HA Sustainable Infrastructure Capital, Inc. — 2013 Form 10-K
Business context and reporting period. The company provides debt and equity financing for energy efficiency, clean energy, and other sustainable infrastructure projects. This annual report covers the year ended December 31, 2013. HASI completed its IPO on April 23, 2013, raising approximately $160.0 million net; therefore, 2013 includes both predecessor-period results and post-IPO results under a materially expanded business model. Comparisons with the prior period are limited: the principal annual comparator is the Predecessor’s year ended September 30, 2012, and the company changed its fiscal year-end to December 31.
Key financial and operating metrics
| Metric | 2013 / December 31, 2013 |
|---|---|
| Net investment interest income | $17.4 million |
| Investment interest expense | $9.8 million |
| Net investment revenue before credit provision | $7.6 million |
| Provision for credit losses | $11.0 million |
| Gain on securitization / fee income | $5.6 million / $1.5 million |
| Net loss / diluted loss per share | $12.6 million / $0.68 |
| Net cash used in operating activities | $10.8 million |
| Net cash used in investing activities | $229.3 million |
| Net cash provided by financing activities | $263.9 million |
| Cash and cash equivalents; restricted cash | $31.8 million; $49.9 million |
| Total assets / liabilities / equity | $571.4 million / $420.8 million / $150.6 million |
| On-balance-sheet portfolio / managed assets | Approximately $468 million / $2.1 billion, including $1.6 billion in non-consolidated securitization trusts |
| Debt | $259.9 million nonrecourse debt and $77.1 million drawn under the revolving credit facility |
Portfolio composition was approximately 94% fixed-rate and 6% floating-rate. By obligor, it was 55% federal government, 16% state/local governments or institutions, and 29% commercial. The company reported that approximately 96% of transactions held on its balance sheet were considered investment grade. The stated leverage policy targets debt-to-equity below 2:1, with a reported ratio of approximately 1.2:1 under the company’s specified calculation.
Material changes versus the prior comparable period
- Net loss of $12.6 million in 2013 compared with $3.8 million of net income for the Predecessor’s year ended September 30, 2012. The periods are not directly comparable because of the IPO, changed business strategy, and different fiscal year-end.
- Net investment revenue rose to $7.6 million from $2.0 million, primarily as the average balance of financing receivables and investments increased. The average yield fell to 5.68% from 6.34%.
- The $11.0 million credit-loss provision for a geothermal mezzanine loan and $9.9 million lower fee income were major offsets to investment-revenue growth. Fee income had been unusually high in the 2012 comparator.
- Compensation and benefits increased to $12.3 million, including $7.1 million of noncash equity compensation and a one-time $5.8 million charge related to the IPO and formation transactions.
- Following the IPO, the company broadened funding sources: it entered a $350 million secured revolving facility, with maximum total advances of $700 million, and issued $100 million of fixed-rate asset-backed nonrecourse notes at 2.79%, maturing in 2019.
Outlook, commentary, risks, and unusual items
- Management expects a larger share of revenue over time to come from recurring investment income, and intends to retain more originated assets on its balance sheet. It expects net investment revenue to grow with portfolio expansion and improved average margins. No quantified earnings or revenue guidance is provided.
- Post-IPO originations from April 23 through year-end totaled approximately $632 million; more than $2.0 billion of potential opportunities were in the pipeline at December 31, but completion is not assured. Management’s stated target portfolio mix is approximately 30%–50% energy efficiency, 30%–50% clean energy, and 15%–25% other sustainable infrastructure.
- The geothermal mezzanine loan was originally $24 million at 15.22%. Approximately $14 million was repaid in December; the remaining $11.8 million was placed on non-accrual and impaired after project equity holders indicated they did not plan to fund further required equity. HASI recorded an $11.0 million allowance and estimated the realizable value of tangible project assets at $0.8 million. Certain executives and directors had an indirect minority interest in the project; the filing describes this relationship.
- Cash flow and liquidity warrant attention: operating activities used $10.8 million, and $74.7 million of deferred funding obligations were outstanding, partly supported by $49.9 million of restricted cash. The revolving facility bears variable rates, includes financial and operating covenants, and is secured by eligible receivables; the company reported compliance with applicable covenants.
- Key risks include credit and project-performance losses, interest-rate and refinancing exposure, asset illiquidity and valuation uncertainty, dependence on government incentives and contractual counterparties, competition, and maintaining REIT status and the 1940 Act exception. The company intends to qualify as a REIT beginning in 2013 and generally expects to distribute substantially all taxable income; distributions remain at the board’s discretion.
- The board declared 2013 dividends totaling $0.42 per share, including $0.22 payable in January 2014. The filing states that 2013 cash distributions were characterized for tax purposes as 63.7% ordinary income and 36.3% return of capital.
- The audited financial statements received an unqualified opinion. The auditor did not express an opinion on internal control over financial reporting; the filing cites the transition period for newly public companies. Management stated disclosure controls were effective and reported no material control changes during the quarter.
Important facts for investors to verify
- Subsequent performance, recovery prospects, collateral value, and any related-party implications of the impaired geothermal loan.
- Whether the larger post-IPO portfolio produces recurring earnings and cash flows sufficient to cover expenses, funding commitments, debt service, and distributions.
- Available revolver capacity, borrowing-base eligibility, covenant headroom, variable-rate sensitivity, and the ability to refinance the 2019 asset-backed notes.
- Pipeline conversion, portfolio concentration and credit quality, and the accuracy of Level 3 asset valuations and impairment assumptions.
- REIT qualification, compliance with the Investment Company Act exception, and the sustainability and tax character of distributions.