HA Sustainable Infrastructure Capital, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company invests in energy efficiency, renewable energy, and other sustainable infrastructure, primarily through equity investments, receivables, real estate, and securitizations. Figures below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|
| Total revenue | $58.9 | $48.6 | $110.6 | $89.4 |
| Net income | $16.4 | $12.1 | $67.6 | $36.5 |
| Net income attributable to controlling stockholders | $16.0 | $12.0 | $67.0 | $36.3 |
| Diluted EPS | $0.20 | $0.16 | $0.81 | $0.51 |
| Interest expense | $40.5 | $21.7 | $68.0 | $39.8 |
- Revenue growth reflected higher interest income and gains on sales/securitizations. Equity-method investment income was $22.3 million in Q2 and $76.7 million for the first half, versus a Q2 loss of $0.6 million and first-half income of $16.0 million in 2020.
- Interest expense rose substantially, in part because of the redemption of the 2024 senior notes, which generated a $14.6 million debt-extinguishment loss, and higher debt balances. Q2 income tax expense was $6.0 million; first-half expense was $12.8 million.
- GAAP-based net investment income was negative $9.0 million in Q2 and negative $5.0 million for the first half, reflecting interest expense. The company reported non-GAAP distributable earnings of $47.6 million ($0.57 per share) in Q2 and $83.2 million ($1.01 per share) for the first half; these measures are not GAAP cash flow or liquidity measures.
| Balance sheet and liquidity at June 30, 2021 | Amount |
|---|
| Total assets | $3.94 billion |
| Cash and cash equivalents | $583 million |
| Cash, cash equivalents, and restricted cash | $609 million |
| Total stockholders’ equity | $1.32 billion |
| Reported debt, including credit facilities, non-recourse debt, senior unsecured notes, and convertible notes | Approximately $2.54 billion |
| Unused unsecured revolving credit capacity | $375 million |
| Available secured revolving credit capacity | $67 million |
- Debt-to-equity leverage was 1.9:1, compared with 1.8:1 at year-end 2020; the board-approved limit was 2.5:1. Approximately 98% of debt was fixed-rate.
- First-half cash flow: operating activities used $2.2 million, investing activities used $198.6 million, and financing activities provided $499.9 million. Financing included $1.0 billion of new senior notes, $102.7 million of net common-stock proceeds, and $514.1 million to redeem senior notes.
- The on-balance-sheet Portfolio was approximately $3.0 billion; Managed Assets, including assets in unconsolidated securitization trusts, were $8.0 billion. The unlevered portfolio yield was 7.7%.
Material changes versus the prior comparable period
- Q2 revenue increased 20% year over year; first-half revenue increased 25%. First-half net income rose to $67.6 million from $36.5 million, largely alongside higher equity-method income and gains on sales.
- First-half equity-method investment income increased by $60.7 million year over year, primarily reflecting new investments. Management cautions that GAAP equity-method income may differ materially from project cash distributions and economic returns.
- First-half gains on sales of receivables and investments doubled to $41.9 million from $20.8 million. Securitization proceeds were $626 million versus $131 million in the first half of 2020.
- Debt and equity funding expanded: the company issued $1.0 billion of 2026 senior notes and approximately $103 million of common stock in the first half. The new notes were used in part to redeem the $500 million 2024 notes.
- Transactions completed totaled approximately $697 million in the first half, compared with $364 million a year earlier. The company’s stated pipeline exceeded $3.0 billion as of June 30, but closings are not assured.
Outlook, management commentary, and risks
- Management reported adequate liquidity and expects identified funding sources to meet investment, debt-service, operating, and distribution needs. It expects to continue using debt, equity, and on- and off-balance-sheet securitizations. The filing provides no specific earnings or revenue guidance.
- The board declared a quarterly dividend of $0.35 per share, payable July 9, 2021. Future distributions remain subject to board discretion, results, cash availability, and REIT distribution requirements.
- The portfolio comprised over 225 assets and had a weighted-average remaining life of approximately 17 years, excluding match-funded transactions. The company estimates Q2-originated investments will avoid approximately 115,000 metric tons of annual carbon emissions.
- Key risks include borrower and project credit performance, refinancing and interest-rate exposure, asset illiquidity, energy-price volatility, weather and other environmental events, and uncertainty from COVID-19. Management stated that the pandemic’s future effects remain difficult to predict.
- The receivables allowance was $37 million. Two commercial receivables with a combined carrying value of approximately $8 million remained on non-accrual; the company is pursuing legal claims. No securitization credit losses or material payments more than 90 days past due were reported for the first half.
- A guarantee related to a joint-venture financing could expose the company to a maximum obligation of approximately $60 million; the partner is liable to reimburse 15% under a separate agreement. No legal proceedings were identified as likely to have a material adverse effect.
- In July 2021, an equity-method investment with a $24 million GAAP carrying value was restructured into a $17 million loan. The company recognized a $7 million reversal of previously recorded non-cash HLBV income in Q2 because it viewed the transaction as evidence of fair value at June 30.
Important facts for investors to verify
- How much of reported earnings and distributable earnings is recurring cash return versus non-cash HLBV allocations, securitization gains, and other adjustments?
- What are the performance, credit quality, and expected cash distributions of major equity-method investments, including Jupiter and the Lighthouse Partnerships?
- Can the company convert its more than $3.0 billion pipeline into completed investments on acceptable terms, and how will those investments be funded?
- How sensitive are earnings, asset values, and refinancing needs to higher rates, energy-price changes, and reduced access to capital markets?
- What cash flows, collateral, and counterparty support underpin the $37 million receivables allowance, the non-accrual assets, and the $60 million guarantee exposure?
- How sustainable are the $0.35 quarterly dividend and the reported liquidity position after planned investments, debt service, and REIT distribution requirements?
