HA Sustainable Infrastructure Capital, Inc. — Q3 2014 Form 10-Q
Business context and period. The company finances energy efficiency, clean energy and other sustainable infrastructure through loans, investments, real estate and arranging or servicing transactions. This filing covers the quarter and nine months ended September 30, 2014; comparisons are to the corresponding 2013 periods. The company notes that pre-IPO Predecessor results are not necessarily comparable with its post-IPO business.
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Investment revenue | $8.24m | $5.18m | $20.93m | $11.29m |
| Net investment revenue | $4.27m | $2.59m | $9.74m | $4.40m |
| Total revenue, net of investment interest expense and credit-loss provision | $7.81m | $4.80m | $21.08m | $8.42m |
| Net income (loss) | $2.60m | $1.89m | $8.29m | ($5.10m) |
| Net income (loss) attributable to controlling shareholders | $2.56m | $1.84m | $8.15m | ($3.13m) |
| Diluted EPS | $0.11 | $0.11 | $0.40 | ($0.20) |
| Net investment margin | 2.84% | 2.87% | 2.51% | 2.21% |
Amounts are in U.S. dollars; financial statement amounts above are rounded to millions. Q3 gains on sales of receivables and investments were $3.36m, versus $1.89m. For the nine months, they were $9.61m versus $2.77m. Non-GAAP Core Earnings were $4.95m ($0.22 per share) for Q3 and $12.93m ($0.64 per share) for the nine months; the company cautions that Core Earnings is not a substitute for GAAP income or cash flow.
- Balance sheet at September 30: assets $703.7m; liabilities $484.0m; equity $219.6m. Financing receivables were $477.9m, real estate and lease intangibles totaled $81.6m, and available-for-sale investments were $43.4m.
- Liquidity and debt: unrestricted cash was $60.9m and restricted cash $7.3m. Borrowings comprised $212.8m under credit facilities, $93.6m asset-backed nonrecourse notes, and $118.3m other nonrecourse debt. Deferred funding obligations were $49.7m. Management reported a 1.4-to-1 debt-to-equity ratio excluding match-funded other nonrecourse debt and compliance with applicable credit-facility covenants.
- Cash flow, nine months: operating activities provided $23.6m; investing activities used $81.9m; financing activities provided $87.4m. Cash increased by $29.1m to $60.9m. Financing cash included $70.4m net proceeds from an April share offering and $158.0m of credit-facility borrowings.
Material changes and management commentary
- Revenue and net investment revenue increased substantially year over year, mainly as the average portfolio grew to $602m in Q3 from $361m and to $518m for the nine months from $266m. Higher transaction gains also contributed. The larger portfolio was partly offset by a lower average portfolio yield: 5.48% in Q3 versus 5.75%, and 5.39% year to date versus 5.67%.
- Average debt balances also rose; average debt cost declined to 3.93% in Q3 from 4.21%, and to 4.05% year to date from 4.44%. Q3 net investment margin edged down year over year, while the nine-month margin improved.
- In May, the company acquired AWCC for approximately $106.7m, adding land leased to three solar projects and lease-payment rights from 57 wind projects. AWCC contributed rental and interest income in 2014. Acquisition costs were $1.1m for the nine-month period.
- In October, after quarter-end, the company acquired a $144m investment in ten operating wind projects and arranged $115m of fixed-rate, nonrecourse debt at 5.74%, maturing in 2021. It also completed a follow-on offering of 4.6m shares, with $58.9m net proceeds. These subsequent events are not included in September 30 balances.
- The company reported a financing pipeline exceeding $2.0bn, but stated there is no assurance that any pipeline transaction will close. It gave no quantified earnings or revenue guidance. Management expects a larger share of revenue from net investment and other recurring sources as the balance-sheet portfolio grows.
Risks, contingencies and unusual items
- Credit and recovery: the company retained an $11.0m allowance against the EnergySource loan; only $0.8m remained as its estimated realizable value. Management expected to pursue recovery through a possible land sale, with recovery capped at $2.0m, but cautioned that timing and ultimate recovery were uncertain. No credit-loss provision was recorded in the 2014 periods.
- Portfolio valuation and concentration: fair values for financing receivables, investments and residual assets rely substantially on Level 3 assumptions. The portfolio had a $610m carrying amount, and management stated approximately 97% of balance-sheet transactions were investment grade. The company highlighted credit, project-performance, illiquidity, commodity-price and interest-rate risks.
- Funding and interest rates: the company uses revolving facilities, securitizations and nonrecourse debt; some borrowing is shorter-term than the assets it finances. Credit facilities are secured, include covenants and permit acceleration upon default. Floating-rate borrowings expose interest expense to rate increases.
- REIT status: proposed Treasury regulations could affect classification of certain assets under REIT tests; the rules were not final. The company must meet REIT requirements, including distributing at least 90% of REIT taxable income, which limits retained capital.
- Other items: Q3 included $0.6m of income tax expense, while the nine-month period showed a $0.2m tax benefit. The company reported no litigation expected to have a material adverse effect and no defaults upon senior securities.
Key facts investors should verify
- Whether the EnergySource land-sale recovery occurred and what amount was ultimately collected.
- Performance, cash flows and debt service of the AWCC assets and the October wind investment, including the effect of the $115m nonrecourse borrowing.
- Portfolio credit quality, the adequacy of the $11.0m allowance, and the sensitivity of Level 3 valuations to discount-rate and default assumptions.
- Credit-facility availability, collateral requirements, covenant compliance and refinancing exposure as borrowings and the portfolio grow.
- Whether the pipeline converts into completed financings, and the effects of share issuance, dividends and REIT requirements on per-share results and capital needs.