Hannon Armstrong 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, 2021

Our Portfolio As of March 31, 2021, 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.

In developing and evaluating performance against our credit criteria, we consider a number of qualitative and quantitative 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, 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 March 31, 2021, which is assessed quarterly:


	Portfolio Performance
	1 (1)						2 (2)			3 (3)			Total
	Government			Commercial			Commercial			Commercial
Receivable vintage	(dollars in millions)
2021	$	—		$	13		$	—		$	—		$	13
2020	—			186			—			—			186
2019	—			437			11			—			448
2018	—			254			—			—			254
2017	32			1			8			—			41
2016	15			59			—			—			74
Prior to 2016	88			47			—			8			143
Total receivables	135			997			19			8			1,159
Less: Allowance for loss on receivables	—			(22)			(6)			(8)			(36)
Net receivables (4)	135			975			13			—			1,123
Receivables held-for-sale	—			24			—			—			24
Investments	10			16			—			—			26
Real estate	—			358			—			—			358
Equity method investments (5)	—			1,360			26			—			1,386
Total	$	145		$	2,733		$	39		$	—		$	2,917
Percent of Portfolio	5		%	94		%	1		%	—		%	100		%
Average remaining balance (6)	$	6		$	14		$	11		$	4		$	13

(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 March 31, 2021 which we have held on non-accrual status since 2017. We expect to continue to pursue our legal claims with regards to these assets. In addition, there is an equity method investment in a wind project with no book value where we had previously disclosed in 2019 our allocation of impairment losses recorded by the project sponsor. We moved this investment from Category 2 to Category 3 due to continued underperformance.

(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 and excludes approximately 149 transactions each with outstanding balances that are less than $1 million and that in the aggregate total $59 million.

Receivables

As of December 31, 2020, our allowance for loan losses was $36 million based on our expectation of credit losses over the lives of the receivables in our portfolio. 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 three months ended March 31,

2021, we held our allowance for loan losses constant at $36 million, as improving macroeconomic factors were offset by certain loan specific reserves.

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 March 31, 2021 and December 31, 2020:


	March 31, 2021						December 31, 2020
	Gross Carrying Value		Loan Funding Commitments		Allowance		Gross Carrying Value		Loan Funding Commitments		Allowance
	(in millions)
Government (1)	$	135	$	—	$	—	$	248	$	—	$	—
Commercial (2)	1,024		315		36		1,002		282		36
Total	$	1,159	$	315	$	36	$	1,250	$	282	$	36

(1)As of March 31, 2021, our government receivables include $32 million of U.S. federal government transactions and $103 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 to our financial statements in this Form 10-Q. Our expectation of credit losses for these receivables is immaterial given the high credit-quality of the obligors.

(2)As of March 31, 2021, this category of assets includes $536 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 $511 million of our commercial receivables are loans made to entities in which we also have non-controlling equity investments of approximately $29 million. This total also includes $48 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 to our financial statements in this Form 10-Q.

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 to our financial statements in this Form 10-Q. All of our commercial receivables are included in Performance Rating 1 in the Portfolio Performance table above, except for $19 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 $22 million allowance on these $997 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:


	Three months ended March 31, 2021				Three months ended March 31, 2020
	Government		Commercial		Government		Commercial
	(in millions)
Beginning balance (1)	$	—	$	36	$	—	$	25
Provision for loss on receivables	—		—		—		1



Ending balance	$	—	$	36	$	—	$	26

(1)For the three months ended March 31, 2020, the beginning balance represents January 1, 2020, the adoption date of Topic 326. The beginning balance includes the pre-tax allowance for loss on receivables of $17 million recorded upon adoption which reflects our estimated loss as of that date under the new standard as well as the $8 million of receivables which were previously on non-accrual status and fully reserved.

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 March 31, 2021:


	Total			Less than 1 year			1-5 years			5-10 years			More than 10 years
	(dollars in millions)
Maturities by period (excluding allowance)	$	1,159		$	19		$	128		$	302		$	710
Weighted average yield by period	8.2		%	8.7		%	6.8		%	9.2		%	8.1		%

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 March 31, 2021:


	Total			Less than 1 year			1-5 years			5-10 years			More than 10 years
	(dollars in millions)
Maturities by period	$	26		$	—		$	—		$	—		$	26
Weighted average yield by period	4.6		%	—		%	—		%	—		%	4.6		%

We had no investments that were impaired or on non-accrual status as of March 31, 2021 or December 31, 2020, 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 March 31, 2021 and December 31, 2020, were as follows:


	March 31, 2021		December 31, 2020
	(in millions)
Real estate
Land	$	269	$	269
Lease intangibles	104		104
Accumulated amortization of lease intangibles	(15)		(14)
Real estate	$	358	$	359

As of March 31, 2021, 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, 2021 to December 31, 2021	$	2	$	17
2022	3		22
2023	3		23
2024	3		24
2025	3		24
2026	3		24
Thereafter	72		717
Total	$	89	$	851

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 March 31, 2021, we held the following equity method investments:

Investment Date

Investee

Carrying Value

(in millions)

Various

Jupiter Equity Holdings, LLC

490

Various

Lighthouse Partnerships (1)

246

March 2020

University of Iowa Energy Collaborative Holdings LLC

119

Various

Phase V Class A LLC

Various

Other investees

456

Total equity method investments

1,386

(1) Represents the total of three equity investments in a portfolio of renewable assets.

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. As of March 31, 2021, we have made capital contributions to Jupiter of approximately $465 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 December, 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, 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, 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 $219 million through March 31, 2021, 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. In the first quarter of 2021, we made approximately $15 million in equity contributions and made $10 million in member loans to one of the Lighthouse Partnerships for the settlement of hedging activity under one of the project's power hedge agreements as a result of the February 2021 winter storms in Texas.

Each of the Lighthouse Partnerships are or will be governed by a limited liability company agreement between us and the sponsor serving as managing member and 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 our 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 March 31, 2021 or December 31, 2020.