In a deal that will more than double its utility customers in eight states adding an opportunity to expand its program of providing reserves for ratepayers from its exploration and production (E&P) segment, Rapid City, SD-based Black Hills Corp. has agreed to acquire SourceGas Holding LLC for $1.89 billion.

The agreement would add 425,000 natural gas utility customers in four states and a 512-mile intrastate gas transmission pipeline in Colorado.

The transaction is expected to be completed in the first half of next year, pending conditions and regulatory approvals in Arkansas, Colorado, Nebraska and Wyoming.

SourceGas utilities would provide “operational and financial benefits to all the customers and communities we serve,” said Black Hills CEO David Emery. “The transaction continues our proven record of growth in the utility business through targeted acquisitions. Over the last decade, we have successfully integrated 19 electric and natural gas systems in support of this growth strategy.”

In the past decade, Black Hills has added 19 small gas and electric utilities across seven states — Colorado, Iowa, Kansas, Montana, Nebraska, South Dakota and Wyoming (see Daily GPIJan. 10, 2014). The latest one was earlier this month when the company picked up Wyoming natural gas utility Energy West Wyoming with 6,700 customers and 72 miles of pipeline assets from Energy West Development.

The acquisition announced Sunday from investment funds managed by Alinda Capital Partners and General Electric’s GE Energy Financial Services would add customers in Colorado, Nebraska and Wyoming, while adding Arkansas to the Black Hills stable of small utilities.

GE and Alinda earlier this year said they intended to sell the four-state SourceGas network of utilities (see Daily GPIApril 14). They acquired the assets from Kinder Morgan Inc. in 2007.

Black Hills officials were emphasizing the complementary fit of the SourceGas utilities, which would boost the holding company’s utility customer base by 55% to more than 1.2 million across the eight states.

On a conference call on Monday, Emery emphasized the financial and operating advantages of the larger-scale utility operation, citing the chance to double Black Hills’ current plans to initiate ratepayer purchases of natural gas reserves from its E&P segment (see Daily GPIFeb 5).

“SourceGas has great potential for a cost-of-service gas program [in which part of utility rates customers pay goes toward the purchase of long-term gas reserves],” Emery said. “We have been working to implement such a program to provide a portion of our gas supply for our own utilities, and the SourceGas acquisition essentially doubles that long-term opportunity.”

Emery said Black Hills still intends to file this fall with various state regulators for the cost-of-service reserves program for its existing utilities, but eventually it would intend to include the added SourceGas utilities in the program.

“We’re looking at a long-term objective of providing about 50% of our [utilities’] gas from cost-of-service gas,” Emery said. “For [the existing Black Hills utilities] that amounts to a little less than 40 Bcf annually, and the volume for SourceGas would be very similar to that, if we provided 50% for their territories as well.”

The sales price includes an estimated $200 million in capital expenditures through closing and the assumption by Black Hills of $720 million in debt.

“The effective purchase price is $1.74 billion, taking into account approximately $150 million of tax benefits resulting from the deal,” a Black Hills spokesperson said.

The combined utilities would operate under the Black Hills Energy brand. Both Black Hills and SourceGas have above-average industry growth rates, the spokesperson said. “The combination enhances Black Hills’ operating scale, which will help drive more efficient delivery of utility services.”

The purchase is supported by a fully committed bridge facility from Credit Suisse, and permanent financing would be the assumed $720 million in debt, $450-550 million of new debt, $575-675 million in equity and equity-linked securities, and the rest with cash on hand and revolver draws, Black Hills said.

SourceGas is the largest acquisition by Black Hills since its purchase of Aquila Inc.’s electric utility in Colorado and four gas utilities in Colorado, Iowa, Kansas and Nebraska for $940 million in 2008 (see Daily GPIJuly 15, 2008). Emery said he has been looking for a similar large-scale utility buy over the years since, but none of the possibilities were complementary enough to justify the premium Black Hills would have had to pay.