HA Sustainable Infrastructure Capital, Inc. — Q3 2013 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2013; filed November 7, 2013. HASI provides debt and equity financing for energy efficiency, clean energy and other sustainable infrastructure projects. It completed its IPO on April 23, 2013, raising approximately $160.1 million in net proceeds. Comparisons with 2012 and pre-IPO 2013 periods reflect the Predecessor’s business and are not necessarily representative of HASI after the IPO, which expanded its capital, financing flexibility and balance-sheet investment activity.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net investment revenue | $2.6 million | $0.5 million | $4.4 million | $1.5 million |
| Other investment revenue | $2.2 million | $10.5 million | $4.0 million | $13.1 million |
| Revenue, net of investment interest expense | $4.8 million | $11.0 million | $8.4 million | $14.5 million |
| Net income (loss) | $1.9 million | $6.2 million | ($5.1 million) | $3.7 million |
| Net income (loss) per share | $0.11 | Not clearly provided | ($0.20) | Not clearly provided |
Q3 investment interest income was $5.2 million and interest expense was $2.6 million. The average yield on interest-earning assets was 5.75%; average debt cost was 4.21%, producing a 1.54% net investment spread. For the nine months, the corresponding yields/costs were 5.67% and 4.44%, with a 1.23% spread. The filing reports no income tax expense for the periods.
At September 30, assets were $520.6 million, liabilities $356.6 million and equity $164.1 million. Financing receivables were $327.5 million, investments $87.5 million and financing receivables held for sale $21.1 million. Cash and cash equivalents were $24.2 million; restricted cash was $38.9 million. Debt included $83.8 million drawn on the credit facility and $187.8 million of nonrecourse debt; deferred funding obligations were $77.2 million. Nonrecourse debt is secured by receivables and has no recourse to HASI’s general assets.
For the first nine months, operating cash flow was negative $1.4 million, investing cash flow was negative $197.8 million and financing cash flow was positive $215.3 million. Financing cash inflows included IPO proceeds and $84.0 million of credit-facility borrowings; investing outflows mainly funded receivable and investment purchases and restricted cash.
Material changes versus comparable periods
- Q3 net income declined $4.3 million year over year, mainly because fee income fell $9.8 million, partly offset by increased net investment revenue and securitization gains.
- Nine-month results shifted to a $5.1 million net loss from $3.7 million income. Fee income declined $9.8 million versus 2012; net investment revenue rose $2.9 million but did not offset lower fee revenue and higher expenses.
- Nine-month compensation expense included $6.6 million of noncash equity compensation, including a one-time $5.8 million charge related to reallocating Predecessor ownership to employees in connection with the IPO.
- Balance-sheet expansion followed the IPO: financing receivables and investments increased, and HASI added a $350 million senior secured revolving facility in July. The agreements provide for maximum total advances of up to $700 million, subject to borrowing-base and other terms.
- Managed assets rose to approximately $1.96 billion from $1.62 billion at year-end 2012; approximately $1.52 billion was held in securitization trusts and not on the consolidated balance sheet.
Outlook, commentary, risks and unusual items
- Management expects to retain more originated assets on its balance sheet, increasing both investment interest income and related funding expense. It expects net investment revenue and recurring income to grow as the portfolio expands, while continuing to use securitizations.
- The financing-opportunity pipeline exceeded $2.0 billion at September 30, 2013, but the filing cautions that pipeline transactions may not close. A clean-energy transaction of approximately $28 million was expected to close by December 31, 2013.
- Management stated it expects to target overall recourse leverage of up to two times debt to equity. At quarter-end, the credit-facility debt-to-equity covenant stood at 1:1 against a maximum of 4:1; minimum liquidity was 32% against a 5% threshold. The company reported compliance with covenants.
- The company intends to qualify as a REIT beginning with tax year 2013. REIT status requires meeting complex rules, including distributing at least 90% of REIT taxable income; failure to qualify could result in corporate income taxes. The board declared a $0.06-per-share quarterly dividend and subsequently declared $0.14 per share for payment in November 2013.
- HASI reported no credit losses, material delinquencies, past-due or impaired financing receivables, or allowance for credit losses at September 30. Its historical record since 2000 included one realized loss of approximately $7 million, net of recoveries, on more than $4.3 billion of transactions; management cautioned that past performance is not assurance of future results.
- Key risks include interest-rate and refinancing exposure, credit and concentration risk as the company expands beyond government-backed assets and increases equity investments, illiquid assets, energy commodity prices, securitization-market access, and government policy changes. Many valuations rely on Level 3 inputs and estimated cash flows; fair values may differ from realizable values.
- A $24 million loan to an EnergySource subsidiary for a geothermal project carried a 15.22% stated rate, with part of the interest accruing to the balance. The project required additional time and equity capital, and approximately $14 million of proceeds remained unspent; HASI had approval rights over a revised budget. Certain executives and directors had indirect minority interests in EnergySource, and independent directors approved the loan.
- The filing reported no legal proceedings expected to have a material adverse effect. Disclosure controls were assessed as effective, providing reasonable—not absolute—assurance.
Important facts for investors to verify
- How post-IPO portfolio growth, fee income and recurring net investment revenue develop, given the sharp year-over-year fee decline and the non-comparability of Predecessor results.
- Actual borrowing capacity, borrowing-base eligibility, covenants and refinancing exposure under the new facilities, including the distinction between stated commitments and available advances.
- Funding and repayment progress on the $77.2 million deferred funding obligations, and liquidity after restricted cash is applied.
- Performance, revised budget and credit protections for the EnergySource geothermal loan and the planned $28 million clean-energy transaction.
- Whether the company meets REIT qualification and distribution requirements, and whether dividends are supported by taxable income and cash generation.
- Sensitivity of residual-asset and servicing valuations to discount rates and changes in expected cash flows, and any deterioration in credit quality or securitization access.