Clearway Energy, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed February 28, 2019. The company owns contracted wind, solar, natural-gas generation and thermal infrastructure assets in North America. Its generation portfolio exceeded 5,272 net MW, with an approximately 15-year weighted-average remaining contract duration, measured by CAFD. The 2017 comparative figures were retrospectively recast to include Buckthorn Solar.
Financial performance and position
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Operating revenue | $1.053 billion | $1.009 billion | Up $44 million, about 4% |
| Operating income | $347 million | $283 million | Up $64 million |
| Net income (loss) | $54 million | $(24) million | Improved $78 million |
| Net income (loss) attributable to Clearway Energy, Inc. | $48 million | $(16) million | EPS was $0.46 versus $(0.16) |
| Operating cash flow | $498 million | $517 million | Down $19 million |
| Cash used in investing activities | $185 million | $442 million | Lower acquisition and capital spending |
| Cash used in financing activities | $46 million | $257 million | Included debt issuance and repayment activity |
| Cash and cash equivalents | $407 million | $148 million | Restricted cash was an additional $176 million |
| Total assets | $8.500 billion | $8.489 billion | — |
| Total debt | $6.044 billion | $6.083 billion | Includes $4.329 billion of project-level debt |
Operating income improved partly because 2017 included $44 million of impairment losses; 2018 recorded none. Revenue and gross margin also benefited from stronger wind generation and solar insolation, Buckthorn Solar entering service, and the UPMC thermal acquisition. Acquisition-related transaction and integration costs rose to $20 million from $3 million, primarily reflecting the GIP transaction and acquisitions. Interest expense was nearly unchanged at $306 million.
Liquidity at year-end was reported as approximately $1.037 billion, comprising $583 million of cash and restricted cash and $454 million of revolving-credit availability. There were no revolver borrowings and $41 million of letters of credit outstanding. Management stated that liquidity, operating cash flow and facility availability were expected to cover commitments, debt service, capital spending and dividends. This assessment preceded the full impact of the PG&E bankruptcy.
Debt ratings were BB from S&P and Ba2 from Moody’s, both with stable outlooks. The company reported approximately $878 million as its proportionate share of unconsolidated affiliates’ debt. A 1% interest-rate change was estimated to change market interest expense by about $3 million on a rolling 12-month basis.
Material changes and significant events
- GIP acquired control through CEG on August 31, 2018. GIP held a 55% voting interest in the company; the company held a 55.8% economic interest in Clearway Energy LLC at year-end. The transition also introduced CEG master services arrangements and an NRG transition-services agreement.
- On January 29, 2019, PG&E filed for Chapter 11 protection. PG&E represented approximately 23% of 2018 consolidated revenue; SCE represented approximately 40%. Six solar facilities totaling 480 MW and the 720 MW Marsh Landing facility have PPAs with PG&E. Related year-end balances included $1.5 billion of net property, plant and equipment, $352 million of equity-method investments, and approximately $1.4 billion of long-term debt.
- The bankruptcy triggered defaults under the PG&E PPAs and related project financing agreements. Clearway was negotiating forbearance agreements; lenders may have acceleration rights, and project distributions may be restricted. The company reported no immediate operating impact as of year-end. It had $17 million of receivables from consolidated PG&E projects at December 31; all were collected in January 2019. Some project cash was restricted, including $31 million in distribution reserves associated with affected subsidiaries.
- The board reduced the quarterly Class A and Class C dividend from $0.331 to $0.20 per share in February 2019, citing uncertainty over PG&E-related project distributions. The 2018 annual dividend was $1.258 per share.
- Clearway issued $600 million of 5.75% senior notes due 2025, raised $75 million net in a Class C share offering, and sold $79 million of Class C shares through its at-the-market program. It repurchased convertible notes; the remaining $220 million of 2019 notes outstanding at year-end was repaid after year-end, before its February 2019 maturity.
- 2018 investments included the 154 MW Buckthorn Solar project, which began commercial operations in July, and the UPMC thermal project. The company also acquired a small California fuel-cell project.
Outlook, risks and contingencies
- No quantified annual earnings, revenue or CAFD guidance is provided in the supplied filing text. Management estimated 2019 maintenance capital expenditures of $30 million; actual spending may differ.
- The company expected comparable dividends to continue under then-current circumstances, but emphasized that dividends are discretionary and subject to liquidity, market conditions, legal requirements and debt covenants. The subsequent dividend reduction underscores this uncertainty.
- PG&E’s bankruptcy is the principal near-term risk: PPA review or rejection, delayed or reduced payments, defaults under financing documents, restricted distributions, potential asset impairment and possible effects on debt service or dividends. The company said no impairment had been recorded for affected assets at year-end, but future events could change that assessment.
- Other material risks include customer concentration, expiring or terminated contracts, renewable resource variability, generation outages, transmission constraints, environmental and regulatory requirements, refinancing and interest-rate exposure, and reliance on GIP and CEG. GIP controls voting outcomes and can designate the board majority; related-party service agreements and acquisition opportunities may create conflicts or dependence.
- On January 11, 2019, Nebraska Public Power District alleged defaults under PPAs for the Laredo Ridge and Elkhorn Ridge wind projects. Courts approved interim injunction stipulations preventing termination while litigation proceeds. Clearway said it considered the allegations meritless and was defending the contracts.
- Auditors issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective at December 31, 2018.
Investor verification priorities
- Track PG&E bankruptcy proceedings, PPA and FERC developments, lender forbearance agreements, debt acceleration exposure, and any limits on project distributions.
- Reconcile reported liquidity with restricted cash, especially balances tied to PG&E projects, and review cash available at the parent company for dividends and debt repayments.
- Confirm the duration and amount of the $0.20 quarterly dividend and any further changes as PG&E-related cash flows become clearer.
- Review 2019 repayment of the 2019 Convertible Notes, remaining 2020 Convertible Notes, debt maturities, covenant headroom and refinancing needs.
- Monitor the Nebraska PPA litigation, related-party fees and services under CEG agreements, and the status and terms of planned or optional asset acquisitions.