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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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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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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