Clearway Energy, Inc. (filed as NRG Yield, Inc.) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are to December 31, 2016. The filing identifies the registrant as NRG Yield, Inc. Results were retrospectively recast for the March 2017 asset acquisition from NRG, so reported comparisons include those assets in prior periods.
Business context and financial results
The company owned contracted renewable and conventional generation assets totaling 4,879 net MW, with an approximately 16-year weighted-average remaining contract duration based on CAFD, plus thermal infrastructure with 1,319 net MWt of steam and chilled-water capacity and 123 net MW of electric capacity.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Operating revenue | $218 million | $234 million |
| Operating income | $54 million | $72 million |
| Net income (loss), consolidated | $(1) million | $2 million |
| Net income (loss) attributable to NRG Yield, Inc. | $(3) million | $5 million |
| Operating cash flow | $61 million | $89 million |
| Gross margin | $202 million | $212 million |
| Economic gross margin | $219 million | $235 million |
| Dividends per Class A and Class C share | $0.26 | $0.225 |
Operating margin was approximately 24.8% of revenue, versus 30.8% in Q1 2016. The filing reports no specific CAFD figure for the quarter.
Debt, liquidity and cash flows
- At March 31, 2017, total debt before unamortized issuance costs and discounts was $6.051 billion; balance-sheet carrying debt was $5.958 billion, including $296 million current and $5.662 billion long-term. Cash was $213 million and restricted cash was $106 million.
- Reported liquidity was approximately $750 million, including cash, restricted cash and revolver availability. The revolving facility had $431 million available, no borrowings and $64 million of letters of credit outstanding.
- Cash flows were $61 million provided by operations, $63 million used in investing and $107 million used in financing. Cash declined $109 million to $213 million.
- Capital expenditures were $4 million. The company paid $131 million for the March 2017 Drop Down Assets, funded with cash on hand. It also received $41 million of long-term debt proceeds and repaid $75 million of long-term debt.
- The company was in compliance with required debt covenants. S&P rated the company and Senior Notes BB; Moody’s rated them Ba2, with stable outlooks.
Material changes and unusual items
- Revenue fell $16 million year over year; operating income declined $18 million. Economic gross margin decreased $16 million, reflecting lower wind output at Alta, weather-related lower solar generation, and reduced El Segundo revenue during a forced outage. Renewable generation sold was 1.662 million MWh versus 1.778 million; conventional generation was 142,000 MWh versus 261,000 MWh.
- Operations and maintenance expense rose $7 million, primarily due to the El Segundo outage and early disposal of Walnut Creek asset components. Equity earnings from unconsolidated affiliates increased $15 million, mainly from the Utah Solar Portfolio and certain other investments.
- The March 27 acquisition included a 16% interest in Agua Caliente and NRG’s Class A interests in the Utah Solar Portfolio. Cash consideration was $130 million plus a $1 million working-capital adjustment; the company also assumed debt. The transaction was accounted for as a transfer under common control, requiring retrospective presentation.
- El Segundo Units 5 and 6 returned to service on February 24. Management said an agreement in principle with the equipment manufacturer reduced expected related capital and other costs from $12 million to approximately $5 million.
- After quarter-end, Walnut Creek Unit 1 had a forced outage from April 18 to April 30. Estimated cost was approximately $8 million before insurance, a significant portion of which management expected to recover by year-end.
- The company sold 424,027 Class C shares through its ATM program for $7 million gross proceeds; approximately $143 million remained available under the program.
Outlook, risks and contingencies
- No numeric earnings, cash flow or CAFD guidance is provided. Management expected comparable cash dividends to continue under current circumstances; on April 25 it declared a $0.27 per-share quarterly dividend payable June 15, 2017.
- Management believed liquidity, operating cash flows and revolver availability would be adequate for commitments, debt service, capital needs and dividends, while cautioning that future financing might not be available on acceptable terms.
- On May 1, NRG offered the company its remaining 25% interest in NRG Wind TE Holdco, an 814-net-MW wind portfolio. Any acquisition was subject to approval by the company’s independent directors.
- Key risks include weather and generation variability, outages, fuel and electricity prices, counterparty performance, regulation and environmental requirements, substantial indebtedness, capital-market access, and the ability to sustain dividends and complete acquisitions. The filing estimated approximately $3 billion of counterparty exposure under long-term power contracts over the next five years; most counterparties were utilities with strong credit quality or regulatory support.
- Three material legal matters were discussed: a securities class action concerning alleged disclosures before a 2015 share offering; a fiduciary-duty suit concerning the 2015 recapitalization; and a GenOn noteholders’ suit, whose amended complaint named NRG Yield LLC and asserted additional claims. Management said outcomes and potential liabilities could not be predicted or reasonably estimated.
Most important facts for investors to verify
- Whether weak wind and solar output and the El Segundo outage were temporary, and the resulting effect on future operating cash flow and CAFD.
- Actual insurance and manufacturer-warranty recoveries for the El Segundo and Walnut Creek outages, and whether Walnut Creek’s estimated costs change.
- Debt service, refinancing and interest-rate exposure, including project-level debt assumed with the acquisition and debt held by unconsolidated affiliates.
- Cash available for dividends versus the declared dividend, given the quarter’s lower operating cash flow and reliance on distributions from affiliates.
- Independent-director review and financing terms for the proposed remaining 25% wind-portfolio interest, as well as the outcomes and potential costs of pending litigation.