BKH 2Q2016 Earnings Note

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Market Price (8/4/2016): $61.35/share; ST-Target: $75/share; NIV: $92/share

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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