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spk05: Good morning and welcome to the PNM resources financial update conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Lisa Goodman, Director of Investor Relations. Please go ahead.
spk04: Thank you, Kate, and thank you, everyone, for joining us this morning for the PNM Resources Financial Update with Preliminary 2021 Earnings and Guidance for 2022 and 2023. Please note that the presentation for this conference call and other supporting documents are available on our website at pnmresources.com. Joining me today are PNM Resources Chairman, President, and CEO, Pat Vincent-Coulon, and Don Terry, our Senior Vice President and Chief Financial Officer. Before I turn the call over to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward-looking statements are based upon current expectations and estimates, and that PNM Resources assumes no obligation to update this information. For a detailed discussion of factors affecting PNM Resources results, please refer to our current and future annual reports on Form 10-K, quarterly reports on Form 10-Q, as well as reports on Form 8-K filed with the SEC. With that, I will turn the call over to Pat.
spk06: Thank you, Lisa. Good morning, and thank you all for joining us today. It's been some time since we've held an earnings call, but I can assure you it is all coming back to us now. You probably knew that yesterday was Groundhog Day, but since the day after Groundhog Day often gets overshadowed, you may not know that today is both National Optimist Day and National Carrot Cake Day. And when you start the day off eating carrot cake, it's easy to be an optimist. Of course, it's also easy to be an optimist when you have great team members like Lisa Goodman. Lisa was recently named a 2022 Woman of Influence by Albuquerque Business First. Lisa deserves this recognition and has been a great part of our PNM Resources family for more than 18 years. Congratulations, Lisa, and thank you for all that you do. I'm going to start on slide four with our financial results and guidance. Preliminary ongoing earnings for 2021 are 245 per share, reflecting another strong year of delivering results. Growth in PNM's FERC transmission business and recovery of TNMP's capital investments through rate riders provided year-over-year utility earnings growth. We are also providing earnings guidance for 2022 at a range of 250 to 260 per share, and for 2023, at a range of $260 to $275. We continue to be focused on running our business in New Mexico and Texas, investing in the infrastructure needed to meet the growing demands of our customers and communities, and providing shareholders a return for their investment. Tied to this increased earnings expectation is a 6% increase to our common dividend, keeping us in the middle of our targeted payout ratio for 2022 earnings. Don will cover each of these items in more detail in the financial slides. As our merger process with Auburn Grid continues, and I'll get to that in a minute, our teams continue to build on the successes of years past and adapt and respond to changes in our business environment to move PNM and TNMP forward. At PNM, we are implementing plans to achieve our goal of providing 100% emissions-free energy by 2040. In the fourth quarter of 2021, our annual renewable plan and our first transportation electrification program were both approved by the Commission. We are also continuing our efforts to exit from coal-fired generation early with our appeal to the New Mexico Supreme Court following the Commission's denial of our planned exit of the Four Corners coal plant. The early exit not only aligns with our carbon-free goals, but it brings customer savings, including reduced fuel costs, and provides the local communities financial support as they transition to a non-fossil fuel economy. TNMP just completed its most significant year of capital expenditures to support growth in its service territory, and it isn't slowing down. Last winter's storm, URIE, has increased interest in adding resource and storage capacity in ERCOT, and we've seen more requests to interconnect to our system. The transmission and distribution capital rate riders in Texas ensure that our investments are recovered in a timely manner. We filed our first semi-annual transmission cost of service adjustment for 2022 last week with a requested increase in annual revenues $14.2 million based on our investments in the second half of 2021. Let's turn to slide five and talk more about the merger. We've extended the agreement with Avangrid to April of 2023 with a three-month extension option to preserve the progress we have made over the last year. We obtained approval from the five required federal agencies and the Public Utility Commission of Texas, leaving only the New Mexico Public Regulation Commission. In our New Mexico application, we negotiated unprecedented customer and economic development benefits, which we conservatively estimate to be worth $300 million. That was all in a stipulation that has broad support, with 23 out of the 24 intervening parties either supporting or not opposing it. Our reasons for the merger have not changed. As we look out into the future and see the capital needed to navigate the transition to clean energy and meet growing demand, we knew that a combination with a larger company would provide benefits of scale, regulatory diversity, and a stronger credit profile. We also looked for a partner who would align strategically with our goals. Avangrid and eBedrola have an impressive ESG profile on the national and global level, and are willing to make commitments on important items to stakeholders in New Mexico and Texas, maintaining local control of the utilities, following through on the clean energy commitments we've made in New Mexico, supporting economic development efforts, and continuing to be strong partners in our community. Our combination makes sense. In December, The New Mexico PRC rejected the stipulated agreement with parties, and at the beginning of January, we filed our notice of appeal with the New Mexico Supreme Court. Yesterday, we jointly filed with Avangrid and Ibadrola our statement of issues in the appeal, and they can be summarized into three key issues. First, was the PRC decision improperly based on inadmissible hearsay evidence? and information outside the evidentiary record? Second, did the Commission determine the merger was contrary to the public interest by imposing arbitrary standards, improperly weighing benefits and risks, and ignoring the weight of the admissible evidence? The benefits and protections we proposed were far beyond the level required in the approval of other mergers. These added benefits and protections were then weighed against perceived risks including a fear that PNM would begin ignoring its obligations to provide quality service to customers as the result of Avangrid's ownership. These were not real risks supported in the record and were contrary to the stipulated commitments made by PNM and Avangrid. The third issue is around the commissioner further acting unreasonable and unlawfully and in violation of due process in their handling of matters concerning the discovery process. We think the Commission failed to follow its own rules in withholding its approval. The next step is for the Supreme Court to assign a case to its calendar, which will trigger a 45-day deadline for P&M and Auburn Grid to file their detailed arguments in the appealed issues in the brief, followed by 45 days for the PRC to file an answer brief. We will then have 20 days to file a response to the PRC's brief. In the briefs, we can request oral argument, which will be at the court's discretion. We expect the appeal process to take 12 to 18 months. If the court agrees with our arguments, the case will be remanded back to the PRC. Our appeal of the PRC's rejection of the stipulation maintains the progress we have made, and retains our negotiated agreements with parties, which was an important consideration in filing the appeal and extending the merger agreement. The merger would create a stronger financial profile, but it does not change our strategic direction. My leadership team and I remain in place and are focused on the tasks at hand. During the appeal process, we will continue to manage our business successfully and deliver results. Don will walk you through our financial plans, but I first want to touch base on some ESG highlights for 2021 on slide six. P&M's resource portfolio capacity moved to more than 30% renewables and 40% carbon-free in 2021 with the addition of new wind resources. We are well on our way to achieving the renewable portfolio standards laid out in the Energy Transition Act. We also joined the Western Energy Imbalance Market in April of 2021. The regional coordination is designed to balance fluctuations in supply and demand by automatically finding lower cost resources to meet real-time power needs. It maximizes the potential for renewable resources across the market by making excess renewable energy available to utilities at low cost rather than curtailing the resource to balance the grid. In CalISO's third quarter report of Western EIM benefits, the total avoided renewable curtailment volume for the second and third quarters was calculated at over 132,000 megawatt hours. Under the assumption that these avoided curtailments displaced production from other resources, the estimated result in carbon dioxide reduction is over 56,000 metric tons. And P&M's participation also provided $12.5 million in customer savings over the first nine months. And as I mentioned earlier, we continue to advance support for electric vehicles with the approval of our first transportation electrification program for P&M customers. This comes on the heels of our announcement to shift more of our own fleet to EVs, and we've also joined a number of our EEI peers to partner with the National Electric Highway Coalition to bring more charging stations to our nation's roadways so that the public can drive EVs with confidence across the country by the end of 2023. To continue our tradition of environmental stewardship, we have named our first chief environmental officer at PNM. Maureen Gannon, who has been with PNM for 25 years, possesses an incredible knowledge base of the environmental challenges, achievements, regulations impacting our industry, and importantly, the future opportunities being explored. She will continue to represent us at a state, national, and global level as we work to achieve our goal for emissions-free energy by 2040 and will expand our ESG reporting. Maureen will also lead our work on a just transition, incorporating into our decision-making the impacts of the clean energy transition on workers and communities, particularly tribal communities. New Mexico's Energy Transition Act and PNM's plans to exit coal We're uniquely designed to consider these elements and we feel strongly that our core values of safety, caring, and integrity are embedded within our business plans for this critical transition. Our communities depend on this and we take this responsibility seriously. Our community support extends throughout our business. Our teams in Texas demonstrated this support through several challenges in 2021. Winter storm Uri created a significant disruption in February when the storm hit. And in August, Hurricane Ida hit Texas, and our TNMP crews assisted in the restoration efforts only to return home in time for Hurricane Nicholas to hit our own service territory in September. But our teams rose to meet these challenges. EEI recently recognized TNMP for their exceptional response to these events, with both an Emergency Assistance Award and an Emergency Response Award. And in New Mexico, we have continued to provide financial assistance for customers impacted by COVID-19 and help them access partnership funding. More than $7 million in cumulative assistance has been provided through these efforts. We care about our customers and our communities, and we continuously walk the talk and demonstrates our core values in our business practices. So now let me turn it over to Don to walk through our financial update.
spk07: Thank you, Pat, and good morning, everyone. I'm going to pick up on slide eight and briefly touch on our earnings results for 2021. For those of you who are following us at Q3, you'll remember that we were ahead of expectations through September based on our original guidance provided for the year of $2.27 to $2.37. We continue that trend and finished off the year strong in the fourth quarter and are reporting preliminary earnings of $2.45 for 2021. Our increase in 2021 earnings was based on growth at the utilities. At PNM, FERC transmission margins increased due to the addition of new customers and higher utilization of our transmission system by third parties. Earnings also increased due to interest savings and higher realized gains from our decommissioning and reclamation trusts. These increases were partially offset by planned increases in operational spending, higher depreciation and property tax expense, resulting from additional capital investments, and milder temperatures in the second half of the year compared to 2020. At TNP, T-cost and D-cost rate rider recovery was partially offset by higher depreciation and property tax expense from additional capital investments and planned increases in operational spending. At corporate, we had interest savings from the pay down of debt with the proceeds from the additional shares issued at the end of 2020, as well as lower interest rates in 2021. All of our detailed drivers are included in the appendix. Looking forward, I'll turn to slide nine. As Pat mentioned, the merger process has not changed our strategic direction, and today we are providing guidance for both 2022 and 2023 to give more detail around our projections while the merger is extended. 2022 earnings guidance is a range of $2.50 to $2.60 with a midpoint of $2.55. 2023 earnings guidance is a range of $2.60 to $2.75 with a midpoint of $2.68. Both of these ranges are consistent with our expectations prior to the merger announcement and reflect continued execution of our plans. On a long-term basis, we are targeting 5% EPS growth from 2020 to 2025. There is a growing need for T&D infrastructure to support safe and reliable growth on our systems and to integrate more renewables on P&M's system as New Mexico transitions to clean energy. Most of this rate-based growth is recovered through FERC transmission rates and TNMP rate riders. Our 5% target assumes additional equity in our plans to fund this infrastructure growth while maintaining our investment-grade credit metrics. We also announced a dividend increase, which maintains our 55% targeted payout ratio on higher level of earnings, resulting in a 6.1% increase. Let's get into the details starting on slide 10. We continue to see strong economic development activities in New Mexico in 2022 and 2023. PNM will see the impact of industrial customers expansion that we've shared in the past. And Amazon Distribution Center and Kairos Power, an engineering company focused on advanced reactor technology, both came online in 2021 and will provide a full benefit in 2022. Intel and the Meta Facebook data center previously announced expansions that are playing into our load projections. The offsetting fluctuation in P&M residential and commercial load due to COVID-related business restrictions are expected to fully return back to pre-COVID levels in 2022. In Texas, we also saw COVID trends reverse in 2021 as volumetric load decreased and demand-based load increased. Moving forward, we expect volumetric load from residential customers to increase 1% to 2% in 2022 and 2023, consistent with customer growth. We continue to see good levels of new service requests and interconnections for new resources in Texas, and we expect demand-based load to increase 2.5% to 3.5%. Now turning to slide 11 for our capital investment plans. We continually evaluate our capital needs to ensure safe and reliable service for our customers. We have increased our capital plan by $500 million to $3.5 billion, with additional T&D investments required to serve economic growth we are seeing in both our PNM and TNMP service territories. At PNM, this incorporates the investments that are designed to deliver clean energy, enhance customer satisfaction, and increase grid resilience. Far beyond replacing aging infrastructure, will reconfigure substations and lines to accommodate growing amounts of intermittent and distributed generation and expand capacity in areas where there have been approaching maximum capacity. These investments will directly serve customers with a focus on growth, reliability, and outage restoration, and will integrate evolving technology to provide long-term customer value. In Texas, the concepts are the same, and we continue to see strong growth in our service territory. Load growth and new ERCOT resources drive the need for investments to ensure safe and reliable service. These investments include distribution feeder extensions, transmission interconnections, and future transmission expansion. CNMP has interconnected 13 battery storage facilities through 2021, with several more inquiring about interconnection service, along with inquiries from large-scale solar developers. On slide 12, These investments result in a 7.7% growth in rate base from 2020 to 2025. At PNM Retail, growth in these new investments offset the reduction in rate base over the five years from our exit of coal generation. The transition to clean energy will result in customer savings that help offset the impact of these new investments and keep customers' rates affordable. FERC rate base grows at a compound rate of 21% during this period, with the recent addition of Western Spirit. TNMP grows at a rate of 16%, more than doubling its 2020 rate base by 2025, and approaching the same level as P&M retail at $2.5 billion. As FERC and TNMP continue to grow, we improve and diversify the regulatory risk across our business. Turning to slide 13, let's look at 2022 guidance. At P&M, the addition of Western Spirit Transmission Line is a significant year-over-year earnings driver as we begin to recover on this investment through an incremental rate on day one. Growth from other transmission investments recovered through our FERC formula rate and low growth will also increase earnings over 2021 levels. These will be offset by higher depreciation, property tax, and interest supporting new capital investments. Our reclamation and decommissioning trusts benefited in 2021 from strong market conditions, and we have assumed those return to prior levels in our 2022 guidance. At TNMP, 2022 guidance increases primarily from rate relief with our two semi-annual transmission filings and our annual distribution filing to recover capital investments. The depreciation property tax and interest expense from those investments partially offset those revenue increases. Corporate is flat as higher interest expense is offset by the benefit of a higher effective tax rate on losses in this segment. These drivers result in an overall increase to our expected earnings in 2022 to a midpoint of $2.55 compared to $2.45 earned in 2021. Now let's turn to slide 14 for 2023 guidance considerations. As we invest in T&D infrastructure, approximately 75% of growth in our rate base is recovered through our existing FERC formula rates or TNMP rate riders. These rate regulatory mechanisms provide for increased earnings in 2023. At TNM Retail, we will look to file a rate case before the end of the year to recover T&D investments and reflect our transition out of cold generation with the retirement of the San Juan coal plant. 2022 and 2023 guidance includes our plan to issue up to $200 million of equity financing over the two years, which we could do in different ways. We will look to implement an ATM program to have this option available, and this helps preserve flexibility around timing and the pending merger, while funding capital investments and maintaining our investment-grade credit metrics. We will provide the segment breakdown of 2023 guidance and the detailed EPS drivers as we near the end of this year. On slide 15, I'll wrap up with our dividend. As you can see on the slide, we continue to grow the dividend to reflect growth in earnings and also move up into the midpoint of our 50% to 60% payout ratio. Our board increased the common dividend to a target of 55% payout ratio on our guidance midpoint for 2022 earnings. That first quarterly dividend will pay out later this month, and the Board will address the annual dividend again in December of 2022. With that, I'll turn it back over to Pat.
spk06: Thank you, Don. I'll wrap things up on slide 16 before turning it over to questions. We remain in the merger agreement with Avangrid and will continue to pursue this path. At the same time, our teams remain focused on carrying out our business plans and achieving our goals and financial targets as a standalone entity. Our goal to achieve emissions-free energy by 2040 continues to be one of the most progressive goals in the country, and we are not taking our foot off the electric vehicle pedal as we lead New Mexico in its clean energy transition. Critical infrastructure is required to support this transition, reliably support growth, and improve grid resilience. We will continue to focus on T&D investments in our business plans while being mindful of customer affordability. And we will continue to focus on earning our authorized returns and financing these investments to maintain investment-grade ratings and a strong corporate profile, enabling us to carry out our values as a trusted partner in our communities and continue to enhance customer satisfaction. Thank you for being here with us this morning as we continue on yet another chapter of our journey. And we hope you agree that it did all come back to us now. With that, Kate, let's open it up for questions.
spk05: We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question is from Julian Dumoulin-Smith of Bank of America. Please go ahead.
spk10: Hey, team. It's a pleasure to connect again. I hope you guys are doing well.
spk06: Hey, Julian. Hey.
spk10: Absolutely. Always a pleasure. Listen, just on the financing plan, as we think about the standalone business for the time being, how are you guys thinking about the couple hundred million here in terms of converts or blocks? And then thinking about just timeline relative to the deal. It seems as if there's perhaps a little bit of a step down in the earlier equity financing quantum you contemplated earlier, if I'm reading the messaging correctly. But I just want to understand sort of how this fits with the timeline for the deal and to what extent the deal would impact this.
spk07: Hey, good morning, Julian. This is Don. Yeah, I mean, we will look to issue up to $200 million in 2022 or 2023. We'll continue to optimize that. Part of that could be an ATM program. We would also look at a potential block selling common equity or for common equity to facilitate that. But the timing, I mean, obviously we'll look to optimize that between 2022 and 2023. We built that into the ranges that we've provided.
spk10: Got it. Okay, fair enough. And then just as we think about the near term here with San Juan, can you comment on just the backdrop on resource adequacy? How do you think about the timeline for that plans closure against the wider story in the West? And perhaps you can maybe recap, there's probably a better way to ask it, your resource planning through the course of the summer and onwards against the planned retirements.
spk06: Yeah, absolutely. The San Juan plant was scheduled for retirement on June 30th of this year. The replacement power that the commission approved was all purchase power agreements. Our developers actually last year started providing notice that they could not meet the deadline. As you all know, there's supply chain issues, et cetera, et cetera. So we gave notice to the commission that we're working to fill the resource gap. We've got several options. We could keep the plant open a few months longer. We are looking at market purchases. I have an 11-by-17 sheet of every option that we are going over, and we are close to finalizing that, and we'll make an announcement on what we're going to do in the next couple of weeks, but I can assure you we do have the resources covered for the summertime. But you got it right. It's a west-wide problem, and actually, if you look at what's going on globally, it's a global problem. but we are fortunate that we're going to be able to cover.
spk10: Excellent.
spk06: Thank you for that.
spk10: And then if I can, this is probably a trickier question, just how do you think about next steps on four corners here? Again, I get that there's a lot of interlapping issues here, but how do you think about just maybe the timeline on that plant at this point, maybe the best way to tackle that?
spk07: Yeah, Julian. So, I mean, obviously the commission went against the hearing examiner's recommended decision to abandon that on December 15th. Under the ETA, we had 10 days to file our notice of appeal. We filed that on December 22nd. We provided our statement of issues on January 21st. And we're really waiting for the Supreme Court to kind of set the timetable. And it will follow the similar timetable that Pat laid out for the merger which is the 45 days brief in chief, and then we'll kind of run through the process. We would expect an appeal process to take 12 to 18 months to work its way through that process. I mean, there were two issues in there. We feel strongly that the ETA supports those. One of them was requiring specific replacement resources. We addressed that clearly, and the ETA allows the ability to be able to bring those in a little bit later, and we provided a good plan in that the second element was a prudency review. And if you remember back, we ended up, you know, as part of the hearing examiner's order, moved the filing from January 2021 to March to specifically address prudency in that arena. So that's the path it will go. The in-tech agreement, which is kind of the underlining agreement that you're referring to, will stay in place.
spk06: And the seasonal operations agreement remain in effect during the appeal also. So it will keep running.
spk10: Right, yeah, sort of you've got a lot of balls in the air around this and hopefully get some resolution here. I mean, just if I can, on this rate case, just to make sure I understand how that fits as well, you're saying that you're going to file potentially at the end of 22 here? How does that fit, again, with this draft? deal approval that I suppose will be coming subsequent to that. Again, I get it's sort of a tricky backdrop to operate under, but what's the expectation here given the stipulation requires staying out until the beginning of December? Conceivably, you would be filing them.
spk07: Yeah, I think the concept, Julian, is we will look to file a rate case before the end of the year, which is aligned with the stipulation that you're referring to, which had a December 1st timeframe table. But we will look to file that. If you remember, we haven't filed a rate case since 2016, and rates went into effect in 2018. So there's a window there. We delayed it in 2020 due to COVID and also delayed it because of COVID. So we're at a point we need to move forward with the rate case.
spk06: Julian, we're the full employment act for lawyers around here. So we're keeping everybody busy.
spk10: No kidding. And it's been an impressively long time to stay out of a case, too. So I hear you. It's about time. Anyway, best of luck. We'll see you soon. Thanks, Julian. Thanks, Julian. Cheers.
spk05: The next question is from Ryan Levine of Citi. Please go ahead.
spk03: Good morning. Good morning, Ryan. Good morning, Ryan. Given the pending merger agreement, what are the options for the board to address the dividend in December 2022? And can you provide some color around how the pending merger agreement would factor into this decision-making process?
spk06: Yeah, actually, the merger agreement now allows us to issue or to increase the dividend in December of 2022 if the board so chooses. As you saw, we just increased it for this year, and the board has that option for 2022 to increase it for 2022. 2023 you know Don talked about equity issuance and financing so we have all of the things that we need to run our business as a standalone as I said we still think the merger is absolutely the right thing strategically for the company and our customers and our employees and our communities but we are able to run the business and so if for heaven's sake something happens and the merger wouldn't go through we'd be in good shape as a standalone.
spk03: Great. And then on the merger itself, is the Supreme Court required to hear the appeal and assign it to the general calendar? And if so, is there any timeline around when a decision would be made to decide when the process would start?
spk06: You know, there's no requirement that any Supreme Court take a case, but I'm trying to remember. I can't remember a case that they haven't taken on the utility side, and this one is obviously one of the biggest decisions that the commission has made in impacting the state. So while I never want to front-run a court, it seems likely that they will take it. There's no time frame for them to stick it on their calendar, but I would imagine it will go on... Pretty quickly, as you know, they're pretty busy with cases. El Paso Electric has one there. SPS has one there. We've got a couple there. So they've got a busy docket, but I think it's highly likely that they will hear this one.
spk03: In the 12 to 18-month guidance around that process, does that incorporate an estimate of when the process would really start? Or to the extent that this gets delayed given the demands on the calendar for the Supreme Court, you know, kind of how does that play into this?
spk06: Yeah, the 12 to 18 months is based on historical timelines and how long it takes the Supreme Court to get to things. So that timeline does change. incorporate sort of a time estimate of how long it would take to get to the calendar. We don't break that out specifically because it can vary, but 12 to 18 months is the historical range it would take for a case.
spk03: Okay. And then on the capital investment plan and the prepared slides that highlighted additional half a billion dollars to the investment plan, what is that comprised of and is there a way to provide a little more color or granularity on on what that additional $500 million is?
spk07: Yeah, some of it relates to the additional industrial-type customers that we have coming on plays a part of it. Part of it is kind of moving in our grid modernization elements and dealing with our substations and improving those. You know, we continue to get more and more DG on the system, and, you know, our systems were designed back in the 1960s and 70s, so some of these substations need to be tool to really help and support the reliability related to the intermittent cycle of renewables.
spk03: Okay. And on the financing plan, the up to $200 million of equity content, kind of what are the determinative factors and where in that range you could see yourself falling, presuming that the company is a standalone business?
spk07: Yeah, Ryan, I'd leave it up to that $200 million. So, I mean, I think that's really what our focus is, is, you know, we could go up to that $200 million.
spk03: Okay, and then last question for me, maybe just to provide some context around what prompted reengaging the investment community in an earnings call and guidance, and should we expect more regular earnings calls as the transaction process proceeds?
spk06: Yeah, Ryan, we were – We were missing our opportunity to celebrate days and put puns in our earnings script. I'm being facetious, but as we said, we believe that the merger will ultimately consummate, but we want to make sure that everybody is informed of our business plans and that we are running this as a standalone entity during this process so that no matter what happens, we're a strong, healthy company in good shape, and we think that communicating with our clients investors and our analysts and our other stakeholders is a great way to be transparent about what's going on.
spk03: I appreciate it. Thank you.
spk06: Thank you.
spk03: Thanks, Ryan.
spk05: The next question is from Ashar Khan of Verition. Please go ahead.
spk01: Hi. Good morning. How are you guys doing? Good morning. Good. So my first question is on the financing side. So if I'm right, the share count in your assumption for 2022 is the same as for 2021, right? You gave the share count, correct? Yes, we did. Okay. Okay. And then, so my question is, why would you do straight equity? Why wouldn't you do a convert? Because a convert would give you the ability, if the merger happens and all that, to buy back or something like that. And so from an investor point of view, I don't understand the rationale of doing plain equity as we are in this uncertain period and where you have full faith that the merger will close. I just don't understand why dilute your current shareholders by doing this. Why not do a convert which you can buy back and have more optionality in it if the merger does go through?
spk07: Yeah, a couple of things. I'm not sure I fully follow to dilute the additional shareholders because a mandatory would flow through anyway and the fixed price on the merger is set to pay pay that price would be one element, Asher. The second element is we're always very focused on our investment grade credit metrics and the importance to keep the company able to continue to grow. And so the common equity provides 100% equity credit versus mandatory convertibles that oftentimes only give you 25% equity credit. So it's a combination of both, continuing to look to grow our investment portfolio from that perspective. as well as ensuring that we have the investment grade.
spk01: Okay. I hope you, as you said, you really require it over a two-year period that this decision is taken to the latest rather than the earlier, right? It should really be a 2023 event unless you have some liquidity concerns this year. So I hope you are mindful not to dilute us and do anything until we are much further along in the process to have some more. Second, if I want to get on the regulatory side of the approval of the merger, so as you kind of pointed out that we have 18 months for the Supreme Court to come up with a decision. So what is the, how are you preparing? So if they come up with and and go against us. Are we planning to file a new approval process in front of the new commission next year? Can you elaborate? How do we get through the merger approval process in case the Supreme Court denies or goes against us in that decision?
spk06: Well, I think the first thing we would have to do is see why the Supreme Court denied it and see what the record is. And then based upon that, we would make a decision. So I think it's It's too early to speculate what we would do if that happened. If it would happen, we'll get right back to you with what we do, but I don't want to speculate.
spk01: Okay, so you're going to wait until the Supreme Court decision and then inform us what the next step is. And, of course, we will have a new commission by then. Okay. And then, Pat, my last question, if I may ask, is... If we look at the takeout price and we look at our 255, we are still trading at a discount to the average multiple. So can you tell me how the board came up decision to continue this merger? Because there's a lot of PV value lost by engaging in a suitor for such long period of time and also taking out options. And the price doesn't seem to be very attractive if we look at it on where multiples are trading this way. And you kind of like with the takeout, you have basically floored the expectations of people. So I just want to ask, apart from the strategic that you mentioned and all that, from a financial perspective, how did the board justify this as being fair and reasonable to extend the timeline?
spk06: Great question. You have to think about the strategic. I know you only want to talk about the financial, but you've also got to think about the strategic benefits, and the board unanimously believes that the merger agreement continues to have significant benefits for shareholders, and we can't forget about our customers and our communities and our employees. The transaction price still represents a significant premium at this point, and shareholders are also continuing to receive a dividend at a higher dividend rate. And we also wanted to retain the progress that we'd already made in the other approvals received in the agreement with the parties in New Mexico. Changing the transaction price would have been a material change as construed, and a new merger agreement would have required approval in Texas, and we need to start the process over in the commissioners. So both strategically it made sense, and financially it's still – an attractive price and you get a higher dividend. So that was their thinking.
spk01: Okay. Okay. I appreciate it. Thank you so much. Thank you, Asher.
spk05: The next question is from Radula Murty of Hudson Bay Capital. Please go ahead.
spk00: Good morning.
spk07: Good morning.
spk00: A lot of what I've been asked, but I guess is there any way for you to engage the regulatory process to address the issues that are contained within the appeal, independent of the remand or having to wait for the Supreme Court to come back to you, like on an individual topic basis, or it's all like one big package?
spk06: No, once you file the case at the Supreme Court, the commission loses jurisdiction over it, and we couldn't talk to them about a case that might come back because it would be considered ex parte. There is a time in the Supreme Court process where you can ask for a mediation, and we might be able to do it then, but we can't violate the ex parte rule.
spk00: So you can't cherry-pick items and basically start a docket of some type to try to resolve those problems. while the appeal is pending?
spk06: No.
spk00: Okay. In the extension to April of 23, it came up about the dividend. Can you tell us any other changes that were made as part of the extension that benefits either the company or other stakeholders such that it helps justify, in addition to all the factors you listed, to continue the process?
spk07: Yeah, the amendments that we made were driven primarily by allowing us to run the standalone business. So they were dividend financing elements that we would need to facilitate the standalone business. So a lot of that flexibility.
spk00: So it really does come down to either the Supreme Court remands it, or if they reject it, you have to then decide whether to come up with a brand new agreement and start all over again.
spk06: Yeah, but that's a Supreme Court remanded or if we decide we would have to decide whether or not that was the right thing to do for the company at that time.
spk00: And can you remind me if you did come up with whether there's any breakup fees or whether this is simply lack of regulatory approval so there is nothing and the amendments that you made to extend this, there's nothing tied to
spk06: No, a regulatory-related breakup fee is only attainable if the merger agreement were to be terminated and Avangrid was in breach of its obligations under their merger agreement with respect to obtaining that approval. A regulatory-related breakup fee is not solely payable due to the failure to get regulatory approval. Okay.
spk00: Thank you very much.
spk06: And Kate, before you give me the next question, Ryan or Julianne, whoever I answered your question about whether or not the Supreme Court has to hear the case, the reason they've heard them all is because they do have to hear them. So my apologies. I gave you a wrong answer on that. My great team corrected me. Kate, go ahead with the next question.
spk05: Okay. The next question is from Andy Levi of Hyde Hedge. Please go ahead. Hi.
spk09: Can you guys hear me?
spk06: Yeah, Andy. Good morning, Andy.
spk09: Hey, how are you? Sorry.
spk06: Good.
spk09: No problem. So just to kind of piggyback on some of this other stuff. So I guess what I'm just trying to figure out, Pat, is so, you know, you extend the agreement. There's not a higher price. We could debate back and forth, which I'm not going to do with you on the call today, whether the deal itself is better for customers or not. But, you know... If we were a shareholder, I'd be pretty upset because basically you put a top on the stock, and based on the guidance that you gave today and where the group is trading and what the group has done since you announced the merger, the stock is a $50 stock kind of standalone, you know, give or take $0.50. Again, that's my valuation, but looking at, you know, peer values and everything on a relative basis. So... you know, stocks trading 45. How can you kind of justify, how can you or the board justify this deal for shareholders and the timeframe that's needed to wait? And really, quite honestly, the unlikelihood that the Supreme Court's going to remand it back to the commission. I understand that we'll have a new commission in January and maybe that's, you know, the ultimate play, but that still gets you, you know, two years out almost. So, you know, it's a long time to wait. to capture value that probably, if there was no deal, the value would be there tomorrow.
spk06: Well, and just remember, the board, we're all shareholders. I'm probably the largest individual shareholder in the company, so we obviously think it makes sense for shareholders. You're right, we could debate on the price, but we won't do it here. You know, it has those benefits. It's a premium at this point. You get a higher dividend. And we still believe, Andy, that this is the right thing to do for the company in the long term. We need that bigger balance sheet. We need access to technology expertise that as a company we are just too small to have. They're going to enhance our cybersecurity abilities. There's just a lot of benefits in there that make it a good deal. Think about employees, for example. A lot of our employees are really excited for the opportunities to rotate around in a bigger company. And in a time when keeping employees is difficult for everybody, having that excitement and that optionality for employees is key when you're running a business. So there are lots of factors in there, and I understand you disagree, and that's the great thing about America, but it just makes sense financially and strategically.
spk08: Financially, you know, as someone who could be a potential shareholder, um, it makes really no sense because the time value of the money, um, yes, I understand the dividend, but I think the main point that I'm just going to leave it alone, but it's going to get it out there is that the stock would be a $50 stock, you know, without the deal. So you should have taken a higher price. Now, if you took, you would have taken a higher price. Um, you know, then, then, you know, there's no argument, right. There's, you know, time value of money. Um, but you didn't take a higher price. It just makes no sense, but I just want to get that out there. It's like something that really bothered me, and I wanted to get it out there publicly, but I appreciate your comments, and I appreciate your view. Thank you very much.
spk06: And thank you, Andy. I appreciate you not being shy and bringing it out, so we do appreciate that.
spk05: And the last question is from Paul Fremont of Mizuho. Please go ahead.
spk02: Thank you very much. I actually want to go back to one of your older slide presentations. You had initially planned on issuing a convert of between $250 and $300 million in the fourth quarter of 21 that would have converted in 24. So when I look at the $200 million of equity that you're issuing in 22 and 23, how should I Should I think of that as being a part of what you would have issued under the convert through 24? Should I think of that as incremental to that equity that you talked about in 24? Or should I think of it as you now defining a lower equity need than what you would have otherwise issued?
spk07: Thanks, Paul, and appreciate the question. Yeah, the original 250 mandatory convert was to facilitate the Western Spirit transaction. We did close on that transaction. And I think the way to think about it is it's $200 million between 22 and 23. We did add additional capital in, you know, $500 million over the four-year window as well, too. So that's what our equity need is in 22 and 23. So I think you can take the mandatory convertible That was assumed in the previous slide off, and that's the equity would be looking to issue in 2022 and 2023 is up to $200 million.
spk02: So if you were not to merge with Avangrid, you would have no equity need in 2024?
spk07: No, we haven't specifically identified needs beyond 2023. But of course, the outcome of the merger will play into that, Paul. We do remain committed to investing in the business while maintaining our investment credit rating, which is absolutely critical. And our commitment to hit the 5% long-term target in 2020 to 2025 factors what we will need in during that period of time.
spk02: Okay. And then I think if you go back to sort of that timeframe, you would initially talk about a 5% to 6% targeted EPS growth rate. Is the... equity issuance that you're planning to do in 22 and 23, the principal driver of that now being 5% instead of 5 to 6%?
spk07: Correct, Paul. The underlining plan is contingent. In fact, we've added capital associated with it, but the underlining plan and the business model that's there is good, so it's driven by the equity itself.
spk11: Great. And then I guess
spk02: Based on sort of what you need, the hoops that you need to jump through, what type of a timeline are you assuming that the merger would ultimately be consummated in if it were to be approved?
spk06: Well, we extended the agreement until April of next year, Paul, with the three-month optionality. So that would be our hope.
spk02: And is that, I mean, I guess from what you're saying, if the courts decide in your favor, it gets remanded back to the commission, and then you would hope, in other words, I guess I'm trying to figure out what would be sort of the best case outcome in terms of merger scenario, that the court rules in your favor and then the commission basically adopts an amended decision that approves the deal? Is that the best case?
spk06: Yeah, I'd say so, Paul, because we would hope it would be on the shorter side, and if you get a chance to read the statement of issues, it's pretty clear what they are, and they're all based on really points of law. And then the reason that we're keeping the merger agreement intact, right, with the stipulation, is that that could be approved easily. The record is already there, so you don't have to establish a new record. And that makes it simpler and quicker.
spk02: Okay, and then conversely, last question for me, if the court were to decide not in your favor, then what would be your options?
spk06: Well, Paul, as I said earlier, what we'd have to do is take a look at why the court decided and what their record was, and then we would have to assess whether or not we felt it made sense to, you know, renegotiate and file again. We'd just have to wait and see on that one. Okay. Great. That's it. Thank you. Thank you, Paul.
spk05: This concludes our question and answer session. I would like to turn the conference back over to Pat Vincent-Colon for closing remarks.
spk06: Thank you, Kate, and thank you all for joining us this morning. We hope that you all remain healthy and safe and that we're actually able to visit with you in person in investor conferences and other events in 2022. Thank you all so much.
spk05: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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