Avangrid, Inc.

Hello and welcome to Avangrid's fourth quarter and full year 2021 earnings conference call. I would now like to hand over to our host, Michelle Hansen, Manager of Investor Relations. Please go ahead.

Thank you, Elliot, and good morning to everyone. Thank you for joining us today to discuss Avangrid's fourth quarter 2021 earnings results. Presenting on the call today are Dennis Areola, our Chief Executive Officer, Patricia Goscow, our Chief Financial Officer, And also joining us today will be Bob Trump, Deputy Chief Executive Officer and President of Off On Grid, Katherine Stempion, President and Chief Executive Officer of Off On Grid Network, Jose Antonio Miranda, Co-CEO and President Onshore, Bill White, Co-CEO and President Offshore, and Doug Stuber, our outgoing CFO. If you do not have a copy of our press release or presentation for today's call, they are available on our website at www.offongrid.com. During today's call, we will make forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Building Station Reform Act of 1995, based on current expectations and assumptions, which are subject to risks and uncertainties. Actual results can differ materially from our forward-looking statements if any of our key assumptions are incorrect or because of other factors discussed in OutlineGrid's earnings news release and the comments made during this conference call in the respective section of the accompanying presentation or in our latest reports and findings of the SEC, each of which can be found on our website. We do not undertake any duty to update any forward-looking statements. Today's presentation also includes references to non-GAAP financial measures. You should refer to the information contained in the slides of some of these state presentations for definitional information and reconciliations of non-GAAP financial measures to the closest GAAP financial measures. I will now turn the call over to Ben.

Well, thanks, Michelle, and good morning, everyone. We appreciate you joining us for our fourth quarter earnings call. Let's get started with the review of 2021, beginning on slide five. By nearly all accounts, 2021 was a banner year for Avangrid as we successfully demonstrated that by focusing on execution and building a culture of accountability, we could deliver on our operating and financial commitments. In 2021, we finished the year with net income and adjusted net income up 22% and 25%, respectively, above our 2020 results. In addition to our strong consolidated financial results, each of our individual business segments delivered as well. At networks, adjusted net income increased 16%, and at renewables, adjusted net income was up 48%. Even with the impact of our equity issuance in May, Auburn Grid's adjusted earnings per share rose 8% compared with 2020 to $2.18 per share. Now, this success was mainly driven by our strong operating performance and customer service and networks, which represents over 80% of our earnings. In renewables, we delivered in critical growth areas, such as offshore wind, by completing the financing and then commencing construction for Vineyard Wind 1, our 800-megawatt joint venture. In December, we were selected as a winner for our largest offshore project yet, a 1.2 gigawatt award for Commonwealth Wind. In addition, we advanced construction and continued improvements to our fleet's energetic availability in onshore wind and solar. Additionally, we were able to raise $4 billion in equity at the market price without a discount, which strengthened our balance sheet and helped fund our growth plans as we continue to work to get the final approval for our merger with PNM Resources. I'm also proud that Avangrid is continuing to be recognized by multiple organizations for our ESG and F leadership. So needless to say, 2021 was a strong foundational year for Avangrid, from which we will continue to build and grow. Turning to slide six, at our last investor day in November 2020, we told you that Avangrid was going to focus on the basics and improve on how we served our customers. In networks, we made great progress in 2021 with a record investment of $2.2 billion and an increase in rate base of 9% to $11.7 billion. A major component of our improvement has been our renewed commitment to the customer experience. We've reduced call handle times and expanded services like e-billing to more customers, increased our customer service contact satisfaction to over 90%, and thanks to our customer service teams, we secured over $100 million in government assistance to help support customers in need. In Maine, we've turned the corner on our customer service challenges, and now, under the leadership of our new Central Maine Power CEO, Joe Purrington, we're focused on the present and the future, not the past. We're pleased to report that last week, the Maine Public Utilities Commission removed the 100 basis point ROE adjustment imposed on CMP as they recognized the consistent improvements we've made. And moving forward, we're redesigning our overall customer experience and improving our communication channels so that our customers can interact with us in a seamless way. In addition, we've increased our proactive planning for storms using data analytics and increased positioning of crews to respond more effectively when we do get impacted by Mother Nature. As a result, we reduced the number of customers impacted by outages in 2021 by 22%. Now, we also supported other utilities across the country in their time and need, and our dedication and hard work were recognized by our national trade group, EEI. In 2021, our team in New York continued the work of implementing the rate plans that were approved at the end of 2020. We're starting to see the results not only in improved operations, but also on the bottom lines. New York makes up about half of our rate base, and with our focus on our new investments, we've started to see the gap in earned ROE improve by approximately 50 basis points, but we still have more work to do. Turning to onshore renewables, our focus on operational excellence and getting back to basics has substantially improved our wind and solar fleet's energetic availability to over 97% in 2021. This focus is what enabled us to successfully meet customer needs during winter storm Yuri in Texas last year. In 2021, we also delivered 386 megawatts of new wind and solar projects and currently have approximately one gigawatt of projects in construction. And we continue to enhance the value of our onshore business by executing contracts for 210 megawatts of solar and 39 megawatts of RECs. 2021 was truly a monumental year for our offshore business, as we became the first company to cross the finish line for permitting a commercial-scale offshore wind project and completed the financing. As a result, we're now constructing Vineyard Wind 1, which will become the first major offshore wind project to deliver clean energy to U.S. families. We close the year on a high note with another win for our Aubin Grid Renewables team, a 1.2 gigawatt award from Massachusetts for our Commonwealth Wind Project, making it both the largest award for us to date as well as the largest offshore wind project in New England. And last week, Prismian Group announced that it would build the first offshore wind manufacturing plant in Massachusetts, bringing hundreds of new jobs to the state and transforming a former coal power plant site into a clean energy hub. This was part of Avangard's proposal for Commonwealth Wind. And we continue to make progress on Park City Wind and Phase 1 of Kitty Hawk, with BOEM launching the environmental review process for both projects. Now, we did hit a couple of road bumps in 2021 in our PNM merger application approval in New Mexico and with the NECEC referendum in May. However, we remain committed to working toward a successful outcome for both important investments. We've extended our merger agreement with PNM Resources to April 2023, and we filed an appeal with the New Mexico Supreme Court In Maine, we're challenging last year's unconstitutional referendum. We truly believe of these efforts that they're a win-win for all of our stakeholders. With PNM, our merger would bring at least $300 million of benefits to the state of New Mexico, while NECEC would help bring much-needed energy cost relief and stability to New England at a time when families are struggling with rising energy prices. Turning to slide seven, I want to spend a couple minutes on our focus on continuous improvement at Auburn. In early 2021, we launched our Every Day Better Continuous Improvement Journey. And from the very beginning, we wanted to do this to be – we wanted it to be about improving and making it easier to do business every day at Auburn. For these improvements to be sustainable over the long term, they can't just be driven by senior management and outside consultants. The ideas and changes we've implemented are driven and owned by our employees. This includes a range of opportunities, including process improvement, creating capacity in our teams, increasing revenues, and reducing low-value activities. And when we do all these things right, we see the results in health and safety, higher employment and employee engagement, increased customer satisfaction, and improved financial results. And we're very proud of what we accomplished through Every Day Better in year one. We successfully delivered between $40 and $50 million in value, with approximately $30 million pre-tax falling to the bottom line. In addition, new capacity has been created that can be reprioritized to critical activities. We're reinvesting the business, and we're addressing cost avoidance. in 2022 we expect to see further improvements in how we do business and even more value creation let's now turn to our 2022 priorities starting on slide eight this year we plan to invest approximately 1.9 billion dollars in our networks business Basically, bread and butter investments to continue improving our operational effectiveness, as well as safety, reliability, and overall resiliency in our system, including our AMI investments in New York. We'll continue to strengthen our relationships with state and federal agencies in 2022, and we have multiple initiatives underway to resolve open regulatory matters. In renewables, it's all about signing market-based PPAs with our customers and continuing to build out our portfolio on time and on budget with a target of about $1.4 billion in investments. In offshore wind, we'll continue constructing Vineyard Wind 1 and hitting our key project milestones, including the start of offshore construction while advancing the development of Park City Wind, Commonwealth Wind, and Kinyaha. We'll remain focused on prudently managing our balance sheet and credit metrics while actively exploring alternative funding options, including partnerships and asset recycling for investments that may no longer be strategic or may be more valuable to others in the market. Now, given the continuing supply chain challenges and inflationary pressures, we'll stay focused on our supplier partnerships and leverage the purchasing power and global scale of Iberdrola's procurement group where it makes sense. and we'll continue to push forward our legal challenges to deliver successful resolutions in our PNM Resources merger and the NECEC project in May. In addition, we'll continue to implement our Everyday Better journey to generate incremental value of at least $30 million in 2022, with approximately $15 to $20 million pre-tax expected to fall to the bottom line. But make no mistake about it, 2022 continues to be about execution. Now, slide nine provides a high-level summary of where we're focusing our $1.9 billion in investments and networks in 2022. Again, this is really about continuing to make our energy systems stronger, safer, and more reliable, while also beginning the rollout of our advanced meter infrastructure in New York. And about 80% of the investments will go to the electric side of the business and just over 20% to gas distribution. And the result will be a roughly 8% increase to total rate base by year end to $12.7 billion. In onshore renewables on slide 10, we continue to focus on constructing our roughly one gigawatts in projects scheduled for COD this year and in 2023 while mitigating supply chain and inflation pressure. With product availability impacting the entire country as well as our sector, we're managing supply chain challenges as effectively as possible. Our wind projects are contracted for supply through 2023, and our solar modules are contracted for our projects under construction with CODs in 2022 and 2023. We still, however, need to stay focused and work with suppliers to ensure the actual availability of the product. That's where we try and leverage Iberdrola's purchasing power to help further manage risk. As for our offshore wind priorities on slide 11, we'll continue to focus on building Vineyard Wind 1 and hitting key construction milestones. And as a reminder, basically all the supply chain elements have been contracted for Vineyard Wind 1, and the labor costs for the project are either fixed or capped. Development of our other major projects continues to go forward, and we expect to have the Commonwealth Wind PPAs completed by the end of the second quarter in 2022. We believe strongly that our affiliation with Iberdrola is a competitive advantage in the U.S. offshore wind business, and we plan to continue leveraging their experience and resources as appropriate. Now turning to slide 12, I want to focus on the value creation that takes place in the offshore wind development lifecycle. Now that we've closed our strategic offshore wind restructuring, and I'll speak to that in a little bit more detail on the next slide, we now directly control 4.9 gigawatts of offshore wind potential along the East Coast. This includes 2.4 gigawatts of project in New England, of which 1.2 gigawatts is fully contracted, and another 1.2 gigawatts is in the contract negotiation process, and also 2.5 gigawatts from our Kitty Hawk lease area in North Carolina and Virginia. Now, this control allows us to more easily deliver incremental value and future growth and to fully capture the value of our offshore wind investments. This economic value will be realized over the life of the assets, but may also be realized in part as we determine the optimal financing structure for these investments, including partnerships, which could then generate additional gains to those we are reporting in Q1 2022. You can see the development timeline here, which starts with the acquisition of the lease area. This is one of our competitive advantages. By being an early mover in offshore, we have lease areas which are undervalued on our books based upon current market prices. We then move through permitting, continue with financial closing, construction, and end with COD. Advancing through the development process reduces uncertainty and increases portfolio value. As you move to the right, it not only reduces the project risk and increases the value, but it also makes it easier for new potential partners to participate in our deals. There are various potential partners that don't want, for example, PPA or permitting risk, but they're able to pay a higher valuation premium for a piece of a project once those development steps have been completed. Now that we solely own and control 4.5 gigawatts of our total 4.9 gigawatts offshore portfolio, Auburn Grid controls its own destiny in terms of when we bring in partners to monetize our projects and reduce capital requirements. I don't believe that this optionality and incremental value is fully appreciated by the market and reflected in our stock price, and we need to do a better job of explaining it. However, the restructuring agreement and resulting gain in 2022 clearly demonstrates part of this value. And speaking of value creation, let's turn to slide 13 and spend a couple minutes on our recently restructured joint venture agreement with CMP. As a result of the restructuring agreement, which closed in January 2022, we're now the sole owner of a 1,232-megawatt Commonwealth wind and 804-megawatt Park City wind project in Massachusetts and Connecticut, respectively. We continue to maintain a 50% interest in the 800-megawatt Vineyard Wind 1 project under construction. This strategic restructuring increases Auburn Grid's offshore wind pipeline to 2.4 gigawatts in New England, making us the largest offshore wind supplier in New England. And to help understand the value of leased areas, we made a net payment of $168 million to acquire 100% of leased area 534, which contained Park City wind and Commonwealth wind. And in exchange, CIP, our partner, took full ownership of lease area 522, the easternmost offshore wind area. As a point of comparison, our lease areas for our Vineyard Wind 1, Park City, and Commonwealth projects were acquired in auction for below $1 million. And based on current market prices of offshore lease areas, they are currently valued in the hundreds of millions of dollars. And that's before we continue to develop the portfolio and further increase its value. This strategic transaction allows Ovingrid to generate a gain of about $175 million, which we'll record in Q1 of 2022. This gain is associated with the value generation from the transaction, considering the excess of the net present value of the future cash flows versus our recorded book value of the lease areas in their current stage of development, which will be recognized since here in 2022. So in essence, this gain in Q1 represents the incremental value of future cash flows related to our initial investment. and the synergies of full control and joint development of Park City Wind and Commonwealth. This unlocked future optionality demonstrates additional value in our total offshore portfolio that's going to be realized in real cash flows and real EBITDA over time. We'll provide additional detail of our offshore business at our investor day so you can get a better understanding of the significant value of these assets and their recurring impact to our P&L in the future. Now, sustainability is truly a part of our DNA at Avangrid. It's how we operate our business, and we're fully committed to our ESG&F strategy as core to our long-term value proposition and our investment decisions. And slide 14 provides a little of our bragging rights when it comes to ESG&F. 2022 marks Auburn's second consecutive year on the annual Just 100 list, where we increased our overall ranking by 25 places to number 48. And we continue to be a top performer among industry peers, placing fourth out of 38 utility companies. We were also named one of the world's most ethical companies by Ethisphere for the third year in a row. And our commitment to health and safety every day, and particularly through the COVID-19 pandemic, made Avangrid the first energy company to earn the well health and safety rate. In addition, S&P highlighted Avangrid as a world leader in sustainability. Now, we'll spend more time on this area during Ambassador Day, but ESPNF is integral to our overall strategy. Now, before we go on to the financial results for 2021 in more detail, I think it's important to recognize that the makeup of Avangrid's executive leadership team has really evolved over the last 18 months. And with that, I want to thank Doug Stuber for his steady leadership as CFO over the last four years and wish him all the best in his new role in Pittsburgh with the Steelers organization. So congratulations, Doug, and go Steelers, except when you guys play my L.A. Rams. Thank you, Doug. Today is Doug's last day with the company, and I'm proud to see him here. But I'm also pleased that we have appointed Patricia Cosco as Aubin Grid's interim CFO. And all of you know Patricia well. She joined UIL Holdings over 10 years ago and has served in various roles, including IR, Treasury, corporate finance, retirement benefits, investment management, and insurance risk management since then. It's a long resume. I'm confident that we won't skip a beat with Patricia leading our finance team. So please help me congratulate Patricia on her new role. And with that, let's put her to work to discuss our financial results and 2022 outlook. Patricia.