Business context and reporting period
The filing is NRG Yield, Inc.’s Form 10-Q for the quarter ended June 30, 2015; the supplied metadata identifies Clearway Energy, Inc. The filing describes a U.S. portfolio of contracted conventional generation, renewable generation and thermal infrastructure assets. Substantially all generation output or capacity was under long-term arrangements, with an approximately 17-year average remaining contract duration based on cash available for distribution.
NRG Yield reported 3,825 net MW of contracted generation and thermal capacity of 1,310 net MWt plus 124 net MW of electric generation. Comparative financials were retrospectively adjusted for acquisitions from NRG under common control.
Financial performance and position
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Operating revenues | $217 million | $173 million | $397 million | $313 million |
| Operating income | $87 million | $64 million | $135 million | $118 million |
| Net income | $41 million | $42 million | $25 million | $68 million |
| Net income attributable to NRG Yield, Inc. | $10 million | $6 million | $5 million | $10 million |
| Basic and diluted EPS | $0.15 | $0.13 | $0.07 | $0.21 |
| Interest expense | $44 million | $34 million | $114 million | $61 million |
- Q2 operating margin was approximately 40% of reported revenue, versus 37% a year earlier. Six-month operating margin was approximately 34%, versus 38%. These are simple calculations from reported revenue and operating income.
- Q2 revenue rose 25% and operating income rose 36% year over year, while net income attributable to the company rose from $6 million to $10 million. For the six-month period, revenue increased 27%, but net income attributable to the company fell by half.
- Cash from operations was $88 million for the first half, versus $75 million a year earlier. Investing used $837 million, mainly for acquisitions and affiliate investments; financing provided $624 million. Cash declined $125 million to $281 million.
- At June 30, total debt was $4.743 billion, including $407 million classified as current; total liabilities were $5.002 billion. Cash was $281 million and restricted cash $38 million. Reported liquidity, including cash, restricted cash and available revolver capacity, was approximately $515 million, down from $863 million at year-end 2014.
- Management said liquidity, operating cash flows and revolver availability should be adequate to meet commitments, service debt, fund growth and maintenance needs, and pay dividends in the near and longer term.
Material changes and significant events
- Revenue and operating income growth primarily reflected the Alta Wind Portfolio acquisition in 2014 and the January 2015 transfer from NRG of Laredo Ridge, Tapestry and Walnut Creek. Contract amortization and depreciation also increased with the acquired assets.
- The January drop-down assets cost $489 million in cash, including working capital, and included $737 million of assumed project debt. The filing retrospectively combined the assets in prior-period financials because they were under common control.
- In June, the company acquired a 25% interest in Desert Sunlight solar facilities for $285 million and acquired 90.1% of two Spring Canyon wind projects. It also acquired a small fuel-cell project and entered solar investment partnerships with NRG.
- The June 2015 recapitalization created Class C and D shares. The company issued 28.198 million Class C shares for $600 million net proceeds and issued $287.5 million of 3.25% convertible notes due 2020. After the equity issuance, it held 53.3% of NRG Yield LLC’s economic interests; NRG retained 46.7%.
- The company raised $119 million through a tax-equity transaction involving Alta Wind X and XI and used proceeds from that transaction and capital offerings to repay the facilities’ project debt. It also amended its revolver, increasing capacity from $450 million to $495 million; $267 million was borrowed and $32 million of letters of credit were outstanding at quarter-end.
- Q2 renewables revenue increased substantially, while thermal gross margin was pressured by milder weather. Six-month thermal gross margin declined $6 million year over year. Lower-than-normal wind resources also affected first-half results.
Outlook, risks and unusual items
- The company expected comparable cash dividends to continue in the foreseeable future, subject to available capital, market conditions, laws and contractual restrictions. It declared a $0.21 per-share quarterly dividend in August 2015, payable in September.
- El Segundo Units 5 and 6 suffered a steam-turbine water-intrusion outage from January until returning to service in April. The company was assessing repair costs and lost capacity revenue potentially recoverable through insurance or warranty claims; recovery amounts were not clear in the filing.
- Management reported lower-than-normal wind resource availability in the first half and said it could not predict future impacts. Other disclosed risks include acquisition execution, access to capital, substantial debt, interest and commodity-price exposure, counterparty performance, operating hazards, weather, regulation and environmental requirements.
- Interest expense rose sharply, reflecting acquired assets and additional debt. A $7 million debt-extinguishment loss was recorded in connection with a refinancing. The filing reported compliance with debt covenants at June 30.
- The company reported no legal proceedings and no material changes to risk factors from its 2014 Form 10-K. Management concluded disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the registrant’s corporate identity and relationship to the Clearway Energy name in the request metadata; this filing itself names NRG Yield, Inc.
- Reconcile reported cash and the $515 million liquidity measure with revolver availability, outstanding borrowings and letters of credit; check the subsequent $190 million revolver repayment disclosed in the filing.
- Assess the effect of acquisitions, higher interest and depreciation, and noncontrolling interests on earnings available to Class A and Class C shareholders; do not treat consolidated net income as shareholder-attributable income.
- Review whether wind resource weakness and the El Segundo outage affected expected cash flows, and whether any insurance or warranty recoveries were ultimately realized.
- Evaluate dividend sustainability against cash available for distribution, maintenance requirements, debt service, acquisition commitments and distributions from unconsolidated affiliates.