HA 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

3 Months Ended

Mar. 31, 2018

As of March 31, 2018, our Portfolio included approximately $2.0 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 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.

The following is an analysis of our Portfolio as of March 31, 2018:



	Investment Grade
	Government ⁽¹⁾			Commercial Investment Grade ⁽²⁾			Commercial Non-Investment Grade ⁽³⁾			Subtotal, Debt and Real Estate			Equity Method Investments		Total
	(dollars in millions)
Equity investments in renewable energy projects	$	—		$	—		$	—		$	—		$	469	$	469
Receivables ⁽⁴⁾	514			463			8			985			—		985
Receivables held-for-sale	16			—			—			16			—		16
Investments	103			49			—			152			—		152
Real estate ⁽⁵⁾	—			340			—			340			21		361
Total	$	633		$	852		$	8		$	1,493		$	490	$	1,983
% of Debt and real estate portfolio	42		%	57		%	1		%	100		%	N/A		N/A
Average remaining balance ⁽⁶⁾	11			9			4			10			18		11

(1)

Transactions where the ultimate obligor is the U.S. federal government or state or local governments where the obligors are rated investment grade (either by an independent rating agency or based upon our internal credit analysis). This amount includes $394 million of U.S. federal government transactions and $239 million of transactions where the ultimate obligors are state or local governments. Transactions may have guaranties of energy savings from third party service providers, which typically are entities rated investment grade by an independent rating agency.

(2)

Transactions where the projects or the ultimate obligors are commercial entities that have been rated investment grade (either by an independent rating agency or based on our internal credit analysis). Of this total, $10 million of the transactions have been rated investment grade by an independent rating agency. Commercial investment grade receivables include $312 million of internally rated residential solar loans made on a non-recourse basis to special purpose subsidiaries of the SunPower Corporation (“SunPower”), for which we rely on certain limited indemnities, warranties, and other obligations of SunPower or its other subsidiaries.


(3)	Transactions where the projects or the ultimate obligors are commercial entities that have ratings below investment grade (either by an independent rating agency or using our internal credit analysis).


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


(5)	Includes the real estate and the lease intangible assets (including those held through equity method investments) from which we receive scheduled lease payments, typically under long-term triple net lease agreements.


(6)	Excludes approximately 140 transactions each with outstanding balances that are less than $1 million and that in the aggregate total $54 million.

Equity Method Investments

We have made non-controlling equity investments in a number of renewable energy projects as well as in a joint venture that owns land with a long-term triple net lease agreement to several solar projects that we account for as equity method investments. As of March 31, 2018, we held the following equity method investments:



Investment Date	Investee	Carrying Value
		(in millions)
Various	Vento I, LLC	$	115
Various	Northern Frontier, LLC	113
December 2015	Buckeye Wind Energy Class B Holdings, LLC	65
October 2016	Invenergy Gunsight Mountain Holdings, LLC	37
June 2016	MM Solar Holdings, LLC	27
Various	Helix Fund I, LLC	24
Various	Other transactions	109
	Total equity method investments	$	490

An underlying solar project associated with one of our equity method investments located in the U.S. Virgin Islands was materially damaged in the recent hurricanes. Although there can be no assurance in this regard, we believe that the project’s insurance will be sufficient to rebuild the project or to recover our investment in the project of approximately $11 million.

As of December 31, 2017, we held a $25 million investment in a wind project that was purchased as part of a portfolio at a significant discount to the project’s book value, in part, due to the lack of a power purchase agreement and some operational issues. As disclosed in our 2017 Form 10-K, in February 2018, the sponsor indicated they would be recording a material write-down of the project within their 2017 annual financial statements due to these issues. As we account for this investment one quarter in arrears, we disclosed in our Form 10-K that we expected a portion of the project's write-down would be allocated to us under HLBV in the three months ended March 31, 2018. Accordingly, we recognized an $8 million non-cash HLBV loss for the three months ended March 31, 2018. Although there can be no assurance in this regard, we believe there are sufficient cash flows to recover the carrying value of our investment as of March 31, 2018.

Based on an evaluation of our equity method investments, inclusive of these projects, we determined that no OTTI had occurred as of March 31, 2018, or December 31, 2017.

Receivables and Investments

The following table provides a summary of our anticipated maturity dates of our receivables and investments and the weighted average yield for each range of maturities as of March 31, 2018:



	Total			Less than 1 year			1-5 years			5-10 years			More than 10 years
	(dollars in millions)
Receivables
Maturities by period	$	985		$	2		$	19		$	64		$	900
Weighted average yield by period	5.1		%	5.9		%	5.8		%	4.7		%	5.1		%
Investments
Maturities by period	$	152		$	—		$	65		$	14		$	73
Weighted average yield by period	4.0		%	—		%	3.6		%	4.0		%	4.3		%

Our non-investment grade assets consist of two commercial receivables with a carrying value of approximately $8 million as of March 31, 2018 that became past due in the second quarter of 2017. These receivables, which we acquired as part of our acquisition of American Wind Capital Company, LLC in 2014, are assignments of land lease payments from two wind projects (the “Projects”). We have been informed by the owner of the Projects that the Projects are experiencing a decline in revenue. The owner of the Projects is seeking to terminate the lease. In July 2017, we filed a legal claim against the owners of the Projects in order to protect our interests in these Projects and the amounts due to us under the land lease assignments. In January 2018, we received a $1.6 million payment from the Projects and we continue to pursue our legal claims. Although there can be no assurance in this regard, we believe that we have the ability to recover the carrying value from the Projects based on projected cash flows, and thus have not recorded an allowance for losses as of March 31, 2018. We have determined that the assets are impaired and placed them on non-accrual status.

Other than discussed above, we had no receivables or investments that were impaired or on non-accrual status as of March 31, 2018 or December 31, 2017. There was no provision for credit losses or troubled debt restructurings as of March 31, 2018 or December 31, 2017.

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 March 31, 2018 and December 31, 2017, were as follows:



	March 31, 2018			December 31, 2017
	(in millions)
Real estate
Land	$	247		$	247
Lease intangibles	99			99
Accumulated amortization of lease intangibles	(6		)	(5		)
Real estate	$	340		$	341

In the first quarter of 2017, we purchased a portfolio of over 4,000 acres of land and related long-term triple net leases to over 20 individual solar projects with investment grade off-takers at a cost of approximately $145 million. Approximately $21 million (1,100 acres) of this real estate portfolio was acquired through an equity method investment in a joint venture that we account for under the equity method of accounting and approximately $56 million of our purchase price was allocated to intangible lease assets on a relative fair value basis. This transaction was accounted for as an asset acquisition.

As of March 31, 2018, 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 April 1, 2018 to December 31, 2018	$	2	$	15
2019	3		20
2020	3		20
2021	3		20
2022	3		20
2023	3		22
Thereafter	76		720
Total	$	93	$	837

Deferred Funding Obligations

In accordance with the terms of purchase agreements relating to certain equity method investments, receivables and investments, payments of the purchase price are scheduled to be made over time and as a result, we have recorded deferred funding obligations of $137 million and $153 million as of March 31, 2018 and December 31, 2017, respectively. We have secured financing for, or placed in escrow, approximately $84 million and $90 million of the deferred funding obligations as of March 31, 2018 and December 31, 2017, respectively. As of March 31, 2018 and December 31, 2017, we have pledged approximately $27 million and $29 million of our equity method investments as collateral for a deferred funding obligation of $20 million and $20 million, respectively.

The outstanding deferred funding obligations to be paid are as follows:



	(in millions)
From April 1, 2018 to December 31, 2018	$	80
2019	36
2020	16
2021	5
	$	137