Black Hills Unit Files For Natural Gas Rate Review In Arkansas

Black Hills Corp.‘s (NYSE:BKH) natural gas utility subsidiary announced that it has submitted a review proposal for its natural gas rate, with the Arkansas Public Service Commission.

Notably, the review is anticipated to result in a rate increase, which in turn is expected to generate additional revenues of $29.9 million per year, for the company. If the proposal is approved, increased rates for the 166,000 natural gas customers that the company serves across Arkansas will definitely benefit Black Hill’s operating results.

Per the filing, the company is seeking to derive a return on equity of 10.2% for investments that Black Hills has been making in its natural gas system in Arkansas. The company is looking forward to implement the new rates in the fourth quarter of 2018, subject to approval.

Reason for Rate Review

Since 2016, Black Hills has made investments worth $160 million toward replacing, upgarding and manitaining its natural gas transmission and distribution pipelines in Arkansas, that is stretched over 5,500 miles.

Notably these infrastructural investments have been made keeping in view the increasing needs of customers. Further, these have been directed to provide safer and more reliable natural gas delivery services to homes and businesses.

Our View

Utility companies operate in a regulated, yet highly competitive market structure. Upgrading and modernizing infrastructure from time to time is consequently important for providing better service to the customers. Further, investments to improve reliability of existing infrastructure become essential, especially in meeting the ever increasing growth in demand for electricity and other utility services.

Being no exception, Black Hills has also made such huge investments, to ensure steady and uninterrupted supply of utility services for its customers in Arkansas. Further, a steady economic growth in Northwest Arkansas might have encouraged the company to invest in this state, for ensuring smoother and improved services.

Notably these investments in improving its transmission and distribution system have been paying off well for Black Hills’ operating results, as is evidenced by its performance in the third quarter of 2017. Toward this, Black Hills witnessed an increase of 2.5% in revenues of $342 million.

Now, a rate increase aids a utility operator to recover the costs of investments. In recent times, other few utilities have also proceeded in the same path like Black Hills, to enjoy the fruits of hiked rates in the form of enhanced profits.

For instance, in June 2017, it was announced that Xcel Energy Inc. (NYSE:XEL) is gearing up to place a rate increase request to the Colorado Public Utilities Commission for natural gas, which would be effective for three years starting 2018.

Price Movement

Shares of Black Hillshave underperformedthe industry in the last three months. The company’s shares lost 12.3%, against the industry’s gain of 1.3%.

Such underperformance can be attributed to lower contribution from the company’s natural gas business that was negatively impacted by lower irrigation demand, during the third quarter of 2017.

Zacks Rank

Black Hills carries a Zacks Rank #4 (Sell). Investors can consider some better-ranked stocks from the same space such as IDACORP, Inc. (NYSE:IDA) and NextEra Energy, Inc. (NYSE:NEE) , both of which carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

IDACORP delivered positive earnings surprise of 8.43% in third-quarter 2017. Its 2017 current year estimates have risen by 2% to $4.08 per share in the last 60 days.

NextEra Energy delivered positive earnings surprise of 5.71% in third-quarter 2017. Its 2017 current year estimates have risen by 0.1% to $6.73 per share in the last 60 days.

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