TXNM Energy, Inc. (TXNM) Earnings Call Transcript & Summary

Good morning, and welcome to the PNM Resources Financial Update Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lisa Goodman, Director of Investor Relations. Please go ahead.

Thank you, Kate, and thank you, everyone, for joining us this morning for the PNM Resources financial update with preliminary 2021 earnings and guidance for 2022 and 2023. Please note that the presentation for this conference call and other supporting documents are available on our website at pnmresources.com. Joining me today are PNM Resources' Chairman, President and CEO, Pat Vincent-Collawn; and Don Tarry, our Senior Vice President and Chief Financial Officer. Before I turn the call over to Pat, I need to remind you that some of the information provided this morning should be considered forward-looking statements pursuant to the Private Securities Litigation Reform Act of 1995. We caution you that all of the forward-looking statements are based upon current expectations and estimates, and that PNM Resources assumes no obligation to update this information. For a detailed discussion of factors affecting PNM Resources' results, please refer to our current and future annual reports on Form 10-K, quarterly reports on Form 10-Q as well as reports on Form 8-K filed with the SEC. With that, I will turn the call over to Pat.

Thank you, Lisa. Good morning, and thank you all for joining us today. It's been some time since we've held an earnings call, but I can assure you, it is all coming back to us now. You probably knew that yesterday was Groundhog Day. But since the day after Groundhog Day often gets overshadowed, you may not know that today is both National Optimist Day and National Carrot Cake Day. And when you start the day off eating carrot cake, it's easy to be an optimist. Of course, it's also easy to be an optimist when you have great team members like Lisa Goodman. Lisa was recently named a 2022 Woman of Influence by Albuquerque Business First. Lisa deserves this recognition and has been a great part of our PNM Resources family for more than 18 years. Congratulations, Lisa, and thank you for all that you do. I'm going to start on Slide 4 with our financial results and guidance. Preliminary ongoing earnings for 2021 are $2.45 per share, reflecting another strong year of delivering results. Growth in PNM's FERC transmission business and recovery of TNMP's capital investments through rate riders provided year-over-year utility earnings growth. We are also providing earnings guidance for 2022 at a range of $2.50 to $2.60 per share and for 2023 at a range of $2.60 to $2.75. We continue to be focused on running our business in New Mexico and Texas, investing in the infrastructure needed to meet the growing demands of our customers and communities and providing shareholders a return for their investment. Tied to this increased earnings expectation is a 6% increase to our common dividend, keeping us in the middle of our targeted payout ratio for 2022 earnings. Don will cover each of these items in more detail in the financial slides. As our merger process with Avangrid continues, and I'll get to that in a minute, our teams continue to build on the successes of years past and adapt and respond to changes in our business environment to move PNM and TNMP forward. At PNM, we are implementing plans to achieve our goal of providing 100% emissions-free energy by 2040. In the fourth quarter of 2021, our annual Renewable Plan and our first Transportation Electrification Program were both approved by the commission. We are also continuing our efforts to exit from coal-fired generation early with our appeal to the New Mexico Supreme Court following the commission's denial of our planned exit of the Four Corners coal plant. The early exit not only aligns with our carbon-free goal but it brings customer savings, including reduced fuel cost and provides the local community's financial support as they transition to a non-fossil fuel economy. TNMP just completed its most significant year of capital expenditures to support growth in its service territory and it isn't slowing down. Last winter storm Uri has increased interest in adding resource and storage capacity in ERCOT, and we've seen more requests to interconnect to our system. The transmission and distribution capital rate riders in Texas ensure that our investments are recovered in a timely manner. We filed our first semiannual Transmission Cost of Service adjustment for 2022 last week with a requested increase in annual revenues of $14.2 million based on our investments in the second half of 2021. Let's turn to Slide 5 and talk more about the merger. We've extended the agreement with Avangrid to April of 2023 with a 3-month extension option to preserve the progress we have made over the last year. We obtained approval from the 5 required federal agencies in the Public Utility Commission of Texas, leaving only the New Mexico Public Regulation Commission. In our New Mexico application, we negotiated unprecedented customer and economic development benefits, which we conservatively estimate to be worth $300 million. That was all in a stipulation that has broad support with 23 out of the 24 intervening parties either supporting or not opposing it. Our reasons for the merger have not changed. As we look out into the future and see the capital needed to navigate the transition to clean energy and meet growing demand, we knew that combination with a larger company would provide benefits of scale, regulatory diversity and a stronger credit profile. We also look for a partner who would align strategically with our goals. Avangrid and Iberdrola have an impressive ESG profile on the national and global level and are willing to make commitments on important items to stakeholders in New Mexico and Texas. Maintaining local control of the utilities, following through on the clean energy commitments we've made in New Mexico, supporting economic development efforts and continuing to be strong partners in our community. Our combination makes sense. In December, the New Mexico PRC rejected the stipulated agreement with parties. And at the beginning of January, we filed our notice of appeal with the New Mexico Supreme Court. Yesterday, we jointly filed with Avangrid and Iberdrola our statement of issues in the appeal, and they can be summarized into 3 key issues. First was the PRC decision improperly based on inadmissible hearsay evidence and information outside the evidentiary record. Second, did the commission determine the merger was contrary to the public interest by imposing arbitrary standards, improperly weighing benefits and risks and ignoring the weight of the admissible evidence. The benefits and protections we proposed were far beyond the level required in the approval of other mergers. These added benefits of protections were then weighed against perceived risks including a fear that PNM would begin ignoring its obligations to provide quality service to customers as a result of Avangrid's ownership. These were not real risks supported in the record and were contrary to the stipulated commitment made by PNM and Avangrid. The third issue is around the commission further acting unreasonable and unlawfully and in violation of due process in their handling of matters concerning the discovery process. We think the commission failed to follow its own rules and withholding its approval. The next step is for the Supreme Court to assign the case to its calendar, which will trigger a 45-day deadline for PNM and Avangrid to file their detailed arguments in the appealed issues in the brief, followed by 45 days for the PRC to file an answer brief. We will then have 20 days to file a response to the PRC's brief. In the brief, we can request oral argument, which will be at the court's discretion. We expect the appeal process to take 12 to 18 months. If the court agrees with our arguments, the case will be remanded back to the PRC. Our appeal of the PRC's rejection of the stipulation maintains the progress we have made and retains our negotiated agreements with parties, which was an important consideration in filing the appeal and extending the merger agreement. The merger would create a stronger financial profile, but it does not change our strategic direction. My leadership team and I remain in place and are focused on the tasks at hand. During the appeal process, we will continue to manage our business successfully and deliver results. Don will walk you through our financial plans, but I first want to touch base on some ESG highlights for 2021 on Slide 6. PNM's resource portfolio capacity moved to more than 30% renewables and 40% carbon-free in 2021 with the addition of new wind resources. We are well on our way to achieving the renewable portfolio standards laid out in the Energy Transition Act. We also joined the Western Energy imbalance market in April of 2021. The regional coordination is designed to balance fluctuations in supply and demand by automatically finding lower cost resources to meet real-time power needs. It maximizes the potential for renewable resources across the market by making excess renewable energy available to utilities at low cost rather than curtailing the resource to balance the grid. In Cal ISO's third quarter report of Western EIM Benefits, the total avoided renewable curtailment volume for the second and third quarters was calculated at over 132,000 megawatt hours. Under the assumption that these avoided curtailments displaced production from other resources, the estimated result in carbon dioxide reduction is over 56,000 metric tons, and PNM's participation also provided $12.5 million in customer savings over the first 9 months. And as I mentioned earlier, we continue to advance support for electric vehicles with the approval of our first Transportation Electrification Program for PNM customers. This comes on the heels of our announcement to shift more of our own fleet to EVs and we've also joined a number of our EEI peers to partner with the National Electric Highway Coalition to bring more charging stations to our nation's roadways so that the public can drive EVs with confidence across the country by the end of 2023. To continue our tradition of environmental stewardship, we have named our first Chief Environmental Officer at PNM. Maureen Gannon, who has been with PNM for 25 years, possesses an incredible knowledge base of the environmental challenges, achievements, regulations impacting our industry, and importantly, the future opportunities being explored. She will continue to represent us at a state, national and global level as we work to achieve our goal for emissions-free energy by 2040 and will expand our ESG reporting. Maureen will also lead our work on a just transition incorporating into our decision-making the impacts of the clean energy transition on workers and communities, particularly tribal communities. New Mexico's Energy Transition Act and PNM's plans to exit coal were uniquely designed to consider these elements, and we feel strongly that our core values of safety, caring and integrity are embedded within our business plans for this critical transition. Our communities depend on this, and we take this responsibility seriously. Our community support extends throughout our business. Our teams in Texas demonstrated the support through several challenges in 2021. Winter Storm Uri created a significant disruption in February when the storm hit. And in August, Hurricane Ida hit Texas and our TNMP crews assisted in the restoration efforts, only to return home in time for Hurricane Nicholas to hit our own service territory in September. But our teams rose to meet these challenges. EEI recently recognized TNMP for their exceptional response to these events with both an Emergency Assistance Award and an Emergency Response Award. And in New Mexico, we have continued to provide financial assistance for customers impacted by COVID-19 and help them access partnership funding. More than $7 million in cumulative assistance has been provided through these efforts. We care about our customers and our communities, and we continuously walk the talk and demonstrate our core values in our business practices. So now let me turn it over to Don to walk through our financial updates.

Thank you, Pat, and good morning, everyone. I'm going to pick up on Slide 8 and briefly touch on our earnings results for 2021. For those of you who are following us at Q3, you will remember that we were ahead of expectations through September based on our original guidance provided for the year of $2.27 to $2.37. We continued that trend and finished off the year strong in the fourth quarter and are reporting preliminary earnings of $2.45 for 2021. Our increase in 2021 earnings was based on growth at the utilities. At PNM, FERC transmission margins increased due to the addition of new customers and higher utilization of our transmission system by third parties. Earnings also increased due to interest savings and higher realized gains from our decommissioning and reclamation trust. These increases were partially offset by planned increases in operational spending, higher depreciation and property tax expense, resulting from additional capital investments and milder temperatures in the second half of the year compared to 2020. At TNMP, TCOS and DCOS rate rider recovery was partially offset by higher depreciation and property tax expense from additional capital investments and planned increases in operational spending. At Corporate, we had interest savings from the pay down of debt with the proceeds from the additional shares issued at the end of 2020 as well as lower interest rates in 2021. All of our detailed drivers are included in the appendix. Looking forward, I'll turn to Slide 9, as Pat mentioned, the merger process has not changed our strategic direction, and today, we are providing guidance for both 2022 and 2023 to give more detail around our projections while the merger is extended. 2022 earnings guidance is a range of $2.50 to $2.60 with a midpoint of $2.55. 2023 earnings guidance is a range of $2.60 to $2.75 with a midpoint of $2.68. Both of these ranges are consistent with our expectations prior to the merger announcement and reflect continued execution of our plans. On a long-term basis, we are targeting 5% EPS growth from 2020 to 2025. There is a growing need for T&D infrastructure to support safe and reliable growth on our systems and to integrate more renewables on PNM system as New Mexico transitions to clean energy. Most of this rate base growth is recovered through FERC transmission rates and TNMP rate riders. Our 5% target assumes additional equity in our plans to fund this infrastructure growth while maintaining our investment-grade credit metrics. We also announced a dividend increase, which maintains our 55% targeted payout ratio on higher level of earnings, resulting in a 6.1% increase. Let's get into the details starting on Slide 10. We continue to see strong economic development activities in New Mexico. In 2022 and 2023, PNM will see the impact of industrial customers expansion that we've shared in the past, an Amazon distribution center and Kairos Power, an engineering company focused on advanced reactor technology, both came online in 2021, and will provide a full benefit in 2022. Intel and the Meta Facebook data center previously announced expansions that are playing into our load projections. The offsetting fluctuation in PNM residential and commercial load due to COVID-related business restrictions are expected to fully return back to pre-COVID levels in 2022. In Texas, we also saw COVID trends reverse in 2021, as volumetric load decreased and demand-based load increased. Moving forward, we expect volumetric load from residential customers to increase 1% to 2% in 2022 and 2023, consistent with customer growth. We continue to see good levels of new service requests and interconnections for new resources in Texas, and we expect demand-based load to increase 2.5% to 3.5%. Now turning to Slide 11 for our capital investment plans. We continually evaluate our capital needs to ensure safe and reliable service for our customers. We have increased our capital plan by $500 million to $3.5 billion with additional T&D investments required to serve economic growth we are seeing in both our PNM and TNMP service territories. At PNM, this incorporates the investments that are designed to deliver clean energy, enhance customer satisfaction and increase grid resilience. Far beyond replacing aging infrastructure, we'll reconfigure substations and lines to accommodate growing amounts of intermittent and distributed generation and expand capacity in areas where they have been approaching maximum capacity. These investments will directly serve customers with a focus on growth, reliability and outage restoration, and will integrate evolving technology to provide long-term customer value. In Texas, the concepts are the same, and we continue to see strong growth in our service territory. Load growth and new ERCOT resources drive the need for investments to ensure safe and reliable service. These investments include distribution feeder extensions, transmission interconnections and future transmission expansion. TNMP has interconnected 13 battery storage facilities through 2021 with several more inquiring about interconnection service along with inquiries from large-scale solar developers. On Slide 12, these investments result in a 7.7% growth in rate base from 2020 to 2025. At PNM Retail, growth in these new investments offset the reduction in rate base over the 5 years from our exit of coal generation. The transition to clean energy will result in customer savings that help offset the impact of these new investments and keep customer rates affordable. FERC rate base grows at a compound rate of 21% during this period with the recent addition of Western Spirit. TNMP grows at a rate of 16%, more than doubling its 2020 rate base by 2025, and approaching the same level as PNM Retail at $2.5 billion. As FERC continues to grow, we improve and diversify the regulatory risk across our business. Turning to Slide 13, let's look at 2022 guidance. At PNM, the addition of Western Spirit transmission line is a significant year-over-year earnings driver as we begin to recover on this investment through an incremental rate on day 1. Growth from other transmission investments recovered through our FERC formula rate and load growth will also increase earnings over 2021 levels. These will be offset by higher depreciation, property tax and interest supporting new capital investments. Our reclamation and decommissioning trust benefited in 2021 from strong market conditions and we have assumed those return to prior levels in our 2022 guidance. At TNMP, 2022 guidance increases primarily from rate relief with our 2 semiannual transmission filings and our annual distribution filing to recover capital investments. The depreciation, property tax and interest expense from those investments partially offset those revenue increases. Corporate is flat as higher interest expense is offset by the benefit of a higher effective tax rate on losses in this segment. These drivers result in an overall increase to our expected earnings in 2022 to a midpoint of $2.55 compared to $2.45 earned in 2021. Now let's turn to Slide 14 for 2023 guidance considerations. As we invest in T&D infrastructure, approximately 75% of growth in our rate base is recovered through our existing FERC formula rates or TNMP rate riders. These rate regulatory mechanisms provide for increased earnings in 2023. At PNM Retail, we will look to file a rate case before the end of the year to recover T&D investments and reflect our transition out of coal generation with the retirement of the San Juan coal plant. 2022 and 2023 guidance includes our plan to issue up to $200 million of equity financing over the 2 years, which we could do in different ways. We will look to implement an ATM program to have this option available and this helps preserve flexibility around timing and the pending merger while funding capital investments and maintaining our investment-grade credit metric. We will provide the segment breakdown of 2023 guidance and the detailed EPS drivers as we near the end of this year. On Slide 15, I'll wrap up with our dividend. As you can see on the slide, we continue to grow the dividend to reflect growth in earnings and also move up into the midpoint of our 50% to 60% payout ratio. Our Board increased the common dividend to a target of 55% payout ratio on our guidance midpoint for 2022 earnings. That first quarterly dividend we'll pay out later this month, and the Board will address the annual dividend again in December of 2022. With that, I'll turn it back over to Pat.

Thank you, Don. I'll wrap things up on Slide 16 before turning it over to questions. We remain in the merger agreement with Avangrid and will continue to pursue this path. At the same time, our teams remain focused on carrying out our business plan and achieving our goals and financial targets as a stand-alone entity. Our goal to achieve emissions-free energy by 2040 continues to be one of the most progressive goals in the country and we are not taking our foot off the electric vehicle pedal as we lead New Mexico in its clean energy transition. Critical infrastructure is required to support this transition, reliably support growth and improve grid resilience. We will continue to focus on T&D investments in our business plan while being mindful of customer affordability. And we will continue to focus on earning our authorized returns in financing these investments to maintain investment-grade ratings and a strong corporate profile, enabling us to carry out our values as a trusted partner in our communities and continue to enhance customer satisfaction. Thank you for being here with us this morning as we continue on yet another chapter of our journey, and we hope you agree that it did all come back to us now. With that, Kate, let's open it up for questions.

[Operator Instructions] The first question is from Julien Dumoulin-Smith of Bank of America.

Listen, just on the financing plan, as we think about the stand-alone business for the time being, how are you guys thinking about the couple of hundred million here in terms of converts or block and then thinking about just time line relative to the deal? It seems as if perhaps a little bit of a step down in the earlier equity financing quantum you contemplated earlier, if I'm reading the messaging correctly, but I just want to understand sort of how this fits with the time line for the deal and to what extent that the deal would impact us?

Julien, this is Don. Yes, I mean we will look to issue up to $200 million in 2022 or 2023. We'll continue to optimize that. Part of that could be an ATM program. We would also look at a potential block of selling common equity or for common equity to facilitate that. So -- but the timing, I mean, obviously, we'll look to optimize that between '22, 2023. We built that into the ranges that we've provided.

Got it. Okay. Fair enough. And then just as we think about the near term here with San Juan, can you comment on just the backdrop on resource adequacy. How do you think about the time line for that plant closure against the wider story in the West? And perhaps you can maybe recap, there's probably a better way to ask it, your resource planning through the course of the summer and onwards against the planned retirement?

Yes, absolutely. The plan with the San Juan plant was scheduled for retirement on June 30 of this year. The replacement power that the commission approved was all purchase power agreement. Our developers actually last year started providing notice that they could not meet the deadline. And as you all know, there are supply chain issues, et cetera, et cetera. So we gave notice to the Commission that we're working to fill the resource gap. We've got several options. We could keep the plant open a few months longer. We are looking at market purchases. I have an 11 x 17 sheet of every option that we are going over. And we are close to finalizing that, and we'll make an announcement on what we're going to do in the next couple of weeks, but I can assure you we do have the resources covered for the summertime. But you got it right. It's a west-wide problem. And actually, if you look at what's going on globally, it's a global problem. But we are fortunate that we're going to be able to cover.

Excellent. And then if I can, this is probably a trickier question. Just how do you think about next steps on Four Corners here? Again, I get that there's a lot of interlapping issues here. But how do you think about just maybe the time line on that plant at this point, maybe the best way to tackle that?

Yes, Julien. So I mean, obviously, the Commission went against the hearing examiner's recommended decision to abandon that on December 15. Under the ETA, we had 10 days to file our notice of appeal. We filed that on December 22. We've provided our statement of issues on January 21. And we're really waiting for the Supreme Court to kind of set the timetable, and it will follow the similar timetable that Pat laid out for the merger, which is the 45 days brief in chief, and then we'll kind of run through the process. We would expect an appeal process to take 12 to 18 months to work its way through that process. I mean there were 2 issues in there. We feel strongly that the ETA supports those. One of them was requiring specific replacement resources. We addressed that clearly and the ETA allows the ability to be able to bring those in a little bit later, and we provided a good plan in that. The second element was a prudency review. And if you remember back, we ended up as part of the hearing examiner's order, moved the filing from January 2021 to March to specifically address prudency in that arena. So that's the path it will go. The NTEC agreement, which is kind of the underlying agreement that you're referring to, will stay in place.

And the seasonal operations agreement remain in effect during the appeal also. So it will keep running. So...

Right. Yes, sort of you've got a lot of balls in the air around this and hopefully, you get some resolution here. I mean just if I can, on this rate case, just to make sure I understand what -- how that fits as well. You're saying that you're going to file potentially at the end of '22 here. How does that fit, again, with this deal approval that I suppose will be coming subsequent to that? Again, I get it sort of a tricky backdrop to operate under, but what's the expectation here given the stipulation requires staying out until the beginning of December, conceivably, you would be filing them?

Yes. I think the concept, Julien, is we will look to file a rate case before the end of the year, which is aligned with the stipulation that you're referring to, which had a December 1 time table. But we will look to file that. If you remember, we haven't been in -- we haven't filed a rate case since 2016 and rates went into effect in 2018. So there's a window there. We delayed it in 2020 due to COVID and also have delayed it because of COVID. So we're at a point we need to move forward with the rate case.

Julien, we're the full employment act for lawyers around here. So we're keeping everybody busy.

No kidding. And it's been an impressively long time to stand on the case. I hear you. It's about time.

The next question is from Ryan Levine of Citi.

Given the pending merger agreement, what are the options for the Board to address the dividend in December 2022? And can you provide some color around how the pending merger agreement would factor into the decision-making process?

Yes. Actually, the merger agreement now allows us to issue -- or to increase the dividend in December of 2022 if the Board so chooses. As you saw, we just increased it for this year, and the Board has that option for 2022 to increase it for 2023. Don talked about equity issuance and financing. So we have all of the things that we need to run our business as a stand-alone. As I said, we still think the merger is absolutely the right thing strategically for the company and our customers and our employees and our communities, but we are able to run the business. And so if for heaven's sakes something happens and the merger wouldn't go through, we'd be in good shape as a stand-alone.

Great. And then on the merger itself, is the Supreme Court required to hear the appeal and assign it to the general calendar? And if so, is there any time line around when a decision would be made to decide when the process would start?

There's no requirement that Supreme Court take a case, but I'm trying to remember. I can't remember a case that they haven't taken on the utility side. And this one is obviously one of the biggest decisions that the Commission has made and impacting the state. So while I never want to [indiscernible] a court, it seems likely that they will take it. There's no time frame for them to stick it on their calendar, but I would imagine it will go on pretty quickly. As you know, they're pretty busy with cases, El Paso Electric has one there, SBS has one there and we've got a couple there. So they've got a busy docket, but I think it's highly likely that they will hear this one.

In the 12 to 18 months guidance around that process, does that incorporate an estimate of when the process would really start? Or to the extent that this gets delayed given the demands on the calendar for the Supreme Court, kind of how does that play into this?

Yes. The 12 to 18 months is based on historical time lines and how long it takes the Supreme Court to get to things. So that would -- that time line does incorporate sort of a time estimate of how long it would take to get to the calendar. We don't break that out specifically because it can vary, but 12 to 18 months is the historical range it would take for a case.

Okay. And then on the capital investment plan in the prepared slides, you've highlighted an additional $0.5 billion on the investment plan. What is that comprised of? And is there a way to provide a little more color or granularity on what that additional $500 million is?

Yes. Some of it relates to the additional industrial type customers that we have coming on plays a part of it. Part of it is kind of moving in our grid modernization elements and dealing with our substations and improving those. We continue to get more and more DG on the system, and our systems were designed back in the 1960s and '70s. So some of these substations need to be to really help and support the reliability related to the intermittent cycle of renewables.

Okay. And on the financing plan up to $200 million of equity content, kind of what's the determinant factors on where in that range you could see yourself following -- presuming that the company is a stand-alone business?

Yes, Ryan, I believe it -- I'll say about $200 million. So I mean I think that's really what our focus is, is we could go up to that $200 million.

Okay. And then last question for me. Maybe just to provide some context around what prompted the engaging investment community in an earnings call and guidance, and should we expect more regular earnings calls as the transaction process proceeds?

Yes, Ryan. We were -- we were missing our opportunity to celebrate days and put funds in our earnings script, I'm being [fictitious]. But as we said, we believe that the merger will ultimately consummate, but we want to make sure that everybody is informed of our business plans and that we are running this as a stand-alone entity during this process so that no matter what happens we're a strong healthy company in good shape, and we think that communicating with our investors and our analysts and our other stakeholders is a great way to be transparent about what's going on.

The next question is from Ashar Khan of Verition.

So my first question is on the financing side. So if I'm right, the share count in your assumption for 2022 is the same as for 2021, right? You gave the share count, correct?

Yes, we did.

Okay. And then so my question is why would you do straight equity? Why wouldn't you do a convert? Because the convert would give you the ability if the merger happens and all that, to buyback or something like that. And so from an investor point of view, I don't understand the rationale of doing plain equity as we are in this uncertain period and where you have full faith that the merger will close. I just don't understand why dilute your current shareholders by doing this? Why not do a convert which you can buy back and have more optionality in it, if the merger does go through?

Yes, a couple of things. I'm not sure I fully follow the diluted -- to dilute the additional shareholders because the mandatory would flow through anyway and the price -- the fixed price on the merger set to pay that price would be one element, Ashar. The second element is we're always very focused on our investment-grade credit metrics and the importance to keep the company able to continue to grow. And so the common equity provides 100% equity credit versus mandatory convertibles that oftentimes only give you 25% equity credit. So it's a combination of both. Continuing to look to grow our investment portfolio from that perspective as well as ensuring that we have the investment grade.

Okay. I hope you, as you said, you really require it over a 2-year period that this decision is taken to the latest rather than the earlier, right? It should really be a 2023 event unless you have some liquidity concerns this year. So I hope you are mindful not to dilute us and do anything until we are much further along in the process to have some more things. Second, if I want to get on the regulatory side of the approval of the merger. So as you kind of pointed out that we have 18 months for the Supreme Court to come up with a decision, so what is the -- how are you preparing -- so if they come up with and go against us, are we planning to file a new approval process in front of the new commission next year? Can you elaborate how do we get through the merger approval process in case the Supreme Court denies or goes against us in that decision?

Well, I think the first thing we would have to do is see why the Supreme Court denied it and see what the record is. And then based upon that, we would make a decision. So I think it's too early to speculate what we would do if that happened. If it would happen, we'll get right back to you with what we do, but I don't want to speculate.

Okay. So you're going to wait till the Supreme Court decision and then inform us what the next step is and, of course, we will have a new commission by then. Okay. And then Pat, my last question, if I may ask, is, if you look at the takeout price and we look at $2.55, we are still trading at a discount to the average multiple. So can you tell me how the Board came up decision to continue this merger, because there's a lot of PV value lost by engaging in a suite for such a long period of time and also taking out options. And the price doesn't seem to be very attractive if we look at it on where multiples are trading this way and you kind of like with the takeout, you have basically floored the expectations of people. So I just want to ask, apart from the strategic that you mentioned and all that from a financial perspective, how did the Board justify this as being fair and reasonable to extend the time line?

Well, you have to think about the strategic. I know you only want to talk about the financial, but you've also got to think about the strategic benefits and the Board unanimously believes that the merger agreement continues to have significant benefits for shareholders, and we can't forget about our customers and our communities and our employees. The transaction price still represents a significant premium at this point and shareholders are also continuing to receive a dividend at a higher dividend rate. And we also wanted to retain the progress that we've already made in the other approvals received and the agreement with the parties in New Mexico. Changing the transaction price would have been material change as construed. The new merger agreement would have required approval in Texas, and we need to start the process over and the commissioners. So both strategically, it made sense. And financially, it's still an attractive price and you get a higher dividend. So that was their thinking.

The next question is from Vedula Murti of Hudson Bay Capital.

A lot of what I've got have been asked, but I guess is there any way for you to engage the regulatory process to address the issues that are contained within the appeal independent of the remand or having to wait for the Supreme Court to come back to you, like on individual profit basis or it's all like one big package?

No, you -- once you file the case at the Supreme Court, the commission loses jurisdiction over it. And we couldn't talk to them about a case that might come back because it would be considered ex parte. There is a time in the Supreme Court process where you can ask for a mediation. And we might be able to do it then, but we can't violate the ex parte rule. So...

So you can't like cherry pick items and basically start a docket of some type to try to resolve those while the appeal is pending?

No.

Okay. In the extension to April '23, it came up about the dividend. Can you tell us any other changes that were made as part of the extension that benefits either as a company or other stakeholders such that it helps justify in addition to all the factors you listed to continue to process?

Yes. The amendments that we made were driven primarily by allowing us to run the stand-alone business. So they were dividend, financing elements that we would need to facilitate the stand-alone business. So a lot is that flexibility.

So it really does come down to either Supreme Court remand it or if they reject that, you have to then decide whether to come up with a brand-new agreement and start all over again?

Yes. With that, the Supreme Court remands it or if we decide, we would have to decide whether or not that was the right thing to do for the company at that time.

And can you remind me if you did come up with if there's any breakup fees or whether this is simply lack of regulatory approval so there is nothing and the amendments that you made to extend this, there's nothing tied to the court remanding item like that?

No. regulatory-related breakup fee is only attainable if the merger agreement were to be terminated and Avangrid was in breach of its obligation under their merger agreement with respect to obtaining that approval. Regulatory-related breakup fee is not solely payable due to the failure to get regulatory approval. And Kate, before you give me the next question, Ryan, or Julien, whoever I answered your question about whether or not the Supreme Court has to hear the case, the reason they've heard them all is because they do have to hear them. So my apologies, I gave you a wrong answer on that. My great team corrected me. Kate, go ahead with the next question.

The next question is from Andy Levi of HITE Hedge.

Can you guys hear me?

Yes, Andy.

So just to kind of piggyback on some of this other stuff. So I guess, what I'm just trying to figure out, Pat, is so you extend the agreement, there's not a higher price, we could debate back and forth, which we're not going to -- I'm not going to go with you on the call today, whether the deal itself is better for customers or not. But if we were a shareholder, I'd be pretty upset because basically you put a top on the stock and based on the guidance that you gave today and where the group is trading and what the group has done since you announced the merger, the stock is a $50 stock kind of stand-alone, give or take $0.50. Again, that's my valuation, but looking at peer values and everything on a relative basis. So stock is trading $45. How can you kind of just -- how can you or the Board justify this deal for shareholders and the time frame that needs to wait and they really, quite honestly, the unlikelihood that the Supreme Court is going remand back to the commission. I understand that we'll have a new commission in January and maybe that's the ultimate play, but that still gets you 2 years out almost. So it's a long time to wait to capture value that probably if there was no deal the value would be there tomorrow.

Well, Andy, just remember the Board, we're all shareholders. I'm probably the largest individual shareholder in the company. So we obviously think it makes sense for shareholders. You're right, we could debate on the price, but we won't do it here. It has those benefits. It's a premium at this point. You get a higher dividend. And we still believe, Andy, that this is the right thing to do for the company in the long term. We need that bigger balance sheet. We need access to technology expertise that as a company we are just too small to have. They're going to enhance our cybersecurity abilities. There's just a lot of benefits in there that make it a good deal. Think about employees, for example, right? A lot of our employees are really excited for the opportunities to rotate around in a bigger company. And in a time when keeping employees is difficult for everybody, having that excitement and that optionality for employees is key when you're running a business. So there are just -- there are lots of factors in there. And I understand you disagree, and that's the great thing about America, but it just makes sense financially and strategically.

Yes, but financially, as someone who could be a potential shareholder that makes really no sense because there's the time value of the money. Yes, I understand the dividend. But I think the main point -- I would obviously going to leave the word on this before we get it out there is that the stock would be a $50 stock without the deal. So you should think of a higher price. Now if you [indiscernible] you would have taken a higher price, then there's no argument, right? Because it seems like time value of money. But you didn't take a higher price, it just makes no sense, but I just want to get that out there, that's something [indiscernible] probably and I want to leave it out there publicly. But I appreciate your comments, and I appreciate your view.

And thank you, Andy. I appreciate you not being shy and bringing it out. So we do appreciate that.

And the last question is from Paul Fremont of Mizuho.

I actually want to go back to one of your older slide presentations. You had initially planned on issuing a convert of between $250 million and $300 million in the fourth quarter of '21 that would have converted in '24. So when I look at the $200 million of equity that you're issuing in '22 and '23, how should I -- should I think of that as being a part of what you would have issued under the convert through '24? Should I think of that as incremental to that equity that you talked about in '24? Or should I think of it as you now defining a lower equity need than what you would have otherwise issued?

Thanks, Paul, and I appreciate the question. Yes, the original $250 million mandatory convert was to facilitate the Western Spirit transaction. We did close on that transaction. And I think the way to think about it is, it's $200 million between '22 and '23. We did add additional capital in $500 million over the 4-year window as well, too. So that's what our equity need is in '22 and '23. So I think you can take the mandatory convertible that was assumed in the previous slide off, and that's the equity we'd be looking to issue in 2022 and 2023 is up to $200 million.

So if you were not to merge with Avangrid, you would have no equity need in '24?

No. We haven't specifically identified needs beyond 2023. But of course, the outcome of the merger will play into that, Paul. We do remain committed to investing in the business while maintaining our investment credit rating, which is absolutely critical. And our commitment to hit the 5% long-term target in 2022 to -- our 2020 to 2025 factors what we will need in during that period of time. So…

Okay. And then I think if you go back to sort of that time frame, you would initially talk about a 5% to 6% targeted EPS growth rate. Is the equity issuance that you're planning to do in '22 and '23, the principal driver of that now being 5% instead of 5% to 6%?

Correct. Paul, the underlying plan has continued. And in fact, we've added capital associated with it, but the underlying plan and the business model that's there is good. So it's driven by the equity itself.

Great. And then I guess, what -- based on sort of what you need -- the hoops that you need to jump through, what type of a time line are you assuming that the merger would ultimately be consummated and if it were to be approved?

Well, we extended the agreement until April of next year, Paul, with the 3-month optionality. So that would be our hope.

And is that -- I mean, I guess, from what you're saying, if the courts decide in your favor, it gets remanded back to the commission. And then you would hope -- in other words, I guess I'm trying to figure out what would be sort of the best-case outcome in terms of merger scenario. That the court rules in your favor and then the commission basically adopts an amended decision that approves the deal. Is that sort of the -- is that the best case?

Yes, I'd say so, Paul, because we would hope it would be on the shorter side. And if you get a chance to read the statement of issues, it's pretty clear what they are, and they're all based on really points of law. And then the reason that we're keeping the merger agreement intact, right, with the stipulation is that that could be approved. Usually, the record is already there, so you don't have to establish a new record, and that makes it simpler and quicker.

Okay. And then conversely, a last question for me, if the court were to decide not in your favor, then what would be your options?

Well, Paul, as I said earlier, what we have to do is take a look at why the court decided and what their record was. And then we would have to assess whether or not we felt it made sense to renegotiate and file again. We just have to wait and see on that one.

This concludes our question-and-answer session. I would like to turn the conference back over to Pat Vincent-Collawn for closing remarks.

Thank you, Kate, and thank you all for joining us this morning. We hope that you all remain healthy and safe and that we're actually able to visit with you in person in Investor Conferences and other events in 2022. Thank you all so much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.