Black Hills buys GE-backed gas distributor SourceGas for $1.89 billion

7/16/2015

By SHARON CHO, JAMES PATON and LARS PAULSSON
Bloomberg

Black Hills Corp. agreed to buy natural gas distributor SourceGas Holdings in a deal that will boost the South Dakota utility’s customer base and cut its exposure to unregulated power markets.

Black Hills will acquire the company for $1.89 billion from investment funds managed by General Electric (GE) and Alinda Capital Partners and will assume $720 million of debt when the deal closes, the Rapid City-based energy company said. The price is $1.74 billion, taking into account about $150 million of tax benefits.

The deal is Black Hills' biggest since it kicked off a string of acquisitions with the $940 million purchase of gas utilities from defunct Aquila Corp. seven years ago, according to data compiled by Bloomberg.

“It is certainly material to Black Hills given the size of the deal and number of customers acquired,” said Christopher Ellinghaus, a New York-based analyst for Williams Capital Group. “All utilities in the general region are looking to expand their regulated businesses.”

Utility companies are using acquisitions to increase their regulated assets and reduce exposure to the competitive and more volatile unregulated market, according to Stacy Nemeroff, an analyst at Bloomberg Intelligence. SourceGas operates four gas utilities with about 425,000 customers and a 512-mile (824-kilometer) transmission pipeline in Colorado. The combined company will have more than 1.2 million utility customers.

“SourceGas is a great strategic fit, adding to our strong utility base,” David Emery, CEO of Black Hills, said in the statement. “We are excited to significantly expand our presence in Colorado, Nebraska, and Wyoming.”

Potential Buyers

SourceGas had also drawn interest from potential buyers including MDU Resources, people with knowledge of the matter said last week.

The acquisition, expected to close in the first half of 2016, is supported by a bridge facility provided by Credit Suisse Group. Black Hills will assume new debt of as much as $550 million to help finance the purchase, according to the statement.

“Black Hills has a strong track record of accumulating small utilities over the years and they’ve been very successful,” said Mark Maloney, who helps manage $5 billion at Manulife Asset Management in Boston. “They’re quite capable of assimilating that into their pool of assets.”

GE’s energy financial-services division and Alinda bought SourceGas in 2007 from Kinder Morgan.

Black Hills has fallen 12% this year, underperforming the 9% decline in the 32-member MSCI USA Utilities Index.