HA Sustainable Infrastructure Capital, Inc. (HASI) — 2019 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2019, not a standalone fourth-quarter filing. HASI invests in energy efficiency, renewable energy and other sustainable infrastructure, using on- and off-balance-sheet financing. It completed approximately $1.3 billion of transactions in 2019. At year-end, its on-balance-sheet Portfolio was approximately $2.1 billion and Managed Assets, including unconsolidated securitization vehicles, were approximately $6.2 billion.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Total revenue | $141.6 million | $139.4 million |
| Total expenses | $115.7 million | $117.6 million |
| Income before equity-method investments | $25.8 million | $21.8 million |
| Income from equity-method investments | $64.2 million | $22.2 million |
| Net income attributable to controlling stockholders | $81.6 million | $41.6 million |
| Diluted earnings per share | $1.24 | $0.75 |
| Operating cash flow | $29.5 million | $58.8 million |
| Total assets / total equity | $2.39 billion / $939.9 million | $2.15 billion / $804.5 million |
- Revenue increased 1%; net income attributable to controlling stockholders rose 96%. The increase in net income was driven principally by higher equity-method income, including a $28 million GAAP gain from selling a wind-project portfolio.
- Interest expense fell $12.6 million to $64.2 million. The reported provision for receivable losses was $8.0 million, versus none in 2018.
- Average yield on receivables, investments and real estate was 6.9%, versus 6.5%; average interest spread was 2.1%, versus 1.6%; and net investment margin was 3.1%, versus 2.4%. Portfolio yield at year-end was 7.6%, versus 6.8%.
- Operating cash flow declined by roughly half. Investing activities used $201.1 million; financing activities provided $218.9 million.
- Year-end cash, cash equivalents and restricted cash totaled $106.6 million, including $101 million of restricted cash. Debt was approximately $1.39 billion, with leverage of 1.5-to-1. Fixed-rate debt represented approximately 98% of debt; the company reported a target leverage limit of 2.5-to-1.
- Dividends declared were $1.34 per share, versus $1.32 in 2018. Return on assets was 3.6% and return on equity was 9.4%.
Material changes versus 2018
- Interest income was broadly flat. The prior year included $13 million from a residential-solar asset repayment that did not recur; excluding that item, interest and rental income increased by $14 million, according to management.
- Gain on sale of receivables and investments decreased $8.5 million to $24.4 million, while fee income increased $9.1 million to $15.1 million.
- Equity-method income increased $42.0 million, including the wind-portfolio sale gain and income associated with co-investors’ realization of tax attributes.
- The balance-sheet funding mix changed materially: HASI issued $500 million of 5.25% senior unsecured notes due 2024. Year-end credit-facility debt fell to $31.2 million from $258.6 million, while non-recourse debt was $700.2 million versus $834.7 million.
- Managed Assets increased to $6.2 billion from $5.3 billion. The company raised approximately $138 million of equity during 2019.
Outlook, management commentary and risks
- Management described long-term market prospects as positive and reported a pipeline exceeding $2.5 billion as of year-end; it cautioned that pipeline opportunities may not close. No specific earnings or revenue guidance is provided in the filing.
- In February 2020, the board raised the target range for fixed-rate debt to 75%–100%, from 60%–85%. Management said it believed available liquidity sources and cash were adequate for short- and long-term needs.
- Key exposures include changes to government incentives and regulation, competition and pricing pressure, low natural-gas and wholesale power prices, interest-rate and refinancing risk, illiquid assets, borrower and project credit risk, and weather and climate-related physical risks. Many assets are long-dated; the weighted-average remaining life of the Portfolio, excluding match-funded transactions, was approximately 15 years.
- Two wind-project land-lease receivables with an aggregate carrying value of approximately $8 million were fully reserved after a 2019 court ruling upheld the project owners’ right to terminate the leases. HASI appealed and said it intended to continue pursuing its claims.
- HASI adopted the expected-credit-loss standard (CECL) on January 1, 2020 and estimated the initial reserve would be less than $20 million; the final impact was still being assessed.
- The company reported no legal proceedings expected to have a material adverse effect at year-end. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting. The audit identified equity-method accounting, including assessment of control and the HLBV allocation method, as a critical audit matter.
Important facts for investors to verify
- How much of 2019 earnings growth is repeatable: GAAP equity-method income was $64.2 million, while the company’s non-GAAP core earnings were $92.7 million, or $1.40 per share. Review the reconciliation and underlying cash distributions.
- The status and potential recovery of the fully reserved $8 million disputed receivables, including the appeal and any subsequent legal developments.
- The final CECL adoption impact and any changes to credit-loss allowances, including the company’s estimate of less than $20 million.
- Debt maturities, covenants, refinancing needs and the composition of restricted versus freely available cash; reported cash plus restricted cash should not be treated as entirely unrestricted liquidity.
- Realization of the more-than-$2.5-billion pipeline, returns on new investments, and exposure to merchant power prices, government policy changes and project-level counterparty risk.
- Future distributions: the $1.34 per-share 2019 declaration is not a guarantee of future dividends; distributions remain subject to board discretion, cash generation, debt covenants and REIT requirements.