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

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

Fair Value Measurements

6 Months Ended

Jun. 30, 2018

Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value accounting guidance provides a three-level hierarchy for classifying financial instruments. The levels of inputs used to determine the fair value of our financial assets and liabilities carried on the balance sheet at fair value and for those which only disclosure of fair value is required are characterized in accordance with the fair value hierarchy established by ASC 820, Fair Value Measurements. Where inputs for a financial asset or liability fall in more than one level in the fair value hierarchy, the financial asset or liability is classified in its entirety based on the lowest level input that is significant to the fair value measurement of that financial asset or liability. We use our judgment and consider factors specific to the financial assets and liabilities in determining the significance of an input to the fair value measurements. As of June 30, 2018 and December 31, 2017, only our residual assets related to our securitization trusts, interest rate swaps and investments, if any, were carried at fair value on the consolidated balance sheets on a recurring basis. The three levels of the fair value hierarchy are described below:

•Level 1 — Quoted prices (unadjusted) in active markets that are accessible at the measurement date.


•	Level 2 — Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.


•	Level 3 — Unobservable inputs are used when little or no market data is available.

The tables below illustrate the estimated fair value of our financial instruments on our balance sheet. Unless otherwise discussed below, fair value for our Level 2 and Level 3 measurements is measured using a discounted cash flow model, contractual terms and inputs which consist of base interest rates and spreads over base rates which are based upon market observation and recent comparable transactions. An increase in these inputs would result in a lower fair value and a decline would result in a higher fair value. Our convertible notes are valued using a market based approach and observable prices. The receivables held-for-sale, if any, are carried at the lower of cost or fair value.



	As of June 30, 2018
	Fair Value		Carrying Value		Level
	(in millions)
Assets
Government receivables	$	494	$	512	Level 3
Commercial receivables	447		468		Level 3
Receivables held-for-sale	18		18		Level 3
Investments ⁽¹⁾	154		154		Level 3
Securitization residual assets ⁽²⁾	62		62		Level 3
Derivative assets	8		8		Level 2
Liabilities
Credit facility	$	103	$	103	Level 3
Non-recourse debt ⁽³⁾	1,202		1,223		Level 3
Convertible notes ⁽³⁾	146		152		Level 2


(1)	The amortized cost of our investments as of June 30, 2018 was $159 million.


(2)	Included in other assets on the consolidated balance sheet.


(3)	Fair value and carrying value excludes unamortized debt issuance costs.



	As of December 31, 2017
	Fair Value		Carrying Value		Level
	(in millions)
Assets
Government receivables	$	519	$	519	Level 3
Commercial receivables	464		473		Level 3
Receivables held-for-sale	20		19		Level 3
Investments ⁽¹⁾	151		151		Level 3
Securitization residual assets ⁽²⁾	45		45		Level 3
Liabilities
Credit facility	$	70	$	70	Level 3
Non-recourse debt ⁽³⁾	1,239		1,238		Level 3
Convertible notes ⁽³⁾	156		152		Level 2

(1) The amortized cost of our investments as of December 31, 2017 was $153 million.

(2) Included in other assets on the consolidated balance sheet.

(3) Fair value and carrying value excludes unamortized debt issuance costs.

Investments

The following table reconciles the beginning and ending balances for our Level 3 investments that are carried at fair value on a recurring basis:



	For the three months ended June 30,						For the six months ended June 30,
	2018			2017			2018			2017
	(in millions)
Balance, beginning of period	$	152		$	125		$	151		$	58
Purchases of investments	3			1			6			67
Payments on investments	(1		)	(1		)	(1		)	(1		)
Unrealized gains (losses) on investments recorded in AOCI	—			1			(2		)	2
Balance, end of period	$	154		$	126		$	154		$	126

The following table illustrates our investments in an unrealized loss position:



	Estimated Fair Value				Unrealized Losses ⁽¹⁾
	Securities with a loss shorter than 12 months		Securities with a loss longer than 12 months		Securities with a loss shorter than 12 months		Securities with a loss longer than 12 months
	(in millions)
June 30, 2018	$	105	$	44	$	3	$	2
December 31, 2017	26		46		1		2

(1) Loss position is due to interest rates movements. We have the intent and ability to hold these investments until a recovery of fair value.

In determining the fair value of our investments, we used a range of interest rate spreads of approximately 1% to 4% based upon comparable transactions as of June 30, 2018 and December 31, 2017.

Interest Rate Swap Agreements

The fair values of the derivative financial instruments are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. We have determined that the significant inputs, such as interest yield curves and discount rates, used to value our derivatives fall within Level 2 of the fair value hierarchy and that the credit valuation adjustments associated with our counterparties and our own credit risk utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of our or our counterparties default. As of June 30, 2018 and December 31, 2017, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of our derivatives. As a result, we determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.

Non-recurring Fair Value Measurements

Our financial statements may include non-recurring fair value measurements related to acquisitions and non-monetary transactions, if any. Assets acquired in a business combination are recorded at their fair value. We may use third party valuation firms to assist us with developing our estimates of fair value.

Concentration of Credit Risk

Government and commercial receivables, investments and leases consist primarily of U.S. federal government-backed receivables, investment grade state and local government receivables and receivables from various sustainable infrastructure projects and do not, in our view, represent a significant concentration of credit risk. See Note 6 for an analysis by type of obligor and the method for rating. As described above, we do not believe we have a significant credit exposure to our interest rate swap providers. We had cash deposits that are subject to credit risk as shown below:



	June 30, 2018		December 31, 2017
	(in millions)
Cash deposits	$	42	$	57
Restricted cash deposits (included in other assets)	68		61
Total cash deposits	$	110	$	118
Amount of cash deposits in excess of amounts federally insured	$	109	$	116