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Item 7. Management’s Discussion and Analysis

2022-02-22 compared with 2021-02-22 · 207 added, 258 removed, 425 unchanged (52% of the section changed)

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Refer to ‘Item 7 -- Management’s Discussion and Analysis of Financial Condition and Results of Operations’ on our Form 10-K for the year ended December 31, 2020 for a discussion of our results for the year ended December 31, 2019 and a comparison of our results of operations for the fiscal years ended December 31, 2020 and December 31, 2019.

We invest in climate solutions developed by the leading companies in the energy efficiency, renewable energy and other sustainable infrastructure markets.

We invest in climate solutions developed or sponsored by leading companies in the energy efficiency, renewable energy and other sustainable infrastructure markets.

We believe we are one of the first U.S.

public companies solely dedicated to such climate change investments.

Our goal is to generate attractive returns from a diversified portfolio of projects with long-term, predictable cash flows from proven technologies that reduce carbon emissions or increase resilience to climate change.

public companies solely dedicated to climate solutions.

Our goal is to generate attractive returns from a diversified portfolio of project company investments with long-term, predictable cash flows from proven technologies that reduce carbon emissions or increase resilience to climate change.

We are internally managed, and our management team has extensive relevant industry knowledge and experience, dating back more than 30 years.

We have long-standing relationships with the leading energy service companies (“ESCOs”), manufacturers, project developers, utilities, owners and operators.

Our origination strategy is to use these relationships to generate recurring, programmatic investment and fee-generating opportunities.

We have long-standing relationships with the leading energy service companies (“ESCOs”), manufacturers, project developers, utilities, owners and operators which provide recurring, programmatic investment and fee-generating opportunities.

Additionally, we have relationships with leading banks, investment banks, and institutional investors from which we are referred additional investment and fee generating opportunities.

We completed approximately $1.7 billion of transactions during 2021, compared to approximately $1.9 billion during 2020.

As of December 31, 2020, we held approximately $2.9 billion of transactions on our balance sheet, which we refer to as our “Portfolio.” 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 cash and in certain cases, residual interests in the assets and ongoing fees.

As of December 31, 2021, we held approximately $3.6 billion of transactions on our balance sheet, which we refer to as our “Portfolio.” 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 cash and/or residual interests in the assets and in some cases, ongoing fees.

As of December 31, 2021, we managed approximately $5.2 billion in these trusts or vehicles that are not consolidated on our balance sheet.

When combined with our Portfolio, as of December 31, 2020, we manage approximately $7.2 billion of assets, which we refer to as our “Managed Assets”.

When we combine these assets with our Portfolio, as of December 31, 2021, we manage approximately $8.8 billion of assets, which we refer to as our “Managed Assets”.

Our investments have taken many forms, including equity, joint ventures, land ownership, lending, or other financing transactions.

We also generate ongoing fees through off-balance sheet securitization transactions, services, and asset management.

We also generate ongoing fees through off-balance sheet securitization transactions, advisory services, and asset management.

We use borrowings as part of our strategy to increase potential returns to our stockholders and have available a broad range of financing sources including non-recourse or recourse debt, equity and off-balance sheet securitization structures.

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Market Conditions

As a result of increasing global awareness of and aversion to climate change impacts, we believe the sustainable infrastructure markets in which we invest, and investment in climate solutions more broadly, will continue to grow as the

impact of climate change increases.

In January 2021, National Oceanic and Atmospheric Administration (“NOAA”) reported that 2020 was the second warmest year on record, with all seven of the warmest years on record having occurred since 2014.

As a result of increasing global awareness of and aversion to climate change impacts, we believe the climate solutions markets in which we invest, and investment in climate solutions more broadly, will continue to grow as the impact of climate change increases.

In January 2022, National Oceanic and Atmospheric Administration (“NOAA”) reported that globally, 2021 was the fourth warmest year on record, with all six of the warmest years on record having occurred since 2012.

Further, communities across the globe are increasingly experiencing the destructive economic impacts of climate change, which are only expected to increase in frequency and severity.

According to the U.S.

National Oceanic and Atmospheric Administration (“NOAA”), there were 22 natural disaster events in the United States in 2020, with an estimated individual cost of greater than $1 billion and an aggregate cost of approximately $95 billion.

NOAA reports, that since 1980, the U.S.

has sustained 285 separate billion-dollar weather events and climate disasters with cumulative costs exceeding $1.9 trillion dollars.

According to NOAA, there were 20 natural disaster events in the United States in 2021, with an estimated individual cost of greater than $1 billion and an aggregate cost of approximately $145 billion.

NOAA reports, that the total cost of climate related disasters over the last five years exceeds $742 billion.

In its Weather, Climate & Catastrophe Insight:

2020 Annual Report, Aon reports that there were 416 natural catastrophe events globally in 2020, resulting in economic losses of $268 billion representing increased losses of 8% compared to the century average

BloombergNEF (“BNEF”) reported in January 2021, that carbon solutions investment exceeded $500 billion annually with $85 billion being invested in the United States.

In its Energy Efficiency 2020 report, the International Energy Agency (“IEA”) estimates global spending on energy efficiency at approximately $250 billion.

2021 Annual Report, Aon reports that there were 401 natural catastrophe events globally in 2021, resulting in economic losses of $343 billion, making it the third costliest year on record.

In its Energy Efficiency 2021 report, the International Energy Agency (“IEA”) estimates global spending on energy efficiency at almost $300 billion, and forecasts that overall investment in energy efficiency will need to triple by 2030 in order to achieve certain net-zero carbon by 2050 targets.

Given that many projects are often self-financed (especially energy efficiency), we believe our total addressable market is likely a subset of these overall industry estimates.

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In its Annual Energy Outlook 2021, the U.S.

Energy Information Administration (“EIA”) estimates that decreasing energy intensity resulting from energy efficiency improvements will keep U.S.

energy consumption for residential and commercial buildings growing at a level far below that of the U.S.

In addition, Lazard’s 2020 Levelized Cost of Energy Analysis shows that renewables continue to outperform traditional generation sources on a new-built cost basis with certain renewable technologies achieving competitiveness with existing conventional generation technologies on a marginal basis, making renewables even more attractive investment targets.

Further, in its New Energy Outlook 2020, BNEF expects wind and solar generation to provide 56% of the world’s electricity by 2050, with renewables attracting $11 trillion of aggregate investment over this time period.

Energy Information Administration (“EIA”) estimates that decreasing energy intensity resulting from energy efficiency improvements will continue until at least 2050.

In addition, Lazard’s 2021 Levelized Cost of Energy Analysis shows that renewables continue to be competitive with traditional generation sources on a new-built cost basis with certain renewable technologies achieving competitiveness with existing conventional generation technologies on a marginal basis, making renewables even more attractive investment targets.

in its New Energy Outlook 2021, Bloomberg New Energy Finance (“BNEF”) states global annual investment in energy supply and infrastructure will need to double from around $1.7 trillion per year today to between $3.1 trillion and $5.8 trillion per year on average over the next thirty years.

We expect the federal government to take, and they have taken, certain actions which are supportive of the industry for climate solutions.

In December 2020, Congress extended the end date to December 2022 for qualifying property being eligible for the 26% investment tax credit for photovoltaic solar projects.

The new presidential administration has taken immediate steps at the federal level which we believe signify support for climate solutions, including, but not limited to, rejoining the Paris Climate Accords and re-establishing a social price on carbon used in cost/benefit analysis for policy making.

We expect the new administration, combined with a closely divided Congress, will result in additional regulations supportive of the markets in which we invest.

State governmental agencies are responding to climate change risks through the implementation of renewable portfolio standards (“RPS”) as well as energy reduction targets such as energy efficiency resource standards.

According to the UCLA Luskin Center of Innovation one in three Americans lives in a city or state that has committed to, or already achieved, 100% clean electricity.

In 2021, Congress passed the Infrastructure Investment and Jobs Act which provides funding opportunities for a variety of traditional infrastructure projects including approximately $65 billion for energy and electric grid development which is critical for further development of renewable energy projects.

In December 2021, President Biden signed an executive order committing the U.S.

federal government to achieve 100 percent carbon pollution-free electricity and to achieve a net-zero emissions building portfolio by 2045, including a 50 percent emissions reduction from buildings, campuses, and installations by 2032 from 2008 levels.

Corporates are also responding to climate change risks - in part through renewable energy sourcing commitments.

In its 2020 Annual Report, the RE 100, a global corporate leadership initiative bringing together influential businesses committed to 100% renewable electricity, reported that over 260 multinational companies have pledged to achieve 100% renewable energy with an average target date of 2028, with three quarters of those companies planning to reach 100% renewable energy by 2030.

BNEF states that in 2021, a record 31 gigawatts of clean energy were purchased through corporate PPAs, an increase of over 20% from the previous year, with two-thirds of this purchasing occurring in the United States.

In its 2021 Annual Report, the RE 100, a global corporate leadership initiative bringing together influential businesses committed to 100% renewable electricity, reported that over 300 multinational companies have pledged to achieve 100% renewable energy with an average target date of 2030, with the average target year for North American companies being 2027.

Federal Energy Savings Performance Contracts (“ESPCs”) are an example of a public-private partnership that eliminate the need for a federal agency to find appropriated funds to replace, operate, and maintain energy-intensive equipment while also providing multiple ancillary benefits, including saving taxpayer dollars currently spent on energy consumption, improving conditions for federal workers and service men and women, and creating private sector jobs.

Support for ESPCs remain bipartisan, and the new presidential administration is expected to continue to support the program.

DOE announced that fiscal year 2020 was the most successful year in the history of the ESPC program, with over $842 million invested in qualifying projects, the third consecutive record year in the history of the program.

While we believe that the long-term growth prospects for our business remain positive, volatility in financial markets and commodity prices along with interest rate movements could impact the markets we serve.

Further, the current interest rate environment of low yields coupled with increasing investor acceptance of our markets has increased competitive pressure.

In 2020, the Federal Reserve Board of Governors lowered the rate at which banks lend to one another (known as the federal funds rate) to a range of 0 to 25 basis points.

The Federal Reserve Board of Governors has indicated that their plan is to keep rates at this level for some time, until labor market conditions recover from the COVID-19 pandemic and their inflation target of 2

percent is met.

Support for ESPCs remain bipartisan, and the presidential administration is expected to continue to support the program.

Almost $3.4 billion in ESPC contracts have been awarded over the last five government fiscal years.

While we believe that the long-term growth prospects for our business remain positive, volatility in financial markets and higher inflation along with interest rate movements could impact the markets we serve.

The Federal Reserve Board of Governors has indicated that it will begin to reduce its asset purchases and increase the rate at which banks lend to one another (known as the federal funds rate) while monitoring the economic outlook.

We believe higher interest rates and inflation are likely to have a minimal impact on our existing portfolio, and that PPA prices for future deals are rising to compensate with regards to new investments.

See “Item 7A.

Quantitative and Qualitative Disclosures about Market Risk-Interest Rate and Borrowing Risks” for an analysis of the impact of rates on our business.

According to the Department of Energy, average annual Henry Hub natural gas prices decreased by over 50% from 2014 to 2020, and its 2021 outlook forecasts that prices will stay below pre-2010 levels through 2050.

According to the Department of Energy, average annual Henry Hub natural gas prices for the years from 2012 to 2021 were over 45% lower than the same prices from 2002 to 2011 , and its 2021 outlook forecasts that prices will stay below pre-2010 levels through 2050.

As wholesale electricity prices are closely tied to wholesale natural gas prices in many parts of the United States, lower natural gas prices have negatively impacted, and are expected to continue to negatively impact, renewable energy projects that sell wholesale power on a “merchant” basis at spot market prices.

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Notwithstanding any concerns that current market conditions have raised for our business, we believe significant opportunities exist for us to grow our business.

As a long-term participant committed to providing capital for sustainable infrastructure, we plan to continue to fund projects that meet our underwriting standards and look for opportunities to expand our business.

As a long-term participant committed to providing capital for climate solutions, we plan to continue to fund projects that meet our underwriting standards and look for opportunities to expand our business.

Factors Impacting our Operating Results

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Income from Securitization, Syndication and Other Services

We will also earn gain on sale of financial assets or fee income by securitizing or selling all or a portion of certain transactions.

We earn gain on sale of financial assets or fee income by securitizing or selling all or a portion of certain transactions.

For transactions that we securitize via a non-consolidated trust, we recognize a gain on the securitization.

The gain may be comprised of both cash received and a residual interest in securitized assets.

The gain may be comprised of either or both cash received and a residual interest in securitized assets.

We may also recognize additional income from servicing fees from these securitized assets over the life of the asset.

In many cases, we arrange the securitization of the loan or other asset prior to originating the transaction and thus have avoided exposure to credit spread and interest rate risks that are typically associated with traditional capital markets conduit transactions.

We view the revenue from such activities as a valuable component of our earnings and an important source of franchise value.

In many cases, we arrange the securitization of the loan or other asset prior to originating the transaction and thus avoid exposure to credit spread and interest rate risks.

In these cases, we avoid funding risks for these financings or other assets given that our securitization partners contractually agree to fund such assets before the origination transaction is completed.

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We may charge advisory, retainer or other fees, including through our broker dealer subsidiary.

The gain on sale income and our other sources of fee income will also vary depending on the level of our new origination activity and the portion of originated assets we decide to transfer to other investors.

We view this revenue from such activities as a valuable component of our earnings and an important source of franchise value.

The total amount of income from securitizations, syndications, and other services will vary on a quarter to quarter basis depending on various factors, including the level of our originations, the duration, credit quality and types of assets we originate, current and anticipated future interest rates, the impact on our leverage, the potential income from a securitization or syndication, the mix of our Portfolio and our need to tailor our mix of assets in order to allow us to qualify as a REIT for U.S.

The total amount of income from securitizations, syndications, and other services will vary from quarter to quarter depending on various factors, including the level of our originations, the duration, credit quality and types of assets we originate, current and anticipated future interest rates, the impact on our leverage, the mix of our Portfolio and our need to tailor our mix of assets in order to allow us to qualify as a REIT for U.S.

federal income tax purposes and maintain our exemption from registration under the 1940 Act.

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We are also exposed to credit risk in our other projects that do not benefit from governments as the obligor such as on balance sheet financing of projects undertaken by universities, schools and hospitals, as well as privately owned commercial projects.

We have extended mezzanine loans to various special purpose entities which own residential solar projects, and the ultimate repayment of those loans is dependent on the creditworthiness of the related residential obligors.

Our level of credit risk has increased, and is expected to continue to increase, as our strategy contemplates new investments in mezzanine debt and equity.

We have extended mezzanine loans to various special purpose entities which own residential or community solar projects, and the ultimate repayment of those loans is dependent on the creditworthiness of the related residential obligors.

As a result of investing in these and other mezzanine loans, we are exposed to additional credit risk.

In certain instances interest is paid on our mezzanine loans in-kind, which increases our outstanding loan balances and causes the ultimate repayment of cash to occur later.

We seek to manage credit risk through 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 effective in reducing our credit losses.

Quantitative and Qualitative Disclosures about Credit Risks for further information on our credit risks and see Note 6 of our audited financial statements in this Form 10-K for additional detail of the credit risks surrounding our Portfolio.

Quantitative and Qualitative Disclosures about Credit Risks for further information on our credit risks and see Note 6 to our audited financial statements in this Form 10-K for additional detail of the credit risks surrounding our Portfolio.

Changes in Market Interest Rates and Liquidity

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 facilities, and in the future, any new floating rate assets, credit facilities or other borrowings.

We are subject to interest rate risk in connection with new asset originations and our borrowings, including our revolving credit facilities, and in the future, to the extent we choose to enter into any new floating rate assets, revolving credit facilities or other borrowings.

Quantitative and Qualitative Disclosures about Market Risk for further information on interest rates risks and liquidity.

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We make investments in renewable energy projects that typically depend in part on various federal, state or local governmental policies that support or enhance the project’s economic feasibility.

Such policies may include governmental initiatives, laws and regulations designed to reduce energy usage and impact the use of renewable energy or the investment in, and the use of, sustainable infrastructure.

Policies and incentives provided by the U.S.

federal government may include tax credits (with some of these tax credits that are related to renewable energy scheduled to be reduced or eliminated in the future), tax deductions, bonus depreciation, federal grants and loan guarantees, and energy market regulations.

The value of tax credits, deductions and incentives may be impacted by changes in tax laws rates or regulations, including as a result of the TCJA.

Incentives provided by state and local governments may include a RPS or similar clean energy standard, which specify the portion of the power utilized by local utilities that must be derived from renewable or clean energy sources as well as the state or local government sponsored programs where the financing of energy efficiency or renewable energy projects is repaid through an assessment in the property tax bill in a program commonly referred to as PACE.

Additionally, certain states have

implemented feed-in or net metering tariffs, pursuant to which electricity generated from renewable energy sources is purchased at a higher rate than prevailing wholesale rates.

The value of tax credits, deductions and incentives and how they can be realized may be impacted by changes in tax laws, rates, or regulations.

Incentives provided by state and local governments may include an RPS or similar clean energy standard, which specify the portion of the power utilized by local utilities that must be derived from renewable or clean energy sources as well as the state or local government sponsored programs where the financing of energy efficiency or renewable energy projects is repaid through an assessment in the property tax bill in a program commonly referred to as PACE.

Additionally, certain states have implemented feed-in or net metering tariffs, pursuant to which electricity generated from renewable energy sources is purchased at a higher rate than prevailing wholesale rates.

Other incentives include tariffs, tax incentives and other cash and non-cash payments.

Governmental agencies, commercial entities and developers of sustainable infrastructure projects frequently depend on these policies and incentives to help defray the costs associated with, and to finance, various projects.

Governmental agencies, commercial entities and developers of climate solutions projects frequently depend on these policies and incentives to help defray the costs of various projects.

Government regulations also impact the terms of third party financing provided to support these projects.

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In managing our business, we consider the potential impacts to our operations that may result in certain climate-related scenarios.

In 2018, we began to implement the recommendations of the TCFD.

The TCFD provides a framework to consider and disclose our processes for managing the risks and opportunities associated with climate change.

We have implemented the recommendations of the TCFD, which provides a framework to consider and disclose our processes for managing the risks and opportunities associated with climate change.

We have disclosed the components of the TCFD framework throughout this document.

The following tables highlight our evaluation of potential impacts to our business in two climate related scenarios as well as our resilience and strategy to handling the potential impacts.

Transition Risks and Opportunities - We believe our investment portfolio will be impacted by the transition risks and opportunities contemplated by the Paris Accords and the achievement of its objectives.

The following tables highlight our evaluation of potential impacts to our business in two climate related scenarios as well as our resilience to and strategy for handling the potential impacts.

Transition Risks and Opportunities - We believe our Portfolio will be impacted by the transition risks and opportunities contemplated by the Paris Accords and the achievement of its objectives.

Scenario 1 - Global action is taken to limit the global temperature increase to 1.5 degrees Celsius above pre-industrial levels

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If the overall price level of RECs increased by 5% we would not expect a material impact to the overall cash flows from our existing investments.

The is largely due to the lower value of RECs in comparison to power prices in most of the markets where our investments are located.

This is largely due to the lower value of RECs in comparison to power prices in most of the markets where our investments are located.

We may identify more investment opportunities resulting from the increased REC value.

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Whether it is due to sales of energy at the then current market price or through a re-contracting of fixed price power purchase agreements.

Under a scenario where a carbon tax drives the price of power up by 10%, our wind equity investments may generate approximately 6% in additional cashflows over their life as compared to the cashflow the investments are expected to generate under the current baseline scenario.

Under a scenario where a carbon tax drives the price of power up by 10%, our wind equity investments may generate approximately 7% in additional cash flows over their life as compared to the cash flow the investments are expected to generate under the current baseline scenario.

We would not expect a material impact to our solar equity, renewable energy debt, solar real estate or energy efficiency investments.

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Additionally, the lower cost of projects may influence the amount of investment we would make in each opportunity.

Significant growth in positive public sentiment for sustainable infrastructure investment Increased demand for investment in sustainable infrastructure increase the volume of transactions in which we may invest, reduce our overall cost of capital and increase our profitability.

Significant growth in positive public sentiment for climate solutions investment Increased demand for investment in climate solutions may increase the volume of transactions in which we may invest, reduce our overall cost of capital and increase our profitability.

Given the nature of our business activities and focus on structuring transactions to meet the capital needs of our clients, it is difficult to reliably quantify the positive impact on our investment opportunities.

However, we would expect to achieve accretive economics from this assumption.

An increased demand for sustainable infrastructure may increase competition and influence our pricing strategy.

An increased demand for climate solutions may increase competition and influence our pricing strategy.

We would continue to review our pricing strategies with these opportunities.

Customer preference shifting to match electricity demand with carbon-free energy generation from resources on the same regional grids

Increased demand for climate solutions investment in particular regions increase the volume of transactions in which we may invest, reduce our overall cost of capital and increase our profitability.

However, we would expect to achieve accretive economics from this assumption.

Changing consumer preference can drive investments in renewable deployments in new areas to improve the localization of clean energy supplies and

can drive development of multi-technology portfolios of intelligent generation and storage, both of which may increase the total investment opportunities available to us.

Scenario 2 - Global temperatures increase more than 2 degrees Celsius above pre-industrial levels

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We currently have risk management processes which include a recurring review of our investments through our portfolio management function to assess any increasing operational costs of our investments.

For our existing portfolio, we will actively manage the risk to make appropriate adjustments to budget approvals, operational approvals, and other asset management tasks.

For our Portfolio, we will actively manage the risk to make appropriate adjustments to budget approvals, operational approvals, and other asset management tasks.

For any new investments, we make conservative assumptions to protect our investments from such types of pricing volatility and will continue to do so, including new assumptions around commodity volatility as relevant.

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We will continue to adjust our assumptions as additional risks and severity of climate risk are assessed.

We actively manage our existing portfolio to preemptively and proactively address any operational or maintenance issues.

We actively manage our Portfolio to preemptively and proactively address any operational or maintenance issues.

Increased wind variability and increased wear on wind turbine components, which may increase operating costs.

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An increase in water prices may reduce the cash flows and financial returns from our related investments, which may cause us to reduce the amount of financial leverage we utilize and cause a decline in our overall profitability.

The impact of water scarcity and increased prices to our existing portfolio is not expected to have a material impact on the cash flows of our investments.

The impact of water scarcity and increased prices to our Portfolio is not expected to have a material impact on the cash flows of our investments.

To the extent this becomes a material matter we would seek out protections to mitigate any impact of additional water related costs.

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This increase in insurance cost would drive an increase in total operating expenses.

We have estimated that an increase in operating expenses of 5% would be expected to reduce our cash flows from wind equity and solar equity projects by 1% and 2%, respectively.

We would not expect a material impact on our renewable energy debt, solar real estate and energy efficiency investments.

We have estimated that an increase in operating expenses of 5% would be expected to reduce our cash flows from solar equity projects by 1% .

We would not expect a material impact on our wind equity, renewable energy debt, solar real estate and energy efficiency investments.

We require that the projects in which we invest are insured against casualty events that could impact our cash distributions.

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The current outbreak of the novel coronavirus (COVID-19) is having an ongoing impact on the U.S., regional and global economies, the U.S.

sustainable infrastructure market and the broader financial markets.

Since March, in an attempt to control COVID-19 the Federal government and most states and/or local governments, including where we have our office (Maryland) and in regions where our projects and other investments are located or where they are managed, have implemented various restrictions, rules, or guidelines including quarantines, restrictions on travel, “shelter in place”, “stay at home”, or "safer at home" rules, restrictions on types of business that may continue to operate, and/or restrictions on types of construction projects allowed.

While some of these restrictions have been relaxed or phased out, many of these or similar restrictions remain in place, continue to be implemented, or additional restrictions are being considered.

Although, in certain cases, exceptions may be available for certain essential operations and businesses which generally include

the renewable energy projects in which we invest, there is no assurance that such exceptions will enable us to avoid adverse effects to our results of operations and business.

Further, such actions create disruption in energy efficiency, renewable energy, real estate and other sustainable infrastructure markets and adversely impact a number of industries.

We closed our office and moved to a remote workforce in early March to help ensure the safety and productivity of our employees and help prevent the spread of COVID-19 among our workforce and in the community.

We took this action early as we recognized the seriousness of the situation and wanted to protect our employees and the members of the communities in which they live and work.

We have spent significant time and resources over the last several years to update our IT infrastructure and our use of the cloud to allow us to take this action.

Operating as a remote workforce has not materially impacted our ability to carry out day to day operations.

We have announced donations totaling $375,000 to several Maryland charities who are providing services during the pandemic as well as to charities addressing racial inequity.

We have taken certain actions to increase liquidity, including issuing approximately $300 million in common stock and issuing over $900 million of senior unsecured and convertible senior notes.

We believe these actions give us ample liquidity to continue to operate our business and make investments in green projects as opportunities present themselves.

See the Notes 7 and 8 to our financial statements and Liquidity and Capital Resources in this Form 10-K for further discussion of our liquidity.

climate solutions market and the broader financial markets, including supply chain disruptions, tightening labor markets, and inflation.

Our financial results for 2021 have not been adversely impacted by COVID-19 to a material degree.

We currently have no material loan delinquencies.

We believe that the cost-savings attributes of the projects in which we invest provide incentive to borrowers and other obligors to continue to make their contractual payments.

The rapid development and fluidity of the circumstances resulting from this pandemic preclude any prediction as to the ultimate adverse impact of COVID-19.

Nevertheless, COVID-19 and the current financial, economic and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to our performance, financial condition, volume of business, results of operations and cash flows.

We expect to review and adjust our efforts as the circumstances and impacts of the pandemic develop and respond to the shifting business and financial landscape and heightened volatility in, among other things, financial markets as well as the general economy and the various federal, state and local guidelines on business operations.

COVID-19 and the current financial, economic and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to our performance, financial condition, volume of business, results of operations and cash flows.

We expect to continue to review and adjust our efforts as the circumstances and impacts of the pandemic develop and respond to the shifting business and financial landscape and heightened volatility in, among other

things, financial markets as well as the general economy and the various federal, state and local guidelines on business operations.

See the Risk Factors section of this Form 10-K for additional discuss of certain potential risks to our business arising from COVID-19.

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Those material accounting policies and estimates that we expect to be most critical to an investor’s understanding of our financial results and condition and require complex management judgment are discussed below.

See Note 2 of the audited financial statements in this Form 10-K for further details on our accounting policies.

See Note 2 to our audited financial statements in this Form 10-K for further details on our accounting policies.

We evaluate our critical accounting estimates and judgments on an ongoing basis and update them, as necessary, based on changing conditions.

Additionally, there were certain newly issued accounting pronouncements that may be relevant to our business.

See Note 2 of the audited financial statements in this Form 10-K for further details on these newly issued accounting pronouncements.

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.

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We account for our investment in entities that are considered voting or variable interest entities under ASC 810, Consolidation .

We perform an ongoing assessment and make judgments to determine the primary beneficiary of each entity as required by ASC 810, which includes an assessment of the type of control we have over the entity.

We perform an ongoing assessment and make judgments to determine the primary beneficiary of each entity as required by ASC 810, which includes an assessment of the type and degree of control we have over the entity.

If we would conclude that certain of these entities should be consolidated, we would include the entities’ assets, liabilities and related activity in our financial statements.

Refer to discussion below relating to consolidation considerations for the securitization of receivables.

We further discuss our process for evaluating these judgments in Note 2 of the audited financial statements of this Form 10-K.

Refer to discussion below relating to additional consolidation considerations related to the securitization of receivables.

We further discuss our process for evaluating these judgments in Note 2 to our audited financial statements in this Form 10-K.

Equity Method Investments

For our non-consolidated equity investments, we generally determine our income allocations under the equity method of accounting based on the change in our claim on net assets of the investee entity using a method commonly referred to as the hypothetical liquidation at book value method or (“HLBV”).

This method uses a hypothetical liquidation scenario that may

require judgment in its application and could have a material impact on our reported financial results.

For our non-consolidated equity investments, we generally determine our income allocations under the equity method of accounting based on the change in our claim on net assets of the investee entity as reported by the investee using a method commonly referred to as the hypothetical liquidation at book value method or (“HLBV”).

This method uses a hypothetical liquidation scenario that may require judgment in its application and could have a material impact on our reported financial results.

Any changes in this method of application or in certain assumptions could either increase or decrease our net income.

We further discuss our process for applying this method of income allocations in Note 2 of the audited financial statements of this Form 10-K.

We further discuss our process for applying this method of income allocations in Note 2 to our audited financial statements in this Form 10-K.

Impairment of our Portfolio

We evaluate the various assets in our Portfolio on at least a quarterly basis, and more frequently when economic or other conditions warrant such an evaluation, for potential delinquencies or other events that may indicate a potential impairment of the such asset.

If an asset is determined to be impaired, any impairment charges would be recorded in the income statement and reduce our net income.

We further discuss our process for evaluating these judgments in Note 2 of the audited financial statements in this Form 10-K.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments-Credit Losses-Measurement of Credit Losses on Financial Instruments (“Topic 326”).

Topic 326 significantly changes how entities will recognize and measure credit losses and impairments for most financial assets and certain other instruments that are not measured at fair value through net income.

Topic 326 replaces 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 expected losses from available-for-sale debt securities rather than reduce the amortized cost, as currently required.

The expected loss model inherently requires more judgment than the incurred loss model, as management’s expectations of the creditworthiness of our borrowers as well as macroeconomic factors such as power prices and unemployment rates can impact the provision for receivables we record.

Topic 326 also simplifies the accounting model for purchased credit-impaired debt securities and loans.

Topic 326 is effective for fiscal years beginning after December 15, 2019 and was adopted through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective.

The Company has adopted the new standard as of January 1, 2020.

We further discuss our process for applying this accounting standard in Note 2 of the audited financial statements of this Form 10-K

We evaluate the various assets in our Portfolio on at least a quarterly basis, and more frequently when economic or other conditions warrant such an evaluation, for delinquencies or other events that may indicate a potential impairment or specific consideration in the development of the allowance for credit losses.

For our equity method investments and real estate, if an impairment charge is deemed appropriate it would be recorded in our income statement and reduce our net income.

In addition, for our receivables, we make judgments about our expected losses related to the receivables in our Portfolio and record an allowance for credit losses on such receivables with a provision for loss on receivables in our income statement.

We further discuss our process for evaluating these judgments in Note 2 to our audited financial statements in this Form 10-K.

Securitization of Financial Assets

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If we would conclude that certain of these special purpose entities or securitization trusts should be consolidated, we would include the assets and liabilities of the entity and their related activity in our financial statements.

If sale accounting is not met in these transactions it would be treated as a secured borrowing rather than a sale in our financial statements.

We further discuss our process for evaluating these judgments in Note 2 of the audited financial statements of this Form 10-K.

If sale accounting is not met in these transactions it would be treated as a secured borrowing rather than a sale in our financial statements, which would result in reduced revenue in the current period and an increase in assets and non-recourse debt.

We further discuss our process for evaluating these judgments in Note 2 to our audited financial statements in this Form 10-K.

We also make assumptions regarding the fair value of our securitization assets in these transferred assets.

If our determination of fair value is determined to be incorrect, our gain on sale of receivables and investments in our income statement and securitization assets on our balance

sheet will be inaccurate.

See Note 3 to our audited financial statements in this Form 10-K for a discussion around fair value measurements.

Results of Operations

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Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 22, 2021.

We make investments in climate solutions by providing capital to the leading companies in the energy efficiency, renewable energy and other sustainable infrastructure markets.

We believe that Hannon Armstrong is one of the first U.S.

public companies solely dedicated to such climate investments.

Our goal is to generate attractive returns for our shareholders by investing in a diversified portfolio of assets and projects that reduce carbon emissions or increase resilience to climate change and generate long-term, recurring and predictable cash flows or cost savings from proven commercial technologies.

We invest in climate solutions developed or sponsored by leading companies in the energy efficiency, renewable energy and other sustainable infrastructure markets.

We believe we are one of the first U.S.

public companies solely dedicated to such climate solutions.

Our goal is to generate attractive returns from a diversified portfolio of project company investments with long-term, predictable cash flows that reduce carbon emissions or increase resilience to climate change.

We completed approximately $1.7 billion of transactions during 2021, compared to approximately $1.9 billion during 2020.

Our strategy includes holding a large portion of these transactions on our balance sheet.

We refer to the transactions we hold on our balance sheet as of a given date as our “Portfolio.” Our Portfolio was approximately $2.9 billion as of December 31, 2020 and $2.1 billion December 31, 2019.

We refer to the transactions we hold on our balance sheet as of a given date as our “Portfolio”.

Our Portfolio was approximately $3.6 billion as of December 31, 2021 and $2.9 billion December 31, 2020.

Our Portfolio totaled approximately $3.6 billion as of December 31, 2021, and included approximately $1.9 billion of BTM assets and approximately $1.7 billion of GC assets.

Approximately 44% consisted of fixed-rate government and commercial receivables and debt securities, which are classified as investments, on our balance sheet.

Approximately 43% of our Portfolio consisted of unconsolidated equity investments in renewable energy related projects and approximately 13% of our Portfolio was real estate leased to renewable energy projects under lease agreements.

Approximately 49% of our Portfolio consisted of unconsolidated equity investments in renewable energy related projects.

Approximately 41% consisted of fixed-rate government and commercial receivables and debt securities, which are classified as investments, on our balance sheet and approximately 10% of our Portfolio was real estate leased to renewable energy projects under long-term operating lease agreements.

Our Portfolio consisted of over 285 transactions with an average size of $12 million and the weighted average remaining life of our Portfolio (excluding match-funded transactions) of approximately 17 years as of December 31, 2021.

Our Portfolio included the following as of December 31, 2020:

• Equity investments in either preferred or common structures in unconsolidated entities;

• Government and commercial receivables, such as loans for renewable energy and energy efficiency projects;

• Real estate, such as land or other assets leased for use by sustainable infrastructure projects typically under long-term leases;

• Investments in debt securities of renewable energy or energy efficiency projects.

The table below provides details on the interest rate and maturity of our receivables and debt securities as of December 31, 2021:

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Fixed-rate receivables, interest rates less than 5.00% per annum $ 131 2023 to 2056

Fixed-rate receivables, interest rates from 5.00% to 6.50% per annum (1)

92 2022 to 2056

Fixed-rate receivables, interest rates from 6.50% to 8.00% per annum 635 2022 to 2069

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Total receivables and investments $ 1,442

The table below presents, for the debt investments and real estate related holdings of our Portfolio and our interest-bearing liabilities inclusive of our credit facilities, the average outstanding balances, income earned, the interest expense incurred, and average yield or cost.

(1) Excludes receivables held-for-sale of $22 million.

The table below presents, for the debt investments and real estate related holdings of our Portfolio and our interest-bearing liabilities inclusive of our short-term commercial paper issuances and revolving credit facilities, the average outstanding balances, income earned, the interest expense incurred, and average yield or cost.

Our earnings from our equity method investments are not included in this table.

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Interest expense (1)

$ 106 $ 92 $ 64

Average balance of debt $ 2,300 $ 1,797 $ 1,307

Average cost of debt 4.6 % 5.1 % 4.9 %

(1) Excludes loss on debt modification or extinguishment included in interest expense in our income statement.

The following table provides a summary of our anticipated principal repayments for our receivables and investments as of December 31, 2021:

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Investments 18 1 2 4 11

See Note 6 of our audited financial statements in this Form 10-K for information on:

See Note 6 to our audited financial statements in this Form 10-K for information on:

• the anticipated maturity dates of our receivables and investments and the weighted average yield for each range of maturities as of December 31, 2021,

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• the receivables on non-accrual status.

For information on our residual assets relating to our securitization trusts, see Note 5 of our audited financial statements in this Form 10-K.

The residual assets do not have a contractual maturity date and the underlying securitized assets have contractual maturity dates until 2056.

For information on our securitization assets relating to our securitization trusts, see Note 5 to our audited financial statements in this Form 10-K.

The securitization assets do not have a contractual maturity date and the underlying securitized assets have contractual maturity dates until 2058.

Comparison of the Year Ended December 31, 2021 to the Year Ended December 31, 2020

December 31, $ Change % Change

(dollars in millions)

(dollars in thousands)

Interest income $ 106,889 $ 95,559 $ 11,330 12 %

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Net income (loss) $ 127,346 $ 82,759 $ 44,587 54 %

• Net income increased by approximately $1 million as a result of a $45 million increase in total revenue, a $39 million increase in total expenses, a $16 million decrease in income from equity method investments, and a $11 million increase in income tax benefit (expense).

• Net income increased by approximately $45 million as a result of a $26 million increase in total revenue and a $78 million increase in income from equity method investments, partially offset by a $40 million increase in total expenses and a $20 million increase in income tax expense.

These results do not include the Non-GAAP earnings adjustment related to equity method investments, which is discussed in the Non-GAAP Financial Measures section.

• Interest and rental income increased by $20 million due to the addition of higher yielding assets to an overall larger portfolio.

• Gain on sale and fee income increased by $25 million primarily due to a change in the mix of assets being securitized.

• Interest expense for the year increased by approximately $28 million primarily as a result of higher outstanding balances of debt during the year.

• Provision for loss on receivables was $10 million primarily as a result of provisions based on new loans and loan commitments made during the year required by the new credit loss standard.

The prior period provision of $8 million, recorded under the previous incurred loss model, was due to a 2019 court ruling related to receivables that were previously placed on non-accrual status in 2017.

• Compensation and benefits increased by $9 million as a result of an increase in our employee headcount and incentive compensation.

• Income from equity method investments decreased by $16 million, primarily due to the GAAP gain of $28 million recognized from the sale of a portfolio of wind projects in 2019 which did not recur in the current year, partially offset by additional income resulting from the realization of tax attributes by our co-investors.

• Income tax benefit (expense) increased by $11 million as a result of higher taxable income in 2019 largely due to the gain on the sale of the portfolio of wind projects discussed above which did not recur in the current year.

• Interest and rental income increased by $11 million due to the addition of higher yielding assets and a larger portfolio.

Gain on sale and fee income increased by $15 million primarily from a change in mix of assets being securitized, partially offset by lower advisory fee generating opportunities.

• Interest expense for the year increased by approximately $30 million due to a one time $15 million loss on the redemption of the 2024 senior unsecured notes, as well as additional expense from a larger average outstanding debt balance partially offset by a lower cost of debt.

Provision for loss on receivables decreased by $10 million compared to the prior period, as the provision related to the current year loan and loan commitments were largely offset by the release of certain loan-specific reserves.

• Compensation and benefits increased by $15 million as a result of an increase in our employee headcount, compensation and one-time employee-related costs.

General and administrative increased by $5 million due to additional investment in corporate infrastructure.

• Income from equity method investments increased by $78 million, primarily due to new investments in our Portfolio, which had large one-time allocations of income under HLBV due to tax benefits recognized by our co-investors.

• We recorded income tax expense of $17 million primarily due to the HLBV income described above, compared with an income tax benefit of $3 million in the previous year.

Non-GAAP Financial Measures

We consider the following non-GAAP financial measures useful to investors as key supplemental measures of our performance:

(1) distributable earnings, (2) managed assets, and (3) distributable net investment income.

(1) distributable earnings, (2) distributable net investment income, and (3) managed assets.

These non-GAAP financial measures should be considered along with, but not as alternatives to, net income or loss as measures of our operating performance.

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Distributable Earnings

We are changing the name of our primary Non-GAAP earnings metric from Core (Pre-CECL) earnings to distributable earnings with no change in the historical method of calculation.

We will no longer be reporting a Core earnings metric which includes the CECL provision.

We calculate distributable earnings as GAAP net income (loss) excluding non-cash equity compensation expense, provisions for loss on receivables, amortization of intangibles, non-cash provision (benefit) for taxes, any one-time acquisition related costs or non-cash tax charges and the earnings attributable to our non-controlling interest of our Operating Partnership.

We calculate distributable earnings as GAAP net income (loss) excluding non-cash equity compensation expense, provisions for loss on receivables, amortization of intangibles, non-cash provision (benefit) for taxes, losses or (gains) from modification or extinguishment of debt facilities, any one-time acquisition related costs or non-cash tax charges and the earnings attributable to our non-controlling interest of our Operating Partnership.

We also make an adjustment to our equity method investments in the renewable energy projects as described below.

Judgment will be utilized in determining when we will reflect the losses on receivables in our distributable earnings.

In making this determination, we will consider certain circumstances such as, the time period in default, sufficiency of collateral as well as the outcomes of any related litigation.

In the future, distributable earnings may also exclude one-time events pursuant to changes in GAAP and certain other non-cash charges as approved by a majority of our independent directors.

We will use judgment in determining when we will reflect the losses on receivables in our distributable earnings, and will consider certain circumstances such as the time period in default, sufficiency of collateral as well as the outcomes of any related litigation.

In the future, distributable earnings may also exclude one-time events pursuant to changes in GAAP and certain other adjustments as approved by a majority of our independent directors.

We believe a non-GAAP measure, such as distributable earnings, that adjusts for the items discussed above is and has been a meaningful indicator of our economic performance and is useful to our investors as well as management in evaluating our performance as it relates to expected dividend payments over time.

As a REIT, we are required to distribute substantially all of our taxable income to investors in the form of dividends and is a principal focus of our investors.

As a REIT, we are required to distribute substantially all of our taxable income to investors in the form of dividends, which is a principal focus of our investors.

Additionally, we believe that our investors also use distributable 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 distributable earnings is useful to our investors.

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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.

The HLBV allocations of income or loss may be impacted by the receipt of tax attributes, as tax equity investors are allocated losses in proportion to the tax benefits received, while the sponsors of the project are allocated gains of a similar

In addition, the agreed upon allocations of the project’s cash flows may differ materially from the profit and loss allocation used for the HLBV calculations.

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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 distributable earnings, for certain of these investments where there are characteristics as described above, we further adjust GAAP net income (loss) to take into account our calculation of the return on capital (based upon the investment rate) from our renewable energy equity method investments, as adjusted to reflect the performance of the project and the cash distributed.

underwritten investment rate) from our renewable energy equity method investments, as adjusted to reflect the performance of the project and the cash distributed.

We believe this equity method investment adjustment to our GAAP net income (loss) in calculating our distributable earnings measure is an important supplement to the HLBV income allocations determined under GAAP for an investor to understand the economic performance of these investments where HLBV income can differ substantially from the economic returns.

In 2021, we acquired equity investments in portfolios of renewable energy projects which have the majority of the distributions payable to more senior investors in the first few years of the project.

The following table provides results related to our equity method investments for the last three years:

For the years ended December 31,

Years ended December 31,

2021 2020 2019

(dollars in millions)

Income under GAAP $ 48 $ 64 $ 22

Income (loss) under GAAP $ 126 $ 48 $ 64

Distributable earnings $ 104 $ 55 $ 41

Return of capital 102 60 74

Return of capital/(deferred cash collections) (51) 102 60

Cash collected $ 53 $ 157 $ 101

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The table below provides a reconciliation of our GAAP net income to distributable earnings:

For the Years Ended December 31,

Years Ended December 31,

2021 2020 2019

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Non-cash provision for loss on receivables 496 10,096 8,027

Loss (gain) on debt modification or extinguishment 16,083 — —

Amortization of intangibles 3,307 3,291 3,285

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$ 158,723 $ 1.88 $ 117,500 $ 1.55 $ 92,746 $ 1.40

(1) This is the GAAP diluted earnings per share and is the most comparable GAAP measure to our distributable earnings per share.

(1) The per share data reflects the GAAP diluted earnings per share and is the most comparable GAAP measure to our distributable earnings per share.

(2) Distributable earnings per share are based on 84,268,341 shares, 75,588,286 shares and 66,046,401 shares for the years ended December 31, 2021, 2020 and 2019, respectively, which represents the weighted average number of fully-diluted shares outstanding including our restricted stock awards, restricted stock units, long-term incentive plan units and the non-controlling interest in our Operating Partnership.

We include any potential common stock issuance in this calculation related to our convertible notes using the treasury stock method and any potential common stock issuances related to share based compensation units in the amount we believe is reasonably certain to vest.

To the extent a convertible note is converted during the period, we include its dilution using the treasury stock method until the date of conversion, after which we include the shares issued upon conversion.

We believe the use of the treasury stock method is an appropriate representation of the potential dilution when considering the economic behaviors of the holders of the instrument.

Managed Assets

As we both consolidate assets on our balance sheet and securitize assets, certain of our receivables and other assets are not reflected on our balance sheet where we may have a residual interest in the performance of the 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 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 receivables that we manage, which enables investors to understand and evaluate the credit performance associated with our portfolio of receivables, investments, and residual assets in securitized receivables.

Our non-GAAP Managed Assets measure may not be comparable to similarly titled measures used by other companies.

The following is a reconciliation of our GAAP Portfolio to our Managed Assets as of December 31, 2020, 2019, and 2018:

As of and for the year ended December 31,

2020 2019 2018

(dollars in millions)

Equity method investments $ 1,280 $ 499 $ 471

Government receivables 248 263 497

Commercial receivables 965 896 447

Real estate 359 362 365

Investments 55 75 170

Assets held in securitization trusts 4,308 4,101 3,334

Managed assets $ 7,215 $ 6,196 $ 5,284

Credit losses as a percentage of assets under management (1)

0.0 % 0.1 % 0.0 %

(1) Represents those credit losses that are are considered in determining distributable earnings.

Distributable Net Investment Income

We have a portfolio of investments in climate solutions which we finance using a combination of debt and equity.

We calculate distributable net investment income by adjusting GAAP-based net investment income for those earnings adjustments related to our distributable earnings which impact net investment income.

We have a portfolio of investments in climate solutions that we finance using a combination of debt and equity.

We calculate distributable net investment income as shown in the table below by adjusting GAAP-based net investment income for the equity method earnings adjustments which are applicable to distributable net investment income.

We believe that this measure is useful to investors as it shows the recurring income generated by our Portfolio after the associated interest cost of debt financing.

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Also refer to discussion above related to Distributable Earnings.

The following is a reconciliation of our GAAP-based net investment income to our distributable net investment income:

The following is a reconciliation of our GAAP-based net investment income to our distributable net investment income for the years ended December 31, 2021, 2020 and 2019:

Years Ended December 31,

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Equity method earnings adjustment 103,707 55,305 41,437

Loss (gain) on debt modification or extinguishment 16,083 — —

Amortization of real estate intangibles 3,089 3,089 3,082

Distributable net investment income $ 133,968 $ 87,649 $ 82,362

Other Measures

The following are certain other financial measures for the years ended December 31, 2020, 2019 and 2018.

Years Ended December 31,

2020 2019 2018

Return on assets - GAAP basis 2.8 % 3.6 % 1.9 %

Return on equity - GAAP basis 7.7 % 9.4 % 5.7 %

Average equity to average total assets ratio - GAAP basis 36.8 % 38.4 % 32.9 %

Managed Assets

As we both consolidate assets on our balance sheet and securitize assets off-balance sheet, certain of our receivables and other assets are not reflected on our balance sheet where we may have a residual interest in the performance of the investment, such as servicing rights or a retained interest in cash flows.

Thus, we present our investments on a non-GAAP “Managed Assets” basis, which assumes that securitized receivables are not sold.

Our management also uses Managed Assets in this way.

Our non-GAAP Managed Assets measure may not be comparable to similarly titled measures used by other companies.

The following is a reconciliation of our GAAP-based Portfolio to our Managed Assets as of December 31, 2021 and 2020:

As of December 31,

(dollars in millions)

Equity method investments $ 1,760 $ 1,280

Commercial receivables, net of allowance 1,299 965

Government receivables 125 248

Receivables held-for-sale 22 —

Real estate 356 359

Investments 18 55

GAAP-based Portfolio 3,580 2,907

Assets held in securitization trusts 5,199 4,308

Managed assets $ 8,779 $ 7,215

Other Measures and Metrics

Portfolio Yield

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Underwritten yield is the rate at which we discount the expected cash flows from the assets in our Portfolio to determine our purchase price.

In calculating underwritten yield, we make certain assumptions, including the timing and amounts of cash flows generated by our investments, which may differ from actual results, and we may update this yield to reflect our most current estimates of project performance.

In calculating underwritten yield, we make certain assumptions, including the timing and amounts of cash flows generated by our investments, which may differ from actual results, and may update this yield to reflect our most current estimates of project performance.

We believe that portfolio yield provides an additional metric to understand certain characteristics of our Portfolio as of a point in time.

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Our Portfolio totaled approximately $3.6 billion as of December 31, 2021.

Unlevered portfolio yield was 7.6% as of both December 31, 2020 and 2019.

Unlevered portfolio yield was 7.5% as of December 31, 2021 and 7.6% as of December 31, 2020.

See Note 6 to our financial statements and MD&A - Our Business in this Form 10-K for additional discussion of the characteristics of our Portfolio as of December 31, 2021.

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As discussed in Item 1.

Business, as part of our investment process, we calculate the estimated metric tons of CO2 equivalent emissions, or carbon emissions avoided by our investments.

In this calculation which we refer to as CarbonCount®, we apply emissions factor data from the U.S.

Business, as part of our investment process, we calculate the estimated metric tons of CO2 equivalent emissions, or carbon emissions avoided by our investments by applying emissions factor data from the U.S.

Government or the International Energy Administration to an estimate of a project’s energy production or savings to compute an estimate of metric tons of carbon emissions avoided.

We estimate that our investments originated in 2020 will reduce annual carbon emissions by approximately 2.0 million metric tons.

We then determine the metric tons of carbon emissions avoided per thousand dollars of investments, in a calculation we refer to as CarbonCount, which enables us to measure the impact our investments have on reducing carbon emissions.

We estimate that our investments originated in 2021 will reduce annual carbon emissions by approximately 0.8 million metric tons, equating to a CarbonCount of 0.50.

In assessing our performance and results of operations, we also consider the impact of our operations on the environment.

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• Scope 1 GHG emissions - Direct emissions - Emissions from operations that are owned or controlled by the reporting company.

Due to the nature of our operations, we do not have Scope 1 GHG emissions.

• Scope 2 GHG emissions - Indirect emissions - Emissions from the generation of purchased or acquired energy such as electricity, steam, heating or cooling, consumed by the reporting company.

As we purchase power for our offices from renewable, zero-carbon energy sources, we do not have market-based Scope 2 emissions.

• Scope 3 GHG emissions - Indirect emissions - All other indirect emissions that occur in the value chain of the reporting company, including both upstream and downstream emissions.

This includes the estimated emissions associated with employee commuting and business travel.

The table below illustrates our goals and performance for 2021 in metric tons (“MT”).

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(1) Performance stated is market-based .

(2) Our stated actual performance for Scope 3 GHG emissions does not include the carbon emissions or the emissions reductions as a result of our investments.

The first year carbon emissions reductions as a result of our investments originated in 2020 are 2.0 million MT.

(2) Our stated actual performance and goal for Scope 3 GHG emissions does not include the carbon emissions or the emissions reductions as a result of our investments.

The first year estimated carbon emissions avoided as a result of our investments originated in 2021 are 809 thousand MT.

Human Capital Metrics

As part of our broader human capital strategy, we monitor and disclose certain metrics which help us understand our workforce and our progress in fostering a diverse and inclusive work environment.

As of December 31, 2020, we employed 73 people full-time, one person part-time, and five people as independent contractors.

As a growing company, the average tenure of our employees as of December 31, 2020, was approximately 5 years, and more than 47% of our employees had been employed by us for more than 4 years.

For the year ending December 31, 2020, we had no retirements or resignations related to ill health.

As of December 31, 2021, we employed 97 people full-time, 2 person part-time, and 9 people as independent contractors.

The average tenure of our employees as of December 31, 2021, was approximately 4.3 years, and more than 36% of our employees had been employed by us for more than 4 years.

For the year ended December 31, 2021, we had an employee turnover rate of 3%, including one retirement.

There were no retirements or resignations related to ill health.

As discussed in Item 1.

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Metrics surrounding the diversity and inclusion of our workforce are shown below:

Percentage of various levels of the workforce who identify as male or female

Percentage of various levels of the workforce who identify as racial- or ethnic-minorities

In addition to diversity of gender and ethnic background, we also value diversity of thought, with 58% of our leadership team and 57% of our board of directors possessing degrees outside the fields of business or economics, including in science and engineering, liberal and fine arts, and law.

Percentage of various levels of the workforce who identify as male or female as of December 31, 2021

Percentage of various levels of the workforce who identify as racial- or ethnic-minorities as of December 31, 2021

Demographic data of promoted employees during the year ended December 31, 2021

Of both our workforce and our managerial roles, 3% represent as LGBTQ.

In addition to diversity of gender and ethnic background, we also value diversity of thought, with 58% of our leadership team and 67% of our Board possessing degrees outside the fields of business or economics, including in science and engineering, liberal and fine arts, and law.

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 investments in sustainable infrastructure, repay principal and interest on our borrowings, make distributions to our stockholders and fund our operations.

We will use significant cash to make investments in climate solutions, 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.

We finance our investments primarily with non-recourse or recourse debt, equity and off-balance sheet securitization structures.

We believe we have substantial liquidity as of December 31, 2020, with unrestricted cash balances of $286 million compared to $6 million as of December 31, 2019.

We have been able to successfully access the equity markets, raising approximately $300 million under our "at-the-market" equity distribution program (our "ATM program") during the twelve months ended December 31, 2020.

During 2020, we have issued $775 million principal amount of senior unsecured notes and $144 million of convertible notes.

We have two senior secured revolving credit facilities (“Rep-Based Facility” and “Approval-Based Facility”) with several lenders with a combined maximum commitment of $450 million.

For additional information on our credit facilities, see Note 7 to our audited financial statements on this Form 10-K.

As of December 31, 2020, we had approximately $605 million of non-recourse borrowings.

We have approximately $1.3 billion of senior unsecured notes and $294 million of convertible notes outstanding.

We have adequate liquidity as of December 31, 2021, with unrestricted cash balances of $226 million, an unsecured revolving credit facility with an unused capacity of $350 million, and $25 million of available capacity in our secured revolving credit facilities.

In 2021 we established our $100 million CarbonCount Green Commercial Paper Notes Program, offering us another potential short-term liquidity source, of which $50 million is available as of December 31, 2021.

During 2021, we entered into a $400 million unsecured revolving credit facility which was upsized to $600 million in February 2022, we issued $201 million in equity, and issued $1 billion in senior unsecured notes, with $500 million of the proceeds of such issuance being used to redeem our 2024 senior unsecured notes.

As of December 31, 2021, we had $440 million of non-recourse borrowings.

We have $1.8 billion of senior unsecured notes and $152 million of convertible notes outstanding.

$142 million of our 2022 senior convertible notes were converted into equity in 2021, representing a non-cash settlement of those notes.

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.

We have continued to complete off-balance sheet securitization transactions with large institutional investors such as life insurance companies throughout 2020.

We have continued to complete off-balance sheet securitization transactions with large institutional investors such as life insurance companies.

As of December 31, 2021, the outstanding principal balance of our assets financed through the use of these off-balance sheet transactions was approximately $5.2 billion.

In addition to general operational obligations which are typically paid as incurred and dividends, which are declared by our board of directors quarterly, our future cash needs include the non-amortizing balances of our senior unsecured debt and the balances of our credit facilities.

Cash maturities related to these obligations are shown below:

The above cash maturities do not include our non-recourse debt, given that to the extent there are not sufficient cash flows received from those investments pledged as collateral, the investor has no recourse against other corporate assets to recover any shortfalls and corporate cash contributions would not be required.

The above also does not include convertible debt maturities, as it is possible those obligations will be settled with the issuance of shares.

For further information on non-recourse debt and our convertible notes, see Note 8 to our financial statements.

Large institutional investors have provided the financing for our on and off-balance sheet financings.

We have worked to expand our liquidity and access to the debt and bank loan markets.

For further information on the credit facilities, senior unsecured notes, asset backed non-recourse debt, convertible notes, and securitizations, see Notes 5, 7 and 8 to our audited financial statements of this Form 10-K.

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 and revolving facilities), warehouse facilities, repurchase agreements, and public and private debt issuances as a means of financing our business.

In addition to general operational obligations, which are typically paid as incurred, and dividends, which are declared by our board of directors quarterly, we will have future cash needs related to the maturity of the non-amortizing balances of our

Senior Unsecured Notes and the balances of our short-term commercial paper issuances and revolving credit facilities.

We also have maturities related to our non-recourse debt and Senior Convertible Notes.

However, as it relates to the non-recourse debt, to the extent there are not sufficient cash flows received from those investments pledged as collateral, the investor has no recourse against other corporate assets to recover any shortfalls and corporate cash contributions would not be required.

As it relates to the Senior Convertible Notes, those obligations may be settled prior to maturity with the issuance of shares or a restructuring of the debt or at maturity with cash.

For further information on our long-term debt, see Note 8 to our financial statements of this Form 10-K.

The maturity profile of these obligations (excluding non-recourse debt) are shown below:

(1) Our unsecured senior credit facility was amended in 2022 to have a maturity in 2025.

We plan to raise additional equity capital and continue to use fixed and floating rate borrowings, which may be in the form of short-term commercial paper issuances, revolving credit facilities, recourse or non-recourse debt, repurchase agreements, and public and private debt issuances as a means of financing our business.

We also expect to use both on-balance sheet and off-balance sheet securitizations.

We may also consider the use of separately funded special purpose entities or funds to allow us to expand the investments that we make or to manage the Portfolio diversification.

We may also consider the use of separately funded special purpose entities or funds to allow us to expand the investments that we make or to manage Portfolio diversification.

The decision on how we finance specific assets or groups of assets is largely driven by risk and portfolio and financial management considerations, including the 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.

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Over time, as market conditions change, we may use other forms of debt and equity in addition to these financing arrangements.

The amount of financial 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 shown in the table below, our debt to equity ratio was approximately 1.6 to 1 as of December 31, 2021, which is below our current board-approved leverage limit of up to 2.5 to 1.

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Leverage 1.6 to 1 1.8 to 1

(1) Floating-rate borrowings include borrowings under our floating-rate credit facilities and approximately $2 million of non-recourse debt with floating rate exposure as of December 31, 2019.

Fixed-rate debt also includes the present notional value of non-recourse debt that is hedged using interest rate swaps.

(1) Floating-rate borrowings include borrowings under our floating-rate credit facilities.

Debt excludes securitizations that are not consolidated on our balance sheet.

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The timing and impact of future sales of receivables and investments, if any, cannot be predicted with any certainty.

We believe these identified sources of liquidity in addition to our cash on hand will be adequate for purposes of meeting our short-term and long-term liquidity needs, which include funding future investments, debt service, operating costs and distributions to our stockholders.

We believe our identified sources of liquidity will be adequate for purposes of meeting our short-term and long-term liquidity needs, which include funding future investments, debt service, 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.

These dividend requirements limit our ability to retain earnings and thereby increase the need to replenish capital for growth and our operations.

Sources and Uses of Cash

We had approximately $310 million and $107 million unrestricted cash, cash equivalents, and restricted cash as of December 31, 2020 and 2019, respectively.

We had approximately $251 million and $310 million in unrestricted cash, cash equivalents, and restricted cash as of December 31, 2021 and 2020, respectively.

Cash Flows Relating to Operating Activities

Net cash provided by operating activities was approximately $13 million for the year ended December 31, 2021, driven primarily by net income of $127 million, less adjustments for non-cash and other items of $114 million.

The non-cash and other adjustments consisted of decreases of $94 million related to equity method investments, $48 million related to non-cash gain on securitization, $22 million related to changes in receivables held for sale, and $7 million in accrued interest and other.

These were partially offset by increases of $17 million for equity based compensation, $14 million of non-cash loss on debt extinguishment, $11 million of changes in accounts payable and accrued expenses, $11 million in amortization of financing costs, and $4 million of depreciation and amortization.

Net cash provided by operating activities was approximately $73 million for the year ended December 31, 2020, driven primarily by net income of $83 million, less adjustments for non-cash and other items of $10 million.

The non-cash and other adjustments consisted of increases of $3 million of depreciation and amortization, $8 million for amortization of finance costs, $17 million related to equity-based compensation, $13 million for equity method investments, $8 million related to accounts payable and accrued expenses, $14 million for gain on sale of receivables and investments, and $10 million for provision for loss on receivables.

These increases were offset by $56 million related to non-cash gains on securitizations and $27 million related to other items.

Net cash provided by operating activities was approximately $29 million for the year ended December 31, 2019, driven primarily by net income of $82 million, less adjustments for non-cash and other items of $53 million.

The non-cash and other adjustments consisted of increases of $4 million of depreciation and amortization, $6 million for amortization of financing costs, $14 million related to equity-based compensation, $5 million related to accounts payable and accrued expenses, $13 million for gain on sale of receivables and investments, and $8 million for provision for loss on receivables.

These increases were offset by $56 million related to non-cash gains on securitizations, $34 million related to equity method investments, and $13 million related to other items.

Cash Flows Relating to Investing Activities

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These were offset by collected payments of $149 million from receivables and fixed rate debt securities and the receipt of $91 million from the sale of financial assets.

We also collected $99 million from equity method investments which are considered return of capital determined under GAAP, withdrew $8 million from escrow accounts, and had other cash inflows of $3 million.

We also collected $21 million from equity method investments in excess of income recognized to date under GAAP, withdrew $2 million from escrow accounts, and had other cash inflows of $6 million.

Net cash used in investing activities was approximately $831 million for the year ended December 31, 2020.

We collected payments of $64 million from receivables and fixed rate debt securities and received $274 million from the sale of financial assets.

We also collected $71 million from equity method investments which are considered return of capital determined under GAAP, received $81 million from the sale of equity method investments, withdrew $31 million from escrow accounts, and had other cash inflows of $2 million.

These were offset by investments in receivables and fixed rate debt securities of $543 million, equity method investments of $152 million, and funding of escrow accounts of $29 million.

We made equity method investments of $886 million, investments in receivables and fixed rate debt securities of $296 million, and funded escrow accounts of $23 million.

These were offset by collected payments of $135 million from receivables and fixed rate debt securities and the receipt of $128 million from the sale of financial assets.

We also collected $99 million from equity

method investments which are considered return of capital determined under GAAP, withdrew $8 million from escrow accounts, and had other cash inflows of $3 million.

Cash Flows Relating to Financing Activities

Net cash provided by financing activities was approximately $631 million for the year ended December 31, 2021.

We received proceeds from the issuance of senior unsecured debt of $1 billion, net proceeds from common stock issuances of $201 million, and proceeds from credit facilities and commercial paper notes of $150 million.

These were partially offset by the redemption of senior unsecured notes of $514 million, principal payments on credit facilities of $22 million, principal payments on non-recourse debt of $38 million, payments of $14 million for withholding requirements as a result of the vesting of employee shares, payment of debt issuance costs of $18 million and payments of dividends, distributions, and other financing activities of $114 million.

Net cash provided by financing activities was approximately $962 million for the year ended December 31, 2020.

We received proceeds from the issuance of senior unsecured debt of $771 million, net proceeds from common stock issuances of $298 million, proceeds from the issuance of convertible notes of $144 million, proceeds from credit facilities of $126 million, and proceeds from non-recourse debt of $16 million.

These were partially offset by principal payments on credit facilities of $134 million, principal payments on non-recourse debt of $126 million, payments of $17 million for withholding requirements as a result of the vesting of employee shares, and payments of dividends, distributions, and other financing activities of $116 million.

Net cash provided by financing activities was approximately $219 million for the year ended December 31, 2019.

We received proceeds from credit facilities of $102 million, proceeds from non-recourse debt of $131 million, proceeds from the issuance of senior unsecured debt of $507 million, and net proceeds from common stock issuances of $138 million.

These were partially offset by principal payments on credit facilities of $328 million, principal payments on non-recourse debt of $207 million, payments of deferred funding obligations of $19 million, payments of $9 million for withholding requirements as a result of the vesting of employee shares, and payments of dividends, distributions, and other financing activities of $96 million.

Contractual Obligations and Commitments

The following table provides a summary of our contractual obligations as of December 31, 2020:

Payment due by Period

Contractual Obligations Total Less than

1 year 1 - 3 Years 3 - 5 Years More than

(in millions)

Credit facilities $ 23 $ — $ 23 $ — $ —

Interest on credit facilities (1)

Non-recourse debt (2)

605 29 57 65 454

Interest on non-recourse debt (2)

225 24 45 39 117

Senior unsecured notes (3)

1,275 — — 900 375

Interest on senior unsecured notes 353 64 129 90 70

Convertible notes (4)

294 — 294 — —

Interest on convertible notes 12 6 6 — —

Operating lease obligations 4 1 1 1 1

Total $ 2,793 $ 125 $ 556 $ 1,095 $ 1,017

(1) Interest is calculated based on the interest rate in effect at December 31, 2020, and includes all interest expense incurred and expected to be incurred in the future based on the current principal balance through the contractual maturity of the credit facilities.

(2) These amounts exclude $12 million of unamortized debt issuance costs.

Interest is calculated based on the interest rate in effect at December 31, 2020, including the effect of interest rate hedges as applicable.

(3) Excludes $15 million of unamortized debt issuance costs and $2 million of unamortized issuance premium.

(4) Excludes $5 million of unamortized debt issuance costs.

Off-Balance Sheet Arrangements

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The taxable income of the REIT can vary from our GAAP earnings due to a number of different factors, including the book to tax timing differences of income and expense recognition from our transactions as well as the amount of taxable income of our TRS distributed to the REIT.

See Note 10 regarding the amount of our distributions that are taxed as ordinary income to our stockholders.

See Note 10 to our financial statements in this Form 10-K regarding the amount of our distributions that are treated as ordinary taxable income to our stockholders.

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.

These results and our ability to pay distributions will be affected by various factors, including the net interest and other income from our assets, 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.

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To the extent that we generate taxable income, distributions to our stockholders generally will be taxable as ordinary income, although all or a portion of such distributions may be designated by us as a qualified dividend or capital gain.

Beginning in 2018 (and through taxable years ending in 2025), a deduction is permitted for certain pass-through business income, including “qualified REIT dividends” (generally, dividends received by a REIT shareholder that are not designated as capital gain dividends or qualified dividend income), which will allow U.S.

capital gain dividends or qualified dividend income), which will allow U.S.

individuals, trusts and estates to deduct up to 20% of such amounts, subject to certain limitations, resulting in an effective maximum U.S.

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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 2020 and 2019 are described in Note 11 of the audited financial statements in this Form 10-K.

The dividends declared in 2021 and 2020 are described in Note 11 to our audited financial statements in this Form 10-K.

Book Value Considerations

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Other than our investments and the residual assets in securitized financial assets that are carried on our balance sheet at fair value as of December 31, 2021, 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 GAAP.

Other than the allowance for current expected credit losses applied to our government and commercial receivables, 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, interest rates or commodity prices since the dates the assets or liabilities were initially recorded.

Other than the allowance for current expected credit losses applied to our commercial and government receivables, 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, interest rates or commodity prices 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.

We do not anticipate that inflation will have a significant effect on our results of operations.

However, in the event of a significant increase in inflation, interest rates could rise and our projects and investments may be materially adversely affected.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis