HA Sustainable Infrastructure Capital, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company invests in renewable energy, energy efficiency and other sustainable infrastructure through equity investments, receivables, real estate, securitizations and related services.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Total revenue | $60.2 million | $48.9 million | $181.4 million | $159.5 million |
| Net income (loss) | $34.9 million | $(3.1) million | $62.1 million | $64.5 million |
| Net income attributable to controlling stockholders | $34.5 million | $(2.8) million | $61.4 million | $64.2 million |
| Diluted EPS | $0.38 | $(0.04) | $0.69 | $0.79 |
| Cash from operating activities | Not separately provided for the quarter | $64.0 million | $21.7 million | |
| Cash used in investing activities | Not separately provided for the quarter | $(253.9) million | $(388.2) million | |
| Cash from financing activities | Not separately provided for the quarter | $237.0 million | $495.0 million |
Derived GAAP net margin was approximately 58% for Q3 2022 versus negative 6% in Q3 2021, and approximately 34% for the first nine months of 2022 versus 40% in 2021. These margins reflect equity-method investment income and are not presented as a standalone operating-margin measure by the company.
Financial position and liquidity
- At September 30, total assets were $4.50 billion and stockholders’ equity was $1.65 billion. Cash and cash equivalents were $272.8 million; cash, cash equivalents and restricted cash totaled $298.2 million.
- Reported debt was approximately $2.73 billion, excluding off-balance-sheet securitizations. This included $1.78 billion of senior unsecured notes, $408 million of non-recourse debt, $342 million of convertible notes, $100 million of commercial paper and $101 million of credit facilities.
- Debt-to-equity leverage was 1.7x, below the board-approved limit of 2.5x; 93% of debt was fixed-rate. The company reported $550 million of unused capacity on its unsecured revolver and $16 million available under secured facilities. Its $100 million commercial-paper program was fully utilized.
- For the nine months, the company paid $98.3 million of dividends and distributions in its cash flow statement. The board declared a quarterly dividend of $0.375 per share for payment in January 2023.
Material changes versus comparable periods
- Q3 revenue rose 23%, primarily as interest income increased with a larger average portfolio and fee income and securitization gains increased. Q3 net income improved by $38 million, mainly because equity-method results shifted from a loss to income.
- Nine-month revenue rose 14%, but net income fell 4%. Higher interest income and fee income were offset by lower equity-method income, increased compensation and administrative costs, and higher credit-loss provision.
- Equity-method income was $30.6 million in Q3, compared with a $7.2 million loss a year earlier; nine-month income declined to $58.5 million from $69.5 million. Management attributed the nine-month decrease primarily to mark-to-market losses on investee energy hedges amid rising power prices.
- The nine-month allowance for receivable losses was $34 million, after a $6.2 million provision and $8 million write-off. The Q3 provision line was a $2.5 million benefit, reflecting a reserve release partly offset by reserves on new loans and commitments.
Outlook, risks and unusual items
- Management cited a pipeline exceeding $4.5 billion as of September 30, with 47% related to behind-the-meter projects and 35% to grid-connected projects. The company said the Inflation Reduction Act may generate additional opportunities, but cautioned that pipeline transactions may not close. No quantified earnings or full-year guidance is provided in this filing.
- The on-balance-sheet portfolio was approximately $3.9 billion; managed assets, including assets in unconsolidated securitization trusts, were $9.4 billion. Unlevered portfolio yield was 7.4%, down from 7.5% at year-end 2021, partly due to expected effects of grid congestion on certain assets.
- Management reported adequate liquidity and stated that identified sources should meet anticipated needs. Key risks include counterparty and project credit performance, rising rates and refinancing costs, asset illiquidity, commodity and power-price volatility, weather and climate-related events, and potential effects of COVID-19.
- A $9 million compensation charge in the first nine months reflected accelerated stock-compensation expense after adoption of a retirement policy. An $8 million receivable tied to disputed wind-project land-lease assignments was written off after an unsuccessful appeal.
- The company guaranteed up to approximately $80 million of financing for three joint-venture entities, repayable at maturity in February 2023. Management considered performance under the guarantee remote, recorded no liability, and noted a separate agreement making its joint-venture partner liable for 15% of the obligation.
- After quarter-end, on November 1, 2022, the company entered into a $383 million delayed-draw unsecured term-loan facility, drawable during the following 90 days and maturing in October 2025.
- No legal proceedings were identified as likely to have a material adverse effect. The filing reports no securitization credit losses in the first nine months and no material trust payments more than 90 days past due.
Important facts for investors to verify
- How much equity-method income and distributable earnings translate into recurring cash distributions, given GAAP HLBV accounting and investee cash-flow timing.
- The performance, collateral and reserve assumptions for commercial receivables, including the $1.0 billion of mezzanine loans to residential-solar-related entities and assets with elevated performance risk.
- Funding and repayment plans for near-term commercial paper and revolving-credit maturities, and the use, pricing and covenants of the post-quarter $383 million term facility.
- Exposure to the $80 million joint-venture guarantee, including collateral requirements and the partner’s 15% reimbursement obligation.
- Whether the reported pipeline converts into funded transactions, and whether grid congestion, power prices and interest-rate movements affect portfolio yields, hedge values and securitization residual valuations.