC breaks even when natural gas prices reach $2.50 per dekatherm, adding about $450,000 per month for each $0.10 increase per dekatherm.

Gross revenue for DGC amounted to $201.9 million. Of this total, $139.2 million came from the natural gas sales and $62.7 mil-lion resulted from selling byproducts and other miscellaneous sources. DGC’s expenses totaled $212.2 million in 1999. The company incurred a net loss of $6.8 million after interest and other income, interest expense and income tax benefits.

The pipeline built by DGC in 1999 is nearly ready to carry carbon dioxide into Canada for enhanced oil recovery. The pipeline extends 205 miles north and west from the Great Plains Synfuels Plant to an oil field operated by PanCanadian Resources near the town of Goodwater in Southern Saskatchewan. PanCanadian plans to pump the CO2 into the large Weyburn field, forecasting to draw an additional 122 million barrels of oil from the 40-year-old oil field.

PanCanadian plans to begin taking up to 95 million standard cubic feet of CO2 per day in 2000--possibly in September or October--under a 15-year contract with DGC. The pipeline was targeted to be fully tested and ready to deliver CO2 by June 2000.

In total, DGC has invested nearly $100 million in the project, which includes the pipeline and a compressor station at the Synfuels Plant. When CO2 begins flowing, the project will mean about $15 million to $18 million annually in net income for DGC over the life of the project.

The PanCanadian contract calls for the sale of about 40 percent of the total available CO2 from the Synfuels Plant. DGC will own and operate the 167 miles of pipeline within North Dakota while a Canadian subsidiary, Souris Valley Pipeline Ltd., was formed to own and operate the 38 miles of pipeline in Canada.

The Great Plains Synfuels Plant which was completed in 1984, has never achieved full environmental compliance. Since purchasing the plant in 1988, DGC has been committed to meeting that goal, investing more than $80 million in environmental systems and facilities.

Though DGC had been working toward environmental compliance, the North Dakota State Health Department issued a Notice of Violation in 1997 regarding the Synfuels Plant’s operation. As a result, DGC entered into a consent agreement with the State Health Department in December 1998 listing needed environmental improvements at the plant. Most of those improvements involve operation of the unique flue gas desulfurization facility installed at the Synfuels Plant. This scrubber has been effective in removing SO2, but ironically has created its own environmental problem--a visible plume from the plant’s main stack as a result of releasing tiny fertilizer particles. It was the plume issue as well as the reliability of the scrubber and plant odors that were cited by the Health Department in its violation notice.

The 1998 consent agreement approved by the North Dakota district court required DGC to pay $162,500 initially and invest at least $487,500 on another project to reduce odors. The Health Department has suspended or dismissed $425,000 of a total of $625,000 in penalties. DGC must meet further specific conditions in the consent agreement to avoid the remaining penalties.

In this past year, DGC has made significant progress toward environmental compliance.

By year’s end, the company achieved more than 18 months of meeting requirements for removing SO2 and NOx from exhaust gases at the Synfuels Plant.

To resolve the plume issue, DGC last year committed to the installation of a wet Electrostatic Precipitator (ESP). Estimated to cost $40 million, this equipment uses an electrostatic charge to remove particulate, which will significantly reduce the plume at the Synfuels Plant.

DGC signed a contract with Asea Brown Boveri Ltd., an international technology and engineering company, to install a wet ESP, which must be operating by June 1, 2003.