BKH 3Q2017: Little matters until we know how much capital is raised from E&P sale

Now that E&P is being sold, the question is how much? Previously we estimated the Mancos shale potential at around $1B or more; however, this was as PUDs for COSGP
Also, given that BKH thought it had enough from Mancos to supply its needs and that of another utility, the reserve potential is great, but how great? Even at $0.50/MCF this could raise $500MM.
BKH lowered 2017 AEPS guidance to $3.30-$3.40 from $3.45-$3.65, largely due to 3Q2017 results
We look for BKH to pull trigger on large acquisition within 12-18 months continuing its focus on Utilities using E&P sale to fund
Mountain West Transmission Group (MWTG) expressed interest in joining the Southwest Power Pool (SPP). If approved membership would start around late-2019.
Maintaining ST-Target at $81/share and our NIV/share at $95/share until we know more about the E&P sale and the disposition of the cash.

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BKH Future Bright; Capex Spending Accelerating; E&P Decision Coming

BKH’s main message is that it is now virtually a pure play (95%+) customer-focused growth utility
BKH is focused on LT decision-making and annual total shareholder return vs. LT growth targets
Forward-looking strategic execution:
Deliver top-quartile LT shareholder return:
Currently in the midst of transition earnings and growth drivers:
LT: Near-term priorities transitioning to strong customer-focused investment program
Capital spending likely to be more than double DD&A (1st D is for depletion)
Additional upside from large projects such as gas pipelines and generation
Targeting LT EPS CAGR in the top quartile of utility industry, which was estimated at 7%
Accelerating capital spending moving forward with significant upside opportunities from generation and pipeline investment

Our conclusion: We believe that BKH is on solid footing and has established a base from which to launch the next acquisition (preference is for electric utility that needs generation investments, but opportunistic), but unlikely for next 12-18 months while focused on repaying debt, continued investment in SG and capital spending program. We look for BKH to sell its remaining oil and gas assets (mostly Mancos Shale play) to fund next acquisition. Utility-focus is laudable. Upside to our ST-Target is visible but meaningless depending on oil & gas decision and outcome, in our opinion.

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BKH 2Q2017 Earnings: Plans for cost of service gas falls thru but there’s a silver lining

Plans for cost of service gas falls thru but there’s a silver lining || It seems that the cost of service gas program (COSGP) will not move forward for the wrong reason, but it may be a blessing in disguise. We look for BKH to sell its oil and gas business and redeploy proceeds to buy another utility. BKH is lowering 2017 AEPS guidance to $3.45-$3.60 from $3.45-$3.65, largely due to 2Q2017 results. Focus on efficiency and cost reductions to continue. We look for BKH to pull trigger on large acquisition within 12-18 months continuing its focus on Utilities. We look for BKH to pivot more towards utility projects including transmission, renewables, but also generation in general, gas pipelines and other utility projects in the ST-to-MT. Also, work on reducing regulatory lag. CO Electric issued 60MW renewable RFP. Capital spending budget for 2017E-2020F was raised. BKH renewed its At-the-Market equity offering program, more as a contingency rather than for an imminent event. Mancos shale could be worth between $20/share-to-$61/share to BKH if fully-developed but far less if sold. 2Q17 results were below expectations. SD Electric entered agreement with staff to stabilize rates for customers through a 6-year base rate moratorium effective 7/1/2017. Lowering our ST-Target to $81/share and our NIV/share was lowered to some $95. BKH to hold Analyst Day in New York on October 5, 2017.

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BKH 1Q2017 Earnings Note

BKH is executing on its plan but big plans ahead ||

Integration of SourceGas is complete and showing investors merits of deal. BKH execution highlighting stock but much depends on cost of service gas program (COSGP) direction. If approve, BKH should have clear skies, if not we look for pull back below $60. We feel BKH will get it done because liquids revenue to go to consumers, which is windfall for them. Looking for renewed filing for cost-of-service-gas program (COSGP) in all jurisdictions in 1H2017. Focus on efficiency and cost reductions to continue. Maintaining 2017 AEPS guidance of $3.45-$3.65. We look for BKH to pull trigger on large acquisition within 12-18 months continuing its focus on Utilities. We still favor Mancos shale for source of COSGP. We remain skeptical re: COSGP, but if it BKH pursues COSGP then, in our opinion, BKH should buy producing reserves now as a base then methodically and systematically develop its Mancos shale play with the intent of transferring reserves as it’s developed into the COSGP as needed. Mancos shale play could add between $20/share-to-$61/share to BKH’s share price at the peak and add some $1.19/share-to-$3.68/share to BKH’s AEPS. 1Q17 results strong. Raising ST-Target to $85.

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BKH 4Q2016 Earnings Note

2017 feels like year for growth, but danger lurks ||

2017 feels like BKH is ready to focus on growth and leave behind write-offs and asset rationalization. Focus on efficiency and cost reductions to continue. But, Oil & Gas could still provide volatility. Looking for renewed filing for cost-of-service-gas program (COSGP) in all jurisdictions in 1H2017. Maintaining 2017 AEPS guidance of $3.45-$3.65. Capex spending estimated at $324MM (before COSGP). We look for BKH to pull trigger on large acquisition within 12-18 months continuing its focus on Utilities. We still favor Mancos shale for source of COSGP. It remains our opinion that BKH not pursue its COSGP program, but if it does then, in our opinion, BKH should buy producing reserves now as a base then methodically and systematically develop its Mancos shale play with the intent of transferring reserves as it’s developed into the COSGP as needed. Mancos shale play could add between $20/share-to-$61/share to BKH’s share price at the peak and add some $1.19/share-to-$3.68/share to BKH’s AEPS. We believe reorganization of non-utilities businesses is over. We look for higher demographic and economic growth. SourceGas is largely fully integrated.

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BKH 3Q2016 Earnings Note

BKH can handle doubling of customers; Mancos play looks impressive ||

Increased 2016 AEPS guidance to $3.00-$3.10 from $2.90-$3.10. Also increased 2017 AEPS guidance to $3.45-$3.65 from $3.35-$3.65. 2017 upside guidance mostly due to synergy savings and longer ownership of SourceGas. BKH ready now for another large acquisition; could double customer base and expand efficiency gains. We look for BKH to pull trigger on large acquisition within 12-18 months. BKH intends to reapply for cost-of-service-gas program (COSGP) in some states in 1H2017; still favors Mancos shale for source of COSGP. It remains our opinion that BKH not pursue its COSGP program, but if it does then, in our opinion, BKH should buy producing reserves now as a base then methodically and systematically develop its Mancos shale play with the intent of transferring reserves as it’s developed into the COSGP as needed. We agree with BKH decision to divest non-core E&P assets and exit E&P completely, if COSGP is not adopted. Mancos shale play could add between $20/share-to-$61/share to BKH’s share price at the peak and add some $1.19/share-to-$3.68/share to BKH’s AEPS. Other growth projects on track. BKH expects SourceGas acquisition to be fully integrated by yearend.

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BKH 2Q2016 Earnings Note

BKH: Upside potential is titillating, but it’s from E&P, so not w/o risks ||

Withdrawal of BKH’s cost-of-service-gas program (COSGP) applications from all jurisdiction isn’t an indication that BKH is abandoning it, but rather a reflection of the complexity involved in setting it up with regulators. BKH expects to refile, but time is running out, in our opinion. It is also our opinion that BKH not pursue its COSGP program, but if it does then, in our opinion, BKH should buy producing reserves now as a base then methodically and systematically develop its Mancos shale play with the intent of transferring reserves as it’s developed into the COSGP as needed. We are unsure of timeline for COSGP regulatory decisions, but we believe time’s running out to buy cheap reserves. We agree with BKH decision to divest non-core E&P assets and exit E&P completely, if COSGP is not adopted. Mancos shale play could add between $20/share-to-$61/share to BKH’s share price at the peak and add some $1.19/share-to-$3.68/share to BKH’s AEPS. Sale of 49.9% interest in Pueblo Airport IPP, a 200MW peaking unit, for $215MM was closed in April. Other growth projects on track. BKH expects SourceGas acquisition to be fully integrated by yearend.

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BKH’s withdrawal of cost of service gas application is not a surprise

BKH’s withdrawal of cost of service gas application is not a surprise ||

BKH announced today that it would withdraw its cost of service gas applications across the board having been rejected in Nebraska and received a dismal of its application in Colorado
We continue to reiterate that in the ST-to-MT cost of service gas (COSG) programs may be beneficial for customers, particularly given the current still low prices for natural gas; however, in the LT there is no reassurance that COSG programs would be beneficial for customers
In particular, the purchase of reserves in the future may be highly contentious and potentially create a value-drain for customers, if future purchases of natural gas reserves are not conducted in a rational manner
Also, operating cost escalations, development costs, and drilling costs are likely to be highly contentious issues
However, the timing of purchases of natural gas reserves in the future is likely to be very contentious in the sense that: 1) purchases of natural gas reserves for future consumption ought to be conducted when natural gas prices are well-below the mean-reverting price of natural gas, a time period in which consumers, regulators and politicians are highly unlikely to support such a capital expenditure, and 2) reserves may have to be purchased well in advance of when those reserves are needed, which means consumers would have to immediately pay for reserves they may not need for many years to come, among other LT issues

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BKH 1Q2016 Earnings Note

BKH: Upside potential is titillating, but it’s from E&P, so not w/o risks ||

SourceGas acquisition closed Feb. 12, 2016. Regardless of SourceGas, moving forward, we believe that the only two things that matter for BKH is its application for cost-of-service gas program (COSGP) and what it does with its Mancos shale play. It is our opinion that BKH not pursue its COSGP program, but if it does then, in our opinion, BKH should buy producing reserves now as a base then methodically and systematically develop its Mancos shale play with the intent of transferring reserves as it is developed into the COSGP as needed. We believe that regulatory decision on COSGP would be due in 2H2016 and may start with a pilot program, which we would argue is a mistake given that securing cheap natural gas reserves is a paramount condition to the success of the COSGP and we do not expect reserve prices to stay at current levels for too much longer. Mancos shale play could add between $20/share-to-$61/share to BKH’s share price at the peak and add some $1.19/share-to-$3.68/share to BKH’s AEPS. Sale of 49.9% interest in Pueblo Airport IPP, a 200MW peaking unit, was announced on February 12, 2016 for $215MM, almost twice the cost to build on a per unit basis.

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BKH 4Q2015 Earnings Note

BKH: Upside potential is titillating, but it’s from E&P, so not w/o risks ||

BKH updated its 2016 AEPS guidance by $0.50/share to account for the SourceGas acquisition. Regardless of SourceGas, moving forward, we believe that the only two things that matter for BKH is its application for cost-of-service gas program (COSGP) and what it does with its Mancos shale play. It is our opinion that BKH not pursue its COSGP program, but if it does then to buy producing reserves and methodically and systematically develop its Mancos shale play independently with the intent of transferring the reserves as it is developed and the COSGP needs additional reserves. We believe that regulatory decision on COSGP would be due in 2H2016 and may start with a pilot program, which we would argue is a mistake given that securing cheap natural gas reserves is a paramount condition to the success of the COSGP and we do not expect reserve prices to stay at current levels for too much longer. Mancos shale play could add between $20/share-to-$61/share to BKH’s share price at the peak and add some $1.19/share-to-$3.68/share to BKH’s AEPS. Sale of 49.9% interest in Pueblo Airport IPP, a 200MW peaking unit, was announced on February 12, 2016 for $215MM.

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