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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