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Market Price (8/09/2016): $32.89/share; ST-Target: $42/share; NIV: $68/share
2016 GRC PD was negative surprise amid positive quarter
2016 GRC preliminary decision (PD) was disappointing and puzzling, and implementation looks to be delayed to at least September 1, 2016. PNM waits for final decision (FD) before potentially appealing to NM’s Supreme Court. 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 lease and property tax expense for Palo Verde (PV). We’re also disappointed by denial of revenue decoupling, which we believe is win-win; however, PD proposes a non-bypassable fixed charge to partially compensate. Good news: PD seems highly specific to PV and doesn’t indicate broader issues with NM’s regulatory framework. PNM reduced its guidance to $1.55-$1.65 from $1.55-$1.76. We have adjusted our estimates accordingly. Regardless, we look for CAGR in AEPS through 2020 of over 7% vs. PNM’s expectations for CAGR in rate base of 5%-7% at PNM and 7%-9% at TNMP. Total capital spending is estimated to be over $1.7B (some $790MM after depreciation) through 2019. Customer growth was up some 0.7% in 2Q2016 at PNM, but energy sales were down 0.4%, indicating energy efficiency efforts are working and economic conditions are lackluster. But, employment growth picture seems to be brightening in New Mexico. Texas economic and demographic conditions remain robust as well.