Clearway Energy, Inc. quarterly report, Q3 FY2018

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Clearway Energy, Inc. — 2018 Q3 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2018. Financial figures are in U.S. dollars; amounts are in millions unless stated otherwise.

Business context and reporting period

Clearway owns contracted renewable and conventional power generation assets and thermal infrastructure across North America. At September 30, the portfolio included 5,405 MW of net generation capacity and 1,392 MWt of thermal capacity. Nearly all output was sold under long-term offtake agreements, with approximately 15 years of weighted-average remaining contract duration based on CAFD.

On August 31, NRG transferred its ownership interest to Clearway Energy Group, which was then acquired by an affiliate of Global Infrastructure Partners (GIP). GIP obtained 55% voting control; Clearway Energy, Inc. held 55.7% of Clearway Energy LLC’s economic interests after its September equity issuance.

Financial performance and liquidity

  • Q3 revenue and earnings: Operating revenue was $292 million, up $23 million year over year. Operating income was $100 million versus $84 million; net income was $49 million versus $31 million. Net income attributable to Clearway Energy, Inc. was $21 million, down from $29 million, reflecting higher income allocated to noncontrolling interests. Basic EPS was $0.20 versus $0.30.
  • Nine-month results: Operating revenue was $824 million versus $778 million; operating income was $293 million versus $263 million; net income was $145 million versus $73 million; and net income attributable to the company was $116 million versus $54 million. Basic EPS was $1.14 versus $0.56.
  • Margins and operating drivers: GAAP gross margin was $272 million in Q3 versus $254 million and $767 million for nine months versus $733 million. Management’s non-GAAP economic gross margin was $289 million and $819 million, respectively, compared with $272 million and $785 million. Growth reflected higher wind generation, Buckthorn Solar entering service, and increased thermal activity. Conventional generation availability was 97.0% in Q3, compared with 99.3% a year earlier.
  • Cash flow: Nine-month operating cash flow was $396 million versus $373 million. Investing cash use was $175 million versus $283 million, and financing cash use was $148 million versus $265 million. Cash, cash equivalents and restricted cash totaled $389 million at period-end.
  • Debt and liquidity: The debt schedule reported $5.87 billion of total debt, including $873 million of current maturities; the fair-value disclosure showed carrying value of $5.86 billion. Total liquidity was $814 million, including $425 million of revolver availability. No revolver borrowings were outstanding, and the company reported compliance with required debt covenants.
  • Dividends: Q3 dividends were $0.32 per Class A and Class C share, compared with $0.28 a year earlier. On October 31, the company declared $0.331 per share for payment in December. Management expected comparable dividends to continue based on then-current circumstances, subject to liquidity, market conditions and contractual restrictions.

Material changes versus the prior comparable period

  • Q3 attributable earnings fell despite higher consolidated net income, as a larger share of earnings was allocated to noncontrolling interests, including sponsor and tax-equity interests.
  • Nine-month interest expense declined $39 million, primarily due to interest-rate-swap fair-value changes in the first half and lower project-level debt balances.
  • Q3 included $17 million of acquisition-related transaction and integration costs, primarily associated with the NRG transaction; nine-month costs were $19 million versus $2 million in 2017.
  • Results benefited from the Buckthorn Solar project, which reached commercial operation in July, and the UPMC thermal project, acquired in June. Q3 2017 included a $12 million impairment charge that did not recur in 2018.
  • Cash dividends and distributions paid increased to $174 million for the first nine months, from $149 million in 2017. The company issued Class C shares for $75 million net proceeds in September and raised $77 million gross through its ATM program during the nine months.

Outlook, management commentary, risks and unusual items

  • Management said available liquidity, operating cash flow and revolver availability should be adequate for commitments, debt service, capital spending, growth and dividends. The filing did not provide quantified earnings, CAFD or full-year guidance.
  • Subsequent to quarter-end, Clearway Operating issued $600 million of 5.75% senior notes due 2025. The company accepted tenders for $109 million of 2019 convertible notes and $243 million of 2020 convertible notes; $220 million and $45 million, respectively, remained outstanding after the tender. The bridge facility was terminated October 31.
  • Planned transactions include a $380 million cash acquisition plus assumed debt for the Carlsbad project, expected to close in January 2019; an approximately $28 million cash acquisition plus assumed debt for 80 MW of Hawaii solar projects, expected in summer 2019; and a proposed $19 million buyout of a Wind TE Holdco tax-equity partner in January 2019. The company also received a November offer to acquire an interest in Agua Caliente, expected to close in Q1 2019, subject to conditions.
  • Key risks include substantial indebtedness and access to capital, operating and weather variability, counterparty performance, regulatory changes, and dependence on distributions from subsidiaries to fund parent-level dividends. GIP controls the company, and its interests may differ from public shareholders; potential sponsor share sales could pressure the stock.
  • The Braun securities class action concerns alleged nondisclosure of low wind production before a 2015 share offering. The company said it could not predict the outcome or estimate potential liability; on November 1, 2018, the court granted defendants’ motion to quash service. The filing states reserves were established where applicable.
  • The company expects adoption of the new lease accounting standard in 2019 to result in lease assets and liabilities; it said the effect could be material but remained under evaluation. Management also noted that standalone state tax filing after the NRG transaction would raise the state effective tax rate.

Important facts for investors to verify

  • Whether recurring operating cash flow and CAFD support the dividend after debt service, maintenance spending and distributions to noncontrolling interests.
  • Final funding, closing conditions and economics of the announced acquisitions, repowering work and tax-equity buyout.
  • Post-tender debt balances, refinancing costs, maturities and the impact of the October 2025 notes issuance on leverage and interest expense.
  • How the NRG-to-GIP transition, service agreements and related-party arrangements affect operating costs, governance and future asset opportunities.
  • Progress on the Braun litigation and the eventual balance-sheet effect of adopting lease accounting in 2019.