Black Hills seeks OK to invest in gas reserves

OREANDA-NEWS. October 06, 2015. Midwest natural gas and power supplier Black Hills wants to join a growing list of utilities that seek to invest directly in gas reserves to reduce long-term fuel price volatility.

Black Hills said its utility units have asked state regulators in Iowa, Kansas, Nebraska, South Dakota and Wyoming to approve cost-of-service gas programs under which Black Hills will acquire gas reserves or drill wells to produce gas that will be paid for by its utility customers. Another application is expected to be filed with Colorado regulators this month.

"Our goal is to provide cost-effective energy for our customers while mitigating the volatility of natural gas prices," said Black Hills' utility group president Linn Evans.

Black Hills joins a growing number of utilities, including NextEra, Entergy, Dominion, Duke Energy and AGL Resources, that are using a variety of methods to invest directly in gas infrastructure and production as stricter federal standards on coal-fired generators dictate more reliance on gas for power generation.

In many regulated states, customers pay fuel costs on a "pass through" basis, meaning the utility makes no profit, but also has little ability or incentive to control price volatility.

As their reliance on gas grows, some utilities want to stabilize future fuel costs under a regulatory arrangement that ensures they will not be penalized if a long-term gas investment becomes uneconomical in the short-term.

South Dakota-based Black Hills said its production costs should be more stable over the long term than the spot market gas price. The cost-of-service mechanism also gives the company's exploration unit a new avenue for growth, Evans said.

Black Hills said the program could mitigate gas volatility for its electric utility customers in Nebraska, Kansas and Iowa as well as for both gas and power utilities in Wyoming and South Dakota.

Questar, a Utah-based gas utility, already operates under a cost-of-service agreement with regulators in Wyoming where its Wexpro unit produces gas from certain properties at cost, plus a return, to benefit Questar Gas utility customers. Questar has a similar arrangement in Utah.

Falling commodity prices over the past year have forced Wexpro to seek to modify its regulatory agreements to lower its rate of return so that its total costs remain low enough to benefit its customers.

Black Hills expects to complete the acquisition of Colorado-based SourceGas Holdings in the first half of 2016. The purchase will expand its gas utility operations in Wyoming, Colorado, Nebraska and Arkansas, boosting its customer base to 1.2 million in eight states.

The company's exploration and production unit sold 180,000 bl of crude and nearly 5mn cf of gas in the second quarter, up 8pc and 38pc, respectively, from the year-earlier quarter. Black Hills has operating and non-operating interests in more than 1,000 oil and gas wells in nine states.