Rapid City, SD-based Black Hills Corp. will sell its 40 MW natural gas-fired “CT II” generation unit at its mostly coal-fired Gillette Energy Complex in Wyoming to the City of Gillette for $22 million.

The announcement came a few days after the company announced its pursuit of an additional 20,000 net acres in the Mancos Shale in the Piceance Basin through a confidential third-party deal as part of its 1Q2013 earnings report that showed profits and natural gas prices up on a quarter-over-quarter basis.

The Gillette deal includes a 20-year agreement for the city to purchase “economy energy” from Black Hills’ Wyoming unit, which will purchase energy on behalf of the city from other third-party suppliers when that energy can be purchased for less than the cost to operate CT II gas-fired unit. “Black Hills Wyoming will receive a portion of any resulting savings to the city,” the company said.

The sale is expected to close in August 2014, which is the expiration date of an existing power sales agreement, under which Black Hills Wyoming sells all of the unit’s output to Cheyenne Light, Fuel and Power, another Black Hills subsidiary. The sale is subject to approval from the Federal Energy Regulatory Commission.

“This agreement will benefit the citizens of Gillette by increasing options for buying electricity at the best available price,” said CEO David Emery.

On an earnings conference call earlier in the month, Emery said Black Hills had begun drilling the first of two wells in the Mancos Shale under a deal with an anonymous third-party operator that will use its permits while Black Hills awaits two permits from the federal Bureau of Land Management (BLM). Black Hills has been trying to secure those permits for 18 months on part of its 74,000 net acres in the Mancos.

In return for drilling and completing the two wells over the next four or five months, Black Hills will get another 20,000 Mancos acres in the Mancos, said Emery, while reporting 1Q2013 profits of $38.4 million (87 cents/diluted share), compared to $28.5 million (65 cents) for the same period last year. The profits were entirely from Black Hills’ natural gas and electric utility, coal mining and power generation operations. Oil and gas operations showed a $1 million loss for the quarter.

Emery said Black Hills’ natural gas prices at Henry Hub were up by $1/MMBtu during the quarter, and he talked bullishly about the confidential gas drilling deal, which he said will increase the company’s Mancos acreage by 27% to about 94,000 net acres later this year.

Emery refused to give much color on the deal, conceding only that it is safe to assume the partner is an existing exploration and production (E&P) company, and that the acreage in play is close to Black Hills’ existing acres, although he wouldn’t say they are contiguous.

“We’re the designated operator to get these two wells drilled and completed, and there is the third-party, along with several other small interest owners in the wells,” Emery said. “I’d call the [E&P] a good strategic partner, but beyond that I am not comfortable giving out any details.” He said that the well spacing used is the Piceance Basin default of 160 acres. Emery was also mum on the offtake agreement, the partner’s takeaway abilities and where exactly the gas would flow. “That’s all part of the confidentiality agreement, too,” he said.

Regarding the Gillette sale, in addition to the 20-year economy energy purchase agreement, Black Hills Wyoming will continue to receive fees for operating the CT II plant and providing plant-related administrative services for the city. The company will use proceeds from the sale for debt reduction.

“Black Hills has been a partner in serving the electricity needs of the Gillette community since the 1960s,” said the company, noting that the Gillette Energy Complex includes Black Hills’ coal mine, six coal-fired generating units and the CT I and CT II gas-fired turbines. The generating units are owned by various equity partners, including several Black Hills Corp. affiliates and other third parties.