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

Annual report pursuant to Section 13 and 15(d)

Our Portfolio

Our Portfolio

12 Months Ended

Dec. 31, 2020

As of December 31, 2020, our Portfolio included approximately $2.9 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 renewable energy and energy efficiency projects and land. 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. Our analysis of our Portfolio has historically been analyzed by type of obligor categorized as either government or commercial obligors and whether those obligors are investment grade or non-investment grade. In conjunction with the adoption of Topic 326, we re-evaluated our reporting for this disclosure and have modified our credit quality disclosure to provide more detail of how the assets in our Portfolio are performing. Additionally, as discussed in Note 2, we have adopted Topic 326 which requires the establishment of an allowance at origination for our receivables expected over the life of the asset rather than at the time it is probable that a loss has been incurred. These allowances are reflected in our disclosures below and are not necessarily an indication that an actual loss has been incurred.

We determine our expectation of credit losses related to our investments by evaluating a number of qualitative and quantitative credit criteria including 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, when deriving our reasonable and supportable forecasts we consider the overall economic environment, the sustainable infrastructure 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 December 31, 2020, which is assessed quarterly:


	Portfolio Performance
	Government			Commercial
	1 (1)			1 (1)			2 (2)			3 (3)			Total
Receivable vintage	(dollars in millions)
2020	$	—		$	184		$	—		$	—		$	184
2019	—			423			2			—			425
2018	—			269			—			—			269
2017	39			1			8			—			48
2016	68			60			—			—			128
Prior to 2016	141			47			—			8			196

Total receivables	248			984			10			8			1,250
Less: Allowance for loss on receivables	—			(24)			(4)			(8)			(36)
Net receivables (4)	248			960			6			—			1,214
Investments	35			20			—			—			55
Real estate	—			359			—			—			359
Equity method investments (5)	—			1,255			25			—			1,280
Total	$	283		$	2,594		$	31		$	—		$	2,908
Percent of Portfolio	10		%	89		%	1		%	—		%	100		%
Average remaining balance (6)	$	7		$	14		$	12		$	4		$	12

(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. Included in this category are two commercial receivables with a combined total carrying value of approximately $8 million as of December 31, 2020 which we have held on non-accrual status since 2017. We expect to continue to pursue our legal claims with regards to these assets.

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

(5)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.

(6)Average remaining balance is calculated gross of allowance for loss on receivables per transaction and excludes approximately 143 transactions each with outstanding balances that are less than $1 million and that in the aggregate total $56 million.

Receivables

We adopted Topic 326 during the year ended December 31, 2020 which requires us to recognize a provision for loss on receivables expected over the life of the receivable rather than only recording an allowance when it is probable a loss has been incurred. As of December 31, 2019, we had an allowance for loss on receivables on specific assets of $8 million discussed above with a Performance Rating of 3. At adoption on January 1, 2020, we recorded an additional pre-tax allowance for loss on receivables of $17 million which reflects our estimated loss as of that date. Quarterly, we update that expected loss to reflect both the expected loss on newly originated receivables and any changes in the expected loss on existing receivables. During the year ended December 31, 2020, we increased the allowance on our receivables by $10 million primarily as a result of additional loans and loan commitments made during this period. While macroeconomic indicators we consider in our analyses including unemployment rates and power prices degraded over the year ended December 31, 2020, we have not seen these factors translate to material default rates, and the contracted nature of many of our assets protects us from low spot energy prices.

Below is a summary of the carrying value, expected loan funding commitments, and allowance by type of receivable or "Portfolio Segment," as defined by Topic 326, as of December 31, 2020 and January 1, 2020:


	December 31, 2020						January 1, 2020
	Gross Carrying Value		Loan Funding Commitments		Allowance		Gross Carrying Value		Loan Funding Commitments		Allowance
	(in millions)
Government (1)	$	248	$	—	$	—	$	263	$	—	$	—
Commercial (2)	1,002		282		36		904		57		26
Total	$	1,250	282		36		$	1,167	57		26

(1)As of December 31, 2020, our government receivables include $145 million of U.S. federal government transactions and $104 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. Our expectation of credit losses for these receivables is immaterial given the high credit-quality of the obligors.

(2)As of December 31, 2020, this category of assets includes, gross of allowance, $505 million of mezzanine loans made on a non-recourse basis to special purpose subsidiaries of residential solar companies which are secured by residential solar assets where we rely on certain limited indemnities, warranties, and other obligations of the residential solar companies or their other subsidiaries. Approximately $408 million of our commercial receivables are loans made to entities in which we also have non-controlling equity investments of approximately $23 million. This total also includes $111 million of lease agreements where we hold legal title to the underlying real estate which are treated under GAAP as receivables since they were deemed to be failed sale/leaseback transactions as described in Note 2.

Risk characteristics of our commercial receivables include a project’s operating risks, which include the impact of the overall economic environment, the sustainable infrastructure 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. All of our commercial receivables are included in Performance Rating 1 in the Portfolio Performance table above, except for $10 million of receivables included in Performance Category 2 and the $8 million of receivables we have placed on non-accrual status which are included in Performance Rating 3. For those assets in Performance Rating 1, 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 $24 million allowance on these $984 million in assets as a result of lower probability assumptions utilized in our allowance methodology.

The following table reconciles our beginning and ending allowance for loss on receivables by Portfolio Segment for the year ended December 31, 2020:


	Government		Commercial
	(in millions)
Beginning balance - January 1, 2020	$	—	$	26
Provision for loss on receivables	—		10



Ending balance - December 31, 2020	$	—	$	36

Other than the $8 million of receivables discussed above with a Performance Rating of 3, we have no receivables which are 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 December 31, 2020:


	Total			Less than 1 year			1-5 years			5-10 years			More than 10 years
	(dollars in millions)
Maturities by period (excluding allowance)	$	1,250		$	24		$	134		$	301		$	791
Weighted average yield by period	8.2		%	9.9		%	6.7		%	9.2		%	7.6		%

Investments

The following table provides a summary of our anticipated maturity dates of our investments and the weighted average yield for each range of maturities as of December 31, 2020:


	Total			Less than 1 year			1-5 years			5-10 years			More than 10 years
	(dollars in millions)
Maturities by period	$	55		$	—		$	—		$	—		$	55
Weighted average yield by period	4.1		%	—		%	—		%	—		%	4.1		%

We had no investments that were impaired or on non-accrual status as of December 31, 2020 or 2019, and no allowances associated with our investments.

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 2057 under the initial terms and 2047 and 2080 if all renewals are exercised. The components of our real estate portfolio as of December 31, 2020 and 2019, were as follows:


	December 31,
	2020		2019
	(in millions)
Real estate
Land	$	269	$	269
Lease intangibles	104		104
Accumulated amortization of lease intangibles	(14)		(11)
Real estate	$	359	$	362

As of December 31, 2020, the future amortization expense of the intangible assets and the future minimum rental income payments under our land lease agreements are as follows:


Year Ending December 31,	Future Amortization Expense		Minimum Rental Payments
	(in millions)
2021	$	3	$	22
2022	3		22
2023	3		23
2024	3		24
2025	3		24
Thereafter	75		741
Total	$	90	$	856

Equity Method Investments

We have made non-controlling equity investments in a number of renewable energy and energy efficiency projects as well as in a joint venture that owns land with long-term triple net lease agreements to several solar projects that we account for as equity method investments. As of December 31, 2020, we held the following equity method investments:

Investment Date

Investee

Carrying Value

(in millions)

Various

Jupiter Equity Holdings, LLC

465

December 2020

Lighthouse Partnerships (1)

201

March 2020

University of Iowa Energy Collaborative Holdings LLC

118

December 2015

Buckeye Wind Energy Class B Holdings, LLC

Various

Vivint Solar Asset 2 Class B, LLC

Various

Other investees

358

Total equity method investments

1,280

(1)Represents a portfolio of interests in renewable energy projects discussed below.

Jupiter Equity Holdings, LLC

On July 1, 2020, we acquired a preferred equity interest in Jupiter Equity Holdings, LLC ("Jupiter") that is expected to own an approximately 2.3 gigawatt portfolio of renewable energy projects. We have agreed to guarantee certain of the obligations of the subsidiary in connection with these agreements. To date, we have made capital contributions to Jupiter of approximately $467 million related to eight operating wind projects and two operating solar projects with an aggregate capacity of approximately 2.1 gigawatts. We expect to ultimately invest approximately $540 million in Jupiter by making additional periodic capital contributions related to three more projects anticipated to be commercially operational on or prior to June 30, 2021, at which time the additional projects relating to a specific funding will be transferred into Jupiter. Assuming all of the projects are acquired by Jupiter, the renewables portfolio will consist of 13 projects (nine onshore wind projects and four utility-scale solar projects) and will 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 who serves as managing member, and 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 in 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, then distributions will be allocated approximately 33% to us and approximately 67% to the sponsor. 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 on or after July 1, 2023. 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

In December 2020, we entered into certain agreements relating to the acquisition, ownership and management of approximately $663 million in preferred cash equity investments in three 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 initial investments in the preferred cash equity interests of the Lighthouse Partnerships of approximately $200 million in 2020 and additional investments are expected to be made in 2021 and 2022 as the projects become commercially operational. 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 Lighthouse Partnership governed by a limited liability company agreement by and among us and the sponsor serving as managing member that will 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 Company 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 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 its 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.

Based on an evaluation of our equity method investments we determined that no OTTI had occurred as of December 31, 2020, 2019, or 2018.