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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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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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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