Clearway Energy, Inc. (filed as NRG Yield, Inc.) — Q1 2018 Form 10-Q
Business context and reporting period
The filing covers the three months ended March 31, 2018. The company operated a diversified U.S. portfolio of contracted conventional generation, renewable generation and thermal infrastructure. Contracted generation capacity was 5,118 net MW, with an approximately 15-year weighted-average remaining offtake-contract duration based on CAFD. The filing’s comparative 2017 figures were retrospectively adjusted for certain acquisitions under common control.
Financial and operating results
- Revenue was $225 million, up $4 million (2%) from $221 million. Operating income was $49 million, down from $54 million; operating margin was approximately 21.8%, versus 24.4%.
- Net income attributable to NRG Yield, Inc. was $16 million, compared with a $3 million loss. Basic and diluted EPS was $0.16, versus a $0.03 loss per share. The improvement reflected, among other items, $20 million lower interest expense; equity earnings from unconsolidated affiliates fell $15 million to $4 million.
- Operating cash flow was $65 million, compared with $64 million. Investing cash outflow was $44 million (versus $124 million), and financing cash outflow was $60 million (versus $115 million). Cash, cash equivalents and restricted cash totaled $277 million at quarter-end, down from $316 million at year-end 2017.
- Total debt was $6.038 billion, including $698 million classified as current; the balance sheet reported $5.261 billion of long-term debt after current maturities, issuance costs and discounts. Total assets were $8.362 billion and total liabilities $6.236 billion.
- Reported liquidity was $630 million, including $277 million cash and restricted cash and $353 million available under the revolving facility. The facility had $75 million drawn and $67 million of letters of credit outstanding. The company reported compliance with required debt covenants.
- Quarterly dividends were $0.298 per Class A and Class C share. A subsequent quarterly dividend of $0.309 per share was declared. Management said comparable dividends were expected to continue based on current circumstances, subject to available capital, market conditions and contractual requirements.
- Renewables generated or sold 1.616 million MWh, versus 1.677 million; thermal MWt sold rose to 617,000 from 569,000; conventional generation rose to 438,000 MWh from 142,000. Economic gross margin was $222 million in both periods.
Material changes and significant events
- On March 30, the company acquired the 154 MW Buckthorn Solar project from NRG for approximately $42 million cash and assumed approximately $183 million of non-recourse debt. The project had a 25-year PPA with Georgetown, Texas, and was expected to begin commercial operation in July 2018.
- GIP agreed to acquire NRG’s full ownership interest in the company and NRG’s renewable development and operations platform. Closing was expected in the second half of 2018, subject to conditions and approvals.
- The company agreed to acquire NRG’s interest in Carlsbad Energy Holdings, which owns a 527 MW natural-gas project, for $365 million cash, subject to adjustments. Closing was expected in Q4 2018 and depended on completion of the NRG transaction.
- On April 30, after quarter-end, the revolving facility was refinanced: maturity extended to April 28, 2023, and borrowing costs decreased. The filing describes a 75-basis-point reduction, with LIBOR margins ranging from 1.50% to 2.00% under the leverage-based grid.
- Q1 performance was affected by lower wind resources: Alta Wind volumes declined 8%. Higher El Segundo revenue, partly reflecting a prior-year forced outage, offset this pressure. Depreciation and amortization increased $4 million, primarily due to useful-life estimate changes made in 2017.
Outlook, risks and unusual items
- Management estimated 2018 maintenance capital expenditures of $32 million; estimates were subject to review and actual spending could differ. No specific full-year earnings or CAFD guidance is provided in the supplied filing text.
- Management considered liquidity, operating cash flows and revolver availability adequate for commitments, debt service, capital expenditures and dividends, while noting that additional financing might be needed and could be unavailable on acceptable terms.
- Key risks include the pending NRG transaction and the company’s historical dependence on NRG for growth and services; substantial indebtedness and financing access; weather and generation variability, outages and maintenance; counterparty performance; contract renewals and pricing; regulation; and cybersecurity, insurance and other operating hazards.
- The company had approximately $2.6 billion of estimated counterparty credit exposure under certain long-term contracts for the next five years. Its pro-rata share of non-recourse debt at unconsolidated affiliates was approximately $792 million; such debt may restrict distributions to the company.
- The company expected adoption of lease accounting Topic 842 in 2019 to result in recognition of lease liabilities and right-of-use assets and said the effect could be material, but had not yet determined the amount.
- Contingencies include a stayed securities class action alleging omissions related to low wind production before a 2015 share offering, and litigation related to GenOn noteholders and the Marsh Landing transfer. The company stated it could not predict outcomes or reasonably estimate potential costs and liabilities.
Important facts for investors to verify
- Whether the GIP transaction closed as expected, and its final terms and implications for ownership, management and growth opportunities.
- Whether Buckthorn achieved commercial operation on schedule, its final financing and construction costs, and the Carlsbad acquisition’s status and funding plan.
- Debt maturities, refinancing needs and restrictions, especially the $345 million 2019 convertible notes classified as current at quarter-end.
- Actual CAFD, maintenance spending and dividend coverage; the filing gives no specific full-year CAFD guidance.
- Subsequent performance of wind and other generation assets, and developments in the disclosed legal matters and Topic 842 implementation.