BKH Initiation Report

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Market Price (1/29/2016): $49.28/share; ST-Target: $63/share; NIV: $82/share

BKH: Solid utility performance, but too many distractions

BKH’s utility performance is good, but it is involved in too many businesses that distract from this core performance. We’d like to see BKH sell all of its non-utility businesses. Ironically, BKH may have to buy more oil and gas assets before it’s ready to sell its E&P business. SourceGas acquisition looks to be fully priced, but synergies should help to make it accretive. Not for a while, but we look for BKH to make not only bolt-on acquisitions of utility assets, but also look for it to utilize its scalability to make a transformative acquisition (SourceGas is but the first). Regulatory scheme isn’t antiquated anymore, but could still make use of more modern rate structures. Environmental regulations look to have only a modest effect on the company’s financial status; regardless, BKH looks to be making efforts to stay ahead of potential impacts, which we believe is prudent. On the other hand, we don’t see many non-E&P growth projects that would make a difference in shareholder value and are particularly concerned that the downturn in E&P prices may have a negative impact on utility growth rates. However, in our opinion, there is no denying the potential for the Mancos shale play.

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