Hannon Armstrong Sustainable Infrastructure Capital, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Our Portfolio

Our Portfolio

9 Months Ended

Sep. 30, 2023

As of September 30, 2023, our Portfolio included approximately $5.5 billion of equity method investments, receivables, real estate and investments on our balance sheet. The equity method investments represent our non-controlling equity investments in climate solutions projects. The receivables and investments are typically collateralized by contractually committed debt obligations of government entities or private high credit quality obligors and are often supported by additional forms of credit enhancement, including security interests and supplier guaranties. The real estate is typically land and related lease intangibles for long-term leases to wind and solar projects.

In developing and evaluating performance against our credit criteria, we consider a number of qualitative and quantitative criteria which may include a project’s operating results, loan-to-value ratio, any cash reserves, the ability of expected cash from operations to cover the cash flow requirements currently and into the future, key terms of the transaction, the ability of the borrower to refinance the transaction, the financial and operating capability of the borrower, its sponsors or the obligor as well as any guarantors and the project’s collateral value. In addition, we consider the overall economic environment, the climate solutions sector, the effect of local, industry and broader economic factors, the impact of any variation in weather and the historical and anticipated trends in interest rates, defaults and loss severities for similar transactions.

The following is an analysis of the Performance Ratings of our Portfolio as of September 30, 2023, which is assessed quarterly:


	Portfolio Performance
	1 (1)						2 (2)			3 (3)			Total
	Government			Commercial			Commercial			Commercial
Receivable vintage (4)	(dollars in millions)
2023	$	—		$	612		$	—		$	—		$	612
2022	—			942			—			—			942
2021	—			293			—			—			293
2020	—			166			—			—			166
2019	—			392			—			—			392
2018	—			275			—			—			275
Prior to 2018	93			77			—			—			170
Total receivables	93			2,757			—			—			2,850
Less: Allowance for loss on receivables	—			(51)			—			—			(51)
Net receivables (5)	93			2,706			—			—			2,799
Receivables held-for-sale	3			14			—			—			17
Investments	2			7			—			—			9
Real estate	—			111			—			—			111
Equity method investments (6)	—			2,521			43			—			2,564
Total	$	98		$	5,359		$	43		$	—		$	5,500
Percent of Portfolio	2		%	97		%	1		%	—		%	100		%

(1)This category includes our assets where based on our credit criteria and performance to date we believe that our risk of not receiving our invested capital remains low.

(2)This category includes our assets where based on our credit criteria and performance to date we believe there is a moderate level of risk to not receiving some or all of our invested capital.

(3)This category includes our assets where based on our credit criteria and performance to date, we believe there is substantial doubt regarding our ability to recover some or all of our invested capital. Loans in this category are placed on non-accrual status. Previously included in this category was $11 million of loans we had made in a new market venture where the performance was not meeting expectations. We collected this loan in full in the second quarter of 2023 and accordingly released the related allowance of $5 million.

(4)Receivable vintage refers to the period in which in which the relevant loan agreement is signed, and a given vintage may contain loan advances made in subsequent periods to the loan agreement.

(5)Total reconciles to the total of the government receivables and commercial receivables lines of the consolidated balance sheets.

(6)Some of the individual projects included in portfolios that make up our equity method investments have government off-takers. As they are part of large portfolios, they are not classified separately.

Receivables

As of September 30, 2023, our allowance for losses on receivables was $51 million based on our expectation of credit losses over the lives of the receivables in our portfolio. During the three months ended September 30, 2023, we increased our reserve by approximately $7 million, due to new loans and loan commitments made during the period. During the three months ended September 30, 2023, we entered into a variable rate revolving credit facility with an energy services company secured by projects in development, with a maximum principal amount of $300 million and that matures in 2026. As of September 30, 2023, the principal amount of the facility was $213 million and the facility bore interest at a rate of 9.7%.

Below is a summary of the carrying value, loan funding commitments, and allowance by type of receivable or “Portfolio Segment”, as defined by Topic 326, as of September 30, 2023 and December 31, 2022:


	September 30, 2023						December 31, 2022
	Gross Carrying Value		Loan Funding Commitments		Allowance		Gross Carrying Value		Loan Funding Commitments		Allowance
	(in millions)
Commercial (1)	2,757		464		51		1,928		256		41
Government (2)	$	93	$	—	$	—	$	103	$	—	$	—
Total	$	2,850	$	464	$	51	$	2,031	$	256	$	41

(1)As of September 30, 2023, this category of assets includes $1.4 billion of mezzanine loans made on a non-recourse basis to special purpose subsidiaries of residential solar companies which hold residential solar assets where we rely on certain limited indemnities, warranties, and other obligations of the residential solar companies or their other subsidiaries.

Risk characteristics of our commercial receivables include a project’s operating risks, which include the impact of the overall economic environment, the climate solutions sector, the effect of local, industry, and broader economic factors, the impact of any variation in weather and trends in interest rates. We use assumptions related to these risks to estimate an allowance using a discounted cash flow analysis or the PD/LGD method as discussed in Note 2 to our financial statements in this Form 10-Q. All of our commercial receivables are included in Performance Rating 1 in the Portfolio Performance table above. For those assets, the credit worthiness of the obligor combined with the various structural protections of our assets cause us to believe we have a low risk we will not receive our invested capital, however we recorded a $51 million allowance on these $2.8 billion in assets as a result of lower probability assumptions utilized in our allowance methodology.

(2)As of September 30, 2023, our government receivables include $10 million of U.S. federal government transactions and $83 million of transactions where the ultimate obligors are state or local governments.

Risk characteristics of our government receivables include the energy savings or the power output of the projects and the ability of the government obligor to generate revenue for debt service, via taxation or other means. Transactions may have guarantees of energy savings or other performance support from third-party service providers, which typically are entities, directly or whose ultimate parent entity is, rated investment grade by an independent rating agency. All of our government receivables are included in Performance Rating 1 in the Portfolio Performance table above. Our allowance for government receivables is primarily calculated by using PD/LGD methods as discussed in Note 2 to our financial statements in this Form 10-Q. Our expectation of credit losses for these receivables is immaterial given the high credit-quality of the obligors.

The following table reconciles our beginning and ending allowance for loss on receivables by Portfolio Segment:


	Three months ended September 30, 2023				Three months ended September 30, 2022
	Government		Commercial		Government		Commercial
	(in millions)
Beginning balance	$	—	$	44	$	—	$	37
Provision for loss on receivables	—		7		—		(3)



Ending balance	$	—	$	51	$	—	$	34

	Nine months ended September 30, 2023				Nine months ended September 30, 2022
	Government		Commercial		Government		Commercial
	(in millions)
Beginning balance	$	—	$	41	$	—	$	36
Provision for loss on receivables	—		10		—		6

Write-off of allowance	—		—		—		(8)

Ending balance	$	—	$	51	$	—	$	34

We have no receivables on non-accrual status.

The following table provides a summary of our anticipated maturity dates of our receivables and the weighted average yield for each range of maturities as of September 30, 2023:


	Total			Less than 1 year			1-5 years			5-10 years			More than 10 years
	(dollars in millions)
Maturities by period (excluding allowance)	$	2,850		$	6		$	324		$	1,309		$	1,211
Weighted average yield by period	8.4		%	9.4		%	9.0		%	8.5		%	8.0		%

Real Estate

Our real estate is leased to renewable energy projects, typically under long-term triple net leases with expiration dates that range between the years 2033 and 2052 under the initial terms and 2047 and 2080 if all renewals are exercised. In the third quarter of 2023, a majority of our land and related intangibles were deconsolidated, and we retain a residual interest in those assets in the form of equity method investments as discussed in Other Equity Method Investments below. The components of our real estate portfolio as of September 30, 2023 and December 31, 2022, were as follows:


	September 30, 2023		December 31, 2022
	(in millions)
Real estate
Land	$	97	$	269
Lease intangibles	22		104
Accumulated amortization of lease intangibles	(8)		(20)
Real estate	$	111	$	353

As of September 30, 2023, the future amortization expense of the intangible assets and the future minimum rental income payments under our land lease agreements are as follows:


	Future Amortization Expense		Minimum Rental Income Payments
	(in millions)
From October 1, 2023 to December 31, 2023	$	—	$	6
2024	1		24
2025	1		24
2026	1		24
2027	1		25
2028	1		25
Thereafter	9		673
Total	$	14	$	801

Equity Method Investments

We have made non-controlling equity investments in a number of climate solutions projects that we account for as equity method investments.

As of September 30, 2023, we held the following equity method investments:

Investment Date

Investee

Carrying Value

(in millions)

Various

Jupiter Equity Holdings LLC

535

Various

Lighthouse Partnerships (1)

682

Various

Other investees

1,347

Total equity method investments

2,564

(1) Represents the total of five equity investments in a portfolio of renewable assets.

Jupiter Equity Holdings LLC

We have a preferred equity interest in Jupiter Equity Holdings LLC (“Jupiter”) that owns nine operating onshore wind projects and four operating utility-scale solar projects with an aggregate capacity of approximately 2.3 gigawatts. As of September 30, 2023, we have made capital contributions to Jupiter of approximately $562 million related to these projects reflecting final funding true-ups after all projects reached substantial completion. Alongside the project sponsor and under terms outlined in the partnership agreement, we have made $10 million in working capital loans to Jupiter for one-time contract restructuring expenses and payments related to winter storm Uri. Those working capital loans are included in our Related Party Transactions disclosures below. At agreement inception, the projects feature cash flows from fixed-price power purchase agreements and financial hedges with a weighted average contract life of 13 years, contracted with highly creditworthy off-takers and counterparties.

Jupiter is governed by an amended and restated limited liability company agreement, dated July 1, 2020, by and among Jupiter, one of our subsidiaries and a subsidiary of the project sponsor, which contains customary terms and conditions. We own 100% of the Class A Units in Jupiter corresponding to 49% of the distributions from Jupiter subject to the preferences discussed below. Most major decisions that may impact Jupiter, its subsidiaries or its assets, require the majority vote of a four person committee on which we and the project sponsor each have two representatives. Through Jupiter, we will be entitled to preferred distributions until certain return targets are achieved. Once these return targets are achieved, distributions will be allocated approximately 33% to us and approximately 67% to the sponsor. As of July 1, 2023, we and the sponsor each have a right of first offer if the other party desires to transfer any of its equity ownership to a third party. We use the equity method of accounting to account for our preferred equity interest in Jupiter, and have elected to recognize earnings from this investment one quarter in arrears to allow for the receipt of financial information.

Lighthouse Renewables Portfolio

We have entered into certain agreements relating to the acquisition, ownership and management of preferred cash equity investments in five partnerships (the “Lighthouse Partnerships”) that expect to own cash equity interests in an approximately 1.6 gigawatt portfolio of onshore wind, utility-scale solar and solar-plus-storage projects (the “Renewables Portfolio”) developed and managed by the project sponsor. We have made investments in the preferred cash equity interests of the Lighthouse Partnerships of approximately $692 million through September 30, 2023, and additional investments are expected to be made as the remaining projects become commercially operational. We expect to make additional capital contributions of $192 million, with the final contribution being made in 2024. Alongside the project sponsor and under terms outlined in the partnership agreement, we have made $17 million in working capital loans to the Lighthouse Partnerships primarily for payments related to winter storm Uri. Those working capital loans are included in our Related Party Transactions disclosures below. At agreement inception, the Renewables Portfolio currently has contracted cash flows with a combined weighted average contract life of greater than 14 years with a diversified group of predominately investment grade corporate, utility, university and municipal offtakers.

Each of the Lighthouse Partnerships are or will be governed by a limited liability company agreement between us and the sponsor serving as managing member and contain customary terms and conditions. Most major decisions that may impact each of the Lighthouse Partnerships, its subsidiaries or its assets, require a unanimous vote of the representatives present at a meeting of a review committee in which a quorum is present. The review committee is a four person committee, which includes two of our representatives and two sponsor representatives. Through each Lighthouse Partnership, commencing on a certain date following the effective date of the applicable limited liability company agreement, we will be entitled to preferred distributions until certain return targets of the Renewables Portfolio are achieved. Subject to customary exceptions, no member of a Lighthouse Partnership can transfer any of its equity ownership in any Lighthouse Partnership to a third party without approval of the review committee of that Lighthouse Partnership. We use the equity method of accounting to account for our preferred equity interest in each Lighthouse Partnership, and have elected to recognize earnings from this investment one quarter in arrears to allow for the receipt of financial information.

Other Equity Method Investments

In the third quarter of 2023, we entered into an agreement with an existing securitization partner to amend the contractual terms of certain non-recourse debt agreements, which caused us to deconsolidate the entities holding such debt and its pledged collateral. Our retained interest in those entities are equity method investments, which hold land and associated operating leases as well as financial assets where the ultimate obligors are grid-connected solar projects. The carrying value of these equity method investments is $152 million. Our retained interest is in the form of an equity method investment, instead of a Securitization Asset, due to the nature of the underlying assets being predominantly real property.

Related Party Transactions

Of our commercial receivables, approximately $872 million are loans made to entities in which we also have non-controlling equity investments of approximately $817 million. Typically, these equity method investments are LLCs taxed as partnerships that we have entered into with various renewable energy project sponsors, such as SunPower Corporation. We negotiate the commercial terms of these loans with the other partner, and the assets against which the project sponsors are borrowing are contributed into the LLCs upon the execution of the loans. Our equity investments allow us to participate in the residual economics of those contributed assets alongside the other partner, and our rights under the project operating agreements do not allow us to make any significant unilateral decisions regarding the terms of the arrangement. Because the loans made to these entities are typically subordinate to senior debt and tax equity investors in the projects, these loans, which have maturities of over ten years, may accrue PIK interest in the early years of the project until sufficient cash flow is available for our interest payments. Any change in PIK interest is included in Change in accrued interest on receivables and investments in the operating section of our statement of cash flows. On a quarterly basis, we assess these loans for any impairment inclusive of any PIK interest accrued under CECL as discussed above under Receivables.

The following table provides additional detail on these related party transactions:


	Three Months Ended September 30, 2023		Three Months Ended September 30, 2022		Nine Months Ended September 30, 2023		Nine Months Ended September 30, 2022
	(in millions)
Interest income from related party loans	$	18	$	14	$	49	$	45
Investments made in related party loans	95		63		187		113
Principal collected from related party loans	12		7		27		76
Interest collected from related party loans	15		14		45		49