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Pace Slows, Partners Sought on Black Hills Utility Gas Reserves Plan

Regulatory timing has been pushed back on Rapid City, SD-based Black Hills Corp.'s longstanding plans to launch a multi-utility natural gas reserves program as it searches for partners and the right reserves mix for the venture.

Black Hills CEO David Emery said a filing to various state regulatory commissions will likely not happen until the third quarter. The company hopes to have all of its non-Mancos Shale exploration and production assets sold by the end of this year so a full-blown utility cost-of-service gas reserves program can be in play in those commissions next year.

An earlier version of the utility reserves proposal was rejected by state regulators last year.

"We continue to believe that a cost-of-service utility gas reserves program will provide long-term price stability with a reasonable expectation of lower long-term costs for customers, while also providing long-term opportunities for earnings for shareholders," Emery said during a conference call with analysts Thursday. "We are in the process of evaluating alternatives, including the possibility of having utility joint venture [JV] partners and filing new applications for specific gas reserve properties."

He said the upcoming filing will be "a little later" than originally planned, because Black Hills needs extra time to talk with potential JV partners and "further assess" the potential reserve properties, including its own Mancos Shale holdings.

Emery declined to name any of the potential partners, saying that they are utilities with territories outside of the Black Hills utilities' service areas.

"We're not prepared to discuss who they are until we are certain that we are going to have partners," Emery said.

Black Hills' Mancos holdings include both dry gas and natural gas liquids (NGL), and the NGLs potentially could drive down the costs of the program for utility customers, Emery said.

"Certainly, the economics would be better in the short term with an emphasis on the NGLs. We're drilling in both areas, but our focus for the cost-of-service program would be to focus on the liquids-rich areas because the economics are better, and then as gas prices rise over time, we could focus on the drier areas."

Black Hills' original proposal for a gas reserves program called for "any liquids benefits reducing the cost-of-service gas reserves program costs for utility customers." There is no "complicated sharing mechanism" proposed between customers and Black Hills shareholders, Emery said. "Our plan is to drill the wells, and all the benefits of both gas and liquids production would benefit customers."

Black Hills has all the processing and pipeline capacity needed for both its gas and liquids, Emery said. And if there are JVs in the program, the other utilities involved would be full partners, he said.

Black Hills reported net income for 1Q2017 of $77 million ($1.39/share), compared to $40 million (77 cents) for 1Q2016.

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