Avangrid Inc

NYSE:AGR

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, thank you for standing by and welcome to AVANGRID Third Quarter Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to your first speaker today, Patricia Cosgel. Please go ahead.

[Patricia Cosgel]

Thank you, Annie, and good morning to everyone. Thank you for joining us today, to discuss AVANGRID's third quarter 2020 earnings results. Presenting on the call today are Dennis Arriola, our Chief Executive Officer; and Doug Stuver, our Senior Vice President and Chief Financial Officer. Also joining us today for the question-and-answer portion of the call will be Bob Kump, Deputy Chief Executive Officer and President of AVANGRID; Alejandro de Hoz, President and Chief Executive Officer of AVANGRID Renewables; and Tony Marone, President and Chief Executive Officer of AVANGRID Networks. Note that some of us will be together for the call today, keeping our social distancing, while others will be joining us remotely.

If you do not have a copy of our press release or presentation for today's call, they are available on our website at www.avangrid.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 key assumptions are incorrect or because of other factors discussed in AVANGRID's earnings release and the comments made during this conference call, in the Risk Factors 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, avangrid.com. We do not undertake any duty to update any forward-looking statements. 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 definitional information and reconciliations of non-GAAP financial measures to the closest GAAP financial measures.

I will now turn the call over to Dennis.

[Dennis Arriola, Chief Executive Officer and President]

Well, thanks, Patricia and good morning, everyone. And thanks all for joining us this morning. I also want to welcome any of our AVANGRID future PNM Resource employees that may be joining us. Well, as you can see we've been busy in the last 90 days and I'm pleased to give you an overview of some of the highlights. 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 5 during our Investor Day. In the meantime, I'm truly excited to announce our agreed upon merger with PNM Resources. This strategic transaction will help further advance AVANGRID's mission to grow both our distribution and transmission businesses, as well as our leadership position in renewables.

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 health 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 Isaias, leveraging resources from the different AVANGRID companies across our service territory. I'm proud of the work by team AVANGRID and appreciative of all of the contractors and third party support we receive 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 received 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 US. We recently executed two new long term PPAs for a total of 170 megawatts of wind and solar projects. And we secured multi year RECs and hedging transactions that will help reduce market exposure on over 200 megawatts. In Offshore Wind, Park City Wind 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 Wind Project 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've also worked out an arrangement with our partners CIP, which could provide AVANGRID with even more control over these projects and for successful in our New York bids.

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&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 AVANGRID was named one of America's most just companies on the Forbes Just 100 annual list. And we ranked 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 the Forbe's annual list of America's best in state employers in 2020. Now for third quarter earnings, our Network 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 Corporate, we recorded interest expense related to our debt issuances in the last year. For the third quarter of 2020, net income was $87 million, or $0.28 a share. And on a year-to-date basis, net income was $415 million versus $1.34 share. Our adjusted net income in third quarter was $100 million or $0.32 a share. And on a year-to-date basis, adjusted net income was $434 million or $1.40 a share. If 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 $0.14 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 and 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 wind 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 6 and provide some additional color on our announced transaction with PNM Resources this morning. This is a strategic transaction for AVANGRID, 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 of $50.30 for each share of PNM Resources. The PNM Resources Board approved the transaction yesterday. And based on the required federal and state approvals, we're optimistic that we can consummate the merger by the end of 2021. And as part of the merger agreement, AVANGRID would add two new directors from PNM Resources to the Board of Directors when the deal closed. We're also pleased to announce that our majority shareholder Iberdrola has provided AVANGRID with a funding commitment letter for the full amount of the transaction. And as a result, Iberdrola is expected to retain their 81.5% ownership position once the final transaction is complete. This funding commitment by Iberdrola will allow AVANGRID to put in place in the optimal capital structure that will help fund the transaction with PNM Resources.

Now, this transaction is strategic and a great fit for AVANGRID 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% accretive depending upon the final funding mix. And next, as a result of PNM earnings from regulated distribution and transmission assets, we expect that AVANGRID 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 Utilities, we become part of the AVANGRID family of companies. We have naturally strong alignment, because we both have a strong commitment to the environment, social and 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 found its pathway to becoming coal free. This truly is a win-win outcome for all of our stakeholders. On slide 7, 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 and TNMP, serving approximately 790,000 customers or 2 million people, and with a total rate base of +4.1 million 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. That will have approximately $14.4 billion in combined rate base, serving nearly 4.1 million customers and 9 million people with over 100,000 miles of transmission and distribution lines.

In addition, AVANGRID already had renewable operations in both New Mexico and Texas. And so we're 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, AVANGRID will have nearly 11 gigawatts of capacity with over 74% coming from wind, solar and hydro generation and about 9% coming from natural gas. Now approximately 762 megawatts are related to coal generation, of which 562 megawatts are scheduled to be shut down by 2022 with the cost collected and rates, and PNM currently plans to exit the remaining 200 megawatts of coal generation, as soon as practicable and AVANGRID will support that effort.

Slide 8 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 investment in the US, CFIUS, the Federal Communications Commission and the Nuclear Regulatory Commission, and regulatory approvals in the states of New Mexico in Texas. No regulatory approvals are required in the other existing states where we have utility, and will obviously be working closely with PNM Resources CEO Pat Vincent-Collawn and her team to obtain the necessary approvals. And as I said, we expect to close the transaction in the fourth quarter of 2021. The resulting company will have $42 billion in assets. And the new AVANGRID will be very well positioned to lead the clean energy transition and to deliver long-term sustainable growth for our shareholders in regulators, networks and contracted renewables. And we're going to be sharing more information with you on this 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 the third quarter financial results in more detail.

[Doug Stuver]

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. First, I believe this is a terrific transaction for AVANGRID shareholders and for PNM. As Dennis noted, the transactions expected to be more than 3% accretive in the first year depending upon the final funding mix. The expansion of our regulatory footprint enhances AVANGRID business mix, allowing us to now exceed 80% on a sustained basis, which is a positive from a credit perspective. Iberdrola 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 finance the transaction in a rating supportive manner, and we'll provide additional information on our financing plans at our Investor Day on November 5.

Two of the rating agencies have already published comments on the transaction today, noting the improved business mix resulting from PNM regulated business, along with the geographic and regulatory diversity that PNM brings to the AVANGRID 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 are already being managed effectively by PNM. PNM is on track to exit their only owned and operated coal facility by October 2022. So this carbon exposure will be part of the AVANGRID family for only a short time. PNM has also received approval to securitize this asset, allowing them to monetize the unrecovered book value. Likewise, PNM has been effective at operating within their regulatory environment, earning returns that are generally in line with their authorized levels. There's also a referendum underway in New 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 AVANGRID family.

Now 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 and first nine months earning results for 2020 reflected 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. Adjusted EPS for the quarter was $0.32, which is $0.08 lower than 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. Network's nine months 2020 results include increased 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 $0.03 lower than the first nine months of 2019. Our adjusted results exclude COVID-19 related costs, including late payment fees, bad debt costs, and certain higher operating costs, which total $8 million pretax for the third quarter and $21 million pretax for the first nine months. Adjusted results also exclude renewables mark-to-market and accelerated depreciation in the repowering of four wind projects. The combined EPS impacts versus the prior year of the adjustments were $0.07 for the quarter and $0.03 for the first nine months.

Moving to slide 11, this provides the results and drivers for the Network's business. For the third quarter, adjusted EPS improved by 12% or $0.03 to $0.32. For the third quarter comparison, we have a benefit of $0.02 for 2020 versus 2019 due to new rate year for our Connecticut gas companies and new rates of CMP which became effective March 1. We've been communicating in 2018 and 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. Those challenges unfortunately continued in the third quarter when we incurred $0.05 outage restoration costs, compared to $0.02 in the third quarter of 2019 for a negative variance of $.03. Other impacts in the third quarter included higher depreciation of $0.03 from new assets and service partially offset by a $0.02 improvement in taxes. As another 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, Network's adjusted EPS improved by 7%, or $0.08 to $1.22. The drivers are similar to those described for the third quarter with rate increases contributing $0.05 and depreciation reducing results by $0.09. First nine months outage restoration costs were $0.03 higher than in 2019. And total outage restoration costs for the first nine months of 2020 were approximately $0.13. Taxes in the first nine months of 2020 versus 2019 were $0.08 favorable, with approximately $0.06 reflecting the excess deferred income tax refund to customers that's part of the New York rate plan. 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 spent to increase the resiliency of our system. Those costs are reflected in our overall Network's results. However, in total, we have approximately $37 million or $0.12 of New York rate recovery is pending for the quarter and $43 million or $0.14 pending recovery for the nine month period in 2020.

These amounts have not been reflected in our quarterly or year-to-date results and are subject to the [maypole] with the New York rate case. Under the New York order, we'll recognize the catch up adjustment for these items once we received the order, allowing them to be reflected in our earnings.

Looking to slide 12, wind 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 positive contributions from our climate, thermal facility and trading in the quarter contributing a $0.03 improvement. Those effects are more than offset by higher depreciation; a prior period benefit from an asset sale did not recur and higher property taxes. These effects netted to an overall third quarter decline and adjusted EPS of $0.05.

For the first nine months comparison, wind production from existing and new projects NPCCs had a combined positive impact of $0.21. 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 $0.02 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 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 AVANGRID, which is a range of $1.90 to $2 per share for EPS and adjusted EPS. This outlook concludes the expectation that the New York rate case is concluded by the end of the year, which will have an incremental impact of approximately $0.19, which is in addition to the $0.06 benefits that we've already reported year-to-date related to taxes. It also includes closing of our announced asset sale and the resolution of an adjustment to the transmission true up mechanism in May. The key drivers for this outlook range are outage restoration costs which will not be fully covered in 2020 with the rate case implementation, renewables wind production, which is lowered due to curtailments year-to-date, along with delays in repowering projects and transmission outages for maintenance by external parties, and taxes.

The taxes represent largely the valuation allowance that we anticipate to be recorded in the fourth quarter related to tax attributes that may be expiring before we have an opportunity to monetize them, along with the tax audit reserve. As Dennis noted, we've been performing in-depth analysis of our business environment, operations, processes and strategies, which we use to mitigate these headwinds and improve 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. That 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 and the call back to our operator, Annie, for questions.

[Operator]

[Operator Instructions]

Your first question today comes from the line of Insoo Kim with Goldman Sachs.

[InsooKim]

Good morning. Thank you. And my first question, Dennis, on the PNM acquisition and just the financing aspect of it. Thank you for providing the color on Iberdrola's commitment. When we just think about on a pro forma basis, what the credit metrics, whether it's net debt to capital or FFO to debt that you're targeting, what would that be?

[DennisArriola]

Look, I think -- so thanks for joining us. And thanks for the question. In general, what we're want to do with the final financing is 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've had discussions with all three of the credit rating agencies, and they understand the rationale behind the strategic transaction and where we want to go. I think one of the things that we'll be doing, and we've got the flexibility of time here is to look at what is the most optimal capital or funding structure for this transaction. Because with the Iberdrola funding commitment letter, we know that we have the funds in whatever form are necessary. And with the Iberdrola indicating that it wants to continue to stay at 81.5%. That's a big vote of confidence that a substantial amount of the overall funding mix is going to be equity. But we haven't made a final decision on the mix of the overall funds. And as we work along the process here, we'll be sharing more with you on that.

[InsooKim]

Understood. The second question is on the 2020 guidance, and I understood it correctly, that the 195 midpoint of the guidance does include the assumption that you'll get the catch up adjustment related to the pending near rate case approval, if that's the case.

[DennisArriola]

That is correct. It assumes that we do receive the approval in New York before the end of the --

[InsooKim]

Got it. And I know this was a year before your time, Dennis, but just the guidance that was pulled earlier in the year, which had a midpoint of the $2.27, that difference between $1.95 and $2.27 is pretty big. And I was just wondering if you could frame what are some of the key differences leading to that adjustment?

[DennisArriola]

Yes, let me start it and I'll handed to Doug because I think one of the things that we want to be careful of is not looking backwards, but really looking forward. But there were some discrete items both in 2019 and here in 2020 that I think can help you understand why we're comfortable and why we're providing the $1.90 to $2. So Doug, if you want to touch on this.

[DougStuver]

Yes, I'll just start, in terms of the guidance that we had, in our projections for this year, we're now expecting with our updated outlook to experience roughly a $0.10 negative in taxes that was not expected, when we issued the original guidance. That's really two items, we have a state tax audit, and it's about $0.02. And then another $0.08 that relates to a valuation allowance that we anticipate may be required in the fourth quarter to reserve against expiring tax attributes. So that's one item, some other things, just from a guidance standpoint, that we've had lower wind production this year with our existing resources; curtailments has been a negative. And arguably COVID impacts have helped to drive that pricing that's causing these curtailments. Likewise, merchant pricing has been off this year. And again, I think, lower usage, and COVID may have some impact on that. But if you step back and just look at 2019 versus 2020, in 2019, we were at $2.17 per share. And we're now with the midpoint of the guidance at $1.95. There's really two items, I would highlight to get you from 2019 to 2020. Those are asset sales and taxes. With asset sales, we had a $0.32 positive in 2019.

This year, we're expecting about a $0.04 positive, so that's about a $0.28 negative year-over-year. The other item with taxes, I mentioned that we have about a $0.10 negative this year. And in 2019, we had a $0.04 positive in the fourth quarter related to state unitary adjustments. So that's a $0.14 year-over-year negative. So you combine those two items, it's about $0.42 negative against the $2.17 base for 2019. That gets you back to about $1.75. So I think that that helps to maybe put more in perspective, the $1.95 that we're now saying is the midpoint of the $1.90 to $2 per share.

[Operator]

Our next question comes from the line of David Arcaro with Morgan Stanley.

[DavidArcaro]

Hey, thanks for taking my question. A quick follow up on the renewables items for -- that were impacting the quarter when you mentioned curtailment. In your view, are you seeing anything that would cause you to think that there are kind of going forward issues or drivers that would contribute to wind production be lower than you've previously been forecasting?

[DennisArriola]

So thanks David for the question. And Alejandro, who is CEO of our renewables to just -- but let me just give you a little bit of color. I think there's no doubt that the COVID 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 challenges, being able to get people out to the facilities as needed. But from a curtailment standpoint, I think in the regions where we're operating, we didn't see lower demand. And so do we expect that to continue? I think the answer is probably not, I think, we're seeing that the economy is starting to come back, and energy demand in general is starting to come back. But Alejandro you may want to add some more color to that.

[AlejandroHoz]

Thank you, Dennis. And thank you, David, for your question. Yes, no, I agree with what Dennis was mentioning. I would maybe just add that this particular case, in my -- so work, it is true that there is a quite a few, quite a lot of additional capacity coming in online with access to PPAS. So in that particular region, we might see the same curtailment issue staying in over the next few years as well. These being said, particularly myself we have a high percentage of those curtailment reimbursed because of how our PPAS are structured.

[DavidArcaro]

Okay, understood. Thanks. And then on the acquisition, I was wondering if you could talk a little bit about the potential synergies that you might expect either operational synergy opportunities that you see or if there are any growth related synergies and potentially, with your renewables business, contributing to the growth outlook at that utility.

[DennisArriola]

Thanks, David. Great question and as we look at 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 the part of the AVANGRID family, they're going to have access to additional resources. There'll be economies of scale from a procurement standpoint. So I think that there are definitely opportunities to continue to get better. So from a synergy standpoint, I think just having been able to share best practices and ideas and how we at AVANGRID learn from PNM Resources as well. But I think the opportunities that we see from a financial standpoint, we haven't really focused as much on synergies from a cost perspective, as we have on the revenue, potential and growing the business. From a renewable standpoint, I'll tell you, we're already in New Mexico and Texas. And we've got about 1,500 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 there's going to be additional opportunities.

And today, as we mentioned, the company does have renewables and they're part of the rate base. They're part of the regulatory rate base. So we see that as a positive. But I think with all those AVANGRID 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 PNM be part of the family, we're going to learn and they're going to learn and we're all going to get better.

[DavidArcaro]

Got it. Maybe just a quick follow up to that, 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 growth rate and growth opportunity going forward?

[DennisArriola]

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 PNM Resources to the mix provides us greater amounts of distribution, transmission, revenue and earnings as well as geographic diversity. So I think that's all positive. But I think that we wouldn't be making this investment if we didn't think it could help us grow faster, and add to the overall composition of quality assets that we already had.

[Operator]

Your next question today comes from the line of Steve Fleishman with Wolfe Research.

[SteveFleishman]

Yes. Hi. Good morning, Dennis. Congratulations. 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% accretion?

[DennisArriola]

Yes. You're absolutely right, Steve. We're not wed to anything. And again, with the Iberdrola funding commitment letter, we have a lot of flexibility there. But in order to calculate, whether it's substance free or [arm]-free, there was some assumptions made that we would add some depth potentially at the AVANGRID level, in order to get to that number. Again, we're going to be refining that. But we do have the flexibility depending upon what we see as a future capital needs of, being able to go all the way to, funny that purely 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 overburdening the balance sheet, but also taking into consideration what are the most economic way and flexible way to finance this.

[SteveFleishman]

Okay, but in that 3% number, was it something like in between? It's not assuming all equity, is it? Or is it?

[DennisArriola]

No, it wasn't, it was not -- it was assuming some debt financing at the AVANGRID level at our balance sheet. Just from a transparency standpoint, to get to that, we were assuming roughly $700 million of debt at AVANGRID, and the residual would be equity. But again, we're not holding ourselves to that. So I wanted to just -- we wanted to just give you a sense for how we got to the 3%.

[SteveFleishman]

Great, that's helpful. Thank you and then just this 2020 range that you've now provided, again, we provided how we should just think about this 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 are needs to be like a lot of adjustments to this year to think about kind of the base.

[DennisArriola]

Steve, you're trying to get me to spill my guts before the analyst goblin, come on? Look, I think, as Doug mentioned there's some in and outs here that we don't think are going to repeat themselves. I wouldn't say that this would be the base year that I want to be measured off of going forward. Because I think that with the additional renewables coming online, with the rate case being finalized, and some of the other improvements that we're looking to make in both of our businesses to be more efficient and more effective. I'd like to look beyond 2020 into the future. So we'll provide you a little bit more color, but I wouldn't necessarily use that as the base here for future growth.

[SteveFleishman]

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 BOEM decisions, I guess on the 13th. What's a good outcome? What's a bad outcome? Because they seem to often not be very definitive. Sometimes, so could you maybe give a little color on what to expect November 13?

[DennisArriola]

Yes, let me turn it over to Alejandro to give a little bit more color, but I'll tell you, I'm really bullish on our renewables business, but especially with what we're doing on offshore. We mentioned that we bid yesterday on the New York RFPs. And I think that the pipeline that we have, and the positions that we have, are probably premier in the market. We've got to deliver; there are 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 Alejandro maybe you can give a little bit more color on BOEM.

[AlejandroHoz]

Sure. Thank you, Dennis. Thanks Steve. And so that when the supplemental environmental impact study, the draft, it was published earlier this year in general was positive, the one by one nautical mile layout, it was considered by majority as the right way to go. We were expecting a recommendation from the Secretary of Interior in late August, which did not come but what the information we have is that the cooperating agencies are working already on our recommendation issued by the Secretary of Interior, and we are hopeful that the record decision which is supposed to come in December, will come on schedule or with little delay. And we are very confident that it's going to be in the right direction for the project. So we continue right now on with our procurement process. We are going to take important decisions about the procurement of the project; the supply chain in the next weeks, and we continue to target on investment decision, final investment decision somewhere around Q3 in next year, so quite -- we are positive about [into winning] general.

[SteveFleishman]

One clarification when the Secretary of Interior comes out with something public.

[DennisArriola]

Hey, Steve. I'm sorry; you broke up a little bit there. Can you repeat the question?

[AlejandroHoz]

Okay, so it's breaking up, Steve, but I think I got your questions. So the Secretary of Interior has to in principle, make public our recommendation. But that does not mean until that comes that the cooperating agencies are not working on a specific recommendation. That's why we think and we have been told that there should be no important delays to the final decision as per the schedule that BOEM has published, which should come by the end of the year.

[Operator]

And your next question today comes from the line of Julien Dumoulin-Smith with Bank of America.

[JulienSmith]

Hey, good morning to you. Congratulations. Thanks for the time. So let me try to reconcile the last round of few questions here. When we think about 2020 what would be a quote clean number to think about, right? There's a litany of factors we can talk about the impact 2020, right? You've got this New York, your earned ROE that your utilities, for instance, have 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 2020 would look like? Just be start to admittedly not spill your guts on what the long term looks like, but at least is a baseline right. To go back to Steve's question. It doesn't seem like the current outlook would be a, good place to start or b, illustrative of your core earnings power of the company.

[DennisArriola]

Yes, I think on that, Julien, I'm gonna kick it a little bit more towards 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 does touch on the fact that we had some large tax items, we obviously don't expect those to continue for every year. And candidly, as we've been doing our reviews here of the business model in our operations, we're trying to make sure that we put forward a number here for 2020 that 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 you for 2020 at this point in time.

[JulienSmith]

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 the 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're required to have?

[DennisArriola]

Yes, again, on the number that I gave on the $700 million, that is not exactly what we're going to do that would use for illustrative purposes to get to the 3%, accretion, it could be more, it could be less, there could be different types of securities that we use to make up the overall funding mix. So I don't want you to be wed 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 recognize we want to maintain a strong balance sheet with investment grade credit rating, go after this. And that will be funding this in a way that allows the new combined company to have those attributes.

[JulienSmith]

Okay, fair enough. Just quickly clarify this if I can. Clean 2020 number, if I can come back to this one more, one more time. I know that there you talk about being able to earn your ROE prospectively at some point in time. But when you think about the corporate adjustments here in 2020, for instance, the tax impact, what are some of those more one time type items that we should be careful of and looking at it, if you don't mind? I'm not trying to get to 2021, necessarily. And I know that's what you're holding off on disclosing here. But if you can stick to the 2020 piece outside of earned ROE perhaps in corporate or other and taxes, what might those items be?

[DennisArriola]

Julien, I love your persistence. Sounds like Doug can give you a little more color.

[DougStuver]

Yes, I mean, Julien, I think these are largely itemized to qualitative factors and quantitatively taxes is probably the most tangible thing I can point to the $0.10 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. With Networks, we've had regulatory lag affecting us with the New York rate case, not effective until April 17th. And with the CMP rate case, not until March 1. 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, it's something that it's 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 over time that will get better. But that's something that's going to be with us for a while as we look to improve the quality of the system.

[DennisArriola]

And, Julien, as we see when we talk 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 help our network thought at least they're authorized.

[Operator]

Your next question comes from the line of Richard Sunderland with JP Morgan.

[RichardSunderland]

Hi, good morning. Thanks for taking my questions here. Just wanted to start out around the transaction. In the past, you've discussed the merchant portfolio and some of the volatility that brings to earnings. I'm curious what your thoughts are on capital recycling and how that might impact the PNM financing?

[DennisArriola]

It's a great question, Richard. I think as I've had discussions with various folks over the last couple months, I think that I would prefer to have less merchant 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 and renewables, as well as our overall pipeline, 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 there's the opportunity to optimize the overall portfolio, because we think it's more valuable to someone else, or it doesn't fit strategically with us. I think one of our main jobs is as the leaders of the company, is to recycle that capital. So we'll, we're always going to be looking at that. In regards to PNM Resources, I'm excited, especially in Texas, I think that there are opportunities in Texas, but also in New Mexico to support PNM Resources, because I think that they probably have been more capital constrained. And yet, when you look at the infrastructure that's needed to meet the clean energy goals in both states, 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 overall -- will help reduce what we're doing from a merchant standpoint, renewables.

[RichardSunderland]

Got it. Thank you. And then just turning to the 2020 guidance update; I'm curious if you could parse a little bit more the $0.14 benefit, we spoke to about the New York rate cases or maybe let's put it this way, the timing impact of the New York rate cases on 2020 results plus storm cost at networks, mainly, what will be covered by the step up in revenues versus what kind of continued storm cost borne by the ongoing business?

[DougStuver]

Yes, this is Doug. I'll talk a little bit about 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 $0.25, since we've already recognized $0.06 of that. So there's really $0.19 that we have waiting to be recognized for the full year. And through the third quarter, we're at roughly $0.14. As we've looked at the outage restoration cost item in particular, that we've talked in prior calls about how the way the rate case was established, we expected that if the outage restoration costs that we incurred in 2019, were to recur in 2020 would have roughly 80% to 90% coverage on that. So that'll give you some benchmark to how to think about this. And in 2020, we're seeing a higher experience so far in those outage restoration costs. So hopefully, that gives you some information to help answer your question.

[Operator]

Our next question comes from the line of Neil Kalton with Wells Fargo Security.

[NeilKalton]

Hi, guys. Thanks for taking my question. I'm still a little bit confused about New York. But maybe I think you've given 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 have been a nice egg this year. And given what the revenues you might get going forward, how we should think about that earned ROE this year?

[DennisArriola]

I don't know that it wouldn't be helpful or accurate if we gave you an estimate. I think that, again, we're focused on getting this the rate case approved that, we're pleased that we've got the joint settlement 20 signatories and we think that it'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 we don't have that, what you're asking for the tip of our fingers as far as what the earned, our off earned ROE is actually today, because there's so many moving pieces, as Doug said, we've got in our numbers year-to-date, the taxes that are reflected because of the rate case, as well as other costs, but we don't have the revenue. So it would be an incomplete number if we gave it to you.

[BobKump]

Yes. I agreed, and Neil and this is Bob Kump. Yes, It's Bob. And Doug said we're 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'd be significant costs we've incurred, that would drive an ROE down to a number Dennis said it really wouldn't make sense because the associated revenues, we can only record once the commission approves the agreement. So I think it's best to defer and with our Investor Day will give a better snapshot for 2021 and beyond.

[NeilKalton]

Yes, thanks. I understand. And then on the asset sale gains, I think in the past, there have been some thought that these would be included there be some 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?

[DennisArriola]

Yes, Neil, it's great question, I think what you're going to see from us going forward is that there's going to be a much more consistent quality of earnings standard, that includes those things that are part of our ongoing operations. And while we will be looking for opportunities to optimize the portfolio and reallocate or recycle capital, I'm not thinking that that's going to be a part of our earnings guidance in the future.

[Operator]

Our next question comes from the line of Sophie Karp.

[SophieKarp]

Hi, good morning, guys. I was just looking if I may on the -- your rating agency system rotations, clearly the more regulated mix is helpful. Could you remind us what your downgrade threshold is right now? And is it possible like do you anticipate that may be changed due to the acquisition before you close allow you to kind of shift the funding mix? Or is it not something that's going to happen you turn your opinion.

[DougStuver]

Hi, Sophie, this is Doug. So really just starting with the rating agencies, we have S&P and Moody's and Fitch; with S&P, they view us as a core holding of Iberdrola and so they really tie our rating to Iberdrola's rating. Fitch and Moody's view is more on a standalone basis with Moody's, I have to speak to them in particular, and 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, they want to gather more information from us as we do our Investor Day presentation and have more detailed information to share. But directionally I think this is certainly a positive in terms of our credit profile, and may give us some additional capacity.

[SophieKarp]

And then on New York and New York state where you guys are assuming that you will have the authorizations and you are right by the end of the year. What drives the confidence? There have been a lot of delays. And it seems like you're pretty confident that this is going to happen in the remaining of two and a half months. Just trying to ascertain, if it's possible that this will going to sustain when you on and how would that be handled? Thank you.

[DennisArriola]

Yes, Sophie. 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 met 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 to the system, I think are very important and that's one of the reasons why we continue to be optimistic that this is the right settlement and rates case going forward. There's no doubt that with everything that continues to go on in the country, and specifically New York related to COVID, things are taking more time. And I think that with any increases in rates for any service that's being delivered, I think Commission's are being much more thoughtful about, what is going to be passed through to ratepayers during these challenging times. So would we have preferred for this to be approved in October? Absolutely. Are we surprised? Not, maybe not completely, but I think the fact that they accepted our extension for one month on the [maypole] shows that they're continuing to work on it. And we're optimistic that this will be addressed in November. But Tony, I don't know if you want to add anything to that.

[TonyMarone]

Dennis, I think you've covered most of it, I'll just add that some of the provisions in the JPA are important not just for the company, but also for our ratepayers in New York things around COVID relief and so forth at nice egg and arginine . So while these things take time to consider, we believe that at this JPA are the right balance and the right mix, and we think it is going to get approved.

[Operator]

And this concludes our Q&A session for today. I turn the call back to the presenters for any closing remarks.

[Dennis Arriola, Chief Executive Officer and President]

Well, good. Well, thanks again, for listening to our third quarter earnings call. I want to thank all of our employees and any PNM Resources employees that are on the call, to really thank you for your relentless commitment to serving our customers and our communities, especially during these challenging times. Despite the current unprecedented challenges and global economic uncertainty, we continue to execute on our strategic objectives for the year, including the commission of approximately one gigawatt of wind projects, progress and the approval of our settlement and our New York rate cases that we just discussed, and the soon to be started construction of NEC state. And again, we're truly excited about this strategic transaction with PNM Resources. And we look forward to updating you on our regulatory approval process throughout the year in 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 questions, please reach out to the Patricia or Michelle. Thanks for joining us. Have a great day and stay safe.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect.