UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended SeptemberJune 30, 20162017
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-35877
HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
(Exact name of registrant as specified in its charter)
Maryland | 46-1347456 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1906 Towne Centre Blvd, Suite 370 Annapolis, | ||
Maryland | 21401 | |
(Address of principal executive offices) | (Zip code) |
(410) 571-9860
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”filer,” “smaller reporting company” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer | |||||
Non-accelerated filer | ☐ (Do not check if a smaller reporting company) | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 43,312,94553,072,035 shares of common stock, par value $0.01 per share, outstanding as of November 1, 2016July 31, 2017 (which includes 1,323,4601,416,629 shares of unvested restricted common stock).
FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this Quarterly Report on Form 10-Q (“Form 10-Q”) within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are subject to risks and uncertainties. For these statements, we claim the protections of the safe harbor for forward-looking statements contained in such Sections. These forward-looking statements include information about possible or assumed future results of our business, financial condition, liquidity, results of operations, plans and objectives. When we use the words “believe,” “expect,” “anticipate,” “estimate,” “plan,” “continue,” “intend,” “should,” “may” or similar expressions, we intend to identify forward-looking statements.
Forward-looking statements are subject to significant risks and uncertainties. Investors are cautioned against placing undue reliance on such statements. Actual results may differ materially from those set forth in the forward-looking statements. Factors that could cause actual results to differ materially from those described in the forward-looking statements are contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (our “20152016 as amended by our Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2016 (collectively, our “2016 Form 10-K”) that was filed with the U.S. Securities and Exchange Commission (the “SEC”), and include risks discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operation of this Form 10-Q and in other periodic reports that we file with the SEC. Statements regarding the following subjects, among others, may be forward-looking:
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Forward-looking statements are based on beliefs, assumptions and expectations as of the date of this Form 10-Q. Any forward-looking statement speaks only as of the date on which it is made. New risks and uncertainties arise over time, and it is not possible for us to predict those events or how they may affect us. Except as required by law, we are not obligated to, and do not intend to, update or revise any forward-looking statements after the date of this Form 10-Q, whether as a result of new information, future events or otherwise.
The risks included here are not exhaustive. Other sections of this Form 10-Q or our 20152016 Form 10-K may include additional factors that could adversely affect our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.
The following discussion is a supplement to and should be read in conjunction with our 20152016 Form 10-K.
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1 | ||||||
Item 1. | Financial Statements | 1 | ||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |||||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | |||||
Item 4. | Controls and Procedures | |||||
Item 1. | Legal Proceedings | |||||
Item 1A. | Risk Factors | |||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |||||
Item 3. | Defaults Upon Senior Securities | |||||
Item 4. | Mine Safety Disclosures | |||||
Item 5. | Other Information | |||||
Item 6. | Exhibits | |||||
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Item 1. Financial1.Financial Statements
HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2016 and DECEMBER 31, 2015
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
September 30, 2016 | December 31, 2015 | June 30, 2017 (unaudited) | December 31, 2016 | |||||||||||||
Assets | ||||||||||||||||
Financing receivables | $ | 865,481 | $ | 783,967 | $ | 1,140,441 | $ | 1,042,237 | ||||||||
Financing receivables held-for-sale | 7,378 | 60,376 | ||||||||||||||
Investments available-for-sale | 50,291 | 29,017 | ||||||||||||||
Investments | 126,329 | 58,058 | ||||||||||||||
Real estate | 134,815 | 128,769 | 298,145 | 172,257 | ||||||||||||
Real estate related intangible assets | 30,924 | 26,930 | ||||||||||||||
Equity method investments in affiliates | 323,968 | 318,769 | ||||||||||||||
Equity method investments | 550,986 | 363,297 | ||||||||||||||
Cash and cash equivalents | 72,968 | 42,645 | 41,696 | 29,428 | ||||||||||||
Other assets | 70,340 | 79,148 | 130,934 | 80,610 | ||||||||||||
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Total Assets | $ | 1,556,165 | $ | 1,469,621 | $ | 2,288,531 | $ | 1,745,887 | ||||||||
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Liabilities and Stockholders’ Equity | ||||||||||||||||
Liabilities: | ||||||||||||||||
Accounts payable, accrued expenses and other | $ | 28,015 | $ | 17,875 | $ | 37,559 | $ | 25,219 | ||||||||
Deferred funding obligations | 64,331 | 108,499 | 273,447 | 170,892 | ||||||||||||
Credit facilities | 356,419 | 247,350 | 392,482 | 283,346 | ||||||||||||
Nonrecourse debt (secured by assets of $763 million and $815 million, respectively) | 610,267 | 663,791 | ||||||||||||||
Nonrecourse debt (secured by assets of $1,269 million and $864 million, respectively) | 921,780 | 692,091 | ||||||||||||||
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Total Liabilities | 1,059,032 | 1,037,515 | 1,625,268 | 1,171,548 | ||||||||||||
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Stockholders’ Equity: | ||||||||||||||||
Preferred stock, par value $0.01 per share, 50,000,000 shares authorized, no shares issued and outstanding | — | — | — | — | ||||||||||||
Common stock, par value $0.01 per share, 450,000,000 shares authorized, 41,989,485 and 37,010,603 shares issued and outstanding, respectively | 420 | 370 | ||||||||||||||
Common stock, par value $0.01 per share, 450,000,000 shares authorized, 51,655,406 and 46,493,155 shares issued and outstanding, respectively | 517 | 465 | ||||||||||||||
Additional paid in capital | 578,107 | 482,431 | 766,894 | 663,744 | ||||||||||||
Retained deficit | (80,865 | ) | (52,701 | ) | ||||||||||||
Accumulated other comprehensive loss | (4,289 | ) | (1,905 | ) | ||||||||||||
Accumulated deficit | (107,263 | ) | (92,213 | ) | ||||||||||||
Accumulated other comprehensive income (loss) | (575 | ) | (1,388 | ) | ||||||||||||
Non-controlling interest | 3,760 | 3,911 | 3,690 | 3,731 | ||||||||||||
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Total Stockholders’ Equity | 497,133 | 432,106 | 663,263 | 574,339 | ||||||||||||
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Total Liabilities and Stockholders’ Equity | $ | 1,556,165 | $ | 1,469,621 | $ | 2,288,531 | $ | 1,745,887 | ||||||||
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See accompanying notes.
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HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | 2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||||||
Interest income, financing receivables | $ | 12,043 | $ | 10,064 | $ | 36,178 | $ | 26,609 | $ | 13,637 | $ | 12,647 | $ | 27,755 | $ | 24,135 | ||||||||||||||||
Interest income, investments | 494 | 364 | 1,303 | 1,118 | 1,358 | 434 | 2,301 | 809 | ||||||||||||||||||||||||
Rental income | 2,977 | 1,988 | 8,768 | 6,641 | 4,863 | 2,975 | 8,972 | 5,791 | ||||||||||||||||||||||||
Gain on sale of receivables and investments | 2,724 | 2,529 | 13,665 | 6,956 | 7,726 | 5,438 | 11,675 | 10,940 | ||||||||||||||||||||||||
Fee income | 770 | 98 | 1,422 | 1,160 | 691 | 351 | 1,372 | 653 | ||||||||||||||||||||||||
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Total Revenue | 19,008 | 15,043 | 61,336 | 42,484 | 28,275 | 21,845 | 52,075 | 42,328 | ||||||||||||||||||||||||
Expenses: | ||||||||||||||||||||||||||||||||
Investment interest expense | (10,635 | ) | (6,689 | ) | (32,945 | ) | (18,940 | ) | ||||||||||||||||||||||||
Interest expense | 15,361 | 11,034 | 29,144 | 22,310 | ||||||||||||||||||||||||||||
Compensation and benefits | (4,325 | ) | (4,341 | ) | (14,497 | ) | (12,171 | ) | 5,659 | 5,754 | 10,385 | 10,172 | ||||||||||||||||||||
General and administrative | (1,991 | ) | (2,034 | ) | (6,129 | ) | (5,360 | ) | 3,139 | 2,322 | 5,327 | 4,138 | ||||||||||||||||||||
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Total Expenses | (16,951 | ) | (13,064 | ) | (53,571 | ) | (36,471 | ) | 24,159 | 19,110 | 44,856 | 36,620 | ||||||||||||||||||||
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Income before equity method investments in affiliates | 2,057 | 1,979 | 7,765 | 6,013 | ||||||||||||||||||||||||||||
Income (loss) from equity method investments in affiliates | 1,331 | 187 | 2,677 | (162 | ) | |||||||||||||||||||||||||||
Income before equity method investments | 4,116 | 2,735 | 7,219 | 5,708 | ||||||||||||||||||||||||||||
Income (loss) from equity method investments | 8,377 | 1,076 | 12,548 | 1,346 | ||||||||||||||||||||||||||||
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Income before income taxes | 3,388 | 2,166 | 10,442 | 5,851 | 12,493 | 3,811 | 19,767 | 7,054 | ||||||||||||||||||||||||
Income tax expense | (41 | ) | (24 | ) | (123 | ) | (77 | ) | ||||||||||||||||||||||||
Income tax (expense) benefit | (83 | ) | (36 | ) | (114 | ) | (82 | ) | ||||||||||||||||||||||||
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Net Income | $ | 3,347 | $ | 2,142 | $ | 10,319 | $ | 5,774 | ||||||||||||||||||||||||
Net income (loss) | $ | 12,410 | $ | 3,775 | $ | 19,653 | $ | 6,972 | ||||||||||||||||||||||||
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Net income attributable to non-controlling interest holders | 18 | 23 | 75 | 62 | ||||||||||||||||||||||||||||
Net income (loss) attributable to non-controlling interest holders | 70 | 28 | 114 | 56 | ||||||||||||||||||||||||||||
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Net Income Attributable to Controlling Shareholders | $ | 3,329 | $ | 2,119 | $ | 10,244 | $ | 5,712 | ||||||||||||||||||||||||
Net income (loss) attributable to controlling stockholders | $ | 12,340 | $ | 3,747 | $ | 19,539 | $ | 6,916 | ||||||||||||||||||||||||
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Basic earnings per common share | $ | 0.07 | $ | 0.06 | $ | 0.23 | $ | 0.16 | $ | 0.23 | $ | 0.09 | $ | 0.38 | $ | 0.16 | ||||||||||||||||
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Diluted earnings per common share | $ | 0.07 | $ | 0.06 | $ | 0.23 | $ | 0.16 | $ | 0.23 | $ | 0.09 | $ | 0.38 | $ | 0.16 | ||||||||||||||||
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Weighted average common shares outstanding—basic | 41,988,036 | 31,221,982 | 38,924,977 | 29,046,742 | 50,573,996 | 37,737,026 | 49,044,051 | 37,376,618 | ||||||||||||||||||||||||
Weighted average common shares outstanding—diluted | 41,998,036 | 31,221,982 | 38,924,977 | 29,046,742 | 50,573,996 | 37,737,026 | 49,044,051 | 37,376,618 |
See accompanying notes.
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HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
Net Income | $ | 3,347 | $ | 2,142 | $ | 10,319 | $ | 5,774 | ||||||||
Unrealized gain/(loss) on interest rate swaps, net of taxes of $0.0 million in 2016 | 488 | — | (5,428 | ) | — | |||||||||||
Unrealized gain/(loss) on available-for-sale securities, net of taxes benefit/(provision) of $0.0 million in each of the three and nine months periods ended 2016 and $0.0 million and $0.2 million for the three and nine months ended 2015, respectively | 2,065 | (788 | ) | 3,027 | (1,281 | ) | ||||||||||
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Comprehensive income | $ | 5,900 | $ | 1,354 | $ | 7,918 | $ | 4,493 | ||||||||
Less: Comprehensive income attributable to non-controlling interests holders | 38 | 16 | 58 | 49 | ||||||||||||
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Comprehensive Income Attributable to Controlling Shareholders | $ | 5,862 | $ | 1,338 | $ | 7,860 | $ | 4,444 | ||||||||
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income (loss) | $ | 12,410 | $ | 3,775 | $ | 19,653 | $ | 6,972 | ||||||||
Unrealized gain (loss) on interest rate swaps, net of tax benefit (provision) of $0.0 million in each of the three and six month periods ended 2017 and 2016 | (2,792 | ) | (2,434 | ) | (1,804 | ) | (5,916 | ) | ||||||||
Unrealized gain (loss) on available-for-sale securities, net of tax benefit (provision) of $0.0 million and $0.0 million in each of the three and six months periods ended 2017 and 2016, respectively | 2,149 | 691 | 2,621 | 962 | ||||||||||||
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Comprehensive income (loss) | $ | 11,767 | $ | 2,032 | $ | 20,470 | $ | 2,018 | ||||||||
Less: Comprehensive income (loss) attributable to non-controlling interest holders | 67 | 19 | 118 | 19 | ||||||||||||
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Comprehensive income (loss) attributable to controlling stockholders | $ | 11,700 | $ | 2,013 | $ | 20,352 | $ | 1,999 | ||||||||
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See accompanying notes.
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HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
Cash flows from operating activities | ||||||||||||||||
Net income | $ | 10,319 | $ | 5,774 | ||||||||||||
Net income (loss) | $ | 19,653 | $ | 6,972 | ||||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Depreciation and amortization | 5,350 | 2,716 | 6,058 | 3,573 | ||||||||||||
Equity-based compensation | 7,452 | 7,728 | 5,553 | 4,920 | ||||||||||||
From equity method investments in affiliates | 570 | 162 | ||||||||||||||
Equity method investments | (6,938 | ) | 412 | |||||||||||||
Non-cash gain on securitization | (11,061 | ) | (7,095 | ) | ||||||||||||
Gain on sale of financing receivables and investments | (10,319 | ) | (5,069 | ) | (1,655 | ) | (1,366 | ) | ||||||||
Changes in financing receivables held-for-sale | 40,560 | 15,019 | — | 5,382 | ||||||||||||
Changes in accounts payable and accrued expenses | 4,596 | 119 | 2,168 | 2,718 | ||||||||||||
Other | (7,523 | ) | (4,652 | ) | (129 | ) | (5,439 | ) | ||||||||
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Net cash provided by operating activities | 51,005 | 21,797 | 13,649 | 10,077 | ||||||||||||
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Cash flows from investing activities | ||||||||||||||||
Purchases of financing receivables | (223,051 | ) | (222,823 | ) | (80,921 | ) | (106,874 | ) | ||||||||
Principal collections from financing receivables | 104,741 | 59,188 | 55,513 | 57,469 | ||||||||||||
Proceeds from sales of financing receivables | 35,052 | 57,995 | 51,389 | 29,032 | ||||||||||||
Purchases of investments | (25,895 | ) | (21,190 | ) | (10,991 | ) | (23,333 | ) | ||||||||
Principal collections from investments | 1,406 | 8,792 | 1,225 | 857 | ||||||||||||
Proceeds from sales of investments | 13,914 | 10,794 | — | 13,914 | ||||||||||||
Purchases of real estate | (10,964 | ) | (42,007 | ) | (118,963 | ) | (7,345 | ) | ||||||||
Investments in equity method affiliates, net | (14,165 | ) | (42,633 | ) | ||||||||||||
Distributions received from equity method affiliates | 41,800 | 21,095 | ||||||||||||||
Equity method investments | (214,537 | ) | (10,706 | ) | ||||||||||||
Equity method distributions received | 33,772 | 27,903 | ||||||||||||||
Other | 12,192 | (3,119 | ) | (5,285 | ) | (1,550 | ) | |||||||||
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Net cash used in investing activities | (64,970 | ) | (173,908 | ) | (288,798 | ) | (20,633 | ) | ||||||||
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Cash flows from financing activities | ||||||||||||||||
Proceeds from credit facilities | 270,900 | 236,786 | 277,612 | 117,400 | ||||||||||||
Principal payments on credit facilities | (161,275 | ) | (174,555 | ) | (168,801 | ) | (119,146 | ) | ||||||||
Proceeds from nonrecourse debt | — | 112,126 | 258,189 | — | ||||||||||||
Principal payments on nonrecourse debt | (56,324 | ) | (38,419 | ) | (27,704 | ) | (41,429 | ) | ||||||||
Payments on deferred funding obligations | (56,281 | ) | (65,869 | ) | (73,927 | ) | (43,414 | ) | ||||||||
Net proceeds of common stock issuances | 91,167 | 81,546 | 98,399 | 91,516 | ||||||||||||
Payments of dividends and distributions | (36,401 | ) | (23,062 | ) | (33,020 | ) | (23,321 | ) | ||||||||
Other | (7,498 | ) | (3,961 | ) | (9,167 | ) | (5,912 | ) | ||||||||
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Net cash provided by financing activities | 44,288 | 124,592 | ||||||||||||||
Net cash provided by (used in) financing activities | 321,581 | (24,306 | ) | |||||||||||||
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Increase (decrease) in cash and cash equivalents | 30,323 | (27,519 | ) | |||||||||||||
Cash and cash equivalents at beginning of period | 42,645 | 58,199 | ||||||||||||||
Increase (decrease) in cash, cash equivalents, and restricted cash | 46,432 | (34,862 | ) | |||||||||||||
Cash, cash equivalents, and restricted cash at beginning of period | 59,144 | 79,216 | ||||||||||||||
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Cash and cash equivalents at end of period | $ | 72,968 | $ | 30,680 | ||||||||||||
Cash, cash equivalents, and restricted cash at end of period | $ | 105,576 | $ | 44,354 | ||||||||||||
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Interest paid | $ | 28,056 | $ | 18,545 | $ | 21,088 | $ | 19,396 | ||||||||
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Non-cash changes in deferred funding obligations (financing activity) | $ | 175,970 | $ | 13,041 | ||||||||||||
Non-cash changes in financing receivables and investments (investing activity) | $ | (175,970 | ) | $ | (26,456 | ) | ||||||||||
Non-cash changes in residual assets (investing activity) | $ | (11,061 | ) | $ | (7,095 | ) |
See accompanying notes.
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HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SeptemberJune 30, 20162017
1.The Company
1. | The Company |
Hannon Armstrong Sustainable Infrastructure Capital, Inc. (“the Company”) providesmakes debt and equity to theinvestments in sustainable infrastructure, including energy efficiency and renewable energy markets.energy. The Company and its subsidiaries are hereafter referred to as “we,” “us,” or “our.” We refer to the financings that we hold on our balance sheet as our “Portfolio.” Our Portfolio may include:
We finance our business through cash on hand, borrowings under our credit facilities and debt transactions, and various asset-backed securitization transactions and equity issuances. We also generate fee income through asset-backed securitizations and syndications, by providing broker/dealer services and by servicing assets owned by third parties. Some of our subsidiaries are special purpose entities that are formed for specific operations associated with financing sustainable infrastructure receivables for specific long term contracts.
Our common stock is listed on the New York Stock Exchange (“NYSE”) under the symbol “HASI.” We have qualified as a REIT and also intend to operate our business in a manner that will continue to permit us to maintain our exception from registration as an investment company under the Investment Company Act of 1940, as amended. We operate our business through, and serve as the sole general partner of, our operating partnership subsidiary, Hannon Armstrong Sustainable Infrastructure, L.P, (the “Operating Partnership”), which was formed to acquire and directly or indirectly own our assets.
2.Summary of Significant Accounting Policies
2. | Summary of Significant Accounting Policies |
Basis of Presentation
The condensed consolidated financial statements reflect all normal and recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations, comprehensive income and cash flows for the periods presented. The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates and such differences could be material. These financial statements have been prepared in accordance with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2016, as filed with the SEC. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been included. The Company’s results of operations for the periods presentedquarterly period ended June 30, 2017 are not necessarily indicative of the results to be expected for the entire year.full year or any other future period. Certain information and footnote disclosures normally included in our annual consolidated financial statements have been condensed or omitted. Certain amounts in the prior yearyears have been reclassified to conform to the current year presentation, includingpresentation. These reclassifications include changes to the formatpresentation of the revenueConsolidated Statements of Cash Flows related to the adoption of Accounting Standards Update (“ASU”) No. 2016-18Statement of Cash Flows (Topic 230).The adoption of this ASU is discussed further in our 2016 Form 10-K in the Recently Issued Accounting Pronouncements section of the income statement to include a calculation of Total Revenue.Note 2.
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The condensed consolidated financial statements include the accounts of the Company and its controlled subsidiaries, including the Operating Partnership. All significant intercompany transactions and balances have been eliminated in consolidation.
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Following the guidance for non-controlling interests in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation, references in this report to our earnings per share and our net income and shareholders’ equity attributable to common shareholders do not include amounts attributable to non-controlling interests.
Financing Receivables
Financing receivables include financing energy efficiency and renewable energy project loans, receivables and direct financing leases.
Unless otherwise noted, we generally have the ability and intent to hold our financing receivables for the foreseeable future and thus they are classified as held for investment. Our ability and intent to hold certain financing receivables may change from time to time depending on a number of factors, including economic, liquidity and capital market conditions. TheAt inception of the arrangement, the carrying value of financing receivables held for investment represents the present value of the note, lease or other payments, net of any unearned fee income, which is recognized as income over the term of the note or lease using the effective interest method. Financing receivables that are held for investment are carried, unless deemed impaired, at cost, net of any unamortized acquisition premiums or discounts and include origination and acquisition costs, as applicable. Financing receivables that we intend to sell in the short-term are classified asheld-for-sale and are carried at the lower of amortized cost or fair value on our balance sheet. The net purchases and proceeds from these sales of our held-for-sale financing receivables are recorded as an operating activity in our statement of cash flows based on our intent at the time of purchase. We may secure nonrecourse debt with the proceeds from our financing receivables. We evaluate any modifications of financing receivables to determine whether the modification is a minor modification in accordance with the guidance in ASC 310, Receivables.
We evaluate our financing receivables for potential delinquency or impairment on at least a quarterly basis and more frequently when economic or other conditions warrant such an evaluation. When a financing receivable becomes 90 days or more past due, and if we otherwise do not expect the debtor to be able to service all of its debt or other obligations, we will generally consider the financing receivable delinquent or impaired and place the financing receivable on non-accrual status and cease recognizing income from that financing receivable until the borrower has demonstrated the ability and intent to pay contractual amounts due. If a financing receivable’s status significantly improves regarding the debtor’s ability to service the debt or other obligations, we will remove it from non-accrual status.
A financing receivable is also considered impaired as of the date when, based on current information and events, it is determined that it is probable that we will be unable to collect all amounts due in accordance with the original contracted terms. Many of our financing receivables are secured by energy efficiency and renewable energy infrastructure projects. Accordingly, we regularly evaluate the extent and impact of any credit deterioration associated with the performance and value of the underlying project, as well as the financial and operating capability of the borrower, its sponsors or the obligor as well as any guarantors. We consider a number of qualitative and quantitative factors in our assessment, including, as appropriate, a project’s operating results,loan-to-value ratios and 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, other credit support from the sponsor or guarantor 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.
If a financing receivable is considered to be impaired, we will determine if an allowance should be recorded. We will record an allowance to reduce the carrying value of the financing receivable toif the present value of expected future cash flows discounted at the financing receivable’s contractual effective rate or the amount realizable from other contractual terms such asis less than its carrying value. This estimate of cash flows may include the currently estimated fair market value of the collateral less estimated selling costs if repayment is expected solely from the collateral. We charge off financing receivables against the allowance when we determine the unpaid principal balance is uncollectible, net of recovered amounts.
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Investments
Investments include debt securities that meet the criteria of ASCFinancial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 320,Investments—Debt and Equity Securities.Securities. We have designated our debt securities as available-for-sale and carry these securities at fair value on our balance sheet. Unrealized gains and losses, to the extent not considered to have an other than temporary impairment (“OTTI”), on available-for-sale debt securities are recorded as a component of accumulated other comprehensive income (“OCI”AOCI”) in equity on our balance sheet.
We evaluate our investments for OTTI on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. Our OTTI assessment is a subjective process requiring the use of judgments and assumptions. Accordingly, we regularly evaluate the extent and impact of any credit deterioration associated with the financial and operating performance and value of the underlying project. We consider a number of qualitative and quantitative factors in our assessment. We first consider the current fair value of the security and the duration of any unrealized loss. Other factors considered include changes in the credit rating, performance of the underlying project, key terms of the transaction, the value of any collateral and any support provided by the sponsor or guarantor.
To the extent that we have identified an OTTI for a security and intend to hold the investment to maturity and we do not expect that we will be required to sell the security prior to recovery of the amortized cost basis, we recognize only the credit component of the OTTI in earnings. We determine the credit component using the difference between the securities’ amortized cost basis and the present value of its expected future cash flows, discounted using the effective interest method or its estimated collateral value. Any remaining unrealized loss due to factors other than credit or the non-credit component, is recorded in accumulated OCI.AOCI.
To the extent we hold investments with an OTTI and if we have made the decision to sell the security or it is more likely than not that we will be required to sell the security prior to recovery of its amortized cost basis, we recognize the entire portion of the impairment in earnings.
Premiums or discounts on investment securities are amortized or accreted into investment interest income using the effective interest method.
Real Estate
Real estate reflectsconsists of land or other real estate held on our balance sheet. Real estate intangibles reflect the value of associatedand its related lease intangibles, net of any amortization. InOur real estate is generally leased to tenants on a triple net lease basis, whereby the tenant is responsible for all operating expenses relating to the property, generally including property taxes, insurance, maintenance, repairs and capital expenditures. Scheduled rental revenue typically varies during the lease term and thus rental income is recognized on a straight-line basis, unless there is considerable risk as to collectability, so as to produce a constant periodic rent over the term of the lease. Accrued rental income is the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis and is recorded in other assets. Expenses related to leases where we are the lessor, if any, are charged to operations as incurred.
We record our real estate purchases as asset acquisitions that are recorded at cost, including acquisition and closing costs, unless they meet the definition of a business combination in accordance with ASC 805,Business Combinations. For business combinations, the fair value of the real estate acquired in a business combination with in-place leases is allocated to (i) the acquired tangible assets, consisting of land or other real property such as buildings, and (ii) the identified intangible assets and liabilities, consisting of the value of above-market and below-market leases and the value of other acquired intangible assets, based in each case on their fair values.
The fair value of the tangible assets of an acquired leased property is determined by valuing the property as if it were vacant, and the “as-if-vacant” value is then allocated to land, building and tenant improvements, if any, based on the determination of the fair values of these assets. The as-if-vacant fair value of a property is determined by management based on an appraisal of the propertyappraisals by a qualified appraiser.
In allocating the fair value of the identified intangible assets and liabilitiesintangibles of an acquired property, above-market and below-market in-place lease values are recorded as intangible assets based on the present value (using an interest rate which reflects the risks associated with the leases acquired) of the difference between (i) the contractual amounts to be paid pursuant to the in-place leases, and (ii) management’s estimate of fair market lease rates for the corresponding in-place leases, measured over a period equal to the remaining term of the lease, including renewal periods likely of being exercised
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by the lessee. The capitalized above-market lease values are amortized as a reduction of rental income and the capitalized below-market lease values are amortized as an increase to rental income.income, both of which are amortized over the term used to value the intangible. We also record, as appropriate, an intangible asset for in-place leases. The value of the leases in place at the time of the transaction is equal to the potential revenue (rent and expenses)income lost if the leases were not in place (during downtime) and that would be incurred to obtain the lease.place. The amortization is calculatedof this intangible occurs over the initial term unless management believes that it is likely that the tenant would exercise the renewal option, whereby we would amortize the value attributable to the renewal over the renewal period.option. If a lease were to be terminated, all unamortized amounts relating to that lease would be written off.
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We record the purchases of real estate, other than in a business combination (i.e. real estate with no in-place leases), as asset acquisitions that are recorded at cost, including acquisition and closing costs. Our real estate is generally leased to tenants on a net lease basis, whereby the tenant is responsible for all operating expenses relating to the property, generally including property taxes, insurance, maintenance, repairs and capital expenditures. Scheduled rental revenue typically varies during the lease term and thus rental income is recognized on a straight-line basis, unless there is considerable risk as to collectability, so as to produce a constant periodic rent over the term of the lease. Accrued rental income is the aggregate difference between the scheduled rents which vary during the lease term and the income recognized on a straight-line basis and is recorded in other assets. Rental expenses (if any) are charged to operations as incurred.
Securitization of Receivables
We have established various special purpose entities or securitization trusts for the purpose of securitizing certain financing receivables or other debt investments. We determined that the trusts used in securitizations are variable interest entities or VIEs,(“VIEs”), as defined in ASC 810, Consolidation.Consolidation. We typically serve as primary or master servicer of these trusts; however, as the servicer, we do not have the power to make significant decisions impacting the performance of the trusts. Based on an analysis of the structure of the trusts, under U.S. GAAP, we have concluded that we are not the primary beneficiary of the trusts as we do not have power over the trusts’ significant activities. Therefore, we do not consolidate these trusts in our condensed consolidated financial statements.
We account for transfers of financing receivables to these securitization trusts as sales pursuant to ASC 860,Transfers and Servicing, as we have concluded the transferred receivables have been isolated from the transferor (i.e., put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership) and we have surrendered control over the transferred receivables. We have received true-sale-at-law opinions for all of our securitization trust structures and non-consolidation legal opinions for all but one oldlegacy securitization trust structure that support our conclusion regarding the transferred receivables. When we sell receivables in securitizations, we generally retain minor interests in the form of servicing rights and residual assets, which we refer to as securitization assets.
Gain or loss on the sale of receivables is calculated based on the excess of the proceeds received from the securitization (less any transaction costs) plus any retained interests obtained over the cost basis of the receivables sold. For retained interests, we generally estimate fair value based on the present value of future expected cash flows using our best estimates of the key assumptions of anticipated losses, prepayment rates, and current market discount rates commensurate with the risks involved.
We initially account for all separately recognized servicing assets and servicing liabilities at fair value and subsequently measure such servicing assets and liabilities using the amortization method. Servicing assets and liabilities are amortized in proportion to, and over the period of, estimated net servicing income with servicing income recognized as earned. We assess servicing assets for impairment at each reporting date. If the amortized cost of servicing assets is greater than the estimated fair value, we will recognize an impairment in netNet income.
Our other retained interest in securitized assets, the residual assets, are classified as available-for-sale securities and carried at fair value on the condensed consolidated balance sheets in Other Assets. We generally do not sell our residual assets. Our residual assets are evaluated for impairment on a quarterly basis. Interest income related to the residual assets is recognized using the effective interest rate method. If there is a change in expected cash flows related to the residual assets, we calculate a new yield based on the current amortized cost of the residual assets and the revised expected cash flows. This yield is used prospectively to recognize interest income.
Cash and Cash Equivalents
Cash and cash equivalents include short-term government securities, certificates of deposit and money market funds, all of which had an original maturity of three months or less at the date of purchase. These securities are carried at their purchase price, which approximates fair value.
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Restricted Cash
Restricted cash includes cash and cash equivalents set aside with certain lenders primarily to support deferred funding and other obligations outstanding as of the balance sheet dates. Restricted Cashcash is reported as part of Other Assets in the condensed consolidated balance sheets. Refer to Note 3 for disclosure of the balances of Restricted cash included in Other Assets.
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Variable Interest EntitiesConsolidation and Equity Method Investments in Affiliates
We account for our investment in entities that are considered voting or variable interest entities under ASC 810, Consolidation.Consolidation. We perform an ongoing assessment to determine the primary beneficiary of each entity as required by ASC 810. We have established various special purpose entities or securitization trusts for the purpose of securitizing certain financing receivables or other debt investments which are not consolidated in our financial statements as described in Securitization of Receivables above.
Substantially all of the activities of the special purpose entities that are formed for the purpose of holding our financing receivables and investments on our balance sheet are closely associated with our activities. Based on our assessment, we determined that we have power over and receive the benefits of these special purpose entities; hence, we are the primary beneficiary and should consolidate these entities under the provisions of ASC 810.
We have made equity investments in various renewable energy projects. We share in the cash flows, income, and tax attributes according to a negotiated schedule.schedule (which typically does not correspond with our ownership percentages). Our renewable energy projects are typically owned in partnerships structures (using limited liability companies, or LLCs taxed as partnerships) where we along with other large institutional investors, if any, receive a stated preferred return consisting of a priority distribution of all or a portion of the project’s cash flows, and in some cases, tax attributes. We have typically partnered with either the operator of the project or other tax equity investors. Once thisour preferred return is achieved, the partnership “flips” and the company which operates the project, receives a larger portion of the cash flows through its interest in the holding company and we, along with theany other institutional investors, will have an on-going residual interest.
We made several newThese equity investments in renewable energy projects in 2016 that, along with our existing investments, are accounted for under the equity method of accounting. Certain of our equity method investments were determined to be VIEs.VIEs in which we are not the primary beneficiary. Our maximum exposure to loss associated with our equity method investments is limited to our recorded value of our investments.
Under the equity method of accounting, the carrying value of ourthese equity method investments is determined based on amounts we invested, adjusted for the equity in earnings or losses of the investee allocated based on the limited liability entitycompany agreement, less distributions received. Because certain of the limited liability entitycompany and holding company agreements contain preferences with regard to cash flows from operations, capital events and liquidation, we reflect our share of profits and losses by determining the difference between our “claim on the investee’s book value” at the end and the beginning of the period.period, which is adjusted for distributions received and contributions made. This claim is calculated as the amount we would receive (or be obligated to pay) if the investee were to liquidate all of its assets at recorded amounts determined in accordance with U.S. GAAP and distribute the resulting cash to creditors and investors in accordance with their respective priorities. This method is commonly referred to as the hypothetical liquidation at book value method or (“HLBV”). Intra companyIntercompany gains and losses are eliminated for an amount equal to our interest and are reflected in the share in income or loss from equity method investments in affiliates in the consolidated statements of operations. Cash distributions received from our equity method investments are classified as operating cash flows to the extent of cumulative HLBV earnings. Any additional cash flows are deemed to be returns of the investment and are classified as investing cash flows. We have elected to recognize earnings from these investments one quarter in arrears to allow for the receipt of financial information.
We have also made an investment in a joint venture which holds land under solar projects. This investment entitles us to receive an equal percentage of both cash distributions and profit and loss under the terms of the LLC agreement. The investment, which we have determined to be a voting interest entity, is accounted for under the equity method of accounting, with our portion of rental income, adjusted for any fair value to book value basis difference, being recognized in Income (loss) from equity method investments in the period in which the income is earned.
We evaluate the realization of our investmentinvestments accounted for using the equity method if circumstances indicate that our investment is an OTTI. An OTTI impairment occurs when the estimated fair value of an investment is below the carrying value and the difference is determined to not be recoverable. This evaluation requires significant judgment regarding, but not limited to, the severity and duration of the impairment; the ability and intent to hold the securities until recovery; financial condition, liquidity, andnear-term prospects of the issuer; specific events; and other factors. Based on an evaluation of our equity method investments, we determined that no impairment had occurred during the three or nine months ended September 30, 2016 or 2015.
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Derivative Financial Instruments
We utilize derivative financial instruments, primarily interest rate swaps, to manage, or hedge, our interest rate risk exposures associated with new debt issuances, to manage our exposure to fluctuations in interest rates on variable rate debt, and to optimize the mix of our fixed and floating-rate debt. In addition, we use forward-starting interest rate swap contracts to manage a portion of our interest rate exposure for anticipated refinancing of our long-term debts. Our objective is to managereduce the impact of changes in interest rates on theour results of operations and cash flows and the market value of our debt.flows.
The interest rate swaps we use are designated as cash flow hedges and are considered highly effective in reducing our exposure to the interest rate risk that they are designated to hedge. This effectiveness is essentialrequired in order to qualify for hedge accounting. Instruments that meet thesethe required hedging criteria are formally designated as hedges at the inception of the derivative contract. Derivatives are recorded on the consolidated balance sheet at fair value. If a derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in Accumulated Other Comprehensive Income,AOCI, net of associated deferred income tax effects in our Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) and are recognized in earnings at the Consolidated Statements of Operations whensame time as the hedged item, affects earnings.including as a result of the accrual of interest. Changes in fair value of the ineffective portions of these hedges are recognized in general and administrative expenses in our Consolidated Statements of Operations.expenses. For any derivative instruments not designated as hedging instruments, changes in fair value would be recognized in our Consolidated Statements of Operationsearnings in the period that the change occurs. We assess, both at the inception of the hedge and on an ongoing basis, whether the derivatives that are used in hedging transactionsdesignated as cash flow hedges are highly effective in offsetting the changes in cash flows of the hedged items. We do not hold derivatives for trading purposes.
Interest rate swap contracts contain a credit risk that counterparties may be unable to fulfill the terms of the agreement. We attempt to minimize that risk by evaluating the creditworthiness of its counterparties, who are limited to major banks and financial institutions, and do not anticipate nonperformance by the counterparties.
Income Taxes
We elected and qualified to be taxed as a REIT for U.S. federal income tax purposes, commencing with our taxable year ended December 31, 2013. To qualify as a REIT, we must meet on an ongoing basis a number of organizational and operational requirements, including a requirement that we currently distribute at least 90% of our net taxable income, excluding capital gains, to our shareholders.stockholders. We intend to continue to meet the requirements for qualification as a REIT. As a REIT, we are not subject to U.S. federal corporate income tax on that portion of net income that is currently distributed to our owners. However, our taxable REIT subsidiaries (“TRSs”) will generally be subject to U.S. federal, state, and local income taxes as well as taxes of foreign jurisdictions, if any.
We account for income taxes ofunder ASC 740,Income Taxes for our TRSs using the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities from a change in tax rates is recognized in earnings in the period when the new rate is enacted. We evaluate any deferred tax assets for valuation allowances based on an assessment of available evidence including sources of taxable income, prior years taxable income, any existing taxable temporary differences and our future investment and business plans that may give rise to taxable income.
We apply accounting guidanceASC 740,Income Taxes with respect to how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. This guidance requires the accounting and disclosure of tax positions taken or expected to be taken in the course of preparing our tax returns to determine whether the tax positions are “more likely than not” to be sustained by the applicable tax authority. We are required to analyze all open tax years, as defined by the statute of limitations, for all major jurisdictions, which includes U.S. federal and certain states. We have no examinations in progress, none are expected at this time, and years 2012 through 2015 are open. As of September 30, 2016 and December 31, 2015, we had no uncertain tax positions. Our policy is to recognize interest expense and penalties related to income tax matters as a component of general and administrative expense. There were no accrued interest and penalties as of September 30, 2016 and December 31, 2015, and no interest and penalties were recognized during the three or nine months ended September 30, 2016 and 2015.
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Equity-Based Compensation
At the time of completion of our initial public offering (“IPO”), we adopted our 2013 Equity Incentive Plan (the “2013 Plan”), which provides for grants of stock options, stock appreciation rights, restricted stock units, shares of restricted common stock, phantom shares, dividend equivalent rights, long-term incentive-plan units (“LTIP units”) and other restricted limited partnership units issued by our Operating Partnership and other equity-based awards. From time to time, we may award unvested restricted stockmake equity or equity based awards as compensation to members of our senior management team, our independent directors, employees, advisors, consultants and other personnel under our 2013 Plan.
We record compensation expense for stock awardsgrants made under the 2013 Plan in accordance with ASC 718,Compensation—Stock Compensation.Compensation. We record compensation expense for unvested sharesgrants that vest solely based on service conditions on a straight-line basis over the vesting period of the entire award based upon the fair market value of the sharesgrant on the date of grant. Fair market value for restricted common stock is based on our share price on the date of grant. For awards where the vesting is contingent upon achievement of certain performance targets, compensation expense is measured based on the fair market value on the grant date and is recorded over the requisite service period (which includes the performance period) based on our estimate of the achievement of the various performance targets. Our share price at the date of grant and actual. Actual performance results at the end of the performance period determine the fair value anddetermines the number of shares that will ultimately be awarded. The award earned is generally between 0% and 150%200% of the initial target, depending on the extent to which the performance target is met. We have also issued restricted stock units where the vesting is contingent upon service being provided for a defined period and certain market conditions being met. The fair value of these awards, as measured at the grant date, is recognized over the requisite service period as it is provided, even if the market conditions are not met. The grant date fair value of these awards was developed by an independent appraiser using a Monte Carlo simulation.
Earnings Per Share
We compute earnings per share of common stock in accordance with ASC 260,Earnings Per Share.Share. Basic earnings per share is calculated by dividing netNet income attributable to controlling stockholders (after consideration of the earnings allocated to unvested shares of restricted common stock)grants under the 2013 Plan if applicable) by theweighted-average number of shares of common stock outstanding during the period excluding the weighted average number of unvested shares of restricted common stock or restricted stock unitsgrants under the 2013 Plan if applicable (“participating securities” as defined in Note 12). Diluted earnings per share is calculated by dividing netNet income attributable to controlling stockholders by the weighted-average number of shares of common stock outstanding during the period plus other potentially dilutive securities. No adjustment is made for shares that are anti-dilutive during a period.
Segment Reporting
We provide and arrange debt and equity financinginvestments for sustainable infrastructure projects and report all of our activities as one business segment.
Recently Issued Accounting Pronouncements
Revenue from Contracts with Customers
In May 2014, the FASB issued Accounting Standards Update (“ASU”)ASU No. 2014-09, “RevenueRevenue from Contracts with Customers (Topic 606),” requiring an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either the retrospective or cumulative effectmodified retrospective transition method. The FASB proposed delaying the effective date of the standard by one year and issued a proposal that is intended to clarify and simplify the guidance. The updated standard becomes effective for us on January 1, 2018 and we expect will be first presented in our March 31, 2018, Form 10-Q. We have not yet selected a transition method, and we are currently evaluating the effect that the updated standard will have on our consolidated financial statements and related disclosures.
Consolidation
In February 2015, the FASB issued ASU No. 2015-02 “Consolidation (Topic 810) Amendments to the Consolidation Analysis,” which affects the following areas of the consolidation analysis: limited partnerships and similar entities, evaluation of fees paid to a decision maker or service provider as a variable interest and in determination of the primary beneficiary, effect of related parties on the primary beneficiary determination and for certain investment funds. ASU No. 2015-02 is effective for us for our fiscal year ending December 31, 2016 and interim periods therein. The adoption of this standard did not have a material impact on our consolidated financial position, results of operations and cash flows.
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Income Taxes
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740) – Balance Sheet Classification of Deferred Taxes.” The purpose of the standard is to simplify the presentation of deferred taxes on a classified balance sheet. Under current GAAP, deferred income tax assets and liabilities are separated into current and noncurrent amounts in the balance sheet. The amendments in ASU 2015-17 require that all deferred tax assets and liabilities be classified as noncurrent in the balance sheet. The ASU will be effective for us beginning January 1, 2017, including interim periods in the calendar year 2017, but with early adoption permitted. Since we do not report a classified balance sheet, we do not expect the adoption of ASU 2015-172014-09 to have a material impact on our consolidated financial statements and related disclosures.disclosures as the majority of our sources of revenue, e.g., investments in financing receivables, debt and equity securities, land leasing, and the securitization of financing receivables are not impacted by this new standard. Upon adoption of the new standard, we expect to elect the modified retrospective transition method.
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Leases
In February 2016, the FASB issued ASU No. 2016-02, “LeasesLeases (Topic 842).” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specifiedan identified asset for the lease term. Changes were made to align lessor accounting with the lessee accounting model and ASU No. 2014-09, “RevenueRevenue from Contracts with Customers.” The new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities.Customers. The ASU will be effective for us beginning January 1, 2019. Early application is permitted for all public business entities upon issuance. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Lesseesstatements, and may not apply a full retrospective transition approach.certain practical expedients to transition. If elected, these practical expedients would allow us to continue to use our previous lease classification conclusions and continue to classify the leases that exist at the date of adoption based on their pre-existing classification. We are currently evaluating the impact of the applicationadoption of this accounting standard updateASU will have on our consolidated financial statements and related disclosures.
Share-Based Payments
In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting.” Under the new guidance, entities will be required to recognize all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. In addition, the new guidance will allow an employer to repurchase up to the maximum statutory income tax rates in the applicable jurisdictions without triggering liability accounting and allow an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures as they occur. The guidance is effective for us beginning after December 15, 2016, and interim periods within those years. Early adoption is permitted in any annual or interim period for which financial statements haven’t been issued or made available for issuance, but all of the guidance must be adopted in the same period. We implemented this standard in the second quarter of 2016. The implementation did not have a material impact on our consolidated financial statements and related disclosures. See Note 11 for further information.
Equity Method Investments
In March 2016, the FASB issued ASU No. 2016-07, “Simplifying the Transition to the Equity Method of Accounting.” The new standard eliminates the requirement for an investor to retroactively apply the equity method when an increase in ownership interest in an investee triggers equity method accounting. It also simplifies in certain areas the accounting for equity method investments. The new standard becomes effective for us in fiscal year ending December 31, 2017 and interim periods therein. The adoption of this standard is not expected to have a material impact on our consolidated financial statements and related disclosures.
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Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Financial Instruments—Credit Losses – Losses—Measurement of Credit Losses on Financial Instruments (Topic 326).” ASU 2016-13 significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 will replace the “incurred loss” approach under existing guidance with an “expected loss” model for instruments measured at amortized cost, and require entities to record allowances for available-for-sale debt securities rather than reduce the carrying amount, as currently required. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 and is to be adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We are currently evaluating the impact the adoption of ASU 2016-13 will have on our consolidated financial statements and related disclosures.
Statement of Cash FlowsEquity Method Investments
In AugustMarch 2016, the FASB issued ASU 2016-15, “StatementNo. 2016-07,Simplifying the Transition to the Equity Method of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides guidance on howAccounting. The new standard eliminates the requirement for an investor to retroactively apply the equity method when an increase in ownership interest in an investee triggers equity method accounting. It also simplifies, in certain cash receipts and cash payments are presented and classified inareas, the statement of cash flows where the current GAAP treatment is either unclear or there is no specific accounting guidance. ASU 2016-15for equity method investments. The new standard is effective for us in the current fiscal years beginning afteryear ending December 15,31, 2017 and isinterim periods therein. The new provisions are applied on a prospective basis to be applied using a retrospective transition method to each period presented.transactions within its scope. The adoption of this standard isdid not expected to have a material impact on our consolidated financial statements and related disclosures.
3.Fair Value MeasurementsOther accounting standards updates effective after June 30, 2017, are not expected to have a material effect on our consolidated financial statements and related disclosures.
3. | Fair Value Measurements |
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 for which only disclosure of fair value is required are characterized in accordance with the fair value hierarchy established by ASC 820,Fair Value Measurements.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 SeptemberJune 30, 20162017 and December 31, 2015,2016, only our residual assets, (described in Note 5), financing receivablesheld-for-sale, interest rate swaps and investments available-for-sale, if any, were carried at fair value on the condensed consolidated balance sheets on a recurring basis. The three levels of the fair value hierarchy are described below:
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Unless otherwise discussed below, fair value is measured using a discounted cash flow model, contractual terms and Level 3 unobservable 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 unobservable inputs would result in a lower fair value and a decline would result in a higher fair value. The financing receivables held for sale, if any, are carried at the lower of cost or market.fair value.
As of September 30, 2016 | As of June 30, 2017 | |||||||||||||||||||||||
Fair Value | Carrying Value | Level | Fair Value | Carrying Value | Level | |||||||||||||||||||
(dollars in millions) | (dollars in millions) | |||||||||||||||||||||||
Assets | ||||||||||||||||||||||||
Financing receivables | $ | 914 | $ | 865 | Level 3 | $ | 1,129 | $ | 1,140 | Level 3 | ||||||||||||||
Financing receivables held-for-sale | 7 | 7 | Level 3 | |||||||||||||||||||||
Investments available-for-sale(1) | 50 | 50 | Level 3 | |||||||||||||||||||||
Investments(1) | 126 | 126 | Level 3 | |||||||||||||||||||||
Securitization residual assets | 28 | 28 | Level 3 | |||||||||||||||||||||
Liabilities | ||||||||||||||||||||||||
Credit facilities | $ | 356 | $ | 356 | Level 3 | $ | 392 | $ | 392 | Level 3 | ||||||||||||||
Nonrecourse debt(2) | 649 | 624 | Level 3 | |||||||||||||||||||||
Nonrecourse notes(2) | 951 | 943 | Level 3 | |||||||||||||||||||||
Derivative liabilities | 6 | 6 | Level 2 | 1 | 1 | Level 2 |
(1) | The amortized cost of our investments |
(2) | Fair value and carrying value of nonrecourse notes excludes unamortized debt issuance costs. |
As of December 31, 2016 | ||||||||||||
Fair Value | Carrying Value | Level | ||||||||||
(dollars in millions) | ||||||||||||
Assets | ||||||||||||
Financing receivables | $ | 1,017 | $ | 1,042 | Level 3 | |||||||
Investments(1) | 58 | 58 | Level 3 | |||||||||
Securitization residual assets | 19 | 19 | Level 3 | |||||||||
Derivative assets | 1 | 1 | Level 2 | |||||||||
Liabilities | ||||||||||||
Credit facilities | $ | 283 | $ | 283 | Level 3 | |||||||
Nonrecourse notes(2) | 718 | 709 | Level 3 |
(1) | The amortized cost of our investments as of December 31, 2016 was $61 million. |
(2) | Fair value and carrying value of nonrecourse notes excludes unamortized debt issuance costs. |
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As of December 31, 2015 | ||||||||||||
Fair Value | Carrying Value | Level | ||||||||||
(dollars in millions) | ||||||||||||
Assets | ||||||||||||
Financing receivables | $ | 806 | $ | 784 | Level 3 | |||||||
Financing receivables held-for-sale | 61 | 60 | Level 3 | |||||||||
Investments available-for-sale(1) | 29 | 29 | Level 3 | |||||||||
Liabilities | ||||||||||||
Credit facility | $ | 247 | $ | 247 | Level 3 | |||||||
Nonrecourse debt(2) | 690 | 680 | Level 3 | |||||||||
Derivative liabilities | 1 | 1 | Level 2 |
Investments
We carry our investments in debt securities at fair value on our balance sheet as investments available-for-sale. 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 September 30, | For the nine months ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(dollars in millions) | ||||||||||||||||
Balance, beginning of period | $ | 48 | $ | 28 | $ | 29 | $ | 27 | ||||||||
Purchases of investments available-for-sale | 2 | 1 | 34 | 21 | ||||||||||||
Payments on investments available-for-sale | — | — | (1 | ) | (9 | ) | ||||||||||
Sale of investments available-for-sale | — | — | (14 | ) | (11 | ) | ||||||||||
Gains on investments available-for-sale recorded in earnings | — | — | 1 | 1 | ||||||||||||
Gains (losses) on investments available-for-sale recorded in OCI(1) | — | (1 | ) | 1 | (1 | ) | ||||||||||
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Balance, end of period | $ | 50 | $ | 28 | $ | 50 | $ | 28 | ||||||||
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For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(dollars in millions) | ||||||||||||||||
Balance, beginning of period | $ | 125 | $ | 37 | $ | 58 | $ | 29 | ||||||||
Purchases of investments | 1 | 10 | 67 | 32 | ||||||||||||
Payments on investments | (1 | ) | — | (1 | ) | (1 | ) | |||||||||
Sale of investments | — | — | — | (14 | ) | |||||||||||
Gains on investments recorded in earnings | — | — | — | 1 | ||||||||||||
Gains (losses) on investments recorded in OCI(1) | 1 | 1 | 2 | 1 | ||||||||||||
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Balance, end of period | $ | 126 | $ | 48 | $ | 126 | $ | 48 | ||||||||
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(1) | As of |
For investments held at fair value, we used a range of interest rate spreads of approximately 1% to 5%4% based upon comparable transactions.
Astransactions as of June 30, 2017 and December 31, 2015, we held a $13 million senior secured debt investment, along with a large financial institution which held the remaining approximately $45 million in outstanding debt securities, in an operating wind project that was being foreclosed upon and expected to be sold. The foreclosure and sale was completed in 2016 and we recovered the full value of our debt investment and recognized a gain of $0.8 million.2016.
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 SeptemberJune 30, 20162017 and December 31, 2015,2016, 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.
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As a result, we determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. See Note 8 for the estimated fair value of our derivative financial instruments. The fair values of the derivative financial instruments are included in the other assets or accounts payable, accrued expenses and other line itemitems in the condensed consolidated balance sheets.
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
Financing 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. 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:
September 30, 2016 | December 31, 2015 | June 30, 2017 | December 31, 2016 | |||||||||||||
(dollars in millions) | (dollars in millions) | |||||||||||||||
Cash deposits | $ | 73 | $ | 43 | $ | 42 | $ | 29 | ||||||||
Restricted cash deposits (included in Other assets) | 25 | 36 | 64 | 30 | ||||||||||||
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Total cash deposits | $ | 98 | $ | 79 | $ | 106 | $ | 59 | ||||||||
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Amount of cash deposits in excess of amounts federally insured | $ | 94 | $ | 75 | $ | 103 | $ | 57 |
4.Non-Controlling Interest
Non-Controlling Interest in Consolidated Entities
4. | Non-Controlling Interest |
Units of limited partnership interests in the Operating Partnership (“OP units”) that are owned by limited partners other than the Company are included in non-controlling interest on our condensed consolidated balance sheets. The non-controlling interest holders are generally allocated their pro rata share of income, other comprehensive income and equity transactions. The outstanding OP units held by outside limited partners represents less than 1% of our outstanding OP units and are redeemable for cash, or at our option, for a like number of shares of our common stock. No OP units were exchanged for shares of common stock or redeemed for cash during the ninesix months ended SeptemberJune 30, 2017 or the six months ended June 30, 2016. The non-controlling interest holders are generally allocated their pro rata share of income, other comprehensive income and equity transactions.
5.Securitization of Receivables
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5. | Securitization of Receivables |
The following summarizes certain transactions with our securitization trusts:
For the Nine Months Ended September 30, | As of and for the six months ended June 30, | |||||||||||||||
2016 | 2015 | 2017 | 2016 | |||||||||||||
(dollars in millions) | (dollars in millions) | |||||||||||||||
Gains on securitizations | $ | 13 | $ | 6 | $ | 12 | $ | 10 | ||||||||
Purchase of receivables securitized | $ | 394 | $ | 219 | $ | 195 | $ | 319 | ||||||||
Proceeds from securitizations | $ | 407 | $ | 225 | $ | 207 | $ | 329 | ||||||||
Residual and servicing assets included in Other Assets | $ | 18 | $ | 9 | $ | 29 | $ | 15 | ||||||||
Cash received from residual and servicing assets | $ | 2 | $ | 1 | $ | 3 | $ | 2 |
In connection with securitization transactions, we typically retain servicing responsibilities and residual assets. In certain instances, we receive annual servicing fees of up to 0.20% of the outstanding balance. We may periodically make servicer advances, which are subject to credit risk. Included in other assets in our condensed consolidated balance sheets are our servicing assets at amortized cost, our residual assets at fair value, and our
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servicing advances at cost, if any. Our residual assets are subordinate to investors’ interests, and their values are subject to credit, prepayment and interest rate risks on the transferred financial assets. The investors and the securitization trusts have no recourse to our other assets for failure of debtors to pay when due. In computing gains and losses on securitizations, we use the same discount rates we use for the fair value calculation of residual assets, which are determined based on a review of comparable market transactions.transactions including Level 3 unobservable inputs which consist of base interest rates and spreads over base rates. Depending on the nature of the transaction risks, the discount rate ranged from 4% to 7%.
As of SeptemberJune 30, 20162017 and December 31, 2015,2016, our managed assets totaled $3.6$4.6 billion and $3.2$3.9 billion, respectively, of which $2.2$2.5 billion and $1.8$2.3 billion, respectively, were securitized assets held in unconsolidated securitization trusts. There were no securitization credit losses duringin the three or ninesix months ended SeptemberJune 30, 20162017 or 2015, and no material2016. As of June 30, 2017 there was approximately $1.4 million in payments from certain debtors to the securitization delinquencies as of September 30, 2016 and December 31, 2015.trusts that was greater than 90 days past due. The securitized assets consist of financing receivables from contracts for the installation of energy efficiency and other technologies in facilities owned by, or operated for or by, the federal, state or local government entities where the ultimate obligor is the U.S. federal government. The contracts may have guarantees of energy savings from third party service providers, the majority of which are entities rated investment grade by an independent rating agency. Based on the nature of the receivables and experience to date,experience-to-date, we do not currently expect to incur any credit losses on the receivables sold.
6.Our Portfolio
6. | Our Portfolio |
As of SeptemberJune 30, 2016,2017, our Portfolio included approximately $1.4$2.1 billion of financing receivables, investments, real estate and equity method investments on our balance sheet. The financing 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 with high credit quality obligors. The equity method investments represent our minoritynon-controlling equity investments in renewable energy projects.projects and land.
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The following is an analysis of our Portfolio by type of obligor and credit quality as of SeptemberJune 30, 2016:2017:
Investment Grade | ||||||||||||||||||||||||
Government(1) | Commercial Investment Grade(2) | Commercial Non- Investment Grade(3) | Subtotal, Debt and Real Estate | Equity Method Investments(4) | Total | |||||||||||||||||||
(dollars in millions) | ||||||||||||||||||||||||
Financing receivables | $ | 380 | $ | 464 | $ | 21 | $ | 865 | $ | — | $ | 865 | ||||||||||||
Financing receivables held-for-sale | 7 | — | — | 7 | — | 7 | ||||||||||||||||||
Investments | 33 | 17 | — | 50 | — | 50 | ||||||||||||||||||
Real estate(5) | 166 | — | 166 | — | 166 | |||||||||||||||||||
Equity method investments | — | — | — | — | 324 | 324 | ||||||||||||||||||
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Total | $ | 420 | $ | 647 | $ | 21 | $ | 1,088 | $ | 324 | $ | 1,412 | ||||||||||||
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% of Debt and Real Estate Portfolio | 39 | % | 59 | % | 2 | % | 100 | % | N/A | N/A | ||||||||||||||
Average Remaining Balance(6) | $ | 10 | $ | 10 | $ | 11 | $ | 10 | $ | 19 | $ | 11 |
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) | ||||||||||||||||||||||||
Financing receivables | $ | 632 | $ | 482 | $ | 26 | $ | 1,140 | $ | — | $ | 1,140 | ||||||||||||
Investments | 104 | 22 | — | 126 | — | 126 | ||||||||||||||||||
Real estate(4) | — | 298 | — | 298 | 21 | 319 | ||||||||||||||||||
Equity investments in renewable energy projects | — | — | — | — | 530 | 530 | ||||||||||||||||||
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Total | $ | 736 | $ | 802 | $ | 26 | $ | 1,564 | $ | 551 | $ | 2,115 | ||||||||||||
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% of Debt and Real Estate Portfolio | 47 | % | 51 | % | 2 | % | 100 | % | N/A | N/A | ||||||||||||||
Average Remaining Balance(5) | $ | 13 | $ | 9 | $ | 9 | $ | 11 | $ | 20 | $ | 12 |
(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 |
(2) | Transactions where the projects or the ultimate obligors are commercial entities |
(3) | Transactions where the projects or the ultimate obligors are commercial entities |
(4) |
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. |
Excludes |
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The components of financing receivables as of September 30, 2016Financing Receivables and December 31, 2015, were as follows:
September 30, 2016 | December 31, 2015 | |||||||
(dollars in millions) | ||||||||
Financing receivables | ||||||||
Financing or minimum lease payments(1) | $ | 1,122 | $ | 1,025 | ||||
Unearned interest income | (255 | ) | (238 | ) | ||||
Allowance for credit losses | — | — | ||||||
Unearned fee income, net of initial direct costs | (2 | ) | (3 | ) | ||||
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Financing receivables(1) | $ | 865 | $ | 784 | ||||
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In accordance with the terms of certain purchase agreements related to financing receivables or other investments, payments of the purchase price are scheduled to be made over time, generally within 12 months of entering into the transaction, and as a result, we have recorded deferred funding obligations of $64 million and $108 million as of September 30, 2016 and December 31, 2015, respectively. Approximately $41 million of those investments were pledged as collateral against these obligations.Investments
The following table provides a summary of our anticipated maturity dates of our financing receivables and investments and the weighted average yield for each range of maturities as of SeptemberJune 30, 2016:2017:
Total | Less than 1 year | 1-5 years | 5-10 years | More than 10 years | Total | Less than 1 year | 1-5 years | 5-10 years | More than 10 years | |||||||||||||||||||||||||||||||
(dollars in millions) | (dollars in millions) | |||||||||||||||||||||||||||||||||||||||
Financing Receivables | ||||||||||||||||||||||||||||||||||||||||
Maturities by period | $ | 865 | $ | 1 | $ | 48 | $ | 80 | $ | 736 | $ | 1,140 | $ | 7 | $ | 25 | $ | 75 | $ | 1,033 | ||||||||||||||||||||
Weighted average yield by period | 5.4 | % | 4.0 | % | 6.4 | % | 5.0 | % | 5.3 | % | 5.2 | % | 8.4 | % | 5.3 | % | 5.0 | % | 5.2 | % | ||||||||||||||||||||
Investments | ||||||||||||||||||||||||||||||||||||||||
Maturities by period | $ | 50 | $ | — | $ | — | $ | 1 | $ | 49 | $ | 126 | $ | — | $ | — | $ | 1 | $ | 125 | ||||||||||||||||||||
Weighted average yield by period | 3.9 | % | — | % | — | % | 4.7 | % | 4.0 | % | 4.3 | % | — | % | — | % | 4.7 | % | 4.3 | % |
Our non-investment grade assets includes two financing receivables with a carrying value of approximately $10 million that became past due in the second quarter of 2017. These financing 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”). We have been informed by the owner of the Projects that the Projects are experiencing a decline in revenue. On this basis, the owner of the Projects is seeking to renegotiate the land lease contractual payment terms or terminate the lease. In July 2017, we filed a legal claim against the owners of the Projects in order to protect our interests in the Projects and the amounts due to us under the land lease assignments. Although there can be no assurance in this regard, we believe that we have the ability to recover the carrying value from the Projects, including by taking title to the underlying collateral, and thus have not recorded an allowance for losses as of June 30, 2017. We have determined that the assets are impaired and placed them on non-accrual status.
Other than discussed above, we had no financing receivables, investments or leases that were impaired or on nonaccrual status as of June 30, 2017 or December 31, 2016. There was no provision for credit losses or troubled debt restructurings as of June 30, 2017 or December 31, 2016.
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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 20512057 under the initial terms and 2047 and 2080 if all extensionsrenewals are exercised. The components of our real estate portfolio as of SeptemberJune 30, 20162017 and December 31, 2015,2016, were as follows:
September 30, 2016 | December 31, 2015 | June 30, 2017 | December 31, 2016 | |||||||||||||
(dollars in millions) | (dollars in millions) | |||||||||||||||
Real Estate | ||||||||||||||||
Land | $ | 135 | $ | 129 | $ | 222 | $ | 145 | ||||||||
Real estate related intangibles | 33 | 28 | ||||||||||||||
Accumulated amortization of real estate intangibles | (2 | ) | (1 | ) | ||||||||||||
Lease intangibles | 80 | 29 | ||||||||||||||
Accumulated amortization of lease intangibles | (4 | ) | (2 | ) | ||||||||||||
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Real Estate | $ | 166 | $ | 156 | $ | 298 | $ | 172 | ||||||||
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There are conservation easement agreements covering severalIn 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 $138 million. Approximately $21 million (1,100 acres) of this real estate portfolio was acquired through an equity interest in a joint venture that we account for under the equity method of accounting and approximately $49 million of our properties that limit the use of the property upon expiration of the respective leases. The real estate relatedpurchase price was allocated to intangible lease assets are amortized on a straight-line basis over the contracted lease term.relative fair value basis. Up to an additional $7 million may become payable under this transaction upon completion of certain project related contingencies.
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As of SeptemberJune 30, 2016,2017, the future amortization expense of these 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 Income Payments | ||||||||||||||
Years Ending December 31, | Future Amortization Expense | Minimum Rental Income Payments | ||||||||||||||
(dollars in millions) | (dollars in millions) | |||||||||||||||
From October 1, 2016 to December 31, 2016 | $ | — | $ | 2 | ||||||||||||
2017 | 1 | 10 | ||||||||||||||
From July 1, 2017 to December 31, 2017 | $ | 1 | $ | 8 | ||||||||||||
2018 | 1 | 11 | 2 | 17 | ||||||||||||
2019 | 1 | 11 | 2 | 17 | ||||||||||||
2020 | 1 | 10 | 2 | 17 | ||||||||||||
2021 | 1 | 11 | 2 | 17 | ||||||||||||
2022 | 2 | 17 | ||||||||||||||
Thereafter | 26 | 292 | 65 | 602 | ||||||||||||
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Total | $ | 31 | $ | 347 | $ | 76 | $ | 695 | ||||||||
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There are conservation easement agreements covering several of our properties that limit the use of the property upon its lease expiration.
Equity Investments
We have made minority interestnon-controlling equity investments in a number of renewable energy projects operated by renewable energy companies 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 June 30, 2017, we held the following equity method investments:
Acquisition Date | Transaction | Investment | Partner | |||||
(in millions) | ||||||||
Various | Strong Upwind Holdings I,II, and III LLC | $ | 195 | Various(1) | ||||
June 2017 | Northern Frontier LLC | 94 | Various | |||||
December 2015 | Buckeye Wind Energy Class B Holdings LLC | 67 | Invenergy | |||||
February 2017 | Strong Upwind Holdings IV LLC | 59 | JPMorgan | |||||
October 2016 | Invenergy Gunsight Mountain Holdings, LLC | 36 | Invenergy |
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Acquisition Date | Transaction | Investment | Partner | |||||||
(in millions) | ||||||||||
June 2016 | MM Solar Holdings LLC | 28 | AES | |||||||
Various | Other transactions | 72 | Various | |||||||
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Total Equity Method Investments | $ | 551 | ||||||||
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(1) | In June 2017, we acquired the remaining interest in these holding company entities for $22 million from JPMorgan. The entities are now consolidated entities in which the underlying assets (i.e. project level equity method investments) are being reported in our financial statements as equity method investments. |
Based on an evaluation of our equity method investments, we determined that no OTTI impairment had occurred as of June 30, 2017, or December 31, 2016.
Deferred Funding Obligations
In accordance with the terms of certain purchase agreements relating to financing 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 $273 million and $171 million as of June 30, 2017 and December 31, 2016, respectively. As of June 30, 2017 and December 31, 2016, we acquired interests in several limited liability companies that collectively ownhave pledged approximately 43 megawatts of operating distributed commercial, industrial$34 million and residential solar projects. We receive a priority distribution from these projects until negotiated financial targets are achieved at which time the partnerships will flip and the company that operates the project will receive a larger portion of the cash flows and we will have an on-going residual interest. We financed approximately $33$41 million of the approximately $42 million purchase price with the seller through a two-year non-interest bearing loan secured by our ownership interest in the limited liability companies. We have recorded our purchase obligation to the sellerequity method investments as collateral for a deferred funding obligation on our balance sheetof $26 million and have reflected an imputed interest expense on the$34 million, respectively.
The next five years of outstanding balance on the investment interest expense line of our income statement. As of September 30, 2016, we held equity method investments of approximately $324 million in these renewable energy projects.deferred funding obligations to be paid are as follows:
See Note 2 for our accounting treatment of these investments and Note 13 for the aggregate financial position and results of operations of the significant holding companies.
(dollars in millions) | ||||
July 1, 2017 to December 31, 2017 | $ | 49 | ||
2018 | 103 | |||
2019 | 73 | |||
2020 | 36 | |||
2021 | 12 | |||
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Total Deferred Funding Obligations | $ | 273 | ||
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We had no financing receivables, investments or leases that were impaired or on nonaccrual status as of September 30, 2016 or December 31, 2015. There was no provision for credit losses for the three or nine months ended September 30, 2016 or 2015. We did not have any loan modifications that qualify as trouble debt restructurings for the three or nine months ended September 30, 2016 or 2015.
7. Credit Facilities
7. | Credit Facilities |
Revolver
We have a senior secured revolving credit facility with an outstanding balance of $307 million.which matures in July 2019. The facility provides for total maximum advances of $1.5 billion with the aggregate amount outstanding at any point in time of $500 million and which consists of two components, the G&I Facility and the PF Facility. The “G&I Facility” can be used to leverage certain qualifying government and institutional financings entered into by us and the “PF Facility” can be used to leverage certain qualifying project financings entered into by us.
The facility was originally In June 2017, we entered into in 2013 and has been amended a number of times, including in January 2016. The effectan amendment that adjusted certain of the various amendments has been to increasesub-limits but did not change the size, flexibility and allocation of the facility and extend the termination date to July 19, 2019. The limit of borrowingoverall maximum advances or aggregate amount available at any point in timetime.
The following table provides additional detail on our credit facility as of June 30, 2017 and the total maximum advances are summarized below:December 31, 2016:
Limit of Borrowing at any point in time | Maximum Total Advances | |||||||||||||||
As of | G&I Facility | PF Facility | G&I Facility | PF Facility | ||||||||||||
(dollars in millions) | ||||||||||||||||
December 31, 2014 | $ | 125 | $ | 325 | $ | 375 | $ | 975 | ||||||||
December 31, 2015 | $ | 150 | $ | 350 | $ | 450 | $ | 1,050 | ||||||||
January 2016 | $ | 250 | $ | 250 | $ | 600 | $ | 900 |
June 30, 2017 | December 31, 2016 | |||||||
(dollars in millions) | ||||||||
Outstanding balance | $ | 290 | $ | 283 | ||||
Value of collateral pledged to credit facility | $ | 421 | $ | 471 | ||||
Weighted average short-term borrowing rate | 2.9 | % | 2.3 | % |
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Loans under the G&I Facility bear interest at a rate equal to the London Interbank Offered Rate (“LIBOR”) plus 1.5% or, under certain circumstances, 1.5% plus the highest of (i) the Federal Funds Rate plus 0.5%, (ii) the rate of interest publicly announced by Bank of America from time to time as its “prime rate,” and (iii) LIBOR plus 1.0%.Base Rate. Loans under the PF Facility bear interest at a rate equal to LIBOR plus 2.5%, or an agreed upon margin, or, under certain circumstances, 2.5% plus the Base Rate or as mutually agreed. The Base Rate is defined as the highest of (i) the Federal Funds Rate plus 0.5%, (ii) the rate of interest publicly announced by Bank of America from time to time as its “prime rate,” and (iii) LIBOR plus 1.0%. and (iv) zero. Under the PF Facility, we also have the option to borrow at a fixed rate of interest until the expiration of the credit facility in July 2019. The fixed rate is determined by agreement with the Administrative Agent and is based on the prevailing US SWAP rate of an equivalent term to the average-life of the fixed rate portion of the borrowing plus an agreed upon margin. The loans are made through wholly-owned special purpose subsidiaries (the “Borrowers”) and we have guaranteed the obligations of the Borrowers under the credit facility pursuant to (x) a Continuing Guaranty, dated July 19, 2013, and (y) a Limited Guaranty, dated July 19, 2013, both as amended and restated.
Any financing we propose to be included in the borrowing base as collateral under the facility is subject to the approval of the administrative agent in its sole discretion and the payment of a placement fee. We may, with the consent of the administrative agent, borrow against new projects before such projects become Approved Financings (as defined in the PF Facility loan agreement) but after they have been pledged as collateral. The amount eligible to be drawn under the facility for purposes of financing such investments will be based on a discount to the value of each investment or an applicable valuation percentage. Under the G&I Facility, the applicable valuation percentage for non-delinquent investments is 85% in the case of a U.S. federal government obligor, 80% in the case of an institutional obligor or a state and local obligor, and with respect to other obligors or in certain circumstances, such other percentage as the administrative agent may prescribe. Under the PF Facility, the applicable valuation percentage is 67% or such other percentage as the administrative agent may prescribe. The sum of approved financings after taking into account the valuation percentages and any changes in the valuation of the financings in accordance with the loan agreements determines the borrowing capacity, subject to the overall facility limits described above.
The following table provides additional detail on our credit facility asWe have approximately $5 million of September 30, 2016 and December 31, 2015:
September 30, 2016 | December 31, 2015 | |||||||
(dollars in millions) | ||||||||
Outstanding balance | $ | 307 | $ | 247 | ||||
Value of collateral pledged to credit facility | $ | 423 | $ | 356 | ||||
Weighted average short-term borrowing rate | 2.4 | % | 2.3 | % |
We incurred approximately $13 million ofremaining unamortized costs associated with the credit facility that have been capitalized (includedand included in otherOther assets on the condensed consolidatedour balance sheets)sheet, and are being amortized on a straight-line basis over the term of the Loan Agreements. On each monthly payment date, the Borrowers shall also pay to the administrative agent, for the benefit of the lenders, certain availability fees for each Loan Agreement equal to 0.50%, divided by 360, multiplied by the excess of the available borrowing capacity under each component of the credit facility over the actual amount borrowed under such component.
The credit facility contains terms, conditions, covenants, and representations and warranties that are customary and typical for a transaction of this nature, including various affirmative and negative covenants, and limitations on the incurrence of liens and indebtedness, investments, fundamental organizational changes, dispositions, changes in the nature of business, transactions with affiliates, use of proceeds and stock repurchases.
The credit facility also includes customary events of default, including the existence of a default in more than 50% of underlying financings. The occurrence of an event of default may result in termination of the credit facility, acceleration of amounts due under the credit facility, and accrual of default interest at a rate of LIBOR plus 2.50% in the case of the G&I Facility and at a rate of LIBOR plus 5.00% in the case of the PF Facility.
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We were in compliance with the required financial covenants described below at each quarterly reporting date that such covenants were applicable:
Covenant | Covenant Threshold | |||
Minimum Liquidity (defined as available borrowings under the Loan Agreements plus unrestricted cash divided by actual borrowings) of greater than: | % | |||
12 month rolling Net Interest Margin of greater than: | zero | |||
Maximum Debt to Equity Ratio of less than:(1) | 4 to 1 |
(1) | Debt is defined as Total Indebtedness excluding accounts payable and accrued expenses and nonrecourse debt. |
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Term Loan
In September 2016,February 2017, we borrowed $50$102 million fromunder a financial institution on a short-term basis. This recourse credit facility. In July 2017, we amended this agreement to mature on September 20, 2017. This credit facility matures on December 30, 2016is secured by equity in one of our wholly-owned subsidiaries that holds approximately $128 million of real estate, financing receivables and equity investments. The credit facility can be repaid at anytime. Itany time. The loan bears interest at a fixed rate of 4.8% which increasesthree month LIBOR plus 200 basis points through September 1, 2017, increasing to 6.8%three month LIBOR plus 275 basis points on November 14, 2016 and is also secured by the equity of our special purpose subsidiary that holds $84 million of residential solar financing receivables. The credit facility contains terms, conditions, covenants, and representations and warranties that are customary and typical for a transaction of this nature, including various affirmative and negative covenants, and limitations on the incurrence of liens and indebtedness, investments, fundamental organizational changes, dispositions, changes in the nature of business, transactions with affiliates, use of proceeds and stock repurchases.September 2, 2017.
This credit facilityterm loan also includes customary events of default. The occurrence of an event of default may result in termination of the credit facility,term loan, acceleration of amounts due, under the credit facility, and accrual of default interest. Any default interest will accrue at the fixedapplicable rate plus 2.0%. prior to any acceleration or the scheduled maturity date, and 5.0% thereafter. We recorded $0.5$1.4 million of debt issuance costs which are netted against the outstanding balance.
8. Nonrecourse Debt
8. | Nonrecourse Debt |
We have outstanding the following asset-backed nonrecourse debt and bank loans (dollars in millions):
Outstanding Balance as of | Value of Assets Pledged as of | Outstanding Balance as of | Value of Assets Pledged as of | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 30, 2016 | December 31, 2015 | Interest Rate | Maturity Date | Anticipated Balance at Maturity | September 30, 2016 | December 31, 2015 | Description of | June 30, 2017 | December 31, 2016 | Interest Rate | Maturity Date | Anticipated Balance at Maturity | June 30, 2017 | December 31, 2016 | Description of Assets Pledged | |||||||||||||||||||||||||||||||||||||||||||||
HASI Sustainable Yield Bond 2013-1 | $ | 77 | $ | 83 | 2.79 | % | December 2019 | $ | 57 | $ | 93 | $ | 99 | Financing receivables | $ | 73 | $ | 75 | 2.79 | % | December 2019 | $ | 57 | $ | 91 | $ | 93 | Financing receivables | ||||||||||||||||||||||||||||||||
ABS Loan Agreement | $ | 92 | $ | 102 | 5.74 | % | September 2021 | $ | 17 | $ | 100 | $ | 117 | Equity interest in Strong Upwind Holdings I, LLC | $ | 89 | $ | 90 | 5.74 | % | September 2021 | $ | 17 | $ | 87 | $ | 97 | Equity interest in Strong Upwind Holdings I, LLC | ||||||||||||||||||||||||||||||||
HASI Sustainable Yield Bond 2015-1 | $ | 98 | $ | 100 | 4.28 | % | October 2034 | $ | — | $ | 138 | $ | 139 | Financing receivables, real estate and real estate intangibles | ||||||||||||||||||||||||||||||||||||||||||||||
HASI Sustainable Yield Bond 2015-1A | $ | 96 | $ | 97 | 4.28 | % | October 2034 | $ | — | $ | 138 | $ | 138 | Financing receivables, real estate and real estate intangibles | ||||||||||||||||||||||||||||||||||||||||||||||
HASI Sustainable Yield Bond 2015-1B Note | $ | 14 | $ | — | 5.41 | % | October 2034 | $ | — | $ | 138 | $ | — | Class B Bond of HASI Sustainable Yield Bond 2015-1 | ||||||||||||||||||||||||||||||||||||||||||||||
HASI SYB Loan Agreement 2015-1 | $ | 76 | $ | 90 | 4.34 | % (1) | December 2021 | $ | — | $ | 100 | $ | 117 | Equity interest in Strong Upwind Holdings II and III, LLC, related interest rate swap | (1) | $ | 74 | (1) | (1) | (1) | (1) | $ | 96 | Equity interest in Strong Upwind Holdings II and III, LLC, related interest rate swap | ||||||||||||||||||||||||||||||||||||
2017 Credit Agreement | $ | 196 | — | 3.47 | %(2) | June 2024 | $ | — | $ | 262 | $ | — | Equity interests in Strong Upwind Holdings I, II, III, and IV LLC, and Northern Frontier, LLC | |||||||||||||||||||||||||||||||||||||||||||||||
HASI SYB Loan Agreement 2015-2 | $ | 41 | $ | 42 | 4.92 | % (1) | December 2023 | $ | — | $ | 70 | $ | 71 | Equity interest in Buckeye Wind Energy Class B Holdings LLC, related interest rate swap | $ | 37 | $ | 41 | 5.38 | % (3) | December 2023 | $ | — | $ | 67 | $ | 70 | Equity interest in Buckeye Wind Energy Class B Holdings LLC, related interest rate swap | ||||||||||||||||||||||||||||||||
HASI SYB Loan Agreement 2015-3 | $ | 152 | $ | 162 | 4.92 | % | December 2020 | $ | 132 | $ | 176 | $ | 175 | Residential Solar Financing receivables | $ | 147 | $ | 150 | 4.92 | % | December 2020 | $ | 127 | $ | 173 | $ | 175 | Residential solar financing receivables, related interest rate swaps | ||||||||||||||||||||||||||||||||
Other nonrecourse debt (2) | $ | 88 | $ | 101 | 2.26 | % - 7.45% | 2017 to 2032 | $ | — | $ | 86 | $ | 97 | Financing receivables | ||||||||||||||||||||||||||||||||||||||||||||||
HASI SYB Loan Agreement 2016-1 | $ | 119 | $ | 98 | 4.23 | %(3) | November 2021 | $ | 101 | $ | 139 | $ | 114 | Residential solar financing receivables, related interest rate swaps | ||||||||||||||||||||||||||||||||||||||||||||||
HASI SYB Trust 2016-2 | $ | 85 | $ | — | 4.35 | % | April 2037 | $ | — | $ | 91 | $ | — | Financing receivables | ||||||||||||||||||||||||||||||||||||||||||||||
Other nonrecourse debt(4) | $ | 87 | $ | 84 | 2.26 | % - 7.45% | 2017 to 2046 | $ | — | $ | 221 | $ | 81 | Financing receivables | ||||||||||||||||||||||||||||||||||||||||||||||
Debt issuance costs | $ | (14 | ) | $ | (16 | ) | $ | (21 | ) | $ | (17 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
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Nonrecourse debt | $ | 610 | $ | 664 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Nonrecourse debt(5) | $ | 922 | $ | 692 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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(1) | This nonrecourse debt agreement was re-financed in the second quarter of 2017 with the same lender through the 2017 Credit Agreement. |
(2) | Interest rate represents the current period’s LIBOR based rate plus the spread. Under the terms of the 2017 Credit Agreement, this rate will become fixed upon the lender’s syndication of the loan, or that can be fixed at our option. |
(3) | Interest rate represents the current period’s LIBOR based rate plus the spread. Also see the interest rate swap contracts shown in the table |
Other nonrecourse debt consists of various debt agreements used to finance certain of our financing receivables for |
(5) | The total collateral pledged against our nonrecourse debt was $1,269 million and $864 million as of June 30, 2017 and December 31, 2016, respectively. |
We have pledged the ownership interestfinanced assets, and typically our interests in one or more parents or subsidiaries of the relevant assets or the relevant assets themselves toborrower that are legally separate bankruptcy remote special purpose entities as security for the nonrecourse debt. There is no recourse for repayment of these obligations other than to the applicable borrower and any collateral pledged as security for the obligations. The assets and credit of these entities are not available to satisfy any of our other debts and obligations, except as set forth innot prohibited by the debt agreements. The debtorscreditors can only look to the borrower, the cash flows of the pledged assets and any other collateral pledged, to satisfy the debt and we are not otherwise liable for nonpayment of such cash flows. The debt agreements contain terms, conditions, covenants, and representations and warranties that are customary and typical for a transaction of this nature, including limitations on the incurrence of liens and indebtedness, investments, fundamental organizational changes, dispositions, changes in the nature of business, transactions with affiliates, use of proceeds and stock repurchases. The agreements also include customary events of default, the occurrence of which may result in termination of the agreements, acceleration of amounts due, and accrual of default interest. We typically act as servicer for the debt transactions.
We have guaranteed the performance of the representations and warranties and other obligations of certain of our subsidiaries under certain of the debt agreements and provided an indemnity against certain losses from “bad acts” of such subsidiaries including fraud, failure to disclose a material fact, theft, misappropriation, voluntary bankruptcy or unauthorized transfers. In the case of the debt secured by certain of our renewable energy equity interests, we have also guaranteed the compliance of our subsidiaries with certain tax matters and certain obligations if certain of our joint venture partners exercise their right to withdraw from our partnerships.
The HASI Sustainable Yield Bond (“HASI SYB”) 2015-1 consists of two notes,instruments, (i) $101 million in aggregate principal amount of 4.28% HASI SYB 2015-1A, Class A Bonds (the “Class A Bonds”) and (ii) $18 million in aggregate principal amount of 5.0% HASI SYB 2015-1B, Class B Bonds (the “Class B Bonds”), both with an anticipated repayment date in October 2034. The Class A Bonds rank senior to the Class B Bonds in priority of payment. We retainedIn January 2017, we borrowed $14 million of non-recourse debt using the Class B Bonds. The other loan and debt transactions were negotiated with, and held by, commercial banks, including one loan agreement that has a corporate financial subsidiaryBonds as a co-lender.collateral.
In connection with several of our nonrecourse debt borrowings, we have entered into the following interest rate swaps that are designated as cash flow hedges (dollars in millions):
Notional Value as of | Fair Value as of | Notional Value as of | Fair Value as of | |||||||||||||||||||||||||||||||||||||||||||||||
Base Rate | Hedged Rate | September 30, 2016 | December 31, 2015 | September 30, 2016 | December 31, 2015 | Term | Base Rate | Hedged Rate | June 30, 2017 | December 31, 2016 | June 30, 2017 | December 31, 2016 | Term | |||||||||||||||||||||||||||||||||||||
HASI SYB Loan Agreement 2015-1 | | 3 month Libor | | 1.55 | % | $ | 70 | $ | 81 | $ | (0.8 | ) | $ | (0.3 | ) | December 2015 to September 2021 | 3 month Libor | 1.55 | % | $ | — | $ | 67 | $ | — | $ | — | December 2015 to September 2021 | ||||||||||||||||||||||
HASI SYB Loan Agreement 2015-2 |
| 3 month Libor |
| 1.52 | % | $ | 37 | $ | 38 | $ | (0.4 | ) | $ | (0.1 | ) | December 2015 to December 2018 | 3 month Libor | 1.52 | % | $ | 36 | $ | 37 | $ | — | $ | — | December 2015 to December 2018 | ||||||||||||||||||||||
HASI SYB Loan Agreement 2015-2 |
| 3 month Libor |
| 2.55 | % | $ | 29 | $ | 29 | $ | (1.1 | ) | $ | (0.2 | ) | December 2018 to December 2024 | 3 month Libor | 2.55 | % | $ | 29 | $ | 29 | $ | (0.4 | ) | $ | (0.2 | ) | December 2018 to December 2024 | ||||||||||||||||||||
HASI SYB Loan Agreement 2015-3 | | 1 month Libor | | 2.34 | % | $ | 119 |
| $ | — | $ | (3.9 | ) | $ | — | November 2020 to August 2028 | 1 month Libor | 2.34 | % | $ | 119 | $ | 119 | $ | 0.2 | $ | 1.0 | November 2020 to August 2028 | ||||||||||||||||||||||
HASI SYB Loan Agreement 2016-1 | 3 month Libor | 1.88 | % | $ | 109 | $ | 72 | $ | (0.1 | ) | $ | 0.2 | November 2016 to November 2021 | |||||||||||||||||||||||||||||||||||||
HASI SYB Loan Agreement 2016-1 | 3 month Libor | 2.73 | % | $ | 107 | $ | 107 | $ | (0.7 | ) | $ | — | November 2021 to October 2032 | |||||||||||||||||||||||||||||||||||||
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Total | $ | 255 | $ | 148 | $ | (6.2 | ) | $ | (0.6 | ) | Total |
| $ | 400 | $ | 431 | $ | (1.0 | ) | $ | 1.0 | |||||||||||||||||||||||||||||
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(1) | This interest rate swap was financially settled in June 2017. |
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The total fair value of our hedgesderivatives relating to interest rate hedges that are effective in offsetting variable cash flows is reflected as unrealized gains or losses in accumulated other comprehensive incomeAOCI and in Other assets or Accounts payable, accrued expenses and other in the accompanying condensed consolidated balance sheets.Condensed Consolidated Balance Sheets. As of SeptemberJune 30, 20162017 and December 31, 2015,2016, all of our derivatives were designated as hedging instruments and there was no ineffectiveness recorded on our designated hedges and no portion of the Accumulated other comprehensive income, net of associated deferred income tax effects, related to our interest rate hedges was reclassified into interest expense.hedges.
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The next 12-months of stated minimum maturities of nonrecourse debt are as follows:
As of September 30, | (dollars in millions) | |||||||
2016 | $ | 49 | ||||||
2017 | 40 | |||||||
(dollars in millions) | ||||||||
July 1, 2017 to December 31, 2017 | $ | 37 | ||||||
2018 | 38 | 47 | ||||||
2019 | 95 | 105 | ||||||
2020 | 164 | 176 | ||||||
2021 | 143 | |||||||
2022 | 18 | |||||||
Thereafter | 238 | 417 | ||||||
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$ | 624 | $ | 943 | |||||
Deferred financing costs, net | (14 | ) | (21 | ) | ||||
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Total nonrecourse debt | $ | 610 | ||||||
Total Nonrecourse | $ | 922 | ||||||
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Debt |
The stated minimum maturities of nonrecourse debt above include only the mandatory minimum principal payments. To the extent there are additional cash flows received from Strong Upwind Holdings II, LLC, Strong Upwind Holdings III, LLC or Buckeye Wind Energy Class B Holdings LLC, these additional cash flows are required to be used to make additional principal payments against the respective debt. Any additional principal payments made due to these provisions may impact the anticipated balance at maturity of these financings.
SunPower Corporation (“Sunpower”), which originated and services the residential solar leases that are the collateral for the HASI SYB Loan Agreement 2015-12015-3 and the HASI SYB Loan Agreement 2015-2 notes.2016-1, had publicly disclosed that were not in compliance and did not expect to be in compliance for 2017, with a debt-to-EBITDA leverage covenant in one of their loan agreements, due in part to a restructuring they have undertaken as result of changes in the broader solar market. According to SunPower’s disclosure, they were not in default under this cash collateralized loan that has an outstanding balance of $5 million. In June 2017, SunPower negotiated an amendment to their loan agreement and removed the debt-to-EBITDA leverage covenant.
9. CommitmentsThe portfolios of residential solar leases are held in bankruptcy remote special purpose entities (“SPEs”) that are performing in line with our expectations and Contingenciesthe SPEs, and not SunPower, are the source of repayment under our loans. SunPower has provided us certain limited indemnities and warranties and as servicer, provides various services including billing, monitoring payments by homeowners to a third-party lockbox and customer service. Our loan agreements included the same debt-to-EBITDA covenant referred to above to monitor changes in SunPower’s credit, as is typical for a servicer. As a result, our lenders are entitled to apply approximately $1 million of the cash flow after payment of principal and interest each quarter to further reduce the principal balance on our loan. We continue to monitor the situation and anticipate having further discussions with our lenders and with SunPower but at the present time, do not anticipate any other impact.
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9. | Commitments and Contingencies |
Litigation
The nature of our operations exposes us to the risk of claims and litigation in the normal course of our business. Other than non-material litigation arising out of the ordinary course of business, we are not currently subject to any legal proceedings that are probable of having a material adverse effect on our financial position, results of operations or cash flows.
10. Income Tax
10. | Income Tax |
We recorded a tax expense of less thanapproximately $0.1 million for the three and ninesix months ended SeptemberJune 30, 20162017 and 2015.2016. Our income tax expense was determined using a federal rate of 35% and a combined state rate, net of federal benefit, of 5%.
11. Equity
11. | Equity |
Dividends and Distributions
Our board of directors declared the following dividends in 20152016 and 2016:2017:
Announced Date | Record Date | Pay Date | Amount per share | Record Date | Pay Date | Amount per share | ||||||||||||||
3/17/15 | 3/30/15 | 4/9/15 | $ | 0.26 | ||||||||||||||||
6/16/15 | 6/30/15 | 7/9/15 | $ | 0.26 | ||||||||||||||||
9/16/15 | 9/30/15 | 10/8/15 | $ | 0.26 | ||||||||||||||||
12/15/15 | 12/30/15 | 1/7/16 | $ | 0.30 | ||||||||||||||||
3/15/16 | 3/30/16 | 4/7/16 | $ | 0.30 | 3/30/16 | 4/7/16 | $ | 0.30 | ||||||||||||
6/07/16 | 7/06/16 | 7/14/16 | $ | 0.30 | 7/06/16 | 7/14/16 | $ | 0.30 | ||||||||||||
9/15/16 | 10/05/16 | 10/13/16 | $ | 0.30 | 10/05/16 | 10/13/16 | $ | 0.30 | ||||||||||||
12/13/16 | 12/29/16 | * | 1/12/17 | $ | 0.33 | |||||||||||||||
3/15/17 | 4/05/17 | 4/13/17 | $ | 0.33 | ||||||||||||||||
6/01/17 | 7/06/17 | 7/13/17 | $ | 0.33 |
* | This dividend was treated as a distribution in 2017 for tax purposes. |
We have an effective universal shelf registration statement registering the potential offer and sale, of upfrom time to $500 milliontime and in one or more offerings, of any combination of our common stock, preferred stock, depositary shares and warrants and rights (collectively referred to as the “securities”). We may offer the securities directly, through agents, or to or through underwriters by means of ordinary brokers’ transactions on the NYSE or otherwise at market prices prevailing at the time of sale or at negotiated prices and may include “at the market” (“ATM”) offerings or sales “at the market,” to or through a market maker or into an existing trading market on an exchange or otherwise. We completed the following public offerings and ATM offerings of our common stock in 20152016 and 2016:
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Closing Date | Common Stock Offerings | Shares Issued1 | Price Per Share | Net Proceeds 2 | Common Stock Offerings | Shares Issued (1) | Price Per Share | Net Proceeds (2) | ||||||||||||||||||||
(amounts in millions, except per share amounts) | (amounts in millions, except per share amounts) | |||||||||||||||||||||||||||
5/4/15 | Public Offering | 4.60 | $ | 18.50 | 3 | $ | 82 | |||||||||||||||||||||
10/19/15 | Public Offering | 5.75 | $ | 18.00 | 3 | $ | 99 | |||||||||||||||||||||
6/21/16 | Public Offering | 4.60 | $ | 19.78 | 4 | $ | 91 | Public Offering | 4.600 | $ | 19.78 | (3) | $ | 91 | ||||||||||||||
5/9/16 to 6/30/16 | ATM | 0.065 | $ | 20.31 | 5 | $ | 1 | ATM | 0.065 | $ | 20.31 | (4) | $ | 1 | ||||||||||||||
11/09/16 | Public Offering | 4.025 | $ | 19.28 | (3) | $ | 77 | |||||||||||||||||||||
12/13/16 to 12/29/16 | ATM | 0.407 | $ | 19.47 | (4) | $ | 8 | |||||||||||||||||||||
1/20/17 to 2/2/17 | ATM | 0.197 | $ | 19.18 | (4) | $ | 4 | |||||||||||||||||||||
3/10/17 | Public Offering | 3.450 | $ | 18.73 | (3) | $ | 64 | |||||||||||||||||||||
5/17/17 to 6/22/17 | ATM | 1.376 | $ | 22.71 | (4) | $ | 31 |
Includes shares issued in connection with the exercise of the underwriters’ option to purchase additional shares. |
Net proceeds from the offerings is shown after deducting underwriting discounts, commissions and other offering costs. |
Represents the price per share at which the underwriters in our public offerings purchased shares from our company. |
Represents the average price per share at which investors in our ATM offerings purchased shares from our company. |
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Awards of Shares of Restricted Common Stock under our 2013 Plan
We recognize equity-based compensation expense as described in Note 2 and have issued both awards with service, conditionsperformance and awards with both service and performancemarket conditions. During the ninesix months ended SeptemberJune 30, 2016,2017, our board of directors awarded employees and directors 367,753707,648 shares of restricted common stock and restricted stock units that vest in 20162017 to 2019 and 291,000 shares of restricted common stock to certain employees that vest upon the achievement of certain performance targets.2020. As of SeptemberJune 30, 2016,2017, as it relates to previously issued awards with performance conditions, we have concluded that it is probable that the performance conditions will be met.
For the three and ninesix months ended SeptemberJune 30, 2016,2017, we recorded $3 million and $7$6 million, respectively, of equity-based compensation expense as compared to $3 million and $8$5 million, respectively, for the three and ninesix months ended SeptemberJune 30, 2015.2016. The total unrecognized compensation expense related to awards of shares of restricted common stock and restricted stock units was approximately $12$17 million as of SeptemberJune 30, 2016, that is expected2017. We expect to be recognizedrecognize compensation expense related to these awards over a weighted-average term of approximately two years. As part of the implementation of ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting,” we will recognize forfeitures when they occur as opposed to the previous requirement under which we reduced equity-based compensation expense for an estimated forfeiture rate of up to 5%. Expenses recognized year to date, and the adjustment to retained earnings for the equity-based compensation expense previously recognized, from the adoption of this change was approximately $1 million.
A summary of the unvested shares of restricted common stock that have been issued is as follows:
Restricted Shares of Common Stock | Weighted Average Share Price | Value (in millions) | Restricted Shares of Common Stock | Weighted Average Share Price | Value (in millions) | |||||||||||||||||||
Balance — December 31, 2014 | 964,820 | $ | 13.41 | $ | 12.9 | |||||||||||||||||||
Ending Balance — December 31, 2015 | 1,248,069 | $ | 15.16 | $ | 18.9 | |||||||||||||||||||
Granted | 586,648 | 17.29 | 10.2 | 661,055 | 18.62 | 12.3 | ||||||||||||||||||
Vested | (285,289 | ) | 13.61 | (3.9 | ) | (716,264 | ) | 14.03 | (10.0 | ) | ||||||||||||||
Forfeited | (18,110 | ) | 15.54 | (0.3 | ) | (11,188 | ) | 17.25 | (0.2 | ) | ||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Balance — December 31, 2015 | 1,248,069 | $ | 15.16 | $ | 18.9 | |||||||||||||||||||
Ending Balance — December 31, 2016 | 1,181,672 | $ | 17.76 | $ | 21.0 | |||||||||||||||||||
Granted | 658,753 | 18.62 | 12.3 | 451,614 | 19.04 | 8.6 | ||||||||||||||||||
Vested | (572,174 | ) | 13.79 | (7.9 | ) | (216,657 | ) | 14.12 | (3.1 | ) | ||||||||||||||
Forfeited | (11,188 | ) | 17.25 | (0.2 | ) | — | — | — | ||||||||||||||||
|
|
|
|
|
| |||||||||||||||||||
Ending Balance — September 30, 2016 | 1,323,460 | $ | 17.46 | $ | 23.1 | |||||||||||||||||||
Ending Balance — June 30, 2017 | 1,416,629 | $ | 18.72 | $ | 26.5 | |||||||||||||||||||
|
|
|
|
|
12. Earnings per Share
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A summary of Common Stockthe unvested shares of restricted stock units that have market based vesting conditions that have been issued is as follows:
Restricted Stock Units | Weighted Average Share Price | Value (in millions) | ||||||||||
Ending Balance — December 31, 2016 | — | — | ��� | |||||||||
Granted | 256,034 | $ | 18.99 | $ | 4.9 | |||||||
Vested | — | — | — | |||||||||
Forfeited | — | — | — | |||||||||
|
|
|
|
|
| |||||||
Ending Balance — June 30, 2017 | 256,034 | $ | 18.99 | $ | 4.9 | |||||||
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|
|
|
12. | Earnings per Share of Common Stock |
Both the netNet income or loss attributable to the non-controlling OP units and the non-controlling limited partners’ outstanding OP units have been excluded from netNet income or loss and the diluted earnings per share calculation attributable to common stockholders.
- 23 -
Unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and are included in the computation of earnings per share pursuant to the two-class method. Any shares of common stock which, if included in the diluted earnings per share calculation, would have an anti-dilutive effect have been excluded from the diluted earnings per share calculation.
The computation of basic and diluted earnings per common share of common stock is as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||
Numerator: | 2016 | 2015 | 2016 | 2015 | 2017 | 2016 | 2017 | 2016 | ||||||||||||||||||||||||
(in millions, except share and per share data) | (in millions, except share and per share data) | |||||||||||||||||||||||||||||||
Net income attributable to controlling shareholders and participating securities | $ | 3.3 | $ | 2.1 | $ | 10.2 | $ | 5.7 | ||||||||||||||||||||||||
Net income attributable to controlling stockholders and participating securities | $ | 12.3 | $ | 3.8 | $ | 19.5 | $ | 6.9 | ||||||||||||||||||||||||
Less: Dividends paid on participating securities | (0.4 | ) | (0.3 | ) | (1.3 | ) | (1.0 | ) | (0.4 | ) | (0.4 | ) | (0.9 | ) | (0.9 | ) | ||||||||||||||||
Undistributed earnings attributable to participating securities | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
|
|
|
|
|
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| |||||||||||||||||||||||||
Net income attributable to controlling shareholders | $ | 2.9 | $ | 1.8 | $ | 8.9 | $ | 4.7 | ||||||||||||||||||||||||
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|
| |||||||||||||||||||||||||||||
Net income attributable to controlling stockholders | $ | 11.9 | $ | 3.4 | $ | 18.6 | $ | 6.0 | ||||||||||||||||||||||||
|
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|
| |||||||||||||||||||||||||||||
Denominator: | ||||||||||||||||||||||||||||||||
Weighted-average number of common shares — basic | 41,988,036 | 31,221,982 | 38,924,977 | 29,046,742 | 50,573,996 | 37,737,026 | 49,044,051 | 37,376,618 | ||||||||||||||||||||||||
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| |||||||||||||||||||||||||
Weighted-average number of common shares — diluted | 41,988,036 | 31,221,982 | 38,924,977 | 29,046,742 | 50,573,996 | 37,737,026 | 49,044,051 | 37,376,618 | ||||||||||||||||||||||||
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|
|
|
|
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| |||||||||||||||||||||||||
Basic earnings per common share | $ | 0.07 | $ | 0.06 | $ | 0.23 | $ | 0.16 | $ | 0.23 | $ | 0.09 | $ | 0.38 | $ | 0.16 | ||||||||||||||||
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|
|
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| |||||||||||||||||||||||||
Diluted earnings per common share | $ | 0.07 | $ | 0.06 | $ | 0.23 | $ | 0.16 | $ | 0.23 | $ | 0.09 | $ | 0.38 | $ | 0.16 | ||||||||||||||||
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|
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| |||||||||||||||||||||||||
Other Information: | ||||||||||||||||||||||||||||||||
Weighted-average number of OP units | 284,992 | 284,992 | 284,992 | 298,218 | 284,992 | 284,992 | 284,992 | 284,992 | ||||||||||||||||||||||||
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|
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| |||||||||||||||||||||||||
Unvested restricted common stock outstanding | 1,323,460 | 1,297,584 | ||||||||||||||||||||||||||||||
Unvested restricted common stock outstanding as of | 1,416,629 | 1,330,026 | ||||||||||||||||||||||||||||||
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|
| |||||||||||||||||||||||||||||
Unvested restricted stock units outstanding as of | 256,034 | 0 | ||||||||||||||||||||||||||||||
|
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13. Equity Method Investments in Affiliate
13. | Equity Method Investments |
As described in Notes 1 and 2, weWe have noncontrolling unconsolidated equity investments in entities that own minority interests in renewable energy projects.projects and in one case, real estate. We recognized income from our equity method investments of $1.3$8.4 million and $2.7$12.5 million during the three and ninesix months ended SeptemberJune 30, 2016,2017, respectively, from our equity method investments, as compared to a income of $0.2$1.1 million and a loss of $0.2$1.3 million during the three and ninesix months ended SeptemberJune 30, 2015, respectively.2016. We describe our accounting for noncontrolling equity investments in Note 2.
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The following is a summary of the consolidated financial position and results of operations of the significant holding companies, accounted for using the equity method:method.
As of June 30, 2016 | As of December 31, 2015 | As of March 31, 2017 | As of December 31, 2016 | |||||||||||||
(dollars in millions, unaudited) | (dollars in millions, unaudited) | |||||||||||||||
Current Assets | $ | 57 | $ | 72 | $ | 3 | $ | 3 | ||||||||
Total Assets | $ | 1,651 | $ | 1,724 | $ | 115 | $ | 99 | ||||||||
Current Liabilities | $ | 18 | $ | 18 | $ | 4 | $ | 4 | ||||||||
Total Liabilities | $ | 68 | $ | 68 | $ | 38 | $ | 39 | ||||||||
Members’ Equity | $ | 1,583 | $ | 1,656 | $ | 77 | $ | 60 | ||||||||
For the six months ended June 30, | ||||||||||||||||
2016 | 2015 | |||||||||||||||
(dollars in millions, unaudited) | ||||||||||||||||
Revenue | $ | 66 | $ | 77 | ||||||||||||
Income from Continuing Operations | $ | (5 | ) | $ | 21 | |||||||||||
Net Income | $ | (5 | ) | $ | 21 |
For the three months ended March 31, | ||||||||
2017 | 2016 | |||||||
(dollars in millions, unaudited) | ||||||||
Revenue | $ | 3 | $ | 3 | ||||
Income from Continuing Operations | $ | 1 | $ | 0 | ||||
Net income | $ | 1 | $ | 0 |
- 2426 -
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
In this Form 10-Q, unless specifically stated otherwise or the context otherwise indicates, references to “we,” “our,” “us,” and “HASI” refer to Hannon Armstrong Sustainable Infrastructure Capital, Inc., a Maryland corporation, Hannon Armstrong Sustainable Infrastructure, L.P., and any of our other subsidiaries. Hannon Armstrong Sustainable Infrastructure, L.P. is a Delaware limited partnership of which we are the sole general partner and to which we refer in this Form 10-Q as our “Operating Partnership.”
The following discussion is a supplement to and should be read in conjunction with the accompanying condensed consolidated financial statementsCondensed Consolidated Financial Statements and related notes and with our 2015Annual Report on Form 10-K for the year ended December 31, 2016 as amended by our Amendment No. 1 to our Annual Report on Form 10-K for the year ended December 31, 2016 (collectively, our “2016 Form 10-K”) that was filed with the SEC.
Our Business
We providemake debt and equity financing to theinvestments in sustainable infrastructure, including energy efficiency and renewable energy markets. We focus on providing preferred or senior level capitalenergy. Our goal is to established sponsors and high credit quality obligors for assetsdeliver attractive risk-adjusted returns to our stockholders by investing in projects that generate long-term, recurring and predictable cash flows.flows or cost savings. The cash flows or cost savings are generally generated from proven technologies that minimize performance uncertainty, enabling us to more accurately predict project cash flow over the term of the financing or investment. Our financings typically benefit from contractually committed obligations of government entities or private, high credit quality obligors. Our investments take various forms, including lending or financing transactions, land ownership and a variety of preferred and common equity structures with a preference for structures in which we hold a senior or preferred position in the capital structure.
We are internally managed and our management team has extensive industry knowledge and experience having completed its first renewable energy financing over 25 years ago and its first energy efficiency financing over 1520 years ago. We have deep and long-standing relationships in the markets we target with leading energy service providers, manufacturers, project developers and owners. We originate many of our transactions through programmatic finance relationships with global energy service companies (“ESCOs”), such as Honeywell International, Ingersoll Rand, Johnson Controls, Schneider Electric, Siemens and United Technologies. We also originate transactions with renewable energy manufacturers, developers and operators such as EDF Renewable Energy, EDP Renewables, E.ON, First Solar, Invenergy, SunPower and other companies who own and operate renewable energy projects, including a number of U.S. utility companies. Additionally, we rely on relationships with a variety of key financial participants, including institutional investors, private equity funds, senior lenders, and investment and commercial banks, as well as leading intermediaries, to complement our origination and financing activities. We believe we are the leading provider of financing for energy efficiency projects for the U.S. federal government, the largest property owner and energy user in the United States.
We focus our investment activities primarily on:
• | Energy Efficiency Projects: projects, typically undertaken by ESCOs, |
• | Renewable Energy Projects: projects that deploy cleaner energy sources, such as solar and wind to generate power production. |
We make debt and air conditioning systems (“HVAC systems”), lighting, energy controls, roofs, windows, building shells, and/or combined heat and power systems; and
We may also provide financing solutions for other projects, such as water or communications infrastructure, that improve water or energy efficiency, increase energy system resiliency, positively impact the environment or more efficiently use natural resources.
Our goal is to deliver attractive risk-adjusted returns to our stockholders by investingequity investments in projects that generate long-term, recurring and predictable cash flows or cost savings. The cash flows or cost savings are generally generated from proven technologies that minimize performance uncertainty, enabling us to more accurately predict project cash flow over the term of the financing or investment. We provide capital through debt financings and a variety of preferred and common equity structures with a preference for structures in which we hold a senior or preferred position in the capital structure.
- 25 -
Our financings typically benefit from contractually committed obligations of government entities or private, high credit quality obligors. When we provide financing for energy efficiency projects, wewhich reduce the amount or cost of energy usage. We are usually assigned the payment stream and other contractual rights, often using our pre-existing master purchase agreements with the ESCOs. Our financings are generally also secured by the installed improvements. Forimprovements in the building or other real estate rights.
- 27 -
We also provide debt and equity investments, or own the land used, for renewable energy projects wesuch as solar or wind. We focus on thoseprojects that use proven technology and that often have contractually committed agreements, such as power purchase agreements (“PPAs”), with high credit quality utilities or large electricity users under which the utility or user purchases the power produced by the project at a minimum price with potential price escalators for a portion of the project’s estimated life. These projects may be distributed (building or facility specific and may be combined with other energy efficiency projects)specific) or utility-scale (standalone projects designed to sell power to electric utilities or large users).
We own approximately 20,000 acres of land that are leased under long-term agreements to over 45 renewable energy projects, which we have recorded in our financial statements as real estate, and also have rights to payments from land leases for a diversified portfolio of over 50 wind and solar projects, which we have recorded in our financial statements as financing receivables. We have equity investments in renewable energy projects operated by various renewable energy companies and in a joint venture that owns land leased to several solar projects. These transactions enable us to participate in the cash flows associated with these projects, typically on a priority basis.
We may also invest in other projects, such as water, electric or communications infrastructure, that improve water or energy efficiency, increase energy system resiliency, positively impact the environment or more efficiently use natural resources.
We completed approximately $242$400 million and $712$690 million of transactions during the three months and ninesix months ended SeptemberJune 30, 2016,2017, respectively, compared to approximately $140$257 million and $595$470 million induring the same periodsperiod in 2015. Our2016. As of June 30, 2017, pursuant to our strategy includesof holding a large portion of these transactions on our balance sheet. sheet, we held approximately $2.1 billion of transactions on our balance sheet, which we refer to as our “Portfolio”, including approximately 91% of our 2017 transactions.
For those transactions that we choose not to hold on our balance sheet, we transfer all or a portion of the economics of the transaction, typically using securitization trusts, to institutional investors in exchange for upfront revenues and in some cases, ongoing fees for managing the assets. We securitized or sold approximately 46% of our 2016 transactions.
As of SeptemberJune 30, 2016 we held approximately $1.4 billion of transactions on our balance sheet, which we refer to as our “Portfolio.” Our Portfolio included the following as of September 30, 2016:
For more information on the assets included in our Portfolio, see the “Our Portfolio” section of Financial Condition and Results of Operation discussed below.
As of September 30, 2016,2017, we managed approximately $2.2$2.5 billion in these trusts or vehicles that are not consolidated on our balance sheet. When combined with our Portfolio, as of SeptemberJune 30, 2016,2017, we managedmanage approximately $3.6$4.6 billion of assets which we refer to as our managed assets.
Since April 2013,We finance our Portfolio with a combination of debt and equity. During the six months ended June 30, 2017, we have raised net proceedsissued approximately $99 million of approximately $560 million in public offerings of our common stockequity and completed approximately $610$360 million of nonrecourse borrowings and secured credit facilities with maximum capacity of $550 million.debt financings.
We have a large and active pipeline of potential new opportunities that are in various stages of our underwriting process. We refer to potential opportunities as being part of our pipeline if we have determined that the project fits within our investment strategy and exhibits the appropriate risk/reward characteristics through an initial credit analysis, including a quantitative and qualitative assessment of the opportunity, as well as research on the market and sponsor. Our pipeline of transactions that could potentially close in the next 12 months consists of opportunities in which we will be the lead originator, as well as projects in which we may participate with other institutional investors. As of SeptemberJune 30, 2016,2017, our pipeline consisted of more than $2.5 billion in new debt and equity opportunities. There can, however, be no assurance if, or when,that any or all of the transactions in our pipeline will be completed.completed or with regard to any specific terms of such pipeline transactions.
We elected to be, and intend to continue to operate our business so as to qualify to be taxed as a REIT for U.S. federal income tax purposes, commencing with our taxable year ended December 31, 2013. We also intend to continue to operate our business in a manner that will permit us to maintain our exception from registration as an investment company under the 1940 Act.
- 26 -
Factors Impacting our Operating Results
We expect that our results of operations will be affected by a number of factors and will primarily depend on the size of our Portfolio, including the mix of transactions which we hold in our Portfolio, the income we receive from securitizations, syndications and other services, our Portfolio’s credit risk profile, changes in market interest rates and liquidity, commodity prices, U.S. federal, state and/or municipal governmental policies, general market conditions in local, regional and national economies and our ability to qualify as a REIT and maintain our exception from registration as an investment company under the 1940 Act. We provide a summary of the factors impacting our operating results in our 20152016 Form 10-K under “MD&A – Factors Impacting our Operating Results.”
- 28 -
Critical Accounting Policies and Use of Estimates
Our financial statements are prepared in accordance with U.S. GAAP, which requires the use of estimates and assumptions that involve the exercise of judgment and use of assumptions as to future uncertainties. Understanding our accounting policies and the extent to which we use management judgment and estimates in applying these policies is integral to understanding our financial statements. We provide a summary of our significant accounting policies under Note 2 in our 20152016 Form 10-K and under Note 2 of this Form 10-Q.
We have identified the following accounting policies as critical because they require significant judgments and assumptions about highly complex and inherently uncertain matters and the use of reasonably different estimates and assumptions could have a material impact on our reported results of operations or financial condition. These critical accounting policies govern:
We evaluate our critical accounting estimates and judgments on an ongoing basis and update them, as necessary, based on changing conditions.
We provide additional information on our critical accounting policies and use of estimates under “MD&A—Critical Accounting Policies and Use of Estimates” in our 20152016 Form 10-K.
Financial Condition and Results of Operation
Our Portfolio
AsOur Portfolio totaled approximately $2.1 billion as of SeptemberJune 30, 2016, our Portfolio was approximately $1.4 billion2017, and included $0.4approximately $0.5 billion of energy efficiency, investments and approximately $1.0$1.4 billion of renewable energy (wind and solar) transactions.and approximately $0.2 billion of other sustainable infrastructure investments. Approximately 65%60% of our Portfolio consisted of fixed rate loans, financing receivables, direct financing leases or debt securities, approximately 12%investments. Approximately 14% of our Portfolio was real estate investments with long-term leases and approximately 23%26% of our Portfolio represented minorityunconsolidated equity ownership of renewable energy related projects. Our real estate investments consist of over 15,000 acres of land leased under long-term lease agreements with over 35 renewable energy projects.
- 27 -
Excluding our equity investments, approximately 38% of our Portfolio consisted of U.S. federal government or state or local government obligors, approximately 60% consistedover 165 transactions with an average size of investment grade commercial obligations and 2% consisted of non-investment grade rated commercial obligations, in all cases rated either by an independent third party rating service or our internal credit rating system. Our Portfolio, as of September 30, 2016, included approximately 122 transactions of greater than $1$12 million and had athe weighted average remaining life of our Portfolio (excluding match-funded transactions) of approximately 11 years. For further information on our12 years as of June 30, 2017.
Our Portfolio see Notes 1included the following as of June 30, 2017:
- 29 -
We generally refer to our financial statements of this Form 10-Q.
both financing receivables and debt securities as debt investments. The table below provides details on the interest rate and maturity of our financing receivables and investments as of SeptemberJune 30, 2016:2017:
Balance in Millions | Maturity | Balance (in millions) | Maturity | |||||||||||||
Fixed-rate financing receivables, interest rates less than 5.00% per annum | 346 | 2017 to 2040 | $ | 485 | 2018 to 2046 | |||||||||||
Fixed-rate financing receivables, interest rates from 5.01% to 6.50% per annum | 311 | 2017 to 2046 | 456 | 2017 to 2046 | ||||||||||||
Fixed-rate financing receivables, interest rates greater than 6.50% per annum | 208 | 2018 to 2069 | 199 | 2018 to 2069 | ||||||||||||
|
| |||||||||||||||
Financing receivables | 865 | 1,140 | ||||||||||||||
Allowance for credit losses | — | — | ||||||||||||||
|
| |||||||||||||||
Financing receivables, net of allowance | 865 | 1,140 | ||||||||||||||
Financing receivables held-for-sale, interest rates of less than 5.00% per annum | 7 | 2032 | ||||||||||||||
Fixed-rate investment in debt securities, interest rates of less than 5.50% per annum | 50 | 2025 to 2038 | ||||||||||||||
Fixed-rate investment in debt securities, interest rates of less than 5.00% per annum | 118 | 2025 to 2041 | ||||||||||||||
Fixed-rate investment in debt securities, interest rates from 5.01% to 6.50% per annum | 8 | 2031 to 2047 | ||||||||||||||
|
| |||||||||||||||
Total Financing Receivables and Investments | $ | 922 | $ | 1,266 | ||||||||||||
|
|
The table below presents, for each major category of our Portfolio and the related interest-bearing liabilities, the average outstanding balances, investment income earned, the interest expense incurred, and average yield or cost. Our earnings from our equity method investments are not included in Total Revenue and thus we have excluded our equity method investments and the related earnings and interest expenses from these calculations. Our net investment margin represents the difference between the interest, investment and rental income generated by our Portfolio and the interest expense, divided by our Portfolio balance.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||
(dollars in millions) | ||||||||||||||||
Interest Income, Financing receivables | $ | 12 | $ | 10 | $ | 36 | $ | 27 | ||||||||
Average monthly balance of financing receivables | $ | 805 | $ | 746 | $ | 843 | $ | 666 | ||||||||
Average interest rate from financing receivables | 6.0 | % | 5.4 | % | 5.7 | % | 5.3 | % | ||||||||
Interest Income, Investments | $ | 0.5 | $ | 0.4 | $ | 1.3 | $ | 1.1 | ||||||||
Average monthly balance of investments | $ | 50 | $ | 29 | $ | 41 | $ | 27 | ||||||||
Average interest rate of investments | 4.0 | % | 5.0 | % | 4.2 | % | 5.4 | % | ||||||||
Rental Income | $ | 3 | $ | 2 | $ | 9 | $ | 6 | ||||||||
Average monthly balance of real estate | $ | 162 | $ | 153 | $ | 162 | $ | 135 | ||||||||
Average yield on real estate | 7.3 | % | 5.2 | % | 7.2 | % | 6.5 | % | ||||||||
Average monthly balance of Portfolio | $ | 1,017 | $ | 928 | $ | 1,045 | $ | 829 | ||||||||
Average yield from Portfolio | 6.1 | % | 5.4 | % | 5.9 | % | 5.5 | % | ||||||||
Investment interest expense(1) | $ | 7 | $ | 5 | $ | 22 | $ | 14 | ||||||||
Average monthly balance of debt(1) | $ | 650 | $ | 625 | $ | 705 | $ | 556 | ||||||||
Average interest rate from debt(1) | 4.3 | % | 3.3 | % | 4.2 | % | 3.3 | % | ||||||||
Average interest spread(1) | 1.8 | % | 2.1 | % | 1.7 | % | 2.2 | % | ||||||||
Net investment margin(1) | 3.3 | % | 3.2 | % | 3.1 | % | 3.3 | % |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(dollars in millions) | ||||||||||||||||
Interest income, financing receivables | $ | 14 | $ | 13 | $ | 28 | $ | 24 | ||||||||
Average monthly balance of financing receivables | $ | 995 | $ | 853 | $ | 1,014 | $ | 862 | ||||||||
Average interest rate from financing receivables | 5.5 | % | 5.9 | % | 5.5 | % | 5.6 | % | ||||||||
Interest income, investments | $ | 1 | $ | 1 | $ | 2 | $ | 1 | ||||||||
Average monthly balance of investments | $ | 128 | $ | 44 | $ | 108 | $ | 37 | ||||||||
Average interest rate of investments | 4.3 | % | 4.0 | % | 4.2 | % | 4.4 | % | ||||||||
Rental income | $ | 5 | $ | 3 | $ | 9 | $ | 6 | ||||||||
Average monthly balance of real estate | $ | 282 | $ | 163 | $ | 257 | $ | 161 | ||||||||
Average yield on real estate | 6.9 | % | 7.3 | % | 7.0 | % | 7.2 | % | ||||||||
Average monthly balance of Portfolio | $ | 1,405 | $ | 1,060 | $ | 1,379 | $ | 1,060 | ||||||||
Average yield from Portfolio | 5.7 | % | 6.1 | % | 5.7 | % | 5.8 | % | ||||||||
Interest expense(1) | $ | 12 | $ | 8 | $ | 22 | $ | 15 | ||||||||
Average monthly balance of debt(1) | $ | 1,001 | $ | 739 | $ | 953 | $ | 733 | ||||||||
Average interest rate from debt(1) | 4.6 | % | 4.1 | % | 4.6 | % | 4.1 | % | ||||||||
Average interest spread(1) | 1.1 | % | 2.0 | % | 1.1 | % | 1.7 | % | ||||||||
Net investment margin(1) | 2.4 | % | 3.2 | % | 2.5 | % | 2.9 | % |
(1) | Excludes the nonrecourse debt used to finance the equity investments in the renewable energy projects because our earnings from the equity investments in the renewable energy projects are not included in total revenue. |
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The following table provides a summary of our anticipated principal repayments for our financing receivables and investments as of SeptemberJune 30, 2016:2017:
Payment due by Period | ||||||||||||||||||||
Total | Less than 1 year | 1-5 years | 5-10 years | More than 10 years | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Financing Receivables(1) | $ | 865 | $ | 59 | $ | 157 | $ | 239 | $ | 410 | ||||||||||
Investments | $ | 50 | $ | 1 | $ | 6 | $ | 5 | $ | 38 |
Payment due by Period | ||||||||||||||||||||
Total | Less than 1 year | 1-5 years | 5-10 years | More than 10 years | ||||||||||||||||
(dollars in millions) | ||||||||||||||||||||
Financing receivables | $ | 1,140 | $ | 16 | $ | 142 | $ | 299 | $ | 683 | ||||||||||
Investments | $ | 126 | $ | 1 | $ | 4 | $ | 4 | $ | 117 |
See Note 6 to our financial statements in this Form 10-Q:
- 30 -
For information on our residual assets relating to our securitization trusts, see Note 5 to our financial statements in this Form 10-Q. The residual assets do not have a contractual maturity date and the underlying securitized assets have contractual maturity dates until 2040.
As previously discussed in our 2015 Form 10-K, along with other regulatory filings, we held a $13 million senior secured debt investment, along with a large financial institution who held the remaining approximately $45 million in outstanding debt securities, in an operating wind project that was being foreclosed upon and expected to be sold. The foreclosure and sale was completed in 2016 and we recovered the full value of our debt investment and recognized a gain of $0.8 million.
We had no financing receivables, investments or leases on nonaccrual status as of September 30, 2016 or December 31, 2015. We did not have any loan modifications that qualify as troubled debt restructurings for the three or nine months ended September 30, 2016 or 2015.2046.
Results of Operations
Comparison of the Three Months Ended SeptemberJune 30, 20162017 vs. Three Months Ended SeptemberJune 30, 20152016
Three Months Ended September 30, | Three Months Ended June 30, | |||||||||||||||||||||||||||||||
2016 | 2015 | $ Change | % Change | 2017 | 2016 | $ Change | % Change | |||||||||||||||||||||||||
(dollars in millions) | (dollars in millions) | |||||||||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||||||
Interest Income, Financing receivables | $ | 12 | $ | 10 | $ | 2 | 20 | % | ||||||||||||||||||||||||
Interest Income, Investments | 0 | 0 | 0 | NM | ||||||||||||||||||||||||||||
Rental Income | 3 | 2 | 1 | 50 | % | |||||||||||||||||||||||||||
Interest income, financing receivables | $ | 14 | $ | 13 | $ | 1 | 8 | % | ||||||||||||||||||||||||
Interest income, investments | 1 | 1 | — | — | ||||||||||||||||||||||||||||
Rental income | 5 | 3 | 2 | 67 | % | |||||||||||||||||||||||||||
Gain on sale of receivables and investments | 3 | 3 | — | NM | 7 | 5 | 2 | 40 | % | |||||||||||||||||||||||
Fee income | 1 | 0 | 1 | 100 | % | 1 | — | 1 | NM | |||||||||||||||||||||||
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| |||||||||||||||||||||||||||
Total Revenue | 19 | 15 | 4 | 27 | % | 28 | 22 | 6 | 27 | % | ||||||||||||||||||||||
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Expenses: | ||||||||||||||||||||||||||||||||
Investment interest expense | (11 | ) | (7 | ) | (4 | ) | (57 | )% | ||||||||||||||||||||||||
Interest expense | 15 | 11 | 4 | 36 | % | |||||||||||||||||||||||||||
Compensation and benefits | (4 | ) | (4 | ) | — | NM | 6 | 6 | — | — | ||||||||||||||||||||||
General and administrative | (2 | ) | (2 | ) | — | NM | 3 | 2 | 1 | 50 | % | |||||||||||||||||||||
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Total Expenses | (17 | ) | (13 | ) | (4 | ) | (31 | )% | 24 | 19 | 5 | 26 | % | |||||||||||||||||||
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Income before equity method investments in affiliates | 2 | 2 | — | NM | ||||||||||||||||||||||||||||
Income from equity method investments | 1 | — | 1 | 100 | % | |||||||||||||||||||||||||||
Income (loss) before equity method investments | 4 | 3 | 1 | 33 | % | |||||||||||||||||||||||||||
Income (loss) from equity method investments | 8 | 1 | 7 | 700 | % | |||||||||||||||||||||||||||
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| |||||||||||||||||||||||||||
Net income before income tax | 3 | 2 | 1 | 50 | % | |||||||||||||||||||||||||||
Net income (loss) before income tax | 12 | 4 | 8 | 200 | % | |||||||||||||||||||||||||||
Income tax expense | — | — | — | NM | — | — | — | NM | ||||||||||||||||||||||||
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Net Income | $ | 3 | $ | 2 | $ | 1 | 50 | % | ||||||||||||||||||||||||
Net income (loss) | $ | 12 | $ | 4 | $ | 8 | 200 | % | ||||||||||||||||||||||||
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* | NM – Percentage change is not meaningful. |
- 29 -
- 31 -
Comparison of the NineSix Months Ended SeptemberJune 30, 20162017 vs. NineSix Months Ended SeptemberJune 30, 20152016
Nine Months Ended September 30, | ||||||||||||||||
2016 | 2015 | $ Change | % Change | |||||||||||||
(dollars in millions) | ||||||||||||||||
Revenue: | ||||||||||||||||
Interest Income, Financing receivables | $ | 36 | $ | 27 | $ | 9 | 33 | % | ||||||||
Interest Income, Investments | 1 | 1 | — | NM | ||||||||||||
Rental Income | 9 | 6 | 3 | 50 | % | |||||||||||
Gain on sale of receivables and investments | 14 | 7 | 7 | 100 | % | |||||||||||
Fee income | 1 | 1 | — | NM | ||||||||||||
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| |||||||||||
Total Revenue | 61 | 42 | 19 | 45 | % | |||||||||||
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Expenses: | ||||||||||||||||
Investment interest expense | (33 | ) | (19 | ) | (14 | ) | (74 | )% | ||||||||
Compensation and benefits | (14 | ) | (12 | ) | (2 | ) | (17 | )% | ||||||||
General and administrative | (6 | ) | (5 | ) | (1 | ) | (20 | )% | ||||||||
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Total Expenses | (53 | ) | (36 | ) | (17 | ) | (47 | )% | ||||||||
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Income before equity method investments in affiliates | 8 | 6 | 2 | 33 | % | |||||||||||
Income (loss) in equity method investments | 2 | — | 2 | 100 | % | |||||||||||
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Net income before income tax | 10 | 6 | 4 | 67 | % | |||||||||||
Income tax (expense) benefit | — | — | — | NM | ||||||||||||
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Net Income | $ | 10 | $ | 6 | $ | 4 | 67 | % | ||||||||
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Six Months Ended June 30, | ||||||||||||||||
2017 | 2016 | $ Change | % Change | |||||||||||||
(dollars in millions) | ||||||||||||||||
Revenue: | ||||||||||||||||
Interest income, financing receivables | $ | 28 | $ | 24 | $ | 4 | 17 | % | ||||||||
Interest income, investments | 2 | 1 | 1 | 100 | % | |||||||||||
Rental income | 9 | 6 | 3 | 50 | % | |||||||||||
Gain on sale of receivables and investments | 12 | 10 | 2 | 20 | % | |||||||||||
Fee income | 1 | 1 | — | NM | ||||||||||||
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| |||||||||||
Total Revenue | 52 | 42 | 10 | 24 | % | |||||||||||
Expenses: | ||||||||||||||||
Interest expense | 29 | 22 | 7 | 32 | % | |||||||||||
Compensation and benefits | 11 | 10 | 1 | 10 | % | |||||||||||
General and administrative | 5 | 4 | 1 | 25 | % | |||||||||||
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| |||||||||||
Total Expenses | 45 | 36 | 9 | 25 | % | |||||||||||
Income (loss) before equity method investments | 7 | 6 | 1 | 17 | % | |||||||||||
Income (loss) from equity method investments | 13 | 1 | 12 | 1200 | % | |||||||||||
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| |||||||||||
Net income (loss) before income tax | 20 | 7 | 13 | 186 | % | |||||||||||
Income tax expense | — | — | — | NM | ||||||||||||
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Net income (loss) | $ | 20 | $ | 7 | $ | 13 | 186 | % | ||||||||
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* | NM – Percentage change is not meaningful. |
- 30 -
- 32 -
Non-GAAP Financial Measures
We consider the followingnon-GAAP financial measures useful to investors as key supplemental measures of our performance: (1) core earningsCore Earnings and (2) managed assets. Thesenon-GAAP financial measures should be considered along with, but not as alternatives to, net income or loss as measures of our operating performance. Thesenon-GAAP financial measures, as calculated by us, may not be comparable to similarly named financial measures as reported by other companies that do not define such terms exactly as we define such terms.
Core Earnings
We calculate Core Earnings as U.S. GAAP netNet income excluding non-cash equity compensation expense, non-cash provision for credit losses, amortization of intangibles, any one-time acquisition related costs if any and anyor non-cash tax charges.charges and the earnings attributable to our non-controlling interest of our operating partnership. We also make an adjustment to account for our equity method investments in the renewable energy projects as described below. In the future, Core Earnings may also exclude one-time events pursuant to changes in U.S. GAAP and certain other non-cash charges as approved by a majority of our independent directors.
OurCertain of our equity method investments in the renewable energy projects are structured using typical partnership “flip” structures where we, along with any other institutional investors, if any, receive a pre-negotiated preferred return consisting of priority distributions from the project cash flows, in many cases, along with tax attributes. Once this preferred return is achieved, the partnership flips“flips” and the renewable energy company, which operates the project, receives more of the cash flows through its equity interests with thewhile we, and any other institutional investors, retainingretain an ongoing residual interest. TheWe typically negotiate the purchase prices of these projects, which have a finite expected life, based on our assessment of the expected cash flows in renewable energywe will receive from these projects are often significantly different fromdiscounted back to the net income duepresent value, based on a target investment rate, with the expected cash flows to high levelsbe received in the future reflecting both a return on the capital (at the investment rate) and a return of depreciation and other non-cash expense and the agreed upon allocationcapital we have committed to the project. This is also similar to how we negotiate many of cash flow in a project with these preferred returns may be different than the profit and loss allocation.our financing receivables.
Under U.S. GAAP, we account for these investments utilizing the hypothetical liquidation at book value method (“HLBV”), in this case, at the end of the immediately preceding quarter. method. Under this method, we recognize income or loss based on the change in the amount each partner would receive, typically based on the negotiated profit and loss allocation, if the assets were liquidated at book value, after adjusting for any distributions or contributions made during such quarter. GivenThe HLBV allocations of income or loss are also impacted by the structurereceipt of the investments, we negotiated the purchase prices of our renewable energy investments based on our assessment of the expected cash flows we will receive from each investment discounted back to net present value based on a discount rate that represented an expected yield on the investment. This is similar to how we value the expected cash flows in financing receivables. In an attempt to treat these investments in a manner similar to our other investments and our initial valuation and because we are entitled to receive a preferred return of cash flows on our investments independent of how profits and lossestax attributes, as tax equity investors are allocated losses in
- 31 -
calculating Core Earnings for proportion to the below periods, we include as Core Earningstax benefits received while the distributions received from these investments less an estimated return of capital. Generally, under this methodology, we reflect our initial capital investment as being amortized over the lifesponsors of the project usingare allocated gains of a constant yield. The initial constant yield we selected is equal tosimilar amount. In addition, the discount rates we determined when making our investment decisions. On at least a quarterly basis, we will review and, if appropriate, adjustagreed upon allocations of the discount rates and the expected amortization for purposes of calculating Core Earnings in future periods, as necessary, to reflect changes in both actualproject’s cash flows received and our estimates of the future cash flowsmay differ materially from the projects. Ourprofit and loss allocation of profits and losses in certain of our equity investment transactions is projected to change in 2019, which is expected to result in an increase ofused for the amount of HLBV profits or losses allocated to us.calculations.
As of September 30, 2016, we have outstanding borrowings of approximately $244 million, most of which is on a nonrecourse basis, usingThe cash distributions for our equity method investments are segregated into a return on and return of capital on our cash flow statement based on the cumulative income that has been allocated using the HLBV method. However, as collateral. Includeda result of the application of the HLBV method, including the impact of tax allocations, the high levels of depreciation and other non-cash expenses that are common to renewable energy projects and the differences between the agreed upon profit and loss and the cash flow allocations, the distributions and thus the economic returns (i.e. return on capital) achieved from the investment are often significantly different from the income or loss that is allocated to us under the HLBV method. Thus, in calculating Core Earnings, we further adjust GAAP Net income to take into account our U.S. GAAPcalculation of the return on capital (based upon the investment interest expense for the nine months ended September 30, 2016, was approximately $11 million of interest expense related to loans secured by our equity investments. For the nine months ended September 30, 2016, we collected cash distributionsrate) from our renewable energy equity method investments, as adjusted to reflect the performance of approximately $45the project and the cash distributed. We believe this adjustment to our GAAP Net income in calculating our Core Earnings measure is an important supplement to the HLBV income allocations determined under US GAAP for an investor to understand the economic performance of these investments.
For the three and six months ended June 30, 2017, we recognized $8 million of which $19and $13 million representsin income under GAAP for our equity investments in renewable energy projects and an additional $2 million and $7 million for our Core Earnings adjustment foras discussed above to reflect our return on capital from these investments based uponfor the constant yield methodology discussed above.three and six months ended June 30, 2017, respectively. This compares to the collected cash distributions from these equity method investments of approximately $22 million and $39 million, for the three and six months ended June 30, 2017, with the difference between Core Earnings and cash collected representing a return of capital.
- 33 -
We believe that Core Earnings provides an additional measure of our core operating performance by eliminating the impact of certain non-cash expenses and facilitating a comparison of our financial results to those of other comparable REITs with fewer or no non-cash charges and comparison of our own operating results from period to period. Our management uses Core Earnings in this way. We believe that our investors also use Core Earnings, or a comparable supplemental performance measure, to evaluate and compare our performance to that of our peers, and as such, we believe that the disclosure of Core Earnings is useful to (and expected by) our investors.
However, Core Earnings does not represent cash generated from operating activities in accordance with U.S. GAAP and should not be considered as an alternative to netNet income (determined in accordance with U.S. GAAP), or an indication of our cash flow from operating activities (determined in accordance with U.S. GAAP), or a measure of our liquidity, or an indication of funds available to fund our cash needs, including our ability to make cash distributions. In addition, our methodology for calculating Core Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and accordingly, our reported Core Earnings may not be comparable to the core earningssimilar metrics reported by other REITs.
We have calculated our Core Earnings for the three and ninesix months ended SeptemberJune 30, 20162017 and SeptemberJune 30, 2015.2016. The table below provides a reconciliation of our U.S. GAAP netNet income to Core Earnings:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||||||||||||||||||||||
$ | Per Share | $ | Per Share | $ | Per Share | $ | Per Share | |||||||||||||||||||||||||
(dollars in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||
Net income attributable to controlling shareholders | $ | 3,329 | $ | 0.07 | $ | 2,119 | $ | 0.06 | $ | 10,244 | $ | 0.23 | $ | 5,712 | $ | 0.16 | ||||||||||||||||
Core Earnings Adjustments | ||||||||||||||||||||||||||||||||
Equity investments in renewable energy projects | 6,244 | 3,173 | 18,558 | 9,544 | ||||||||||||||||||||||||||||
Non-cash equity-based compensation charges | 2,531 | 2,701 | 7,452 | 7,728 | ||||||||||||||||||||||||||||
Amortization of intangibles | 364 | 527 | 1,076 | 939 | ||||||||||||||||||||||||||||
Non-cash provision for taxes | — | — | — | 47 | ||||||||||||||||||||||||||||
Current year earnings attributable to minority interest | 18 | 23 | 75 | 62 | ||||||||||||||||||||||||||||
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Core Earnings(1) | $ | 12,486 | $ | 0.29 | $ | 8,543 | $ | 0.26 | $ | 37,405 | $ | 0.92 | $ | 24,032 | $ | 0.79 | ||||||||||||||||
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
$ | Per Share | $ | Per Share | $ | Per Share | $ | Per Share | |||||||||||||||||||||||||
(dollars in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||
Net income attributable to controlling stockholders | $ | 12,340 | $ | 0.23 | $ | 3,747 | $ | 0.09 | $ | 19,539 | $ | 0.38 | $ | 6,916 | $ | 0.16 | ||||||||||||||||
Core Earnings Adjustments: | ||||||||||||||||||||||||||||||||
Equity method investments | 1,814 | 5,673 | 6,991 | 12,315 | ||||||||||||||||||||||||||||
Non-cash equity-based compensation charges | 2,984 | 2,913 | 5,553 | 4,920 | ||||||||||||||||||||||||||||
Amortization of intangibles | 658 | 363 | 1,165 | 713 | ||||||||||||||||||||||||||||
Current year earnings attributable to non-controlling interest | 70 | 28 | 114 | 56 | ||||||||||||||||||||||||||||
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Core Earnings(1) | $ | 17,866 | $ | 0.34 | $ | 12,724 | $ | 0.32 | $ | 33,362 | $ | 0.66 | $ | 24,920 | $ | 0.64 | ||||||||||||||||
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(1) | Core Earnings per share is based on |
- 32 -
Managed Assets
As we both consolidate assets on our balance sheet and securitize investments, certain of our financing receivables and other assets are not reflected on our balance sheet where we may have a residual interest in the performance of the investment.investment, such as servicing rights or a retained interest in cash flows. Thus, we present our investments on a non-GAAP “managed” basis, which assumes that securitized financing receivables are not sold. We believe that our managed asset information is useful to investors because it portrays the amount of both on- and off-balance sheet financing receivables that we manage, which enables investors to understand and evaluate the credit performance associated with the portfolio of financing receivables and investments reported on our consolidated balance sheet and our retained interests in securitized financing receivables. Our non-GAAP managed assets measure may not be comparable to similarly titled measures used by other companies.
- 34 -
The following is a reconciliation of our U.S. GAAP Portfolio to our managed assets as of September 30, 2016 and December 31, 2015:assets:
As of | As of | |||||||||||||||
September 30, 2016 | December 31, 2015 | June 30, 2017 | December 31, 2016 | |||||||||||||
(dollars in millions) | (dollars in millions) | |||||||||||||||
Financing receivables | $ | 865 | $ | 784 | $ | 1,140 | $ | 1,042 | ||||||||
Financing receivables held-for-sale | 7 | 60 | ||||||||||||||
Investments | 50 | 29 | 126 | 58 | ||||||||||||
Real estate | 166 | 156 | 298 | 172 | ||||||||||||
Equity method investments in affiliates | 324 | 319 | ||||||||||||||
Equity method investments | 551 | 363 | ||||||||||||||
Assets held in securitization trusts | 2,163 | 1,840 | 2,458 | 2,298 | ||||||||||||
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Managed Assets | $ | 3,575 | $ | 3,188 | $ | 4,573 | $ | 3,933 | ||||||||
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Credit losses as a percentage of assets under management | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % |
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet potential short term (within one year) and long term cash requirements, including ongoing commitments to repay borrowings, fund and maintain our current and future assets, make distributions to our stockholders and other general business needs. We will use significant cash to make debt and equity investments, repay principal and interest on our borrowings, make distributions to our stockholders and fund our operations.
We use borrowings as part of our financing strategy to increase potential returns to our stockholders and have available to us a broad range of financing sources. In July 2013, we entered into a $350 million senior secured revolving credit facility with maximum total advances of $700 million. Since that time, we have entered into a number of amendments, including in June 2017, intended to increase the flexibility and borrowing capability under the credit facility and to extend the maturity date. The facility has been increaseddate for an additional year to July 2019. As of June 30, 2017, we have used $290 million of the $500 million withof borrowing capacity and have utilized approximately $1.2 billion of the maximum total advances of $1.5 billion and the facility was extended an additional year and matures in July 2019.billion.
In September 2016,February 2017, we borrowed $50$102 million from a financial institution. This recourse creditIn July 2017, we amended this agreement matures on December 30, 2016 andto extend the maturity date to September 20, 2017, which can be repaid at anytime.any time. It bears interest at a fixedfloating rate of 4.8%2.00% above three month LIBOR which increaseswill increase to 6.8% on November 14, 20162.75% after September 1, 2017 and is also secured by the equity of our special purpose subsidiary that holds $84$128 million of residential solarland investments, financing receivables.receivables, and equity method investments.
In addition, as of June 30, 2017, we have completedhad approximately $610$920 million of nonrecourse borrowings since April 2013.borrowings. We also continue to utilize off-balance sheet securitization transactions where we transfer the loans or other assets we originate to securitization trusts or other bankruptcy remote special purpose funding vehicles that are not consolidated on our balance sheet. As of SeptemberJune 30, 2016,2017, the outstanding principal balance of our assets financed through the use of these off-balance sheet transactions was approximately $2.2$2.5 billion.
- 33 -
Large institutional investors, primarily insurance companies and commercial banks, have provided the financing for these nonrecoursenon-recourse and off-balance sheet financings. We have worked to expand our liquidity and access to the debt and bank loan markets and have entered into transactions with a number of new lenders and insurance companies in the last year. We continue to provide details on the greenhouse gas emissions (“GHG”) saved by our investments and believe that investors increasingly are interested in investments that have a measurable GHG savings. For further information on the credit facility, asset backed nonrecourse notes, securitizations and our nonrecourse match funded debt, see Note 5, 7 and 8 to our financial statements of this Form 10-Q.
The decision on how we finance specific assets or groups of assets is largely driven by capital allocations and risk and portfolio management considerations, as well as the overall interest rate environment, prevailing credit spreads and the terms of available financing and market conditions. Over time, as market conditions change, we may use other forms of leverage in addition to these financings arrangements.
We plan to raise additional equity capital and continue to use fixed and floating rate borrowings which may be in the form of additional bank credit facilities (including term loans of various durations and revolving facilities), warehouse facilities, repurchase agreements and public and private equity and debt issuances, including match funded arrangements, as a means of financing our business. We also expect to use both on-balance sheet and non-consolidated securitizations and also believe we will be able to customize securitized tranches to meet investment preferences of different investors. We may also consider the use of separately funded special purpose entities or funds to allow us to expand the investments that we make.
We mayalso expect to continue to raise funds through public and private offerings of equityequity. During the three months and debt securities. Beginning withsix months ended June 30, 2017, we issued approximately 1.4 million and 1.6 million shares, respectively and raised approximately $31 million and $35 million, respectively, under our initial public offering in April 2013, we have raised total net proceeds of approximately $560 million in public offerings of our common stock including approximately $91 million in a follow on public offering completed in the second quarter of 2016. In May 2016, we established an “at-the-market” equity distribution program, or our ATM program, pursuant to whichestablished in May 2016. In addition, in March 2017, we can offer to sell, from time to time, up to an aggregate amount of $75raised $64 million of common equity through public offerings in 2017. See Note 11 to our common stock. Duringfinancial statements of this Form 10-Q.
- 35 -
The decision on how we finance specific assets or groups of assets is largely driven by capital allocations and risk and portfolio and financial management considerations, including the nine months ended September 30, 2016,potential for gain on sale or fee income, as well as the overall interest rate environment, prevailing credit spreads and the terms of available financing and market conditions. Over time, as market conditions change, we issued a totalmay use other forms of 65,000 sharesdebt and raised approximately $1 million under our ATM program.equity in addition to these financings arrangements.
Although we are not restricted by any regulatory requirements to maintain our leverage ratio at or below any particular level, the amount of leverage we may deploy for particular assets will depend upon the availability of particular types of financing and our assessment of the credit, liquidity, price volatility and other risks of those assets, the interest rate environment and the credit quality of our financing counterparties. As of September 30, 2016,shown in the table below, our debt to equity ratio was 1.9approximately 2.0 to 1 as of June 30, 2017 which is slightly below our target rangeratio of 2.5 to 1. We would expect over time to add additional debt, which will allow us to achieve our targeted levels. Our percentage of fixed rate debt was approximately 67%54% as of SeptemberJune 30, 2016, near the upper end of2017, below our targeted fixed rate debt percentage range of approximately 50%60% to 70%85%. In the second quarter of 2017, we modified an existing non-recourse loan, increasing our overall borrowing under the arrangement by $125 million. The instrument is currently floating based on three month LIBOR plus an applicable spread, however the instrument may become fixed either upon the lender’s successful syndication of the loan or, at our option.
The calculation of our debt at fixed rates and leverage is shown in the chart below:
September 30, 2016 | % of Total | |||||||
($ in millions) | ||||||||
Floating-Rate Borrowings | $ | 317 | 33 | % | ||||
Fixed-Rate debt | $ | 650 | 67 | % | ||||
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Total Debt(1) | $ | 967 | 100 | % | ||||
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Equity | $ | 497 | ||||||
Leverage | 1.9 to 1 |
June 30, 2017 | % of Total | December 31, 2016 | % of Total | |||||||||||||
Floating-rate Borrowings | $ | 599 | 46 | % | $ | 320 | 33 | % | ||||||||
Fixed-rate debt | $ | 715 | 54 | % | $ | 655 | 67 | % | ||||||||
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Total debt(1) | $ | 1,314 | 100 | % | $ | 975 | 100 | % | ||||||||
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| |||||||||
Equity | $ | 663 | $ | 574 | ||||||||||||
Leverage | 2.0 to 1 | 1.7 to 1 |
(1) | Floating-Rate Borrowings include borrowings under our floating-rate credit |
We intend to use leverage for the primary purpose of financing our portfolio and business activities and not for the purpose of speculating on changes in interest rates. While we may temporarily exceed the leverage target,or fixed rate debt targets, if our board of directors approves a material change to our leverage target,these targets, we anticipate advising our stockholders of this change through disclosure in our periodic reports and other filings under the Exchange Act.
While we generally intend to hold our target assets that we do not securitize upon acquisition as long term investments, certain of our investments may be sold in order to manage our interest rate risk and liquidity needs, to meet other operating objectives and to adapt to market conditions. The timing and impact of future sales of financings, if any, cannot be predicted with any certainty. Since we expect that our assets will generally be financed, we expect that a significant portion of the proceeds from sales of our assets (if any), prepayments and scheduled amortization will be used to repay balances under our financing sources.
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We believe these identified sources of liquidity will be adequate for purposes of meeting our short term and long term liquidity needs, which include funding future investments, operating costs and distributions to our stockholders. To qualify as a REIT, we must distribute annually at least 90% of our REIT’s taxable income without regard to the deduction for dividends paid and excluding net capital gains. These dividend requirements limit our ability to retain earnings and thereby replenish or increase capital for growth and our operations.
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Sources and Uses of Cash
We had approximately $73$106 million and $43$59 million of unrestricted cash, and cash equivalents, and restricted cash as of SeptemberJune 30, 20162017 and December 31, 2015,2016, respectively.
Cash Flows Relating to Operating Activities
Net cash provided by operating activities was approximately $51$14 million for ninesix months ended SeptemberJune 30, 2017, driven primarily by net income of $20 million and various non-cash adjustments of approximately $5 million offset by an $11 million non-cash gain on securitizations.
Net cash provided by operating activities was approximately $10 million for six months ended June 30, 2016, driven primarily by net income of $10$7 million and net cash provided by the sale of financing receivables (including financing receivables held-for-sale) and investments of $30 million, and adjustments for noncash items of $14 million, consisting primarily of equity based compensation and depreciation and amortization, offset by changes in accounts payable and various accruals of $3 million.
Net cash provided by operating activities was $22 million for the nine months ended September 30, 2015, driven by net income of $6 million, net cash providedproceeds from the sale of financing receivables (including financing receivables held-for-sale) and investmentsheld for sale of $10$5 million and adjustments for noncash items of $11 million, consisting primarily of equity based compensation and depreciation and amortization, offset by changesa net decrease in accounts payable and various accrualsaccrued expenses and other of $5approximately $2 million.
Cash Flows Relating to Investing Activities
Net cash used in investing activities was approximately $65$289 million for ninesix months ended SeptemberJune 30, 2016.2017. We used $249$92 million to purchase financing receivables and investments, $11$119 million to purchase real estate, and made an additional $14$215 million investment in our renewable energy equity method investments. We received $49$51 million from the sale of financing receivables and investments and $42$34 million in distributions in excess of our cumulative income from our equity investments in renewable energy projects. In addition, we collected cash from principal payments on our financing receivables and investments of $106$57 million and had $12a $5 million cash inflowoutflow from other investing activities.
Net cash used in investing activities was $174approximately $21 million for the ninesix months ended SeptemberJune 30, 2015.2016. We used $244$130 million to purchase financing receivables and investments, $42$7 million to purchase real estate, and a net ofmade an additional $11 million investment in our equity method investments. We received $43 million for additional windfrom the sale of financing receivables and investments and $28 million in distributions in excess of our cumulative income from our equity method investments. WeIn addition, we collected cash from principal payments on our financing receivables and investments of $68 million. In addition, we received $69$58 million from the sale of financing receivables and investments andhad a $2 million cash distributionsoutflow from our investment in our wind projects of $21 million. In addition, $3 million was used for other investing activities.
Cash Flows Relating to Financing Activities
Net cash provided by financing activities was approximately $44$322 million for the ninesix months ended SeptemberJune 30, 2016.2017. This includes netproceeds from borrowings under the credit facility of $278 million, proceeds from our credit facilitiesnon-recourse borrowings of $110$258 million and net proceeds of $91 million from the issuance of our common stock of $98 million which were partially offset by payments of $121$270 million on our credit facility, nonrecourse debt and deferred funding obligations and payments of $42 million related to dividends and distributions and other financing obligations and dividend and distribution payments of $36 million.activities.
Net cash provided byused in financing activities was $125approximately $24 million for the ninesix months ended SeptemberJune 30, 2015.2016. This includes payments of $204 million on our credit facility, and nonrecourse debt borrowingsand deferred funding obligations and payments of $349$29 million related to dividends and net proceeds of $82 million from the sale of our common stock. These cash inflowsdistributions and other financing activities that were partially offset by payments to reduce ourproceeds from borrowings under the credit facility deferred funding obligations and nonrecourse debts totaling $279 million, the payment of dividends and distributions of $23$117 million and other cash outflowsnet proceeds from the issuance of $4common stock of $92 million.
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Off-Balance Sheet Arrangements
We have relationships with non-consolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate the sale of securitized assets. Other than our securitization assets (including any outstanding servicer advances) of approximately $18$29 million as of SeptemberJune 30, 2016,2017, that may be at risk in the event of defaults in our securitization trusts, and limited representations, warranties and covenants regarding our activities with regard to certain of our renewable energy equity interests, we have not guaranteed any obligations of nonconsolidated entities or entered into any commitment or intent to provide additional funding to any such entities. A more detailed description of our relations with non-consolidated entities can be found in Note 2 included in the notes to the condensed consolidated financialCondensed Consolidated
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Financial statements included in this Form 10-Q and as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations —CriticalOperations—Critical Accounting Policies and Use of Estimates,” in our 20152016 Form 10-K, filed with the SEC.10-K.
Dividends
U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income. Our current policy is to pay quarterly distributions, which on an annual basis will equal or exceed substantially all of our REIT taxable income. Any distributions we make will be at the discretion of our board of directors and will depend upon, among other things, our actual results of operations. These results and our ability to pay distributions will be affected by various factors, including the net interest and other income from our portfolio, our operating expenses and any other expenditures. In the event that our board of directors determines to make distributions in excess of the income or cash flow generated from our assets, we may make such distributions from the proceeds of future offerings of equity or debt securities or other forms of debt financing or the sale of assets. To the extent that in respect of any calendar year, cash available for distribution is less than our taxable income, we could be required to sell assets or borrow funds to make cash distributions or make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. We will generally not be required to make distributions with respect to activities conducted through our domestic TRSs.
We anticipateTo the extent that we generate taxable income, distributions to our distributionsstockholders generally will be taxable as ordinary income, to our stockholders, although all or a portion of thesuch distributions may be designated by us as a qualified dividend income or capital gain or maygain. In the event we make distributions to our stockholders in excess of our taxable income, the excess will constitute a return of capital. In addition, a portion of such distributions may be taxable stock dividends payable in our shares. We will furnish annually to each of our stockholders a statement setting forth distributions paid during the preceding year and their characterization as ordinary income, return of capital, qualified dividend income or capital gain.
The dividends declared in 20152016 and 20162017 are described under Note 11 to our financial statements in this Form 10-Q.
Book Value Considerations
As of SeptemberJune 30, 2016,2017, we carried only our investments available-for-sale, interest rate swaps and retained assets in securitized receivables at fair value on our balance sheet. As a result, in reviewing our book value, there are a number of important factors and limitations to consider. Other than the approximately $50$126 million in investments available-for-sale, an approximately $6$1 million liability for interest rate swaps and the $17$28 million in residual assets relating to our retained interests in securitized receivables that are on our balance sheet at fair value as of SeptemberJune 30, 2016,2017, the carrying value of our remaining assets and liabilities are calculated as of a particular point in time, which is largely determined at the time such assets and liabilities were added to our balance sheet using a cost basis in accordance with U.S. GAAP. As such, our remaining assets and liabilities do not incorporate other factors that may have a significant impact on their value, most notably any impact of business activities, changes in estimates, or changes in general economic conditions or interest rates since the dates the assets or liabilities were initially recorded. Accordingly, our book value does not necessarily represent an estimate of our net realizable value, liquidation value or our market value as a whole.
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Item 3. Quantitative3.Quantitative and Qualitative Disclosures About Market Risk
Quantitative and Qualitative Disclosures About Market Risk
We anticipate that our primary market risks will be related to, the credit quality of our counterparties and project companies, market interest rates, the liquidity of our assets, and commodity prices. We will seek to manage these risks while, at the same time, seeking to provide an opportunity to stockholders to realize attractive returns through ownership of our common stock.
Credit Risks
We source and identify quality opportunities within our broad areas of expertise and apply our rigorous underwriting processes to our transactions, which, we believe, will generally enable us to minimize our credit losses and keep financing costs low. While we do not anticipate facing significant credit risk in our financingsassets related to U.S. federal government or other governmental energy efficiency projects, we are subject to varying degrees of credit risk in these projects in relation to guarantees provided by ESCOs where payments under energy savings performance contracts are contingent upon achieving pre-determined levels of energy savings. We are also exposed to credit risk in our other projects including those projects we have under long-term lease arrangements that do not benefit from a governmental obligor. We increasingly targetgovernments as obligor such as on balance sheet financing of projects undertaken by universities, schools and hospitals, as part of our strategy.well as privately owned commercial projects. In the case of various renewable energy and sustainable infrastructure projects, we will also be exposed to the credit risk of the obligor of the project’s power purchase agreement or other long-term contractual revenue commitments, as well as to the credit risk of certain suppliers and project operators. We may encounter enhanced credit risk as we expect that over time our strategy will increasingly include mezzanine debt, andreal estate or equity investments. We seek to manage credit risk thorough due diligence and underwriting processes, strong structural protections in our transaction agreements with customers and continual, active asset management and portfolio monitoring. Nevertheless, unanticipated credit losses could occur and during periods of economic downturn in the global economy, our exposure to credit risks from obligors increases, and our efforts to monitor and mitigate the associated risks may not be completely effective in reducing our credit risks. Additional detail of the credit risks surrounding our Portfolio can be found in Note 6 of our financial statements included in this Form 10-Q.
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Interest Rate and Borrowing Risks
Interest rate risk is highly sensitive to many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors beyond our control.
We are subject to interest rate risk in connection with new asset originations and our borrowings, including our credit facility, and in the future, will be subject to interest rate risk for any new floating rate assets, and credit facilities.facilities or other borrowings. Because short-term borrowings are generally short-term commitments of capital, lenders may respond to market conditions, making it more difficult for us to secure continued financing. If we are not able to renew our then existing facilitiesborrowings or arrange for new financing on terms acceptable to us, or if we default on our covenants or are otherwise unable to access funds under any of these facilities,borrowings, we may have to curtail entering intoour origination of new transactionsassets and/or dispose of assets. We face particular risk in this regard given that we expect many of our borrowings will have a shorter duration than the assets they finance. Increasing interest rates may reduce the demand for our investments while declining interest rates may increase the demand. Both our current and future credit facilities and other borrowings may be of limited duration and are periodically refinanced at then current market rates. We expect to attempt to reduce interest rate risks and to minimize exposure to interest rate fluctuations through the use of match funded or fixed rate financing structures, when appropriate, whereby we may seek (1) to match the maturities of our debt obligations with the maturities of our assets, (2) to borrow at fixed rates for a period of time, like in our asset backed securitizations, or (3) to match the interest rates on our assets with like-kind debt (i.e., we may finance floating rate assets with floating rate debt and fixed-rate assets with fixed-rate debt), directly or through the use of interest rate swap agreements, interest rate cap agreements or other financial instruments, or through a combination of these strategies. We expect these instruments will allow us to minimize, but not eliminate, the risk that we have to refinance our liabilities before the maturities of our assets and to reduce the impact of changing interest rates on our earnings. In addition to the use of traditional derivative instruments, we also seek to mitigate interest rate risk by using securitizations, syndications and other techniques to construct a portfolio with a staggered maturity profile. We monitor the impact of interest rate changes on the market for new originations and often have the flexibility to increase the term of the project to offset interest rate increases.
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OurTypically, our nonrecourse debt is at fixed rates or we have generally used interest rate hedges whichthat convert the majority of the floating rate debt to fixed rate as described in Note 8 to our financial statements in this Form 10-Q. Changes in market rates impact the fair value of the fixed rate debt but have no impact on our consolidated financial statements, other than the fair value change of our interest rate hedges which should be offset by a corresponding change in the value of the debt.rate. If interest rates rise, and our fixed rate debt balance remains constant, we expect the fair value of our fixed rate debt to decrease and the value of our hedgehedges on floating rate debt to increase. See Note 3 to our financial statements in this Form 10-Q for the estimated fair value of our fixed rate nonrecourse debt, which is based on having the same debt service requirements that could have been borrowed at the date presented, at prevailing current market interest rates. We carry our interest rate hedges at fair value in our balance sheet as described in Note 8 to our financial statements in this Form 10-Q.
Our credit facility is afacilities are variable rate loanloans with approximately $307$392 million outstanding as of SeptemberJune 30, 20162017 and we have approximately $10$207 million of variable rate exposure under our nonrecourse debt. Significant increases in interest rates would result in higher interest expense while decreases in interest rates would result in lower interest expense. As described above, we may use various financing techniques including interest rate swap agreements, interest rate cap agreements or other financial instruments, or a combination of these strategies to mitigate the variable interest nature of this facility. A 50 basis point increase in LIBOR would increase the quarterly interest expense related to the $317$599 million in variable rate borrowings by $0.4$0.7 million. Such hypothetical impact of interest rates on our variable rate borrowings does not consider the effect of any change in overall economic activity that could occur in a rising interest rate environment. Further, in the event of such a change in interest rates, we may take actions to further mitigate our exposure to such a change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the analysis assumes no changes in our financial structure.
We record certain of our retained assets at fair value in our financial statements and any changes in the discount rate would impact the value of these assets. See Note 3 to our financial statements in this Form 10-Q.
Liquidity and Concentration Risk
The assets that comprise our asset portfolio are not and will not be publicly traded. A portion of these assets may be subject to legal and other restrictions on resale or will otherwise be less liquid than publicly-traded securities. The illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises, including in response to changes in economic and other conditions. OurEach of our projects typically have one obligor and thus we are subject to concentration risk and could incur significant losses if any of these projects perform poorly or if we are required to write down the value of any of these projects. See also “—Credit Risks” above.
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Commodity Price Risk
When we providemake debt or equity investments for a project that acts as a substitute for an underlying commodity, we aremay be exposed to volatility in prices for that commodity. For example, the performance of renewable energy projects that produce electricity can be impacted by volatility in the market prices of various forms of energy, including electricity, coal and natural gas. This is especially true for utility scale projects that sell power on a wholesale basis likesuch as many of our wind projects as opposed to distributed renewable projects or energy efficiency projects which compete against the retail or delivered costs of electricity which includes the cost of transmitting and distributing the electricity to the end user.
Although we generally focus on renewable energy projects that have the majority of their operating cash flow supported by long term PPAs, ranging from 10 to 30 years, to the extent that the projects have shorter term contracts (which may have the potential of producing higher current returns) or sell their power in the open market on a merchant basis, the cash flows of such projects, and thus the repayment of, or the returns available for, our assets, may be subject to risk if energy prices change. We also mitigate our exposure through structural protections. These structural protections, which are typically in the form of a preferred return mechanism, are designed to allow recovery of our capital and an acceptable return over time. When structuring and underwriting these transactions, we evaluate these transactions using a variety of scenarios, including natural gas prices remaining low for an extended period of time. In the case of utility scale solar projects, we focus on owning the land under the project where our rent is paid out of project operational costs before the debt or equity in the project receives any payments.
We believe the current low prices in natural gas will increase demand for some types of our projects, such as combined heat and power, but may reduce the demand for other projects such as renewable energy that may be a substitute for natural gas. We seek to structure our energy efficiency financings so that we typically avoid exposure to commodity price risk. However, volatility in energy prices may cause building owners and other parties to be reluctant to commit to projects for which repayment is based upon a fixed monetary value for energy savings that would not decline if the price of energy declines.
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Risk Management
Our ongoing active asset management and portfolio monitoring processes provide investment oversight and valuable insight into our origination, underwriting and structuring processes. These processes create value through active monitoring of the state of our markets, enforcement of existing contracts and real-time receivables management. Subject to maintaining our qualification as a REIT, and as described above, we engage in a variety of interest rate management techniques that seek to mitigate the economic effect of interest rate changes on the values of, and returns on, some of our assets. While there havehas only been only two incidents ofone credit loss, amounting to approximately $18$11 million (net of recoveries) on the more than $5approximately $4 billion of transactions we originated since 2000,2012, which represents an aggregate loss of less than approximately 0.4%0.3% on cumulative transactions originated over this time period, there can be no assurance that we will continue to be as successful, particularly as we invest in more credit sensitive assets or more equity positions and engage in increasing numbers of transactions with obligors other than U.S. federal government agencies.
We seek to manage credit risk using thorough due diligence and underwriting processes, strong structural protections in our loan agreements with customers and continual, active asset management and portfolio monitoring.
Recent U.S. Federal Income Tax Regulatory Developments
In addition, to the adoption of the Protecting Americans From Tax Hikes Act of 2015 (the “PATH Act”). which is discussed in our Form 10-K for the year ended December 31, 2015, the following is a discussion of certain recent significant developments in the U.S. federal income tax laws affecting REIT qualification that have important implications with respect to our qualification as a REIT:
Real Property Regulations
As previously disclosed beginning in our Form 10-Q for the quarter ended September 30, 2014, in May of 2014, the Treasury Department and the Internal Revenue Service, or the IRS, published proposed regulations which considered revisions to the definition of “real property” for purposes of the REIT income and asset tests. On August 30, 2016, these regulations, which we refer to as the Real Property Regulations, became final and will apply to us with respect to our taxable years beginning after December 31, 2016. Among other things, the Real Property Regulations provide that an obligation secured by a structural component of a building or other inherently permanent structure qualifies as a real estate asset for REIT qualification purposes only if such obligation is also secured by a real property interest in the inherently permanent structure served by such structural component. This aspect of the Real Property Regulations has important implications for our qualification as a REIT since a significant portion of our REIT qualifying assets consists of financing receivables that are secured by liens on installed structural improvements designed to improve the energy efficiency of buildings and a significant portion of REIT qualifying gross income is interest income earned with respect to such financing receivables.
The structural improvements securing our financing receivables generally qualify as “fixtures” under local real property law, as well as under the Uniform Commercial Code, or the UCC, which governs rights and obligations of parties in secured transactions. Although not controlling for REIT purposes, the general rule in the United States is that once improvements are permanently installed in real properties, such improvements become fixtures and thus take on the character of and are considered to be real property for local law purposes. In general, in the United States, laws governing fixtures, including the UCC, afford lenders who have secured their financings with security interests in fixtures with rights that extend not just to the fixtures that secure their financings, but also to the real properties in which such fixtures have been installed. By way of example only, Section 9-604(b) of the UCC, which has been adopted in all but two states in the United States, permits a lender secured by a structural component, upon a default, to enforce its rights under the UCC or under applicable real property laws. Although there is limited authority directly on point, we believe the nature and scope of our rights in the buildings in which the structural improvements securing our financing receivables have been fully integrated are sufficient to satisfy the requirement of the Real Property Regulations described above. In addition to the limited authority directly on point, two other important caveats apply in this regard. First, the Real Property Regulations do not define what is required for an obligation secured by a lien on a structural component to also be secured by a real property interest in the building served by such structural component, although the final Real Property Regulations do not include the requirement that the interest in the real property held by a REIT be “equivalent” to the REIT’s interest in the structural component itself as was initially included in the proposed version of the Real Property Regulations, which never became effective, which implies that under the final Real Property Regulations our rights as a creditor in the building need not be equivalent to our rights in the structural components serving the building. Second, real property law is typically defined at a state or local jurisdiction basis and the specific rights available to us as a fixture lien holder in the real properties in which our structural components have been installed may vary between jurisdictions as a result of a range of factors including the specific local real property law requirements and judicial and regulatory interpretations of such laws, and the competing rights of mortgage and other lenders. Further, these issues have been considered by the courts in only a few jurisdictions, and their resolution in many jurisdictions is therefore uncertain. As a result of the foregoing, no assurance can be given that the IRS will not challenge our position that our financing receivables meet the requirements of the Real Property Regulations or that, if challenged, such position would be sustained.
Prior to the issuance of the Real Property Regulations, we received a private letter ruling from the IRS, which we refer to as the Ruling, which, based on the representations and assumptions contained therein, held that our financing receivables qualify as real estate assets and the income from such financing receivables qualify as interest income from mortgages on real property for purposes of the REIT requirements. The preamble to the Real Property Regulations provides that, to the extent a private letter ruling issued prior to the issuance of the Real Property Regulations is inconsistent with the Real Property Regulations, the private letter ruling is revoked prospectively from the applicability date of the Real Property Regulations. We do not believe that the Ruling is inconsistent with the Real Property Regulations because we believe the analysis in the Ruling was based on similar principles as the relevant portions of the Real Property Regulations, and accordingly we do not believe that the Real Property Regulations impact our ability to rely on the Ruling. However, no assurance can be given that the IRS would not successfully assert that we are not permitted to rely on the Ruling because the Ruling has been revoked by the Real Property Regulations.
If the IRS were to assert that a significant portion of our financing receivables do not qualify as real estate assets and do not generate income treated as interest income from mortgages on real property, we would fail to satisfy both the gross income requirements and asset requirements applicable to REITs. As a result, we could be required to pay one or more penalty taxes, which could be significant in amount, alter our mix of assets or adjust our business strategy, or we could fail to qualify as a REIT.
Tax on Built in Gains
As indicated in our 10-K, the PATH Act reduced the period during which dispositions of properties that were acquired with net built-in gains from C corporations in carry-over basis transactions will trigger a built-in gains tax from 10 years to 5 years for taxable years beginning after December 31, 2014. However, on June 7, 2016, the IRS and Treasury Department issued temporary regulations changing the recognition period back to ten years, effective for assets with built-in gain acquired on or after August 8, 2016.
Item 4. Controls and Procedures
The Company’s Chief Executive Officer and Chief Financial Officer, based on their evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) required by paragraph (b) of Rule 13a-15 or Rule 15d-15, have concluded that as of SeptemberJune 30, 2016,2017, the Company’s disclosure controls and procedures were effective to give reasonable assurances to the timely collection, evaluation and disclosure of information relating to the Company that would potentially be subject to disclosure under the Exchange Act and the rules and regulations promulgated thereunder.
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Notwithstanding the foregoing, a control system, no matter how well designed and operated, can provide only reasonable, not absolute assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports.
Changes in Internal Controls over Financial Reporting
There have been no changes in the Company’s “internal control over financial reporting” (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the three month period ended SeptemberJune 30, 2016,2017, that have materially affected, or was reasonably likely to materially affect, the Company’s internal control over financial reporting.
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The nature of our operations exposes us to the risk of claims and litigation in the normal course of our business. Other than non-material litigation arising out of the ordinary course of business, we are not currently subject to any legal proceedings that are probable of having a material adverse effect on our financial position, results of operations or cash flows.
For a discussion of our potential risks and uncertainties, see the information in Item 1A. “Risk Factors” of our 20152016 Form 10-K, filed with the SEC, which is accessible on the SEC’s website atwww.sec.gov. www.sec.gov.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities
During the ninesix months ended SeptemberJune 30, 2016,2017, certain of our employees surrendered common stock owned by them to satisfy their federal and state tax obligations associated with the vesting of their restricted stock awards. No OP units were exchanged for shares of common stock during the ninesix months ended SeptemberJune 30, 2016.2017.
The table below summarizes all of our repurchases of common stock during 2016. The number of shares purchased represents shares2017. These repurchases are related to the surrender of common stock surrendered by certain of our employees to satisfy their tax and other compensation related withholdings associated with the vesting of restricted stock. The price paid per share is based on the closing price of our common stock as of the date of the withholding.
Period | Total number of shares purchased | Average price per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs | ||||||||
February 2016 | 413 | $ | 17.49 | N/A | N/A | |||||||
March 2016 | 8,991 | $ | 18.06 | N/A | N/A | |||||||
April 2016 | 62,800 | $ | 19.93 | N/A | N/A | |||||||
May 2016 | 168,302 | $ | 19.70 | N/A | N/A | |||||||
June 2016 | 15,295 | $ | 20.30 | N/A | N/A | |||||||
August 2016 | 2,491 | $ | 22.80 | N/A | N/A |
Period | Total number of shares purchased | Average price per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs | ||||||||||||
January 2017 | 2,332 | $ | 18.28 | N/A | N/A | |||||||||||
February 2017 | 351 | $ | 19.92 | N/A | N/A | |||||||||||
March 2017 | 22,701 | $ | 19.82 | N/A | N/A | |||||||||||
April 2017 | 52,185 | $ | 21.35 | N/A | N/A |
Item 3. Defaults Upon Senior Securities
NoneNone.
Item 4.Mine Safety Disclosures
Not applicable.
None.
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Exhibit | Exhibit description | |
3.1 | Articles of Amendment and Restatement of Hannon Armstrong Sustainable Infrastructure Capital, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Form 10-Q for the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013) | |
3.2 | Bylaws of Hannon Armstrong Sustainable Infrastructure Capital, Inc. (incorporated by reference to Exhibit 3.2 to the Registrant’s Form 10-Q for the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013) | |
3.3 | Amended and Restated Agreement of Limited Partnership of Hannon Armstrong Sustainable Infrastructure, L.P. (incorporated by reference to Exhibit 3.3 to the Registrant’s Form 10-Q for the quarter ended June 30, 2013 (No. 001-35877), filed on August 9, 2013) | |
4.1 | Specimen Common Stock Certificate of Hannon Armstrong Sustainable Infrastructure Capital, Inc. (incorporated by reference to Exhibit 4.1 to the Registrant’s Form S-11 (No. 333-186711), filed on April 12, 2013) | |
10.1* | Amendment No. 6 to Amended & Restated Loan Agreement PF dated June 8, 2017 | |
10.2* | Reaffirmation of Guaranty (PF) dated June 8, 2017 | |
10.3* | Amendment No. 6 to Amended & Restated Loan Agreement G&I dated June 8, 2017 | |
10.4* | Reaffirmation of Guaranty (G&I) dated June 8, 2017 | |
31.1* | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2* | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1** | Certification of Chief Executive Officer pursuant to section 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes—Oxley Act of 2002 | |
32.2** | Certification of Chief Financial Officer pursuant to section 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes—Oxley Act of 2002 | |
XBRL Instance Document | ||
XBRL Taxonomy Extension Schema | ||
XBRL Taxonomy Extension Calculation Linkbase | ||
XBRL Taxonomy Extension Definition Linkbase | ||
XBRL Taxonomy Extension Label Linkbase | ||
XBRL Taxonomy Extension Presentation Linkbase |
* | Filed herewith. |
** | Furnished herewith. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HANNON ARMSTRONG SUSTAINABLE INFRASTRUCTURE CAPITAL, INC. | ||||||
(Registrant) | ||||||
Date: | /s/ Jeffrey W. Eckel | |||||
Jeffrey W. Eckel | ||||||
Chairman, Chief Executive Officer and President | ||||||
Date: | /s/ | |||||
Charles W. Melko | ||||||
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