HA Sustainable Infrastructure Capital, Inc. — Q3 2021 Form 10-Q
Business context and reporting period. The company invests in energy efficiency, renewable energy and other sustainable infrastructure, using debt, equity, real estate, securitizations and related services. This filing covers the quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Figures below are in U.S. dollars.
Key financial metrics
- Q3 revenue: $48.9 million, up 1% year over year. Interest income was $26.2 million; gains on sales of receivables and investments were $13.1 million; fee income was $3.1 million.
- Q3 results: Net loss was $3.1 million, or $0.04 per diluted share, versus net income of $21.3 million, or $0.28 per diluted share, a year earlier. Equity-method investments recorded a $7.2 million loss, compared with $16.5 million of income in Q3 2020.
- Nine-month results: Revenue was $159.5 million, up 16%; net income was $64.5 million, up 12%; diluted EPS was $0.79 versus $0.78. Equity-method investment income was $69.5 million, compared with $32.5 million in 2020.
- Expenses and margins: Q3 total expenses rose 11% to $46.0 million, including $27.3 million of interest expense. Nine-month expenses rose 39% to $153.0 million, including $95.4 million of interest expense. The filing does not present a conventional gross margin measure.
- Cash flow: For the first nine months, operating cash flow was $21.7 million, investing cash outflow was $388.2 million, and financing cash inflow was $495.0 million. Cash, cash equivalents and restricted cash totaled $438.8 million at period-end, including $413.3 million of unrestricted cash.
- Balance sheet and debt: Total assets were $3.94 billion and stockholders’ equity was $1.47 billion. Debt was approximately $2.39 billion, with reported debt-to-equity leverage of 1.6x, down from 1.8x at year-end 2020. About 99% of debt was fixed-rate. Senior unsecured notes had $1.775 billion principal outstanding; convertible notes had $158 million principal outstanding.
- Liquidity: Management reported $375 million of unused capacity on its $400 million unsecured revolving facility and $75 million available under secured facilities. The $100 million green commercial paper program had no notes outstanding at quarter-end.
- Portfolio: On-balance-sheet portfolio was $3.19 billion; managed assets, including assets in off-balance-sheet securitizations, were $8.24 billion. The portfolio’s unlevered yield was 7.6%, unchanged from year-end 2020.
Material changes versus prior periods
- Q3 net income swung to a loss, principally because equity-method results fell by $23.7 million, alongside higher compensation, general and administrative, and interest expenses. Management attributed the investment decline mainly to unrealized mark-to-market losses on project power hedges as power prices rose.
- Nine-month net income increased despite sharply higher expenses, supported by higher revenue and equity-method income. The period included a $15 million loss on redemption of the 2024 senior notes, contributing to higher interest expense.
- Gain on sale of receivables and investments rose to $55.0 million for nine months from $34.4 million; fee income declined to $8.8 million from $13.1 million. Management cited securitization mix and fewer advisory fee opportunities.
- Investing cash outflow increased to $388.2 million from $138.2 million, chiefly reflecting greater investment in receivables and equity-method investments. Financing included $1.0 billion of new senior notes, $500 million used to redeem 2024 notes, and $151.5 million net proceeds from common stock issuances.
- During Q3, $136 million principal amount of 2022 convertible notes converted into approximately 5 million common shares.
Outlook, risks and unusual items
- Outlook: No specific financial guidance is provided. Management reported a pipeline exceeding $3.0 billion of potential opportunities that could close over the next 12 months, but cautioned that completion is not assured. It also said identified liquidity sources should meet investment, debt-service, operating and distribution needs.
- Distribution: The board declared a quarterly dividend of $0.35 per share, payable October 8, 2021. As a REIT, the company generally must distribute at least 90% of REIT taxable income; future distributions remain at the board’s discretion.
- Credit and portfolio risks: The allowance for receivable losses was $39 million. Two commercial receivables totaling about $8 million remained on non-accrual status, with legal claims being pursued. Management said the portfolio is increasingly exposed to mezzanine debt and equity risk.
- Commitments and contingencies: A guarantee relating to a joint-venture financing had a maximum obligation of about $60 million; the partner is responsible for 15% under a separate agreement. Management reported no legal proceedings expected to have a material adverse effect.
- Market and operating risks: The filing highlights COVID-19 uncertainty, interest rates and refinancing, project and counterparty credit, asset illiquidity, commodity and power prices, weather and other environmental events, and changes in government policy. Some project cash flows are exposed to merchant power prices or contract expirations.
- Accounting and unusual items: Equity-method income uses HLBV accounting and can differ substantially from cash distributions and economic returns. Nine-month distributable earnings were $118.0 million, or $1.42 per share, versus GAAP net income attributable to controlling stockholders of $64.2 million; distributable earnings is a non-GAAP measure and is not a measure of cash flow or liquidity. The filing also reports a $7 million accelerated reversal of prior non-cash HLBV income in Q2 following an investment restructuring.
Most important facts for investors to verify
- Whether equity-method earnings and distributable earnings translate into sustained cash distributions, given the large divergence between HLBV accounting results and cash collected.
- The performance and credit quality of the $1.39 billion gross receivables portfolio, the $39 million allowance, and the two non-accrual loans.
- Whether the >$3.0 billion investment pipeline converts to completed transactions and at what yields, funding costs and risk profile.
- Debt maturities, refinancing access and covenant headroom, including the $60 million joint-venture guarantee and the company’s reliance on securitizations and capital markets.
- How power-price and hedge volatility, COVID-19 effects, and other climate, weather and regulatory risks affect portfolio cash flows and valuation.