Black Hills Corp. agreed to buy natural gas distributor SourceGas Holdings LLC 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 Co. and Alinda Capital Partners LLC and will assume $720 million of debt when the deal closes, the Rapid City-based energy company said in a statement Sunday. The price is $1.74 billion, taking into account about $150 million of tax benefits.
The deal is Black Hill’s 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,” Christopher Ellinghaus, a New York-based analyst for Williams Capital Group LP, said Monday in an e-mail. “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, chief executive officer of Black Hills, said in the statement. “We are excited to significantly expand our presence in Colorado, Nebraska, and Wyoming.”
SourceGas had also drawn interest from potential buyers including MDU Resources Group Inc., 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 AG. 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,” Mark Maloney, who helps manage $5 billion at Manulife Asset Management LLC in Boston, said Monday in an interview. “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 Inc.
Black Hills has fallen 12 percent this year, underperforming the 9 percent decline in the 32-member MSCI USA Utilities Index.