BKH 1Q2018 Earnings (05/04/2018): Weather induced performance doesn’t change our thesis

Between disappointing oil and gas sales proceeds, lower 2018 guidance, expected increase in share count by yearend, and slower earnings growth-rate guidance through 2019, we believe that BKH is likely to underperform, particularly as it tries to navigate through new regulatory jurisdictions, compounded by the issue of expected increases in the interest rate environment
However, adjusting for 1Q2018 results, our estimates are forced up, which raises our NIV/share to $115/share from $110/share
Therefore, we are commensurately raising our ST-target to $65/share from $62/share
BKH maintains its lowered 2018 AEPS guidance at $3.30-$3.50
We continue to look for BKH to pivot more towards utility projects including transmission, renewables, but also generation in general, gas pipelines and other utility projects in the ST-to-MT
Also, work on reducing regulatory lag
Regulatory filings continue for various reasons that should all benefit shareholder value
1Q18 results were above expectations mostly due to colder than normal weather, which accounted for about $0.16/shares and would have reduced 1Q2018 AEPS results to $1.47 vs. our $1.41 estimate and $1.53 consensus
Power segment wins competitive bid to build 60MW wind farm for $71MM (Busch Wind Farm 2). However, management is suggesting margin on this project may be thin due to competitive nature – we suspect it’s in the high single digit ROE. In service date is estimated to be late-2019.

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BKH 4Q2017 Earnings (02/02/2018): E&P sale was very disappointing; downgrading forward expectations

E&P sales raised very disappointing $95MM in proceeds less $20MM contract make-up for net proceeds of $75MM, far less than our estimate of $500MM, 19% of our minimum expectations.
Regardless, between the disappointing sales proceeds, lower 2018 guidance, expected increase in share count by yearend, and slower earnings growth-rate guidance through 2019, we believe that BKH is likely to underperform
Therefore, we are lowering our ST-target to $62/share
BKH lowered 2018 AEPS guidance to $3.30-$3.50 from $3.35-$3.55 due to tax law changes
We are no longer looking for BKH to pull trigger on large acquisition within 12-18 months

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2018 Industry Update: Economic growth should favor commodities-driven businesses in 2018

Warmer than normal winter:
Weak gas prices:
However, 4Q2017 and 1Q2018 power gross profit could be better than expectations:
Similarly, we’d expect natural gas infrastructure businesses to perform well for 4Q2017 and 1Q2018:
We expect economic growth to surpass 4% for 2018:
Strong economic performance should lead to strong power sector performance:
Commensurately, we expect natural gas infrastructure businesses to perform well:
Adjusted for seasonality, we expect natural gas prices to creep up throughout 2018 and, given normal weather, we’d expect natural gas prices to average at or just below $3.50 for 2018 with an exit price of some $3.65-$3.75:
Conclusion: Going into 2018, we believe that natural gas prices will stage a moderate recovery, but power margins should do better benefiting from accelerating economic activity. Individually, we continue to like… . However, the real star may be … . Among the utility names, we like … due to their growth prospects. We also look for … to outperform as … .

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GOP Tax Bill is win for utilities, power, infrastructure, and customers

GOP Tax Bill (GOPTB) looks to be positive for industries and companies in our coverage universe
Key aspects of GOPTB that affect our coverage industries and companies include, but not limited to:
21% corporate tax rate would be expected to reduce deferred income tax liability by some 40%
Interest expense deductibility capped at 30% of EBITDA for 2018-2021 and to 30% of EBIT after
100% investment deduction, except for utilities that would continue to deduct 100% interest
Preservation of existing investment tax credits (ITC) and production tax credits (PTC)
Repatriation of profits tax at 15.5% for cash and equivalent and 8% for non-liquid assets
Base-erosion & Anti-abuse Tax (BEAT) not impactful: If payments to foreign affiliates are 3% or more of a large company’s tax deductions then BEAT is imposed. We do not view this as relevant to companies that we cover, given 100% of PTC would be allowed to offset up to 80% of BEAT
AES Corp. faces large disqualification of interest expense deductibility but given its $3.7B in NOLs, we do not believe this to be an immediate issue; AES has time to remedy the situation:
NRG Energy shouldn’t have any issues with interest expense deductibility:
Exelon Corp. isn’t expected to have any problems with interest expense deductibility:
Cheniere Energy, oddly enough, shouldn’t have any problems with interest expense deductibility:
BKH, CNP, DUK, EIX, PCG, PNM, SRE should not have any issues with interest expense deductibility but may be able to use 100% investment deductibility to create win-win:
We note that the inability to deduct interest expense is limited to $0.21/$1 of lost deductibility
Loss of interest expense deduction could lead to some unexpected corporate behavior

Conclusion: Net effect of GOPTB looks to be positive, more so if utility holding companies are permitted to use non-utility subs to take advantage of the 100% capital investment deduction

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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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BKH 2Q2017 Earnings: Plans for cost of service gas falls thru but there’s a silver lining

Plans for cost of service gas falls thru but there’s a silver lining || It seems that the cost of service gas program (COSGP) will not move forward for the wrong reason, but it may be a blessing in disguise. We look for BKH to sell its oil and gas business and redeploy proceeds to buy another utility. BKH is lowering 2017 AEPS guidance to $3.45-$3.60 from $3.45-$3.65, largely due to 2Q2017 results. Focus on efficiency and cost reductions to continue. We look for BKH to pull trigger on large acquisition within 12-18 months continuing its focus on Utilities. We look for BKH to pivot more towards utility projects including transmission, renewables, but also generation in general, gas pipelines and other utility projects in the ST-to-MT. Also, work on reducing regulatory lag. CO Electric issued 60MW renewable RFP. Capital spending budget for 2017E-2020F was raised. BKH renewed its At-the-Market equity offering program, more as a contingency rather than for an imminent event. Mancos shale could be worth between $20/share-to-$61/share to BKH if fully-developed but far less if sold. 2Q17 results were below expectations. SD Electric entered agreement with staff to stabilize rates for customers through a 6-year base rate moratorium effective 7/1/2017. Lowering our ST-Target to $81/share and our NIV/share was lowered to some $95. BKH to hold Analyst Day in New York on October 5, 2017.

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BKH 1Q2017 Earnings Note

BKH is executing on its plan but big plans ahead ||

Integration of SourceGas is complete and showing investors merits of deal. BKH execution highlighting stock but much depends on cost of service gas program (COSGP) direction. If approve, BKH should have clear skies, if not we look for pull back below $60. We feel BKH will get it done because liquids revenue to go to consumers, which is windfall for them. Looking for renewed filing for cost-of-service-gas program (COSGP) in all jurisdictions in 1H2017. Focus on efficiency and cost reductions to continue. Maintaining 2017 AEPS guidance of $3.45-$3.65. We look for BKH to pull trigger on large acquisition within 12-18 months continuing its focus on Utilities. We still favor Mancos shale for source of COSGP. We remain skeptical re: COSGP, but if it BKH pursues COSGP 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. 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. 1Q17 results strong. Raising ST-Target to $85.

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BKH 4Q2016 Earnings Note

2017 feels like year for growth, but danger lurks ||

2017 feels like BKH is ready to focus on growth and leave behind write-offs and asset rationalization. Focus on efficiency and cost reductions to continue. But, Oil & Gas could still provide volatility. Looking for renewed filing for cost-of-service-gas program (COSGP) in all jurisdictions in 1H2017. Maintaining 2017 AEPS guidance of $3.45-$3.65. Capex spending estimated at $324MM (before COSGP). We look for BKH to pull trigger on large acquisition within 12-18 months continuing its focus on Utilities. We still favor Mancos shale for source of COSGP. It remains 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. 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. We believe reorganization of non-utilities businesses is over. We look for higher demographic and economic growth. SourceGas is largely fully integrated.

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BKH 3Q2016 Earnings Note

BKH can handle doubling of customers; Mancos play looks impressive ||

Increased 2016 AEPS guidance to $3.00-$3.10 from $2.90-$3.10. Also increased 2017 AEPS guidance to $3.45-$3.65 from $3.35-$3.65. 2017 upside guidance mostly due to synergy savings and longer ownership of SourceGas. BKH ready now for another large acquisition; could double customer base and expand efficiency gains. We look for BKH to pull trigger on large acquisition within 12-18 months. BKH intends to reapply for cost-of-service-gas program (COSGP) in some states in 1H2017; still favors Mancos shale for source of COSGP. It remains 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 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. Other growth projects on track. BKH expects SourceGas acquisition to be fully integrated by yearend.

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