HA Sustainable Infrastructure Capital, Inc. — Q1 2023 10-Q
Reporting period: Three months ended March 31, 2023. The company invests in renewable energy, energy efficiency and other sustainable infrastructure through equity, lending, real estate and securitization activities. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior date |
|---|---|---|
| Total revenue | $69.1 million | $58.5 million; up 18% |
| Net income | $24.6 million; $0.26 basic and diluted EPS | $45.7 million; $0.53 basic, $0.51 diluted EPS |
| Distributable earnings (non-GAAP) | $49.7 million; $0.53 per share | $45.7 million; $0.52 per share |
| Distributable net investment income (non-GAAP) | $47.1 million | $42.5 million |
| Operating cash flow | $48.8 million | $(31.9) million |
| Investing cash flow | $(448.7) million | $(95.5) million |
| Financing cash flow | $388.2 million | $31.5 million |
Revenue growth reflected higher interest income, up $12.9 million, and securitization income, up $0.7 million. Interest expense rose 40% to $37.2 million as average debt balances and borrowing costs increased. The filing reports an average cost of debt of 4.8%, versus 4.2%; average yield on receivables, investments and real estate was 8.1%, versus 8.0%. It does not present a single consolidated operating-margin measure.
Net income fell 46%, primarily because equity-method investment income declined $25.1 million to $22.4 million, alongside higher expenses. Management attributed lower equity-method income mainly to fewer tax attributes recognized by co-investors, reducing the company’s HLBV earnings allocation. GAAP net income and non-GAAP distributable earnings moved in opposite directions; distributable earnings includes significant adjustments for equity-method investments.
At March 31, total assets were $5.14 billion, including $2.25 billion of equity-method investments and $1.96 billion of net commercial receivables. Total liabilities were $3.48 billion and stockholders’ equity was $1.66 billion. Company-defined debt was $3.36 billion, or 2.0x equity, versus 1.8x at year-end 2022; the board-approved leverage limit is up to 2.5x. Fixed-rate debt was 87% of total debt, within the stated 75%–100% target range.
Unrestricted cash was $142 million. The $600 million unsecured revolver had $350 million unused capacity; secured facility availability was $2 million, and the $100 million green commercial-paper program was fully utilized. The company reported $404 million of non-recourse borrowings, $1.8 billion of senior unsecured notes, $383 million of term loans and $344 million principal of convertible notes. Cash, cash equivalents and restricted cash totaled $164 million, down from $176 million at year-end.
Material changes and portfolio developments
- The on-balance-sheet Portfolio increased to $4.69 billion from $4.31 billion at year-end; Managed Assets, a non-GAAP measure including securitized assets, rose to $10.38 billion from $9.79 billion.
- The company completed approximately $389 million of transactions, versus $331 million a year earlier. It invested $363 million in equity-method investments during the quarter, compared with $79 million a year earlier.
- Interest expense increased $10.6 million, provision for receivable losses increased to $1.9 million from $0.6 million, and compensation and benefits rose 23% to $18.4 million. Equity-based compensation expense was $7.9 million, versus $3.5 million.
- Commercial receivables had a $43 million credit-loss allowance, up from $41 million at year-end. The company reported $11 million of receivables on non-accrual status; other receivables were not on non-accrual.
- Cash dividends declared increased to $0.395 per share for the second and third quarters of 2023, from $0.375 per share in 2022.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management reported a pipeline exceeding $5.0 billion of opportunities that could potentially close within 12 months, while cautioning that transactions may not be completed. The company expects the Inflation Reduction Act to support investment opportunities over the next several years.
- Management stated liquidity was adequate and expected identified sources to meet near- and long-term needs. The company plans to continue funding investments through debt, equity and on- and off-balance-sheet securitizations.
- The 2023 Convertible Senior Notes, with $144 million principal and 0% stated interest, mature in August 2023. The filing says convertible obligations may be settled with shares or cash. A separate guarantee related to joint-venture financing had a maximum exposure of approximately $80 million and repayment was due in May 2023; management considered performance remote and recorded no liability.
- Interest-rate exposure remains material: $439 million of borrowings were variable-rate, and a 50-basis-point increase was estimated to add $549,000 to quarterly interest expense, before any mitigating actions. New swaps were entered into during the quarter; their $32 million fair-value liability contributed to a $31.8 million unrealized swap loss in other comprehensive income.
- Key risks include credit and counterparty losses, refinancing and funding access, illiquid or geographically concentrated assets, energy and environmental-attribute price volatility, and climate-related effects. Management reported no material legal proceedings, no securitization credit losses, and no material securitization-trust debtor payments more than 90 days past due.
Important facts for investors to verify
- How much of the $5.0 billion-plus pipeline converts to funded transactions, and on what terms.
- Funding or settlement plans for the August 2023 convertible notes and the May 2023 joint-venture guarantee exposure.
- Whether portfolio cash collections and financing capacity remain sufficient as investment outflows, debt costs and dividends continue.
- Credit performance of commercial receivables, particularly the $11 million on non-accrual and the assumptions underlying the $43 million allowance.
- The sustainability and comparability of distributable earnings, given its material equity-method adjustments, and the relationship between that measure and cash available for dividends.