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, 2020 and 2019, and for the three years endedDecember 31, 2020 , included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSecurities and Exchange Commission , or theSEC , onMarch 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 theSEC . OverviewAVANGRID is one of the leading sustainable energy companies inthe 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 guideAVANGRID , 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 inNew York andNew England . Avangrid Renewables owns and operates 8.6 gigawatts of electricity capacity, primarily through wind and solar 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 , was named among the World's Most Ethical companies in 2021 for the third consecutive year by theEthisphere Institute and is listed byForbes andJust Capital as one of the 2021 Just 100, an annual ranking of the most justU.S. public companies.AVANGRID employs approximately 7,000 people.Iberdrola S.A. , orIberdrola , a corporation (sociedad anónima) organized under the laws of the Kingdom ofSpain , a worldwide leader in the energy industry, directly owns 81.5% of the outstanding shares ofAVANGRID common stock.AVANGRID's primary businesses 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 utility customers as ofSeptember 30, 2021 . Networks, aMaine 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 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 aroundRochester ; •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 Southern Connecticut Gas Company, or SCG, which serves natural gas customers inConnecticut ; •Connecticut Natural Gas Corporation, or CNG, which serves natural gas customers inConnecticut ; •The Berkshire Gas Company, or BGC, which serves natural gas customers in westernMassachusetts ; and •Maine Natural Gas Corporation, or MNG, which serves natural gas customers in several communities in central and southernMaine . Renewables has a combined wind, solar and thermal installed capacity of 8,594 megawatts, or MW, as ofSeptember 30, 2021 , including Renewables' share of joint projects, of which 7,766 MW was installed wind capacity. As ofSeptember 30, 2021 , approximately 75% of the capacity was contracted for an average period of approximately 9 years. We have hedged 12% 50 -------------------------------------------------------------------------------- of estimated production for the remainder of the year. Being among the top three largest wind operators inthe United States based on installed capacity as ofSeptember 30, 2021 , Renewables strives to lead the transformation of theU.S. energy industry to a sustainable, competitive, clean energy future. Renewables installed capacity includes 66 wind farms and five solar facilities in 21 states acrossthe United States . Texas Weather Event DuringFebruary 2021 ,Texas and the surrounding region experienced unprecedented extreme cold weather, resulting in outages impacting millions in the state. Avangrid Renewables safely operated ourTexas wind generation facilities during this event meeting all of our delivery obligations inTexas and producing excess energy that was sold based on the rules established at the time by theEnergy Reliability Council of Texas , orERCOT . If the received payments are subject to adjustments byERCOT , it could adversely affect our results of operations. In connection with the Texas Weather Event, more than 150 defendants including certain Renewables subsidiaries inTexas were named in a civil petition filed inTexas 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 inTexas state court inApril 2021 naming more than a hundred defendants including certain Renewables subsidiaries inTexas based on similar theories of liability. We cannot predict the outcome of these matters. Proposed Merger with PNMR OnOctober 20, 2020 ,AVANGRID , PNM Resources, Inc., aNew Mexico corporation, or PNMR, andNM Green Holdings, Inc. , aNew Mexico corporation and wholly-owned subsidiary ofAVANGRID , 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 ofAVANGRID , or the Merger. PNMR is a publicly-owned holding company with two regulated utilities providing electricity and electric services inNew Mexico andTexas . PNMR's electric utilities are thePublic Service Company of New Mexico and theTexas-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 theU.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 byAVANGRID , Merger Sub, PNMR or any wholly-owned subsidiary ofAVANGRID 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 whichIberdrola has unilaterally agreed to provide toAVANGRID , or arrange the provision toAVANGRID of, funds to the extent necessary forAVANGRID to consummate the Merger, including the payment of the aggregate Merger Consideration. OnApril 15, 2021 ,AVANGRID entered into a side letter agreement withIberdrola , 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 payIberdrola a facility fee equal to 0.12% per annum on the undrawn portion of the funding commitment set forth in the Funding Commitment Letter. OnFebruary 12, 2021 , the shareholders of PNMR approved the proposed Merger. As ofOctober 29, 2021 , the Merger has obtained all regulatory approvals except from NMPRC. The final approval is expected to be received, and the Merger is expected to close, in the fourth quarter of 2021 subject to certain conditions including 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 theUnited States District Court for the Southern District of New York and one was filed in theUnited States District Court for the Eastern District of New York . The lawsuits pending in theSouthern District ofNew York were consolidated and the five plaintiffs filed notices of voluntary 51 -------------------------------------------------------------------------------- dismissal and the cases were dismissed in April. The remaining case is pending in theEastern District ofNew 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 andthe 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 9%, from$1,470 million for the three months endedSeptember 30, 2020 to$1,598 million for the three months endedSeptember 30, 2021 . Networks business revenues increased mainly due to increased rates inNew York , which were approved onNovember 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 a decrease in wind generation output in the period. Net income attributable toAVANGRID increased by 28% from$87 million for the three months endedSeptember 30, 2020 to$111 million for the three months endedSeptember 30, 2021 , primarily due to higher Networks revenues from theNew York rate case. Adjusted net income (a non-GAAP financial measure) increased by 33% from$100 million for the three months endedSeptember 30, 2020 to$133 million for the three months endedSeptember 30, 2021 . The increase is primarily due to a$31 million increase in Networks driven mainly by increased rates inNew York that were approved onNovember 19, 2020 , a$16 million increase in Corporate mainly driven by favorable tax expense in the period, offset by a$14 million decrease in Renewables driven primarily by lower wind generation output and related balancing charges in the period. 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 actively participate in the regulatory 52 -------------------------------------------------------------------------------- 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 endedDecember 31, 2020 . Vineyard Wind 1 Federal Approval OnMay 11, 2021 , theU.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 ventureVineyard Wind, LLC . Lawsuits were filed inJuly 2021 ,August 2021 andSeptember 2021 against BOEM, theU.S. Fish and Wildlife Service ,NOAA Fisheries Directorate ,U.S. Army Corps of Engineers and theU.S. Department of the Interior challenging the approval of the proposed Vineyard Wind 1 Project. We cannot predict the outcome of these proceedings. Customer Disconnections Due to the COVID-19 pandemic, all of our regulated utilities suspended customer disconnections commencing inMarch 2020 . InNew York , we had voluntarily suspended disconnections for non-payment. TheNew 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 inNew York is lifted, which occurred onJune 24, 2021 . Due to the winter disconnection moratorium period, disconnections will not be able to resume untilApril 2022 . InConnecticut andMaine , regulatory orders for COVID-19 disconnection moratoriums ceased onNovember 1, 2020 . Disconnections inMaine resumed after the winter disconnection moratorium period ended inApril 2021 . InConnecticut , disconnections of residential customers for non-payment were authorized to beginSeptember 15, 2021 . CMP Metering and Billing Investigation OnFebruary 19, 2020 , the MPUC issued an order in CMP's distribution rate case proceeding and onFebruary 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 onMarch 1, 2020 . CMP has met the required rolling average benchmarks for all four of these quality measures and onSeptember 20, 2021 , filed with the MPUC a request for removal of the management efficiency adjustment. In addition to requesting the lifting of the management efficiency adjustment, CMP requested an accounting order to allow it to defer for future recovery the revenues it would effectively lose by not having the adjustment lifted bySeptember 1, 2021 . CMP Standard Offer Uncollectible Adder Investigation OnAugust 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 effectJanuary 1, 2022 . The investigation also included a review of CMP's credit and collection practices. OnJune 22, 2021 , CMP and theMaine Office of the Public Advocate executed and filed with the MPUC a Stipulation resolving all matters in this proceeding, which requires CMP to credit the residential and small non-residential standard-offer retainage account for$4 million . OnJune 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$144 million and$148 million , respectively, for this item atSeptember 30, 2021 andDecember 31, 2020 . CMP began recovering its regulatory asset in 2020. In 2017, the NYPSC commenced an audit of the power tax regulatory assets. OnJanuary 11, 2018 , the NYPSC issued an order opening an operations audit on NYSEG and RG&E and certain otherNew York utilities regarding tax accounting. The NYPSC audit report is expected to be completed during 2022. 53 -------------------------------------------------------------------------------- New England Clean Energy Connect OnJanuary 4, 2021 , CMP transferred the NECEC project toNECEC Transmission LLC , a wholly-owned subsidiary of Networks, pursuant to the terms of a transfer agreement datedNovember 3, 2020 . The NECEC project requires certain permits, including environmental, from multiple state and federal agencies and a presidential permit from theU.S. Department of Energy , orDOE , authorizing the construction, operation, maintenance and connection of facilities for the transmission of electric energy at the international border betweenthe United States andCanada . OnJanuary 8, 2020 , theMaine 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 datedMay 11, 2020 . The MDEP Order has been appealed by certain intervenors. The appeals are currently pending before theMaine Board of Environmental Protection and theMaine Superior Court . In addition, certain intervenors have appealed MDEP'sDecember 4, 2020 Order approving the transfer of the permits for the project toNECEC Transmission LLC and MDEP'sMay 7, 2021 Order approving certain minor revisions. These appeals are currently pending before theMaine Board of Environmental Protection . OnAugust 12, 2021 , the Commissioner of the MDEP notifiedNECEC Transmission LLC and CMP of the initiation of a proceeding to consider whether to suspend the MDEP license for the NECEC in light of the ruling from theMaine Superior Court reversing a decision from theMaine Bureau of Parks and Lands , or BPL, to grant a lease over a small area ofMaine public reserved lands to host a small section of the Project and vacating the lease. The suspension proceeding is ongoing. We cannot predict the outcome of these proceedings. OnNovember 6, 2020 , the project received the required approvals from theU.S. Army Corps of Engineers , orArmy 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 inMaine . A related request for preliminary injunction seeking to enjoin construction of the NECEC was denied by the District Court onDecember 16, 2020 . That denial was appealed to theFirst Circuit Court of Appeals . OnDecember 21, 2020 , plaintiffs filed a motion for emergency injunction pending appeal in the District Court.The District Court denied that motion onDecember 23, 2020 . OnDecember 30, 2020 , plaintiffs filed an emergency motion for injunction with theFirst 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. OnJanuary 15, 2021 , theFirst Circuit Court granted the motion temporarily enjoining construction in Segment 1 of the NECEC project. OnMay 13, 2021 , theFirst Circuit Court of Appeals affirmed the District Court's decision to deny the plaintiffs request for preliminary injunction and vacated the emergency injunction issued onJanuary 15, 2021 . ISO-NE issued the final System Impact Study (SIS) for NECEC onMay 13, 2020 , determining the upgrades required to permit the interconnection of NECEC to the ISO-NE system. OnJuly 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 theSeabrook Station , onOctober 13, 2020 ,AVANGRID andNECEC Transmission LLC filed a complaint with theFERC and an amended complaint onMarch 26, 2021 . OnOctober 5, 2020 ,NextEra Energy Seabrook, LLC filed a Petition for Declaratory Order. Both proceedings are currently pending beforeFERC . We cannot predict the outcome of these proceedings. OnJanuary 14, 2021 , theDOE issued a Presidential Permit granting permission toNECEC Transmission LLC to construct, operate, maintain and connect electric transmission facilities at the international border ofthe United States andCanada . OnMarch 26, 2021 , the plaintiffs challenging theArmy Corps permit filed a motion for leave before the District Court inMaine to supplement their complaint to add claims againstDOE in connection with the Presidential Permit. OnApril 20, 2021 , the District Court granted the plaintiffs motion to amend the complaint. OnApril 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. OnAugust 10, 2021 , theMaine Superior Court issued a ruling reversing BPL's decision to grant a lease over a small area of public reserved lands to host a small section of the NECEC project. OnAugust 13 , BPL, andNECEC Transmission LLC appealed this ruling and prior decisions and orders in the case. The appeal is currently pending before the Maine Supreme Judicial Court. As a result of the appeal, theMaine Superior Court decision vacating the lease is stayed. OnSeptember 15, 2021 , the Maine Supreme Judicial Court orderedNECEC Transmission LLC to refrain from construction activities on the public reserved lands lease area during the pendency of the appeal. We cannot predict the outcome of this proceeding. OnSeptember 16, 2020 , a group ofMaine voters submitted an application for a citizen referendum (i.e., aMaine 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 eachHouse of the Maine Legislature to approve construction of a high-impact electric transmission line 54 -------------------------------------------------------------------------------- crossing or utilizing public lands, prohibit construction of a high impact electric transmission line in theUpper Kennebec Region and require the vote of 2/3 of all members elected to eachHouse of the Maine Legislature for the lease by BPL of public reserved lands for transmission lines and similar linear projects. The citizen initiative states that these provisions would apply retroactively. OnFebruary 22, 2021 , theMaine 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 ballot. The citizen initiative will appear on the statewide ballot inMaine onNovember 2, 2021 . 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. Twenty towns have granted municipal approvals to date. Construction of the NECEC project started inJanuary 2021 and commercial operation is expected in 2023. As ofSeptember 30, 2021 , we have capitalized approximately$412 million for the NECEC project. PURA Investigation of the Preparation for and Response to the Tropical Storm Isaias OnAugust 6, 2020 , the PURA opened a docket to investigate the preparation for and response to Tropical Storm Isaias by the electric distribution companies inConnecticut including UI. Following hearings and the submission of testimony, PURA issued a final decision onApril 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 reduction 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. OnJune 11, 2021 , UI filed an appeal of PURA's decision with theConnecticut Superior Court . OnMay 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 datedJuly 14, 2021 , reduced the civil penalty to approximately$1 million . UI filed an appeal of PURA's decision with theConnecticut Superior Court . This appeal and the appeal of PURA's decision on the Tropical Storm Isaias docket have been consolidated. We cannot predict the outcome of these appeals. Connecticut Energy Legislation OnOctober 7, 2020 , the Governor ofConnecticut signed into law an energy bill that, among other things, instructs PURA to revise the rate-making structure inConnecticut 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, onOctober 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 onMarch 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. OnMarch 9, 2021 , UI, jointly with theOffice of the CT Attorney General , theOffice of CT Consumer Counsel, DEEP andPURA's Office of Education , Outreach, and Enforcement entered into a settlement agreement and filed a motion to approve the settlement agreement. In an order datedJune 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 endingApril 2023 , and also includes a distribution base rate freeze throughApril 2023 . Pursuant to the legislation, PURA opened a docket to consider the implementation of the associated customer compensation and reimbursement provisions in emergency events where customers were without power for more than 96 consecutive hours. OnJune 30, 2021 , PURA issued a final decision implementing the legislative mandate to create a program pursuant to which residential customers will receive$25 for each day without power after 96 hours and also receive reimbursement of$250 for spoiled food and medicine. The decision emphasizes that no costs incurred in connection with this program are recoverable from customers. The Company is reviewing the requirements of this program and evaluating next steps. 55 -------------------------------------------------------------------------------- NYDPS Investigation of the Preparation for and Response to the Tropical Storm Isaias InAugust 2020 , following Tropical Storm Isaias, the NYDPS commenced a comprehensive investigation of the preparation and response to this event byNew York's major electric utility companies. In addition, onAugust 20, 2020 , theNew York State Senate and Assembly held a joint hearing to examine the response of various utility companies during the aftermath of Tropical Storm Isaias. OnDecember 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 . The settlement was approved onJanuary 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. CMP Generator Interconnection Investigation OnFebruary 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. OnApril 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 Examiners in the matter have issued a procedural order setting a discovery schedule, CMP has responded to data requests and a technical conference has been conducted. OnSeptember 21, 2021 , the MPUC Staff issued a Bench Memorandum providing the staff's assessment (i) whether CMP has followed a course of conduct that a capably managed utility would have followed in light of existing and reasonably knowable circumstances and (ii) if not, what steps should be taken, including penalties and changes to ensure that CMP acts reasonably on a forward going basis. In the Bench Memorandum, staff found that CMP's conduct, and related management actions and inactions, raise significant issues regarding prudency. Specifically, staff found that CMP did not adequately prepare for the large volume of generator interconnection applications that resulted from "An Act To Promote Solar Energy Projects and Distributed Generation Resources inMaine ", enacted by theMaine legislature in 2019. MPUC staff recommends that the MPUC require that CMP to file a detailed plan to better integrate planning across relevant departments in the generator interconnection process with the MPUC. CMP's response to the Bench Memorandum was filed onOctober 12, 2021 . We cannot predict the outcome of this investigation or any potential penalties that may be assessed. Summary Investigation of Management Issues Identified in Management Audit of CMP As noted above, onFebruary 19, 2020 , the MPUC issued its final order in CMP's distribution revenue case. As part of that order, the MPUC initiated a management audit of CMP and its affiliates to evaluate whether CMP's current management structure, and the management and other services from its affiliates, are appropriate and in the interest ofMaine customers. The management audit was commenced inJuly 2020 by the MPUC's consultants and onJuly 12, 2021 , the independent auditor released its final report. OnSeptember 28, 2021 , the MPUC issued a Notice of Summary Investigation of certain management issues identified in the independent auditors final report and directed CMP to file a plan for addressing the concerns raised in the independent auditor's report byNovember 30, 2021 . We cannot predict the outcome of this summary investigation. 56 -------------------------------------------------------------------------------- Results of Operations The following tables set forth financial information by segment for each of the periods indicated: Three Months Ended Three Months Ended September 30, 2021 September 30, 2020 Total Networks Renewables Other(1) Total Networks Renewables Other(1) (in millions) Operating Revenues$ 1,598 $ 1,357 $ 243 $ (2) $ 1,470 $ 1,197 $ 276 $ (3) Operating Expenses Purchased power, natural gas and fuel used 319 288 31 - 259 218 41 - Operations and maintenance 727 615 109 3 634 527 107 - Depreciation and amortization 259 156 103 - 255 151 104 - Taxes other than income taxes 155 140 18 (3) 157 141 17 (1) Total Operating Expenses 1,460 1,199 261 - 1,305 1,037 269 (1) Operating Income 138 158 (18) (2) 165 160 7 (2) Other Income (Expense) Other income (expense) 13 15 - (2) 16 14 5 (3) (Losses) earnings from equity method investments (1) 3 (4) - 1 3 (2) - Interest expense, net of capitalization (70) (51) - (19) (86) (63) 1 (24) Income (Loss) Before Income Tax 80 125 (22) (23) 96 114 11 (29) Income tax (benefit) expense (24) 8 (26) (6) 15 20 (7) 2 Net Income (Loss) 104 117 4 (17) 81 94 18 (31) Net loss (income) attributable to noncontrolling interests 7 (1) 8 - 6 (1) 7 - Net Income (Loss) Attributable to Avangrid, Inc.$ 111 $ 116 $ 12 $ (17) $ 87 $ 93 $ 25 $ (31) Nine Months Ended Nine Months Ended September 30, 2021 September 30, 2020 Total Networks Renewables Other(1) Total Networks Renewables Other(1) (in millions) Operating Revenues$ 5,041 $ 4,149 $ 894 $ (2) $ 4,651 $ 3,779 $ 876 $ (4) Operating Expenses Purchased power, natural gas and fuel used 1,085 973 112 - 999 819 180 - Operations and maintenance 2,045 1,665 376 4 1,788 1,479 318 (9) Depreciation and amortization 756 461 294 1 748 446 301 1 Taxes other than income taxes 480 432 54 (6) 469 418 53 (2) Total Operating Expenses 4,366 3,531 836 (1) 4,004 3,162 852 (10) Operating Income 675 618 58 (1) 647 617 24 6 Other Income (Expense) Other income (expense) 48 47 1 - 15 14 10 (9) Earnings (losses) from equity method investments 4 10 (6) - (3) 8 (11) - Interest expense, net of capitalization (218) (157) - (61) (251) (199) 1 (53) Income (Loss) Before Income Tax 509 518 53 (62) 408 440 24 (56) Income tax expense (benefit) - 74 (56) (18) 21 75 (53) (1) Net Income (Loss) 509 444 109 (44) 387 365 77 (55) Net loss (income) attributable to noncontrolling interests 34 (2) 36 - 28 (2) 30 - Net Income (Loss) Attributable to Avangrid, Inc.$ 543 $ 442 $ 145 $ (44) $ 415 $ 363 $ 107 $ (55)
(1)"Other" represents Corporate and intersegment eliminations.
57 -------------------------------------------------------------------------------- Comparison of Period to Period Results of Operations Three Months EndedSeptember 30, 2021 Compared to Three Months EndedSeptember 30, 2020 Operating Revenues Our operating revenues increased by$128 million , or 9%, from$1,470 million for the three months endedSeptember 30, 2020 to$1,598 million for the three months endedSeptember 30, 2021 , as detailed by segment below: Networks Operating revenues increased by$160 million , or 13%, from$1,197 million for the three months endedSeptember 30, 2020 to$1,357 million for the three months endedSeptember 30, 2021 . Electricity and gas revenues increased by$68 million , primarily due to new rates inNew York that were approvedNovember 19, 2020 , a$9 million favorable impact from COVID-19 deferrals during the period inNew York andConnecticut (inConnecticut this is included in the revenue decoupling mechanism), offset by$1 million of other decreases. Electricity and gas revenues changed due to the following items that have offsets within the income statement: an increase of$70 million in purchased power and purchased gas (offset in purchased power), an increase of$51 million in flow-through amortizations (offset in operating expenses), offset by a decrease of$37 million in flow-through amortizations ($31 million offset in income tax expense and$6 million offset in other income). Renewables Operating revenues decreased by$33 million , or 12%, from$276 million for the three months endedSeptember 30, 2020 to$243 million for the three months endedSeptember 30, 2021 . The decrease in operating revenue is primarily driven by unfavorable MtM changes of$10 million on energy derivative transactions entered into for economic hedging purposes, a decrease of$27 million driven by 97 GWh lower wind generation output and balancing charges in the current period and a decrease of$2 million from curtailment payments, offset by a$6 million increase in merchant prices in the period.Purchased Power , Natural Gas and Fuel Used Our purchased power, natural gas and fuel used increased by$60 million , or 23%, from$259 million for the three months endedSeptember 30, 2020 to$319 million for the three months endedSeptember 30, 2021 , as detailed by segment below: Networks Purchased power, natural gas and fuel used increased by$70 million , or 32%, from$218 million for the three months endedSeptember 30, 2020 to$288 million for the three months endedSeptember 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 in the period. Renewables Purchased power, natural gas and fuel used decreased by$10 million , or 24%, from$41 million for the three months endedSeptember 30, 2020 to$31 million for the three months endedSeptember 30, 2021 . The decrease is primarily due to favorable MtM changes on derivatives of$8 million due to market price changes and a decrease of$2 million in power purchases and transmission costs in the period. Operations and Maintenance Operations and maintenance expenses increased by$93 million , or 15%, from$634 million for the three months endedSeptember 30, 2020 to$727 million for the three months endedSeptember 30, 2021 , as detailed by segment below: Networks Operations and maintenance expenses increased by$88 million , or 17%, from$527 million for the three months endedSeptember 30, 2020 to$615 million for the three months endedSeptember 30, 2021 . The increase is driven by$18 million of increased personnel expenses, a$13 million increase in uncollectible expenses, increased business costs of$7 million and an increase of$51 million in flow-through amortizations (which is offset in revenue). Renewables Operations and maintenance expenses increased by$2 million , or 2%, from$107 million for the three months endedSeptember 30, 2020 to$109 million for the three months endedSeptember 30, 2021 . The increase is primarily due to$2 million of higher land rents driven by new sites,$1 million of increased costs resulting from higher maintenance costs in the period,$4 58 -------------------------------------------------------------------------------- million due to the write-off of certain development projects and casualty losses in the period, offset by a$5 million decrease driven by settlement of liquidated damage claims in the period. Depreciation and Amortization Depreciation and amortization for the three months endedSeptember 30, 2021 was$259 million compared to$255 million for the three months endedSeptember 30, 2020 , representing an increase of$4 million . The increase is primarily due to an increase of$7 million in depreciation expense from plant additions in Networks and Renewables in the period, offset by a$3 million decrease 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) decreased by$5 million from$17 million for the three months endedSeptember 30, 2020 to$12 million for the three months endedSeptember 30, 2021 . The change is primarily due to a$2 million of unfavorable equity earnings and$3 million other unfavorable decreases in the period. Interest Expense, Net of Capitalization Interest expense for the three months endedSeptember 30, 2021 and 2020 was$70 million and$86 million , respectively. The change is primarily due to a decrease of$16 million of interest expense at Networks ($7 million of favorable carrying charges and$9 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 endedSeptember 30, 2021 and 2020, were (30.0)% and 15.6%, 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, the effect of the excess deferred tax amortization resulting from the Tax Act, and the equity component of allowance for funds used during construction. Nine Months EndedSeptember 30, 2021 Compared to Nine Months EndedSeptember 30, 2020 Operating Revenues Our operating revenues increased by$390 million , or 8%, from$4,651 million for the nine months endedSeptember 30, 2020 to$5,041 million for the nine months endedSeptember 30, 2021 , as detailed by segment below: Networks Operating revenues increased by$370 million , or 10%, from$3,779 million for the nine months endedSeptember 30, 2020 to$4,149 million for the nine months endedSeptember 30, 2021 . Electricity and gas revenues increased by$116 million , primarily due to new rates inNew York that were approvedNovember 19, 2020 , a$6 million favorable impact from a pension deferral write-off recorded in the same period of 2020,$30 million favorable impact from a COVID-19 deferral during the period inNew York andConnecticut (inConnecticut this is included in the revenue decoupling mechanism), and$12 million favorable impact from transmission, offset by$5 million of other decreases. Electricity and gas revenues changed due to the following items that have offsets within the income statement: an increase of$154 million in purchased power and purchased gas (offset in purchased power), an increase of$127 million in flow-through amortizations (offset in operating expenses), offset by a decrease of$70 million in flow-through amortizations ($52 million offset in income tax expense and$18 million offset in other income). Renewables Operating revenues increased by$18 million , or 2%, from$876 million for the nine months endedSeptember 30, 2020 , to$894 million for the nine months endedSeptember 30, 2021 . The increase in operating revenues was primarily due to a$164 million increase in merchant prices driven mainly by higher demand during theTexas storm in the first quarter of 2021,$49 million in favorable thermal and power trading driven by higher average prices in the period,$14 million from curtailment payments, and$4 million from the sale of assets, offset by unfavorable MtM changes of$143 million on energy derivative transactions entered for economic hedging purposes, and a decrease of$70 million driven by 1,053 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$86 million , or 9%, from$999 million for the nine months endedSeptember 30, 2020 to$1,085 million for the nine months endedSeptember 30, 2021 , as detailed by segment below: 59 --------------------------------------------------------------------------------
Networks
Purchased power, natural gas and fuel used increased by$154 million , or 19%, from$819 million for the nine months endedSeptember 30, 2020 to$973 million for the nine months endedSeptember 30, 2021 . The increase is primarily driven by a$154 million increase in average commodity prices and an overall increase in electricity and gas units procured due to higher degree days in the period. Renewables Purchased power, natural gas and fuel used decreased by$68 million , or 38%, from$180 million for the nine months endedSeptember 30, 2020 to$112 million for the nine months endedSeptember 30, 2021 . The decrease is primarily due to favorable MtM changes on derivatives of$83 million due to market price changes in the period, offset by an increase of$15 million in power purchases and transmission costs in the period. Operations and Maintenance Operations and maintenance expenses increased by$257 million , or 14%, from$1,788 million for the nine months endedSeptember 30, 2020 to$2,045 million for the nine months endedSeptember 30, 2021 , as detailed by segment below: Networks Operations and maintenance expenses increased by$186 million , or 13%, from$1,479 million for the nine months endedSeptember 30, 2020 to$1,665 million for the nine months endedSeptember 30, 2021 . The increase is driven by$27 million of increased personnel expenses, a$21 million increase in uncollectible expenses, and increased business costs of$12 million offset by$1 million other decreases. In addition, there were increases of$127 million in flow-through amortizations (which is offset in revenue). Renewables Operations and maintenance expenses increased by$58 million , or 18%, from$318 million for the nine months endedSeptember 30, 2020 to$376 million for the nine months endedSeptember 30, 2021 . The increase is primarily due to a$19 million increase in the bad debt provision driven mainly by provisions during theTexas storm in the first quarter of 2021,$14 million of higher land rents driven by new sites,$8 million of higher maintenance costs in the period,$7 million increase driven by higher personnel costs primarily attributable to new capacity,$19 million due to the write-off of certain development projects and casualty losses in the period, offset by$5 million decrease driven by settlement of liquidated damage claims and$4 million of other decreases in the period. Depreciation and Amortization Depreciation and amortization for the nine months endedSeptember 30, 2021 was$756 million compared to$748 million for the nine months endedSeptember 30, 2020 , an increase of$8 million . The increase is driven by$23 million from plant additions in Networks and Renewables in the period, offset by a$9 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$40 million from$12 million for the nine months endedSeptember 30, 2020 to$52 million for the nine months endedSeptember 30, 2021 . The change is primarily due to a$19 million favorable increase in allowance for equity funds used during construction, a$24 million favorable change in the non-service component of pension expense driven by revised actuarial studies in Networks (which is partially offset within revenue), and$7 million of favorable equity earnings in the period, offset by$6 million of unfavorable carrying charges and$4 million other decreases. Interest Expense, Net of Capitalization Interest expense for the nine months endedSeptember 30, 2021 and 2020 was$218 million and$251 million , respectively. The change is primarily due to a decrease of$41 million of interest expense at Networks ($16 million of favorable carrying charges,$29 million favorable regulatory amortizations, offset by unfavorable$4 million interest expense from increased debt), offset by a$7 million increase in Other due to increased debt. Income Tax Expense The effective tax rates, inclusive of federal and state income tax, for the nine months endedSeptember 30, 2021 and 2020 was 0.0% and 5.1%, 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, the effect of the excess deferred tax amortization resulting from the Tax Act and the equity component of allowance for funds used during construction. 60 -------------------------------------------------------------------------------- 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, adjusted EBITDA and adjusted EBITDA with Tax Credits as 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, 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 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. 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 comparableU.S. GAAP measure to adjusted EBITDA and adjusted EBITDA with tax credits is net income. 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. 61 -------------------------------------------------------------------------------- The following tables provide a reconciliation between Net Income attributable toAVANGRID and non-GAAP measures Adjusted Net Income, Adjusted EBITDA and Adjusted EBITDA with Tax Credits by segment for the three and nine months endedSeptember 30, 2021 and 2020, respectively: Three Months EndedSeptember 30, 2021 Nine
Months Ended
Total Networks Renewables Corporate* Total
Networks Renewables Corporate*
(in millions) (in millions) Net Income Attributable to Avangrid, Inc.$ 111 $ 116 $ 12 $ (17) $ 543 $ 442 $ 145 $ (44) Adjustments: Mark-to-market earnings - Renewables 9 - 9 - 50 - 50 - Impact of COVID-19 19 18 - - 33 33 - - Merger costs 3 - - 3 6 - - 6 Income tax impact of adjustments (1) (8) (5) (2) (1) (24) (9) (13) (2) Adjusted Net Income (2)$ 133 $ 130 $ 18 $ (15) $ 609 $ 467 $ 182 $ (39) Net (loss) income attributable to noncontrolling interests (7) 1 (8) - (34) 2 (36) - Income tax (benefit) expense (16) 13 (25) (4) 24 83 (43) (16) Depreciation and amortization 259 156 103 - 756 461 294 1 Interest expense, net of capitalization 70 51 1 18 218 157 - 61 Other (income) expense (13) (15) - 2 (48) (47) (1) - Losses (earnings) from equity method investments 1 (3) 4 - (4) (10) 6 - Adjusted EBITDA (3)$ 427 $ 333 $ 93 $ 1 $ 1,521 $ 1,113 $ 402 $ 7 Retained PTCs and ITCs 29 - 29 - 132 - 132 - PTCs allocated to tax equity investors 13 - 13 - 55 - 55 -
Adjusted EBITDA with Tax Credits (3)
$ 136 $ 1 $ 1,708 $ 1,113 $ 589 $ 7 62
-------------------------------------------------------------------------------- Three Months EndedSeptember 30, 2020 Nine
Months Ended
Total Networks Renewables Corporate* Total
Networks Renewables Corporate*
(in millions) (in millions) Net Income (Loss) Attributable to Avangrid, Inc.$ 87 $ 94 $ 25 $ (31) $ 415 $ 363 $ 107 $ (55) Adjustments: Mark-to-market earnings - Renewables 7 - 7 - (9) - (9) - Restructuring charges 1 1 - - 5 3 1 - Accelerated depreciation from repowering 3 - 3 - 9 - 9 - Impact of COVID-19 8 7 1 - 21 18 1 2 Income tax impact of adjustments (1) (5) (2) (3) - (7) (6) - (1) Adjusted Net Income (2)$ 100 $ 99 $ 32 $ (31) $ 434 $ 379 $ 108 $ (53) Net (loss) income attributable to noncontrolling interests (6) 1 (7) - (28) 2 (30) - Income tax expense (benefit) 20 22 (4) 2 28 81 (53) - Depreciation and amortization 252 151 101 - 739 446 292 1 Interest expense, net of capitalization 86 63 (1) 24 251 199 (1) 53 Other (income) expense (16) (14) (5) 3 (15) (14) (10) 9 (Earnings) losses from equity method investments (1) (3) 2 - 3 (8) 11 - Adjusted EBITDA (3)$ 435 $ 319 $ 118 $ (2) $ 1,412 $ 1,085 $ 318 $ 9 Retained PTCs and ITCs 22 - 22 - 111 - 111 - PTCs allocated to tax equity investors 14 - 14 - 45 - 45 -
Adjusted EBITDA with Tax Credits (3)
(1)Income tax impact of adjustments: 2021 -$(2) million and$(13) million from MtM earnings,$(5) million and$(9) million from impact of COVID-19 and$(1) million and$(2) million from merger costs of for the three and nine months endedSeptember 30, 2021 , respectively; 2020 -$(2) million and$2 million from MtM earnings,$0 and$(1) million from restructuring charges,$(1) million and$(3) million from accelerated depreciation from repowering and$(2) million and$(5) million from the impact of COVID-19 for the three and nine months endedSeptember 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 EndedSeptember 30, 2021 Compared to Three Months EndedSeptember 30, 2020 Adjusted net income Our adjusted net income increased by$33 million , or 33%, from$100 million for the three months endedSeptember 30, 2020 to$133 million for the three months endedSeptember 30, 2021 . The increase is primarily due to a$31 million increase in Networks driven primarily by new rates inNew York that were approved onNovember 19, 2020 , and a$16 million increase in Corporate mainly driven by favorable tax expense in the period, offset by$14 million decrease in Renewables driven primarily by lower wind generation output and related balancing charges in the period. Nine Months EndedSeptember 30, 2021 Compared to Nine Months EndedSeptember 30, 2020 Adjusted net income Our adjusted net income increased by$175 million , or 40%, from$434 million for the nine months endedSeptember 30, 2020 to$609 million for the nine months endedSeptember 30, 2021 . The increase is primarily due to a$88 million increase in Networks driven primarily by new rates inNew York that were approved onNovember 19, 2020 , a$74 million increase in Renewables driven by higher merchant pricing mainly from theTexas weather event and a$13 million increase in Corporate mainly driven by favorable tax expense in the period. 63 -------------------------------------------------------------------------------- The following tables reconcile Net Income attributable toAVANGRID to Adjusted Net Income (non-GAAP), and EPS attributable toAVANGRID to adjusted EPS (non-GAAP) for the three and nine months endedSeptember 30, 2021 and 2020, respectively: Three Months Ended Nine Months Ended September 30, September 30, (Millions) 2021 2020 2021 2020 Networks$ 116 $ 94 $ 442 $ 363 Renewables 12 25 145 107 Corporate (1) (17) (31) (44) (55) Net Income$ 111 $ 87 $ 543 $ 415 Adjustments: Mark-to-market earnings - Renewables (2) 9 7 50 (9) Restructuring charges (3) - 1 - 5 Accelerated depreciation from repowering (4) - 3 - 9 Impact of COVID-19 (5) 19 8 33 21 Merger costs (6) 3 - 6 - Income tax impact of adjustments (8) (5) (24) (7) Adjusted Net Income (7)$ 133 $ 100 $ 609 $ 434 Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Networks$ 0.30 $ 0.30 $ 1.27 $ 1.17 Renewables 0.03 0.08 0.42 0.35 Corporate (1) (0.04) (0.10) (0.13) (0.18) Net Income$ 0.29 $ 0.28 $ 1.56 $ 1.34 Adjustments: Mark-to-market earnings - Renewables (2) 0.02 0.02 0.14 (0.03) Restructuring charges (3) - - - 0.02 Accelerated depreciation from repowering (4) - 0.01 - 0.03 Impact of COVID-19 (5) 0.05 0.02 0.10 0.07 Merger costs (6) 0.01 - 0.02 - Income tax impact of adjustments (0.02) (0.02) (0.07) (0.02) Adjusted Earnings Per Share (7)$ 0.34 $ 0.32 $ 1.75 $ 1.40 (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. 64 -------------------------------------------------------------------------------- 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 ofSeptember 30, 2021 . Liquidity Position The following table provides the components of our liquidity position as ofSeptember 30, 2021 andDecember 31, 2020 , respectively: As of September 30, As of December 31, 2021 2020 (in millions) Cash and cash equivalents $ 1,410 $ 1,463 AVANGRID Credit Facility 2,500 2,500 2020 Credit Facility - 500 Iberdrola Group Credit Facility 500 500 Less: borrowings - (309) Total $ 4,410 $ 4,654 We manage our overall liquidity position as part of the group of companies controlled byIberdrola , or theIberdrola Group , and are a party to a liquidity agreement withBank of America, N.A . along with certain members of theIberdrola Group . The liquidity agreement aids theIberdrola 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 bothSeptember 30, 2021 andDecember 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 withinthe 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. AVANGRID Commercial Paper ProgramAVANGRID has a commercial paper program with a limit of$2 billion that is backstopped by the AVANGRID Credit Facility (described below). As of bothSeptember 30, 2021 andOctober 28, 2021 , there was$0 of commercial paper outstanding. AVANGRID Credit FacilityAVANGRID 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. OnJune 29, 2020 , we entered into an amendment to the AVANGRID Credit Facility, which reducedAVANGRID's maximum sublimit from$2.0 billion to$1.5 billion and added minimum sublimits for each joint borrower other thanAVANGRID . Under the AVANGRID Credit Facility, each of the borrowers will pay an annual facility fee that is dependent on their credit rating. As ofSeptember 30, 2021 , the facility fees ranged from 10.0 to 17.5 basis points. The AVANGRID Credit Facility matures onJune 29, 2024 . As of bothSeptember 30, 2021 andOctober 28, 2021 , we had no borrowings outstanding under this credit facility. Since theAVANGRID credit facility is also a backstop to theAVANGRID commercial paper program, the total amount available under the facility as of bothSeptember 30, 2021 andOctober 28, 2021 , was$2,500 million . 65 -------------------------------------------------------------------------------- 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 . We terminated this facility onApril 28, 2021 . Iberdrola Group Credit FacilityAVANGRID has a credit facility withIberdrola Financiacion , S.A.U., a company of theIberdrola Group . The facility has a limit of$500 million and matures onJune 18, 2023 .AVANGRID pays a facility fee of 10.5 basis points annually. As of bothSeptember 30, 2021 andOctober 28, 2021 , we had no borrowings outstanding under this credit facility. Supplier Financing Arrangements To manage cash flow and related liquidity, we operate a number of supplier financing arrangements under which certain suppliers can obtain accelerated settlement on invoices from the banking provider. This is a form of reverse factoring which has the objective of serving the group's suppliers by giving them early access to funding. This supplier financing program allows participating suppliers the ability to voluntarily elect to sell our payment obligations to a designated third-party financial institution. We have no economic interest in a supplier's decision to enter into the arrangements and no direct financial relationship with the financial institution supporting these obligations. Our obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted by our suppliers' decisions to sell amounts under these arrangements. As ofSeptember 30, 2021 ,$97 million of these arrangements were considered notes payable on our condensed consolidated balance sheet. Capital Resources OnMay 18, 2021 , we issued 77,821,012 shares of common stock in two private placements.Iberdrola purchased 63,424,125 shares andHyde Member LLC , aDelaware limited liability company and a wholly owned subsidiary ofQatar 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 ofMay 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 inAVANGRID . OnSeptember 15, 2021 , Vineyard Wind closed on financing for the Vineyard Wind 1 project. Concurrently, Renewables entered into a credit agreement with certain banks to provide future term loans and letters of credit up to a maximum of approximately$1.2 billion to finance a portion of its share of the cost Vineyard Wind 1 at the maturity of the Vineyard Wind 1 project construction loan. Any term loans mature byOctober 15, 2031 , subject to certain extension provisions.AVANGRID also issued a guaranty, up to$827 million in the aggregate, of Renewables equity contribution obligations to Vineyard Wind 1. As part of the Vineyard Wind 1 financial close,$136 million of Renewables prior contributions to Vineyard Wind were returned. OnSeptember 24, 2021 , NYSEG issued$350 million aggregate principal amount of unsecured notes maturing in 2031 at a fixed interest rate of 2.15%. 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$0.9 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. 66 --------------------------------------------------------------------------------
The following is a summary of the cash flows by activity for the nine months
ended
Nine Months Ended September 30, 2021 2020 (in millions) Net cash provided by operating activities $ 994$ 1,092 Net cash used in investing activities (1,465) (1,956) Net cash provided by financing activities 418 786 Net increase (decrease) in cash, cash equivalents and restricted cash $ (53)$ (78) Operating Activities The cash from operating activities for the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 decreased by$98 million , primarily attributable to higher operations and maintenance expenses in the period. Investing Activities For the nine months endedSeptember 30, 2021 , net cash used in investing activities was$1,465 million , which was comprised of$1,897 million of capital expenditures partially offset by$228 million of other investments and equity method investments,$141 million of distributions received from equity method investments,$53 million of contributions in aid of construction and$6 million of proceeds from the sale of assets. For the nine months endedSeptember 30, 2020 , net cash used in investing activities was$1,956 million , which was comprised of$1,960 million of capital expenditures and$48 million of other investments and equity method investments, partially offset by$35 million of contributions in aid of construction and$12 million of proceeds from the sale of assets. Financing Activities For the nine months endedSeptember 30, 2021 , financing activities provided$418 million in cash reflecting primarily proceeds from private placements of$4 billion in connection with share issuance and contribution from non-controlling interests of$141 million in the period, offset by a net decrease in non-current debt, including with affiliate, and current notes payable of$3.3 billion , dividends of$443 million and distributions to non-controlling interests of$9 million . For the nine months endedSeptember 30, 2020 , financing activities provided$786 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$897 million , offset by distributions to non-controlling interests of$5 million , payments on finance leases of$7 million and dividends of$408 million . Off-Balance Sheet Arrangements There have been no material changes in our off-balance sheet arrangements during the nine months endedSeptember 30, 2021 as compared to those reported for the fiscal year endedDecember 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 ofMaine . There have been no other material changes in contractual and contingent obligations during the nine months endedSeptember 30, 2021 as compared to those reported for the fiscal year endedDecember 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 withU.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 67 -------------------------------------------------------------------------------- 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 endingDecember 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 nine months endedSeptember 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 ofJanuary 1, 2021 , and reflected in our condensed consolidated financial statements are described in Note 3 of our condensed consolidated financial statements for the nine months endedSeptember 30, 2021 . 68 -------------------------------------------------------------------------------- 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; •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, supply-chain interruptions and changing prices and labor costs; •the impacts of climate change, 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, including those subject to referendums 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 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 nine months endedSeptember 30, 2021 , as compared to those reported for the fiscal year endedDecember 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 69 -------------------------------------------------------------------------------- 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 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. 70
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