Clearway Energy, Inc. quarterly report, Q2 FY2017

Business context and reporting period

The supplied filing is an unaudited Form 10-Q for NRG Yield, Inc. for the quarter and six months ended June 30, 2017; it does not name Clearway Energy, Inc. as the registrant. NRG Yield operated contracted U.S. renewable and conventional generation and thermal infrastructure assets. Its contracted generation portfolio was 4,879 net MW, with approximately 16 years of weighted-average remaining offtake contract duration based on CAFD.

Financial performance and position

Amounts are in millions of dollars unless stated otherwise.

Operating margin was approximately 43.0% in Q2 2017 versus 45.2% in Q2 2016, and 35.1% for the first half of 2017 versus 38.7% in the prior-year period. Basic earnings per share were $0.29 for Q2 and $0.26 for the first half of 2017. The filing does not provide a clear CAFD figure in the supplied text.

At June 30, 2017, cash was $181 and restricted cash was $114, compared with $322 and $165, respectively, at year-end 2016. Reported liquidity was approximately $722, including $427 of available revolving-credit borrowings; the revolver had no borrowings and $68 of letters of credit outstanding. Total debt was $5,983 gross principal (carrying amount including current maturities: $5,961); the company reported $5,597 of long-term debt on the balance sheet. All required debt covenants were met.

Material changes versus prior period

• First-half revenue declined $15 and operating income declined $24 year over year; attributable net income fell $12. Q2 revenue was nearly flat, but operating income fell $6 and attributable net income fell $4.
• First-half economic gross margin, a non-GAAP measure, decreased $15 to $506. Management attributed the decline chiefly to lower wind and solar production and forced outages at El Segundo and Walnut Creek; lower emissions-credit amortization partly offset the decrease in GAAP gross margin.
• Interest expense rose $20 in the first half to $162, reflecting debt issued in the second half of 2016, debt assumed with the Utah Solar Portfolio, and interest-rate swap accounting, partly offset by lower project-debt balances and prior-year revolver borrowings.
• Operating cash flow decreased $47 to $171. Investing cash outflow increased to $143, primarily reflecting $131 paid for the March 2017 Drop Down Assets. Financing cash outflow was $220, including $104 of dividends and distributions and $142 of long-term debt payments.
• The March 2017 acquisition added interests in Agua Caliente and the Utah Solar Portfolio for $130 cash plus a $1 working-capital adjustment, with project debt also assumed. The acquisition was funded from cash on hand; comparative financial statements were retrospectively adjusted for common-control accounting.

Outlook, management commentary, and risks

• NRG announced on July 12, 2017 that it was exploring strategic alternatives for its renewables platform and its interest in NRG Yield. NRG held a 55.1% voting interest and was an important source of growth opportunities and management and administrative services. The filing warns a change of ownership could materially affect strategy, financing access, business, and results.
• Management said it expected comparable cash dividends to continue in the foreseeable future, subject to capital availability, market conditions, legal requirements, and contractual obligations. The July 25 declaration set a $0.28 quarterly dividend per Class A and Class C share, payable September 15, 2017. No broader earnings or CAFD guidance is provided in the supplied text.
• Walnut Creek had several Q2 forced outages; the plant was back in service by July. Estimated outage costs were approximately $8 before insurance, with a significant portion expected by management to be recoverable by year-end. El Segundo Units 5 and 6 returned to service in February; a July warranty settlement reduced the related cost from $12 to approximately $5.
• Key risks include weather-driven generation variability, plant outages and repair costs, counterparty performance, regulation and environmental requirements, substantial indebtedness and capital-market access, and dependence on NRG. Estimated counterparty credit exposure under long-term contracts was approximately $2.9 billion for the next five years.
• Material litigation included securities and fiduciary-duty actions and a GenOn noteholder suit alleging, among other claims, fraudulent transfer relating to Marsh Landing. The company said it could not predict outcomes or reasonably estimate potential liabilities. It also disclosed that a GenOn restructuring support agreement could ultimately resolve the noteholder matter if a reorganization plan is approved.
• Management stated liquidity, operating cash flows, and revolver availability were expected to be adequate for commitments, debt service, capital expenditures, and dividends. Adoption of the new lease accounting standard was expected to require recognition of lease assets and liabilities and could be material; the impact was still under review.

Most important facts for investors to verify

• Confirm the issuer and filing identity: the supplied 10-Q is for NRG Yield, Inc., despite the request metadata naming Clearway Energy, Inc.
• Track NRG’s strategic review, any ownership change, and implications for governance, services, acquisition pipeline, and access to capital.
• Assess whether lower renewable generation and conventional-plant outages persist, and whether expected insurance recoveries and outage-related warranty amounts are realized.
• Review debt maturities, interest-rate exposure, liquidity availability, and cash generation relative to dividends and other funding needs.
• Monitor litigation developments, including the GenOn matter, and the company’s progress in assessing the impact of lease accounting adoption.