$4.3B deal forms third-largest U.S. renewable power company

Source: By Edward Klump, E&E News reporter • Posted: Thursday, October 22, 2020

Avangrid Inc. is planning to acquire New Mexico’s largest electric utility company in a $4.3 billion transaction that could accelerate development of renewables in the state and beyond.

The tie-up, announced yesterday, would cement Avangrid as the third-largest renewable energy operator in the U.S. with a foothold in 24 states, according to Iberdrola SA, the Spanish parent of Connecticut-based Avangrid.

The merger with PNM Resources Inc. would bring Avangrid’s holdings to 10 regulated electric and gas utilities in six states, including PNM Resources’ operations in New Mexico and Texas. Avangrid CEO Dennis Arriola told investors, analysts and employees yesterday that the transaction is part of an effort to bolster the company’s transmission and distribution businesses as well as leadership in renewables.

It remains to be seen how successful Avangrid might be in using a larger footprint to further develop wind and solar. But for PNM Resources, combining with Avangrid offers a source of financial backing during an era of change. It also could help speed up decisions planned around aging coal-fired power plants.

“Our industry is navigating an extraordinary transition,” Pat Vincent-Collawn, CEO of New Mexico-based PNM Resources, said on a conference call yesterday. “The exit out of coal and into clean energy resources, along with the necessary grid improvements, requires a level of investment that has created challenges to our business.”

A transition to lower-carbon energy is at the center of plans for both companies.

Avangrid has pledged to be carbon neutral by 2035. The utility called Public Service of Company of New Mexico, or PNM, has said it aims to provide 100% emissions-free power by the end of 2040. That would be ahead of a 2045 zero-carbon resources deadline for PNM from the state of New Mexico.

PNM Resources and Avangrid hope to close their deal by the end of 2021, though the proposal must pass federal and state regulatory hurdles. Avangrid estimated yesterday that a combined company would have nearly 11,000 megawatts of generation capacity in its portfolio — with more than 7,600 MW of that coming from wind.

“This transaction will make us an even more impactful clean energy player for our customers and the local economies,” said Arriola, who also touted the deal’s geographic diversity and ability to add to earnings.

Solar, wind and ‘execution risk’

Avangrid and PNM Resources suggested their merger could help build on Avangrid’s renewable footprint in New Mexico and Texas.

In that region, Vincent-Collawn said, “the output from solar panels in the afternoon is often complemented by the evening production of high-capacity wind farms.” She said Avangrid’s presence in New Mexico includes about 306 MW of nearly completed wind generation that will serve customers of her company.

Moody’s Investors Service outlined potential benefits of the deal in a report yesterday, saying that for Iberdrola it’s part of a “long term strategy to grow its regulated and renewable generation businesses and marries well with PNM’s goal” of reaching zero emissions.

But Moody’s said there’s “a degree of execution risk” because alternative bids could occur and “negotiations with state regulators and stakeholders could result in concessions such as customer credits, rate freezes or other economic compromises requisite to close the deal.”

The proposal essentially cashes out existing investors in PNM Resources. It calls for shareholders to get $50.30 for each share of the company’s common stock held at the closing, translating to an equity value of about $4.3 billion. Net debt and other adjustments suggest a so-called enterprise value of about $8.3 billion, according to a news release.

Iberdrola has provided a funding commitment letter for the full amount of the transaction, Arriola said. That company has a majority stake in Avangrid, whose stock fell about 7% in regular New York Stock Exchange trading yesterday after word of the planned acquisition spread along with Avangrid’s third-quarter earnings results.

Paul Patterson, an analyst with Glenrock Associates LLC, said how the financing terms come together for Avangrid isn’t completely clear yet. But the proposed deal is in keeping with industry trends.

“This is one more example of a smaller utility being bought by a larger one,” Patterson said. “This has been a consolidating industry for decades now, and I think it’s going to continue to be.”

Patterson said PNM Resources is a relatively small player in the industry, and he said having its utility operations owned by a larger entity with more resources and expertise could help it deploy renewables.

Earlier coal exit?

Environmental advocates didn’t universally praise the deal yesterday, but some outlined steps Avangrid could take on issues such as existing coal-fueled power plants.

“We urge Avangrid to commit to a complete cleanup of [the] San Juan and Four Corners coal [plants] and a reinvestment into a long-term renewable economy for the communities that have sacrificed for PNM’s profits,” Camilla Feibelman, director of the Rio Grande Chapter of the Sierra Club, said in a statement.

In an interview, Feibelman urged PNM Resources not to sell its stake in Four Corners to an entity that might seek to keep the plant operating. She also said she needed to do more due diligence to understand what Avangrid is and the deal’s potential effects.

PNM Resources, in a news release yesterday, said it’s committed to exiting coal at the San Juan Generating Station in 2022. It’s also exploring a possible exit from its 200-MW ownership stake in the Four Corners plant earlier than planned.

“PNM sees the potential for additional customer savings by exiting the plant sooner than the expiration of the ownership and coal supply agreements in 2031,” the company said.

Another wrinkle is work by the city of Farmington, N.M., and Enchant Energy Corp. to give the San Juan plant new life using carbon capture technology. In a statement yesterday, the city and Enchant said their project at San Juan “remains on track” and wasn’t changed by the Avangrid-PNM Resources news.

“The announcement by AVANGRID and PNM underscores the extremely dynamic nature of the electric energy and utility industries,” Cindy Crane, Enchant’s CEO, said in a statement.

Larry Behrens, Western states director for a group called Power the Future, criticized the proposed deal, saying Avangrid was a political contributor to New Mexico Gov. Michelle Lujan Grisham (D). Families in the state “will no doubt be ‘thrilled’ to know our electric bills will now be determined by an eco-company based thousands of miles away that doesn’t seem to care about our energy workers,” he said.

PNM Resources said widespread job protections would be in place for two years after the transaction closes, and it said its New Mexico and Texas utilities would still have local management.

Nora Meyers Sackett, press secretary for Lujan Grisham, said the proposed agreement would be “good news for New Mexico’s renewable energy goals” in terms of support from Avangrid.

“New Mexico continues to work to build additional energy transmission infrastructure, enabling New Mexico to export renewable energy to states all across the West, and this agreement will bolster those efforts,” Meyers Sackett said in a statement.