Clearway Energy, Inc. (then NRG Yield, Inc.) — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The filing registrant is NRG Yield, Inc.; the filing describes a contracted U.S. portfolio of renewable and conventional generation and thermal infrastructure assets. Comparative figures reflect retrospective accounting for certain transfers from NRG.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Operating revenue | $258 million | $235 million | $478 million | $435 million |
| Operating income | $113 million | $86 million | $181 million | $132 million |
| Net income | $58 million | $38 million | $60 million | $18 million |
| Net income attributable to NRG Yield, Inc. | $32 million | $10 million | $37 million | $5 million |
| Basic EPS, Class A and C | $0.33 | $0.15 | $0.38 | $0.07 |
| Operating cash flow | Not separately stated for the quarter | $198 million | $93 million |
Q2 operating margin was approximately 44%, versus 37% a year earlier. Economic gross margin, a company-defined non-GAAP measure, was $261 million for Q2 versus $238 million, and $482 million for the half year versus $420 million. Interest expense was $62 million in Q2 and $130 million for the half year. The filing reports income tax expense of $12 million for both periods in 2016.
Financial position and liquidity
At June 30, 2016, cash and cash equivalents were $89 million, restricted cash was $55 million, total assets were $7.607 billion, and total liabilities were $5.050 billion. Total debt, including current maturities, was $4.772 billion, down from $4.863 billion at year-end 2015; the balance sheet reports $251 million current and $4.465 billion long-term debt, net of deferred financing costs. Stockholders’ equity was $2.557 billion.
Management reported liquidity of approximately $254 million, including cash, restricted cash, and revolver availability; $110 million of revolver borrowing capacity was available at quarter-end. Operating cash flow was $198 million, investing cash outflow $42 million, and financing cash outflow $178 million for the first half. The company paid $83 million in dividends and distributions and used $11 million for capital expenditures, including $9 million of maintenance capex.
Changes and operating drivers
- Q2 revenue increased 10% year over year; operating income rose 31%, and company-attributable net income rose from $10 million to $32 million.
- Higher renewable generation, mainly at Alta, and the start of higher-priced Alta X and XI PPAs in January 2016 lifted Q2 renewable economic gross margin. For the half year, renewable margin also benefited from Spring Canyon and increased wind generation.
- Higher equity-method earnings, including from Desert Sunlight and distributed solar investments, supported results. Q2 interest expense rose $17 million, driven principally by interest-rate swap fair-value changes, the 2020 Convertible Notes, and higher revolver borrowings.
- First-half operating cash flow improved by $105 million. Prior-year investing cash use included the January 2015 asset drop-down and larger affiliate investments; prior-year financing inflows included a $600 million Class C stock offering.
Outlook, risks, and notable items
- Management said liquidity, operating cash flow, and revolver availability were expected to be adequate for commitments, debt service, capital needs, and dividends. It expected comparable cash dividends to continue, subject to available capital, market conditions, and contractual and legal limits. The Q2 dividend was $0.23 per Class A and Class C share; a subsequent $0.24 per-share quarterly dividend was declared July 26, payable September 15, 2016.
- On August 8, 2016, the company agreed to acquire NRG’s remaining 51.05% interest in CVSR for expected cash consideration of $78.5 million, plus assumed debt and working-capital adjustments. Closing was expected in Q3, subject to customary conditions, with revolver borrowings expected to fund the purchase.
- CVSR Holdco issued $200 million of secured notes on July 15 at 4.68%, maturing in 2037. The company’s pro-rata proceeds of $97.5 million, together with $28 million of cash, were used to reduce revolver borrowings; revolver borrowings were $193 million at July 31.
- Key exposures include variable wind and solar resources, weather, generation outages, interest rates, counterparty performance, regulation, capital-market access, and substantial indebtedness. The filing states all required debt covenants were met at June 30.
- A purported class action alleges inadequate disclosure about low wind production before the June 2015 Class C offering. The company says it intends to defend the case; it could not estimate the outcome or potential liability.
- The company disclosed approximately $836 million of its pro-rata share of non-recourse debt at unconsolidated affiliates, which may limit distributions to it. It also reported $159 million of derivative liabilities and an accumulated other comprehensive loss attributable to the company of $47 million.
Important facts for investors to verify
- Whether operating cash flow and available revolver capacity can support debt service, planned investment, and distributions as intended.
- The closing, final cost, assumed debt, funding, and expected contribution of the proposed CVSR acquisition.
- Renewable resource performance and the durability of the Alta X and XI PPA benefits relative to prior merchant exposure.
- Interest-rate sensitivity, derivative valuations, and the effect of debt and hedge obligations on future cash flows.
- Developments in the securities class action and any resulting material exposure.
- The filing’s reported quarterly dividends and later declaration; note that its six-month dividend-per-share presentation differs across comparative periods, so the basis for that comparison should be checked.