AVANGRID : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

You should read the following discussion of our financial condition and results
of operations in conjunction with the condensed consolidated financial
statements and the notes thereto included elsewhere in this Quarterly Report on
Form 10-Q and with our audited consolidated financial statements as of
December 31, 2020 and 2019, and for the three years ended December 31, 2020,
included in our Annual Report on Form 10-K for the year ended December 31, 2020,
filed with the Securities and Exchange Commission, or the SEC, on March 1, 2021,
which we refer to as our "Form 10-K." In addition to historical condensed
consolidated financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates and beliefs. Our
actual results could differ materially from those discussed in the
forward-looking statements. The foregoing and other factors are discussed and
should be reviewed in our Form 10-K and other subsequent filings with the SEC.
Overview
AVANGRID is one of the leading sustainable energy companies in the United
States. Our purpose is to work every day to deliver a more accessible clean
energy model that promotes healthier, more sustainable communities. A commitment
to sustainability is firmly entrenched in the values and principles that guide
AVANGRID, with environmental, social, governance and financial sustainability
key priorities driving our business strategy.
AVANGRID has approximately $39 billion in assets and operations in 24 states
concentrated in our two primary lines of business - Avangrid Networks and
Avangrid Renewables. Avangrid Networks owns eight electric and natural gas
utilities, serving approximately 3.3 million customers in New York and New
England. Avangrid Renewables owns and operates 8.6 gigawatts of electricity
capacity, primarily through wind and solar power, with a presence in 22 states
across the United States. AVANGRID supports the achievement of the Sustainable
Development Goals approved by the member states of the United Nations, was named
among the World's Most Ethical companies in 2021 for the third consecutive year
by the Ethisphere Institute and is listed by Forbes and Just Capital as one of
the 2021 Just 100, an annual ranking of the most just U.S. public companies.
AVANGRID employs approximately 7,000 people. Iberdrola S.A., or Iberdrola, a
corporation (sociedad anónima) organized under the laws of the Kingdom of Spain,
a worldwide leader in the energy industry, directly owns 81.5% of the
outstanding shares of AVANGRID common stock. AVANGRID's primary businesses are
described below.
Our direct, wholly-owned subsidiaries include Avangrid Networks, Inc., or
Networks, and Avangrid Renewables Holdings, Inc., or ARHI. ARHI in turn holds
subsidiaries including Avangrid Renewables, LLC, or Renewables. Networks owns
and operates our regulated utility businesses through its subsidiaries,
including electric transmission and distribution and natural gas distribution,
transportation and sales. Renewables operates a portfolio of renewable energy
generation facilities primarily using onshore wind power and also solar, biomass
and thermal power.
Through Networks, we own electric generation, transmission and distribution
companies and natural gas distribution, transportation and sales companies in
New York, Maine, Connecticut and Massachusetts, delivering electricity to
approximately 2.3 million electric utility customers and delivering natural gas
to approximately 1.0 million natural gas utility customers as of June 30, 2021.
Networks, a Maine corporation, holds regulated utility businesses, including
electric transmission and distribution and natural gas distribution,
transportation and sales. Networks serves as a super-regional energy services
and delivery company through the eight regulated utilities it owns directly:
•New York State Electric & Gas Corporation, or NYSEG, which serves electric and
natural gas customers across more than 40% of the upstate New York geographic
area;
•Rochester Gas and Electric Corporation, or RG&E, which serves electric and
natural gas customers within a nine-county region in western New York, centered
around Rochester;
•The United Illuminating Company, or UI, which serves electric customers in
southwestern Connecticut;
•Central Maine Power Company, or CMP, which serves electric customers in central
and southern Maine;
•The Southern Connecticut Gas Company, or SCG, which serves natural gas
customers in Connecticut;
•Connecticut Natural Gas Corporation, or CNG, which serves natural gas customers
in Connecticut;
•The Berkshire Gas Company, or BGC, which serves natural gas customers in
western Massachusetts; and
•Maine Natural Gas Corporation, or MNG, which serves natural gas customers in
several communities in central and southern Maine.
Renewables has a combined wind, solar and thermal installed capacity of 8,577
megawatts, or MW, as of June 30, 2021, including Renewables' share of joint
projects, of which 7,754 MW was installed wind capacity. As of June 30, 2021,
approximately 70% of the capacity was contracted for an average period of 9.2
years, and 18% of production was hedged.
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Being among the top three largest wind operators in the United States based on
installed capacity as of June 30, 2021, Renewables strives to lead the
transformation of the U.S. energy industry to a sustainable, competitive, clean
energy future. Renewables installed capacity includes 65 wind farms and four
solar facilities in 21 states across the United States.
Texas Weather Event
During February 2021, Texas and the surrounding region experienced unprecedented
extreme cold weather, resulting in outages impacting millions in the state.
Avangrid Renewables safely operated our Texas wind generation facilities during
this event meeting all of our delivery obligations in Texas and producing excess
energy that was sold based on the rules established at the time by the Energy
Reliability Council of Texas, or ERCOT. If the received payments are subject to
adjustments by ERCOT, it could adversely affect our results of operations.
In connection with the Texas Weather Event, more than 150 defendants including
certain Renewables subsidiaries in Texas were named in a civil petition filed in
Texas state court by more than 160 plaintiffs alleging a variety of legal
theories, including negligence and gross negligence, product liability and
strict liability, strict liability-abnormally dangerous activity, negligent
misrepresentation, misrepresentation, fraud, civil conspiracy, breach of
continuing duty to warn, breach of express warranties and breach of implied
warranty of fitness for a particular purpose. A second lawsuit was filed in
Texas state court in April 2021 naming more than a hundred defendants including
certain Renewables subsidiaries in Texas based on similar theories of liability.
We cannot predict the outcome of these matters.
Proposed Merger with PNMR
On October 20, 2020, AVANGRID, PNM Resources, Inc., a New Mexico corporation, or
PNMR, and NM Green Holdings, Inc., a New Mexico corporation and wholly-owned
subsidiary of AVANGRID, or Merger Sub, entered into an Agreement and Plan of
Merger, or Merger Agreement, pursuant to which Merger Sub is expected to merge
with and into PNMR, with PNMR surviving the Merger as a direct wholly-owned
subsidiary of AVANGRID, or the Merger. PNMR is a publicly-owned holding company
with two regulated utilities providing electricity and electric services in New
Mexico and Texas. PNMR's electric utilities are the Public Service Company of
New Mexico and the Texas-New Mexico Power Company. Following consummation of the
Merger, AVANGRID will expand its geographic and regulatory diversity with ten
regulated electric and gas companies in six states to help expand our growing
leadership position in transforming the U.S. energy industry.
Pursuant to the Merger Agreement, each issued and outstanding share of the
common stock of PNMR (other than (i) the issued shares of PNMR common stock that
are owned by AVANGRID, Merger Sub, PNMR or any wholly-owned subsidiary of
AVANGRID or PNMR, which will be automatically cancelled at the time the Merger
is consummated and (ii) shares of PNMR common stock held by a holder who has not
voted in favor of, or consented in writing to, the Merger who is entitled to,
and who has demanded, payment for fair value of such shares) will be converted,
at the time the Merger is consummated, into the right to receive $50.30 in cash,
or Merger Consideration, or approximately $4.3 billion in aggregate
consideration. In connection with the Merger, Iberdrola has provided the
Iberdrola Funding Commitment Letter, pursuant to which Iberdrola has
unilaterally agreed to provide to AVANGRID, or arrange the provision to AVANGRID
of, funds to the extent necessary for AVANGRID to consummate the Merger,
including the payment of the aggregate Merger Consideration.
On April 15, 2021, AVANGRID entered into a side letter agreement with Iberdrola,
which sets forth certain terms and conditions relating to the Funding Commitment
Letter (the Side Letter Agreement). The Side Letter Agreement provides that any
drawing in the form of indebtedness made by the Corporation pursuant to the
Funding Commitment Letter shall bear interest at an interest rate equal to
3-month LIBOR plus 0.75% per annum calculated on the basis 360-day year for the
actual number of days elapsed and, commencing on the date of the Funding
Commitment Letter, we shall pay Iberdrola a facility fee equal to 0.12% per
annum on the undrawn portion of the funding commitment set forth in the Funding
Commitment Letter.
On February 12, 2021, the shareholders of PNMR approved the proposed Merger. As
of June 30, 2021, the Merger has obtained all regulatory approvals except from
NMPRC. The Merger is expected to close in the second half of 2021 and is subject
to certain conditions including certain regulatory approvals and entry into
agreements providing for, and to making filings required to, exit from all
ownership interests in the Four Corners Power Plant and certain other customary
closing conditions.
In connection with the Merger, purported shareholders of PNMR have filed
lawsuits against PNMR and the members of the PNMR board of directors under the
federal securities laws, challenging the adequacy of the disclosures made in
PNMR's proxy statement in connection with the Merger or otherwise. Five lawsuits
were filed in the United States District Court for the Southern District of New
York and one was filed in the United States District Court for the Eastern
District of New York. The lawsuits pending in the Southern District of New York
were consolidated and the five plaintiffs filed notices of voluntary
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dismissal and the cases were dismissed in April. The remaining case is pending
in the Eastern District of New York and PNMR and the members of the PNMR board
have not yet been served. We cannot predict the outcome of this lawsuit.
COVID-19
The COVID-19 pandemic continues to cause global economic disruption and
volatility in financial markets and the United States economy. AVANGRID is one
of the many companies providing essential services during this national
emergency and we communicate regularly with federal and state authorities and
industry resources to ensure a coordinated response. We continue to operate
pursuant to our business continuity and emergency response plans in order to
provide safe and reliable service to our customers and support our operational
needs while managing the impacts of the COVID-19 pandemic and begin recovery
from the pandemic. We deployed COVID-19 safety protocols for our front-line
essential workers and, where possible, moved employees to remote work. We
continue to monitor developments affecting both our workforce and our customers
and will take precautions that we determine are necessary or appropriate. We
continue to regularly communicate with our customers regarding the tools and
resources available and to help our customers stay informed during this public
health crisis. In addition to measures to protect our workforce and critical
operations, we established a cross-functional task force that is planning for a
safe and effective return to office. AVANGRID continues to actively monitor
potential supply chain and transportation disruptions that could impact the
Company's operations and will implement plans to address any such impacts on our
business.
While we have developed and implemented and continue to develop and implement
health and safety protocols, business continuity plans and emergency response
plans in an effort to mitigate the negative impact of COVID-19 to our employees,
customers and business, the extent of the impact of the pandemic on our business
and financial results will continue to depend on numerous evolving factors that
we are not able to accurately predict and which will vary by jurisdiction,
including the duration and scope of the pandemic, the emergence of new variants
of the virus, the likelihood of a resurgence of positive cases, the development
and availability of effective treatments and vaccines, the speed at which such
vaccines are administered, economic conditions during and after the pandemic,
and governmental actions that have been taken, or may be taken in the future, in
response to the pandemic. We will continue to actively monitor the situation and
may take further actions that may be required by federal, state or local
authorities or that we determine are in the best interests of our employees,
customers, suppliers and shareholders.
We have not yet experienced a materially adverse impact to our business, results
of operations or financial condition, however, given the uncertain scope and
duration of the COVID-19 outbreak and its potential effects on our business, we
currently cannot predict if there will be materially adverse impacts to our
business, results of operations or financial condition in the future.
Summary of Results of Operations
Our operating revenues increased by 6%, from $1,392 million for the three months
ended June 30, 2020 to $1,477 million for the three months ended June 30, 2021.
Networks business revenues increased mainly due to rate case activity in New
York, which was approved November 19, 2020. Renewables revenues decreased mainly
due to unfavorable mark to market, or MtM, changes on energy derivative
transactions entered into for economic hedging purposes along with decrease in
wind generation output in the period.
Net income attributable to AVANGRID increased by 11% from $88 million for the
three months ended June 30, 2020 to $98 million for the three months ended
June 30, 2021, primarily due to higher Networks revenues from the New York rate
case activity in the period.
Adjusted net income (a non-GAAP financial measure) increased by 25% from $98
million for the three months ended June 30, 2020 to $122 million for the three
months ended June 30, 2021. The increase is primarily due to a $26 million
increase in Renewables driven primarily by thermal and power trading revenue due
to higher average prices in the period, a $11 million increase in Networks
driven primarily by new rate case activity in New York which was approved
November 19, 2020, offset by $12 million decrease in Corporate mainly driven by
unfavorable tax expense in the period.
For additional information and reconciliation of the non-GAAP adjusted net
income to net income attributable to AVANGRID, see "-Non-GAAP Financial
Measures".
See "-Results of Operations" for further analysis of our operating results for
the quarter.
Legislative and Regulatory Update
We are subject to complex and stringent energy, environmental and other laws and
regulations at the federal, state and local levels as well as rules within the
independent system operator, or ISO, markets in which we participate. Federal
and state legislative and regulatory actions continue to change how our business
is regulated. We actively participate in the regulatory
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process at the federal, regional, state and ISO levels. Significant updates are
discussed below. For a further discussion of the environmental and other
governmental regulations that affect us, see our Form 10-K for the year ended
December 31, 2020.
Vineyard Wind 1 Federal Approval
On May 11, 2021, the U.S. Bureau of Ocean Energy Management, or BOEM, issued its
Record of Decision, or ROD, approving Vineyard Wind 1, an 800 MW offshore wind
project that is part of our joint venture Vineyard Wind, LLC.
In July 2021, a lawsuit was filed against BOEM, the U.S. Fish and Wildlife
Service, NOAA Fisheries Directorate, U.S. Army Corps of Engineers and the U.S.
Department of the Interior challenging the approval of the proposed Vineyard
Wind 1 Project. We cannot predict the outcome of this proceeding.
Customer Disconnections
Due to the COVID-19 pandemic, all of our regulated utilities suspended customer
disconnections commencing in March 2020. In New York, we had voluntarily
suspended disconnections for non-payment. The New York state legislature passed
a bill stating moratoriums on residential customer disconnections shall remain
in place until 180 days after the COVID-19 state of emergency in New York is
lifted, which occurred on June 24, 2021. Due to the winter disconnection
moratorium period, disconnections will not be able to resume until April 2022.
In Connecticut and Maine, regulatory orders for COVID-19 disconnection
moratoriums ceased on November 1, 2020. Disconnections in Maine resumed after
the winter disconnection moratorium period ended in April 2021. In Connecticut,
residential disconnections have not yet been authorized and commercial
disconnections were authorized to resume June 15, 2021.
CMP Metering and Billing Investigation
On February 19, 2020, the MPUC issued an order in CMP's distribution rate case
proceeding and on February 24, 2020 issued an order in the metering and billing
investigation. Each order reflected the MPUC's conclusion that CMP's Metering
and Billing system is accurately reporting data, there is no systemic root cause
for high usage complaints and errors related to CMP's metering and billing
system are localized and random, not systemic. However, the MPUC orders imposed
a reduction of 100 basis points in ROE, as a management efficiency adjustment,
to address the MPUC Commissioners' concerns with CMP's customer service
implementation and performance following the launch of its new billing system in
2017. The management efficiency adjustment will remain in effect until CMP has
demonstrated satisfactory customer service performance on four specified service
quality measures for a rolling average period of 18 months, which commenced on
March 1, 2020. CMP is meeting the required rolling average benchmarks for all
four of these quality measures and expects to file with the MPUC in the second
half of 2021 to obtain approval for the removal of the management efficiency
adjustment.
CMP Standard Offer Uncollectible Adder Investigation
On August 19, 2020, the MPUC issued a Notice of Investigation to open an
investigation into whether the uncollectible adder to CMP's standard offer
retainage account for the residential and small non-residential standard offer
customer class should be increased for standard offer electricity-supply rates
that will go into effect January 1, 2022. The investigation also included a
review of CMP's credit and collection practices.
On June 22, 2021, CMP and the Maine Office of the Public Advocate executed and
filed with the MPUC a Stipulation resolving all matters in this proceeding,
which requires CMP credit the residential and small non-residential
standard-offer retainage account up to $4 million depending on the amount of net
write-offs in 2021. On June 29, 2021, the MPUC issued an Order Approving
Stipulation pursuant to which the MPUC approved the Stipulation and closed the
investigation.
Power Tax Audits
Previously, CMP, NYSEG and RG&E implemented Power Tax software to track and
measure their respective deferred tax amounts. In connection with this change,
we identified historical updates needed with deferred taxes recognized by CMP,
NYSEG and RG&E and increased our deferred tax liabilities, with a corresponding
increase to regulatory assets, to reflect the updated amounts calculated by the
Power Tax software. Since 2015, the NYPSC and MPUC accepted certain adjustments
to deferred taxes and associated regulatory assets for this item in recent
distribution rate cases, resulting in regulatory asset balances of approximately
$145 million and $148 million, respectively, for this item at June 30, 2021 and
December 31, 2020.
CMP began recovering its regulatory asset in 2020. In 2017, the NYPSC commenced
an audit of the power tax regulatory assets. On January 11, 2018, the NYPSC
issued an order opening an operations audit on NYSEG and RG&E and certain other
New York utilities regarding tax accounting. The NYPSC audit report is expected
to be completed during 2021.
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New England Clean Energy Connect
On January 4, 2021, CMP transferred the NECEC project to NECEC Transmission LLC,
a wholly-owned subsidiary of Networks, pursuant to the terms of a transfer
agreement dated November 3, 2020.
The NECEC project requires certain permits, including environmental, from
multiple state and federal agencies and a presidential permit from the U.S.
Department of Energy, or DOE, authorizing the construction, operation,
maintenance and connection of facilities for the transmission of electric energy
at the international border between the United States and Canada.
On January 8, 2020, the Maine Land Use Planning Commission, or LUPC, granted the
LUPC Certification for the NECEC. The Maine Department of Environmental
Protection, or MDEP, granted Site Location of Development Act, Natural Resources
Protection Act, and Water Quality Certification permits for the NECEC by an
Order dated May 11, 2020. The MDEP Order has been appealed by certain
intervenors. The appeals are currently pending before the Maine Board of
Environmental Protection and the Maine Superior Court. In addition, certain
intervenors have appealed MDEP's December 4, 2020 Order approving the transfer
of the permits for the project to NECEC Transmission LLC and MDEP's May 7, 2021
Order approving certain minor revisions. These appeals are currently pending
before the Maine Board of Environmental Protection. Certain parties to the MDEP
proceedings requested the stay of the MDEP permits during the pendency of the
appeals. The motions to stay were denied by the MDEP Commissioner in August
2020. On November 2, 2020, a motion to stay the MDEP permits was filed before
the Maine Superior Court by certain parties. In January 2021, the Maine Superior
Court denied the motion for a stay. On May 27, 2021, and July 14, 2021, certain
parties requested, again, that the MDEP stay the permits granted for the NECEC
based on allegations of permit violations by NECEC Transmission LLC. We cannot
predict the outcome of these proceedings.
On November 6, 2020, the project received the required approvals from the U.S.
Army Corps of Engineers, or Army Corps, pursuant to Section 10 of the Rivers and
Harbor Act of 1899 and Section 404 of the Clean Water Act. A complaint for
declaratory and injunctive relief asking the court to vacate or remand the
Section 404 Clean Water Act permit for the NECEC project filed by three
environmental groups is currently pending before the District Court in Maine. A
related request for preliminary injunction seeking to enjoin construction of the
NECEC was denied by the District Court on December 16, 2020. That denial was
appealed to the First Circuit Court of Appeals. On December 21, 2020, plaintiffs
filed a motion for emergency injunction pending appeal in the District Court.
The District Court denied that motion on December 23, 2020. On December 30,
2020, plaintiffs filed an emergency motion for injunction with the First Circuit
Court seeking to enjoin construction in Segment 1 of the project pending their
appeal of the District Court's denial of a preliminary injunction. On January
15, 2021, the First Circuit Court granted the motion temporarily enjoining
construction in Segment 1 of the NECEC project. On May 13, 2021, the First
Circuit Court of Appeals affirmed the District Court's decision to deny the
plaintiffs request for preliminary injunction and vacated the emergency
injunction issued on January 15, 2021.
ISO-NE issued the final System Impact Study (SIS) for NECEC on May 13, 2020,
determining the network upgrades required to permit the interconnection of NECEC
to the ISO-NE system. On July 9, 2020, the project received the formal I.3.9
approval associated with this interconnection request. CMP, NECEC Transmission
LLC and ISO-NE executed an interconnection agreement. With respect to the system
upgrade required at the Seabrook Station, on October 13, 2020, AVANGRID and
NECEC Transmission LLC filed a complaint with the FERC and an amended complaint
on March 26, 2021. On October 5, 2020, NextEra Energy Seabrook, LLC filed a
Petition for Declaratory Order. Both proceedings are currently pending before
FERC. We cannot predict the outcome of these proceedings.
On January 14, 2021, the DOE issued a Presidential Permit granting permission to
NECEC Transmission LLC to construct, operate, maintain and connect electric
transmission facilities at the international border of the United States and
Canada. On March 26, 2021, the plaintiffs challenging the Army Corps permit
filed a motion for leave before the District Court in Maine to supplement their
complaint to add claims against DOE in connection with the Presidential Permit.
On April 20, 2021, the District Court granted the plaintiffs motion to amend the
complaint. On April 22, 2021 the plaintiffs filed their amended complaint asking
the court, among other things, to vacate, set aside, remand or stay the
Presidential Permit. We cannot predict the outcome of these proceedings.
A complaint challenging the validity of NECEC Transmission LLC's leasehold
interest in public land that will host a section of the NECEC project, granted
by Maine's Bureau of Parks and Lands, is currently pending before the Maine
Superior Court. We cannot predict the outcome of this proceeding.
On September 16, 2020, a group of Maine voters submitted an application for a
citizen referendum (i.e., a Maine citizen initiative) to enact legislation that,
if enacted into law and found to be constitutional, would require the vote of
2/3 of all members elected to each House of the Maine Legislature to approve
construction of a high-impact electric transmission line crossing or utilizing
public lands, prohibit construction of a high impact electric transmission line
in the Upper Kennebec Region and require the vote of 2/3 of all members elected
to each House of the Maine Legislature for the lease by Maine's
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Bureau of Parks and Lands of public reserved lands for transmission lines and
similar linear projects. The citizen initiative states that these provisions
would apply retroactively. On February 22, 2021, the Maine Secretary of State
issued a decision finding that proponents of the initiative have gathered the
constitutionally required number of signatures and that the referendum is valid
for placement on the November 2021 ballot. We cannot predict the outcome of this
citizen initiative.
At the municipal level, the project plans to apply for and obtain local
approvals from organized towns gradually, based on the project's construction
sequence and schedule. Nineteen towns have granted municipal approvals to date.
Construction of the NECEC project started in January 2021 and commercial
operation is expected in 2023. As of June 30, 2021, we have capitalized
approximately $350 million for the NECEC project.
PURA Investigation of the Preparation for and Response to the Tropical Storm
Isaias
On August 6, 2020, the PURA opened a docket to investigate the preparation for
and response to Tropical Storm Isaias by the electric distribution companies in
Connecticut including UI. Following hearings and the submission of testimony,
PURA issued a final decision on April 15, 2021, finding that UI "generally met
standards of acceptable performance in its preparation and response to Tropical
Storm Isaias," subject to certain exceptions noted in the decision, but ordered
a 15 basis point to UI's ROE in its next rate case to incentivize better
performance and indicated that penalties could be forthcoming in the penalty
phase of the proceedings. On June 11, 2021, UI filed an appeal of PURA's
decision with the Connecticut Superior Court. We cannot predict the final
outcome of this investigation or potential penalties that may be assessed.
On May 6, 2021, in connection with its findings in the Storm Isaias Docket, PURA
issued a Notice of Violation to UI for allegedly failing to comply with
standards of acceptable performance in emergency preparation or restoration of
service in an emergency and with orders of the Authority, and for violations of
accident reporting requirements. PURA assessed a civil penalty in the total
amount of $2 million. PURA held a hearing on this matter and, in an order dated
July 14, 2021, reduced the civil penalty to approximately $1 million.
Connecticut Energy Legislation
On October 7, 2020, the Governor of Connecticut signed into law an energy bill
that, among other things, instructs PURA to revise the rate-making structure in
Connecticut to adopt performance-based rates for each electric distribution
company, increases the maximum civil penalties assessable for failures in
emergency preparedness, and provides certain penalties and reimbursements to
customers after storm outages greater than 96 hours and extends rate case
timelines.
Pursuant to the legislation, on October 30, 2020, PURA re-opened a docket
related to new rate designs and review, expanding the scope to consider (a) the
implementation of an interim rate decrease; (b) low income rates; and (c)
economic development rates. Separately, UI was due to make its annual rate
adjustment mechanism, or RAM, filing on March 8, 2021 for the approval of its
RAM Rate Components reconciliations: Generation Services Charges, By-passable
Federally Mandated Congestion Costs, System Benefits Charge, Transmission
Adjustment Charge and Revenue Decoupling Mechanism.
On March 9, 2021, UI, jointly with the Office of the CT Attorney General, the
Office of CT Consumer Counsel, DEEP and PURA's Office of Education, Outreach,
and Enforcement entered into a settlement agreement and filed a motion to
approve the settlement agreement.
In an order dated June 23, 2021, PURA approved the as amended settlement
agreement in its entirety and it was executed by the parties. The settlement
agreement includes a contribution by UI of $5 million and provides customers
rate credits of $50 million while allowing UI to collect $52 million in RAM, all
over a 22-month period ending April 2023 and also includes a distribution base
rate freeze through April 2023.
NYDPS Investigation of the Preparation for and Response to the Tropical Storm
Isaias
In August 2020, following Tropical Storm Isaias, the NYDPS commenced a
comprehensive investigation of the preparation and response this event by New
York's major electric utility companies. In addition, on August 20, 2020, the
New York State Senate and Assembly held a joint hearing to examine the response
of various utility companies during the aftermath of Tropical Storm Isaias. On
December 31, 2020, NYSEG and NYDPS Staff entered into a settlement agreement
regarding three alleged violations by NYSEG of its emergency response plan
pursuant to which NYSEG agreed to payment of a penalty of approximately $2
million dollars. The settlement was approved on January 21, 2021.
Proposed New York Legislation in Response to the Tropical Storm Isaias
Proposed legislation has been introduced that would amend the public service law
to, among other things, increase potential penalties and give greater discretion
to the NYPSC to assess penalties for violations of the Public Service Law,
Regulations, or Orders of the NYPSC. We cannot predict the outcome of this
proposed legislation.
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CMP Generator Interconnection Investigation
On February 10, 2021, two solar developer associations petitioned the MPUC to
open an investigation into CMP's generator interconnection practices and the
estimates CMP provided to developers related to expected interconnection costs.
On April 6, 2021, the MPUC issued a Notice of Formal Investigation related to
the prudency and reasonableness of CMP's actions with respect to the
interconnection of generation to its distribution system. The Hearing Examiner
in the matter has issued a Procedural Order setting a discovery schedule, CMP
has responded to data requests and a technical conference has been conducted. We
cannot predict the outcome of this investigation or any potential penalties that
may be assessed.
Results of Operations
The following tables set forth financial information by segment for each of the
periods indicated:
                                                            Three Months Ended                                                        Three Months Ended
                                                               June 30, 2021                                                             June 30, 2020
                                      Total           Networks          Renewables           Other(1)           Total           Networks          Renewables           Other(1)
                                                                                                    (in millions)
Operating Revenues                  $ 1,477          $  1,219          $      258          $       -          $ 1,392          $  1,121          $      272          $      (1)
Operating Expenses
Purchased power, natural gas
and fuel used                           265               236                  29                  -              265               207                  58                  -
Operations and maintenance              676               544                 128                  4              584               486                 102                 (4)
Depreciation and amortization           250               149                 100                  1              242               147                  94                  1
Taxes other than income taxes           155               143                  17                 (5)             146               133                  14                 (1)
Total Operating Expenses              1,346             1,072                 274                  -            1,237               973                 268                 (4)
Operating Income                        131               147                 (16)                 -              155               148                   4                  3
Other Income (Expense)
Other income (expense)                   34                26                   7                  1                2                 2                  (1)                 1
Earnings (losses) from equity
method investments                        4                 5                  (1)                 -                2                 3                  (1)                 -
Interest expense, net of
capitalization                          (75)              (53)                  -                (22)             (89)              (68)                  1                (22)
Income (Loss) Before Income
Tax                                      94               125                 (10)               (21)              70                85                   3                (18)
Income tax expense (benefit)             10                24                 (21)                 7               (6)               12                 (16)                (2)
Net Income (Loss)                        84               101                  11                (28)              76                73                  19                (16)
Net loss attributable to
noncontrolling interests                 14                 -                  14                  -               12                 -                  12                  -
Net Income (Loss)
Attributable to Avangrid,
Inc.                                $    98          $    101          $       25          $     (28)         $    88          $     73          $       31          $     (16)


                                       55

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                                                               Six Months Ended                                                          Six Months Ended
                                                                 June 30, 2021                                                             June 30, 2020
                                        Total           Networks          Renewables           Other(1)           Total           Networks          Renewables           Other(1)
                                                                                                      (in millions)
Operating Revenues                    $ 3,443          $  2,792          $      651          $       -          $ 3,181          $  2,582          $      600          $      (1)
Operating Expenses
Purchased power, natural gas
and fuel used                             766               685                  81                  -              740               601                 139                  -
Operations and maintenance              1,318             1,050                 267                  1            1,154               952                 211                 (9)
Depreciation and amortization             497               305                 191                  1              493               295                 197                  1
Taxes other than income taxes             325               292                  36                 (3)             312               277                  36                 (1)
Total Operating Expenses                2,906             2,332                 575                 (1)           2,699             2,125                 583                 (9)
Operating Income                          537               460                  76                  1              482               457                  17                  8
Other Income (Expense)
Other income (expense)                     35                32                   1                  2               (1)                -                   5                 (6)
Earnings (losses) from equity
method investments                          5                 7                  (2)                 -               (4)                5                  (9)                 -
Interest expense, net of
capitalization                           (148)             (106)                  -                (42)            (165)             (136)                  -                (29)
Income (Loss) Before Income Tax           429               393                  75                (39)             312               326                  13                (27)
Income tax expense (benefit)               24                66                 (30)               (12)               6                55                 (46)                (3)
Net Income (Loss)                         405               327                 105                (27)             306               271                  59                (24)
Net loss (income) attributable
to noncontrolling interests                27                (1)                 28                  -               22                (1)                 23                  -
Net Income (Loss) Attributable
to Avangrid, Inc.                     $   432          $    326          $      133          $     (27)         $   328          $    270          $       82          $     (24)


(1)"Other" represents Corporate and intersegment eliminations.
Comparison of Period to Period Results of Operations
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Operating Revenues
Our operating revenues increased by $85 million, or 6%, from $1,392 million for
the three months ended June 30, 2020 to $1,477 million for the three months
ended June 30, 2021, as detailed by segment below:
Networks
Operating revenues increased by $98 million, or 9%, from $1,121 million for the
three months ended June 30, 2020 to $1,219 million for the three months ended
June 30, 2021. Electricity and gas revenues increased by $22 million, primarily
due to new rate case activity in New York which was approved November 19, 2020,
a $16 million favorable impact from COVID-19 deferrals during the period in New
York and Connecticut (in Connecticut this is included in the revenue decoupling
mechanism), a $12 million favorable impact from transmission offset by $4
million of other decreases. Electricity and gas revenues changed due to the
following items that have offsets within the income statement: an increase of
$29 million in purchased power and purchased gas (offset in purchased power), an
increase of $37 million in flow through amortizations (offset in operating
expenses), offset by a decrease of $14 million in flow through amortizations ($8
million offset in income tax expense and $6 million offset in other income).
Renewables
Operating revenues decreased by $14 million, or 5%, from $272 million for the
three months ended June 30, 2020 to $258 million for the three months ended
June 30, 2021. The decrease in operating revenue is primarily driven by
unfavorable MtM changes of $60 million on energy derivative transactions entered
into for economic hedging purposes and a decrease of $20 million driven by 276
GWh lower wind generation output in the current period, offset by a $22 million
increase in merchant prices and $27 million in favorable thermal and power
trading driven by higher average prices in the period, $7 million from
curtailment payments, $4 million from the sale of assets and $6 million of other
increases.
Purchased Power, Natural Gas and Fuel Used
Our purchased power, natural gas and fuel used was at $265 million for both the
three months ended June 30, 2021 and 2020, as detailed by segment below:
                                       56
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Networks

Purchased power, natural gas and fuel used increased by $29 million, or 14%,
from $207 million for the three months ended June 30, 2020 to $236 million for
the three months ended June 30, 2021. The increase is primarily driven by a $23
million increase in average commodity prices and an overall increase in
electricity and gas units procured due to higher degree days along with a $6
million increase in other power supply purchases in the period.
Renewables
Purchased power, natural gas and fuel used decreased by $29 million, or 50%,
from $58 million for the three months ended June 30, 2020 to $29 million for the
three months ended June 30, 2021. The decrease is primarily due to favorable MtM
changes on derivatives of $41 million due to market price changes in the period,
offset by an increase of $12 million in power purchases and transmission costs
in the period.
Operations and Maintenance
Operations and maintenance expenses increased by $92 million, or 16%, from $584
million for the three months ended June 30, 2020 to $676 million for the three
months ended June 30, 2021, as detailed by segment below:
Networks
Operations and maintenance expenses increased by $58 million, or 12%, from $486
million for the three months ended June 30, 2020 to $544 million for the three
months ended June 30, 2021. The increase is driven by $9 million of increased
personnel expenses, a $3 million increase in uncollectible expenses, an increase
of $37 million in flow through amortizations (which is offset in revenue) and
$10 million of reclassifications (offset in other income), offset by $1 million
of other decreases.
Renewables
Operations and maintenance expenses increased by $26 million, or 25%, from $102
million for the three months ended June 30, 2020 to $128 million for the three
months ended June 30, 2021. The increase is primarily due to a $3 million
increase in bad debt provision in the period, $3 million of higher land rents
driven by new sites, $6 million of increased costs resulting from higher
maintenance costs in the period, $7 million increase driven by higher personnel
costs primarily attributable to new capacity, $6 million of reclassifications
(offset in other income) and $1 million of other increases.
Depreciation and Amortization
Depreciation and amortization for the three months ended June 30, 2021 was $250
million compared to $242 million for the three months ended June 30, 2020,
representing an increase of $8 million. The increase is primarily due to an
increase of $4 million in depreciation expense from plant additions in Networks
and Renewables in the period and a $4 million increase driven by accelerated
depreciation from the repowering of wind farms in Renewables recorded in the
same period of 2020 .
Other Income (Expense) and Earnings (Losses) from Equity Method Investments
Other income (expense) and equity earnings (losses) increased by $34 million
from $4 million for the three months ended June 30, 2020 to $38 million for the
three months ended June 30, 2021. The change is primarily due to an $8 million
favorable increase in allowance for equity funds used during construction, an
$11 million favorable change in the non-service component of pension expense
driven by revised actuarial studies in Networks (which is partially offset in
revenue), $10 million of Networks reclassifications (offset in operating
expenses), $2 million of favorable equity earnings in the period, and $6 million
of Renewables reclassifications (offset in operating expenses) offset by $3
million other unfavorable decreases.
Interest Expense, Net of Capitalization
Interest expense for the three months ended June 30, 2021 and 2020 was $75
million and $89 million, respectively. The change is primarily due to a decrease
of $16 million of interest expense at Networks ($6 million of favorable carrying
charges and $10 million favorable regulatory amortizations), offset by a $1
million increase in Other due to increased debt.
Income Tax Expense
The effective tax rates, inclusive of federal and state income tax, for the
three months ended June 30, 2021 and 2020, were 10.6% and (8.6)%, respectively,
which are lower than the federal statutory tax rate of 21%, primarily due to the
recognition of production tax credits associated with wind production and the
effect of the excess deferred tax amortization resulting from the Tax Act.
                                       57
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Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Operating Revenues
Our operating revenues increased by $262 million, or 8%, from $3,181 million for
the six months ended June 30, 2020 to $3,443 million for the six months ended
June 30, 2021, as detailed by segment below:
Networks
Operating revenues increased by $210 million, or 8%, from $2,582 million for the
six months ended June 30, 2020 to $2,792 million for the six months ended
June 30, 2021. Electricity and gas revenues increased by $48 million, primarily
due to new rate case activity in New York which was approved November 19, 2020,
a $6 million favorable impact from a pension deferral write-off recorded in the
same period of 2020, $21 million favorable impact from a COVID-19 deferral
during the period in New York and Connecticut (in Connecticut this is included
in the revenue decoupling mechanism), $12 million favorable impact from
transmission, offset by $4 million of other decreases. Electricity and gas
revenues changed due to the following items that have offsets within the income
statement: an increase of $84 million in purchased power and purchased gas
(offset in purchased power), an increase of $76 million in flow through
amortizations (offset in operating expenses), offset by a decrease of $33
million in flow through amortizations ($21 million offset in income tax expense
and $12 million offset in other income).
Renewables
Operating revenues increased by $51 million, or 9%, from $600 million for the
six months ended June 30, 2020, to $651 million for the six months ended
June 30, 2021. The increase in operating revenues was primarily due to a $156
million increase in merchant prices driven mainly by higher demand during the
Texas storm in the first quarter of 2021, $43 million in favorable thermal and
power trading driven by higher average prices in the period, $16 million from
curtailment payments, $4 million from the sale of assets, and $8 million from
other, offset by unfavorable MtM changes of $133 million on energy derivative
transactions entered for economic hedging purposes, and a decrease of $43
million driven by 955 GWh lower wind generation output in the current period.
Purchased Power, Natural Gas and Fuel Used
Purchased power, natural gas and fuel used increased by $26 million, or 4%, from
$740 million for the six months ended June 30, 2020 to $766 million for the six
months ended June 30, 2021, as detailed by segment below:
Networks
Purchased power, natural gas and fuel used increased by $84 million, or 14%,
from $601 million for the six months ended June 30, 2020 to $685 million for the
six months ended June 30, 2021. The increase is primarily driven by a $71
million increase in average commodity prices and an overall increase in
electricity and gas units procured due to higher degree days along with a $13
million increase in other power supply purchases in the period.
Renewables
Purchased power, natural gas and fuel used decreased by $58 million, or 42%,
from $139 million for the six months ended June 30, 2020 to $81 million for the
six months ended June 30, 2021. The decrease is primarily due to favorable MtM
changes on derivatives of $75 million due to market price changes in the period,
offset by an increase of $17 million in power purchases and transmission costs
in the period.
Operations and Maintenance
Operations and maintenance expenses increased by $164 million, or 14%, from
$1,154 million for the six months ended June 30, 2020 to $1,318 million for the
six months ended June 30, 2021, as detailed by segment below:
Networks
Operations and maintenance expenses increased by $98 million, or 10%, from $952
million for the six months ended June 30, 2020 to $1,050 million for the six
months ended June 30, 2021. The increase is driven by $9 million of increased
personnel expenses, a $8 million increase in uncollectible expenses and $5
million of other increases. In addition, there were increases of $76 million in
flow through amortizations (which is offset in revenue).
Renewables
Operations and maintenance expenses increased by $56 million, or 27%, from $211
million for the six months ended June 30, 2020 to $267 million for the six
months ended June 30, 2021. The increase is primarily due to a $19 million
increase in bad debt provision driven mainly by the increased provisions during
the Texas storm in the first quarter of 2021, $12 million of
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higher land rents driven by new sites, $10 million of increased costs resulting
from higher maintenance costs in the period, $8 million increase driven by
higher personnel costs primarily attributable to new capacity, $6 million due to
the write-off of certain development projects in Renewables in the period.
Depreciation and Amortization
Depreciation and amortization for the six months ended June 30, 2021 was $497
million compared to $493 million for the six months ended June 30, 2020, an
increase of $4 million. The increase is driven by $16 million from plant
additions in Networks and Renewables in the period, offset by a $6 million
decrease driven by accelerated depreciation from the repowering of wind farms
recorded in the same period of 2020 and $6 million decrease driven by
amortization of a deferred gain.
Other Income (Expense) and Earnings (Losses) from Equity Method Investments
Other income (expense) and equity earnings (losses) increased by $45 million
from $(5) million for the six months ended June 30, 2020 to $40 million for the
six months ended June 30, 2021. The change is primarily due to a $13 million
favorable increase in allowance for equity funds used during construction, a $22
million favorable change in the non-service component of pension expense driven
by revised actuarial studies in Networks (which is partially offset within
revenue), $9 million of favorable equity earnings in the period and $1 million
favorable other increases.
Interest Expense, Net of Capitalization
Interest expense for the six months ended June 30, 2021 and 2020 was $148
million and $165 million, respectively. The change is primarily due to a
decrease of $24 million of interest expense at Networks ($9 million of favorable
carrying charges, $20 million favorable regulatory amortizations, offset by
unfavorable $4 million interest expense from increased debt), offset by a $6
million increase in Other due to increased debt.
Income Tax
The effective tax rates, inclusive of federal and state income tax, for the six
months ended June 30, 2021 and 2020 was 5.6% and 1.9%, respectively, which are
lower than the federal statutory tax rate of 21%, primarily due to the
recognition of production tax credits associated with wind production and the
effect of the excess deferred tax amortization resulting from the Tax Act.
Non-GAAP Financial Measures
To supplement our consolidated financial statements presented in accordance with
U.S. GAAP, we consider adjusted net income and adjusted earnings per share,
adjusted EBITDA and adjusted EBITDA with Tax Credits as financial measures that
are not prepared in accordance with U.S. GAAP. The non-GAAP financial measures
we use are specific to AVANGRID and the non-GAAP financial measures of other
companies may not be calculated in the same manner. We use these non-GAAP
financial measures, in addition to U.S. GAAP measures, to establish operating
budgets and operational goals to manage and monitor our business, evaluate our
operating and financial performance and to compare such performance to prior
periods and to the performance of our competitors. We believe that presenting
such non-GAAP financial measures is useful because such measures can be used to
analyze and compare profitability between companies and industries by
eliminating the impact of certain non-cash charges. In addition, we present
non-GAAP financial measures because we believe that they and other similar
measures are widely used by certain investors, securities analysts and other
interested parties as supplemental measures of performance.
We define adjusted net income as net income adjusted to exclude restructuring
charges, mark-to-market earnings from changes in the fair value of derivative
instruments used by AVANGRID to economically hedge market price fluctuations in
related underlying physical transactions for the purchase and sale of
electricity, accelerated depreciation derived from repowering of wind farms,
costs incurred in connection with the COVID-19 pandemic and costs incurred
related to the PNMR Merger. We believe adjusted net income is more useful in
understanding and evaluating actual and projected financial performance and
contribution of AVANGRID core lines of business and to more fully compare and
explain our results. The most directly comparable U.S. GAAP measure to adjusted
net income is net income. We also define adjusted earnings per share, or
adjusted EPS, as adjusted net income converted to an earnings per share amount.
We define adjusted EBITDA as adjusted net income adjusted to fully exclude the
effects of net (loss) income attributable to noncontrolling interests, income
tax expense (benefit), depreciation and amortization, interest expense, net of
capitalization, other (income) expense and (earnings) losses from equity method
investments. We further define adjusted EBITDA with tax credits as adjusted
EBITDA adding back the pre-tax effect of retained Production Tax Credits (PTCs)
and Investment Tax Credits (ITCs) and PTCs allocated to tax equity investors.
The most directly comparable U.S. GAAP measure to adjusted EBITDA and adjusted
EBITDA with tax credits is net income.
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The use of non-GAAP financial measures is not intended to be considered in
isolation or as a substitute for, or superior to, AVANGRID's U.S. GAAP financial
information, and investors are cautioned that the non-GAAP financial measures
are limited in their usefulness, may be unique to AVANGRID, and should be
considered only as a supplement to AVANGRID's U.S. GAAP financial measures. The
non-GAAP financial measures may not be comparable to other similarly titled
measures of other companies and have limitations as analytical tools.
Non-GAAP financial measures are not primary measurements of our performance
under U.S. GAAP and should not be considered as alternatives to operating
income, net income or any other performance measures determined in accordance
with U.S. GAAP.
The following tables provide a reconciliation between Net Income attributable to
AVANGRID and non-GAAP measures Adjusted Net Income, Adjusted EBITDA and Adjusted
EBITDA with Tax Credits by segment for the three and six months ended June 30,
2021 and 2020, respectively:
                                                                  Three Months Ended June 30, 2021                                             Six Months Ended June 30, 2021
                                               Total             Networks          Renewables          Corporate*             Total              

Networks Renewables Corporate*

                                                                            (in millions)                                                               (in millions)
Net Income Attributable to Avangrid,
Inc.                                        $      98          $     101          $       25          $      (29)         $       432          $     326          $      133          $      (28)
Adjustments:
Mark-to-market earnings - Renewables               21                  -                  21                   -                   41                  -                  41                   -

Impact of COVID-19                                  9                  9                   -                   -                   15                 15                   -                   -
Merger costs                                        3                  -                   -                   3                    4                  -                   -                   4
Income tax impact of adjustments (1)               (9)                (2)                 (6)                 (1)                 (16)                (4)                (11)                 (1)
Adjusted Net Income (2)                     $     122          $     108          $       41          $      (26)         $       476          $     337          $      164          $      (25)

Net (loss) income attributable to
noncontrolling interests                          (14)                 -                 (14)                  -                  (27)                 1                 (28)                  -
Income tax expense (benefit)                       19                 26                 (14)                  7                   40                 70                 (18)                (12)
Depreciation and amortization                     250                149                 100                   1                  497                305                 191                   1
Interest expense, net of
capitalization                                     75                 53                  (1)                 23                  148                106                  (1)                 43
Other (income) expense                            (34)               (26)                 (7)                 (1)                 (35)               (32)                 (1)                 (2)
(Earnings) losses from equity method
investments                                        (4)                (5)                  1                   -                   (5)                (7)                  2                   -
Adjusted EBITDA (3)                         $     414          $     305          $      105          $        4          $     1,094          $     780          $      309          $        5

Retained PTCs and ITCs                             53                  -                  53                   -                  103                  -                 103                   -
PTCs allocated to tax equity
investors                                          19                  -                  19                   -                   41                  -                  41                   -

Adjusted EBITDA with Tax Credits (3) $ 486 $ 305

      $      177          $        4          $     1,238          $     780          $      453          $        5


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                                                                  Three Months Ended June 30, 2020                                             Six 

Months Ended June 30, 2020

                                               Total             Networks          Renewables          Corporate*             Total              

Networks Renewables Corporate*

                                                                            (in millions)                                                               (in millions)
Net Income (Loss) Attributable to
Avangrid, Inc.                              $      88          $      73          $       31          $      (15)         $       328          $     270          $       82          $      (24)
Adjustments:
Mark-to-market earnings - Renewables                2                  -                   2                   -                  (16)                 -                 (16)                  -
Restructuring charges                               1                  1                   -                   -                    4                  2                   1                   -
Accelerated depreciation from
repowering                                         (4)                 -                  (4)                  -                    6                  -                   6                   -
Impact of COVID-19                                 13                 11                   -                   2                   13                 11                   -                   2
Income tax impact of adjustments (1)               (3)                (3)                  -                   -                   (2)                (4)                  2                   -
Adjusted Net Income (2)                     $      98          $      82          $       30          $      (14)         $       334          $     280          $       76          $      (22)

Net (loss) income attributable to
noncontrolling interests                          (12)                 -                 (12)                  -                  (22)                 1                 (23)                  -
Income tax expense (benefit)                       (3)                15                 (16)                 (2)                   8                 59                 (48)                 (3)
Depreciation and amortization                     246                147                  98                   1                  487                295                 191                   1
Interest expense, net of
capitalization                                     89                 68                  (1)                 22                  165                136                   -                  29
Other (income) expense                              2                  2                  (1)                  1                    1                  -                  (5)                  6
(Earnings) losses from equity method
investments                                         2                  3                  (1)                  -                    4                 (5)                  9                   -
Adjusted EBITDA (3)                         $     422          $     317          $       96          $        8          $       977          $     765          $      200          $       11

Retained PTCs and ITCs                             45                  -                  45                   -                   89                  -                  89                   -
PTCs allocated to tax equity
investors                                          15                  -                  15                   -                   32                  -                  32                   -

Adjusted EBITDA with Tax Credits (3) $ 482 $ 317

$ 156 $ 8 $ 1,097 $ 765 $ 320 $ 11

(1)Income tax impact of adjustments: 2021 - $(6) million and $(11) million from
MtM earnings, $(2) million and $(4) million from impact of COVID-19 and $(1)
million and $(1) million from merger costs of for the three and six months ended
June 30, 2021, respectively; 2020 - $(1) million and $4 million from MtM
earnings, $0 and $(1) million from restructuring charges, $1 million and $(2)
million from accelerated depreciation from repowering and $(3) million and $(3)
million from impact of COVID-19 for the three and six months ended June 30,
2020, respectively.
(2)Adjusted Net Income is a non-GAAP financial measure and is presented after
excluding restructuring charges, accelerated depreciation derived from
repowering of wind farms, costs incurred in connection with the COVID-19
pandemic, the impact from mark-to-market activities in Renewables and costs
incurred related to the PNMR Merger.
(3)Adjusted EBITDA is a non-GAAP financial measure defined as adjusted net
income adjusted to fully exclude the effects of net (loss) income attributable
to noncontrolling interests, income tax expense (benefit), depreciation and
amortization, interest expense, net of capitalization, other (income) expense
and (earnings) losses from equity method investments. We further define adjusted
EBITDA with tax credits as adjusted EBITDA adding back the pre-tax effect of
retained PTCs and ITCs and PTCs allocated to tax equity investors.
  * Includes corporate and other non-regulated entities as well as intersegment
eliminations.
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Adjusted net income
Our adjusted net income increased by $25 million, or 25%, from $98 million for
the three months ended June 30, 2020 to $122 million for the three months ended
June 30, 2021. The increase is primarily due to a $26 million increase in
Renewables driven primarily by thermal and power trading revenue due to higher
average prices in the period, a $11 million increase in Networks driven
primarily by new rate case activity in New York which was approved November 19,
2020, offset by $12 million decrease in Corporate mainly driven by unfavorable
tax expense in the period.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Adjusted net income
Our adjusted net income increased by $142 million, or 43%, from $334 million for
the six months ended June 30, 2020 to $476 million for the six months ended
June 30, 2021. The increase is primarily due to a $88 million increase in
Renewables driven by higher merchant pricing mainly from the Texas weather
event, a $57 million increase in Networks driven primarily by new rate case
activity in New York which was approved November 19, 2020, offset by $3 million
decrease in Corporate mainly driven by interest expense from increased debt in
the period.
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The following tables reconcile Net Income attributable to AVANGRID to Adjusted
Net Income (non-GAAP), and EPS attributable to AVANGRID to adjusted EPS
(non-GAAP) for the three and six months ended June 30, 2021 and 2020,
respectively:
                                                        Three Months Ended                        Six Months Ended
                                                             June 30,                                 June 30,
(Millions)                                           2021                2020                  2021                  2020
Networks                                         $      101          $      73          $      326               $     270
Renewables                                               25                 31                 133                      82
Corporate (1)                                           (29)               (15)                (28)                    (24)
Net Income                                       $       98          $      88          $      432               $     328
Adjustments:
Mark-to-market earnings - Renewables (2)                 21                  2                  41                     (16)
Restructuring charges (3)                                 -                  1                   -                       4
Accelerated depreciation from repowering
(4)                                                       -                 (4)                  -                       6
Impact of COVID-19 (5)                                    9                 13                  15                      13
Merger costs (6)                                          3                  -                   4                       -
Income tax impact of adjustments                         (9)                (3)                (16)                     (2)
Adjusted Net Income (7)                          $      122          $      98          $      476               $     334


                                                                Three Months Ended                          Six Months Ended
                                                                     June 30,                                   June 30,
                                                              2021                  2020                 2021                 2020
Networks                                               $     0.29               $    0.24          $     0.99             $    0.87
Renewables                                                   0.07                    0.10                0.41                  0.27
Corporate (1)                                               (0.08)                  (0.05)              (0.08)                (0.08)
Net Income                                             $     0.28               $    0.28          $     1.31             $    1.06
Adjustments:
Mark-to-market earnings - Renewables (2)                     0.06                    0.01                0.13                 (0.05)
Restructuring charges (3)                                       -                       -                   -                  0.01
Accelerated depreciation from repowering (4)                    -                   (0.01)                  -                  0.02
Impact of COVID-19 (5)                                       0.03                    0.04                0.05                  0.04
Merger costs (6)                                             0.01                       -                0.01                     -
Income tax impact of adjustments                            (0.03)                  (0.01)              (0.05)                (0.01)
Adjusted Earnings Per Share (7)                        $     0.35               $    0.32          $     1.45             $    1.08


(1)Includes corporate and other non-regulated entities as well as intersegment
eliminations.
(2)Mark-to-market earnings relates to earnings impacts from changes in the fair
value of Renewables' derivative instruments associated with electricity and
natural gas.
(3)Restructuring and severance related charges relate to costs to implement an
initiative to mitigate costs and achieve sustainable growth.
(4)Represents the amount of accelerated depreciation derived from repowering of
wind farms in Renewables.
(5)Represents costs incurred in connection with the COVID-19 pandemic.
(6)Pre-merger costs incurred.
(7)Adjusted net income and adjusted earnings per share are non-GAAP financial
measures and are presented after excluding restructuring charges, accelerated
depreciation derived from repowering of wind farms, costs incurred in connection
with the COVID-19 pandemic, the impact from mark-to-market activities in
Renewables and costs incurred related to the PNMR Merger.
Liquidity and Capital Resources
Our operations, capital investment and business development require significant
short-term liquidity and long-term capital resources. Historically, we have used
cash from operations and borrowings under our credit facilities and commercial
paper program as our primary sources of liquidity. Our long-term capital
requirements have been met primarily through retention of earnings, equity
issuances and borrowings in the investment grade debt capital markets. Continued
access to these sources of liquidity and capital are critical to us. Risks may
increase due to circumstances beyond our control, such as a general disruption
of the financial markets and adverse economic conditions.
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We and our subsidiaries are required to comply with certain covenants in
connection with our respective loan agreements. The covenants are standard and
customary in financing agreements, and we and our subsidiaries were in
compliance with such covenants as of June 30, 2021.
Liquidity Position
We manage our overall liquidity position as part of the group of companies
controlled by Iberdrola, or the Iberdrola Group, and are a party to a liquidity
agreement with Bank of America, N.A. along with certain members of the Iberdrola
Group. The liquidity agreement aids the Iberdrola Group in efficient cash
management and reduces the need for external borrowing by the pool participants.
Parties to the agreement, including us, may deposit funds with or borrow from
the financial institution, provided that the net balance of funds deposited or
borrowed by all pool participants in the aggregate is not less than zero. The
balance was $0 at both June 30, 2021 and December 31, 2020. Any deposit amounts
would be reflected on our condensed consolidated balance sheets under cash and
cash equivalents because our deposited surplus funds under the cash pooling
agreement are highly-liquid short-term investments.
We optimize our liquidity within the United States through a series of
arms-length intercompany lending arrangements with our subsidiaries and among
our regulated utilities to provide for lending of surplus cash to subsidiaries
with liquidity needs, subject to the limitation that the regulated utilities may
not lend to unregulated affiliates. These arrangements minimize overall
short-term funding costs and maximize returns on the temporary cash investments
of the subsidiaries. We have the capacity to borrow up to $2.5 billion from the
lenders committed to the AVANGRID Credit Facility and $500 million from an
Iberdrola Group Credit Facility, each of which are described below.
The following table provides the components of our liquidity position as of
June 30, 2021 and December 31, 2020, respectively:
                                              As of June 30,      As of December 31,
                                                   2021                  2020
                                                           (in millions)
        Cash and cash equivalents            $        1,729      $             1,463
        AVANGRID Credit Facility                      2,500                    2,500
        2020 Credit Facility                              -                      500
        Iberdrola Group Credit Facility                 500                      500
        Less: borrowings                                  -                     (309)
        Total                                $        4,729      $             4,654


AVANGRID Commercial Paper Program
AVANGRID has a commercial paper program with a limit of $2 billion that is
backstopped by the AVANGRID Credit Facility (described below). As of both
June 30, 2021 and July 29, 2021, there was $0 of commercial paper outstanding.
AVANGRID Credit Facility
AVANGRID and its subsidiaries, NYSEG, RG&E, CMP, UI, CNG, SCG and BGC, each of
which are joint borrowers, have a revolving credit facility with a syndicate of
banks, or the AVANGRID Credit Facility, that provides for maximum borrowings of
up to $2.5 billion in the aggregate.
Under the terms of the AVANGRID Credit Facility, each joint borrower has a
maximum borrowing entitlement, or sublimit, which can be periodically adjusted
to address specific short-term capital funding needs, subject to the maximum
limit contained in the agreement. On June 29, 2020, we entered into an amendment
to the AVANGRID Credit Facility, which reduced AVANGRID's maximum sublimit from
$2.0 billion to $1.5 billion and added minimum sublimits for each joint borrower
other than AVANGRID. Under the AVANGRID Credit Facility, each of the borrowers
will pay an annual facility fee that is dependent on their credit rating. As of
June 30, 2021, the facility fees ranged from 10.0 to 17.5 basis points. The
AVANGRID Credit Facility matures on June 29, 2024. As of both June 30, 2021 and
July 29, 2021, we had no borrowings outstanding under this credit facility.
Since the AVANGRID credit facility is also a backstop to the AVANGRID commercial
paper program, the total amount available under the facility as of both June 30,
2021 and July 29, 2021, was $2,500 million.
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2020 Credit Facility
During 2020, we entered into a revolving credit agreement with several lenders,
or the 2020 Credit Facility, that provides maximum borrowings up to $500
million. The 2020 Credit Facility was scheduled to mature on June 28, 2021. We
terminated this facility on April 28, 2021.
Iberdrola Group Credit Facility
AVANGRID has a credit facility with Iberdrola Financiacion, S.A.U., a company of
the Iberdrola Group. The facility has a limit of $500 million and matures on
June 18, 2023. AVANGRID pays a facility fee of 10.5 basis points annually. As of
both June 30, 2021 and July 29, 2021, we had no borrowings outstanding under
this credit facility.
Capital Resources
On May 18, 2021, we issued 77,821,012 shares of common stock in two private
placements. Iberdrola purchased 63,424,125 shares and Hyde Member LLC, a
Delaware limited liability company and a wholly owned subsidiary of Qatar
Investment Authority, purchased 14,396,887 shares of our common stock, par value
$0.01 per share, at the purchase price of $51.40 per share, which was the
closing price of the shares of our common stock on the NYSE as of May 11, 2021.
Proceeds of the private placements were $4,000 million. $3,000 million of the
proceeds were used to repay the Iberdrola Loan. After the effect of the private
placements, Iberdrola retained its 81.5% ownership interest in AVANGRID.
Capital Requirements
We expect to fund our capital requirements, including, without limitation, any
quarterly shareholder dividends and capital investments primarily from the cash
provided by operations of our businesses and through the access to the capital
markets in the future. We have revolving credit facilities, as described above,
to fund short-term liquidity needs and we believe that we will continue to have
access to the capital markets as long-term growth capital is needed. To date,
the Company has not experienced limitations in our ability to access these
sources of liquidity in connection with the COVID-19 pandemic. While taking into
consideration the current economic environment, management expects that we will
continue to have sufficient liquidity and financial flexibility to meet our
business requirements.
We expect to incur approximately $1.5 billion in capital expenditures through
the remainder of 2021.
Cash Flows
Our cash flows depend on many factors, including general economic conditions,
regulatory decisions, weather, commodity price movements and operating expense
and capital spending control.
The following is a summary of the cash flows by activity for the six months
ended June 30, 2021 and 2020, respectively:
                                                                                 Six Months Ended
                                                                                     June 30,
                                                                            2021                    2020
                                                                                   (in millions)
Net cash provided by operating activities                            $        851              $        884
Net cash used in investing activities                                      (1,001)                   (1,352)
Net cash provided by financing activities                                     416                       335
Net increase (decrease) in cash, cash equivalents and
restricted cash                                                      $        266              $       (133)


Operating Activities
The cash from operating activities for the six months ended June 30, 2021
compared to the six months ended June 30, 2020 decreased by $33 million,
primarily attributable to higher operations and maintenance expenses in the
period.
Investing Activities
For the six months ended June 30, 2021, net cash used in investing activities
was $1,001 million, which was comprised of $1,264 million of capital
expenditures partially offset by $231 million of other investments and equity
method investments, $21 million of contributions in aid of construction, $5
million of proceeds from the sale of assets and $4 million of distributions
received from equity method investments.
For the six months ended June 30, 2020, net cash used in investing activities
was $1,352 million, which was comprised of $1,345 million of capital
expenditures and $37 million of other investments and equity method investments,
partially offset by $19 million of contributions in aid of construction and $8
million of proceeds from the sale of assets.
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Financing Activities
For the six months ended June 30, 2021, financing activities provided $416
million in cash reflecting primarily proceeds from private placements of $4
billion in connection with share issuance and contribution from non-controlling
interests of $10 million in the period, offset by a net decrease in non-current
debt with affiliate and current notes payable of $3.3 billion, dividends of $272
million and distributions to non-controlling interests of $5 million.
For the six months ended June 30, 2020, financing activities provided $335
million in cash reflecting primarily a contribution from non-controlling
interests of $312 million and a net increase in non-current debt and current
notes payable of $308 million, offset by distributions to non-controlling
interests of $4 million, payments on finance leases of $6 million and dividends
of $272 million.
Off-Balance Sheet Arrangements
There have been no material changes in our off-balance sheet arrangements during
the six months ended June 30, 2021 as compared to those reported for the fiscal
year ended December 31, 2020 in our Form 10-K.
Contractual Obligations
As part of the NECEC project, NECEC Transmission LLC and/or CMP committed to
approximately $90 million of future payments to support various programs in the
state of Maine. There have been no other material changes in contractual and
contingent obligations during the six months ended June 30, 2021 as compared to
those reported for the fiscal year ended December 31, 2020 in our Form 10-K.
Critical Accounting Policies and Estimates
We have prepared the accompanying condensed consolidated financial statements
provided herein in accordance with U.S. GAAP. In preparing the accompanying
condensed consolidated financial statements, our management has made certain
estimates and assumptions that affect the reported amounts of assets,
liabilities, stockholders' equity, revenues and expenses and the disclosures
thereof. The accounting policies and related risks described in our Form 10-K
are those that depend most heavily on these judgments and estimates. We continue
to utilize information reasonably available to us; however, the business and
economic uncertainty resulting from COVID-19 has made such estimates and
assumptions more difficult to assess and calculate. Impacted estimates include,
but are not limited to, evaluations of certain long-lived assets and goodwill
for impairment, expected credit losses and potential regulatory deferral or
recovery of certain costs. While there were no material impacts from COVID-19 on
financial results, actual results could differ from those estimates, which could
result in material impacts to our consolidated financial statements in future
reporting periods. The other notable changes to the significant accounting
policies described in our Form 10-K for the fiscal year ending December 31,
2020, are with respect to our adoption of the new accounting pronouncements
described in the Note 3 of our condensed consolidated financial statements for
the six months ended June 30, 2021.
New Accounting Standards
We review new accounting standards to determine the expected financial effect,
if any, that the adoption of each such standard will have. The new accounting
pronouncements we have adopted as of January 1, 2021, and reflected in our
condensed consolidated financial statements are described in Note 3 of our
condensed consolidated financial statements for the six months ended June 30,
2021.
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           CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains a number of forward-looking
statements. Forward-looking statements may be identified by the use of
forward-looking terms such as "may," "will," "should," "would," "could," "can,"
"expect(s)," "believe(s)," "anticipate(s)," "intend(s)," "plan(s),"
"estimate(s)," "project(s)," "assume(s)," "guide(s)," "target(s),"
"forecast(s)," "are (is) confident that" and "seek(s)" or the negative of such
terms or other variations on such terms or comparable terminology. Such
forward-looking statements include, but are not limited to, statements about our
plans, objectives and intentions, outlooks or expectations for earnings,
revenues, expenses or other future financial or business performance, strategies
or expectations, or the impact of legal or regulatory matters on business,
results of operations or financial condition of the business and other
statements that are not historical facts. Such statements are based upon the
current reasonable beliefs, expectations, and assumptions of our management and
are subject to significant risks and uncertainties that could cause actual
outcomes and results to differ materially. Important factors are discussed and
should be reviewed in our Form 10-K and other subsequent filings with the SEC.
Specifically, forward-looking statements include, without limitation:
•the future financial performance, anticipated liquidity and capital
expenditures;
•actions or inactions of local, state or federal regulatory agencies;
•the ability to recruit and retain a highly qualified and diverse workforce in
the competitive labor market;
•changes in amount, timing or ability to complete capital projects;
•adverse developments in general market, business, economic, labor, regulatory
and political conditions including, without limitation, the impacts of
inflation, deflation and changing prices and labor costs;
•the impacts of climate changed, fluctuations in weather patterns and extreme
weather events;
•technological developments;
•the impact of extraordinary external events, such as any cyber breaches or
other incidents, grid disturbances, acts of war or terrorism, civil or social
unrest, natural disasters, pandemic health events or other similar occurrences;
•the impact of any change to applicable laws and regulations affecting the
ownership and operations of electric and gas utilities and renewable energy
generation facilities, respectively, including, without limitation, those
relating to the environment and climate change, taxes, price controls,
regulatory approval and permitting;
•our ability to close the proposed Merger, the anticipated timing and terms of
the proposed Merger, our ability to realize the anticipated benefits of the
proposed Merger and our ability to manage the risks of the proposed Merger;
•the COVID-19 pandemic, its impact on business and economic conditions and the
pace of recovery from the pandemic;
•the implementation of changes in accounting standards;
•adverse publicity or other reputational harm; and
•other presently unknown unforeseen factors.
Should one or more of these risks or uncertainties materialize, or should any of
the underlying assumptions prove incorrect, actual results may vary in material
respects from those expressed or implied by these forward-looking statements.
You should not place undue reliance on these forward-looking statements. We do
not undertake any obligation to update or revise any forward-looking statements
to reflect events or circumstances after the date of this report, whether as a
result of new information, future events or otherwise, except as may be required
under applicable securities laws. Other risk factors are detailed from time to
time in our reports filed with the SEC, and we encourage you to consult such
disclosures.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in our market risk during the six months
ended June 30, 2021, as compared to those reported for the fiscal year ended
December 31, 2020 in our Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer, or CEO,
and our Chief Financial Officer, or CFO, has evaluated the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a- 15(e) and 15d-
15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)), as
of the end of the period covered by this Quarterly Report on Form 10-Q. Based on
such evaluation, our CEO and CFO have concluded that as of such date, our
disclosure controls and procedures were effective.
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Changes in Internal Control
There has been no change in our internal control over financial reporting
identified in management's evaluation pursuant to Rules 13a-15(d) or 15d-15(d)
of the Exchange Act during the period covered by this Quarterly Report on Form
10-Q that materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives. In addition, the design of disclosure controls and procedures must
reflect the fact that there are resource constraints and that management is
required to apply judgment in evaluating the benefits of possible controls and
procedures relative to their costs.
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