NMPRC’s periodic anti-shareholder decisions are unproductive but creates buying opportunity, in our opinion

Adjusted modified final decision (FD) supports the modified FD and includes following modifications:
$48MM rebate to customers for expected lower tax burden in 2018, which is supported by PNM
$9MM reduction for the return on investment on PNM’s Four Corner environmental investment
Prudency of PNM’s Four Corners (4C) investment continues to be deferred to a later judgment
While we are disappointed by the decision to withhold $9MM for the return on investment portion of PNM’s environment capital expenditures, we do understand that until and unless the validation of the investment itself is approved, the logical action would be to withhold the $9MM
However, we believe that PNM’s environmental capital expenditures in 4C should be approved, which creates a buying opportunity, in our opinion

Conclusion: While we are disappointed with the Adjusted Modified FD, we believe that it has created an opportune buying opportunity for PNM

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Final Decision (FD) have gives and takes but could be better

he FD largely accepts the RD with some modifications; no financial consequences of note
The RD was close to the SA but for two twists:
Rates are recommended to be applied on a straight pro-rata basis
Stop participation in Four Corners Power Plant (FCPP) immediately
NMPRC’s FD approved $62.3MM rate increase in the SA phased-in over 2 years, and 9.575% ROE
Despite the FCPP findings, the PRC authorized recovery of about $148MM of PNM’s environmental investments in the plant but disallowed PNM from collecting a return on this investment
Further, the PRC temporarily disallowed some $36MM in capital expenditures for improvements in the San Juan Generating Station (SJGS), but permitted PNM to request recovery in future rate cases, the earliest which may be filed in late 2019 or early 2020
We believe that an agreement would be reached to approve the modified SA by all signatories to the original SA by Thursday, December 28, 2017
However, if litigation is pursued, we believe that it cannot be completed by March 6, 2018, which would give PNM the authority to implement the $99MM rate increase in its OF, but we believe that PNM would act more prudently and either 1) not increase rates, or 2) more likely, implement the $62.3MM rate increase stipulated in the FD until the litigation process is settled
Longer-term, we feel that the NMPRC may be seeking a path towards the early withdrawal of PNM’s participation in FCPP; however, we feel that PNM has some flexibility

Conclusion: We would expect the parties to the original SA to agree to the modified SA in the FD by next Thursday, December 28, 2017, and we look for negotiations to PNM’s participation in FCPP to continue, which may result in PNM’s participation in FCPP to terminate before the end of the coal contract period which extends through 2031. In return, we’d expect PNM to be authorized to build new power plants including at least one gas plant and further renewable projects, and to be at least partially compensated for the early exit from the FCPP coal contract

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FLASH PCG: PG&E Suspends common and preferred dividends due to wildfires

This afternoon, the board of directors of PG&E Corporation and Pacific Gas and Electric announced the suspension of dividends for both the common and preferred stock as of the three month ending January 31, 2018. The decision was made due to the unprecedented wildfires from October 2017 in northern California, given that California’s courts have consistently applied inverse condemnation to events in which utility equipment were involved in the incident, regardless of whether or not the utility acted in accordance with established inspection and safety rules. This means that the utility is liable for the property damages and attorney’s fees associated with the incident. It is our understanding that California courts apply inverse condemnation under the assumption — not necessarily accurate, in our opinion — that the utility would be permitted to pass-through these costs to their customers.

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Flash: LNG Signals positive FID for CCL3 in 1H2018 with Bechtel EPC contract

On Monday, December 18, 2017, Cheniere announced that it signed an approximately $2.36B fixed-price turnkey Engineering, Procurement and Construction (EPC) contract with Bechtel Oil, Gas and Chemical, Inc. (Bechtel) to proceed with the construction of Corpus Christi Train 3 (CCL3), a 4.5MM Metric Ton per Annum (MM MTPA) or about 576MMCF/Day LNG liquefaction facility, by July 5, 2018

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Share buybacks do not create value and the notion that a company can invest in its own stock is nonsense

Ever since I graduated business school – which was a long time ago – I’ve been having discussions and arguments as to whether or not share buybacks (SBB) create value. Despite the fact that many impartial studies have demonstrated and many mathematical proofs have been proffered that SBB don’t create value, astonishingly people continue to emphatically argue that SBB create value. This is not to say that SBB cannot be used to return truly unused capital back to shareholders, but we believe that SBB should be an action of last resort. Regardless, the conclusion: SBB cannot and, therefore, do not create shareholder value.
Even CEOs and CFOs of many companies can’t seem to bring themselves to stop SBB despite all of the evidence that companies cannot create value by buying back their own shares. And, even when it is demonstrated to these managements that there are far better ways to utilize the cash, managements still have reservations about ending their SBB program.
Therefore, I’m hoping that I can end this resistance to ending SBB through this editorial tutorial. The following lists arguments that we’ve encountered for why SBB create value for shareholders:
1) The P/E argument: SBB reduce share count, which increases EPS, and given the same multiple, the stock price must go up;
2) Investing in the company’s own stock creates value for shareholders: Companies can buy their stock at a low price and sell it at a higher price, which creates value;
3) Higher ROE means higher valuation: By reducing the amount of equity on the balance sheet, this raises the ROE on the returns from company projects, for which investors give the stock a higher valuation; and
4) Excess cash returned: This point is about returning excess cash to investors not about shareholder value.

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PNM: 2018-2019 Guidance was in-line with expectations, but upside potential good

2018E and 2019F AEPS guidance was unsurprising coming in at $1.70-$1.80 for 2018 and $2.00-$2.16 for 2019 versus our expectation of $1.81 for 2018E and $2.20 for 2019E and consensus of $1.75 and $2.07, respectively
Total capital expenditure plan of some $2.7B for 2018-2022 is largely unchanged and consolidated 2017-2021 rate base CAGR of 4.5%-6.5% is also largely unchanged
Potential AEPS power for 2020F&2021F is also largely in-line with our view, but conservative, in our opinion, coming in at $2.12-$2.28 for 2020F and $2.16-$2.34 for 2021F or mid-point of $2.20 and $2.25, respectively, versus our estimates of $2.27 and $2.40, respectively
We view guidance as in-line with a conservative bent, which leaves room for upside, in our opinion.
We thought that PNM and other holding companies may have an opportunity to take advantage of the 100% capital investment deduction, if the tax reform passes, by creating a non-regulated entity that invests in utility-like projects
PNM may join a regional Energy Imbalancing Market
While management has largely disavowed using its stock as currency for an acquisition, we believe that PNM may be well situated to do so, particularly in Texas, if it so desires

Conclusion: We believe that PNM is well positioned for upside surprise in its financial performance

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Letter to FERC outlining our thoughts on how to redesign wholesale power market pricing mechanism

For years, I have been advocating for a wholesale change in how power is priced in the wholesale electricity markets. And, I wish to be heard on this matter, because I believe that my views are not only intelligent and cogent, but also on-point to a future grid that is both reliable and resilient.

From my perspective, there are five main issues that must be resolved to maintain a grid that is both reliable and resilient for the long-term:
Renewable power disruption of wholesale power pricing
Proper compensation of reliability and resiliency characteristics of generation
No regression to “cost-of-service” rates
No “freebies” to businesses
Redesign must be based on market principals

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LNG 3Q2017: 2018 looks to be breakout year, but depends on commercialization

In our opinion, Cheniere needs to buy back all CCH HoldCo II Convertible Senior Notes (CCH Holdco 2 Convertibles), but conversion unlikely before March 1, 2020. So, we feel investors won’t be concerned until 2H2019.
We like that Cheniere’s looking at ways to deploy future FCF, but not thrilled about foreign and liquids-based ventures. We believe there are many US opportunities involving E&P, pipelines or M&T
We believe CQH and CQP roll-up will happen in due time
LT, Chenier faces under-leverage problem. We’d like Cheniere to take excess cash flow to pay dividend after rolling up CQH and CQP and after its 3rd-act, but no share buybacks.
As expect global LNG markets are tightening quicker than past expectations, but we wonder how much of it is due to Qatar sanctions imposed by neighbors
2018 likely to be driven by SPL 6 and CCL 3 FID and associated LT-contracts
We believe CNPC MOU will lead to LT-contract and both SPL 6 and CCL 3 will FID in 2018. We also look for additional LT-contracts to boost value.

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PCG: ALJ PD on Diablo Canyon seems a bit capricious, so room for upside

The PD has adjustments to employee, community, and energy replacement programs that PG&E believes are inappropriate and advocates for the settlement agreement to go forward as is. The significant differences between the settlement agreement and the PD are as follows:

The PD proposes that replacement power for Diablo Canyon Power Plant (DCPP) should be handled through the Integrated Resource Plan (IRP) instead of separately through an independent track:
Our Analysis:
Instead of $350MM for the employee retention program, the PD proposes only $175MM, cutting the total provisions for employee assistance to $345MM from $520MM:
Our Analysis:
Complete denial of the $85MM in community assistance program (CAP):
Our Analysis:

Our Conclusion: Hearings are scheduled for November 28 with rebuttals due by December 4. We continue to expect a final decision (FD) by yearend. We’d expect the FD to … .

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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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