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

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Market Price (7/26/2016): $/share; ST-Target: $/share; NIV: $/share

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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