Business context and reporting period
The supplied filing is NRG Yield, Inc.’s Form 10-Q for the quarter ended September 30, 2016; NRG Yield is the predecessor corporate name associated with Clearway Energy, Inc. The company owned contracted renewable and conventional generation and thermal infrastructure assets. It reported 4,563 net MW of contracted generation capacity and a weighted-average remaining offtake term of approximately 17 years, based on CAFD.
Comparative 2015 financial statements were retrospectively adjusted to reflect the common-control CVSR acquisition and other drop-down assets; interpret year-over-year comparisons in that context.
Financial performance and position
- Third quarter: Revenue was $272 million, up $16 million from $256 million. Operating income was $117 million versus $101 million; net income was $47 million versus $32 million; and net income attributable to NRG Yield, Inc. was $33 million versus $17 million. Basic EPS was $0.34 for both Class A and Class C shares, compared with $0.18 for each class a year earlier.
- First nine months: Revenue was $789 million, up $60 million. Operating income was $317 million versus $250 million; net income was $111 million versus $53 million; and net income attributable to NRG Yield, Inc. was $70 million versus $22 million. Basic EPS was $0.72 for each of Class A and Class C shares, versus $0.28.
- Economic gross margin, a non-GAAP measure: $271 million for the quarter versus $252 million, and $792 million for nine months versus $710 million. The filing attributes much of the increase to higher renewable generation and improved pricing after Alta X and XI entered PPAs.
- Cash flow: Nine-month operating cash flow was $439 million, up from $310 million. Investing used $142 million versus $867 million; financing used $208 million versus providing $273 million. Cash and cash equivalents ended the period at $200 million, compared with $111 million at year-end 2015.
- Debt and liquidity: Total debt, including current maturities, was $5.704 billion; long-term debt net of current maturities and financing costs was $5.359 billion. Liquidity was approximately $769 million, including $200 million cash, $138 million restricted cash, and $431 million available on the revolver. No revolver borrowings were outstanding; $64 million of letters of credit were outstanding. The company reported compliance with required debt covenants.
- Dividends: Third-quarter dividends were $0.24 per Class A and Class C share. On November 2, the company declared $0.25 per share for each class, payable December 15, 2016. Nine-month dividends per share were $0.695 for both classes.
Material changes and notable items
- On September 1, the company acquired NRG’s remaining 51.05% interest in CVSR for $78.5 million plus an immaterial working-capital adjustment, funded with cash on hand. It also assumed $496 million of additional debt. The transaction was accounted for as a common-control transfer and prior periods were recast.
- In August, NRG Yield Operating LLC issued $350 million of 5.00% senior notes due 2026, using part of the proceeds to repay the revolver. CVSR Holdco had issued $200 million of 4.68% secured notes in July, of which the company received $97.5 million in net proceeds based on its ownership at issuance.
- On August 9, the company established a Class C at-the-market offering program of up to $150 million; no shares had been issued under it as of October 31.
- On August 15, S&P lowered the company’s and its 2024 Senior Notes’ ratings from BB+ to BB; the outlook was stable. Moody’s ratings were Ba2.
- Walnut Creek experienced two unrelated forced outages in July and August, affecting Units 2 and 4. Both units had returned to service by September 15. The company was reviewing potential warranty and insurance coverage.
Outlook, risks and contingencies
Management said liquidity, operating cash flow and revolver availability were expected to support financial commitments, debt service, capital spending, growth and dividends. The company expected comparable cash dividends to continue in the foreseeable future, subject to available capital, market conditions, laws and contractual obligations. No quantified earnings or CAFD guidance was provided in the supplied filing.
Key risks include variable wind and solar resources, outages and maintenance, fuel and power market movements, counterparty performance, access to capital, substantial indebtedness, regulation and environmental requirements, and the ability to maintain or grow dividends and complete acquisitions. Management noted that interim results are not necessarily indicative of full-year results.
Two putative class actions were disclosed: one alleging securities-law disclosure failures concerning low wind production before the 2015 Class C offering, and another alleging fiduciary-duty breaches related to the 2015 share recapitalization. The company said it could not predict outcomes or reasonably estimate potential costs and liabilities. It stated that there had been no material changes to the risk factors in its 2015 Form 10-K.
Important facts for investors to verify
- How much of the reported earnings and cash generation reflects the CVSR consolidation and other retrospective adjustments, versus underlying comparable operations.
- The financial and operational effects of the Walnut Creek outages, including any recoveries from warranties or insurance.
- Debt maturities, project-level restrictions, interest-rate exposure and the impact of the S&P downgrade on future financing costs and acquisition capacity.
- Whether operating cash flow and CAFD support the declared dividend, especially given restricted cash, debt service and planned investments.
- Developments in the disclosed litigation and any potential exposure not estimable at the filing date.