HA 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, 2019

As of December 31, 2019, our Portfolio included approximately $2.1 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.

The following is an analysis of our Portfolio as of December 31, 2019:



	Investment Grade						Commercial Non-Investment Grade ⁽³⁾			Subtotal, Debt and Real Estate			Equity Method Investments		Total
	Government ⁽¹⁾			Commercial ⁽²⁾			Commercial Non-Investment Grade ⁽³⁾			Subtotal, Debt and Real Estate			Equity Method Investments		Total
	(dollars in millions)
Equity investments in renewable energy and energy efficiency projects	$	—		$	—		$	—		$	—		$	477	$	477
Receivables ⁽⁴⁾	263			209			687			1,159			—		1,159
Real estate ⁽⁵⁾	—			362			—			362			22		384
Investments	33			42			—			75			—		75
Total	$	296		$	613		$	687		$	1,596		$	499	$	2,095
% of Debt and real estate portfolio	19		%	38		%	43		%	100		%	N/A		N/A
Average remaining balance ⁽⁶⁾	$	7		$	7		$	20		$	10		$	19	$	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 $186 million of U.S. federal government transactions and $110 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, $8 million of the transactions have been rated investment grade by an independent rating agency. This total includes $89 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.

(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 $451 million of mezzanine loans made 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. The remaining $236 million of transactions are projects where the ultimate obligors are commercial entities that have ratings below investment grade using our internal credit analysis. Approximately $357 million of our commercial non-investment grade loans were made to entities in which we also have non-controlling equity investments of approximately $40 million.We have fully reserved $8 million of loans that are 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 140 transactions each with outstanding balances that are less than $1 million and that in the aggregate total $49 million.

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 a long-term triple net lease agreement to several solar projects that we account for as equity method investments. As of December 31, 2019, we held the following equity method investments:



Investment Date	Investee	Carrying Value
		(in millions)
Various	2007 Vento I, LLC	$	79
December 2015	Buckeye Wind Energy Class B Holdings, LLC	73
Various	Vivint Solar Asset 1 Class B, LLC	60
December 2019	2019 K102 Investor LLC	48
October 2016	Invenergy Gunsight Mountain Holdings, LLC	35
December 2018	3D Energie, LLC	34
Various	Vivint Solar Asset 2 Class B, LLC	32
Various	Helix Fund I, LLC	26
Various	Other transactions	112
	Total equity method investments	$	499

In December 2019, we sold our interest in Northern Frontier Wind, LLC for $58 million, resulting in a gain of $28 million recorded in income from equity method investments on our consolidated statement of operations. The gain is primarily the result of cash we received from our investment in excess of our carrying value which includes the income allocated using the HLBV method of accounting. In January 2020, the majority of the proceeds from this sale along with additional cash from the project’s operating distributions received in the fourth quarter were used to pay the remaining balance of the 2017 Credit Agreement in as described below in Note 8.

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. In the first quarter of 2019, we collected insurance proceeds of approximately $8 million. While there can be no assurance in this regard, we continue to believe that the project’s other existing assets will be sufficient to recover our remaining carrying value of approximately $2 million.

As of December 31, 2018, we held a $14 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. In January 2019, the sponsor indicated it was evaluating this project for impairment due to these issues and recorded an impairment of approximately $12 million in their financial statements as of and for the year ended December 31, 2018, which were issued to us in March 2019. Due to the fact that we account for this investment one quarter in arrears to allow for the receipt of financial information, we recognized our share of the operating results of the project, a loss of approximately $8 million, in the quarter ended March 31, 2019.

Based on an evaluation of our equity method investments, inclusive of these projects, we determined that no OTTI had occurred as of December 31, 2019, 2018, or 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 December 31, 2019:



	Total			Less than 1 year			1-5 years			5-10 years			More than 10 years
	(dollars in millions)
Receivables
Maturities by period	$	1,159		$	6		$	175		$	182		$	796
Weighted average yield by period	7.8		%	7.0		%	7.2		%	7.6		%	8.0		%
Investments
Maturities by period	$	75		$	—		$	—		$	—		$	75
Weighted average yield by period	4.4		%	—		%	—		%	—		%	4.4		%

Included in our non-investment grade assets are two commercial receivables with a combined carrying value of approximately $8 million which we consider impaired and have held on non-accrual status since the second quarter of 2017. In the third quarter of 2019, we recorded a provision for loss on these receivables for their full carrying value. These receivables were acquired as part of a larger 2014 portfolio acquisition and represent assignments of land lease payments from two wind projects (the “Projects”) that became past due in the second quarter of 2017. We were informed by the owners of the Projects that the Projects experienced a decline in revenue. The owners of the Projects have terminated the leases. 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, but have received no payments since that date. In October 2019, we received a court decision indicating that the owners of the projects were within their rights under the contract terms to terminate the lease which impacts the land lease assignments to us. We have appealed the court’s decision and expect to continue to pursue our legal claims.

Other than discussed previously, we had no receivables or investments that were impaired, on non-accrual status, no provision for credit losses, and no troubled debt restructurings as of December 31, 2019 or 2018.

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, 2019 and 2018, were as follows:



	December 31,
	2019			2018
	(in millions)
Real estate
Land	$	269		$	269
Lease intangibles	104			104
Accumulated amortization of lease intangibles	(11		)	(8		)
Real estate	$	362		$	365

As of December 31, 2019, 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)
2020	$	3	$	22
2021	3		22
2022	3		22
2023	3		23
2024	3		24
Thereafter	78		764
Total	$	93	$	877

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 $1 million and $72 million as of December 31, 2019 and December 31, 2018, respectively.