Iberdrola, S.A. (IBDSF) CEO Ignacio Galán on Nine Months 2020 Results - Earnings Call Transcript

Iberdrola, S.A. (OTCPK:IBDSF) Nine Months 2020 Earnings Conference Call October 21, 2020 3:30 AM ET

Company Participants

Ignacio Cuenca Arambarri - Head, Investor Relations

Ignacio Galán - Chairman and Chief Executive Officer

José Sainz - Chief Financial Officer

Pedro Azagra Blazquez - Director, Corporate Development and M&A

Conference Call Participants

Ignacio Cuenca Arambarri

Good morning, ladies and gentlemen. First of all, we would like to offer a warm welcome to all of you who have joined us today for our 2020 Nine Months Results Presentation. Secondly, we hope that you, your family, friends and colleagues are all safe and well during this global pandemic we are suffering.

Now onto the reason why we are here. Our nine-month results presentation, which in the current occasion will be structured in a different way due to the US deal that we have just announced today. Firstly, we will begin with an overview of the results and the main developments during the period given by the Senior Executive team that we usually have with us, our Chairman and CEO, Mr. Ignacio Galán; Mr. Francisco Martinez Corcoles, Business CEO; and finally, the CFO, Mr. José Sainz.

Once we finish the review of the results, we will continue with the presentation where Mr. Pedro Azagra, our M&A Director will inform you about the details of the acquisition of PNM Resources and then it will be followed by a Q&A session, where we will try to give answer to the question you may have about both items presented today, nine-months results, and the mentioned transaction.

I would also like to highlight that we are only going to take questions submitted via the web. From our part, we will divide your queries between the ones corresponding to the results in the one hand and those relating to the deal on the other. So feel free to ask all kind of questions you might have, but please only through www.iberdrola.com. Hoping that both presentations will be useful and informative for all of you.

Now, without further ado, I would like to give the floor to our Chairman and CEO, Mr. Ignacio Galán. Thank you very much again. Please Mr. Galán?

Ignacio Galán

Good morning, everyone and thank you very much for joining today's conference call. As Ignacio mentioned, after our usual results presentation this morning, we will give some details of the announced yesterday deal between AVANGRID and PNM Resources. It's a deal, which fits our strategy and improve significantly our position and growth potential in United States, as you know, one of our key geographies.

Just focusing on results over the last months, we have seen an ongoing recovery of market condition after the strong hit of COVID-19 during the second quarter. In any case, Iberdrola will remain fully aware of our responsibility to our employees, customers and society. We continue to make safety of our -- our top priority doing everything at our disposal to mitigate the impact of the virus, especially as the second wave appears. Thanks to the professionalism and responsibility of all the women and men who worked for the company and our supply chains and a comprehensive set of measures implemented by the company, the infection rate at Iberdrola continues to be much lower than the countries where we operate. Our thoughts continue to be with everyone affected by this disease.

We have also maintained the quality of service to our customers and we have continued accelerating our investment to contribute to the recovery of economic activity and create jobs. We believe this is not only our duty, but also our moral obligation, be sure Iberdrola will stand up to the challenge as we have always done, showing that it's possible to deliver our social dividend and increase result at the same time.

Over the first nine-months, our adjusted net profit grew 8.8% more than 1-point above the evolution shown in June. Reported net profit reached €2,681 million, including the divestment of Siemens Gamesa and the part of the decision of the UK government to maintain corporate tax rate at 90%. Gross divestments -- gross investments had continued to register new record figures despite the restriction suffered [ph]. As of September, Iberdrola invested €6,638 million, 23% up more than previous year. Thanks to the ramp up of activity registered in the third quarter when investment increased by 60% year-on-year to €3 billion. The remarkable figure confirms the new investment sedation period we are entering.

Next November 5, I will share with you our outlook for the coming years. But let me advise today that we see a great investment opportunity in all our traditional markets. As well, and other geographies like Japan where one month ago we reached a deal to acquire 3.3 gigawatt offshore wind portfolio. Capturing this potential growth will be possible, thanks to our strong cash flow generation even in the current circumstances.

In the first nine months, adjusted EBITDA, which exclude COVID impact, exceeds €7.5 billion with 3.2% increase year-on-year. Including COVID effect, reported EBITDA reaches €7,345 million. The set of result we are presenting allow us to maintain our commitment to shareholders' remuneration. Yesterday, the Board of Directors approved the interim shareholder dividend of €0.168 per share.

Let me now give you some highlights about the transaction closed yesterday by the US subsidiary AVANGRID with PNM Resources. This merger fits with Iberdrola's group strategy base of growing regulated networks and renewables in countries with high growth potential and strong ratings, with accretive impact on our earnings and preserving our financial strength. The deal creates a stronger and more diversified growth platform for the Group in one of the key market, the United States.

PNM Resources, a full regulated group with transmission and distribution activities serving 800,000 customers in New Mexico and Texas. And it has more than 2,000 megawatt of regulated generation asset with an increased share of wind power. Its regulated asset base reached $4.1 billion, and in 2019, the company registered almost $600 million in EBITDA and close to $100 million in net profit. PNM Resources is based into a state we know well, in Texas, where it has grown in areas close to Houston and Dallas. AVANGRID has 1,800 [ph] megawatt of wind generation and the group is starting new retail activities. In New Mexico, where PNM is the largest utility and distribute electricity in all major cities, we are already have 600 megawatt of wind capacity in operation or under construction. For the last 15 years, we have funded the King Felipe VI Chair in advanced computing [ph] at the University of New Mexico. So they are people, which are close to us for long time.

The transaction consideration will be 100% cash, valuing PNM Resources equity in $4.3 billion and AVANGRID will assume $4 billion in debt. Iberdrola has provided funds commitment letter to AVANGRID, guaranteed the financing of the deal. After the transaction, our new subsidiary will reach pro forma EBITDA of close to $2.5 billion and net profit close to $900 million on 2019 based data. For Iberdrola, this merger adds around €500 million to our EBITDA on a pro forma basis and more than €120 million on net profit. These numbers represent at least 3% accretion of earnings per share level for both companies. This deal is a new step in our successful strategy adding to the other western [ph] transaction like Infigen in Australia, Aalto Power in France and the acquisition of Svea Vind portfolios in Sweden and Japan. Pedro Azagra, our M&A responsible will give you more details about this transaction later on.

Going back to nine months result, in the last three months, we have seen a confirmation of the trends identified in the second quarter, which pointed to a progressive normalization operating conditions. Our demand evolution has continued improving week after week, moving from decreases of more than 15% in the worst moment of the lockdown to just minus 2% in September, both in UK and Spain. Similar in 2021 forward prices has recovered reaching higher levels than before the crisis in both countries. In addition, the Group has continued accelerating its expansion in gross investment of €3 billion in the last three months, thanks to the huge effort made by our employees and also by the 400,000 people who work for us in our supply chain contractors. Iberdrola has recorded the highest amount ever invested in a quarter even in the circumstances created by COVID-19 leading to a 23% increase year-to-date, up just 2% in June. More than half of this €6,638 million invested were allocated to renewables, will registered 51.8% increase, consolidated its position at the largest investment destination of the Group.

Network investment increased by 5.5% contributing 14% [ph] to the total investment, mainly United States and Spain, but also in transmission and distribution in Brazil and UK. Investment in generation and supply, which as you know, consists mostly on capitalization of the customer acquisition expenses, fell 21% driven by this lockdown of commercial activity. We expect this to recover in the coming months as confinement measures decrease. As a consequence, we remain confident about reaching €10 billion in the remaining [ph] 2020.

All in all, in the last 12 months, we have installed more than 4,600 megawatt reaching 54,000 [ph] megawatt in total capacity. We have 7,600 megawatt under construction. Close to 1,000 megawatt corresponding of offshore wind project like Saint Brieuc in France and Baltic Eagle that together represent more than €4 billion investment. Onshore wind represent 2,200 megawatt split of all our geographies. Solar photovoltaic has up more than 2,700 with approximately two-third located in Spain as we continue ramping up investment in the country. Batteries and hydro storage represent 1,250 [ph] megawatts and will continue progressing the construction of the Tamega River hydropower [ph] plant, and hybrid project combining renewables and batteries.

Focusing now on our Group operating performance. Adjusted EBITDA increased by 3.2% to €7,561 million, thanks to the positive evolution of renewables in generation and supply. Renewables EBITDA was up more than 5% due to the contribution of new facilities like the East Anglia 1 offshore wind farm. The better performance in United States is driven by new wind capacity and higher availability and the increase of hydro production in Spain and Brazil with Spain's hydro reserves are 50% above previous year levels. Generation and Supply EBITDA already reflect the normalization of production, and still benefiting also from the lower procurement costs, thanks to the price hedge. In particular, UK results are starting to return to normal levels despite the market situation, is still challenging to the tariff caps. In the coming months, result will also include the recent acquisition of 250,000 new contracts from an independent retailer driven ScottishPower to customer portfolio over 5 million customers.

Finally, networks result were negotiated -- negatively impacted by the transition to the new regulatory period in Spain, the temporary adjustment in United States due to the deviation on demand and energy costs and major storm such as Isaias. As you know, all these amounts are fully recognized on regulatory asset and therefore will be recovered in the future with a positive impact in next year's consolidated results.

In Brazil, the impact of COVID-19 on distribution was more than offset by the new transmission project awarded in the last year together with higher efficiencies. Globally, COVID has had a total impact of €216 million at the Group EBITDA level. More [ph] results were also impacted by the best movement of exchange rate mainly due to the Brazilian real. Excluding this effects, adjusted EBITDA rise by 6.4%. This improvement in operating profit was also the result of our cost reduction, which have been strengthened by more in the current scenario. Net operating expenses improved by €57 million to €3,101 million versus 2019. Even after €43 million of one-off expenditure, mainly related to donations of medical equipment related to COVID-19.

Operating cash flow grows 2.3% improving our FFO to adjusted net debt ratio to 21.9%, 20 basis points higher than one year ago. The company maintains full access to capital market at extremely competitive condition, despite the overall contradiction -- contraction. Pepe Sainz will give you more details on this side later on.

A strong financial structure is particularly relevant in the current situation which combines macro uncertainty with unpresent [ph] investment in the industry. Let me just mention, stronger [ph] milestones then give clear signal of this investment acceleration in all our geographies. In Europe, the commission proposed an increase in the emission reduction target for 2030 from previous 40% to 55%. This level of ambition fully consistent with reaching carbon-neutral [ph] by 2050 will require increasing the share of renewables in electricity mix 10 points to 65%. According to our estimate, this will give a further increase in investment of 30% for renewables and 15% for power networks in Continent.

The hydrogen has also emerged as a simple investment opportunity with European Commission target in 40 gigawatt of hydrogen electrolysis power by renewables in 2030. All European countries are setting a national target on this line. Spain recently published a national hydrogen strategy aiming at 4 gigawatts of renewable electrolysis by 2030, with €9 billion in investment. In this context, Iberdrola recently announced the creation of a new unit, specifically related to green hydrogen. And we have signed a deal with Fertiberia, the first producer of fertilizer in Spain to the below 20 megawatt of green hydrogen plant in Puertollano, Spain. They will be the largest of this kind in Europe when it became operational next year. We will give you more details of further developments of this plant very soon.

Green hydrogen is one of the building blocks of the recovery plan been approved all around Europe. They government of Spain has recently announced the monster coronavirus recovery funds for a total of €140 billion will be allocated to energy and climate change. These funds open massive opportunity to a stronger Spanish economy and Iberdrola is already collaborating with all public administration to make sure the money is allocated to initiative, they create jobs, accelerated rate of industrialization and the modernization of the industry, country's products and model in a more sustainable manner.

In the UK, just weeks ago, the government announced an increase of the offshore wind target for -- offshore wind target from 30 gigawatt to 40 gigawatt for 2040 with an aim of power in every home in the country with offshore wind. The Prime Minister also signaled hydrogen as part of the government strategy for reaching net zero by 2050. Similarly in the United States offshore, we continued gaining momentum. New York and New Jersey have announced new auction to be held in 2020 and 2021 for 4,900 megawatts. And government of Virginia ratified last July the Clean Economy Act setting 5.2 gigawatt of offshore wind target as well.

Iberdrola is once again showing anticipation in this global scenario, expanding our geographical footprint to the new growth platform. On top of the transaction, we already explained to -- just in July in Swedish and France, we have reached agreement to acquire an offshore wind portfolio in Japan consisting two offshore wind farms under development with a combined capacity up to 1.2 gigawatt, strategic located [ph] to access the auctions announced by Japanese government to be held from 2023 for additional projects with a total capacity 2.1 gigawatt for the second half of the decade. These developments allow us to diversify even more our mix of business and geographies, while extending our current pipeline with 14,000 new megawatt to boost future growth where around 90% are offshore wind. All in all, our pipeline reached 70,000 megawatt of capacity.

At the same time, we keep reinforcing our position in the good current [ph] markets with a new transaction as one announced yesterday in the United States, a country where we also had massive organic growth opportunities. Just yesterday AVANGRID submitted bids to the upcoming offshore wind auction in New York that will allocate up to 2,500 megawatts of new capacity. In this state, the regulatory body is also expected to approve the rate case for our network subsidiaries before the year-end with tariff retroactive activity from April. And it has already allocated to this company $150 million until 2025 for the deployment of charging points for electric mobility. Regarding [ph] following the court ruling considered unconstitutional referendum about our interconnection line with Canada, the project continues ahead and is expected to start construction in the next weeks.

In the UK, the process for new regulatory framework for transmission RIIO-T2 continues ahead. As you know, the CMA has recently published its provisional finding on the remunerational water distribution companies, increasing the investment and the rate of return in initial load by the regulator body of WAT [ph]. This has been recognized by many agents as a signal for the regulation of power transmission. As we have expressed in many occasion to the UK government at the investor meet conference [ph] between energy policy, which is clearly asking for additional investment to reach net zero by 2050 and regulatory frameworks. We still need to wait for the outcome, but we would expect higher return on power transmission than water as the risk and technological complex associated to the business are higher. And investment in the power sector is essential to promote the carbonization and industrialization in the UK. Iberdrola and ScottishPower remain totally open to collaborate with [indiscernible] the UK government in this process. Also in the UK, England, Wales and Scotland have announced the leasing of new offshore wind areas with potential up to 18 gigawatt bids. Bids are due in early 2021.

In Brazil, the regulatory procedure linked to COVID-19 continued progressing. Neoenergia has already received BRL1,660 million corresponding to the off-balance sheet loan to recover the extra cost and the extraordinary tariff review for distribution companies continue progressing.

I will now hand over to Pepe Sainz to present the Group financial result in more detail.

José Sainz

Thank you. Thank you, Chairman. Good morning. I will start updating the two main COVID impacts considered in our accounts, totaling €308 million at EBIT level, €80 million above the €228 million of the first-half. The third quarter COVID impact is decreasing with demand recover in our main countries and bad debt growing less than in the first-half as you can see -- as you will see in the next slide. €216 million out of this €308 million related to demand decrease. €59 million additional to the €157 million of the first-half, mainly affecting to Network business more than to Generation & Supply. €92 million of bad debt accounted for us provisions reducing our EBIT, €21 million more than in the first-half, being in this case Generation & Supply more affected than Networks. There are several measures under way in order to offset COVID impacts.

In Networks, we are still expecting the recovery of the impacts to regulatory measures in the UK and in the US in '21 and '22 and it is being negotiated in Brazil as the Chairman has commented. In Generation & Supply, bad debt will be managed to our commercial activity and there has been submitted a proposal to OFGEM for recognition in the SVT tariff of bad debts cost starting in April '21. As mentioned, net profit COVID impact amounted to €136 million in Q2 and in Q3 fell to €50 million. Hopefully, in the fourth quarter, this trend will continue. Our reported net profit was 4.7% up to €2,681 million as the FX negative impacts at the EBITDA level have been hedged. The real has depreciated 22% while the dollar and the pound were flat versus last year.

Our adjusted results exclude the most relevant non-recurring items both in '19 and '20 nine months, but does not considered any FX impact. As you can see in the Slide, 2020 nine months adjusted EBITDA is €7,561 million, excluding €216 million COVID demand effect. Nine months '19 adjusted EBITDA was €7,329 million instead of the €7,499 million reported and excludes a €170 million non-recurring, €89 million from LNG sales, €49 million of the transfer of the fiber optic contracts in Q3 2019 and €33 million from settlements in Spanish networks. As a consequence, adjusted EBITDA grew 3.2% instead of the 2% reported. If added the FX impact, our adjusted EBITDA would have grown 6.4%.

Nine months adjusted net profit was €2,553 million instead of the €2,681 million reported and excludes all COVID net impact in our accounts, €203 million. The €485 million of the Gamesa gain, another €154 million of non-recurring negative tax impact mainly due to the UK. As a result, adjusted net profit grew 8.8% instead of the 4.7% growth reported. Revenues decreased 8.4% to €24 billion, impacted by COVID, FX and weather related lower demand and procurements fell 13.7%, reaching €12.4 billion. As a consequence, gross margin was down 2% to €11.8 billion, affected by the €343 million of negative FX impact. Without this FX hit, gross margin would have grown by 0.8%.

Net operating expenses improved by 1.8% to €3.1 billion, driven by cost containment due to COVID and efficiency plans. €108 million positive FX impact more than compensated €43 million of donation and other expenses related to COVID. Levies fell by 2.4% to €1,395 million with lower prices in Spain being a key factor. As you can see in the slide, Spanish taxes on generation improved €36 million. Analyzing the results of the different business and starting by Networks, its EBITDA fell by 10.7% to €3.5 billion, considering €122 million negative COVID impact on demand and €181 million of timing and storm effects in the US. As you can see in the slide, Spain contributed 34%, the US 24%, Brazil reached 21% and the UK contributed another 21%.

In Spain, EBITDA fell 7.2% to €1.2 billion due to the €49 million negative impact of transferring the fiber optic contracts that was accounted as a positive result in the third quarter of last year. In addition, lower remuneration for 2020 brings down revenues by €44 million and there is an impact of €33 million of positive settlements also accounted for in the first nine months of 2019. Net operating expenses and taxes improved, compensating partially this fall.

In the US, IFRS EBITDA was 20% down to $935 million driven by a $190 million negative temporary adjustments under IFRS as a consequence of difference in volumes and energy cost, together with the impact of storms, especially the Isaias Storm in the Q3. These negative impacts will start to be recovered during the fourth quarter of 2020 and following years. US GAAP EBITDA is €102 million higher than the IFRS EBITDA and fell just 1.1%. In addition to all these negative impacts, as the Chairman has commented, there is a delay in the New Year Rate Case due to the COVID that has been postponed to December versus April this year, whose impact is €66 million in our accounts although it will be recovered.

In Brazil, EBITDA grew 8.6% to BRL4.2 billion. Tariff revision in Coelba and Cosern from April and Elektro -- and in Elektro from August increasing contribution for higher investments in transmission and cost contention due to efficiency plans have been partially compensated by a minus €167 million COVID impact on demand. Finally, in the UK, EBITDA was 3.3%, up to GBP647 million with higher revenues both in transmission and distribution as a consequence of the growing asset base due to investments, partially offset by GBP21 million less revenues due to COVID linked to lower demand to be recovered in 2022.

Renewables EBITDA grew 5.6% to €1.8 billion driven by growth in the UK and in the US and despite weak conditions and prices in Spain. Our average operating capacity increased to 29,175 megawatts and our total installed capacity reached almost 34,000 megawatts.

In the UK, EBITDA was 47%, up to GBP443 million with higher contribution both in onshore and offshore as a result of the East Anglia production assets, 714 megawatts are fully operational since mid-July. It is worth noting that the offshore wind business contributed already 40% to the total gross margin in the business paying back the strong investments needed. In the US, EBITDA increased 9% to $511 million caused by a 14.5% higher output following by -- following the 695 megawatts increase in operating capacity in the last year and a higher wind resource.

In Spain, EBITDA was €445 million, 14% below last year due to a 36% lower prices in sales to other supply business despite a 23% higher output driven by a 54% higher hydro production, as well as higher PV capacity. In the IEI, in the international business, mainly Europe, EBITDA fell 5.5% to €234 million due to lower wind conditions and higher development costs accounted as a one-off in the quarter as business expands. Aalto Power is consolidated from the 1st of July and Infigen from the 5th of August. In April -- in Brazil, EBITDA grew 0.7% to BRL449 million as output is increasing 5.8% with higher hydro output compensated the fall in wind as Brazil [ph] was fully operational.

Finally, in Mexico, EBITDA decreased 1.8% to $62 million improving versus the 13.7% fall at June due to the new installed capacity. Here it's already in operation. Nevertheless this is still decreasing slightly due to the lower load factor both in wind and photovoltaic generation. Generation & Supply EBITDA was up 10.3% to €2 billion, including €94 million negative COVID impact on demand. In Spain, the EBITDA was up by 4.7% to €1.2 billion despite lower output due to a 11% higher purchases at lower prices versus last year. We continue active management of our customer portfolio of energy and smart solutions. There are €89 million negative non-recurring from LNG sale accounted for in the second quarter of 2019.

In Mexico, the EBITDA grew 0.4% to $643 million, thanks to higher sales as a consequence of a production increase, partially compensated by temporary lower availability of one CCGT plant and lower prices. In the UK, the EBITDA grew 266% to GBP137 million, more than double in the 130% growth of June as a consequence of improved margins versus 2019 despite the fall in sales.

Brazil added BRL273 million to the EBITDA in a context of business normalization after the one-off negative effect that lowered results in 2019. And in the international business, EBITDA was €2.9 million negative improving versus last year, but still affected by initial development costs of our Supply business in Europe. We have reached 1,740,00 contracts, 36% higher than one year ago. EBITDA fell 11.2% to €4.0 billion as provisions grew 42% after including €92 million of bad debt COVID provisions: €40 million in Networks, mostly in Brazil that has been negotiated to be recovered through regulatory mechanism; and €52 million in Generation & Supply to be managed our commercial activity.

As I mentioned, there is a consultation by OFGEM to save part of the bad debt cost in the UK are included in the SVT tariff from April '21. In addition, amortizations increased 8.7% due to increase of the asset base and activity.

Net financial expenses improved €250 million to €641 million, driven by €180 million in hedges mostly linked to FX. Another €118 million positive impact due to the lower cost of debt that improved 42 basis points to 3.15% and a €49 million negative result due to the €1.8 billion higher average debt. Our reported credit metrics remained strong and in comfortable levels for our rating requirements in spite of the €1.4 billion adjusted debt increase due to investments and the Infigen and Aalto Power deals that have increased our debt in €1 billion.

FFO adjusted net debt improved 0.2 percentage points to 21.9%. Adjusted net debt to EBITDA increased slightly to 3.8 times from 3.6 times. Retained cash flow adjusted net debt remained around 20% level and adjusted leverage ratio increased 45.5%. As of today, we maintain ample liquidity of around €13.8 billion, maintaining 30 months of coverage of financial needs in our basis scenario and 21 months in distressed world. Our sources of financing continue to be highly diversified currently the bond market 62% of sources current weight of the bank financing is 12% giving us the opportunity to increase this kind of funding is required. Reported net profit grew 4.7% to €2.7 million and adjusted net profit grew 8.8% as explained in previous slides.

And now the Chairman will end the presentation.

Ignacio Cuenca Arambarri

Thank you, Pepe. To conclude, over the last nine months in one of the most challenging scenarios indicates, Iberdrola has delivered strong results to the resilient business model. Reported net profit reached €2,681 million, 4.7% up versus the figure registered last year. And adjusted net profit which exclude COVID impact for more than €200 million rose 9%. At the same time, we have continued executing our steady plan in creating new growth platforms for the coming decade. Up to September growth investment increased 23% up to €6,630 million, is still more than 4,600 megawatt in the last 12 months and reached total capacity of 54,000 and we combine these growth within improvement or financial position as shown by our solvency ratios in our liquidity with existing €13.8 billion up today.

For the rest of the year we expect then the positive trends we have started to define July following the provision softening of COVID-19 measures will consolidate the acceleration of investment on top of the €9.6 [ph] billion already spent in the last 12 months will allow us to continue adding generation capacity. Results also reflect the impact of new rates and higher revenues in transmission mainly in Brazil, United States. And in UK, we expect the normalization of our retail business to continue. East Anglia 1 offshore wind farm will keep its contribution in the fourth quarter. On top of this, efficiency measures will also continue. We expect all these offset the impact from COVID-19 on demand and prices which in any case, we see decreasing in the last quarter.

As a consequence, we expect earnings to continue increasing quarter-on-quarter after this impact of coronavirus in result with a full quarter showing a positive net profit growth versus last year, allowing us to maintain our net profit guidance a mid-high single-digit growth and to maintain our dividend policy base in our payout ratio between 65% and 75%. Following the policy as I mentioned, the Board of Directors has approved an interim dividend of €0.168 per share payable in February '21, showing our commitment to shareholder remuneration. You can be sure that the women and men working at Iberdrola will continue delivering the essential service we provide, an accelerating investment to make the energy transition a reality and create jobs and wealth to the benefit of our customer [ph].

Now, Pedro Azagra will explain in detail the transaction between AVANGRID and PNM Resources.

Pedro?

Pedro Azagra Blazquez

Good morning, Chairman. I am going to kick off with the presentation. As the Chairman explained, the transaction between AVANGRID and PNM reflects the strategy that the Chairman and the Group has had for many, many years, allows growth in regulated businesses and renewables, continuous investments in AAA or very good rated countries mostly, it's accretive in earnings from the first year and intends to maintain the balance sheet strength that we have at present.

In relation to PNM, which is that utility in the State of New Mexico and Texas in the US, first of all, it's a regulated utility. So, therefore, it is 100% almost regulated both distribution and network, and also generation in a small piece. In the US, largest country as we know by GDP in the world and very good rating. This company operates in states where we are ready and that is important. In the case of New Mexico, we have right now over 600 megawatts of installed capacity or assets under construction. This company PNM is the transmission operator of those assets -- some of those assets that take energy from New Mexico into California. We've been working with them in that part -- in that piece of the business for some time now.

In the case of Texas, through AVANGRID, we already have the state with more presence in renewable assets with almost 1,300 megawatts and we also have three Iberdrola retail business operations right now kicking off in Texas. In both the states, AVANGRID today has over 1,400 megawatts of pipeline in renewables. This company PNM is almost 100% regulated. As the Chairman explained, it has in 2019 over $4 billion of rate base and approximately 2.8 gigawatt of regulated generation. In the case of the service territory, it forms two utilities; one of them in New Mexico. It serves the most important cities in New Mexico, especially Albuquerque and Santa Fe. And then in the case of Texas, it also covers the surroundings of the two main cities in the state both Dallas and Houston, among others, Lewisville and League City.

I think just to give some operational city for P&M, it has been almost 800 rate payers, it has a population of almost 2 million people served. The EBITDA for 2019 approaching $600 million and net income approaching $180 million in that period. When we look at the combined company between AVANGRID and PNM, we're going to be approaching a very important data in the US. We will hold through AVANGRID, 10 regulated utilities. The company -- the combined company will have presence in more than 24 states when you include the renewable operations. Installed capacity, including the regulated generation, it will almost reach 11,000 megawatts and it will have more than 1,680 kilometers of T&D lines.

Data from a financial operational point of view for the combined company, AVANGRID plus P&M, rate payers over 4 million population served, approaching 9 million people. Installed capacity approaching 11,000 gigawatts and very important, a renewal pipeline of around 19,000 gigawatt. In terms of some financial data for the combined entity, EBITDA in 2019 pro forma figures, almost $2.5 billion and net income, almost $850 million. Very important, the new company and this is important for the profile of AVANGRID and also for the Group, we're adding 100% almost regulated utility with two utilities. Therefore, the EBITDA of AVANGRID after this potential transaction, if it's closed, it will reach more than 80% of its activities coming from regulated.

For the Iberdrola Group, the strategy laid out by the Chairman continues to apply growth in regulated businesses, T&D and renewables, good countries from our rating point of view, EPS accretive more than 3% both at the AVANGRID and Iberdrola level from year one. Very important to keep in mind, year one means 2022, because it will take almost a year to get it approved. So the first year full consolidation will be 2022. And ESG leadership, we will explain the acceleration of the only asset they own and operate of coal.

Pro forma figures for Iberdrola, just to give some feeling we're adding more or less to the Iberdrola Group €500 million from an EBITDA point of view in '19, and also around €120 million '19 figures for net income. The transaction, simple, AVANGRID has agreed to buy -- to merge with PNM and paying a 100% in cash with a total equity value of $4.3 billion. I think the transaction, I suspect it will be intends to be close a year from now approximately. The software represents more or less a 10% premium of the price -- recent price of the company and more or less 19% premium over the 30-day volume average.

Just some highlights from a sample [ph] point of view, as we said, is more than 3% accretive from year one, which is '22. In the case of the funding of AVANGRID in order to be able that AVANGRID can commit to pay to the target to its shareholders, Iberdrola has sent a letter to AVANGRID where it commits funds, enough funds to pay for the equity of this company. I think, as you know, Iberdrola has right now more than -- around €14 billion of credit lines available. So therefore, more than enough to target this transaction. And I think very important on November 5, Iberdrola Group and AVANGRID will be providing, as you know, new guidance both on target for different lines of the business group, also for AVANGRID and also there it will be explained in detail the financing under different alternatives for AVANGRID and also for Iberdrola. We believe it's important to mention that we already in both the states. I think from an economic point of view, the state of New Mexico and Texas on a compound growth basis, they've been growing 3.4 and 4.9 in the last 20 years. I think the population very important also between 0.7 and 1.7 growth in that period.

As it had been mentioned, we already have over 600 megawatts of renewables installed capacity under construction in New Mexico and almost 1,300 megawatts of renewable business -- in renewable assets in Texas, plus the retail business done through the parent company. In the case of the pipeline, we have right now in AVANGRID in excess of 1,400 megawatts of pipeline and in the case of PNM, very important. We have also more than 600 megawatts both identified projects in order to be developed. I think just to get a feeling of our presence, we also have a Chair in the University of Albuquerque, the King Felipe VI Chair and we have been there for more than 15 years.

In this case, regulatory approvals, we're very familiar with the further approvals because of the energies, UIL, sale of the gas distribution, et cetera transactions. We've been there quite often. Only one additional mention, because of our financial stake PNM actually [ph] is a nuclear facility, we also need in this case Nuclear Regulatory Commission approval and the two states that have to approve the transaction, our New Mexico and Texas. I think in both states, there has been recent transactions in the case of New Mexico TECO bought from PNM some businesses very few years ago and Emera bought TECO as you know recently. Also in the case of Texas, we have the Oncor transaction being bought by Sempra and we also have their recent transaction JPMorgan construction buying El Paso last year. So from that point of view, very comfortable on those jurisdictions in terms of merger approval, that's why we believe the expectations should be around 12 months in order to get it approved.

I think we're going to spend now a little bit of time on two things. The first, the regulatory environment in both the states. I think if we start by Texas, mainly utilities very both in our regulatory environment, most of the things they propose they get approved over 9.6 return on equity approved authorized ROE in the case of debt equity ratio of 55% and usually they have semi-annual approaches to rates in transmission annually distribution and now and then they also do general rate cases.

In the case of New Mexico, very important to highlight several things, so I think we have clear explanation about this regulatory environment. First of all, as many other companies in the US, they target it with the regulator to get recovery, especially in the coal facilities, and nuclear facilities of different costs associated with them. I think in the case of the coal facilities we'll explain it later, but they have been achieving usually around 50%, 60% of the request from our rate base, they have requested is a one-year forward, so basically they get things approved in advance, otherwise they would not invest in them.

Just to get some feeling, if they got the most recent filing on the Renewable Act approved, they also have been exceeding the authorized ROE and therefore the actual has been exceeding the authorize of 9.5%. They have led a coalition of the other utilities in requesting from the public commission unauthorized regulatory asset for the COVID item, they have also got it approved the abandonment of the only power plant they own in coal and will explain that later.

They also got approvals to acquire [indiscernible] in 2019 they got approved application to continue using a fuel and purchasing power clause mechanism, I just wanted to give this feeling to get the feeling that yes, there were some issues on the recovery of the coal facilities, finally Supreme Court got it approved, will explain that now in detail. So therefore, I think we believe there is a good environment in both cases and we believe, Iberdrola has experienced to actually put on the table the strategic angle on renewables and T&D and make sure we'll work together with the commissioners, with the Governor and the rest of the constituencies.

Finally, we're going to explain a little bit about the coal matter just to make sure you know that there is no misunderstanding on this topic. PNM owns and operates just one facility. They own 66.3% interest in a coal facility, which basically means 562 megawatts. Just to update very precise, so there is no confusion on this item, again a very, very small portion of the company and by the way regulated. But in July '19 basically PNM filed to exit the San Juan Power.

In January 2020, the New Mexico Supreme Court ruling basically applies the new and recently approved energy transition out by the Governor and approves the exit plan. Therefore, on April 2020, which is, as you can see very recently, and that's part of the reasons why in our negotiations it was important for us. The public commission order approved the abandonment and the securitization of the pending asset value. Therefore, by 2022, this power plant will be shut down.

In the case of Four Corners, which is another coal facility, it's not controlled by PNM. The only half 13% financial stake. This is equivalent to 200 megawatts, but it's just a financial stake just also to be very specific in dates. In June 2020, there was a public announcement by PNM with the intention to access Four Corners' stake by the end of 2020 they expect to have a final agreement with the exit and also by December 2024 they will expect the same procedure in terms of new Public Commission approval and securitization of the pending asset. Just to be very specific also in relation with both power plants, in the case of the San Juan power plant, the $361 million is still pending asset value on some of the cost will be securitized in 2022. It has been already approved and in the case of four corners, that you expect to do the portion, which is related to the financial stake also by 2024.

I think in the case of what is called -- in the US, a completion remediation and what is actually called the reclamation liability, just to make very simple in relation with the mine related to these assets and as in most of the utilities that own coal assets in the US in this case for both assets, there is a liability, which is audited, reviewed and updated and by the way, very updated in the case of the nuclear very recently with around $140 million. Out of that, $90 million have been already approved -- sorry, expensed, and the remaining $40 million are included in the projections for the company that we have assumed. Very important, these are figures only for the above service reclamation liability. Below service, a 100% will go through rates. So I think with that, we wanted to give a very simple explanation about this also in relation with the stake in the nuclear facility. I think two comments here. They own a stake 7.3% of stake, they also have 114 megawatts of leases, those leases they have announced they are selling them and they will proceed to sell as well.

I think the financial stake, there will be no issue with that, we're expecting the regulatory agency, federal one, the Nuclear Regulatory Commission, the NRC and also on the decommissioning cost, the Supreme Court has also told the public commission that's something that has to be taken care about rates under the commissioning fund, which both was updated because of El Paso transaction by JPMorgan infrastructure. There is actually accessing funds in the decommissioning fund.

And I think with this, we just wanted to do a summary of the different things which we believe are important for this transaction in relation with AVANGRID and Iberdrola.

So thank you, Chairman, and please, Ignacio, I'll leave it to you.

Question-and-Answer Session

A - Ignacio Cuenca Arambarri

Thank you, Pedro, our Corporate Development Director, by the way, who many of you already well known. Now, as we told you previously, we are going to now to deliver the set of questions regarding the result and afterwards we will go directly to the PNM deal. First question comes from Jorge Alonso, Societe Generale; and James Brand, Deutsche Bank. Could you give an update on the extraordinary tariff review in Brazil, what are they main measures do you expect to be introduced?

Ignacio Galán

So, well, I think, in Brazil, certain measure has been introduced. I think, they already paid already in our case BRL1,360 million of what they call account of COVID, which is a balance which I think is already in our balance sheet in this moment and also we are in this moment negotiating an extraordinary review of the tariffs for compensating mainly the bad debt incurred as consequences of the confinement. So I think there already talks are going in a good line. And I think we are expecting what has been done already in the past in the many years ago when we have already the situation of Europe [ph] in which they make already a regulatory asset, which we recognize in our accounts and finished paying [ph] across the years in the tariff. That is what we are talking. I think, in our case, I think the amount what we are looking, I don't know precisely, but the thing is in line of few millions of hundreds of reals as in BRL200 million, BRL300 million. So, I think is not a huge amount, but I think is important amount for Neoenergia.

Ignacio Cuenca Arambarri

Second question comes from Javier Suarez, Mediobanca; and Rob Pulleyn, Morgan Stanley, and is regarding the hydrogen, which is the role that Iberdrola intends to play through the hydrogen value chain. Does management believe green hydrogen could accelerate the development of corporate PPAs in Europe as a new offtake route for renewable synergies?

Ignacio Galán

Well, I think, hydrogen is just something which can be used for those areas with kind of the electrify. I think, there are around 60% of the total industrial processes or transport, which is very difficult to electrify. I think that represent roughly 60% and 30%, roughly 18%, 20% of the emission. So for those sectors is what the hydro has already a clear use. And that's why I think the two main use in this moment, I think, is for gasoline, for refining gasoline, which is already in the refineries and in fertilizers, as well they are another processes, but is going to come another one, which I think can be used in the future. So that's why our approach goes to go strive for those areas and today is the largest industrial consumer, which is fertilizers, the price of ammonia in our target and objective that is that the full ammonia production in Spain within the next few years will be full clean, full green. I think, for that, I think the first installation is using solar photovoltaic in Puertollano, the center of Spain close to our solar planning site or the factory of active area for making already these electrolyzer for transforming the use of natural gas, they are already using today for generation hydrogen and polluting [ph] emitting CO2 with this electrolyte. In the next few days, we will present much ambitious plans like in probably at the end of this week or beginning this week together with Fertiberia. But the second area -- the second area is another users, which can be already been applying which is already heavy transport, which is already certain industrial process is still another one -- what we are working in other one. But I think our initial approach is just to go where is today the uses and have to go to transform another users and hydrogen instead though using fossil fuels, that is the plan we have and we have a really ambitious plan, but I insist that represent roughly 60% of the -- of the processes which is very difficult to be electrify, has been our ambition continue electrifying as much as we can and hydrogen is a complement for that one.

Ignacio Cuenca Arambarri

Next question comes from Jorge Alonso, Societe Generale. It is regarding the UK Networks, do your spec of the aim proposal to improve from the back of the outcome for water companies, what improvements is Iberdrola proposing?

Ignacio Galán

Well, I think I mentioned in my speech, we find CMA comments positive. I think it is no sense. Therefore one side the government is already saying that they would like to reach zero, then they would like to electrify more economy, to make more ambitious plan in terms of electric breakers, in terms of transforming industrial process in more electrify, if another side then the regulator will diminish the investment, we are allowed to make for achieving the government targets and put in already a remuneration we may not attracted to invest one single penny. So, I think they got -- we have seen from CMA is precisely this two direction, and I think is needed more investment, if you would like to read the objective. And second is needed to give already a much attractive returns, because if not the money is going to flow, and that is what they are expecting. I think we have already conversation ongoing either with the government, either with the regulator and we expect, as always, in Britain, the rationality will come again.

So I think something which is a contradiction we will already this contradiction for our lease and might misunderstanding, but that is sure, I think we will -- then through the discussion and negotiation, would reach a reasonable thing, we can already fit both things towards that interest energy policy of the government, if one decides something, which is reasonable either for consumers, I think the point then the OFGEM is proposing represent £1 per customer per annum is peanuts. So, but I think the interest of that one with the industrial interest of the country and the policy, energy policy of the government.

Ignacio Cuenca Arambarri

James Brand from Deutsche Bank and Fernando Garcia, Royal Bank of Canada are asking about Mexico, there were all -- have recent regulatory changes made you less keen to invest heavily in Mexico in the coming years?

Ignacio Galán

So I finish as I used to say we are not making the energy policy, the energy policy is being made by the government. If a government is welcoming investment in certain areas, I think, we go. If the government is not welcoming the investment, we are not going to invest. And I think we are in this moment, in Mexico just completing the investment we started a few months ago, few years ago and we have not started a new one, unless the government decide that the policy will be clarified policy. So if the policy of the government is that they don't like, then the foreign investor invest in the country, we are going to invest. If the government would like to invest, they make a necessary reasonable framework as we had already had up to now, we will go. But I think, in any case, I think it represent very little in our total contribution in our total balance sheet. So the transaction we already announced today is almost the same size than our investment already in Mexico. So, I think roughly in Mexico, we have €10 billion and this transaction is €8 billion or €9 billion, so which is very similar.

Ignacio Cuenca Arambarri

From Deutsche Bank, James Brand is asking again, you have entered new markets with the acquisition of Infigen in Australia and offshore pipelines in Japan and Sweden. In the past you have been very focused with a concentrated position in handful of countries. Do you see the renewables growth opportunity as requiring a more global approach? If so, why?

Ignacio Galán

So I think, is we are already a company quite well diversified. I think one thing is that we are focusing in the five or six main countries, but another one is that we're present in other ones. I think we are present in France, we are present in Germany, we are present in Greece, we are present in Hungary, we are present in many countries. So I think Australia, it looks to us a country with a huge potential, and I think that's why we're going there. So I think we are in the front of energy revolution. So -- and I think we have been pioneers in this energy revolution for 20 years. When nobody believes, then the electricity can be produced with clean sources and everybody was thinking then coal will remain for centuries and the oil and gas are absolutely needed for that one, we were already the only one we used the flag saying that we can already generate and produce electricity with clean sources and we can already and we have started our energy transition 20 years ago.

So -- and I feel in this moment, that is already happening in most geographies and we would like to benefit of our experience in countries as has been mentioned before in the transaction we make with a stable, clear and defined regulatory framework with good ratings and for using our expertise and our knowledge, that is the case of Japan. I think we have an expertise in offshore. Why not to use our participation in offshore in a country which is not starting still making any one, same thing we did in United States. In United States, we are the first mover in offshore. I think our [indiscernible] win is going to be the first largest offshore wind farm in the States and we are delighted to do the same thing as well in Japan or in Sweden. So because we've been for the last 20 years always ahead of the rest of competitors in moving in countries, geographies and technologies.

Ignacio Cuenca Arambarri

Next question comes from Stefano Bezzato, Credit Suisse. Can you give an idea of the scope of our increase in network investment in the context of the European Union Recovery Fund?

Ignacio Galán

I think I mentioned before, I think the European Commission was standing that reduction of the emission from 40% to 55%, that represents something like increases of renewables up to 60%, 65% of the total mix, and for making that one it will need something like 15% extra investment in networks. I think those were the numbers I have in my memory. So I think certain -- this ambition needs more ambition -- this ambition -- increased ambition in emission reduction means more ambition in terms of renewable target for -- if there are more renewables, I think there's needed more networks. And I think the number I have in mind with the European Commission is already announcing is in the range of 15% extra investment. And I think, here in the case of Spain, we are already -- our association of network operator has really led us to the government I think in this line that we will need to remove the cap we have in this moment for investment, for being able to make the necessary investment the country requires for making that happen.

Ignacio Cuenca Arambarri

Next question comes from Rob Pulleyn, Morgan Stanley. Does the effects on political events of 2020 drive a change in future capital allocation between emerging markets and developed one?

Ignacio Galán

Well, give me some possibilities of explaining those thing on the November 5. I feel certain that we are going to modify things. But on November 5, we will provide you the detail what is our investment in order to go in the next few years.

Ignacio Cuenca Arambarri

Next question from Stefano Bezzato, Credit Suisse. Can you anticipate the deterioration of the COVID impact in light of the tightening of measures we are currently experiencing in Europe?

Ignacio Galán

You know, we are always very prudent, and I think in our outlook for the year-end, we have already introduced certain provisions that in our thinking that that happened, so our -- how that is going to affect our P&L. And I think the provision -- if my memory doesn't fail, but believe me if my memory fail is that something in between the damage we have already suffered in the second quarter was something like €150 million and the damage we suffered in the third quarter was in the range of €50 million. So something in between has been already put in our accounts. So I think we are only are already making this provision already because the things can already happen. So what we have seen is that the situation been already not very positive in terms of confinement, it's not as far as this was already in the second quarter. So I think our estimate looks for the time being reasonable.

Ignacio Cuenca Arambarri

Next question comes from Javier Garrido, JP Morgan, and is probably is related to Pepe answer. Would your FFO over net debt ratio change if you use the methodology of the rating agencies? How much. What is the minimum level to keep your rating?

José Sainz

Yes, normally different rating agencies adjust the ratio that we provide according to other, I'd say, possible liabilities, which is bad [ph] debt for example. Yes. Typically rating agencies, they don't use the same methodology. But they make some adjustment for future liabilities, which are not bad debt, for example, pensions. So typically the impact of that and from what we have to what they normally get is between 2 and 3 percentage points. Obviously, we monitor the ratings or the levels that the rating agencies use and we maintain more or less according to the ratings, the ratios that are enough to maintain our credit rating. So today, the 21.9%, for example that we are publishing is around 19% according to the S&P methodology and slightly less to -- with Moody's. To maintain a BBB+ rating in S&P and BAA1 for Moody's, you need to have an around 18% ratio FFO over net debt. So right now, we are above that ratio. But as I say, we monitor not only the ratios that we provide. But also the adjustments that rating agencies do to the ratios.

Ignacio Cuenca Arambarri

Next question comes from Jorge Alonso, Societe Generale. What would be the rationale for the government to make renewable options if many players are developing them directly? And looking at the pipelines, do the [indiscernible] will easily be achieved?

Ignacio Galán

Well, I think I agree with you. I've not seen very many rationale. I was explaining to everybody, if they are not already -- anybody which is able to deliver what is already expected in the plan, and the government has to take the necessary action for that one. But being so much people ready to invest, I'm not seeing what is the need of this action. But I think that is, as I mentioned before, the energy policy is made by government and give respect to the policy that the government is making. But I'm not seeing the needs of making those things. I think there are many people ready to put their money, and I think the question is negotiating with the customers, as we did another day with Heineken. Then we reached an agreement with them for providing the electricity generated in one of our plant we inaugurated a couple of weeks ago. So, -- but I think this new policy is made by politician and the government, and we respect what they are making. I don't see that is needed at all.

Ignacio Cuenca Arambarri

Jorge Guimaraes, JB Capital Markets is asking about the impact of the temporary suspension of a plant in Mexico mentioned in the presentation. Is it already back online?

Ignacio Galán

Well, I think we have not any suspension as far as they are not back or not.

Pedro Azagra Blazquez

I think he is referring to the 5th unit [ph] of Monterrey that had a problem and has been shut down for several months. Now, it's back online, and was -- were having problem in the mechanical assembly of GE, of General Electric and now is back online since several months and the effect could be around few thousands of US dollar.

Ignacio Cuenca Arambarri

The last three questions. The first one is coming from Fernando Garcia, Royal Bank of Canada. Is it possible to detail the UK client acquisitions mentioned in the call by the CEO, namely client number and cost?

Ignacio Galán

I think the numbers, if I don't remember, but it's in the range of 250,000 customers. In terms or as far as I know the acquisition cost is lower than the average acquisition cost we have for a standard one, so which I think is something which is reasonable in terms of how -- what is the cost of our acquisition that is since what I understood is lower than the average of our acquisition cost and the number is 250,000 customers.

Ignacio Cuenca Arambarri

Javier Garrido, JPMorgan is asking about AVANGRID's results, and he states, AVANGRID has missed to gain expectation under US GAAP and has lowered materially the 2020 guidance. What action is the new management taking to address this underperformance?

Ignacio Galán

Well, I think they will explain those things as well. But I think what we reported another day in the Board, the first thing is the new COO is already a stand only for 2.5 months, I think he has landed. But I think there are certain things which is already affecting, is affecting the storms [ph] suffering. The delay of these rate case even is going to be attractive, but I think they cannot account yet. The availability of -- the availability of the good results in certain area has not been as good as they were expecting, certain delays on the construction of the wind farms and -- but I think he is already working hard, I have to say. He's working hard to improve the rate cases, has already succeeded in the short time, has already for starting the construction of this transmission line with Canada. The availability of the green fleet is already going well. Tonight -- last night was presented the offer for the new offshore wind farm for New York and we hope that it will happen. So, I think he is working and I think there are external things, but the he will comment more in detail in his presentation result.

But I think what I can tell you as far as ourselves as investors concerned, is then he is already taking the drive of the company for making already much predictable and avoiding this situation as much as he can, because I think they are in the storm is in the storm and the storm is the storm and that has already an impact. Then he has recovered afterwards, but I think in the short term, it's already been affecting.

Ignacio Cuenca Arambarri

Last questions coming are regarding the results. It is coming from Stefano Bezzato, Credit Suisse and Sam Arie, UBS. Given the scope for increase in investment and the step up in M&A, do you see the need to raise cash via capital increase in order to keep your commitment of maintaining financial strength?

Ignacio Galán

Well, we will comment all those things to you on the Investor Day. But I think what we're mentioning, the level of investment we are making today, we are more than able to finance with our cash flow and with the level of liquidity we have in the company. Also, I think we are already rising some hybrids. I think today, as Pepe kind of already mentioned, we are already launching a new hybrid for funding already the company. So we will comment to you, but it's not in our mind to make an increase in share capital for the time being at all.

Ignacio Cuenca Arambarri

Okay. Now we are moving towards the deal questions and the first one comes from Alberto Gandolfi, Goldman Sachs, Rob Pulleyn, Morgan Stanley, Javier Suarez, Mediobanca, Fernando Garcia, Royal Bank of Canada, [indiscernible] and Jose Javier Ruiz, Barclays. How do you plan to finance the acquisition of PNM? If preferred option is with net debt, can you elaborate on your net debt to EBITDA position at the Group level? Would a capital increase be considered diluted our position perhaps?

Ignacio Galán

So I think, Pedro, you can already reply that one. But I think as he also explained, our plan is that we will already propose an increase in share capital of AVANGRID [ph]. Iberdrola is ready to supply at least this -- our 81% and I think that is the most thing -- but then you will have to complete anything, Pedro, you can say. But I think is an increase in share capital of AVANGRID for funding that one, then Iberdrola will subscribe [ph]?

Pedro Azagra Blazquez

No, I think you have explained that very well. I think, first of all, in relation with transaction when you announce a deal, you need to prove to them, in this case, you know, to P&M that you have the money at AVANGRID. The way we have done so to avoid bridge financing costs, things like that, it has been -- Iberdrola is sending a fund commitment letter to AVANGRID. So they are fine. I think when the time comes, as the Chairman has said, I think for the purposes of the case, some additional debt may be raised in AVANGRID, but also definitely they will have to do a capital increase in due course. And as the Chairman said, I think our intention is to keep 81.5%. In the case of Iberdrola, I think we have, as it was mentioned €14 million [ph] like credit as the Chairman mentioned, we are considering hybrids in other potential financings as well in debt et cetera. So from that point of view, I think it is well taken care of.

Ignacio Cuenca Arambarri

Next question comes from Javier Garrido, JPMorgan is related to the [indiscernible]. How do you calculate the 3% accretion to EPS from the PNM deal, Pedro? Do you use 2019 figures? Which is the cost of financing you use?

Pedro Azagra Blazquez

Okay. So I think for the accretion dilution, we are using '22 and '23 figures. I think because of AVANGRID and Iberdrola in November, we're releasing new guidance, I think we are not providing right now those numbers, underlying numbers under which we're calculating them. But really doesn't matter more to from a transaction point of view. Even if we use the existing plan that as of today we have or if we use the new plan that it will be explained by the Chairman on November 5, I think in both the scenarios, it is accretive. And it's very simple. For EBITDA purposes, very simple to account for that. For net income basis, I think we are assuming right now in the base case that AVANGRID is issuing the 700 million of debt at the same cost, average cost that the company is holding right now and the rest will be done through a capital increase. That's how we do get to the accretion dilution.

In the case of adjustment, I think we're assuming some enhancement in the PDC's treatment on NOLs, very conservative. So probably we're speaking about around 20 million related to that of enhancement in those earnings and that's it. I think in the case of Iberdrola, to be very conservative in the accretion dilution as well, we could have used the 100% debt finance at Iberdrola level, we're not. I think the best case we are doing for the contribution of let's say, for example, 3.6 billion capital increase in AVANGRID required, the 81.5% we have done for the purposes of the 3%, at more than 3% accretion are 100% hybrids. If you were to use debt, it will be much more accretive of course.

Ignacio Cuenca Arambarri

Javier Garrido is asking, why using cash for a transaction when you have a listed currency in AVANGRID?

Ignacio Galán

So Pedro, you can already comment as well.

Pedro Azagra Blazquez

I think we agree and I think the Chairman knows very well, this will add to those share transactions. I think we also do cash deals. We did energy using cash and we very quickly did a capital increase, we did but we did also shares in ScottishPower and we did shares recently as well with UIL. I think in this case there has been already for some time material potential leaks of the deal we were working on. I think because of that we needed to move into announcing a deal right now. We couldn't give shares today under the existing guidance that we have of earnings. And then on November 5 changing those earnings. So from that point of view, much simpler and quicker, if we want to accommodate to the timetable we needed, it was to do an all-cash deal, and it's not such a material transaction for the group. So that's the reason.

Ignacio Galán

So -- but I think it's a good question. I think it's almost -- prepare for making with shares and cuts and I think we decided in the last minute to make for the recent [indiscernible] announcing to pass to all cash for avoiding leakage and for already avoiding whatever question can be passed already taking our Investor Day as close as is going to be. So -- but I think our policy is, no change on that one. I think we are ready to make deals with shares because, I think it's true then we have already a unique currency for making this sort of transaction. That is not very large, and I think is made -- I think certainly in the future we'll make anything larger, we will use our shares as currency. So the policy is, no change.

Ignacio Cuenca Arambarri

We have now question from Javier Suarez, Mediobanca and Jorge Guimaraes, JB Capital Markets. Related to something that you have already explained, and if you can detail again is worthy for them. It is regarding the installed capacity of PNM in gas, coal and nuclear, what do you plan to do with fuel convention and generation? Can you elaborate on the commissioning plants and probationary [ph] substitution. Why acquiring [ph] thermal generation in the US instead of using those funds in renewable organic growth? So something regarding the installed capacity of PNM.

Pedro Azagra Blazquez

Okay. So very quickly. First of all, let's remind everybody that is regulated generation. So we're not buying merchant generation in the US. This is regulated generation, so rate base. Out of the 2,800 [ph] megawatts, 2,087 megawatts are in rate base, so therefore regulated as T&D. So you get an early return on equity on that and you get that. I think out of that, we have solar, 157 in rate base and then we have the stake in nuclear and then we have the coal facilities. I think the coal facility as we explained to be shut down in '22. Let's not forget that '22 will be the first year of full consolidation. So therefore, by the end of that year, we will have no control of any coal asset. I think gas generation, as you know, gas generation in the US, I cannot think of almost any utility that doesn't have gas generation. But in this case is 800 megawatt of regulated gas generation and 158 of PPAs.

In the case of the wind, 356 megawatt is what basically they call a contracted output included in rates, and therefore, they do not own the asset. The same thing for 15 [ph] megawatt coming out of the geothermal. In the case of solar, there is another 130 megawatt step up, contracted the output also through rates, but in that case 50% of it is owned. So that's the reason why we don't see these as moving at all into the conventional generation. And in the case of coal generation, I think we have explained very clearly that by '22, the only asset controlled will be shut down.

Ignacio Galán

I think also -- I think the fact that we measure, we can offer the guarantee then that coal will be shut down. So I think we cannot guarantee, then it will be shut down by 2022 as soon as we land it in the company.

Ignacio Cuenca Arambarri

Next question comes from Alberto Gandolfi, Goldman Sachs and Fernando Garcia, Royal Bank of Canada. Can you talk about CapEx and growth outlook for -- in PNM. Bloomberg consensus has more than $20 million net income for 2021 and 700 million EBITDA. Can growth be so strong versus 2019?

Ignacio Galán

Pedro?

Pedro Azagra Blazquez

Yes, thank you Chairman. In relation with the CapEx, I think our estimates right now and we are working '21 to '24, I'm going to focus on '22 to '24. I think we're speaking roughly of around 700 million of CapEx per year, just to get a feeling, I would say, in terms of the New Mexico and Texas numbers out of that is almost 90%. So 90% of that figures is going to be T&D. We have not put in the projections for that period anything at all about additional renewable opportunity. However, with the Governor in New Mexico has been named this year, the greenish governor in the country. You have heard, we are already there in green energy doing assets. They are our system transmission operator for the energy being transferred from New Mexico into California in one of our assets. And therefore those in excess of 600 megawatts that we know they have identified already, I think they are very clear in the messages. They don't have money and they don't have skills to develop, operate build those assets. So it seems to us that's an additional pipeline that we have there, that I'm sure working with the governor and the public commission will be able to give it a push in the upcoming years.

Ignacio Cuenca Arambarri

Next question comes from Javier Suarez, Mediobanca, Jorge Guimaraes, JB Capital Markets, Rob Pulleyn, Morgan Stanley and Sam Arie, UBS has hit another [ph] component. Which are the operational synergies between AVANGRID and PNM? And the second one is more a strategic, when does the company feels they need to go into a corporate deal with opportunities for organic growth already look like very significant?

Ignacio Galán

So, I think it's -- we -- our strategy remain. I think the organic opportunities in distribution is known. I think we are the organic -- the only one is on the distribution companies we hold and I think we are increasing our investment in New York, in Maine and Connecticut, but I think that's for our ambition. So I think we have the opportunity of jumping with a regulated asset base of 4 billion. So, I think it's a unique opportunity in a base of something which has already been accretive from the day one, which already offer opportunities of growth as well, not only in the area of regulated area, which I think as Pedro was mentioning, that the plans of investment on this company, but as well in non-regulated areas where I think I mentioned that we have pulled together between what we have in pipeline plus what they have in pipeline, I think we have already close to 2,000-megawatt that can much easily been already transformed in a real power plant that we are already not physically present in the area.

So I think our ambition is growing. And I think, growing healthy and I think that is a transaction offering. I think it is -- it's a regulated, is accretive, we can already finance easily and offer growth opportunities either in the line of regulated in networks and transmission and distribution or in the area of renewables. And that is the deal. So, in -- as well in the states which are well known for us, we are now discovering in a state we've never been. I think we have presence in Texas, in New Mexico [ph] in many years. I was mentioning then among others, myself personally, we're 50 years ago, 80 years ago with the Prince Felipe for inauguration of the Chair of the New Mexico University about the bank computing, we've been already sharing students, Americans and Spanish student to University for these 50 years, we have already had for many years. I think with Palo Verde -- you've been already involved with that one nuclear power plant, which we've been already -- we have already just with them as well. I think it's in the state, which is well known.

I think we have already a lot of links with them and I think that we go to a state we know, with people we know, with -- and even PNM is -- Pedro mentioned is our supplier of transmission for our -- at some of our wind farm in New Mexico, we are exporting [ph] the electricity to Texas -- Texas to California. So I think that fits absolutely and it's absolutely growing with our strategy for 20 years, growing regulated business, growing renewables, accretive and I think it's already maintaining our financial solidity in geographical areas that has growth and are well known. So that fits all.

Ignacio Cuenca Arambarri

Next question come from Andrew Moulder, CreditSights. PNM is an 8.5 billion enterprise value transaction. Do you expect to have to take any mitigating measures to maintain your current rating levels?

Pedro Azagra Blazquez

I think on that one Chairman, and reason [ph] to credit two things. We have been analyzing again with the approaches as we mentioned of a base case financing for AVANGRID and what we have heard from the rating agency as a feedback is the ratios are not materially impacted at all, because of the transaction. I put aside the strategic plan that we will comment it on November 5. And I think it's also clear that the profile of the new company is better than before because of the increase of regulated activities. From that point of view, I think that's the feedback we have received.

Ignacio Cuenca Arambarri

Next question comes from Michael Charlton, Santander. Moody's has indicated that the AVANGRID-PNM resources transaction will increase a structural subordination at the Iberdrola HoldCo level. How will this issue be addressed to avoid the risk of a downgrade of the HoldCo bonds?

Ignacio Galán

As far as I know, we are going to make already an increase in share capital. So I think we increasing share capital is not at all

Ignacio Cuenca Arambarri

No, he has mentioned to Iberdrola. But I would say that, that is true, Michael, the structural subordination increase with this deal, but in the November 5, we will come with measures to reduce structurally the situation and to avoid that the plan will include this increase that mentioned in this moment, the rating agencies. But on November 5, Pepe will come with this situation. Next question regarding -- Sam Arie, UBS. Are incremental growth opportunities after this merger -- are there incremental growth opportunities after this merger?

Ignacio Galán

I think we have already replied. I think certainly it's increased opportunities in the area of transmission and distribution in the new states. As in the new cases, we will participate as well in this state objectives of the carbonization and electrification. So I think that will require more investment in renewables and transmission. And second, we will accelerate the construction of the pipeline we have already in both states, so -- which I think that in both cases has been positive in terms of growth.

Ignacio Cuenca Arambarri

Next question, and the last one comes from Jorge Guimaraes, JB Capital Markets, and Jose Javier Ruiz, Barclays. Should we assume that this acquisition means that there will be no acquisition in the UK?

Ignacio Galán

I think as far as I know, we are already not taking a decision related to UK. But I think it's -- we for the time being, we are more than concentrated than what we have today. I think we have the Investor Day on the 5th and we will explain to you what is our organic expectation, including this one because we will consider just organic, one is already been done and I think that will be our plan. Our ambition in organic is so huge that we don't require already further investment on that one. But I think you will see all those thing in our Investor Day. But certainly, we are not already in this moment very fun to do anything in Britain, more than those thing that we are making in this moment in an organic manner.

Ignacio Cuenca Arambarri

Okay. After one and a half hour with this event, it is time to end with it. And please let me now give the floor to Mr. Galán to conclude with the day.

Ignacio Galán

So, thank you very much for taking part in this conference call. As always, Ignacio and his team of Investor Relation will provide you if you require any further information. Well, we hope to meet you again in November 5 on our Capital Market Day. And in the meantime, probably in the next few days, we will announce something as well related to hydrogen that we will make public our plans with Fertiberia.

So, thank you very much and see you on November 5. Thank you.