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

6 Months Ended

Jun. 30, 2022

As of June 30, 2022, our Portfolio included approximately $3.9 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 which may include 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 climate solutions 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 June 30, 2022, which is assessed quarterly:


	Portfolio Performance
	1 (1)						2 (2)			3 (3)			Total
	Government			Commercial			Commercial			Commercial
Receivable vintage	(dollars in millions)
2022	$	—		$	228		$	—		$	—		$	228
2021	—			285			—			—			285
2020	—			164			—			—			164
2019	—			425			—			2			427
2018	—			267			—			—			267
2017	26			1			—			9			36
Prior to 2017	85			102			—			—			187
Total receivables	111			1,472			—			11			1,594
Less: Allowance for loss on receivables	—			(29)			—			(8)			(37)
Net receivables (4)	111			1,443			—			3			1,557
Receivables held-for-sale	50			24			—			—			74
Investments	3			9			—			—			12
Real estate	—			359			—			—			359
Equity method investments (5)	—			1,907			28			—			1,935
Total	$	164		$	3,742		$	28		$	3		$	3,937
Percent of Portfolio	4		%	95		%	1		%	—		%	100		%
Average remaining balance (6)	$	8		$	11		$	14		$	11		$	11

(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. Loans in this category are placed on non-accrual status. In the second quarter of 2022, we moved to this category from Category 2 $11 million of loans we had made in a new market venture where the performance has not met expectations.

Previously included in this category were two commercial receivables with a combined total carrying value of approximately $8 million which were assignments of land lease payments from two wind projects that we had originated in 2014. In 2017, the operator of the projects terminated the lease, at which time we filed a legal claim and placed these assets on non-accrual status. In 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, at which time we reserved the receivables for their full carrying amount. In the second quarter of 2022, we received a court decision indicating that our appeal was not successful, and accordingly we wrote off the full amount of the receivable.

(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 243 transactions each with outstanding balances that are less than $1 million and that in the aggregate total $76 million.

Receivables

As of June 30, 2022, our allowance for loan losses was $37 million based on our expectation of credit losses over the lives of the receivables in our portfolio. During the three and six months ended June 30, 2022, we increased our reserve by approximately $8 million, due to loans and loan commitments made during the period as well as an incremental reserve recorded on the loans moved into Portfolio Performance Category 3 discussed above.

Below is a summary of the carrying value, loan funding commitments, and allowance by type of receivable or “Portfolio Segment”, as defined by Topic 326, as of June 30, 2022 and December 31, 2021:


	June 30, 2022						December 31, 2021
	Gross Carrying Value		Loan Funding Commitments		Allowance		Gross Carrying Value		Loan Funding Commitments		Allowance
	(in millions)

Commercial (1)	1,483		117		37		1,335		184		36
Government (2)	$	111	$	—	$	—	$	125	$	—	$	—
Total	$	1,594	$	117	$	37	$	1,460	$	184	$	36

(1)As of June 30, 2022, this category of assets includes $1.0 billion 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. This total also includes $47 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 climate solutions 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 the $11 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 $29 million allowance on these $1.5 billion in assets as a result of lower probability assumptions utilized in our allowance methodology.

(2)As of June 30, 2022, our government receivables include $16 million of U.S. federal government transactions and $95 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.

The following table reconciles our beginning and ending allowance for loss on receivables by Portfolio Segment:


	Three months ended June 30, 2022				Three months ended June 30, 2021
	Government		Commercial		Government		Commercial
	(in millions)
Beginning balance	$	—	$	37	$	—	$	36
Provision for loss on receivables	—		8		—		1

Write-off of allowance	—		(8)		—		—

Ending balance	$	—	$	37	$	—	$	37

	Six months ended June 30, 2022				Six months ended June 30, 2021
	Government		Commercial		Government		Commercial
	(in millions)
Beginning balance	$	—	$	36	$	—	$	36
Provision for loss on receivables	—		9		—		1

Write-off of allowance	—		(8)		—		—

Ending balance	$	—	$	37	$	—	$	37

Other than the $11 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 June 30, 2022:


	Total			Less than 1 year			1-5 years			5-10 years			More than 10 years
	(dollars in millions)
Maturities by period (excluding allowance)	$	1,594		$	1		$	48		$	733		$	812
Weighted average yield by period	8.1		%	7.4		%	4.6		%	8.3		%	8.2		%

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 June 30, 2022:


	Total			Less than 1 year			1-5 years			5-10 years			More than 10 years
	(dollars in millions)
Maturities by period	$	12		$	—		$	—		$	—		$	12
Weighted average yield by period	4.7		%	—		%	—		%	—		%	4.7		%

We had no investments that were impaired or on non-accrual status as of June 30, 2022 or December 31, 2021, 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 2058 under the initial terms and 2047 and 2080 if all renewals are exercised. The components of our real estate portfolio as of June 30, 2022 and December 31, 2021, were as follows:


	June 30, 2022		December 31, 2021
	(in millions)
Real estate
Land	$	275	$	269
Lease intangibles	103		104
Accumulated amortization of lease intangibles	(19)		(17)
Real estate	$	359	$	356

As of June 30, 2022, 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 July 1, 2022 to December 31, 2022	$	2	$	12
2023	3		24
2024	3		24
2025	3		24
2026	3		25
2027	3		25
Thereafter	67		713
Total	$	84	$	847

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 June 30, 2022, we held the following equity method investments:

Investment Date

Investee

Carrying Value

(in millions)

Various

Jupiter Equity Holdings LLC

538

Various

Lighthouse Partnerships (1)

404

Various

Phase V Class A LLC

181

March 2020

University of Iowa Energy Collaborative Holdings LLC

127

Various

Vivint Solar Asset 3 HoldCo Parent, LLC

Various

Other investees

589

Total equity method investments

1,935

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

Jupiter Equity Holdings LLC

We have a preferred equity interest in Jupiter Equity Holdings LLC (“Jupiter”) that owns nine operating onshore wind projects and four operating utility-scale solar projects with an aggregate capacity of approximately 2.3 gigawatts. As of June 30, 2022, we have made capital contributions to Jupiter of approximately $536 million related to these projects reflecting final funding true-ups after all projects reached substantial completion. The projects 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 on 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

We have entered into certain agreements relating to the acquisition, ownership and management of approximately $870 million in preferred cash equity investments in four 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 $423 million through June 30, 2022, and additional investments are expected to be made 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.

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 of our 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 of the Renewables Portfolio 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.

Related Party Transactions

Of our commercial receivables, approximately $612 million are loans made to entities in which we also have non-controlling equity investments of approximately $128 million. These equity method investments are LLCs taxed as partnerships that we have entered into with various renewable energy project sponsors, such as SunPower Corporation. We negotiate the commercial terms of these loans with the other partner, and the assets against which the project sponsors are borrowing are contributed into the LLCs upon the execution of the loans. Our equity investments allow us to participate in the residual economics of those contributed assets alongside the other partner, and our rights under the project operating agreements do not allow us to make any significant unilateral decisions regarding the terms of the arrangement. Because the loans made to these entities are typically subordinate to senior debt and tax equity investors in the projects, these loans, which have maturities of over ten years, may accrue PIK interest in the early years of the project until sufficient cash flow is available for our interest payments. Any change in PIK interest is included in Change in Accrued Interest in the operating section of our statement of cash flows. On a quarterly basis, we assess these loans for any impairment inclusive of any PIK interest accrued under CECL as discussed above under Receivables. We recorded approximately $15 million and $30 million in interest income inclusive of any PIK interest related to these loans in the three and six months ended June 30, 2022, respectively, compared to $13 million and $24 million in the three and six months ended June 30, 2021, respectively. In the six months ended June 30, 2022 and 2021, we made $50 million and $179 million, respectively, of investments in these loans to related parties, and we collected $69 million and $14 million, respectively, of principal payments related to these loans. For the six months ended June 30, 2022 and 2021, we collected $35 million and $27 million of cash related to interest income, including cash collections of amounts accrued in prior periods, respectively, which are reflected in cash flows from operating activities.

In the six months ended June 30, 2022, as part of a purchase and sale agreement with an equity investee, we exchanged three performing loans for equity interests in the same project companies. The GAAP carrying value of the loans was $55 million, which were exchanged in a non-cash transaction for equity method investments with no gain or loss recognized at the time of exchange as calculated using discounted cash flows at a market interest rate.