Black Hills to soon close on $2 billion SourceGas deal, Arkansas PSC approves

Officials at Black Hills Corp. said they expect to close the $2 billion acquisition of SourceGas later in the first quarter, putting the South Dakota utility operator on target to become the third owner of the former Arkansas Western Gas Company in less than eight years.

Pro forma data shows the combined Black Hills-SourceGas utility will have operations across eight states and nearly 1.2 million electric and gas customers in some 800, mostly rural communities. Of that total, there will be some 162,000 customers in Arkansas, and Fayetteville will be one of the largest cities the utility holding company will serve.

Black Hills Energy Arkansas, the name of the new utility that will take over the company’s operations in northern part of the state, received approval from the Arkansas Public Service Commission (PSC) on Jan. 15 to purchase SourceGas Holdings LLC, company officials said. Black Hills and SourceGas filed the joint application on Aug. 10, 2015, with the Arkansas commission.

“This announcement represents a significant milestone in our acquisition of SourceGas, and reaffirms our strategy that acquiring SourceGas will benefit both our shareholders and our customers,” Black Hills President and COO Linn Evans said in a news release on Friday (Jan. 22). “As Arkansas is a new region for Black Hills, we look forward to serving and developing new relationships with these customers.”

Fast growing Black Hills agreed in July to acquire SourceGas from an investment group managed by Alinda Capital Partners and GE Energy Financial Services for nearly $2 billion in cash and debt. Golden, Colo.-based SourceGas operates four regulated natural gas utilities serving approximately 425,000 customers in Arkansas, Colorado, Nebraska and Wyoming and a 512-mile regulated intrastate natural gas transmission pipeline in Colorado.

In the PSC docket 15-078-U where Arkansas regulators approved the deal, Black Hills and SourceGas both made the case that the acquisition will not adversely impact customers, service or local jobs. In 2008, SourceGas investors purchased the former Fayetteville-based utility from Southwestern Energy Corp. in for a sum of $225 million and working capital.

In direct testimony, Evans said Black Hills would adopt all of SourceGas’s existing tariffs and continue near-term operations “without change.” He added that the deal would provide “enhanced operating scale and bring a solid financial foundation to benefit the local distribution system for Arkansas customers.”

“Black Hills understands utility service and will continue to deliver SGA’s high quality of service; (we) will be an active partner in regional economic and community development, and an enhanced operating scale will drive more efficient service and bring a solid financial foundation and access to substantial capital resources to benefit the local distribution service and customers,” Evans told state regulators.

Despite Evan’s rosy predictions, officials with the Arkansas Attorney General’s Office argued that the deal was not in the public’s interest. AG witness, David Dismukes, testified that the proposed acquisition should be rejected because it does not provide sufficient benefits to ratepayers or properly balance risks between ratepayers and shareholders.

Dismukes, executive director of the Center for Energy Studies at Louisiana State University, told the commission that the $2 billion “premium” acquisition price would possibly be passed on to ratepayers along with other indirect costs, including the failure to generate synergy savings and the loss of Arkansas jobs.

Dismukes recommended a list of primary conditions for approval of the deal, including a $11 million ratepayer credit, a prohibition on recovery of acquisition premium and other transition costs, and a five-year “rate case” moratorium on the South Dakota utility.

Black Hills’ “lack of a commitment to share cost savings arising from efficiencies gained by consolidating operations due to the operation (is) ‘one of the single largest reasons; why the acquisition should be rejected,” Dismukes testified.

In the end, the Commission approved a settlement embracing a long list of protections and assurances recommended by the PSC staff to protect Arkansas ratepayers, including an agreement to reduce rates by $250,000 annually over the next five years.

In its finding, the three-person regulatory panel, which includes PSC Commissioners Ted Thomas, Elana Wills and Lamar Davis, found the settlement agreement was supported by substantial evidence and is in the public interest.

“The Commission finds that the acquiring entity appears to be a sound business with the necessary expertise to own and operate SourceGas. The settlement is in the public interest, in part, on the basis of its provision of an annual bill credit, which is a known and measurable, incremental benefit to ratepayers,” PSC Chair Ted Thomas wrote in his order approving the settlement deal.

With the approval by the Arkansas commission, Black Hills has no additional regulatory hurdles left prior to closing the deal with SourceGas. In August, the Federal Trade Commission granted early termination of the waiting period under the Hart-Scott-Rodino Antitrust act for its proposed acquisition. Utility regulators in Nebraska, Wyoming and Colorado also signed off on the $2 billion deal late last year.

On the financing end, Black Hills closed last week on a previously announced $550 public debt offering that will go toward financing a big part of the SourceGas deal.