With the close of its $1.89 billion acquisition of SourceGas Holding LLC and its utilities in multiple states earlier this year (see Daily GPI, July 13, 2015), Rapid City, SD-based Black Hills Corp. is a "pure-play utility" and all of its non-utility units, including its oil/natural gas exploration/production business, will transform to be supportive of the utilities, according to CEO David Emery.
Speaking on a quarterly earnings conference call Wednesday, Emery said Black Hills has completed a nearly 12-year transition to emphasize utility operations in eight states, serving more than 1.2 million customers collectively. "Utilities account for a large percentage of our earnings, assets and employees," he said.
"All of our non-utility businesses (mining and power generation in addition to the E&P) are either supporting or being transitioned to provide support directly to our utility businesses," Emery said. And the poster child for that is the company’s efforts to establish natural gas reserve programs covered in utility rates in the various states in which it operates.
Despite getting an initial rejection from Colorado regulators (see Daily GPI, April 28), Emery said Blacks Hills continues to push forward with the plan, noting that in a time of historically low natural gas prices, locking up long-term deals for utility customers makes sense.
Emery said that the company has still not received a copy of the Colorado Public Utilities Commission's dismissal of its cost-of-service gas reserves filing. "When we filed in all six of our states we proposed that approvals be done in two phases -- the first phase to establish the basic regulatory constructs of the program and phase two to include a proposal of specific gas reserve properties, and the associated impact on customers," he said.
He thinks the Colorado regulators seemed to prefer combining the two into one proceeding. "Once we receive the Colorado order, we will examine our options and determine how best to proceed, and that may include refiling with a specific property."
Emery estimated that gas prices in the $3-$4/Mcf range would provide a very good long-term result for customers. "Now is an opportune time to lock in prices like that; it may be one of the best times in the last decade," he said. "This is about long-term customer cost of gas; it isn't about beating the market in any individual time period."
Another analyst questioned Emery on the potential of the Mancos Shale, noting it makes the Marcellus look like "child's play," but the CEO pointed that the Mancos is far more immature than the Marcellus with far fewer wells drilled. Nevertheless, Black Hills' reserves in the Mancos could become part of the utility-supported program.
"I firmly believe that a long-term drilling program is a better deal for customers that trying to buy reserves opportunistically," Emery said. "If you buy reserves in the ground on any given day the price of those reserves is going to be directly proportional to the strip price for natural gas. Long term, we would like to includes properties similar to the Mancos where you have a good gas resource and almost no risk of dry holes."
Emery said he called the ideal property "gas manufacturing" buys for inclusion in the utility cost of service program. He said it keeps you free from having to depend on the spot prices to buy properties in the program in any given year.
As far as its comparison to the Marcellus, the Mancos is not near as mature and thus, its economics are not as good as the Marcellus, Emery said. Based on feedback from the various state commissions, Black Hills will determine if and when to include the Mancos in the reserves program.
For 1Q2016, Black Hills reported adjusted net income of $64 million ($1.13/share), compared with adjusted net income of $48 million ($1.08) for the same period in 2015.