Q3 2020 Avangrid Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the island grids third quarter earnings Conference call.
At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session.
To ask a question. During this time, we will need to press Star then one on your telephone.
If you require any further assistance. Please press star then zero and an operator will come back on to assist you.
I would now like to hand, the conference over to your first speaker today Patricia Cosgel. Please go ahead.
[noise] [noise]. Thank you Amy and good morning to everyone. Thank you for joining us today to discuss haven't group third quarter 2020 earnings result, presenting on the call today are Dennis Arriola, our Chief Executive Officer, and Doug Stuever, Our senior Vice President and Chief Financial Officer also joining us today for the question and answer part of the call.
We will be Bob <unk>, Deputy Chief Executive Officer, and President Avangrid, 100, <unk>, President and Chief Executive Officer of Avangrid, renewable and Tony Marone, President and Chief Executive officer above and grid network nodes.
No that talks will be together for the call today, keeping our social distancing well all this will be joining us remotely.
If you do not have a copy of our press release or presentation for todays call. They are available on our website at www dot on Green Dot com during today's call. We will make various forward looking statements within the meaning of the safe Harbor provisions of the U.S Private Securities Litigation Reform Act of 1995 based on current expectations and assumptions, which are subject to risks and uncertainties.
Actual results could differ materially from our forward looking statements if any of our legal assumptions are incorrect or because of other factors discussed in our hundreds earnings news release in the comments made during this conference call in the risk factor section of the accompanying presentation or in our latest reports and filings with the Securities and Exchange Commission each of which can be found on our website.
Going Green Dot Com, we do not.
We do not undertake any duty to update any forward looking statements today.
Today's presentation also includes references to non-GAAP financial measures you should refer to the information contained in the slides accompanying today's presentation for Definitionally information and reconciliations of non-GAAP financial measures to the closest GAAP financial measures I will now turn the call over to Dennis.
Well thanks for Tricia good morning, everyone. Thanks, all for joining US. This morning, I also want to welcome any of our offering bread and future PNM resources for user may be joining us.
Well as you can see we've been building over the last 90 days and I'm pleased to give you an overview of some of the highlights when we.
When we last spoke during our second quarter earnings call in July I indicated that we would be conducting a detailed and thorough review of the company's operations business model and financial projections.
That work is nearly completed and we look forward to sharing our updated strategy and financial forecast with you on November 5th during our Investor day in the meantime, I'm truly excited to announce our agreed upon merger with PNM resources. This year.
This strategic transaction will help further advance Auburn grids division to grow both our distribution and transmission businesses as well as our leadership position in renewables W.
Now before I get into more of the details of this important transaction, let me discuss some of the highlights of the third quarter.
During this pandemic, we've continued to operate in a safe and reliable manner, focusing on the hill and the needs of our employees and customers.
In our networks business, we successfully prepared for and responded to several major storms during the quarter, including tropical storm to say, yes, leveraging resources from the different Auburn grid companies across our service territories.
I'm proud of the work by T mob in grid and appreciative of all of the contractors and third party support we received and safely restoring power to our impacted customers.
In regards to our new England clean energy connect transmission project. We're on track to start construction in Q4 2020. Once we receive the approval of the US Army Corps of engineers, which we expect by the end of this month.
In renewables, we also continue to execute on our strategy to build our portfolio of clean generation throughout the U.S.
We recently executed two new long term PPA for a total of 170 megawatts of wind and solar projects and we secured multi year Rex and hedge transactions that will help reduce market exposure on over 200 megawatts.
In offshore Wind Park city when contracts were approved in July by the Connecticut Public utilities regulatory authority and we submitted the commercial operation plan with the Bureau of Ocean Energy management.
I'm also pleased to inform you that yesterday, our liberty when projects submitted multiple bids for over one gigawatt to the New York offshore wind RFP.
The winning bids are expected to be selected within the next several months we have.
We've also worked out an arrangement with our partners see IP, which could provide often grid with even more control over these projects. If we're successful in our New York fits.
We've included some slides in the appendix that provide additional information and updates on both our networks and renewables businesses and we'd be happy to answer any questions regarding this information during our Q and a period.
I'm also proud to share that we were recognized for our leadership as a company driven by our purpose to serve our customers and society and just last week, we announced that often grid was named one of America's most just companies on the Forbes just 100 annual list and we rank number one within the utility industry.
For our commitment to the environment and the communities we serve.
We were also recognized in Connecticut as part of affords annual list of Americas Best in state employers in 2020.
Now for third quarter earnings our networks business had a solid quarter overall, although our consolidated results were negatively impacted by the timing of expenses incurred in advance of receiving final rate approvals in New York as well as our higher outage restoration costs and networks.
In addition in our renewables business, we experienced lower wind production from existing assets and unfavorable market pricing at all.
At corporate we reported interest expense related to our debt issuances in the last year.
For the third quarter of 2020, net income was $87 million or 28 cents a share and on a year to date basis net income was our choosy on a year to date basis net income was for 15.
Versus $1.34, a share $415 million our Ajay.
Our adjusted net income in the third quarter was $100 million or 32 cents a share and on a year to date basis, adjusted net income was $434 million or $1.40 a share.
Is the New York rate case had been approved as outlined in the joint settlement. It would have mitigated the expenses already recorded in New York and it would have contributed approximately 14 cents year to date on a pro forma adjusted earnings per share basis.
We expect New York Public Service Commission to address the joint settlement in November.
Now based on year to date results in our review of our business prospects for the remainder of the year.
We expect our 2020 consolidated results for both GAAP and adjusted EPS to be in the range of $1.90 to $2 per share.
This outlook reflects the impacts of lower than expected wins and merchant pricing on renewables.
Higher than anticipated outage restoration and other costs and tax impacts.
It also assumes approval of our New York rate case before year end.
And Doug is going to provide some additional details on our third quarter performance in his section.
Now I'd like to turn to slide six and provide some additional color on our announced transaction with PNM resources. This morning.
This is a strategic transaction for Robin grid, and it will add important growth for both our distribution and transmission business as well as our clean renewable generation business.
Overall, the transaction has an enterprise value of approximately $8.3 billion with our all cash offer a $50.30 read share of TM and resources. The PNM resources Board approved the transaction yesterday and based on the required federal and state approvals, we're optimistic that we can console.
The merger by the end of 2021 and a.
And as part of the merger agreement on grid would add two new directors from PNM resources for the board of directors when the deal closes.
We're also pleased to announce that our majority shareholder ever drilled as provided on grid with a funding commitment letter for the full amount of the transaction and as a.
And as a result of EBRD role is expected to retain their 81.5% ownership position once the final transaction is complete.
This funding commitment by Enbridge rollout, while allowing ready to put in place an optimal capital structure that will help fund the transaction with PNM resources.
Now this transaction is strategic and a great fit for often group for the following reasons first we expect this transaction to be EPS accretive in the first full year. After we close it could be more than 3% decreases depending upon the final funding mix and next as a result of PNM to earnings from regulated did.
For fusion and transmission assets, we expect that operating rigs regulated earnings post transaction will exceed 80%, providing predictability and visibility to our future earnings and it also gives us additional earnings diversity geographic diversity in our network business.
Now this higher proportion of regulators will also support our fast growing renewables business over the next decade.
As PNM is utilities be become part of the Auburn grid family of companies, we have naturally strong alignment because we both have strong commitments to the environmental social and government governance issues that matter to our customers our employees regulators the communities that we serve and our shareholders.
Both companies have carbon neutrality goals and PNM has already find its pathway to becoming coal free this.
This truly is a win win outcome for all of our stakeholders.
On slide seven you can get a better picture of what our combined companies look like after the transaction closes.
PNM resources with operations in New Mexico, and Texas is comprised of two regulated utilities PNM NTN MP, serving approximately 790000 customers or 2 million people and with a total rate base of $4.1 billion and 2.8 gigawatts of regulated generation.
Together, we will have 10 regulated electric and gas utilities with a strong distribution and transmission footprint in six different states and significant growth prospects.
The combined adjusted net income based on 2019 pro forma basis was $846 million and the current combined market cap is approximately $20 billion.
Now, we'll have approximately $14.4 billion in combined rate base, serving nearly 4.1 million customers and 9 million people with over 100000 miles of transmission and distribution lines. In addition.
In addition on grid already have renewable operations in both new Mexico, and Texas, and so were comfortable and knowledgeable of these environments and this transaction will make us an even more impactful clean energy player for our customers in the local economies.
Looking at generation on a post closing basis operating grid will have nearly 11 gigawatts of capacity with over 74% coming from wind solar and hydro generation and about 9% of coming from natural gas.
Now approximately 762 megawatts are related to coal generation of which 562 megawatts are scheduled to be shutdown by 2022 with the cost collected in rates and PNM currently plans to exit the remaining 200 megawatts of coal generation as soon as practicable and often grid will soon.
For that effort.
Slide eight provides a detailed list of the regulatory approvals required to finalize this transaction.
The key milestones are federal approvals, including FERC, the Hart Scott Rodino clearance the committee on foreign investments in the USA Cynthia's, The Federal Communications Commission and the nuclear regulatory Commission.
And regulatory approvals in the state of New Mexico, and Texas, No regulatory approvals are required in the other existing states, where we have utility.
And we'll obviously be working closely with PNM resources, CEO, Pat Vincent Holland, and her team to obtain the necessary approvals and as I said, we expect to close the transaction in the fourth quarter 2021.
The resulting company will have $42 billion in assets and the new often grid, we will be very well positioned to lead the clean energy transition and to deliver long term sustainable growth for our shareholders in both regulated networks and contracted renewables and we are.
We are going to be sharing more information with you on the strategic transaction and our long term outlook very soon at our Investor day in November so with that I'll pass it to Doug to discuss through third quarter financial results in more detail.
Thank you Dennis good morning, everyone and thank you for joining us today before I get into the slides I'd like to reemphasize a few points that Dennis covered concerning the merger transaction.
I believe this is a terrific transactions robin good shareholders and for PNM as Dennis noted the transaction is expected to be more than 3% accretive in the first year, depending upon the final funding mix.
The expansion of our regulatory footprint enhances and grow the business mix, allowing us to now exceed 80% on a sustained basis, which is a positive from a credit perspective.
Either drill support for the transaction is also a positive with the funding commitment letter that reinforces our ability to close the transaction and give us additional financial flexibility, we expect to fund.
We expect to finance the transaction in a rating supportive manner and we will provide additional information on our financing plans at our Investor day on November 5th.
Two of the rating agencies have already published comments on the transaction today, noting the improved business mix, resulting from PNM is regulated business along with the geographic and regulatory diversity that PNM brings to the oven good family.
The rating agencies like the greater proportion of regulated cash flows the PNM will bring to the consolidated group with the high predictability and security that comes from this business.
The two primary challenges that were noted by the agencies in our discussions with them, the new Mexico regulatory environment and carbon exposure.
Our already being managed effectively by PNM PNM is on track to exit their only owned and operated coal facility by October 22. So this carbon exposure will be part of the often grip family for only a short time.
PNM has also received approval to securitize this asset, allowing them to monetize the unrecovered book value like.
Likewise PNM has been effective at operating within their regulatory environment, earning returns that are generally in line with our authorized levels Theres also.
There is also a referendum underway in Mexico with the governor support to shift from elected commissioners to appointed commissioners, which the rating agencies view as a positive if enacted.
So I'll just close on this topic by saying that we're all very excited for this opportunity and for those PNM employees, who are listening on the call I want to wish you a warm welcome to the offering good family.
Now ill start on slide 10, with the financial results for the quarter.
While we continue to make progress on our strategic initiatives and focus on the management of our outage restoration costs and the construction and operation of our wind assets our quarterly in first nine month, earning results for 2020 reflects the decline.
Compared to 2019 of 19% for the quarter and 2% for the nine months on an adjusted basis.
For the third quarter. The decline resulted primarily from lower results in our renewables and corporate business.
The declines were partially offset by improvements in networks, which is pending a final rate order for the New York rate case Ajay.
Adjusted EPS for the quarter was 32 cents, which is eight cents lower than the third quarter of 2019.
The decline was more modest for the first nine months of 2020 also reflecting lower renewables and corporate earnings.
Mitigated in part by increased earnings in the network segment net.
Networks nine months 2020 results include increase New York expenses without the associated revenue offsets, which are awaiting the new York rate case decision.
Adjusted EPS for the first nine months was $1.40, which is three cents lower than the first nine months of 2019.
Our adjusted results exclude Kobin vice team related costs, including late payment fees bad debt costs, and certain higher operating costs, which totaled $8 million pre tax for the third quarter and $21 million pre tax for the first nine months.
Adjusted results also exclude renewables mark to market and accelerated depreciation from the Repowering for wind projects.
The combined EMEA EPS impacts versus the prior year of the adjustments were seven cents for the quarter and three cents for the first nine months.
Moving to slide 11. This provides the results and drivers for the networks business.
For the third quarter, adjusted EPS improved by 12% or three cents to 32 cents.
For the third quarter comparison, we have a benefit of two cents for 2020 versus 2019 due to new rate years for our Connecticut gas companies and new rates in CMP, which became effective March onest.
We've been communicating in 2018 2019 that outage restoration costs have been a challenge for us given the significant number of minor storms and our aging infrastructure, primarily in New York, but.
Those challenges. Unfortunately continued in the third quarter, when we incurred five cents of outage restoration costs compared to two cents in the third quarter of 2019 for a negative variance of three cents.
Other impacts in the third quarter included higher depreciation of three cents from new.
From new assets in service, partially offset by a two cents improvement in taxes as.
As noted last quarter. This tax improvement is primarily due to the return to customers of excess deferred taxes related to the New York rate case, which is being recognized over the 2020 calendar year.
For the nine month comparison networks, adjusted EPS improved by 7% or eight cents to $1.22 the dry.
The drivers were similar to those described for the third quarter with rate increases contributing five cents and depreciation reducing results by nine cents.
First nine month outage restoration costs were three cents higher than in 2019, and total outage restoration costs for the first nine months of 2014 were approximately 13 cents.
Taxes in the first nine months of 2020 versus 2019 were eight cents favorable with approximately six cents, reflecting the excess deferred income tax refund to customers as part of the New York rate plan.
While the joint proposal for our rate cases in New York has not been approved by the commission we have been incurring additional expenses related to rate base growth such as depreciation expense interest and property taxes from our continued investment in New York, along with the commencement of additional vegetation management spend to increase the.
Resiliency of our system both.
Those costs are reflected in our overall networks results.
However in total we have approximately $37 million or 12 cents of New York rate recovery. This pending for the quarter and $43 million or 14 cents pending recovery for the nine month period in 2020. These.
These amounts have not been reflected in our quarterly or year to date results and are subject to the make whole with the New York rate case.
Under the New York Order will recognize a catch up adjustments to these items. Once we received the order, allowing them to be reflected in our earnings.
Moving to slide 12, when production for the quarter is slightly positive with production from new capacity more than offsetting declines in production from existing assets.
The lower production from existing assets is largely due to curtailments. We also saw a positive contributions from our claim of thermal facility and trading in the quarter contributing a 3% improvement.
Those effects are more than offset by higher depreciation of prior period benefit from an asset sale that did not recur and higher property taxes.
These effects netted to an overall third quarter decline in adjusted EPS of five cents.
For the first nine months comparison, when production from existing and new projects and Ctcs had a combined positive impact of 21 cents negative.
Negative impacts are similar to the third quarter comparison, plus a decline in the climate operations and trading results in the first nine months, which combined resulted in two cents decline in adjusted EPS for the first nine months.
Moving to slide 13, the corporate segment drivers primarily include higher interest expense due to the.
Due to the issuance of the $750 million Green bond at 3.2% interest rate in April and also the $750 million of new debt issued in May of 2019 at a 3.8% interest rate.
Now moving to slide 14, as Dennis noted earlier, we're announcing an updated full year 2020 outlook for often grid, which is a range of $1.90 to $2 per share for EPS and adjusted EPS risk.
This outlook includes the expectations that the New York rate case is concluded by the end of the year, which will have an incremental impact of approximately 19 cents, which is in addition to the six cents benefit that we've already reported year to date related to taxes.
It also includes the closing of our announced asset sale and the resolution of an adjustment to the transit transmission true up mechanism in Maine.
The key drivers for this outlook range, our outage restoration costs, which will not be fully covered in 2020 with the rate case implementation renewables when production, which is lower due to curtailments year to date, along with delays in repowering projects and transmission outages for maintenance by external.
Pardon and taxes.
With taxes represent largely the valuation allowance that we anticipate to be recorded in the fourth quarter related to tap.
Tax attributes that that may be expiring before we have an opportunity to monetize them along with the tax audit reserves.
As Dennis noted we've been performing in depth analysis of our business environment Upper.
Operations processes and strategies, which we'll use to mitigate these headwinds and improved future financial performance and we look forward to talking to you with more about these at our Investor day.
Finally on slide 15, I want to end with our highlights of the drivers of long term value creation for our company. The combined with our refreshed long term outlook will support achievable.
Solid results driven by the attractive growth opportunities that we have in our business.
Thank you and now I'll hand, the call back to our operator aiming for questions.
At this time, ladies and gentlemen, if you would like to ask a question. Please go ahead and press Star then the number one on your telephone keypad.
Our first question today comes from the line of Insoo, Kim with Goldman Sachs.
Please proceed with your question.
Good morning.
Thank you and my first question.
Maybe on the PNM acquisition and just the financing aspect of it. Thank you for providing color on patrol its commitments. When we just think about on a per month basis what.
Our credit metrics, whether its net debt to top up that you are targeting on what was happening.
Look I think in so thanks for joining us and thanks for the question in General what were we want to do with the final financing just to make sure that we've got a strong balance sheet and access to liquidity and credit ratings to support the types of businesses that we have.
As Doug mentioned, we have had discussions with all three of the credit rating agencies and they understand the rationale behind these strategic transactions and where we want to go I think one of the things that we'll be doing and we've.
We've got the flexibility of time here is to look at and what is the most optimal capital or funding structure for this transaction because with the.
Because with the eventual a funding commitment letter and we know that we have the funds in.
In whatever form are necessary and with deeper drama.
Indicating that he wants to continue to stay at 81.5%, that's a big vote of confidence on that Jim a substantial amount of the overall funding mix has been to be equity, but we haven't made a final decision on the mix of the overall funds and as as we work along the process here will be sharing more.
With you on that.
Understood. The second question is on the 2020 guidance and I understood it correctly that.
195 midpoint of the guidance that includes the assumption that you will get the ketchup adjustment related to pending one year rate case approval.
Yes.
About the case that that is correct. It assumes that we do receive the on the approval and in New York before the end of the got it got.
Got it and I know this is a year before you'd have been asked but just the guidance I was told earlier in the year, which had a midpoint of the 227, but difference between the 195 Mg twice on it's pretty big and I was just wondering if you could frame what are some of the key differences.
But adjustments.
Let me let me, let me start not all handed to Doug because I think one of the things that we want to be careful of is is not looking backwards, but really looking forward, but there were some discrete items. Both in 2019 and here in 2020 design I think can help you understand why we're comfortable and why were provided in the one nine needed to two.
$2 to Doug if you want to touch on homes, yet I will just start in terms of the guidance that we had.
In our projections for this year.
We're now expecting with our updated outlook through experience roughly a 10 cents negative in taxes that was not expected when we issued the original guidance.
It's really two items, we have a state tax audit that's about two cents and then another eight cents that relates to.
Valuation allowance that we anticipate may be required in the fourth quarter to reserve against expiring tax attributes so.
So thats one item and some other things just from a guidance standpoint.
We've had lower wind production this year with our existing resources curtailments has been a negative and arguably cobot impacts have helped to drive that that pricing that's causing these curtailments likewise.
Likewise merchant pricing has been off this year and again I think lower usage in Copel may have some impact on that.
But if you step back and just look at 20.
2019 versus 2020.
In 2019, we were at $2.17 per share and we are now with the midpoint of the guidance and dollar 95.
There is really two items I would highlight that get you from 2019% to 2020 those.
Those are asset sales and taxes.
Thats set sales we had a 32 cents positive in 2019. This year, we're expecting about a four cents positive. So thats about a 28 cents negative year over year. The other item with taxes I mentioned that we have about a 10 cents negative this year.
And in 2019, we had a four cents positive in the fourth quarter related to state unitary adjustments, so thats, a 14% year over year negative.
You combine those two items, it's about 42 cents negative against the 217 base for 2019 that gets you back to about $1.75. So.
I think that that helps to maybe put more in perspective. The dollar 95, but we're now saying is the midpoint of the two 190 to $2 per share.
Understood.
Thank you for that color I'll get back into queue. Thank you.
Your next question comes from the line of David Arcaro with Morgan Stanley. Please proceed with your question.
Hi, Thanks for taking my question.
Good.
A quick follow up on the renewables items for the that were impacting the quarter when you mentioned curtailments.
In your view are you seeing anything that would cause you to think.
There are kind of going forward issues or drivers that would contribute to meet production would be lower than previously forecasted.
Thanks, David for the question and I'll ask Alejandro foods, the CEO of our renewables to jump in but let me just give you a little bit of color I think as there is no doubt that the cobot impact across the country is impacted operations for a lot of people and for US. It did result in some losses in production due to personnel challenge.
As being able to get people out to the facilities as needed, but from a curtailment standpoint I think.
I think in the regions, where we're operating we did see lower demand and so do we expect that to continue I think the answer is probably not I think we're saying that the economy is starting to come back and energy demand in general is starting to come back.
But I Wonder you may want to add some more color to that.
Thank you Denise and thank you David for your question, Yes, I agree with what Dennis was mentioning I would maybe just add thats, a spectacular and Casey in my soul, and where east to that Denise in quite a few would equate on a lot of additional capacity coming on nine weeks and we see access to ptcs so in that.
Mexico region, we might see the same and contains each who is staying in over the next two years. This will be seen said pretty much a particularly nice so we have in a high percentage of those coatings reimbursed because of how our TPS our structure.
Okay understood. Thanks, and then on the acquisition I was wondering if you could.
I was wondering if you could talk a little bit about the.
The potential synergies that you might expect either operational synergy opportunities that you see or.
If there are any growth related synergies.
Potentially with the renewables business contributing to the growth outlook utility.
Thanks, David Yes, Great question and as we look at that does this opportunity with PNM resources. This is really about growth going forward I think you've got two very well operated companies.
I think that being part of the ongoing grid family, they're going to have access to additional resources I don't be economy.
There will be economies of scale from a procurement standpoint, so I think that there is definitely opportunities to continue to get better so from a synergy standpoint, I think just.
Having being able to share best practices and ideas and how we can that Amit grid learned from PNM resources as well, but I think the the opportunities that we see from a financial standpoint, we haven't really added focus as much on synergies from a cost perspective, as we have on the revenue potential and growing the business.
From a renewable standpoint, I will tell you we bought were already in new Mexico, and Texas and we've got about 1500 megawatts of operating wind projects.
There and so given that new Mexico wants to continue to focus on becoming a cleaner state, we think that theres going to be additional opportunities and today as we mentioned on the company does have renewables and they're part of the rate base are there other part of the regulatory rate base. So we see that as.
Positive, but I think with all the Hondros Almond grid renewables group, we're going to continue to look at new opportunities in New Mexico, and Texas and Texas. As you know is the largest producer of renewables in the country. So we see a lot of upside there and I think that having that at PNM be part of the family, we're going to learn and Theyre going.
Alarm and we're all going to get better.
Got it Tom maybe just a quick follow up to that unit there their guidance is 5% to 6% earnings growth over the next couple of years do you see a path to that.
Being kind of accretive to your organic.
Organic growth rate and growth opportunity going forward.
Well again, we'll go into a little bit more detail at our Investor day on what our growth prospects are for the next several years I'm bullish and I think that adding.
Nm resources to the mix provides us.
Greater amounts of distribution and transmission revenue.
Revenue and earnings as well as geographic diversity. So I think thats, all all positive, but I think that we wouldn't be making this investment if we didnt think it can help us grow faster.
And add to the overall composition of quality assets that we already have.
Okay, great. Thanks, so much.
[music].
Your next question today comes from the line of Steve question with both research. Please proceed with your question.
Yes, hi, good morning, Dennis Congratulations.
Morning.
So just first of all on the 3% accretion from the transaction I assume you had to make some assumption.
When you did that on how the financing is done so even though you're not set in stone what.
Rough range are you using in that 3%.
Yes, you're absolutely right, Steve we're not wedded to anything and again with the Enbridge rollout funding commitment letter, we have a lot of flexibility there, but in order to calculate it out whether its adjusted free around free on there was some assumptions made that we would add some debt potentially at the on grid.
A level in order to get to that number again, we're going to be refining that on but we do have the flexibility depending upon what we see as a future capital needs.
Being able to go all the way to funding a purely with with equity if that makes sense and we believe that this still would be accretive. So we're going to be looking for the optimal mix of what's the right amount of debt without over burdening the balance sheet, but also taken into consideration, what's the most economic way and flexible way to finance.
Okay, but in that 3% number was it something like in between.
It's it's not assuming all equity is it or is it no no. It wasn't it was not it was assuming some some debt financing at beyond grid level at our balance sheet products and and just from a transparency standpoint to get to that we were assuming roughly $700 million of debt at often grid.
On the residual would be equity, but again, we're not holding ourselves to that but I wanted to just wanted to just give you a sense for how we got to the 3%.
Great. That's helpful. Thank you and then just this 2020 range that you've now provided again.
We provided.
So how should we just think about this as a.
As whether this is a good base year to use for your future growth.
I know, we were not going to get your future growth rate.
Today, but just.
Is this kind of the base year to be thinking about from what you're going to grow there is.
The reserve need to be like a lot of adjustments to this year to think about kind of the base.
Steve You tried to get me to spill my guidance before the analyst conference come on like I think it has as Doug as Doug mentioned.
There's some in and out here that we don't think are going to repeat themselves I Wouldnt say that this would be the base year that I'd want to be measured off of going forward.
Just add because I think that with the additional renewables coming online with the with the rate case being finalized and some of the other improvements that were looking to make in both of our businesses to be.
More and more efficient and more effective.
I'd like to look beyond 2020 into the future. So little more provide you a little bit more color, but I wouldn't necessarily use that as the base year for our future growth.
Okay, and then finally on the.
Just curious to get an update on the offshore wind projects and.
Maybe just what we should expect our potential outcomes for the bones decisions I guess on the 13 cents, what's a good outcome, what's a bad outcome.
'cause they seem too often not the very definitive.
Yes from time so.
Could you maybe give a little color on what to expect November 13th.
Yes, let me, let let me, let me turn it over to Alejandro to give a little bit more color about I'll tell you that I'm really bullish on our on our renewables business, but especially with what we're doing on offshore we mentioned that we did yesterday on the New York RFP and I think that the pipeline that we have in the positions that we have.
Our probably premier in the market, we've got to deliver theres, some things that aren't necessarily completely in our control as far as the timing of the permits and everything but I feel good about where we're at and on the horizon or maybe you can give a little bit more color on on ball.
Sure. Thank you Denise and thanks, Keith and so I think you know that when a when the supplemental environmental impact study of the draft day was published.
This year in general was plus Keith and the one by one notes the Meiomi out a will say consider to buy a majority TSS delights in way to go and we weren't expecting as recommendation from the seacoast interior in late August which did not come to the formation.
We happy stats.
Decompression agencies are working already on a on a on recommendation issued by the ticketing tidier onto we are hopeful that to date as the competition, which is supposed to come in December and when the lead compound scheduling or we can be too late.
And we are we are going to compete in that he is going to be the right direction for the project. So we continue right now own, namely our procurement process.
We are going to take a pause and decisions about the procurement of the project the supply chain in Dayton Dynex weeks until we continue to target on investment decision final investment decision some somewhere around Q3 and next year, so quite quite today, we'll see difficult we continue.
One clarification when the circuit variant carrier comes in on.
So with that something.
It public.
Just after the call.
Yeah.
Hey, Steve Good I'm, sorry, you broke up a little bit there can you repeat the question.
Okay.
For.
Okay. So it's breaking up Steve, but I think I got two questions. So the security to your house too.
The principal making the company on recommendation and but that does not mean until that comes that the cooperating agencies are not working on a on a specific recommendation. That's why we think we have been and they told that there should be no and important delays to the final decision as per the schedule that Boeing has.
Yes.
In which it should come by the end of the year.
And your next question today comes from the line of Julien Neely.
With Bank of America. Please proceed with your question.
Good morning, congratulations thanks for the time, so good morning, Joe Thank you.
Absolutely. So let me try to reconcile the the last ran a few questions here when we speak about 2020, what would be a quote clean number to think about right. There's a litany of factors, we could talk about that impact 2020, right. You've got this new York.
Around are we that utilities for instance, I certainly did impact it.
We can talk about some of the true ups here.
Taxes storms of renewables relative to quote unquote normal.
How would you clarify what a run rate 20 look like just as we start to admittedly not still your guts on what the long term looks like but at least as a baseline rate to go back to Steve's question. It doesnt seem like the current outlook would be a good place to start or B.
Illustrative of the core earnings power of the company.
Yes, I think I think that on that Julien I'm going to kick in a little bit more towards the at the analyst day, because I think you'll have a better appreciation when we talk about 2021, what the differences are between that and 2020.
And I think that Doug touched on the fact that we had some large tax items, we obviously don't expect to those too.
To continue it ever every year.
And candidly as we have been.
We've been doing our reviews here of the of the business model and our operations.
We're trying to make sure that we put forward a number here for 2020 that we have.
We have a high degree of confidence that we can deliver on so.
I'm, we're not ready to say here's the new base number going forward. This is the best that we can give it for 2020 at this point in time.
Excellent and just to clarify the earlier comments about the transaction itself.
I think I heard you say, we should be thinking about 700 million of holding company debt as reconciling with a 3% earnings accretion, but what does that reconcile with in terms of FFO to debt. When you think about where you're projecting versus what you are required to have.
Yes, again on the than the number that I gave on the 700 million that is not exactly what we're going to do that was used for illustrative purposes to to get it to the 3% accretion I could be more could be last there could be different types of securities that we use to make up the overall funding mix. So.
So I don't want you to be wed on the on the 700 billion of debt. What I can tell you is in the discussions that Doug and his team have had with the rating agencies.
They they recognize that we want to maintain a strong balance sheet.
With investment grade credit ratings got after this and that will be funding this in a way.
Way that allows the new combined company to have those attributes.
Okay Fair enough sorry, just quickly clarify if I can't that KLH.
The clean 2020 number if I can come back to is one more one more time.
I know that there.
You talked about being able to earn your are we prospectively at some point in time, but when you think about the corporate adjacency and 20 for instance, the tax impact.
What are some of those more onetime type.
Items that we should be careful in looking at it if you don't mind Im not trying to get to 21 necessarily and I know that Thats. What you are holding off on disclosing here, but if you can stick to the 20 piece outside of earned our we use perhaps a corporate or other taxes what might those items be June.
Julian I'd Love your persistence subsequent to jogging give you a little more color, yes, I mean it.
I think you'd largely itemize, the qualitative factors and quantitatively taxes is probably the most tangible thing I could point to.
With Tencent negative that's affecting 2020 results.
Qualitatively things like the wind production with renewables and the curtailment impacts something that we hope does not persist into 2021.
Networks, we fast regulatory lag affecting us with the New York rate case, not effective until April 17th than with the CMP rate case not until March onest. So those are conditions that we don't expect to recur in 2021, and then just with storms, we've seen a higher incidence rate this year.
Storms I would say in general with something that is going to take time to resolve but it's not an overnight fix we have to invest in vegetation management, we have to invest in resiliency and and over time that will get better, but that's something that's going to be with us for a while.
As we look to to improve the quality of the system and Julian has achieved when we talked about this at the Investor day, you're going to hear some more detailed plans and actions that we're working on right now that will be executed in the years to come to to help our networks the earn out at least their authorized.
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Got it excellent basement bad guys. Good luck, we'll talk to you that.
Thanks.
Your next question comes from the line of Richard Sutherland with JP Morgan. Please proceed with your question.
Hi, good morning, Thanks for taking my questions here, just wanted to start out around the transaction.
In the past few years.
Discuss the merchant portfolio and some of the volatility that brings to earnings Im curious what your thoughts are on capital recycling and how that might impact the PNM financing.
Yes. It is it's just it's a great question, Richard I think as I've had discussions with various folks over the last couple of months I think you know that up.
I would prefer to have less merchants and market pricing exposure and we're working on a plan to reduce that I think that as we've looked at our existing portfolio of assets in renewables as well as our overall pipeline. We're on we're going to be sharing some information with you that gives you confidence that the assets that we have are the right ones.
Going forward, but as always if theres the opportunity to optimize the overall portfolio because we think it's more valuable to someone else or doesn't fit strategically with us I think one of our main jobs as leaders of the company is to recycle that capital so.
So, we'll we're always going to be looking at that in regards to PNM resources timing.
Im excited, especially in Texas, I think that there's opportunities in Texas, but also in new Mexico to support PNM resources, because I think that they probably have been more capital.
More capital constrained and yet when you look at the infrastructure that's needed to meet the clean energy goals of both state and especially with the economic growth that continues to take place in Texas, We think there's going to be opportunities to continue to grow there which is going to reduce the.
The overall a little.
Will help reduce what we're doing from a from a merchant standpoint renewables.
Got it. Thank you and then just turning to the 2020 guidance update Im curious if you could parcel little bit more the.
The 14 cents benefit you spoke about the New York rate cases, or or maybe let's put it this way the the timing impact of the New York rate cases on 2020 results plus storm cost to patent networks main leaks on what will be covered by the step up in revenues versus.
What's kind of continued strong cost borne by the ongoing business.
Yes. This is Doug I will talk a little bit above that so just to kind of put the numbers in perspective, we expect the overall annual impact.
For the New York rate case to be 25 cents cents.
We've already recognized six of that so theres really 19 cents that we have waiting to be recognized for the full year.
And through the third quarter were at roughly 14 cents.
As we've looked at the outage restoration cost item in particular, we've talked in prior calls about how the way the rate case was established we expected that if the outage.
Outage restoration costs that we incurred in 2019, where to recur in 2020 would have roughly 80% to 90% coverage on that so.
So that will give you some benchmark so.
How to think about this and in in 2020, we are seeing a higher experienced so far in those outage restoration costs. So.
Hopefully that gives you some information to help answer your question.
Great. Thank you.
Your next question comes from the line of Neal Copeland with Wells Fargo Securities.
Please proceed with your question.
Hi, guys. Thanks for taking my question.
Werent available, yes morning, I'm still a little bit confused about New York, but maybe I think you've given some of us have some answers that we can.
Look into but just out of curiosity are you willing to stay sort of through the first nine months, what the earned ROE has been a nice take this year and get.
Given what the revenues might get going forward, how we should think about that burned our OE this year.
I don't know that it would be helpful are accurate. If we gave you an estimate I think that that again, we're focused on getting this.
The rate case approved.
We're pleased that we've got the the joint settlement 20 signatories and we think that it's that's going to provide the capital that we need going forward to continue to build on the system make it safe and reliable, but I think that that we don't have that with draft. In part. This is the tip of our fingers as far as what the.
And our off earned our OE is actually today on because there's so many moving pieces as Doug said, we've got in our numbers year to date the taxes the.
That are reflected because of that.
The the rate case as well as other cost, but we don't have a revenue. So it would be an incomplete number if we gave it to you yes and.
I agree and Neil and then the Bostco, Yes, Bob.
As Doug said, we are incurring costs.
Throughout the year that will be reflected in that rate increase right. So if you took a snapshot at the end of September there will be significant cost we've incurred that would drive and are are we down to a number of dentists and it really would make sense because the associated revenues. We can only record once once the commission approves the the agreement so.
I think it's best to defer and with our Investor Day will give a better snapshot for 2021 and beyond.
Yes, Thanks, I understand and then on the.
Asset sale gains I think in the in the past there have been some.
Note that these would be included there be some men.
Measure of these included in the EPS guidance going forward is that.
Still the intention that this is part of sort of an ongoing thing that future EPS outlooks will reflect an asset sale program to some degree or do you anticipate excluding these.
Yes, neon great question, I think what you're going to see from US going forward is that there is going to be a much more consistent quality of earnings stand.
Standard that includes those things that are.
Our part of our ongoing operations and while we will be looking for opportunities to add.
Optimize the portfolio and reallocate or recycle capital I'm, not I'm, not thinking that thats going to be a part of our earnings guidance in the future.
Perfect. Thank you.
The.
But.
Our next question comes from the line of Sophie Karp. Please proceed with your question.
Hi, good morning, guys.
Good morning so.
I don't think it from a on the Canadians this conversation.
Ladies this conversation clearly the more regulated mix is helpful could you remind us what your downgrade threshold right now and.
Is it possible do you anticipate that that may be.
Changed as Youve mentioned before you close to allow you to.
The funding mix, which is it's not something that we're going to have.
The near term.
I see this is Doug so.
Really just starting with the rating agencies, we have.
S&P, Moody's and Fitch with S&P, they view us as a core holding of LIBOR drawn so that they really tie our rating to ever drilled those ratings Fitch.
Fitch and Moodys view us more on a standalone basis.
With Moody's I'll, just speak to them in particular.
They have a downgrade threshold of 17% on a sustained basis for cash from operations pre working capital to debt.
But as they look at this transaction and how it affects our business.
It is viewed as a positive they like the geographic diversity the regulatory diversity the increased networks business mix. So we haven't gotten into those specifics at this time and frankly may want to gather more information from us as we do our Investor day presentation and have more detailed information to show.
Sure, but directionally I think this is certainly a positive in terms of our credit profile and May give us some additional.
Capacity.
Paul.
Then on the New York, New York stable are you guys thinking that you will have.
The patient the rate by the end of the year.
What drives the confidence has been a lot of delayed.
It seems like you're pretty constant.
Were going to happen.
Two and a half months.
Just trying to ascertain if that.
It's possible that this will equip at the same venue on them.
Thank you.
Yes, our business. This is Dennis let me start and then I'll ask Tony if he wants to add any color again I think the fact that we've had a settlement that was filed in the middle of the year 20 parties, including the commission staff and recognizing the investments that need to be done onto the system. I think are very important and thats one of the.
Reasons, why we continue to be very optimistic that as this is the right settlements and rate case going forward.
There is no doubt that with everything that continues to go on in the country and specifically in New York related to co that things are taken more time, and I think that with any increases in rates for any service. That's being delivered I think commissions are being much more thoughtful about what what is going to be.
Pass through to rate payers during these challenging times so.
Our wood, we have preferred for this to be approved in October absolutely are we.
Are we surprised not maybe not completely but I think that the fact that they accepted our extension for one month on the make whole show.
Shows that they are continuing to work on it then we're.
We're optimistic that this will be addressed in November, but Tony I don't know if you want to add anything to that but Dennis I think you covered most of it I'll just add that the.
Some of the provisions in the JP eggs are important not just for the company, but also for our repairs in New York things around co. Good relief and so forth that nice second our genie. So while these things take time to consider we build.
We believe that this gain is the right balance and the right mix and.
We think it's going to get approved.
Thank you.
Thanks Jose.
This concludes our Q and a session for today I turn the call back to the presenters for any closing remarks.
Okay, well, thanks again for listening to our third quarter earnings call I want to thank all of our employees in any PNM resources employees that are on the call really thank you for your relentless commitment to serving our customers and our communities, especially during these challenging times now despite the current unprecedented challenges in global economic answer.
Certainty, we continue to execute on our strategic objectives for the year, including the commissioning of approximately one gigawatt of wind projects progress and the approval of our settlement on our newer up New York rate cases that we just discussed and the soon to be started construction of any T. C.
And again, we're truly excited about this trust strategic transaction with PNM resources, and we look forward to updating you on our regulatory approval process throughout the year end 2021. We're also looking forward to sharing more information with you on our strategy and our outlook beyond 2020 at our Investor Day in November. So if you have any other.
Two questions. Please reach out to Patricia Michelle Thanks for joining us have a great day stay safe.
This concludes todays conference call. Thank you for your participation you may now disconnect.
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