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, 2018

As of December 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 December 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	$	—		$	—		$	—		$	—		$	449	$	449
Receivables ⁽⁴⁾	498			148			299			945			—		945
Real estate ⁽⁵⁾	—			365			—			365			22		387
Investments	102			68			—			170			—		170
Total	$	600		$	581		$	299		$	1,480		$	471	$	1,951
% of Debt and real estate portfolio	41		%	39		%	20		%	100		%	N/A		N/A
Average remaining balance ⁽⁶⁾	$	12		$	6		$	14		$	9		$	16	$	10

(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 $384 million of U.S. federal government transactions and $216 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, $9 million of the transactions have been rated investment grade by an independent rating agency.

(3)

Transactions where the projects or the ultimate obligors are commercial entities that either have ratings below investment grade (either by an independent rating agency or using our internal credit analysis) or where the nature of the subordination in the asset causes it to be considered non-investment grade. This category of assets includes $273 million of mezzanine loans made in 2018 on a non-recourse basis to special purpose subsidiaries of residential solar companies where the nature of the subordination causes it to be considered non-investment grade. These loans are secured by residential solar assets and we rely on certain limited indemnities, warranties, and other obligations of the residential solar companies or their other subsidiaries. This amount also includes $18 million of transactions made in 2018 where the projects or the ultimate obligors are commercial entities that have ratings below investment grade using our internal credit analysis, and $8 million of loans on non-accrual status. See Receivables and Investments below for further information.


(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 170 transactions each with outstanding balances that are less than $1 million and that in the aggregate total $64 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 December 31, 2018, we held the following equity method investments:



Investment Date	Investee	Carrying Value
		(in millions)
Various	2007 Vento I, LLC	$	92
Various	Northern Frontier Wind, LLC	75
December 2015	Buckeye Wind Energy Class B Holdings, LLC	72
December 2018	3D Engie, LLC	49
October 2016	Invenergy Gunsight Mountain Holdings, LLC	37
Various	Helix Fund I, LLC	26
Various	Other transactions	120
	Total equity method investments	$	471

In December 2018, we sold for approximately $24 million an equity interest in a portfolio of behind-the-meter solar projects which we acquired in 2016 for $27 million, and from which we had received cash of $10 million since we made our investment. At the time of sale, we had a carrying value of approximately $29 million due to the income allocations from HLBV in excess of cash received. Thus, we recognized a non-cash loss of approximately $5 million on the sale which is included in our income from equity method investments on our consolidated statement of operations.

An underlying solar project associated with one of our equity method investments located in the U.S. Virgin Islands was materially damaged in the 2017 hurricanes. Although there can be no assurance in this regard, we continue to believe that the project's insurance as well as other existing assets in the project will be sufficient to recover our carrying value of approximately $10 million (which includes non-cash HLBV allocations that have occurred since the damaging event).

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. The sponsor recorded a material write-down of the project in its 2017 annual financial statements due to these issues and this write-down is recognized in our financial statements using HLBV as an $8 million non-cash loss in the first quarter of 2018 as we account for this investment one quarter in arrears. There have been no additional write-downs of the project recorded by us subsequent to the first quarter of 2018. The sponsor is presently reviewing the project for any additional impairment for their 2018 annual financial statements as a result of these issues. If the sponsor records an impairment, the resulting HLBV impact will be recorded in our financial statements in the first quarter of 2019. 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 December 31, 2018.

Based on an evaluation of our equity method investments, inclusive of these projects, we determined that no OTTI had occurred as of December 31, 2018, 2017, or 2016.

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 December 31, 2018:



	Total			Less than 1 year			1-5 years			5-10 years			More than 10 years
	(dollars in millions)
Receivables
Maturities by period	$	945		$	1		$	17		$	57		$	870
Weighted average yield by period	6.6		%	3.4		%	6.0		%	4.8		%	6.7		%
Investments
Maturities by period	$	170		$	64		$	—		$	13		$	93
Weighted average yield by period	4.2		%	3.6		%	—		%	4.1		%	4.7		%

In November 2018, approximately $307 million of senior investment grade loans we had made to certain subsidiaries of the SunPower Corporation were repaid. We used $250 million of this repayment to repay the related non-recourse debt, and we received pre-payment fees of approximately $9 million, and we recognized approximately $4 million of unamortized loan fees which are included in interest income. These amounts were offset by approximately $9 million of costs recorded in interest expense relating to the debt repayment.

In 2018, we provided mezzanine loans with a carrying value as of December 31, 2018 of approximately $273 million to subsidiaries of residential solar providers owning portfolios of residential solar systems and our loans are subordinate to senior debt and other minority tax equity investments. The cash flows from the residential solar assets, in most cases, are first applied to the minority tax equity investments and the senior debt and then to our mezzanine loan. In the event there is not sufficient cash for payment on the mezzanine loan, the interest is paid-in-kind. Due to the mezzanine nature of these loans, we have classified these loans as a non-investment grade commercial receivable on our balance sheet.

Our non-investment grade assets also consist of two commercial receivables with a combined total carrying value of approximately $8 million as of December 31, 2018 that we consider impaired and that are on non-accrual status. 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”) which became past due in the second quarter of 2017. 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. We have received no payments since January 2018. 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 December 31, 2018.

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



	December 31,
	2018			2017
	(in millions)
Real estate
Land	$	269		$	247
Lease intangibles	104			99
Accumulated amortization of lease intangibles	(8		)	(5		)
Real estate	$	365		$	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 December 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:



Year Ending December 31,	Future Amortization Expense		Minimum Rental Payments
	(in millions)
2019	$	3	$	22
2020	3		22
2021	3		22
2022	3		22
2023	3		23
Thereafter	81		788
Total	$	96	$	899

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 $72 million and $153 million as of December 31, 2018 and December 31, 2017, respectively. We have secured financing for, or placed in escrow, approximately $68 million and $90 million of the deferred funding obligations as of December 31, 2018 and December 31, 2017, respectively. As of December 31, 2017, we had pledged approximately $29 million of our equity method investments as collateral for a deferred funding obligation of $20 million, which was fully funded in 2018.

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



Year Ending December 31,	Future Payments
	(in millions)
2019	$	51
2020	16
2021	5
Total	$	72