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: 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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