The potential implications of tax legislation and regulatory headwinds on the gas and electric utility Black Hills Corp BKH led to a downgrade from Credit Suisse on Tuesday.
The Analyst
Analyst Michael Weinstein downgraded Black Hills from Outperform to Neutral and lowered his price target from $66 to $60. The downgrade comes after shares outperformed peers by roughly 7 percent since December.
The Thesis
The net impact of the tax bill is one factor that could contribute to a 15-cent drop in Black Hill's 2018 guidance, Weinstein said in a note. (See the analyst's track record here.)
Another negative catalyst Weinstein identified: " ... An accelerated ratecase schedule that is likely to pick up steam after the recent filing in Arkansas and subsequent dockets for tax review in Kansas and South Dakota."
Credit Suisse expects another rate filing in Colorado in 2018 following a U.S. District Court ruling in Denver and follow-on regulatory reconsideration on the Pueblo CT rate treatment.
A gas utility return on equity of 10.9 percent is projected by Credit Suisse, despite recent lowering of estimates and guidance on lower SourceGas load and revenue.
The shifting of $500 million in parent debt away from Black Hills' capital utility structure calculations would bring EPS down 15 cents and reduce the gas utility ROE to 9.6 percent, Weinstein said.
"We anticipate regulators across most BKH jurisdictions to require this interest cost shifting as they begin to review rates for the purpose of passing tax savings back to customers," Credit Suisse said.
The Price Action
Shares of Black Hills are down over 5 percent over the past year.
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