Clearway Energy, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; compared with the corresponding 2018 periods. Figures are in U.S. dollars unless noted. Clearway owns more than 5,330 MW of generation capacity, principally contracted wind, solar and natural-gas assets, plus district energy systems. The company is sponsored by GIP through CEG.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Operating revenue | $296 million | $292 million | $797 million | $824 million |
| Operating income | $90 million | $100 million | $218 million | $293 million |
| Net income (loss) | $35 million | $49 million | $(48) million | $145 million |
| Net income (loss) attributable to Clearway | $39 million | $21 million | $(5) million | $116 million |
| EPS attributable to Class A and C, basic | $0.36 | $0.20 | $(0.04) | $1.14 |
| Interest expense | $106 million | $74 million | $337 million | $200 million |
- Margins: Gross margin was $276 million in Q3 2019 versus $272 million; economic gross margin, a non-GAAP measure, was $296 million versus $289 million. For the nine-month period, gross margin was $743 million versus $767 million and economic gross margin was $804 million versus $819 million.
- Cash flow: Operating cash flow was $374 million for the nine months, down from $396 million. Investing cash outflow was $300 million, including $200 million of capital expenditures; financing cash outflow was $260 million. Cash, cash equivalents and restricted cash totaled $397 million at period-end, down from $583 million at year-end 2018.
- Debt and liquidity: Debt principal totaled $6.179 billion at September 30, 2019, compared with $6.044 billion at December 31, 2018. The balance sheet classified $1.965 billion as current, including approximately $1.3 billion of project debt reclassified as short-term following PG&E-related defaults. Long-term debt reported on the balance sheet was $4.143 billion. Reported liquidity was $840 million, including $249 million of restricted cash and $443 million of revolver availability. Corporate and Clearway Energy LLC cash, excluding subsidiaries, was $32 million.
- Dividend: Class A and C holders received $0.20 per share in each of the first three quarters of 2019. On October 29, the company declared another $0.20 per share, payable December 16, 2019.
Material changes versus the prior comparable period
- Q3 revenue rose $4 million, but operating income fell $10 million and consolidated net income fell $14 million. Lower Q3 transaction and integration costs than in 2018 helped offset higher depreciation and interest.
- Nine-month revenue declined $27 million and operating income declined $75 million; Clearway shifted from $145 million of consolidated net income to a $48 million loss. Higher interest expense, lower renewable generation and increased depreciation were major factors. Interest expense rose $137 million, largely from interest-rate swap fair-value changes and reclassification of previously deferred hedge losses.
- Renewables gross margin declined $35 million over nine months, reflecting unfavorable wind and solar resources, a CVSR outage and a $9 million loss on an Elbow Creek power hedge; Buckthorn Solar’s contribution partly offset the decline. Thermal margin increased $7 million, including contributions from the UPMC and Duquesne assets.
- Cash used in investing increased, principally because capital expenditures rose to $200 million from $62 million. Renewable repowering and the Oahu and Kawailoa partnerships were key investment areas.
Outlook, risks and unusual items
- PG&E bankruptcy: Clearway has PPAs connected to six solar facilities totaling 480 MW and the 720 MW Marsh Landing facility. The bankruptcy triggered defaults under related PPAs and project financing agreements; about $1.3 billion of debt was classified as short-term, and affected project distributions are restricted. As of November 6, the company reported that the contracts continued to operate normally, had obtained forbearance agreements for certain financing arrangements and was seeking others. PG&E’s proposed plan and a competing plan would both assume Clearway’s PPAs, but confirmation remained pending.
- Dividend and funding: Management expected comparable cash dividends to continue in the foreseeable future based on then-current circumstances, while noting that dividends depend on available capital, contractual restrictions and the company’s ability to receive unrestricted project distributions. Management said liquidity, operating cash flow and revolver availability should be adequate for commitments, debt service, capital needs and dividends; financing on acceptable terms is not assured.
- Repowering and projects: The company committed an estimated $111 million of net corporate capital toward repowering Wildorado and Elbow Creek. Repowering-related accelerated depreciation added $26 million of expense in the first nine months. Duquesne district energy assets were acquired for an approximately $107 million total investment, supported by a 40-year service agreement. Oahu solar projects reached commercial operation in September.
- Other unusual items: A $19 million impairment was recorded for a Thermal facility. A sale agreement was signed for Energy Center Dover and Energy Center Smyrna, subject to approvals and maintenance work; a separate 6 MW solar portfolio sale closed after quarter-end for $20 million, alongside repayment of $23 million of associated financing.
- Contingencies and operating risks: NPPD disputes involving the Laredo Ridge and Elkhorn Ridge PPAs remained in litigation, with injunctions preventing termination while the cases proceeded. Georgetown sued the Buckthorn Westex subsidiary in October over alleged nondisclosure and contract breaches; Clearway stated it would defend the PPA. Risks also include weather and resource variability, outages, counterparty performance, interest-rate and commodity exposure, regulation, and access to capital.
- Guidance: The filing does not provide a clear numerical earnings or cash-flow outlook. It estimates 2019 maintenance capital expenditures of $30 million, subject to revision.
Important facts for investors to verify
- Whether PG&E’s eventual reorganization plan is confirmed, the PPAs are assumed, and lenders provide sufficient forbearances or other relief from project-debt defaults.
- How much of reported liquidity is practically available, given restricted project cash and limits on distributions, and whether dividends remain supportable.
- Drivers and potential persistence of higher interest expense, including swap valuation and deferred hedge-loss reclassifications.
- Actual renewable resource performance, repowering costs and completion timing, and the economic contribution of new and acquired projects.
- Developments in the NPPD and Georgetown litigation and any resulting effects on contracts, cash flows or reserves.