Clearway Energy, Inc. (then NRG Yield, Inc.) — Form 10-Q, Q3 2017
Reporting period: Quarter and nine months ended September 30, 2017. The filing identifies the registrant as NRG Yield, Inc.; the supplied filing does not use the Clearway Energy name. Unless otherwise stated, amounts are in millions of dollars.
Business context
The company owned contracted U.S. renewable and conventional generation assets and thermal infrastructure. Its generation portfolio was approximately 5,080 net MW, with a weighted average remaining offtake-contract term of about 16 years, measured by CAFD. Thermal assets had 1,319 net MWt of steam and chilled-water capacity and 123 net MW of electric capacity. CAFD is a company-defined, non-GAAP measure; the supplied text does not give a reported CAFD amount.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Operating revenue | $265 | $272 | $767 | $789 |
| Operating income | $95 | $117 | $271 | $317 |
| Net income | $41 | $50 | $85 | $116 |
| Net income attributable to NRG Yield, Inc. | $29 | $33 | $54 | $70 |
| Basic EPS, Class A and C | $0.30 | $0.34 | $0.56 | $0.72 |
| Dividends per Class A and C share | $0.28 | $0.24 | $0.81 | $0.70 |
- Q3 revenue declined $7 and operating income fell $22 year over year. Management attributed lower renewable gross margin mainly to reduced wind generation and lower solar output at CVSR; fewer conventional-plant outages partly offset the decline.
- For the nine months, revenue fell $22 and operating income fell $46. Net income attributable to the company decreased $16. Higher depreciation, O&M expense and interest expense weighed on results; increased equity earnings from unconsolidated affiliates provided a partial offset.
- Nine-month operating cash flow was $374, compared with $443 in 2016. Investing cash use was $204, including acquisition payments; financing cash use was $338. Cash, cash equivalents and restricted cash totaled $319 at period end, down from $487 at the beginning of the period.
- At September 30, cash was $179 and restricted cash was $140. Liquidity was approximately $746, including $427 of available revolving-credit borrowings; there were no revolver borrowings and $68 of letters of credit outstanding. Liquidity was $922 at December 31, 2016.
- Balance-sheet debt comprised $300 of current debt and $5,520 of long-term debt, net of financing costs and discounts. The debt table showed $5,901 of total debt before those deductions. The company reported compliance with debt covenants. Its revolving facility had $427 available.
- Reported Q3 economic gross margin was $268, versus $271 a year earlier; nine-month economic gross margin was $774, versus $792. This company-defined non-GAAP measure is not equivalent to GAAP gross margin.
Material developments and outlook
- In August, the company paid $44 to acquire NRG’s remaining 25% interest in a 12-project wind portfolio; it recorded $8 of estimated contingent consideration tied to future merchant-period energy prices beginning in 2027. In March, it acquired interests in Agua Caliente and the Utah Solar Portfolio for $130 plus working capital and assumed project debt.
- After quarter end, on November 1, the company acquired a 38 MW solar portfolio for $71, excluding working-capital adjustments, and assumed non-recourse debt. These related-party transactions were accounted for as transfers under common control, requiring retrospective presentation of the acquired entities’ results.
- NRG announced a three-year transformation plan and was exploring strategic alternatives for its renewables platform and its interest in the company. NRG held a 55.1% voting interest and provided growth opportunities and management and administrative services; changes to that relationship could affect the company.
- Management expected comparable cash dividends to continue in the foreseeable future, subject to available capital, market conditions, legal requirements and contractual restrictions. A quarterly dividend of $0.288 per share was declared October 31, payable December 15. No quantified earnings or CAFD guidance is provided in the supplied filing text.
- Management cited a possible fourth-quarter 2017 impairment of certain long-lived assets because its view of long-term merchant power prices had decreased. El Segundo and Walnut Creek experienced forced outages earlier in 2017; Walnut Creek’s estimated outage cost was about $8 before anticipated insurance recoveries. The filing also describes litigation, including claims concerning the transfer of Marsh Landing, and states that outcomes and potential liabilities cannot be reliably estimated.
- Key risks include generation and weather variability, counterparty performance, regulation and environmental requirements, substantial indebtedness and access to capital, derivative and interest-rate exposure, and dependence on NRG. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether NRG’s strategic alternatives change control, asset access, management services or future acquisition opportunities.
- Whether renewable resource conditions, plant reliability and maintenance or insurance recoveries improve; and whether the potential impairment occurs.
- Debt maturities, project-level restrictions, available revolver capacity and the company’s ability to fund dividends and acquisitions from cash generation.
- Actual CAFD and dividend coverage, which are not quantified in the supplied filing text, and the assumptions behind future dividend payments.
- Progress and final costs of the related-party acquisitions, contingent consideration, and material litigation or other contingencies.