AVANGRID, INC. 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 ofDecember 31, 2019 and 2018, and for the three years endedDecember 31, 2019 , included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSecurities and Exchange Commission , or theSEC , onMarch 2, 2020 , 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 theSEC . OverviewAVANGRID is a leading sustainable energy company with approximately$35 billion in assets and operations in 24 states.AVANGRID has 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 inNew York andNew England . Avangrid Renewables owns and operates 8.1 gigawatts of electricity capacity, primarily through wind power, with a presence in 22 states acrossthe United States .AVANGRID supports the achievement of theSustainable Development Goals approved by the member states of theUnited Nations , and was named among the World's Most Ethical companies in 2019 by theEthisphere Institute .AVANGRID employs approximately 6,600 people.Iberdrola S.A. , a corporation (sociedad anónima) organized under the laws of the Kingdom ofSpain , a worldwide leader in the energy industry, directly owns 81.5% of outstanding shares ofAVANGRID common stock.AVANGRID's primary business is ownership of its operating businesses, which are described below. Our direct, wholly-owned subsidiaries includeAvangrid Networks, Inc. , or Networks, andAvangrid Renewables Holdings, Inc. , or ARHI. ARHI in turn holds subsidiaries includingAvangrid 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 inNew York ,Maine ,Connecticut andMassachusetts , delivering electricity to approximately 2.3 million electric utility customers and delivering natural gas to approximately 1.0 million natural gas public utility customers as ofMarch 31, 2020 . Networks, aMaine corporation, holds our 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 upstateNew York geographic area; •Rochester Gas and Electric Corporation , or RG&E, which serves electric and natural gas customers within a nine-county region in westernNew York , centered around Rochester; •The United Illuminating Company , or UI, which serves electric customers in southwesternConnecticut ; •Central Maine Power Company , or CMP, which serves electric customers in central and southernMaine ;
• The
customers in Connecticut ;
•
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 .
Through Renewables, we had a combined wind, solar and thermal installed capacity
of 8,104 megawatts, or MW, as of March 31, 2020 , including Renewables' share of
joint projects, of which 7,339 MW was installed wind capacity. As of March 31,
2020 , approximately 68% of the capacity was contracted for an average period of
9.5 years, and 12% of installed capacity was hedged. Being among the top three
largest wind operators in the United States based on installed capacity as of
March 31, 2020 , Renewables strives to lead the transformation of the U.S. energy
industry to a sustainable, competitive, clean energy future. Renewables
currently operates 62 wind farms and four solar facilities in 21 states across
the United States .
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In recent weeks, the continued spread of the novel Coronavirus, or COVID-19, has led to global economic disruption and volatility in financial markets.AVANGRID is one of the many companies providing essential services during this national emergency. We have implemented business continuity and emergency response plans to continue to provide service to our customers and support our operational needs. We continue to monitor developments affecting both our workforce and our customers and will take precautions that we determine are necessary or appropriate. In addition to measures to protect our workforce and critical operations,AVANGRID is actively monitoring 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. This is a rapidly evolving situation that could lead to extended disruption of economic activity in our markets, which could adversely affect our business. 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 a material impact to our business, results of operations or financial condition. For more information, see the risk factor under the heading "The outbreak of COVID-19 and its impact on business and economic conditions could negatively affect our business, results of operations or financial condition." in Item 1A. Risk Factors in this Form 10-Q. Summary of Results of Operations Our operating revenues decreased by 3%, from$1,842 million for the three months endedMarch 31, 2019 to$1,789 million for the three months endedMarch 31, 2020 . Networks business revenues decreased mainly due to the pass-through to customers of decreased purchased power and gas driven by lower commodity prices and volumes in the period. Renewables had an increase in revenues mainly due to an increase in wind generation from existing and new capacity along with favorable mark to market, or MtM, changes on energy derivative transactions entered into for economic hedging purposes in the period. Net income attributable toAVANGRID increased by 11% from$217 million for the three months endedMarch 31, 2019 to$240 million for the three months endedMarch 31, 2020 , primarily due to increased revenue from Renewables in the period. Adjusted net income (a non-GAAP financial measure) increased by 8% from$219 million for the three months endedMarch 31, 2019 to$236 million for the three months endedMarch 31, 2020 . The increase is primarily due to a$41 million increase in Renewables as a result of increases in production and income tax benefits in the period, offset by a$3 million decrease in Networks driven by increased depreciation expense and a$21 million decrease in Corporate mainly driven by unfavorable income tax expense. For additional information and reconciliation of the non-GAAP adjusted net income to net income attributable toAVANGRID , 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 are actively participating in these debates 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 endedDecember 31, 2019 . Customer Disconnections Due to the COVID-19 pandemic, all of our regulated utilities suspended customer disconnections duringMarch 2020 . InNew York , we have voluntarily suspended disconnections for non-payment. InConnecticut andMaine , disconnections for non-payment have been suspended per regulatory orders from PURA and the MPUC, respectively. NYSEG and RG&E Rate Cases OnMay 20, 2019 , NYSEG and RG&E filed rate cases with theNew York State Public Service Commission , or NYPSC, for new tariffs. The effective date of new tariffs, assuming an approximately 11-month suspension period, will beApril 20, 2020 . The proposed rates facilitate the companies' transition to a cleaner energy future while allowing for important initiatives such as vegetation management, hardening/resiliency and emergency preparedness. The companies are requesting delivery revenues to be based on a 9.50% ROE and 50% equity ratio. The below table provides a summary of the proposed delivery rate increases, delivery revenue percentages and total revenue percentages for all four businesses in the initial filing: 46 --------------------------------------------------------------------------------
Requested Revenue Increase Delivery Revenue Total Revenue
Utility (Millions) % %
NYSEG Electric $ 156.7 20.4 % 10.4 %
NYSEG Gas $ 6.3 3.0 % 1.4 %
RG&E Electric $ 31.7 7.0 % 4.1 %
RG&E Gas $ 5.8 3.3 % 1.4 %
Staff of the Department of Public Service , or NYDPS Staff, and other parties
filed responsive testimony on September 15, 2019 . The NYDPS Staff is
recommending an 8.2% ROE and 48% equity and the following rate
increases/decreases: NYSEG electric a rate increase of $76.7 million , NYSEG Gas
a rate decrease of $15.9 million , RG&E Electric a rate increase of $0.7 million
and RG&E Gas a rate decrease of $22.5 million . The NYDPS Staff is also
recommending NYSEG credit the environmental reserve by $31.1 million due to the
legal rulings in 2017 and 2018 that denied insurance claims against OneBeacon
and Century Indemnity in an insurance lawsuit. The companies entered into
settlement discussion with the NYDPS Staff and other parties in October 2019 . On
February 26, 2020 , the companies filed notice with the NYPSC that an agreement
in principle has been reached among the companies, the NYDPS Staff and certain
other parties to the matter.
As a result of the COVID-19 pandemic, NYSEG and RG&E proposed additional time
for settlement negotiations, including consideration of the impacts of the
COVID-19 pandemic. The suspension date would be extended through September 13,
2020 , subject to a "make-whole" provision that would keep NYSEG, RG&E and their
customers in the same position they would have been absent the extension. The
"make whole" provision covers the period back to April 17, 2020 .
On March 23, 2020 , the Public Utility Law Project (a party to the cases)
submitted a letter motion requesting that the NYPSC administrative law judges
assigned to preside over the rate cases require NYSEG and RG&E to pause
settlement discussions and to provide new and accurate calculations based on the
current and future expected economic impact of COVID-19. On March 31, 2020 , the
NYSEG and RG&E, Multiple Intervenors (a party to the cases), and NYDPS staff
each filed a response in opposition to the motion. On April 7, 2020 , the NYPSC
administrative law judges issued a Ruling Denying Public Utility Law Project's
Motion, allowing settlement negotiations to continue. On April 22, 2020 , the
Public Utility Law Project and AARP filed an interlocutory appeal requesting
that the NYPSC review the determination of the administrative law judges.
NYSEG, RG&E, NYPSC staff and other parties are continuing settlement
negotiations and plan to address impacts of the COVID-19 pandemic. We cannot
predict the outcome of these proceedings.
CMP Rate Case
In an order issued on February 19, 2020 , the MPUC authorized an increase in
CMP's distribution revenue requirement of $17 million , or approximately 7%,
based on an allowed ROE of 9.25% and a 50% equity ratio. The rate increase is
effective March 1, 2020 . The MPUC also imposed a 1.00% ROE reduction (to 8.25%)
for management efficiency associated with CMP's customer service performance
following the implementation 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 period of 18 consecutive months with measurement commencing on
March 1, 2020 . The order provides additional funding for staffing increases,
vegetation management programs and storm restoration costs, while retaining the
basic tiered structure for storm cost recovery implemented in the 2014
stipulation. The MPUC order also retains the revenue decoupling mechanism
implemented in 2014. The order denies CMP's request to increase rates for higher
costs associated with services provided by its affiliates and will instead
initiate a management audit to assess the quality of these services as well as
the impacts of the AVANGRID management structure on the quality of CMP's
customer service.
CMP Metering and Billing Investigation
On January 9, 2020 the hearing examiners issued their report whereby they
recommended that the Commission find that the evidence in the record shows that
there is no systemic problem within CMP's metering and billing systems that has
caused erroneous high usage on customers' bills. Instead, the evidence-including
the detailed forensic audit conducted by an independent third-party
auditor-demonstrates that CMP's metering and billing systems have been, and
continue to be, recording and transmitting customer usage data accurately, and,
with the exception of discrete billing calculation and presentation issues,
customers' billed amounts have been accurate. On January 30, 2020 , the MPUC
Commissioners deliberated and based on the verbal discussion, the Commissioners
indicated 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. The
Commissioners were critical of CMP finding that CMP failed to implement proper
testing of the SmartCare system prior to go-live; CMP's implementation of
SmartCare was imprudent; CMP's SmartCare implementation experienced an
unacceptable number of billing errors, delayed or estimated bills, bill
presentment issues and unreasonable time required to address these issues; and
47
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the implementation issues were compounded by inadequate staffing, resulting in
the inability of customers to contact a CMP representative. In its February 19,
2020 order in the CMP's distribution rate case proceeding discussed above and
the February 24, 2020 order in the metering and billing investigation, the MPUC
imposed a reduction of 100 basis points in ROE, as a management efficiency
adjustment, to address concerns with CMP's customer service performance
following the implementation 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 period of 18 consecutive months with measurement commencing on
March 1, 2020 . On April 27, 2020 , the MPUC issued an order requiring that CMP
pay for the costs of the metering, billing, and customer service practices
audit, which were less than $1 million .
CMP Notice of Investigation - Disconnection Notices
On January 22, 2020 , the MPUC initiated an investigation into certain customer
notices of CMP that reference service disconnection. The purpose of this
investigation is (1) to determine whether CMP provided customers notices that
violated Commission rules or that contained incorrect or misleading information
and, (2) if it did, to order CMP to show cause why it should not be subject to
administrative penalties for those violations. CMP has responded to data
requests and party testimony was filed on March 2, 2020 . Hearings have been
suspended for settlement discussions which began in March and are ongoing. On
April 27, 2020 , CMP filed a proposed stipulation to resolve all issues in this
proceeding and requested that the Hearing Examiner convene a settlement
conference to discuss the proposed Stipulation. A settlement conference was held
on April 30, 2020 and May 5, 2020 . We cannot predict the outcome of this
proceeding.
CMP Annual Compliance Filing
On March 31, 2020 , CMP submitted its annual compliance filing in accordance with
the Commission's February 19, 2020 decision in Public Utilities Commission ,
Investigation into Rates and Revenue Requirements of Central Maine Power
Company . In its filing, CMP proposes an overall increase in its distribution
delivery revenues of $14.5 million , or 5.56% over current rates, effective July
1, 2020 . This increase is due primarily to storm costs, RDM and excess deferred
income taxes. The MPUC will review CMP's filing and hearings will be held in the
second quarter of 2020. Discovery is underway. We cannot predict the outcome of
this proceeding.
New York State Department of Public Service Investigation of the Preparation for
and Response to the March 2018 Winter Storms
In March 2018 , following two severe winter storms that impacted more than one
million electric utility customers in New York , including 520,000 NYSEG and
RG&E customers, the NYDPS commenced a comprehensive investigation of the
preparation and response to those events by New York's major electric utility
companies. The investigation was expanded in the spring of 2018 to include other
2018 New York spring storm events.
On April 18, 2019 , the NYDPS staff issued a report (the 2018 Staff Report) of
the findings from their investigation. The 2018 Staff Report identifies 94
recommendations for corrective actions to be implemented in the utilities
Emergency Response Plans (ERP). The report also identified potential violations
by several of the utilities, including NYSEG and RG&E.
Also on April 18, 2019 , the NYPSC issued an Order Instituting Proceeding and to
Show Cause directed to all major electric utilities in New York , including NYSEG
and RG&E. The order directs the utilities, including NYSEG and RG&E, to show
cause why the NYPSC should not pursue civil penalties, and/or administrative
penalties for the apparent failure to follow their respective ERPs as approved
and mandated by the NYPSC. The NYPSC also directs the utilities, within 30 days,
to address whether the NYPSC should mandate, reject or modify in whole or in
part, the 94 recommendations contained in the 2018 Staff Report. On May 20,
2019 , NYSEG and RG&E responded to the portion of the Order to Show Cause with
respect to the recommendations contained in the 2018 Staff Report. The
Commission granted the companies a series of extensions to respond to the
portion of the Order to Show Cause with respect to why the Commission should not
pursue a penalty action. A petition requesting Commission approval of a joint
settlement agreement was filed with the Commission on December 17, 2019 . On
February 6, 2020 , the Commission approved the joint settlement agreement, which
allows the companies to avoid litigation and provides for payment by the
companies of penalty of $10.5 million .
NYPSC directs Counsel to commence Judicial Enforcement Proceeding against NYSEG
On April 18, 2019 , the NYPSC issued an Order Directing Counsel to the Commission
to commence a special proceeding or an action in New York State Supreme Court to
stop and prevent ongoing future violations by NYSEG of NYPSC regulations and
orders. On December 24, 2019 , the Commission filed a verified petition to
commence the action against NYSEG. At the same time, NYSEG and the Commission
settled the causes of action asserted in the verified petition and entered into
a consent and stipulation and also submitted a joint motion to the court
requesting that the court approve and enter a consent order and judgment
reflecting the settlement. The consent order and judgment were issued by the
court on January 24, 2020 .
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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
$152 million and $153 million , respectively, for this item at March 31, 2020 and
December 31, 2019 .
In 2017, audits of the power tax regulatory assets were commenced by the NYPSC
and MPUC. 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 2020. In
January 2018 , the MPUC published the Power Tax audit report with respect to CMP,
which indicated the auditor was unable to verify the asset "acquisition value"
used to calculate the Power Tax regulatory asset. The audit report requires that
CMP must provide support for the beginning balance of the regulatory assets or
it will be unable to recover the value of the assets, which is approximately $11
million , excluding carrying costs. CMP responded to the audit report in its rate
case filing by providing additional acquisition value support and, therefore,
requested full recovery of the Power Tax regulatory asset. MPUC staff expressed
concerns about the value CMP has attributed to this issue. The MPUC also had an
outside firm conduct an audit of CMP's filing and acquisition values, and the
auditor found CMP's information was reasonable. In September 2019 , CMP filed a
report in response to the audit report and addressed MPUC staff concerns. On
December 17, 2019 , CMP filed a stipulation with the MPUC providing for recovery
of the Power Tax regulatory asset and adjusting the carrying costs values for
the period of July 1, 2017 through June 30, 2019 . The MPUC approved the
stipulation on January 21, 2020 and CMP will begin collecting the Power Tax
Regulatory asset beginning in July 2020 over 32.5 years.
New England Clean Energy Connect
The New England Clean Energy Connect, or NECEC, transmission project includes a
145-mile transmission line linking the electrical grids in Québec, Canada and
New England . The project, which has an estimated cost of approximately $950
million , would add 1,200 MW of transmission capacity to supply New England with
power from reliable hydroelectric generation. On March 13, 2020 , the FERC
approved the transfer of jurisdictional facilities from CMP to NECEC
Transmission LLC . Regulatory approval from the MPUC is expected to be received
in the second quarter of 2020. The Maine Department of Environmental Protection ,
or MDEP, draft approval was issued on March 13, 2020 , with final MDEP approval
anticipated by the end of April 2020 . Construction of the project is expected to
begin in the third quarter after the receipt of a permit from the Army Corps of
Engineers .
In 2019 certain opponents of the NECEC began an effort to have a referendum
ballot question to enact legislation (i.e., a Maine Citizens Initiative)
entitled "Resolve, To Reject the New England Clean Energy Transmission Project ,"
which, if passed by Maine voters, would require the MPUC amend its May 3, 2019
"Order Granting Certificate of Public Convenience and Necessity and Approving
Stipulation" and deny the certificate of public convenience and necessity for
the NECEC transmission project (the NECEC Referendum). On March 4, 2020 , the
Maine Secretary of State qualified the NECEC Referendum for the ballot in the
November 3, 2020 general election in Maine . A challenge of the Secretary of
State's determination that the NECEC Referendum qualified for the ballot was
filed in the Maine Superior Court on March 13, 2020 , alleging that the
proponents violated Maine's signature gathering laws. The Superior Court upheld
the Maine Secretary of State's determination and the matter has been appealed to
the Maine Supreme Judicial Court. We expect a final decision with respect to
this challenge on or before May 13, 2020 . The company cannot predict the outcome
of this proceeding and, if submitted to Maine voters, the NECEC Referendum.
49
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Results of Operations
The following tables set forth financial information by segment for each of the
periods indicated.
Three Months Ended Three Months Ended
March 31, 2020 March 31, 2019
Total Networks Renewables Other(1) Total Networks Renewables Other(1)
(in millions)
Operating Revenues $ 1,789 $ 1,461 $ 328 $ - $ 1,842 $ 1,604 $ 242 $ (4 )
Operating Expenses
Purchased power, natural
gas and fuel used 475 394 81 - 563 526 37 -
Operations and
maintenance 570 466 109 (5 ) 553 468 87 (2 )
Depreciation and
amortization 251 148 103 - 222 134 88 -
Taxes other than income
taxes 166 144 22 - 163 145 17 1
Total Operating Expenses 1,462 1,152 315 (5 ) 1,501 1,273 229 (1 )
Operating Income 327 309 13 5 341 331 13 (3 )
Other Income (Expense)
Other income (expense) (3 ) (2 ) 6 (7 ) (7 ) (1 ) (3 ) (3 )
Earnings (losses) from
equity method
investments (6 ) 2 (8 ) - 1 3 (2 ) -
Interest expense, net of
capitalization (76 ) (68 ) (1 ) (7 ) (78 ) (68 ) (4 ) (5 )
Income (Loss) Before
Income Tax 242 241 10 (9 ) 257 265 4 (11 )
Income tax expense
(benefit) 12 43 (30 ) (1 ) 41 64 1 (24 )
Net Income (Loss) 230 198 40 (8 ) 216 201 3 13
Net loss (income)
attributable to
noncontrolling interests 10 (1 ) 11 - 1 - 1 -
Net Income (Loss)
Attributable to
Avangrid, Inc. $ 240 $ 197 $ 51 $ (8 ) $ 217 $ 201 $ 4 $ 13 (1) "Other" represents Corporate and intersegment eliminations.
Comparison of Period to Period Results of Operations Three Months EndedMarch 31, 2020 Compared to Three Months EndedMarch 31, 2019 Operating Revenues Our operating revenues decreased by$53 million , or 3%, from$1,842 million for the three months endedMarch 31, 2019 to$1,789 million for the three months endedMarch 31, 2020 , as detailed by segment below: Networks Operating revenues decreased by$143 million , or 9%, from$1,604 million for the three months endedMarch 31, 2019 to$1,461 million for the three months endedMarch 31, 2020 . Electricity and gas revenues increased by$4 million , primarily due to the impact of increased customer rates in the three months endedMarch 31, 2020 compared to the same period of 2019, offset by a decrease of$10 million from pension deferral write-off and$1 million of other decreases. Electricity and gas revenues changed due to the following items that have offsets within the income statement: decrease of$132 million in purchased power and purchased gas in the same period (offset in purchased power) and decrease of$4 million due to flow through items (offset within operations and maintenance). Renewables Operating revenues increased by$86 million , or 36%, from$242 million for the three months endedMarch 31, 2019 , to$328 million for the three months endedMarch 31, 2020 . The increase in operating revenues was primarily due to an increase of$63 million with wind generation output increasing 1,371 GWh from existing and new capacity in the current period, favorable mark to market, or MtM, changes of$61 million on energy derivative transactions entered into for economic hedging purposes, offset by a decrease of$6 million in merchant pricing and$32 million decrease in thermal revenue driven by lower volumes and average prices in the period. 50 --------------------------------------------------------------------------------Purchased Power , Natural Gas and Fuel Used Our purchased power, natural gas and fuel used decreased by$88 million , or 16%, from$563 million for the three months endedMarch 31, 2019 to$475 million for the three months endedMarch 31, 2020 , as detailed by segment below: Networks Purchased power, natural gas and fuel used decreased by$132 million , or 25%, from$526 million for the three months endedMarch 31, 2019 to$394 million for the three months endedMarch 31, 2020 . The decrease is primarily driven by a$131 million decrease in average commodity prices and an overall decrease in electricity and gas units procured due to a decline in heating degree days combined with a$1 million decrease in other power supply purchases in the period. Renewables Purchased power, natural gas and fuel used increased by$44 million , or 119%, from$37 million for the three months endedMarch 31, 2019 to$81 million for the three months endedMarch 31, 2020 . The increase is primarily driven by an increase of$12 million in power purchases and unfavorable MtM changes on derivatives of$46 million due to market price changes in the period, offset by a decrease of$14 million in thermal purchases driven by the decrease in volume and unit cost in the period. Operations and Maintenance Our operations and maintenance increased by$17 million , or 3%, from$553 million for the three months endedMarch 31, 2019 to$570 million for the three months endedMarch 31, 2020 , as detailed by segment below: Networks Operations and maintenance decreased by$2 million , or less than 1%, from$468 million for the three months endedMarch 31, 2019 to$466 million for the three months endedMarch 31, 2020 . The decrease is driven by a$5 million unfavorable write-off of deferred storm costs in the first quarter of 2019 which did not recur in 2020 and a$4 million decrease due to flow through items (offset within revenue). These were offset by an increase of$3 million in unplanned outage expenses, a$3 million increase due to customer service expenses for collections, customer inquiry and marketing and sales communications and$1 million of other increases. Renewables Operations and maintenance expenses increased by$22 million , or 25%, from$87 million for the three months endedMarch 31, 2019 to$109 million for the three months endedMarch 31, 2020 . The increase is primarily due to$20 million of increased costs resulting from headcount increases and higher maintenance costs which are primarily attributed to operations of new capacity. Additionally, operations and maintenance expense increased by$3 million due to insurance recoveries received in 2019. Depreciation and Amortization Depreciation and amortization for the three months endedMarch 31, 2020 was$251 million compared to$222 million for the three months endedMarch 31, 2019 , an increase of$29 million . An increase of$25 million results from plant additions in Networks and Renewables in the period and an increase of$4 million results from accelerated depreciation from the repowering of wind farms in Renewables. Other Income (Expense) and Earnings (Losses) from Equity Method Investments Other income (expense) and equity earnings (losses) decreased by$3 million from$(6) million for the three months endedMarch 31, 2019 to$(9) million for the three months endedMarch 31, 2020 . The change is primarily due to a$7 million of unfavorable equity earnings in the current period, offset by a$2 million favorable change in allowance for funds used during construction in Networks and$2 million of other. Interest Expense, Net of Capitalization Interest expense for the three months endedMarch 31, 2020 and 2019 was$76 million and$78 million , respectively. The change was primarily driven by higher capitalized interest at Renewables in the current period. Income Tax Expense The effective tax rate, inclusive of federal and state income tax, for the three months endedMarch 31, 2020 was 5.0%, which is below 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. The effective tax rate, inclusive of federal and state income tax, for the three months endedMarch 31, 2019 was 16.0%, which is lower than the 21% statutory 51 -------------------------------------------------------------------------------- federal income tax rate, predominantly due to the recognition of production tax credits associated with wind production, partially offset by discrete tax adjustments recorded during the period. Non-GAAP Financial Measures To supplement our consolidated financial statements presented in accordance withU.S. GAAP, we consider adjusted net income and adjusted earnings per share as non-GAAP financial measures that are not prepared in accordance withU.S. GAAP. The non-GAAP financial measures we use are specific toAVANGRID 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 toU.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 byAVANGRID to economically hedge market price fluctuations in related underlying physical transactions for the purchase and sale of electricity and accelerated depreciation derived from repowering of wind farms. We believe adjusted net income is more useful in understanding and evaluating actual and projected financial performance and contribution ofAVANGRID core lines of business and to more fully compare and explain our results. The most directly comparableU.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. 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 toAVANGRID , and should be considered only as a supplement toAVANGRID'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 underU.S. GAAP and should not be considered as alternatives to operating income, net income or any other performance measures determined in accordance withU.S. GAAP. The following tables provide a reconciliation between Net Income attributable toAVANGRID and Adjusted Net Income (non-GAAP) by segment for the three months endedMarch 31, 2020 and 2019, respectively: Three Months Ended March 31, 2020 Total Networks Renewables Corporate* (in millions) Net Income Attributable to Avangrid, Inc.$ 240 $ 197 $ 52 $ (8 ) Adjustments: Mark-to-market earnings - Renewables (18 ) - (18 ) - Restructuring charges 3 1 1 - Accelerated depreciation from repowering 10 - 10 - Income tax impact of adjustments (1) 2 - 2 - Adjusted Net Income (2)$ 236 $ 198 $ 46 $ (8 ) Three Months Ended March 31, 2019 Total Networks Renewables Corporate* (in millions) Net Income Attributable to Avangrid, Inc.$ 217 $ 201 $ 4 $ 13 Adjustments: Mark-to-market earnings - Renewables (3 ) - (3 ) - Accelerated depreciation from repowering 5 - 5 - Income tax impact of adjustments (1) - - - - Adjusted Net Income (2)$ 219 $ 201 $ 5 $ 13
(1) Income tax impact of adjustments: 2020 -
$(0.6) million from restructuring charges, and$(2.5) million from accelerated 52
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depreciation from repowering for the three months ended
excluding restructuring charges, accelerated depreciation derived from
repowering of wind farms and the impact from mark-to-market activities in
Renewables.
* Includes corporate and other non-regulated entities as well as intersegment
eliminations.
Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019
Adjusted net income
Our adjusted net income increased by $17 million , or 8%, from $219 million for
the three months ended March 31, 2019 to $236 million for the three months ended
March 31, 2020 . The increase is primarily due to a $41 million increase in
Renewables as a result of increase in production and income tax benefits in the
period, offset by a $3 million decrease in Networks driven by increased
depreciation expense and a $21 million decrease in Corporate mainly driven by
unfavorable income tax expense.
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 months ended March 31, 2020 and 2019, respectively:
Three Months Ended
March 31,
(in millions) 2020 2019
Networks $ 197 $ 201
Renewables 52 4
Corporate (1) (8 ) 13
Net Income $ 240 $ 217
Adjustments:
Mark-to-market earnings - Renewables (2) (18 ) (3 )
Restructuring charges (3) 3 -
Accelerated depreciation from repowering (4) 10 5
Income tax impact of adjustments 2 -
Adjusted Net Income (5) $ 236 $ 219
Three Months Ended
March 31,
2020 2019
Networks $ 0.64 $ 0.65
Renewables 0.17 0.01
Corporate (1) (0.03 ) 0.04
Net Income $ 0.78 $ 0.70
Adjustments:
Mark-to-market earnings - Renewables (2) (0.06 ) (0.01 )
Restructuring charges (3) 0.01 -
Accelerated depreciation from repowering (4) 0.03 0.02 Income tax impact of adjustments
- -
Adjusted Earnings Per Share (5) $ 0.76 $ 0.71 (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) 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 and the impact from
mark-to-market activities in Renewables.
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 and
borrowings in the investment grade debt capital markets. Continued access to
these sources of liquidity and capital are critical to
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us. Risks may increase due to circumstances beyond our control, such as a
general disruption of the financial markets and adverse economic conditions.
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 March 31, 2020 .
Liquidity Position
At March 31, 2020 and December 31, 2019 , available liquidity was approximately
$2,293 million and $2,616 million , respectively.
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 and $150 million as of March 31, 2020 and December 31, 2019 ,
respectively. Any deposit amounts are 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
the 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, both of which are described below.
The following table provides the components of our liquidity position as of
March 31, 2020 and December 31, 2019 , respectively:
As of March 31, As of December 31,
2020 2019
(in millions)
Cash and cash equivalents $ 26 $ 178
AVANGRID Credit Facility 2,500 2,500
Iberdrola Group Credit Facility 500 500
Less: borrowings (733 ) (562 )
Total $ 2,293 $ 2,616
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 March 31,
2020 and May 4, 2020 , there was $383 million and $152 million of commercial
paper outstanding, respectively.
AVANGRID Credit Facility
AVANGRID and its subsidiaries, NYSEG, RG&E, CMP, UI, CNG, SCG and BGC 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. AVANGRID's maximum sublimit is $2 billion ,
NYSEG, RG&E, CMP and UI have maximum sublimits of $400 million , CNG and SCG have
maximum sublimits of $150 million and BGC has a maximum sublimit of $40 million .
Under the AVANGRID Credit Facility, each of the borrowers will pay an annual
facility fee that is dependent on their credit rating. As of March 31, 2020 , the
facility fees range from 10.0 to 17.5 basis points. The AVANGRID Credit Facility
matures on June 29, 2024 .
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At March 31, 2020 and May 4, 2020 , we had borrowed $350 million and $0 ,
respectively, under the facility. Since the facility is also a backstop to the
AVANGRID commercial paper program, the amount available under the facility as of
March 31, 2020 and May 4, 2020 , were $1,767 million and $2,348 million ,
respectively.
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 on the
facility. As of both March 31, 2020 and May 4, 2020 , there was no outstanding
amount under this credit facility.
Capital Resources
On April 9, 2020 , AGR issued $750 million aggregate principal amount of
unsecured notes maturing in 2025 at a fixed interest rate of 3.20%.
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 a revolving credit facility, as described above,
to fund short-term liquidity needs and we believe that we will have access to
the capital markets as long-term growth capital is needed.
We expect to incur approximately $1.9 billion in capital expenditures through
the remainder of 2020.
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 three months
ended March 31, 2020 and 2019, respectively:
Three Months Ended
March 31,
2020 2019
(in millions)
Net cash provided by operating activities $ 307 $ 315
Net cash used in investing activities (749 ) (526 )
Net cash provided by financing activities 290 206
Net decrease in cash, cash equivalents and restricted cash
Operating Activities The cash from operating activities for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 decreased by$8 million , primarily attributable to higher operations and maintenance expenses in the period. Investing Activities For the three months endedMarch 31, 2020 , net cash used in investing activities was$749 million , which was comprised of$742 million of capital expenditures and$23 million of other investments and equity method investments, partially offset by$7 million of contributions in aid of construction and$6 million of proceeds from the sale of assets. For the three months endedMarch 31, 2019 , net cash used in investing activities was$526 million , which was comprised of$425 million of capital expenditures and other investments and equity method investments of$116 million , partially offset by$10 million of contributions in aid of construction and$2 million of cash distributions from equity method investments. Financing Activities For the three months endedMarch 31, 2020 , financing activities provided$290 million in cash reflecting primarily a contribution from non-controlling interests of$244 million and a net increase in non-current debt and current notes payable of$184 million , offset by distributions to non-controlling interests of$1 million , payments on finance leases of$1 million and dividends of$136 million . For the three months endedMarch 31, 2019 , financing activities provided$206 million in cash reflecting primarily an issuance of notes/bonds with net proceeds of$194 million , contributions from non-controlling interests of$3 million and a net 55 -------------------------------------------------------------------------------- increase in non-current debt and current notes payable of$168 million , offset by distributions to non-controlling interests of$3 million , payments on capital leases of$21 million and dividends of$135 million . Off-Balance Sheet Arrangements There have been no material changes in our off-balance sheet arrangements during the three months endedMarch 31, 2020 as compared to those reported for the fiscal year endedDecember 31, 2019 in our Form 10-K. Contractual Obligations There have been no material changes in contractual and contingent obligations during the three months endedMarch 31, 2020 as compared to those reported for the fiscal year endedDecember 31, 2019 in our Form 10-K. Critical Accounting Policies and Estimates The accompanying condensed consolidated financial statements provided herein have been prepared in accordance withU.S. GAAP. In preparing the accompanying condensed consolidated financial statements, our management has applied accounting policies and made certain estimates and assumptions that affect the reported amounts of assets, liabilities, stockholders' equity, revenues and expenses and the disclosures thereof. While we believe that these policies and estimates used are appropriate, actual future events can and often do result in outcomes that can be materially different from these estimates. The accounting policies and related risks described in our Form 10-K are those that depend most heavily on these judgments and estimates. As ofMarch 31, 2020 , the only notable changes to the significant accounting policies described in our Form 10-K for the fiscal year endingDecember 31, 2019 , are with respect to our adoption of the new accounting pronouncements described in the Note 3 of our condensed consolidated financial statements for the three months endedMarch 31, 2020 . New Accounting Standards We review new accounting standards to determine the expected financial impact, if any, that the adoption of each such standard will have. The new accounting pronouncements that we have adopted as ofJanuary 1, 2020 , and reflected in our condensed consolidated financial statements are described in Note 3 of our condensed consolidated financial statements for the three months endedMarch 31, 2020 . There have been no other material changes to the significant accounting policies described in our Form 10-K for the fiscal year endedDecember 31, 2019 , except for those described in Note 3 resulting from the adoption of new authoritative accounting guidance issued by FASB. 56 -------------------------------------------------------------------------------- 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 theSEC . 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;
• success in retaining or recruiting our officers, key employees or directors;
• changes in levels or timing of capital expenditures;
• adverse developments in general market, business, economic, labor,
regulatory and political conditions;
• fluctuations in weather patterns;
• technological developments;
• the impact of any cyber breaches or other incidents, grid disturbances,
acts of war or terrorism, natural disasters or pandemic health events or
other similar occurrences;
• the impact of any change to applicable laws and regulations affecting
operations, including those relating to the environment and climate
change, taxes, price controls, regulatory approval and permitting;
• the implementation of changes in accounting standards; 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 theSEC , 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 three months endedMarch 31, 2020 , as compared to those reported for the fiscal year endedDecember 31, 2019 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. 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 57 -------------------------------------------------------------------------------- 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. 58
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