PNM: Recommended Decision (RD) creates unwanted drama; likely leads to May 2017 settlement agreement becoming effective

The RD is close to the SA but for two twists:

o Rates are recommended to be applied on a straight pro-rata basis

§ SA calls for higher rates for water processing company and industrial users

o Stop participation in Four Corners Power Plant (FCPP) immediately and stop PNM from recovering its investment in FCPP

· Statutory deadline for NMPRC to make a decision is January 6, 2018 but NMPRC may choose to delay the decision to as late as March 6, 2018 (two one-month suspension periods could be invoked)

· However, if the NMPRC does not make a decision by March 6, 2018 then PNM’s original December 2016 filing (OF) takes immediate effect, which, among other conditions, proposes a $99MM rate increase vs. the $62.3MM rate increase in the SA

· More importantly, if the NMPRC makes any changes to the SA, any signatory to the SA has the right to withdraw its support of the SA, and negotiations would have to start over

· However, regardless of whether or not negotiations are reopened, NMPRC must make a decision by March 6, 2018 or the OF takes effect

· Given this last condition, we believe that PNM has the advantage in negotiations given that if a decision cannot be made by March 6, 2018, its OF takes effect
Conclusion: Given the risks, we are of the opinion that the NMPRC would want to avoid drama, particularly for the two Commissioners that are up for re-election in November 2018, which implies to us that the NMPRC is likely to adopt the SA in whole to avoid reopening negotiations

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PNM 3Q2017: PNM beat but keeping guidance unchanged; this is overly conservative

Keeping guidance implies 4Q17 would be no more than $0.20, which we feel is too low
PNM accounts for low 4Q17 guidance due to higher donations to PNM’s Foundation and higher costs
New guidance for CAGR in AEPS to 2021 of 6%, but dividend CAGR likely higher. We estimate CAGR in AEPS thru 2021 at some 7.7%.
Lowering our 2018E AEPS due to 2016 rate case
We see upside driven mostly by better economic performance
PNM’s future depends on regulatory matters, in our opinion
Total capex estimate is some $3,254MM (some $1,557MM of depreciation) for 2017-2021
PNM may need to issue equity to fund its capex program using the at-the-market structure beyond 2019
Guidance meeting December 8, 2017 at New York Stock Exchange

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PNM 2Q2017 Earnings Note: PNM performed as expected; now it’s up to regulatory matters

PNM performed as expected; now it’s up to regulatory matters || Management has negotiated well through a maze of complications, but now PNM’s future depends regulatory matters, in our opinion. 2018 GRC settlement agreement was reached and waiting NMPRC final decision (FD); we’d estimate by March 2018. PNM 2018 RPS plan with FD by YE2017. Final IRP looks to close coal plants, which is most cost effective and renewable plan; decision expected 4Q2017. PNM AMI installation supplemental hearings in Oct. 2017, and TNMP GRC to be filed no later than May 2018. NMPRC rulemaking on utility ratemaking policy has public workshop scheduled September 14, 2017 – this is NOT about rate structure but more procedural matters and developing framework for consistent rulemaking in such matters as cost of capital and limiting litigation in certain ratemaking processes. No changes to demographic assumptions. Regardless, we raise our outlook for CAGR in AEPS through 2019 to about 10.3% from 8.6% based on strong 2Q17 and pending regulatory matters. Total capital spending estimate is some $1.76B (some $960MM of depreciation) through 2020. PNM maintaining 2017 AEPS guidance of $1.77-$1.87, which we view as conservative given 1H2017 results.

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PNM 2018 GRC Settlement Agreement is Fair-Minded; We Look for Approval

PNM filed a revised rate case settlement agreement (RRCSA) on Tuesday, May 23, 2017 in response to the hearing examiner’s (HE) specific issues on May 12, 2017 regarding a number of points in the May 5, 2017 settlement agreement (SA)
Major financial stipulations are unchanged:
Rate increase of $62.3MM to be phased-in over two years: $30MM as of 1/1/2018 and an additional $32.3MM to be implemented as of 1/1/2019

What has changed are issues that are either more appropriately addressed separately or through other existing channels or processes. These include, but are not limited to:
The provision that would have allowed for the exchange of $10MM in additional annual depreciation for San Juan Generating Station (SJGS) offset by $10MM lower annual depreciation on distribution assets has been eliminated
Rate design issues have been pulled from the RRCSA and is expected to be addressed through a separate track. These include, but are not limited to the following:

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PNM Rate Case Settlement Takes an Unexpected but Fair Turn

• On Friday, May 12, 2017, the Hearing Examiner (HE) rejected the current settlement agreement, but not for economic reasons, but more due to rate design and procedural timing issues
1) The HE felt that due to a lack of precedents of approving a rate case while certain items, mostly due to rate designs, are being held aside to be negotiated and finalized, the HE felt that the settlement agreement (SA) could not be approved as is;
2) Given that the suspension period goes through mid-January 2018, the HE also felt that there was no time to file new rate design proposals, get them approved and in place before the suspension period is over and, therefore, felt that the current SA couldn’t be approved; and
3) Lastly, the HE did not like that certain rate increase were to be implemented on a pro rata basis, but that the water-pumping and processing customers were to be given a subsidy, and given that such matters lacked a precedent, the HE felt that it was not in their purview to make any ruling on this matter.
• In response to the HE’s decision three avenues of action would have been possible:
1) Try to negotiate all of the particulars in the rate designs that were being held over for future negotiations and have it approved before the suspension period is over;
2) Ask for rehearing, and provide the precedent necessary for the HE to rule on the particular issues, and failing to achieve the objectives, go through legal channels and continue to appeal the process up through to the NM Supreme Court; or
3) Remove the offending articles, have the existing SA approved then separately negotiate the items that were removed and file it separately or through future rate cases.
• We feel that option 3) is the best choice and appears that PNM is following this track

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PNM 2017 GRC Settlement Agreement

2018 GRC Settlement Agreement is Fair-Minded; We Look for Approval ||

PNM filed a rate case settlement on Friday, May 5, 2017, having filed its rate case on December 14, 2016
PNM originally filed for a $99.2MM rate increase over two-years:
$50MM as of January 1, 2018, which would have resulted in a monthly increase of some $6 per residential customer in 2018
An additional $49.2MM as of January 1, 2019, which would have resulted in a monthly increase of some $5 per residential customer in 2019
Summary of the stipulation:
Phase-in $62.3MM rate increase over 2-years, resulting in 3.9% increase in 2018 (an increase of about $32.3MM) & 3.4% in 2019 (an increase of some $30MM)
Accelerate return of state income tax reduction to consumers and adjust 2019 rate increase for any federal corporate tax rate reductions [it’s unclear whether this applies to 2019 corporate rates and forward or it would incorporate, retroactively, any changes enacted for 2018 and 2017]
Theoretically, the stipulation balances customers’ interest with NM’s environmental policy goals

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PNM 1Q2017 Earnings Note

Near-term regulatory catalyst should help drive stock ||

A settlement agreement is at hand in the 2018 GRC. Pursuantly, PNM and parties to agreement have filed for an extension. Draft IRP was filed and having gone through the document we wrote a Quick Note dated April 20, 2016. We’re generally on-board with closure of San Juan and Four Corners, and the migration towards renewables and natural gas. From our view, PNM is on-track and delivering on its upside potential. In view of more modest demographic growth assumptions going forward, PNM reduced expectations for its CAGR in rate base for 2016-2019 to about 5%-6% (was 5%-7%) and lowered its expectations for CAGR in earnings for 2016-2019 to roughly 7%-8% (was 7%-9%). Regardless, we maintain our outlook for CAGR in AEPS through 2019 of about 8.6%. Total capital spending estimate is some $1.7B (some $1,013MM of depreciation) through 2020. The next important development is the settlement agreement for the 2018 GRC and the IRP that has final filing date in mid-July 2017. Draft IRP was not much of a surprise and in-line with expectations, AMI installation final decision in May 2017, and TNMP GRC to be filed no later than September 2018.

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PNM 2017 IRP Quick Note

Draft Integrated Resources Plan (IRP) is mostly in-line w/expectations ||

We had called for the draft IRP to build a new combined-cycle gas turbine (CCGT) power plant to replace the San Juan Generating Station units 1&4 by the end of 2022 and to build renewable generation, including solar and wind to augment; we had also assumed the continuation of Palo Verde Nuclear Generating Station (PVNGS) ownership (288MW) and leases (114MW: 104MW expiring in 2023 and 10MW expiring in 2024)
The actual draft IRP calls for:
As expected SJGS 2&3 will shut-down by yearend 2017, and the draft IRP calls for closure of SJGS 1&4 (some 497MW) by June 30, 2022 when the current coal contract ends; this is in-line with our expectations; plan assumes PNM would be permitted to fully recover its remaining investment
Abandonment filing is required between July 1-and-December 31, 2018 with the NMPRC
Some combination of natural gas, solar and possibly additional wind projects would be utilized to offset the closure of SJGS and Four Corners
Energy storage projects could also be part of the energy supply mix
PNM may need to add new transmission capacity to the eastern parts of New Mexico where wind energy potentials are high, but transmission capacity is fully subscribed
We expect PNM to either renew the expiring PVNGS leases or outright buy the interests

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PNM 4Q2016 Earnings Note

Continues to perform with regulatory matters taking center stage ||

2016 GRC final decision (FD) was better than the preliminary decision, but still puzzlingly disappointing. Implementation began Oct. 1 2016. The FD was appealed to NM Supreme Court on Sept. 30, 2016 with final adjudication expected in 1Q2018. We’re particularly puzzled by disallowance of balance draft technology at San Juan, which we believe is necessary part of keeping San Juan operational, and book-value transfer-pricing for PV 2. In view of more modest demographic growth assumptions going forward, PNM reduced expectations for its CAGR in rate base for 2016-2019 to about 5%-6% (was 5%-7%) and lowered its expectations for CAGR in earnings for 2016-2019 to roughly 7%-8% (was 7%-9%). Regardless, we maintain our outlook for CAGR in AEPS through 2019 of about 8.6%. Total capital spending estimate is some $1.7B (some $1,013MM of depreciation) through 2020. The next important development is the IRP to be file mid-2017. We expect surprises, particularly on the renewable energy front. Other regulatory decisions include PNM 2018 GRC filed 12/7/2016 with settlement agreement expected to be filed by March 27, 2017, AMI installation final decision in May 2017, TNMP TCOS decision in March 2017, and TNMP GRC to be filed no later than September 2018.

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PNM 4Q2016 Earnings Quick Note

Continues to perform ||

Note: Please note that due to 5 companies (NRG, CNP, PNM, LNG, SRE) reporting on one day, we will be writing Quick Notes for all of the companies reporting today followed by full notes later in the week

PNM reported $0.34 vs. our $0.38 and consensus of $0.31
It seems that we over estimated contributions from TNMP
We appears that we over estimated retail load contribution as well
PNM maintains 2017E AEPS guidance at: $1.77-$1.87
PNM filed 2018 GRC on December 7, 2016
Requested $99MM revenue increase of which some $44MM is for implementing BART agreement and for the Four Corners SCR environmental work
125% ROE was requested
Implementation date of January 1, 2018
Settlement discussions are scheduled to begin on March 7, 2017
Settlement filing is expected on March 27, 2017
Good basis to believe an amicable settlement would be reached given that many of the BART settlement participants have already agreed that they would not oppose any BART elements
Advanced Metering Infrastructure (AMI) hearings commenced February 27, 2017

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