Business Context and Reporting Period
This Form 8-K, filed on October 20, 2020, reports a material definitive agreement entered into by PNM Resources, Inc. ("PNMR") and its subsidiary Texas-New Mexico Power Company ("TNMP"). The filing details an Agreement and Plan of Merger with Avangrid, Inc. ("Avangrid"), a New York corporation, and NM Green Holdings, Inc., a wholly-owned subsidiary of Avangrid. Under the agreement, PNMR will merge into a subsidiary of Avangrid, with PNMR surviving as a direct wholly-owned subsidiary of Avangrid.
Key Financial Metrics and Transaction Terms
- Merger Consideration: Shareholders will receive $50.30 in cash per share of PNMR common stock.
- Termination Fees: PNMR must pay Avangrid $130 million if PNMR terminates to accept a superior proposal or changes its recommendation. Avangrid must pay PNMR $184 million if Avangrid terminates due to a breach of regulatory covenants or fails to close when conditions are met.
- Reimbursement Cap: Upon termination due to breach, parties must reimburse reasonable out-of-pocket fees up to $10 million.
- Financing Commitment: Iberdrola, S.A. (owner of 81.5% of Avangrid) has provided a commitment letter to fund the merger consideration as necessary.
- Backstop Facilities: PNMR secured a $300 million 364-day revolving credit facility and a $50 million 364-day delayed-draw term loan to refinance existing debt triggered by the change of control.
- Debt Covenants: The new backstop facilities require a maximum consolidated debt-to-consolidated capitalization ratio of 0.70 to 1.00.
- Bond Obligations: TNMP holds $750 million in First Mortgage Bonds (FMBs) subject to a mandatory offer to prepay at 100% of principal plus accrued interest (no make-whole) within 30 days of the agreement signing.
Material Changes and Triggering Events
The execution of the Merger Agreement constitutes a "Change of Control" under PNMR, TNMP, and PNMR Development's existing credit facilities, triggering an "Event of Default." This includes:
- $300 million revolving credit agreement (Wells Fargo).
- $150 million term loan (MUFG Bank).
- $50 million term loan (Bank of America).
- $75 million TNMP revolving credit agreement (KeyBank).
- Other term loans and letter of credit facilities totaling approximately $190 million.
PNMR is negotiating waivers from lenders to avoid acceleration of these debts. If waivers are not obtained for the TNMP Revolver within 15 days, a "Bond Repurchase Event" could be triggered for the $750 million TNMP FMBs, requiring repurchase at principal plus a make-whole amount. PNMR intends to use the new backstop facilities to refinance these obligations if necessary.
Outlook, Risks, and Contingencies
- Closing Timeline: The merger is expected to close in the second half of 2021, subject to regulatory approvals and shareholder vote.
- Regulatory Approvals: Closing is contingent on approvals from PUCT, NMPRC, FERC, FCC, CFIUS, NRC, and compliance with the Hart-Scott-Rodino Act.
- Divestiture Requirement: PNMR must exit all ownership interests in the Four Corners Power Plant by December 31, 2024.
- Shareholder Approval: The transaction requires approval by holders of at least a majority of outstanding PNMR common stock.
- Termination Rights: The agreement may be terminated if not consummated by January 20, 2022 (subject to a three-month extension).
- Executive Compensation: PNMR amended its Officer Retention Plan to clarify restrictive covenant requirements and tax compliance for named executive officers in the event of termination following a change in control.
Investor Verification Checklist
- Verify the status of regulatory approvals from FERC, PUCT, NMPRC, and CFIUS.
- Confirm whether lenders have granted waivers for the "Event of Default" triggered by the change of control on existing credit facilities.
- Monitor the outcome of the mandatory offer to prepay the $750 million TNMP First Mortgage Bonds.
- Review the proxy statement for shareholder voting results on the Merger Agreement.
- Assess the progress of the Four Corners Power Plant divestiture agreements.
- Check for any updates on the $130 million or $184 million termination fee contingencies.