HA Sustainable Infrastructure Capital, Inc. — 2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter filing. Comparisons below are primarily with fiscal 2021.
Business context
HASI invests in energy efficiency, renewable energy and other sustainable infrastructure, using loans, equity, real estate and securitizations. At year-end, it reported a $4.3 billion on-balance-sheet Portfolio and $9.8 billion of Managed Assets, including $5.5 billion in unconsolidated securitization trusts. It completed approximately $1.8 billion of transactions in 2022, versus $1.7 billion in 2021, and reported a pipeline exceeding $4.5 billion of potential opportunities.
Financial and operating performance
| Metric | 2022 | 2021 |
|---|---|---|
| Total revenue | $239.7 million | $213.2 million |
| Income before equity-method investments | $18.0 million | $18.1 million |
| Income from equity-method investments | $31.3 million | $126.4 million |
| Net income attributable to controlling stockholders | $41.5 million | $126.6 million |
| Diluted EPS | $0.47 | $1.51 |
| Operating cash flow | $0.2 million | $13.3 million |
| Investing cash flow | $(592.1) million | $(703.4) million |
| Financing cash flow | $516.8 million | $630.8 million |
- Revenue rose 12%, led by higher interest income (up 26% to $134.7 million) and fee income (up 80% to $21.6 million). Gain on sale of receivables and investments declined 16% to $57.2 million.
- Net income fell 67%, principally because equity-method income declined by $95.1 million. Management attributed the comparison to tax-credit allocations recognized in 2021 that did not recur and 2022 unrealized mark-to-market losses on project-level economic hedges. Management noted those hedge losses may be offset over time as projects sell power at higher market prices.
- Total expenses increased 14% to $221.7 million. The provision for receivable losses rose to $12.8 million from $0.5 million, primarily reflecting new loans and commitments. Compensation and benefits rose 20%; general and administrative expense rose 50%.
- GAAP net income was $41.9 million, while the company’s non-GAAP distributable earnings were $185.8 million, or $2.08 per share, versus $158.7 million, or $1.88 per share, in 2021. Distributable net investment income was $180.2 million, versus $134.0 million. These non-GAAP measures use adjustments, including an equity-method investment earnings adjustment, and are not substitutes for GAAP income or cash flow.
- Portfolio yield, as defined by the company, was 7.5%, unchanged year over year. Average yield on receivables, investments and real estate was 7.9%; average cost of debt was 4.3%. The figures are different measures and should not be read as a like-for-like portfolio margin.
- At year-end, the company reported $155.7 million of unrestricted cash and $176.0 million of cash, cash equivalents and restricted cash combined. It also reported $600 million of unused capacity on its unsecured revolver, $16 million of available secured-revolver capacity and $100 million available under its green commercial-paper program.
- Total debt was approximately $3.0 billion, excluding off-balance-sheet securitizations; debt-to-equity was 1.8 to 1, compared with 1.6 to 1 in 2021. Fixed-rate debt was 86% of total debt, within the company’s 75%–100% target range. Debt included $1.8 billion of senior unsecured notes, $344 million of convertible notes and $433 million of non-recourse debt.
- Operating cash flow was nearly break-even despite positive net income, reflecting non-cash items and working-capital movements. Investing outflows included $727 million of receivable investments and $128 million of equity-method investments; financing inflows included a $383 million term loan, $200 million of exchangeable notes and $189 million of net common-stock proceeds.
Material changes and unusual items
- The balance-sheet Portfolio increased to $4.3 billion from $3.6 billion; Managed Assets increased to $9.8 billion from $8.8 billion. Equity-method investments were $1.87 billion, commercial receivables net of allowance were $1.89 billion, and real estate was $353 million.
- The company wrote off approximately $8 million of receivables in 2022 after an unsuccessful appeal involving assigned land-lease payments from two wind projects. It had previously fully reserved those receivables. The write-off was excluded from distributable earnings under the company’s methodology.
- Accumulated other comprehensive income moved from positive $9.9 million to a loss of $10.4 million, including a $63.9 million unrealized loss on available-for-sale securities, partly offset by $43.4 million of unrealized gains on interest-rate swaps.
- During 2022, HASI issued $189 million of equity, entered into a $383 million variable-rate term loan due in 2025, and issued $200 million of 0% green exchangeable notes due in 2025 that accrete at an effective annual rate of 3.25%. The notes may be exchangeable for common stock under specified conditions.
Outlook, risks and other disclosures
- Management expressed a positive long-term view of climate-solutions investment opportunities, citing the Inflation Reduction Act, Infrastructure Investment and Jobs Act, corporate clean-energy procurement and the company’s pipeline. The filing does not provide numerical earnings or revenue guidance, and pipeline transactions are not assured to close.
- Management said inflation had not materially affected the business to date, while noting that higher interest rates had increased financing costs for the markets it serves. Higher natural-gas prices in 2022 supported merchant renewable-power economics, but commodity prices and future power-contract pricing remain uncertain.
- Key risks include interest-rate and refinancing exposure, illiquid and hard-to-value investments, credit and counterparty losses, project performance and weather risks, reliance on government incentives and regulations, competition, and maintaining REIT status and the company’s exemption from investment-company registration. Many investments are unrated, and the company generally does not control the projects in which it invests.
- A guarantee associated with financing for three joint-venture entities had a maximum exposure of approximately $80 million at year-end. Management considered performance under the guarantee remote and recorded no liability; the arrangement was extended to May 2023. The filing reports no legal proceedings likely to have a material adverse effect.
- The Board declared a quarterly dividend of $0.375 per share in 2022; a $0.395 dividend was declared in February 2023. Distributions remain subject to Board discretion, liquidity and REIT requirements.
- Planned leadership changes effective March 1, 2023: Jeffrey Eckel became Executive Chairman, Jeffrey Lipson became President and CEO, and Marc Pangburn became CFO. The filing describes new executive employment agreements and related compensation and severance terms.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective. The auditor identified accounting for equity-method investments as a critical audit matter, involving judgments over control, HLBV income allocations and impairment.
Most important facts for investors to verify
- Reconcile GAAP earnings with distributable earnings and cash actually received from equity-method investments; review the assumptions behind the HLBV adjustment.
- Assess receivable credit quality, including the $41 million allowance, $256 million of loan-funding commitments and $11 million of non-accrual receivables.
- Review debt maturities, variable-rate exposure, covenant headroom and refinancing needs, especially the term loan and notes due in 2025 and 2026.
- Evaluate the sustainability of dividends against taxable income, cash generation, investment needs and access to capital, rather than relying on non-GAAP earnings alone.
- Monitor the $80 million joint-venture guarantee, project-level hedge valuations, and changes in the fair value of securitization residual assets.
- Track whether the announced pipeline converts to completed investments on acceptable risk-adjusted terms and whether the leadership transition affects execution.