PNM 1Q2018 Earnings Note (04/27/2018): 1Q2018 provides no additional insights and we continue to be positive

PNM reported AEPS of $0.21 vs. our $0.24 and consensus of $0.21. 2018E AEPS guidance remains at $1.82-$1.92 and forward earnings power for 2019E-2021E remains consistent
PNM maintaining CAGR in AEPS to 2021 of 6%, which may be conservative, but dividend CAGR likely higher
We estimate CAGR in AEPS thru 2021 at some 8.4% from mid-point of 2018 guidance
We continue to be constructive on PNM due to upside driven mostly by better economic performance, demographics and continue regulatory filings
TNMP GRC to be filed no later than May 2018
Total capex estimate is some $2.7MM (some $1.3B of depreciation) for 2018-2022. PNM may need to issue equity to fund its capex program using the at-the-market structure beyond 2019
We don’t expect any resolution to 2015GRC NM Supreme Court case until at least mid-2019, given that hearings aren’t expected to be held until October 2018
AMI filing expected with next energy efficiency filing in spring 2020
Revenue decoupling is being debated and likely file separately from any GRC, and likely would proceed – matter of how not if

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PNM (02/27/2018): Outlook improves but still conservative; 2H18 outperformance likely

2018E AEPS guidance $1.82-$1.92 is better than before due to benefit from Tax Cut and Jobs Act (TCJA)
PNM reported 4Q2017 of $0.24 vs. our $0.25 estimate and $0.19 consensus
PNM maintaining CAGR in AEPS to 2021 of 6%, which may be conservative, but dividend CAGR likely higher
We estimate CAGR in AEPS thru 2021 at some 8.4% from mid-point of 2018 guidance
Raising our 2018E AEPS due to new guidance and growth prospects. We see upside driven mostly by better economic performance. PNM’s future depends on regulatory matters, in our opinion
PNM 2018 RPS plan with FD by YE2018. Final IRP looks to be coal-free by 2031, which is most cost effective, and build renewable plants
TNMP GRC to be filed no later than May 2018. Total capex estimate is some $2.7MM (some $1,332MM of depreciation) for 2018-2022
TCJA is generally positive for PNM

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2018 Industry Update: Economic growth should favor commodities-driven businesses in 2018

Warmer than normal winter:
Weak gas prices:
However, 4Q2017 and 1Q2018 power gross profit could be better than expectations:
Similarly, we’d expect natural gas infrastructure businesses to perform well for 4Q2017 and 1Q2018:
We expect economic growth to surpass 4% for 2018:
Strong economic performance should lead to strong power sector performance:
Commensurately, we expect natural gas infrastructure businesses to perform well:
Adjusted for seasonality, we expect natural gas prices to creep up throughout 2018 and, given normal weather, we’d expect natural gas prices to average at or just below $3.50 for 2018 with an exit price of some $3.65-$3.75:
Conclusion: Going into 2018, we believe that natural gas prices will stage a moderate recovery, but power margins should do better benefiting from accelerating economic activity. Individually, we continue to like… . However, the real star may be … . Among the utility names, we like … due to their growth prospects. We also look for … to outperform as … .

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GOP Tax Bill is win for utilities, power, infrastructure, and customers

GOP Tax Bill (GOPTB) looks to be positive for industries and companies in our coverage universe
Key aspects of GOPTB that affect our coverage industries and companies include, but not limited to:
21% corporate tax rate would be expected to reduce deferred income tax liability by some 40%
Interest expense deductibility capped at 30% of EBITDA for 2018-2021 and to 30% of EBIT after
100% investment deduction, except for utilities that would continue to deduct 100% interest
Preservation of existing investment tax credits (ITC) and production tax credits (PTC)
Repatriation of profits tax at 15.5% for cash and equivalent and 8% for non-liquid assets
Base-erosion & Anti-abuse Tax (BEAT) not impactful: If payments to foreign affiliates are 3% or more of a large company’s tax deductions then BEAT is imposed. We do not view this as relevant to companies that we cover, given 100% of PTC would be allowed to offset up to 80% of BEAT
AES Corp. faces large disqualification of interest expense deductibility but given its $3.7B in NOLs, we do not believe this to be an immediate issue; AES has time to remedy the situation:
NRG Energy shouldn’t have any issues with interest expense deductibility:
Exelon Corp. isn’t expected to have any problems with interest expense deductibility:
Cheniere Energy, oddly enough, shouldn’t have any problems with interest expense deductibility:
BKH, CNP, DUK, EIX, PCG, PNM, SRE should not have any issues with interest expense deductibility but may be able to use 100% investment deductibility to create win-win:
We note that the inability to deduct interest expense is limited to $0.21/$1 of lost deductibility
Loss of interest expense deduction could lead to some unexpected corporate behavior

Conclusion: Net effect of GOPTB looks to be positive, more so if utility holding companies are permitted to use non-utility subs to take advantage of the 100% capital investment deduction

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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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