BKH 4Q2015 Earnings Note

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Market Price (2/3/2016): $50.80/share; ST-Target: $62/share; NIV: $83/share

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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