PNM 3Q2016 Earnings Note

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Market Price (10/28/2016): $31.95/share; ST-Target: $42/share; NIV: $68/share

2016 GRC PD was negative surprise amid positive quarter

2016 GRC final decision (FD) was better than the preliminary decision, but still puzzlingly disappointing. Implementation began Oct. 1 2016. The FD is expected to be appealed to NM Supreme Court 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 2015-2019 to about 5%-6% (was 5%-7%) and lowered its expectations for CAGR in earnings for 2015-2019 to roughly 7%-8% (was 7%-9%). Regardless, we maintain our outlook for CAGR in AEPS through 2019 of about 7%. Total capital spending estimate was increased to some $1.9B (was $1.7B; some $1,019MM after depreciation) through 2019. Much of the increase spending comes from PNM T&D and at TNMP, partially offset by deferment of the now 40MW (was 80MW) peaking unit to 2020 from 2018. The next important development is the IRP to be file mid-2017. We expect surprises, particularly on the renewable energy front.

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