PNM-Avangrid Merger Delayed due to New Mexico Supreme Court Decision

On May 15^th, the New Mexico Supreme Court denied a request that would have suspended the pending appeal of a Public Regulation Commission (PRC) decision blocking the proposed merger between Avangrid and PNM and remanded the case back to the PRC for reconsideration. In the pending court case, Avangrid (an Iberdrola subsidiary) and PNM (the largest public utility in New Mexico) argue that the 2021 PRC decision was wrongly decided and that the proposed merger should be allowed to go forward. Interestingly, the remand to the PRC was requested by both PNM/Avangrid (the parties that filed the suit in question in order to reverse the decision blocking the proposed merger) and the current PRC (a newly reconstituted version of the same regulatory body that voted to block the merger less than two years ago). While the court decision is by no means a fatal blow to the proposed merger, it does represent another setback in a saga that is likely to see the case further delayed and ultimately argued before two different iterations of the same regulatory body.

In assessing the probable future trajectory of the proposed merger, it is useful to first consider a timeline of developments to date.

Source: FactSet Insights, New Mexico Public Regulation Commission (Updated May 30, 2023)

The Proposed Merger, PRC Decision, and Applicant Appeal

As proposed in the November 2020 application, the merger would see Avangrid become the indirect parent of PNM for a total purchase price of approximately $4.3 billion. The joint applicants claim that that the merger would “bring more than $300 million in benefits to the customers and communities in New Mexico and more than $16 million in rate relief to Texas customers.” Approval from the New Mexico PRC remains the last regulatory hurdle since the merger has already been approved by all relevant federal agencies and the Public Utility Commission of Texas.

This proposed merger between PNM and Avangrid is somewhat unusual in an electric utility sector that has seen very little merger and acquisition activity in recent years. However, FactSet does track this activity in its M&A database, and the last transaction of a similar size was the $3.8 billion merger between Narragansett Electric and PPL Corp. completed in May 2022.

While the proposed merger faced determined opposition from the outset (particularly from the Santa Fe-based advocacy group New Energy Economy), a stipulation for approval of the settlement was eventually signed by 12 key stakeholders in the proceedings, including intervenors such as the New Mexico Attorney General and Western Resource Advocates. However, the Hearing Examiner in the case recommended that the merger be denied based on concerns about reliability, alleged mismanagement at other Avangrid owned utilities in New England, uncertainty regarding benefits to customers, and ongoing criminal investigations of Iberdrola executives in Spain. In the final decision, the PRC not only rejected the merger but went so far as to fine the joint applicants $10,000 for violations of discovery directives.

Less than one month later, the joint applicants filed an appeal of the decision, contending that the case was wrongly decided by the PRC on the grounds of improper weighing of the benefits of the merger and consideration of improper evidence.

The PRC Changes from Elected to Appointed Format, Remand of Court Case to PRC Requested

While the outcome of the initial proceeding was obviously unfavorable from the perspective of the joint applicants, a subsequent change in the structure of the PRC itself has seemingly bolstered the prospects of eventual approval. In 2020, New Mexico voters approved a change to the state’s constitution requiring the change from a commission of five elected members to a commission with three appointed commissioners with no more than two of those appointed being members of the same political party. Accordingly, Democratic Governor Michelle Lujan Grisham appointed the following commissioners, who took their seats at the PRC in January 2023:

Source: FactSet Insights, State Utility Regulator Profiles (Updated May 30, 2023)

As the governor herself is known to favor the merger, it is generally assumed that a commission appointed by her is likely to also be more amenable to approval than the previous elected commission that blocked the proposed merger. Consistent with this view, the newly constituted PRC joined PNM and Avangrid in filing the request for remand to the PRC that the New Mexico Supreme Court would eventually deny. While the attempt to quickly return the case to the PRC was unsuccessful, it does indicate a high level of interest at the current commission in revisiting the previous PRC decision.

The Court Decision and Next Steps

As stated above, the New Mexico Supreme Court’s decision to deny a quick remand of the case to the PRC will, at a minimum, delay the completion date of any potential merger. The court has scheduled oral arguments in the case for September 12, 2023, meaning a decision in the case is unlikely until at least late 2023. Currently, Avangrid and PNM have extended the merger agreement only through July 20, 2023, so the agreement between the two companies will also need to be extended to incorporate the new timeline. It is also possible that the joint applicants could decide to cancel the merger in light of the decision, but there has been no indication of this to date.

Once the case is decided in court, the potential merger will likely take one of two paths:

• If the court agrees with the joint petitioners that the initial PRC case was wrongly decided, it is likely the existing case will be remanded back to the PRC. In this scenario, the joint applicants are likely to quickly receive a reconsideration at the commission and quite possibly an approval of the merger.
• If, on the other hand, the court decides that the case was correctly considered by the former PRC, the joint applicants would need to file a completely new application in order to pursue a potential merger. While it is entirely possible that they would do so in the expectation of more favorable treatment before the reconstituted PRC, this would likely be a much longer process, as the case is litigated in an entirely new docket. Such an extended delay could conceivably imperil the future of a merger that will likely have been pending for more than five years by the time a new docket could be completed.

One final complication in any subsequent review by the PRC is that Commissioner O’Connell has recused himself from the case due to his work with Western Resource Advocates – an intervenor in favor of the merger. As a result, any reconsideration of the case before the current PRC will be decided by the two remaining commissioners.

Stay tuned as FactSet continues to produce additional services related to rate case analytics and regulatory proceedings, including the new State Utility Regulator Profiles Report, which details regulatory commission composition and procedures for all 50 states and the District of Columbia and is available in the FactSet Workstation.

This blog post is for informational purposes only. The information contained in this blog post is not legal, tax, or investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.