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July 27, 2022, 4:11 p.m. EDT

10-Q: AVANGRID, INC.

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(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and with our audited consolidated financial statements as of December 31, 2021 and 2020, and for the three years ended December 31, 2021, included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission, or the SEC, on February 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 the SEC.

Overview

AVANGRID aspires to be the leading sustainable energy company in the United States. Our purpose is to work every day to deliver a more accessible clean energy model that promotes healthier, more sustainable communities. A commitment to sustainability is firmly entrenched in the values and principles that guide AVANGRID, with environmental, social, governance and financial sustainability key priorities driving our business strategy.

AVANGRID has approximately $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 in New York and New England. Avangrid Renewables owns and operates 9.0 gigawatts of electricity capacity, primarily through wind and solar power, with a presence in 22 states across the United States. AVANGRID supports the achievement of the Sustainable Development Goals approved by the member states of the United Nations, was named among the World's Most Ethical companies in 2022 for the fourth consecutive year by the Ethisphere Institute and is listed by Forbes and Just Capital as one of the 2022 Just 100, an annual ranking of the most just U.S. public companies. AVANGRID employs approximately 7,300 people. Iberdrola S.A., or Iberdrola, a corporation (sociedad an�nima) organized under the laws of the Kingdom of Spain, a worldwide leader in the energy industry, directly owns 81.6% of the outstanding shares of AVANGRID common stock. The remaining outstanding shares are owned by various shareholders with approximately 18.4% of AVANGRID's outstanding shares publicly-traded on the New York Stock Exchange (NYSE). AVANGRID's primary businesses are described below.

Our direct, wholly-owned subsidiaries include Avangrid Networks, Inc., or Networks, and Avangrid Renewables Holdings, Inc., or ARHI. ARHI in turn holds subsidiaries including Avangrid Renewables, LLC, or Renewables. Networks owns and operates our regulated utility businesses through its subsidiaries, including electric transmission and distribution and natural gas distribution, transportation and sales. Renewables operates a portfolio of renewable energy generation facilities primarily using onshore wind power and also solar, biomass and thermal power.

Through Networks, we own electric distribution, transmission and generation companies and natural gas distribution, transportation and sales companies in New York, Maine, Connecticut and Massachusetts, delivering electricity to approximately 2.3 million electric utility customers and delivering natural gas to approximately 1.0 million natural gas utility customers as of June 30, 2022.

Networks, a Maine corporation, holds regulated utility businesses, including electric transmission and distribution and natural gas distribution, transportation and sales. Networks serves as a super-regional energy services and delivery company through the eight regulated utilities it owns directly:

New York State Electric & Gas Corporation, or NYSEG, which serves electric and natural gas customers across more than 40% of the upstate New York geographic area;

Rochester Gas and Electric Corporation, or RG&E, which serves electric and natural gas customers within a nine-county region in western New York, centered around Rochester;

The United Illuminating Company, or UI, which serves electric customers in southwestern Connecticut;

Central Maine Power Company, or CMP, which serves electric customers in central and southern Maine;

The Southern Connecticut Gas Company, or SCG, which serves natural gas customers in Connecticut;

Connecticut Natural Gas Corporation, or CNG, which serves natural gas customers in Connecticut;

The Berkshire Gas Company, or BGC, which serves natural gas customers in western Massachusetts; and

Maine Natural Gas Corporation, or MNG, which serves natural gas customers in several communities in central and southern Maine.

Renewables has a combined wind, solar and thermal installed capacity of 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

On October 20, 2020, AVANGRID, PNM Resources, Inc., a New Mexico corporation, or PNMR, and NM Green Holdings, Inc., a New Mexico corporation and wholly-owned subsidiary of AVANGRID, or Merger Sub, entered into an Agreement and Plan of Merger, or Merger Agreement, pursuant to which Merger Sub is expected to merge with and into PNMR, with PNMR surviving the Merger as a direct wholly-owned subsidiary of AVANGRID, or the Merger. PNMR is a publicly-owned holding company with two regulated utilities providing electricity and electric services in New Mexico and Texas. PNMR's electric utilities are the Public Service Company of New Mexico and the Texas-New Mexico Power Company. Following consummation of the Merger, AVANGRID will expand its geographic and regulatory diversity with ten regulated electric and gas companies in six states to help expand our growing leadership position in transforming the U.S. energy industry.

Pursuant to the Merger Agreement, each issued and outstanding share of the common stock of PNMR (other than (i) the issued shares of PNMR common stock that are owned by AVANGRID, Merger Sub, PNMR or any wholly-owned subsidiary of AVANGRID or PNMR, which will be automatically cancelled at the time the Merger is consummated and (ii) shares of PNMR common stock held by a holder who has not voted in favor of, or consented in writing to, the Merger who is entitled to, and who has demanded, payment for fair value of such shares) will be converted, at the time the Merger is consummated, into the right to receive $50.30 in cash, or Merger Consideration, or approximately $4.3 billion in aggregate consideration. In connection with the Merger, Iberdrola has provided the Iberdrola Funding Commitment Letter, pursuant to which Iberdrola has unilaterally agreed to provide to AVANGRID, or arrange the provision to AVANGRID of, funds to the extent necessary for AVANGRID to consummate the Merger, including the payment of the aggregate Merger Consideration.

On April 15, 2021, AVANGRID entered into a side letter agreement with Iberdrola, which sets forth certain terms and conditions relating to the Funding Commitment Letter (the Side Letter Agreement). The Side Letter Agreement provides that any drawing in the form of indebtedness made by AVANGRID 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 pay Iberdrola a facility fee equal to 0.12% per annum on the undrawn portion of the funding commitment set forth in the Funding Commitment Letter.

On February 12, 2021, the shareholders of PNMR approved the proposed Merger. As of November 1, the Merger had obtained all regulatory approvals other than from the NMPRC. On November 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 in June 2021. On December 8, 2021, the NMPRC issued an order rejecting the amended stipulated agreement. On January 3, 2022, AVANGRID and PNMR filed a notice of appeal of the December 8, 2021 decision of the NMPRC with the New Mexico Supreme Court. The Statement of Issues was filed on February 2, 2022 and the Brief in Chief was filed on April 7, 2022. On June 14, 2022, the NMPRC filed its Answer Brief. On

June 13, 2022, New Energy Economy, an intervener in the Merger proceeding, filed its Answer Brief. AVANGRID's Reply Brief is due on August 5, 2022 (pending any additional extensions granted to the parties). On February 24, 2022, the FCC granted an extension to its approval to transfer operating licenses in connection with the Merger.

In addition, on January 3, 2022, AVANGRID, PNMR and Merger Sub entered into an Amendment to the Merger Agreement, or the Amendment, pursuant to which Avangrid, PNMR and Merger Sub each agreed to extend the "End Date" for consummation of the Merger until April 20, 2023. The parties acknowledge in the Amendment that the required regulatory approval from the New 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 by April 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 of Avangrid and PNMR under certain circumstances, including if the Merger is not consummated by April 20, 2023 (subject to a three-month extension by Avangrid 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 and AVANGRID 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 than December 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 before April 20, 2023 (subject to a three-month extension by Avangrid 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 if AVANGRID 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 pay AVANGRID 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 of AVANGRID'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 or AVANGRID 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 provided AVANGRID a commitment letter (Iberdrola Funding Commitment Letter), pursuant to which Iberdrola has unilaterally agreed to provide to AVANGRID, or arrange the provision to AVANGRID of, funds to the extent necessary for AVANGRID to consummate the Merger, including the payment of the aggregate Merger Consideration.

Business Environment

The COVID-19 pandemic continues to cause global economic disruption and volatility in financial markets and the 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 the Federal Reserve's monetary policy and other disruptions caused by global economic conditions, including the COVID-19 pandemic and the Russia and Ukraine 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.

In February 2022, Russia invaded Ukraine resulting in the United States, Canada, the European Union and other countries imposing economic sanctions on Russia. 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

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 the Department of Commerce's, or DOC, anti-circumvention petition alleging that solar panels and cells shipped from Vietnam, Thailand, Malaysia and Cambodia 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. In June 2022, President Joe 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 the United States House of Representatives in March 2022 and the National Defense Authorization Act that was passed by the United 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) a U.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 $1,477 million for the three months ended June 30, 2021 to $1,794 million for the three months ended June 30, 2022.

Networks business revenues increased mainly due to rate increases in New York effective December 1, 2020. Renewables revenues increased mainly due to favorable mark to market, or MtM, changes on energy derivative transactions entered into for economic hedging purposes and higher curtailment payments.

Net income attributable to AVANGRID increased by 88% from $98 million for the three months ended June 30, 2021 to $184 million for the three months ended June 30, 2022, primarily due to higher Networks revenues from the New York rate case activity.

Adjusted net income (a non-GAAP financial measure) increased by 46% from $122 million for the three months ended June 30, 2021 to $178 million for the three months ended June 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 in New York which was approved November 19, 2020, an $11 million impact from the arrearages order in New 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 AVANGRID, see "-Non-GAAP Financial Measures".

See "-Results of Operations" for further analysis of our operating results for the quarter.

Legislative and Regulatory Update

We are subject to complex and stringent energy, environmental and other laws and regulations at the federal, state and local levels as well as rules within the independent system operator, or ISO, markets in which we participate. Federal and state legislative and regulatory actions continue to change how our business is regulated. We actively participate in the regulatory process at the federal, regional, state and ISO levels. Significant updates are discussed below. For a further discussion of the environmental and other governmental regulations that affect us, see our Form 10-K for the year ended December 31, 2021.

Customer Disconnections

Due to the COVID-19 pandemic, all of our regulated utilities suspended customer disconnections commencing in March 2020. In New York, we had voluntarily suspended disconnections for non-payment. The New York state legislature passed a bill stating moratoriums on residential customer disconnections shall remain in place until 180 days after the COVID-19 state of emergency in New York is lifted, which occurred on June 24, 2021. Due to the winter disconnection moratorium period, disconnections did not resume until April 2022.

CMP Metering and Billing Investigation

On February 19, 2020, the MPUC issued an order in CMP's distribution rate case proceeding and on February 24, 2020 issued an order in the metering and billing investigation. Each order reflected the MPUC's conclusion that CMP's Metering and Billing system is accurately reporting data, there is no systemic root cause for high usage complaints and errors related to CMP's metering and billing system are localized and random, not systemic. However, the MPUC orders imposed a reduction of 100 basis points in ROE, as a management efficiency adjustment, to address the MPUC Commissioners' concerns with CMP's customer service implementation and performance following the launch of its new billing system in 2017, which would be removed after demonstrating satisfactory customer service performance. In September 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 its February 18, 2022 order.

CMP Standard Offer Uncollectible Adder Investigation

On August 19, 2020, the MPUC issued a Notice of Investigation to open an investigation into whether the uncollectible adder to CMP's standard offer retainage account for the residential and small non-residential standard offer customer class should be increased for standard offer electricity-supply rates that go into effect January 1, 2022. The investigation also included a review of CMP's credit and collection practices.

On June 22, 2021, CMP and the Maine Office of the Public Advocate executed and filed with the MPUC a Stipulation resolving all matters in this proceeding, which requires CMP to credit the residential and small non-residential standard-offer retainage account for $4 million. On June 29, 2021, the MPUC issued an Order Approving Stipulation pursuant to which the MPUC approved the Stipulation and closed the investigation.

Power Tax Audits

Previously, CMP, NYSEG and RG&E implemented Power Tax software to track and measure their respective deferred tax amounts. In connection with this change, we identified historical updates needed with deferred taxes recognized by CMP, NYSEG and RG&E and increased our deferred tax liabilities, with a corresponding increase to regulatory assets, to reflect the updated amounts calculated by the Power Tax software. Since 2015, the NYPSC and MPUC accepted certain adjustments to deferred taxes and associated regulatory assets for this item in recent distribution rate cases, resulting in regulatory asset balances of approximately $139 million and $142 million, respectively, for this item at June 30, 2022 and December 31, 2021.

CMP began recovering its regulatory asset in 2020. In 2017, the NYPSC commenced an audit of the power tax regulatory assets. On January 11, 2018, the NYPSC issued an order opening an operations audit on NYSEG and RG&E and certain other New York utilities regarding tax accounting. NYSEG and RG&E received the auditors confidential draft report in May 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 the U.S. Department of Energy, or DOE, authorizing the construction, operation, maintenance and connection of facilities for the transmission of electric energy at the international border between the United States and Canada. On January 8, 2020, the Maine Land Use Planning Commission, or LUPC, granted the LUPC Certification for the NECEC. The Maine Department of Environmental Protection, or MDEP, granted Site Location of Development Act, Natural Resources Protection Act, and Water Quality Certification permits for the NECEC by an Order dated May 11, 2020. The MDEP Order was appealed by certain intervenors. On July 21, 2022, the Maine Board of Environmental Protection, or BEP, denied the appeals of the MDEP Order, as well as the appeal of MDEP's December 4, 2020 Order approving the transfer of the permits for the project to NECEC Transmission LLC. In addition, certain intervenors have appealed MDEP's May 7, 2021 Order approving certain minor revisions. This appeal remains pending before the BEP. We cannot predict the outcome of these proceedings.

On November 6, 2020, the project received the required approvals from the U.S. Army Corps of Engineers, or Army Corps, pursuant to Section 10 of the Rivers and Harbor Act of 1899 and Section 404 of the Clean Water Act. A complaint for

declaratory and injunctive relief asking the court to, 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 in Maine.

ISO-NE issued the final System Impact Study (SIS) for NECEC on May 13, 2020, determining the upgrades required to permit the interconnection of NECEC to the . . .

Jul 27, 2022

COMTEX_411104955/2041/2022-07-27T16:10:51

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