HA Sustainable Infrastructure Capital, Inc. — 2016 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2016; quarterly figures below identify the fourth quarter. The company originates and invests in debt and equity for energy-efficiency and renewable-energy projects, alongside related sustainable infrastructure. It reported approximately $3.9 billion of managed assets, including on-balance-sheet investments and assets in unconsolidated securitization trusts.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Total revenue | $81.2 million | $58.7 million |
| Total expenses | $72.4 million | $50.4 million |
| Net income attributable to controlling shareholders | $14.7 million; $0.32 per share | $8.0 million; $0.21 per share |
| Net cash provided by operating activities | $56.9 million | $18.5 million |
| Net cash used in investing activities | $190.6 million | $349.0 million |
| Net cash provided by financing activities | $113.7 million | $339.6 million |
| Net investment margin | 2.9% | 3.3% |
| Core Earnings, a non-GAAP measure | $50.5 million; $1.20 per share | $33.5 million; $1.04 per share |
Fourth quarter: Revenue was $19.9 million, expenses $18.8 million, income before equity-method investments $1.0 million, equity-method investment income $3.4 million, net income $4.4 million, and basic and diluted EPS $0.09.
- Revenue growth reflected higher financing-receivable interest income ($48.2 million, up 30%), rental income ($11.9 million, up 33%), and gains on asset sales ($17.4 million, up 89%). Total revenue increased 37% year over year.
- Interest expense rose 67% to $45.2 million, principally reflecting higher average debt balances and borrowing costs. Expenses overall rose 41%.
- Equity-method investment income was $6.1 million versus a $0.1 million loss in 2015. The company’s non-GAAP Core Earnings adjustment for these investments was $24.4 million; Core Earnings should not be treated as GAAP income or operating cash flow.
- At year-end, total assets were $1.746 billion, total liabilities $1.172 billion, and equity $574.3 million. Balance-sheet debt comprised $283.3 million under the credit facility and $692.1 million of nonrecourse debt. Deferred funding obligations were a further $170.9 million. Separately, approximately $2.3 billion of assets were financed through off-balance-sheet securitizations.
- Debt-to-equity leverage was approximately 1.7:1, below the 2.5:1 target. Fixed-rate debt was 67% of balance-sheet debt; in February 2017 the board raised the fixed-rate target range to 60%–85%. The revolving facility had $283 million outstanding and a July 2019 maturity.
- Cash, cash equivalents and restricted cash totaled $59.1 million at year-end, including $29.4 million of unrestricted cash and cash equivalents. The company reported operating cash flow of $56.9 million and paid $49.5 million in dividends and distributions during 2016.
Material changes versus prior period
- Transactions completed increased to approximately $1.1 billion from $935 million. The on-balance-sheet portfolio was approximately $1.6 billion; approximately 59% of 2016 transactions were retained and 41% securitized or sold.
- Managed assets grew to $3.933 billion from $3.188 billion. Total assets rose to $1.746 billion from $1.470 billion, and equity to $574.3 million from $432.1 million.
- Annual GAAP EPS increased to $0.32 from $0.21, while net investment margin declined to 2.9% from 3.3%. Higher portfolio income and equity-method earnings more than offset increased expenses and interest costs.
- The company issued approximately $176 million of common equity in 2016. Dividends declared increased to $1.23 per share from $1.08 in 2015. For tax purposes, 2016 cash dividends were classified entirely as return of capital.
Outlook, commentary, risks and unusual items
- Management described a pipeline exceeding $2.5 billion of potential debt and equity transactions that could close over the next 12 months; completion and terms are not assured. It expected continued growth opportunities but provided no specific earnings or revenue guidance.
- Management saw long-term opportunity in energy efficiency, renewable energy, state renewable standards, corporate renewable-energy demand and infrastructure investment. It also cited uncertainty about federal policy and tax changes, low natural-gas prices, interest rates and market conditions.
- Key exposures include changes to government incentives and regulation, interest rates and refinancing costs, credit and project performance, energy commodity prices, illiquid assets and concentration in individual obligors or projects. REIT qualification and the company’s Investment Company Act exception are also material regulatory and tax dependencies.
- Liquidity and leverage depend on continued access to equity, bank financing and securitization markets. Long-dated assets may be funded with borrowings of shorter duration; financing covenants and collateral requirements may constrain operations. Management stated that identified liquidity sources were adequate for expected needs.
- A $13 million senior secured investment in a wind project previously undergoing foreclosure was recovered in full in 2016, with a $0.8 million gain. There were no financing receivables, investments or leases on nonaccrual, and no credit-loss provision or troubled-debt restructurings at year-end. No material adverse legal proceedings were reported.
- A new Treasury/IRS definition of real property applicable to taxable years beginning after 2016 may affect whether certain energy-efficiency financing receivables qualify for REIT tests; the company’s position remains subject to uncertainty. The company reported unqualified audit opinions on its financial statements and internal control over financial reporting.
Important facts for investors to verify
- Reconcile GAAP net income and cash flows with non-GAAP Core Earnings, especially the $24.4 million equity-investment adjustment; review the assumptions and cash distributions behind that measure.
- Review debt maturities, deferred funding obligations, facility covenants, hedges and refinancing needs, and distinguish balance-sheet debt from off-balance-sheet securitizations.
- Assess portfolio credit quality and concentration, including the internally rated commercial and residential-solar exposures, project performance, and the limited liquidity of many assets.
- Monitor the effect of interest rates, natural-gas and power prices, government policy and tax changes on asset returns, new originations and financing costs.
- Evaluate whether distributions are supported by recurring cash generation: 2016 dividends were $1.23 per share, while tax reporting characterized 100% of cash dividends as return of capital.
- Track REIT qualification and Investment Company Act compliance, including the unresolved implications of the real-property regulations for energy-efficiency receivables.