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, 2021 and 2020, and for the three years endedDecember 31, 2021 , included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSecurities and Exchange Commission , or theSEC , onFebruary 23, 2022 , 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 .
Overview
AVANGRID aspires to be the leading sustainable energy company 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$40 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 9.0 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 2022 for the fourth consecutive year by theEthisphere Institute and is listed byForbes andJust Capital as one of the 2022 Just 100, an annual ranking of the most justU.S. public companies.AVANGRID employs approximately 7,300 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 81.6% of the outstanding shares ofAVANGRID common stock. The remaining outstanding shares are owned by various shareholders with approximately 18.4% ofAVANGRID's outstanding shares publicly-traded on theNew York Stock Exchange (NYSE).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 distribution, transmission and generation 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 ofJune 30, 2022 . 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
southwestern
•Central Maine Power Company, or CMP, which serves electric customers in central
and southern
•The Southern Connecticut Gas Company, or SCG, which serves natural gas
customers in
•Connecticut Natural Gas Corporation, or CNG, which serves natural gas customers
in
•The Berkshire Gas Company, or BGC, which serves natural gas customers in
western
•Maine Natural Gas Corporation, or MNG, which serves natural gas customers in
several communities in central and southern
52
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Renewables has a combined wind, solar and thermal installed capacity of 9,016
megawatts, or MW, as of June 30, 2022 , including Renewables' share of joint
projects, of which 8,007 MW was installed wind capacity. Renewables targets to
contract or hedge 85% to 95% of its capacity under long-term PPAs and hedges to
limit market volatility. As of June 30, 2022 , approximately 74% of the capacity
was contracted with PPAs for an average period of approximately 10 years and an
additional 14% of production was hedged. AVANGRID is one of the three largest
wind operators in the United States based on installed capacity as of June 30,
2022 , Renewables strives to lead the transformation of the U.S. energy industry
to a sustainable, competitive, clean energy future. Renewables installed
capacity includes 66 wind farms and four solar facilities in 21 states across
the United States .
Texas Weather Event
During February 2021 , Texas and the surrounding region experienced unprecedented
extreme cold weather, resulting in outages impacting millions in the state.
Avangrid Renewables safely operated our Texas wind generation facilities during
this event meeting all of our delivery obligations in Texas and producing excess
energy that was sold based on the rules established at the time by the Energy
Reliability Council of Texas , or ERCOT . If the received payments are adjusted by
ERCOT , it could adversely affect our results of operations.
In connection with the Texas Weather Event, a number of plaintiffs have filed
multiple cases against generators and natural gas suppliers, including certain
Avangrid Renewables entities in Texas , alleging liability for injuries and
damages arising from the event under a variety of legal theories. The plaintiffs
have amended many of their petitions within the multidistrict litigation, and
more than 100 of the cases now name Avangrid Renewables entities among the
defendants. Four of the consolidated cases have been designated as "bellwether"
cases and are proceeding to resolve certain common issues of fact and law. In
May 2022 , the Avangrid Renewables entities were part of a broader motion to
dismiss by all generators in the bellwether cases in which they were named. 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 byAVANGRID 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 of a 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 ofNovember 1 , the Merger had obtained all regulatory approvals other than from the NMPRC. OnNovember 1, 2021 , after public hearing and briefing on the matter, the hearing examiner in the Merger proceeding at the NMPRC issued an unfavorable recommendation related to the amended stipulated agreement entered into by PNMR,AVANGRID and several interveners in the NMPRC proceeding with respect to consideration of the joint Merger application inJune 2021 . OnDecember 8, 2021 , the NMPRC issued an order rejecting the amended stipulated agreement. OnJanuary 3, 2022 ,AVANGRID and PNMR filed a notice of appeal of theDecember 8, 2021 decision of the NMPRC with theNew Mexico Supreme Court . The Statement of Issues was filed onFebruary 2, 2022 and the Brief in Chief was filed onApril 7, 2022 . OnJune 14, 2022 , the NMPRC filed its Answer Brief. On 53 --------------------------------------------------------------------------------June 13, 2022 , New Energy Economy, an intervener in the Merger proceeding, filed its Answer Brief.AVANGRID's Reply Brief is due onAugust 5, 2022 (pending any additional extensions granted to the parties). OnFebruary 24, 2022 , the FCC granted an extension to its approval to transfer operating licenses in connection with the Merger. In addition, onJanuary 3, 2022 ,AVANGRID , PNMR and Merger Sub entered into an Amendment to the Merger Agreement, or the Amendment, pursuant to whichAvangrid , PNMR and Merger Sub each agreed to extend the "End Date" for consummation of the Merger untilApril 20, 2023 . The parties acknowledge in the Amendment that the required regulatory approval from theNew Mexico Public Regulation Commission , or NMPRC, has not been obtained and that the parties have reasonably determined that such outstanding approval will not be obtained byApril 20, 2022 . In light of this outstanding approval, the parties determined to approve the Amendment. As amended, the Merger Agreement may be terminated by each ofAvangrid and PNMR under certain circumstances, including if the Merger is not consummated byApril 20, 2023 (subject to a three-month extension byAvangrid and PNMR by mutual consent if all of the conditions to the closing, other than the conditions related to obtaining regulatory approvals, have been satisfied or waived). During the pendency of this appeal certain required regulatory approvals and consents may expire andAVANGRID and PNMR will reapply and/or apply for extensions of such approvals, as the case may be. We cannot predict the outcome of this proceeding for the outstanding approvals. The Merger Agreement contains representations, warranties and covenants of PNMR,AVANGRID and Merger Sub, which are customary for transactions of this type. In addition, among other things, the Merger Agreement contains a covenant requiring PNMR to, prior to the closing, enter into agreements (Four Corners Divestiture Agreements) providing for, and to make filings required to, exit from all ownership interests in the Four Corners Power Plant, all with the objective of having the closing date for such exit be no later thanDecember 31, 2024 . The Merger Agreement (as amended) provides for certain customary termination rights including the right of either party to terminate the Merger Agreement if the Merger is not completed on or beforeApril 20, 2023 (subject to a three-month extension byAvangrid and PNMR by mutual consent if all of the conditions to the closing, other than the conditions related to obtaining regulatory approvals, have been satisfied or waived). The Merger Agreement further provides that, upon termination of the Merger Agreement under certain specified circumstances (including ifAVANGRID terminates the Merger Agreement due to a change in recommendation of the board of directors of PNMR or if PNMR terminates the Merger Agreement to accept a superior proposal (as defined in the Merger Agreement)), PNMR will be required to payAVANGRID a termination fee of$130 million . In addition, the Merger Agreement provides that (i) if the Merger Agreement is terminated by either party due to a failure of a regulatory closing condition and such failure is the result ofAVANGRID's breach of its regulatory covenants, or (ii)AVANGRID fails to effect the Closing when all closing conditions have been satisfied and it is otherwise obligated to do so under the Merger Agreement, then, in either such case, upon termination of the Merger Agreement,AVANGRID will be required to pay PNMR a termination fee of$184 million as the sole and exclusive remedy. Upon the termination of the Merger Agreement under certain specified circumstances involving a breach of the Merger Agreement, either PNMR orAVANGRID will be required to reimburse the other party's reasonable and documented out-of-pocket fees and expenses up to$10 million (which amount will be credited toward, and offset against, the payment of any applicable termination fee). In connection with the Merger,Iberdrola has providedAVANGRID a commitment letter (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.
Business Environment
The COVID-19 pandemic continues to cause global economic disruption and volatility in financial markets andthe United States economy. We continue to monitor developments affecting both our workforce and our customers and will take precautions that we determine are necessary or appropriate, regularly communicate with our customers regarding the tools and resources available and to help our customers stay informed during this public health crisis, and continue 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. In addition, we are experiencing changes in inflation levels resulting from various supply chain disruptions, increased business and labor costs, increased financing costs from changes in theFederal Reserve's monetary policy and other disruptions caused by global economic conditions, including the COVID-19 pandemic and theRussia andUkraine conflict described below. 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 or global economic trends 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. InFebruary 2022 ,Russia invadedUkraine resulting inthe United States ,Canada , theEuropean Union and other countries imposing economic sanctions onRussia .AVANGRID is monitoring the broader economic impact of this conflict, which may include further sanctions, supply chain instability, and potential retaliatory action by the Russian government 54 -------------------------------------------------------------------------------- against us.AVANGRID is taking steps intended to mitigate the potential risks from this continued conflict. To date, there has been no material impact on our operations or financial performance as a result of the conflict; however, we cannot predict the extent of these effects, given the evolving nature of the conflict, on our business, results of operations or financial condition.AVANGRID is monitoring theDepartment of Commerce's , or DOC, anti-circumvention petition alleging that solar panels and cells shipped fromVietnam ,Thailand ,Malaysia andCambodia have circumvented tariffs imposed on Chinese solar panels and cells. The petition calls for anti-dumping and countervailing duties to be applied to solar panels and cells and could be retroactive to the filing date. InJune 2022 , PresidentJoe Biden's Administration announced a 24-month tariff exemption on any potential tariff resulting from the anti-circumvention investigation. Renewables is taking steps intended to mitigate potential risks to their solar project development portfolio. To date, there has been no material impact on Renewables' operations or financial performance as a result of this investigation. Despite the 24-month tariff exemption, there is uncertainty around the final resolution by the DOC and related long-term effects to the solar panel supply chain and we currently cannot predict if there will be materially adverse impacts to our business, results of operations or financial condition.AVANGRID is also monitoring the Coast Guard Authorization Act of 2022 that was passed by theUnited States House of Representatives inMarch 2022 and the National Defense Authorization Act that was passed by theUnited States House of Representatives in mid-July. If enacted, the bills may only allow foreign vessels to operate on the Outer Continental Shelf if they have (a) aU.S. crew or (b) the crew of the nation of which the vessel is from. If passed, the legislation could affect expected timelines and returns on approved projects. To date, there has been no material impact on Renewables' operations or financial performance as a result of these bills; however, given the uncertainty of resolution of the final legislation and the related effects to our offshore projects, we currently cannot predict if there will be materially adverse impacts to our business, results of operations or financial condition. There are a limited number of turbine suppliers in the market. Renewables' largest turbine suppliers, Siemens-Gamesa and GE Wind, are engaged in an intellectual property dispute with respect to certain offshore wind turbines. To date, there has been no material impact on Renewables' operations or turbine procurement; however, we are monitoring this dispute and we cannot predict if there will be materially adverse impacts to our business, results of operations or financial condition.
Summary of Results of Operations
Our operating revenues increased by 21%, from
Networks business revenues increased mainly due to rate increases in
Net income attributable toAVANGRID increased by 88% from$98 million for the three months endedJune 30, 2021 to$184 million for the three months endedJune 30, 2022 , primarily due to higher Networks revenues from theNew York rate case activity. Adjusted net income (a non-GAAP financial measure) increased by 46% from$122 million for the three months endedJune 30, 2021 to$178 million for the three months endedJune 30, 2022 . The increase is primarily due to a$26 million increase in Renewables driven primarily by favorable production, including new assets in service and curtailment payments, and favorable impacts from our tax equity partnerships in the current period, a$21 million increase in Networks driven primarily by new rate case activity inNew York which was approvedNovember 19, 2020 , an$11 million impact from the arrearages order inNew York , and$9 million decrease in Corporate mainly driven by favorable tax expense in the period.
For additional information and reconciliation of the non-GAAP adjusted net
income to net income attributable to
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 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, 2021 . 55 --------------------------------------------------------------------------------
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 did not resume untilApril 2022 .
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, which would be removed after demonstrating satisfactory customer service performance. InSeptember 2021 , CMP met the 18-month required rolling average satisfactory customer service benchmarks and filed with the MPUC a request for removal of the management efficiency adjustment, which was approved by the MPUC effective as of itsFebruary 18, 2022 order.
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 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$139 million and$142 million , respectively, for this item atJune 30, 2022 andDecember 31, 2021 . 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. NYSEG and RG&E received the auditors confidential draft report inMay 2022 and are responding to the report's factual accuracy. NYSEG and RG&E expect the final report to be issued in 2023 and cannot predict the outcome of the final report.
New England Clean Energy Connect
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 was appealed by certain intervenors. OnJuly 21, 2022 , theMaine Board of Environmental Protection , or BEP, denied the appeals of the MDEP Order, as well as the appeal of MDEP'sDecember 4, 2020 Order approving the transfer of the permits for the project toNECEC Transmission LLC . In addition, certain intervenors have appealed MDEP'sMay 7, 2021 Order approving certain minor revisions. This appeal remains pending before the BEP. 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 56 -------------------------------------------------------------------------------- declaratory and injunctive relief asking the court to, among other things, 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 . 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 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. This challenge to the Presidential Permit is currently pending before the District Court inMaine . We cannot predict the outcome of this proceeding. OnAugust 10, 2021 , theMaine Superior Court issued a ruling reversing theMaine Bureau of Parks and Lands' , or BPL, decision to grant a lease over a small area of public reserved lands to host a small section of the NECEC project. OnAugust 13, 2021 , 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 sitting as the Law Court, or the Maine Law Court. As a result of the appeal, theMaine Superior Court decision vacating the lease is stayed. OnSeptember 15, 2021 , the Maine Law Court orderedNECEC Transmission LLC to refrain from construction activities on the public reserved lands lease area during the pendency of the appeal. Oral argument before the Law Court is scheduled forMay 10, 2022 . We cannot predict the outcome of this proceeding. OnNovember 2, 2021 ,Maine voters approved, by virtue of a referendum, L.D. 1295 (I.B. 1) (130th Legis. 2021), "An Act To Require Legislative Approval of Certain Transmission Lines, Require Legislative Approval of Certain Transmission Lines and Facilities and Other Projects on Public Reserved Lands and Prohibit the Construction of Certain Transmission Lines in theUpper Kennebec Region " (the "Initiative"). The Initiative (i) requires, retroactive to 2020, legislative approval for the construction of any high-impact transmission line inMaine , with approval by a 2/3 vote of all members elected to eachHouse of the Maine Legislature required for such lines crossing or utilizing public lands; (ii) prohibits, retroactive to 2020, construction of a high-impact electric transmission line in theUpper Kennebec Region and (iii) requires, retroactive to 2014, the vote of 2/3 of all members elected to eachHouse of the Maine Legislature for a lease by BPL of public reserved lands for transmission lines and similar linear projects.
On
OnNovember 23, 2021 , the MDEP issued an Order finding that the Initiative constitutes a changed circumstance justifying the suspension of the MDEP permits for the NECEC project. This MDEP-ordered suspension will remain effective unless and until a court grantsNetworks and NECEC Transmission LLC's request for a preliminary injunction and allows continued construction of the NECEC project pending the final outcome of the legal challenge to the Initiative, or, if a court does not grant a preliminary injunction, until final disposition of the legal challenge in favor ofNetworks and NECEC Transmission LLC . In its order, the MDEP ruled that, so long as such MDEP permits are suspended, all construction must stop, subject to the performance and completion of certain activities required by the Order. The MDEP also stated in its Order that in the event that the current ordered suspension ended, it would promptly consider whether to suspend the MDEP permits for the NECEC in light of the ruling from theMaine Superior Court reversing BPL's decision to grant a lease over public reserved lands for the NECEC project. OnDecember 16, 2021 , the Maine Business & Consumer Court deniedNetworks and NECEC Transmission LLC's request for a preliminary injunction temporarily precluding application of the Initiative to the NECEC transmission project. The Initiative took effect onDecember 19, 2021 . OnDecember 22, 2021 ,Networks and NECEC Transmission LLC moved that the Business & Consumer Court report its decision to the Maine Law Court for an interlocutory appeal under the applicable rule of appellate procedure. OnDecember 28, 2021 , the Business & Consumer Court granted this motion, thereby sending its decision to the Law Court for review. Briefing on the report is complete and oral argument before the Law Court took place onMay 10, 2022 . We cannot predict the outcome of these proceedings. 57 --------------------------------------------------------------------------------
At the municipal level, twenty-one towns have granted municipal approvals to date.
Construction of the NECEC project started inJanuary 2021 and was halted inNovember 2021 . Construction remains stopped pending a decision by the Maine Law Court on the report of the Business & Consumer Court decision that deniedNetworks and NECEC Transmission LLC's request for preliminary injunction preventing enforcement of the Initiative against the NECEC project during the pendency of the challenge against the Initiative.NECEC Transmission LLC has communicated to the counterparties to its agreements, including, without limitation, vendors, suppliers andTSA parties, the suspension of the MDEP permit, the Initiative and the status of the pending challenge. There are potentially adverse implications arising out of the suspension of the MDEP permit, the Initiative and the pending challenge, which may have negative impacts on the NECEC project, including impacts related to increased project construction costs and a decrease in expected returns. We cannot predict the outcome of the pending challenge against the Initiative. The company estimates a commercial operation date inDecember 2024 , assuming construction activities resume in 2022. As ofJune 30, 2022 , we have capitalized approximately$575 million for the NECEC project. The outcome of these ongoing legal proceedings could have an adverse effect on the success of the NECEC project indicating that the carrying amount may not be recoverable. We cannot predict the outcome of these proceedings and the results of such evaluation, if any.
PURA Investigation of the Preparation for and Response to the Tropical Storm Isaias
OnAugust 6, 2020 , 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 Tropical 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, which addressed issues in both dockets. 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 . Also, 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. 58 --------------------------------------------------------------------------------
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 . OnJanuary 11, 2022 , an uncontested Stipulation settling this matter and two other dockets was filed with the MPUC. All but two parties to the three proceedings joined the Stipulation and the two non-signatory parties do not oppose the Stipulation. In the Stipulation, among other things, the Stipulating Parties agree to support resolution of all issues, that CMP shall pay$150,000 to be used to support a facilitator for theMPUC's DG Interconnection Working Group for a period of two years and$550,000 to fund up to six contracted analyst resources to support the interconnection process for a period of two years. Also, CMP has agreed to meet certain published cluster study timelines subject to qualifications set forth in the Stipulation. OnMarch 22, 2022 , the MPUC approved the Stipulation.
Maine Government-Run Power Referendum and Legislation to Ensure Utility Accountability
OnSeptember 18, 2020 , a request was submitted to theMaine Secretary of State to initiate the process of placing a government-run power referendum on the ballot. The proponents did not submit signatures inJanuary 2022 , the deadline to place the referendum on theNovember 2022 ballot, but have made statements that they intend to continue to collect sufficient signatures to present the referendum in a general election. We cannot predict the outcome of this request or any potential referendum. InFebruary 2022 , a bill, L.D. 1959, An Act To Ensure Transmission and Distribution Utility Accountability was introduced in theMaine Legislature . The bill provides additional Maine PUC requirements onMaine large electric utilities, including CMP, to ensure customer service and reliability. The bill imposes penalties for poor performance, adds more protection for whistleblowers who report illegal or improper behavior by a utility, authorizes the PUC to audit utilities' financial information, requires utilities to submit regular plans to address the impact of climate change on their infrastructure, and initiates a proceeding for divestiture subject to constitutional protections due process and just compensation should the large electric utilities fail to meet to be determined standards. The bill, as amended, passed theMaine Legislature inApril 2022 and became law.
Late Payment Charge Order
Due to the COVID-19 pandemic, theState of New York previously issued an executive order onMarch 20, 2020 which, among other items, resulted in the suspension of recovery of unbilled fees, including late payment fees and other fees associated with customer non-payment including, but not limited to, connection fees and reconnection fees. OnJune 17, 2022 , the NYPSC issued an order authorizing NYSEG and RG&E to establish a surcharge to recover unbilled fees for Rate Year One and a surcharge/surcredit for Rate Years Two and Three, subject to the offsetting cost reductions resulting from the COVID-19 pandemic, starting onJuly 1, 2022 .
Customer Arrearages Reduction Order
OnJune 16, 2022 , the NYPSC issued an order authorizing an arrears reduction program targeting low-income customers to provide COVID-19-related relief through a one-time bill credit to eliminate accrued arrears throughMay 1, 2022 . A portion of the targeted arrearages will be funded via direct contributions from theState of New York , and the remainder to be received via a surcharge to all customers. The surcharge recovery is over five years for RG&E and three years for NYSEG, which begins onAugust 1, 2022 . 59 --------------------------------------------------------------------------------
Results of Operations
The following tables set forth financial information by segment for each of the
periods indicated:
Three Months Ended Three Months Ended
June 30, 2022 June 30, 2021
Total Networks Renewables Other(1) Total Networks Renewables Other(1)
(in millions)
Operating Revenues $ 1,794 $ 1,464 $ 330 $ - $ 1,477 $ 1,219 $ 258 $ -
Operating Expenses
Purchased power, natural gas
and fuel used 440 384 56 - 265 236 29 -
Operations and maintenance 693 568 120 5 676 544 128 4
Depreciation and amortization 271 164 106 1 250 149 100 1
Taxes other than income taxes 169 148 20 1 155 143 17 (5)
Total Operating Expenses 1,573 1,264 302 7 1,346 1,072 274 -
Operating Income 221 200 28 (7) 131 147 (16) -
Other Income (Expense)
Other income (expense) 9 9 1 (1) 34 26 7 1
Earnings (losses) from equity
method investments 6 2 4 - 4 5 (1) -
Interest expense, net of
capitalization (79) (61) (3) (15) (75) (53) - (22)
Income (Loss) Before Income
Tax 157 150 30 (23) 94 125 (10) (21)
Income tax expense (benefit) (4) 21 (20) (5) 10 24 (21) 7
Net Income (Loss) 161 129 50 (18) 84 101 11 (28)
Net loss attributable to
noncontrolling interests 23 - 23 - 14 - 14 -
Net Income (Loss)
Attributable to Avangrid,
Inc. $ 184 $ 129 $ 73 $ (18) $ 98 $ 101 $ 25 $ (28)
Six Months Ended Six Months Ended
June 30, 2022 June 30, 2021
Total Networks Renewables Other(1) Total Networks Renewables Other(1)
(in millions)
Operating Revenues $ 3,927 $ 3,399 $ 528 $ - $ 3,443 $ 2,792 $ 651 $ -
Operating Expenses
Purchased power, natural gas
and fuel used 1,181 1,140 41 - 766 685 81 -
Operations and maintenance 1,344 1,107 233 4 1,318 1,050 267 1
Depreciation and amortization 532 325 206 1 497 305 191 1
Taxes other than income taxes 347 308 38 1 325 292 36 (3)
Total Operating Expenses 3,404 2,880 518 6 2,906 2,332 575 (1)
Operating Income 523 519 10 (6) 537 460 76 1
Other Income (Expense)
Other income (expense) 20 21 2 (3) 35 32 1 2
Earnings (losses) from equity
method investments 259 5 254 - 5 7 (2) -
Interest expense, net of
capitalization (150) (111) (6) (33) (148) (106) - (42)
Income (Loss) Before Income Tax 652 434 260 (42) 429 393 75 (39)
Income tax expense (benefit) 64 52 21 (9) 24 66 (30) (12)
Net Income (Loss) 588 382 239 (33) 405 327 105 (27)
Net loss (income) attributable
to noncontrolling interests 41 (1) 42 - 27 (1) 28 -
Net Income (Loss) Attributable
to Avangrid, Inc. $ 629 $ 381 $ 281 $ (33) $ 432 $ 326 $ 133 $ (27) (1)"Other" represents Corporate and intersegment eliminations.
60
--------------------------------------------------------------------------------Comparison of Period to Period Results of Operations
Three Months Ended
Operating Revenues
Our operating revenues increased by$317 million , or 21%, from$1,477 million for the three months endedJune 30, 2021 to$1,794 million for the three months endedJune 30, 2022 , as detailed by segment below:
Networks
Operating revenues increased by$245 million , or 20%, from$1,219 million for the three months endedJune 30, 2021 to$1,464 million for the three months endedJune 30, 2022 . Electricity and gas revenues increased by$37 million , primarily due to rate increases inNew York effectiveDecember 1, 2020 ,$17 million increase in late payment fees and$2 million of other. Electricity and gas revenues changed due to the following items that have offsets within the income statement: an increase of$148 million in purchased power and purchased gas (offset in purchased power) driven by higher average pricing in commodities in the period and an increase of$41 million in flow through amortizations (offset in operating expenses).
Renewables
Operating revenues increased by$72 million , or 28%, from$258 million for the three months endedJune 30, 2021 to$330 million for the three months endedJune 30, 2022 . The increase in operating revenue is primarily driven by favorable MtM changes of$83 million on energy derivative transactions entered into for economic hedging purposes and$8 million from production, including new assets in service and curtailment payments in the current period, offset by a decrease of$15 million in power trading driven by lower average prices in the second quarter of 2022 compared to the same period of 2021 and$4 million from the sale of assets in the second quarter of 2021.
Our purchased power, natural gas and fuel used increased by$175 million , or 66%, from$265 million for the three months endedJune 30, 2021 to$440 million for the three months endedJune 30, 2022 , as detailed by segment below:
Networks
Purchased power, natural gas and fuel used increased by$148 million , or 63%, from$236 million for the three months endedJune 30, 2021 to$384 million for the three months endedJune 30, 2022 . The increase is primarily driven by a$148 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 increased by$27 million , or 93%, from$29 million for the three months endedJune 30, 2021 to$56 million for the three months endedJune 30, 2022 . The increase is primarily due to unfavorable MtM changes on derivatives of$54 million due to market price changes in the period, offset by a decrease of$27 in power and gas purchases due to lower average prices in the current period.
Operations and Maintenance
Operations and maintenance expenses increased by$17 million , or 3%, from$676 million for the three months endedJune 30, 2021 to$693 million for the three months endedJune 30, 2022 , as detailed by segment below:
Networks
Operations and maintenance expenses increased by$24 million , or 4%, from$544 million for the three months endedJune 30, 2021 to$568 million for the three months endedJune 30, 2022 . The increase is driven by$7 million of increased personnel expenses primarily driven by an increase in headcount, offset by a$24 million decrease in uncollectible expenses driven primarily by the arrearages order inNew York . In addition, there were increases of$41 million in flow-through amortizations (which is offset in revenue).
Renewables
Operations and maintenance expenses decreased by$8 million , or 6%, from$128 million for the three months endedJune 30, 2021 to$120 million for the three months endedJune 30, 2022 . The decrease is primarily due to a decrease of$14 million driven by the write-off of certain development projects in the same period of 2021,$6 million of reclassifications (offset in other income) recorded in 2021, offset by a$9 million increase in personnel costs driven primarily by increase in headcount in the period and$3 million of other increases. 61 --------------------------------------------------------------------------------
Depreciation and Amortization
Depreciation and amortization for the three months endedJune 30, 2022 was$271 million compared to$250 million for the three months endedJune 30, 2021 , representing an increase of$21 million . The increase is driven by$21 million from plant additions in Networks and Renewables in the current period.
Other Income (Expense) and Earnings (Losses) from Equity Method Investments
Other income (expense) and equity earnings (losses) decreased by$23 million from$38 million for the three months endedJune 30, 2021 to$15 million for the three months endedJune 30, 2022 . The change is primarily due to a$5 million unfavorable change in the non-service component of pension expense driven by the revised actuarial studies in Networks (which is partially offset in revenue), decrease of$15 million from the carrying costs on regulatory deferrals primarily driven by the rate case requirements inNew York and$3 million other decreases in the period.
Interest Expense, Net of Capitalization
Interest expense for the three months ended
Income Tax Expense The effective tax rates, inclusive of federal and state income tax, for the three months endedJune 30, 2022 and 2021, were (2.5)% and 10.6%, respectively, which are lower than the federal statutory tax rate of 21%, primarily due to the recognition of production tax credits associated with wind production and the effect of the excess deferred tax amortization resulting from the Tax Act.
Six Months Ended
Operating Revenues
Our operating revenues increased by
Networks
Operating revenues increased by$607 million , or 22%, from$2,792 million for the six months endedJune 30, 2021 to$3,399 million for the six months endedJune 30, 2022 . Electricity and gas revenues increased by$63 million , primarily due to rate increases inNew York effectiveDecember 1, 2020 ,$10 million favorable impact from increased deferrals,$23 million increase in late payment fees. Electricity and gas revenues changed due to the following items that have offsets within the income statement: an increase of$455 million in purchased power and purchased gas (offset in purchased power) driven by higher average pricing in commodities in the period and an increase of$56 million in flow through amortizations (offset in operating expenses).
Renewables
Operating revenues decreased by$123 million , or 19%, from$651 million for the six months endedJune 30, 2021 , to$528 million for the six months endedJune 30, 2022 . The decrease in operating revenues was primarily due to a$139 million decrease in merchant prices driven mainly by lower demand as compared to the same period of 2021 when demand was higher during theTexas storm,$34 million in power trading driven by lower average prices in the first half of 2022 compared to the same period of 2021,$4 million from the sale of assets in the second quarter of 2021, offset by favorable MtM changes of$40 million on energy derivative transactions entered for economic hedging purposes,$14 million from production, including new assets in service and curtailment payments in the current period.
Purchased power, natural gas and fuel used increased by$415 million , or 54%, from$766 million for the six months endedJune 30, 2021 to$1,181 million for the six months endedJune 30, 2022 , as detailed by segment below:
Networks
Purchased power, natural gas and fuel used increased by$455 million , or 66%, from$685 million for the six months endedJune 30, 2021 to$1,140 million for the six months endedJune 30, 2022 . The increase is primarily driven by a$455 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
62
--------------------------------------------------------------------------------
Purchased power, natural gas and fuel used decreased by $40 million , or 49%,
from $81 million for the six months ended June 30, 2021 to $41 million for the
six months ended June 30, 2022 . The decrease is primarily due to favorable MtM
changes on derivatives of $6 million driven by market price changes in the
period and a decrease of $34 million in power and gas purchases due to lower
average prices in the current period.
Operations and Maintenance
Operations and maintenance expenses increased by$26 million , or 2%, from$1,318 million for the six months endedJune 30, 2021 to$1,344 million for the six months endedJune 30, 2022 , as detailed by segment below:
Networks
Operations and maintenance expenses increased by$57 million , or 5%, from$1,050 million for the six months endedJune 30, 2021 to$1,107 million for the six months endedJune 30, 2022 . The increase is driven by$8 million of increased personnel expenses primarily driven by an increase in headcount, increased business costs of$25 million , offset by a$32 million decrease in uncollectible expenses driven primarily by the arrearages order inNew York . In addition, there were increases of$56 million in flow-through amortizations (which is offset in revenue).
Renewables
Operations and maintenance expenses decreased by$34 million , or 13%, from$267 million for the six months endedJune 30, 2021 to$233 million for the six months endedJune 30, 2022 . The decrease is primarily due to a$16 million bad debt provision recorded in the first half of 2021 driven by an increase in uncollectibles billed during theTexas storm, decrease of$20 million primarily driven by the write-off of certain development projects in the same period of 2021,$9 million in land rents and maintenance costs driven by a lower number of new sites in 2022 compared to the same period of 2021 and$2 million of other decreases, offset by a$13 million increase in personnel costs driven primarily by increase in headcount in the period.
Depreciation and Amortization
Depreciation and amortization for the six months ended
Other Income (Expense) and Earnings (Losses) from Equity Method Investments
Other income (expense) and equity earnings (losses) increased by$239 million from$40 million for the six months endedJune 30, 2021 to$279 million for the six months endedJune 30, 2022 . The increase is primarily due to a$246 million gain recognized in the current period from the offshore joint venture restructuring transaction in Renewables, offset by$7 million unfavorable change in the non-service component of pension expense driven by the revised actuarial studies in Networks (which is partially offset in revenue).
Interest Expense, Net of Capitalization
Interest expense for the six months endedJune 30, 2022 and 2021 was$150 million and$148 million , respectively. The change is primarily due to an increase of$4 million of interest expense at Networks from increased debt in the current period, offset by a$2 million decrease driven by a favorable impact from the fair value hedge of the debt in Other.
Income Tax
The effective tax rates, inclusive of federal and state income tax, for the six months endedJune 30, 2022 was 9.8%, which is below 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, partially offset by the tax on gain from the offshore joint venture restructuring transaction, which is reflected in total in the first half of 2022 as a discrete adjustment. The effective tax rates, inclusive of federal and state income tax, for the six months endedJune 30, 2021 was 5.6%, which was 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.
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 63 -------------------------------------------------------------------------------- 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 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, 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
under
64
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The following tables provide a reconciliation between Net Income attributable to
AVANGRID and non-GAAP measures Adjusted Net Income, Adjusted EBITDA and Adjusted
EBITDA with Tax Credits by segment for the three and six months ended June 30,
2022 and 2021, respectively:
Three Months Ended June 30, 2022 Six Months Ended June 30, 2022
Total Networks Renewables Corporate* Total Networks Renewables Corporate*
(in millions) (in millions)
Net Income Attributable to Avangrid,
Inc. $ 184 $ 130 $ 73 $ (18) $ 629 $ 381 $ 281 $ (33)
Adjustments:
Mark-to-market earnings - Renewables (8) - (8) - (5) - (5) -
Impact of COVID-19 (1) (1) - - 1 1 - -
Merger costs 2 - - 2 2 - - 2
Income tax impact of adjustments (1) 2 - 2 - 1 - 1 (1)
Adjusted Net Income (2) $ 178 $ 129 $ 66 $ (17) $ 628 $ 382 $ 277 $ (32)
Net (loss) income attributable to
noncontrolling interests (23) - (23) - (41) 1 (42) -
Income tax expense (benefit) (6) 21 (22) (5) 63 52 20 (8)
Depreciation and amortization 271 164 106 1 532 325 206 1
Interest expense, net of
capitalization 79 61 3 15 150 111 6 33
Other (income) expense (9) (9) (1) 1 (20) (21) (2) 3
(Earnings) losses from equity method
investments (6) (2) (4) - (259) (5) (254) -
Adjusted EBITDA (3) $ 484 $ 363 $ 125 $ (5) $ 1,053 $ 846 $ 210 $ (3)
Retained PTCs and ITCs 48 - 48 - 91 - 91 -
PTCs allocated to tax equity
investors 35 - 35 - 64 - 64 -
Adjusted EBITDA with Tax Credits (3)
$ 208 $ (5) $ 1,208 $ 846 $ 366 $ (3) 65
--------------------------------------------------------------------------------
Three Months Ended June 30, 2021 Six
Months Ended
Total Networks Renewables Corporate* Total Networks Renewables Corporate*
(in millions) (in millions)
Net Income Attributable to Avangrid,
Inc. $ 98 $ 101 $ 25 $ (29) $ 432 $ 326 $ 133 $ (28)
Adjustments:
Mark-to-market earnings - Renewables 21 - 21 - 41 - 41 -
Impact of COVID-19 9 9 - - 15 15 - -
Merger costs 3 - - 3 4 - - 4
Income tax impact of adjustments (1) (9) (2) (6) (1) (16) (4) (11) (1)
Adjusted Net Income (2) $ 122 $ 108 $ 41 $ (26) $ 476 $ 337 $ 164 $ (25)
Net (loss) income attributable to
noncontrolling interests (14) - (14) - (27) 1 (28) -
Income tax expense (benefit) 19 26 (14) 7 40 70 (18) (12)
Depreciation and amortization 250 149 100 1 497 305 191 1
Interest expense, net of
capitalization 75 53 (1) 23 148 106 (1) 43
Other (income) expense (34) (26) (7) (1) (35) (32) (1) (2)
(Earnings) losses from equity method
investments (4) (5) 1 - (5) (7) 2 -
Adjusted EBITDA (3) $ 414 $ 305 $ 105 $ 4 $ 1,094 $ 780 $ 309 $ 5
Retained PTCs and ITCs 48 - 48 - 93 - 93 -
PTCs allocated to tax equity
investors 19 - 19 - 41 - 41 -
Adjusted EBITDA with Tax Credits (3)
(1)Income tax impact of adjustments: 2022 -$2 million and$2 million from MtM earnings and$1 million and$0 from impact of COVID-19 and$(1) million and$(1) million from merger costs for the three and six months endedJune 30, 2022 , respectively; 2021 -$(6) million and$(11) million from MtM earnings,$(2) million and$(4) million from impact of COVID-19 and$(1) million and$(1) million from merger costs for the three and six months endedJune 30, 2021 , respectively. (2)Adjusted Net Income is a non-GAAP financial measure and is presented after excluding costs incurred in connection with the COVID-19 pandemic, the impact from mark-to-market activities in Renewables and costs incurred related to the PNMR Merger. (3)Adjusted EBITDA is a non-GAAP financial measure defined as adjusted net income adjusted to fully exclude the effects of net (loss) income attributable to noncontrolling interests, income tax expense (benefit), depreciation and amortization, interest expense, net of capitalization, other (income) expense and (earnings) losses from equity method investments. We further define adjusted EBITDA with tax credits as adjusted EBITDA adding back the pre-tax effect of retained PTCs and ITCs and PTCs allocated to tax equity investors.
* Includes corporate and other non-regulated entities as well as intersegment eliminations.
Three Months Ended
Adjusted net income
Our adjusted net income increased by$56 million , or 46%, from$122 million for the three months endedJune 30, 2021 to$178 million for the three months endedJune 30, 2022 . The increase is primarily due to a$26 million increase in Renewables driven primarily by favorable pricing, production, including new assets in service and curtailment payments, and favorable impacts from our tax equity partnerships in the current period, a$21 million increase in Networks driven primarily by new rate case activity inNew York which was approvedNovember 19, 2020 , an$11 million impact from the arrearages order inNew York , and$9 million decrease in Corporate mainly driven by favorable tax expense in the period.
Six Months Ended
Adjusted net income
Our adjusted net income increased by$152 million , or 32%, from$476 million for the six months endedJune 30, 2021 to$628 million for the six months endedJune 30, 2022 . The increase is primarily due to a$113 million increase in Renewables driven by a gain recognized in the current period from the offshore joint venture restructuring transaction, a$45 million increase in Networks driven primarily by rate increases inNew York effectiveDecember 1, 2020 and an$11 million impact from the arrearages order inNew York , offset by$7 million decrease in Corporate mainly driven by unfavorable tax expense in the period. 66 -------------------------------------------------------------------------------- The following tables reconcile Net Income attributable toAVANGRID to Adjusted Net Income (non-GAAP), and EPS attributable toAVANGRID to adjusted EPS (non-GAAP) for the three and six months endedJune 30, 2022 and 2021, respectively: Three Months Ended Six Months Ended June 30, June 30, (Millions) 2022 2021 2022 2021 Networks$ 130 $ 101 $ 381 $ 326 Renewables 73 25 281 133 Corporate (1) (18) (29) (33) (28) Net Income$ 184 $ 98 $ 629 $ 432 Adjustments: Mark-to-market earnings - Renewables (2) (8) 21 (5) 41 Impact of COVID-19 (3) (1) 9 1 15 Merger costs (4) 2 3 2 4 Income tax impact of adjustments 2 (9) 1 (16) Adjusted Net Income (5)$ 178 $ 122 $ 628 $ 476 Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Networks$ 0.34 $ 0.29 $ 0.99 $ 0.99 Renewables 0.19 0.07 0.73 0.41 Corporate (1) (0.05) (0.08) (0.09) (0.08) Net Income$ 0.48 $ 0.28 $ 1.63 $ 1.31 Adjustments: Mark-to-market earnings - Renewables (2) (0.02) 0.06 (0.01) 0.13 Impact of COVID-19 (3) - 0.03 - 0.05 Merger costs (4) - 0.01 0.01 0.01 Income tax impact of adjustments 0.01 (0.03) - (0.05) Adjusted Earnings Per Share (5)$ 0.46 $ 0.35 $ 1.62 $ 1.45 (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)Represents costs incurred in connection with the COVID-19 pandemic, mainly related to bad debt provisions. (4)Pre-merger costs incurred. (5)Adjusted net income and adjusted earnings per share are non-GAAP financial measures and are presented after excluding 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.
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 and throughout the
Liquidity Position
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 67 -------------------------------------------------------------------------------- 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$3,575 million from the lenders committed to the AVANGRID Credit Facility and$500 million from an Iberdrola Group Credit Facility, each of which are described below.
The following table provides the components of our liquidity position as of
As of June 30, As of December 31,
2022 2021
(in millions)
Cash and cash equivalents $ 411 $ 1,474
AVANGRID Credit Facility 3,575 3,575
Iberdrola Group Credit Facility 500 500
Less: borrowings - -
Total $ 4,486 $ 5,549
AVANGRID Commercial Paper Program
AVANGRID Credit Facility
AVANGRID and its subsidiaries, NYSEG, RG&E, CMP, UI, CNG, SCG and BGC, each of which are joint borrowers, have a revolving credit facility with a syndicate of banks, or the AVANGRID Credit Facility, that provides for maximum borrowings of up to$3,575 million in the aggregate, which was executed onNovember 23, 2021 . The agreement contained a commitment from lenders, which expired onApril 20, 2022 to increase maximum borrowings to$4,000 million upon the joinder of PNM and TNMP as borrowers under the AVANGRID Credit Facility. 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. OnNovember 23, 2021 , the executedAVANGRID Credit Facility increasedAVANGRID's maximum sublimit from$1,500 million to$2,500 million . The AVANGRID Credit Facility contains pricing that is sensitive toAVANGRID's consolidated greenhouse gas emissions intensity. The Credit Facility also contains negative covenants, including one that sets the ratio of maximum allowed consolidated debt to consolidated total capitalization at 0.65 to 1.00, for each borrower. Under the AVANGRID Credit Facility, each of the borrowers will pay an annual facility fee that is dependent on their credit rating. The initial facility fees will range from 10 to 22.5 basis points. The maturity date for the AVANGRID Credit Facility isNovember 22, 2026 . As of bothJune 30, 2022 andJuly 26, 2022 , 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 bothJune 30, 2022 andJuly 26, 2022 , was$3,575 million .
Iberdrola Group Credit Facility
AVANGRID 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 bothJune 30, 2022 andJuly 26, 2022 , we had no borrowings outstanding under this credit facility. Capital Resources
On
On
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
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that we will continue to have access to the capital markets as long-term growth
capital is needed. To date, the Company has not experienced limitations in our
ability to access these sources of liquidity in connection with the COVID-19
pandemic. While taking into consideration the current economic environment,
management expects that we will continue to have sufficient liquidity and
financial flexibility to meet our business requirements.
We expect to incur approximately $1.2 billion in capital expenditures through
the remainder of 2022. This estimate is subject to continuing review and actual
capital expenditures may vary significantly. For example, the U.S. Department of
Commerce's anti-circumvention petition alleging that solar panels and cells
shipped from Vietnam , Thailand , Malaysia and Cambodia could result in higher
than expected costs for projects beyond 2022. As a result, the timing and
ultimate cost associated with solar panels and cells and related project capital
expenditures may vary from our current expectations.
Cash Flows
Our cash flows depend on many factors, including general economic conditions, regulatory decisions, weather, commodity price movements and operating expense and capital spending control.
The following is a summary of the cash flows by activity for the six months
ended
Six Months Ended
June 30,
2022 2021
(in millions)
Net cash provided by operating activities $ 805 $ 851
Net cash used in investing activities (1,492) (1,001)
Net cash (used in) provided by financing activities (376) 416
Net (decrease) increase in cash, cash equivalents and
restricted cash $ (1,063) $ 266
Operating Activities
The cash from operating activities for the six months ended
Investing Activities
For the six months endedJune 30, 2022 , net cash used in investing activities was$1,492 million , which was comprised of$1,403 million of capital expenditures and$168 million of payment for the offshore joint venture restructuring transaction, partially offset by$80 million of contributions in aid of construction. For the six months endedJune 30, 2021 , net cash used in investing activities was$1,001 million , which was comprised of$1,264 million of capital expenditures partially offset by$231 million of other investments and equity method investments,$21 million of contributions in aid of construction,$5 million of proceeds from the sale of assets and$4 million of distributions received from equity method investments.
Financing Activities
For the six months endedJune 30, 2022 , financing activities used$376 million in cash reflecting primarily a net decrease in non-current debt and current notes payable of$160 million , distributions to non-controlling interests of$6 million and dividends of$340 million , offset by contribution from non-controlling interests of$138 million in the period. For the six months endedJune 30, 2021 , financing activities provided$416 million in cash reflecting primarily proceeds from private placements of$4 billion in connection with share issuance and contribution from non-controlling interests of$10 million in the period, offset by a net decrease in non-current debt with affiliate and current notes payable of$3.3 billion , dividends of$272 million and distributions to non-controlling interests of$5 million .
Off-Balance Sheet Arrangements
There have been no material changes in our off-balance sheet arrangements during the six months endedJune 30, 2022 as compared to those reported for the fiscal year endedDecember 31, 2021 in our Form 10-K.
Contractual Obligations
There have been no material changes in contractual and contingent obligations during the six months endedJune 30, 2022 as compared to those reported for the fiscal year endedDecember 31, 2021 in our Form 10-K. 69 --------------------------------------------------------------------------------
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. 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. As ofJune 30, 2022 , the only notable changes to the significant accounting policies described in our Form 10-K for the fiscal year endingDecember 31, 2021 , are with respect to our adoption of the new accounting pronouncements described in the Note 3 of our condensed consolidated financial statements for the six months endedJune 30, 2022 . 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, 2022 , and reflected in our condensed consolidated financial statements are described in Note 3 of our condensed consolidated financial statements for the six months endedJune 30, 2022 . 70 -------------------------------------------------------------------------------- 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, including theDepartment of Commerce's anti-circumvention petition that could adversely impact renewable solar energy projects; •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, including the ongoing geopolitical conflict withRussia andUkraine ; •the impact of any change to applicable laws and regulations, including those subject to referendums and legal challenges, 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 (as defined in "Note 1 - Background and Nature of Operations" to the accompanying unaudited condensed consolidated financial statements under Part I, Item 1 of this report), 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, including but not limited to impacts from consumer payment behavior and supply chain delays, 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.
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