What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-21 compared with 2022-02-22 · 145 added, 122 removed, 510 unchanged (34% of the section changed)

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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 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 are internally managed, and our management team has extensive relevant industry knowledge and experience.

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

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

We completed approximately $1.8 billion of transactions during 2022, compared to approximately $1.7 billion during 2021.

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When we combine these assets with our Portfolio, as of December 31, 2022, we manage approximately $9.8 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.

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

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.

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

Business for a further discussion of our business, investing strategy, and financing strategy.

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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 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:

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.

However, we believe these estimates are reliable indicators of market trends.

These positive industry trends coupled with the increasing environmental and economic imperative to reduce carbon emissions are expected to further broaden our investable universe.

In January 2023, National Oceanic and Atmospheric Administration (“NOAA”) reported that globally, 2022 was the sixth warmest year on record, with ten of the warmest years on record having occurred since 2010.

In light of this trend, we expect the federal government to continue to build upon its recent efforts to support the industry for climate solutions.

On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law, representing an unprecedented level of government support for the climate solutions industry as a whole.

The IRA includes approximately $400 billion in federal funding for tax credits, consumer rebates, and other incentives that put the U.S.

on a path to achieve the U.S.’s goal of reducing emissions 50 percent below 2005 levels by the end of the decade.

Specifically, production tax credits (“PTCs”) and investment tax credits (“ITCs”) for certain wind and solar investments have been extended for at least ten years, which we believe will provide developers, operators, and investors significant runway for capital deployment.

Importantly, these new tax credits transition to technology-neutral credits for projects that generate electricity with zero greenhouse gas emissions placed into service after 2024 and phase down upon the later of 2032 or when annual greenhouse gas emissions in the U.S.

electric sector fall 75 percent from 2022 levels.

The PTCs and ITCs under the IRA are transferable, and also include energy community and low-income community adders incentivizing the installation of projects in markets traditionally underserved by the renewables industry.

Further, the IRA provides incentives for domestic content production, energy storage, clean fuel production, clean transportation, and other climate solutions markets that support the expansion of our total addressable market.

The IRA builds on the climate and clean energy investments provided in the Infrastructure Investment and Jobs Act (“IIJA”), signed into law by President Biden in November 2021.

The IIJA provides billions of dollars for a variety of traditional infrastructure projects, as well as funding to invest in new emissions reduction technologies, build out a domestic network of electric vehicle chargers, and strengthen the battery supply chain.

Critically, the IIJA includes approximately $65 billion for energy and electric grid development, which will prove critical to integrating the next generation of renewable energy projects.

Relatedly, President Biden signed the CHIPS and Science Act into law in August 2022, which provides more than $280 billion to bolster U.S.

semiconductor capacity and research and development efforts for key emerging technologies over the next ten years.

As McKinsey & Company noted in “The CHIPS and Science Act:

Here’s what’s in it” published October 4, 2022, semiconductor shortages have been a key aspect of global supply chain pressures over the past 18 months, with the global supply chain approximately 2.5 standard deviations away from normal operations.

This new law is expected to help to alleviate such supply chain issues within our markets over time, as high-powered semiconductors play a key role in both renewable power generation and transmission of this power to the grid.

In addition to these laws, President Biden has taken several executive actions aimed at accelerating the clean energy economy.

In June 2022, President Biden issued an executive order authorizing use of the Defense Production Act to accelerate domestic production of clean energy technologies, including solar panel parts.

In December 2022, the President Biden announced the first-ever Federal Building Performance Standard, setting a goal of reducing energy usage and electrifying equipment and appliances in 30 percent of the building space owned by the federal government by 2030.

This action represents another important step in meeting President Biden’s goal of achieving net-zero emissions in all federal buildings by 2045.

The Federal Building Performance Standard follows a December 2021 executive order, signed by President Biden, that commits the federal government to achieving 100 percent carbon pollution-free electricity and a net-zero emissions building portfolio by 2045, including a 50 percent emissions reduction from buildings, campuses, and installations by 2032 from 2008 levels.

Each of these actions by the federal government represent unprecedented support for the climate solutions markets that we serve.

While we are not dependent on the support of the federal government to achieve our financial results, we welcome these actions to further combat the impact of climate change.

Corporates are also responding to climate change risks.

The American Clear Power Association (“ACP”) noted in its “Clean Energy Powers American Business” report for 2022 that corporate sustainability targets as well as economic and environmental benefits have led to a 100-fold increase in corporate clean power procurement over the past decade.

In 2022, despite rising PPA prices, ACP estimates that corporations purchased nearly 20 gigawatts of clean energy and contracted for more than 77 gigawatts of clean energy during the year.

Corporations remain an integral component in removing carbon from energy markets through their own energy transition plans as well as the carbon within their supply chains.

These positive industry trends coupled with the increasing environmental and economic imperative to reduce carbon emissions are expected to further broaden our investment opportunities.

Investments in energy efficiency as a service allow organizations to avoid the upfront costs of efficiency investments by paying for efficiency-enabled cost savings as operating rather than capital expenses.

In its Annual Energy Outlook 2022, the U.S.

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 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.

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 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.

Energy Information Administration (“EIA”) estimates that decreasing energy intensity resulting from energy efficiency improvements will continue until at least 2050 with declines in each end-use sector.

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.

The Federal Reserve Board of Governors began increasing the federal funds rate (the rate at which banks lend to one another) on March 17, 2022 for the first time since December 20, 2018.

In total, the Federal Reserve increased the federal funds rate by 4.25 percent in 2022, as well as 0.25 percent in 2023, and has signaled future increases and balance sheet reductions as necessary to reduce inflation to its 2 percent target.

These actions, in additional to general market conditions, have increased the cost of financing available to the markets that we serve.

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 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.

To date, inflationary pressures have not had a material impact on our business.

According to the EIA, the average annual Henry Hub natural gas price for 2022 was $6.45/MMBtu, an increase of 53 percent over 2021 and a 14-year high.

The EIA cites COVID-related issues as well as Russia’s invasion of Ukraine as key contributors to the sharp increase in price during 2022.

The EIA’s outlook for 2023 is for an average price of $4.90/MMBtu with an expectation that prices remain at nearly the same level in 2024.

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

For more detail on commodity price impacts, see “Item 7A.

Quantitative and Qualitative Disclosures about Market Risk-Commodity Price Risk”.

We attempt to mitigate our exposure to these low commodity prices and future volatility, as well as any credit risk associated with these prices, by acquiring projects with contracted revenues, negotiating certain structural protections such as preferred returns, and through active asset management and portfolio monitoring.

Similarly, we seek to manage credit risk that might arise from commodity price declines through our due diligence and underwriting processes, strong structural protections in our transaction agreements with customers, and active asset management and portfolio monitoring.

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

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Factors Impacting our Operating Results

We expect that our results of operations will be affected by a number of factors and will primarily depend on the size of our Portfolio, including the mix of transactions which we hold in our Portfolio, the income we receive from securitizations, syndications and other services, our Portfolio’s credit risk profile, changes in market interest rates, commodity prices, federal, state and/or municipal governmental policies, general market conditions in local, regional and national economies, our ability to qualify as a REIT and maintain our exemption from registration as an investment company under the 1940 Act and, the impact of climate change, and the impact of the novel coronavirus (COVID-19).

Portfolio Size

The size of our Portfolio will be a key revenue driver.

The size of our Portfolio will be a key driver of revenue.

Generally, as the size of our Portfolio on our balance sheet grows the amount of our revenue will increase.

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

If any of these government policies, incentives or regulations are adversely amended, delayed, eliminated, reduced, retroactively changed or not extended beyond their current expiration dates or there is a negative impact from the recent federal law changes or proposals, the operating results of the projects we finance and the demand for, and the returns available from our investments may decline, which could harm our business.

negative impact from the recent federal law changes or proposals, the operating results of the projects we finance and the demand for, and the returns available from our investments may decline, which could harm our business.

Impacts of climate change on our future operations

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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 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.

Under a scenario where a carbon tax drives the price of power up by 10%, our existing GC equity investments may hit their preferred return targets earlier, resulting in a modest increase in our overall investment yield, compared to the current baseline scenario.

Our existing BTM equity investments would experience a 2% increase in expected cash flows.

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

In relation to new business, there is the potential that more competitors enter our markets and put pressure on our asset pricing strategies as renewable energy and energy efficiency projects become more cost competitive with fossil fuel electricity generation assets.

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Assumption Qualitative impacts Quantitative impacts Considerations of and impact to our management strategy

Operational performance of the projects in which we invest are impacted by the global temperature increase A decrease in performance and power generation of the solar and wind energy assets related to our investments, as the performance of these assets vary based upon the ambient temperatures (in the case of solar) and air density (in the case of wind).

Both conditions may be caused by increases in global temperatures.

Operational performance of the projects in which we invest are impacted by the global temperature increase A decrease in performance

and power generation of the

solar and wind energy assets

related to our investments, as

the performance of these

assets vary based upon the

ambient temperatures (in the

case of solar) and air density

(in the case of wind).

conditions may be caused by

increases in global

temperatures.

Solar portfolio production can be affected by an increase in global temperature depending on the geography.

If solar production decreases by 5% we may expect there to be a 8% decrease in expected cash flows from our solar equity investments.

High temperatures have a significant efficiency impact on wind turbines as high temperature faults create more wear and tear on equipment.

If wind production decreases by 5% the cash flows from our wind equity investments would be expected to decrease by 5%.

If production of these GC assets decreases by 5% the cash flows from those investments would be expected to decrease by approximately 8%.

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

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We continually evaluate whether there are superior asset or portfolio level policies that are available that optimize our insurance coverage and premium costs.

Impact of COVID-19

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.

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 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.

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.

Critical Accounting Policies and Use of Estimates

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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.

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, along with non-controlling interests related to the ownership of the other equity holders.

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

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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.

Any changes in this method of application or in certain assumptions could either increase or decrease our net income and the carrying value of the assets accounted for under this method.

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.

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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, which would result in reduced revenue in the current period and an increase in assets and non-recourse debt.

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 period in which an asset contributed to the trust 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.

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.

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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, 2021, filed with the SEC on February 22, 2022.

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 $1.8 billion of transactions during 2022, compared to approximately $1.7 billion during 2021.

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Fixed-rate receivables, interest rates less than 5.00% per annum $ 122 2023 to 2047

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

92 2022 to 2056

Fixed-rate receivables, interest rates from 5.00% to 6.50% per annum 348 2024 to 2057

Fixed-rate receivables, interest rates from 6.50% to 8.00% per annum 728 2024 to 2069

Fixed-rate receivables, interest rates from 8.00% to 9.50% per annum 313 2025 to 2032

Fixed-rate receivables, interest rates greater than 9.50% per annum 520 2024 to 2061

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Net income (loss) $ 41,911 $ 127,346 $ (85,435) (67) %

• 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.

• Net income decreased by approximately $85 million as a result of a $95 million decrease in income from equity method investments and a $27 million increase in total expenses, partially offset by a $27 million increase in total revenue and a $10 million decrease 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 $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.

• Interest and rental income increased by $28 million due to a larger portfolio.

Gain on sale of receivables and investments and fee income decreased by $2 million primarily from a change in mix of assets being securitized, partially offset by increased fee income.

• Interest expense for the year decreased by approximately $6 million due to a one time $15 million loss on the redemption of the 2024 senior unsecured notes in the prior year which did not recur, offset partially by additional expense from a larger average outstanding debt balance.

Provision for loss on receivables increased by $12 million compared to the prior period as the result of new loans and loan commitments made in the current year.

• Compensation and benefits increased by $10 million as a result of an increase in our employee headcount and compensation and the acceleration of share based compensation associated with the adoption of a new retirement policy.

General and administrative increased by $10 million due to additional investment in corporate infrastructure and corporate governance expenses.

• Income from equity method investments decreased by $95 million, due to allocations of income in the prior period related to tax credits allocated to our investors which did not recur, as well as our current period allocation of unrealized mark to market losses on economic hedges used by some of our projects.

Renewable energy projects often enter into contracts to minimize the impact of increasing power prices.

These contracts serve as economic hedges where rising power prices cause the value of these contracts to decrease, which in our case is recognized through the project’s income statement under mark-to-market accounting.

As these economic hedges are settled over the life of the contracts, the projects will sell power at the higher market price, offsetting the loss recognized on the hedge.

• Income tax expense decreased by $10 million primarily due to lower pre-tax income.

Non-GAAP Financial Measures

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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.

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 in any one period 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, which is a principal focus of our investors.

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We have made investments in both the preferred and common equity of these structures.

Regardless of the nature of our equity interest, we typically negotiate the purchase prices of our equity investments, which have a finite expected life, based on our assessment of the expected cash flows we will receive from these projects discounted back to the net present value, based on a target investment rate, with the expected cash flows to be received in the future reflecting both a return on the capital (at the investment rate) and a return of the capital we have committed to the project.

Regardless of the nature of our equity interest, we typically negotiate the purchase prices of our equity investments, which have a finite expected life, based on our underwritten project cash flows discounted back to the net present value, based on a target investment rate, with the cash flows to be received in the future reflecting both a return on the capital (at the investment rate) and a return of the capital we have committed to the project.

We use a similar approach in the underwriting of our receivables.

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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 amount.

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.

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 amount.

The investment tax credit available for election in solar projects is a one-time credit realized in the quarter when the project is considered operational for tax purposes and is fully allocated under HLBV in that quarter (subject to an impairment test), while the production tax credit required for wind projects and electable for solar projects is a ten-year credit and thus is allocated under HLBV over a ten year period.

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 in a given period.

We also consider the impact of any OTTI in determining our income from equity method investments.

The cash distributions for those equity method investments where we apply HLBV are segregated into a return on and return of capital on our cash flow statement based on the cumulative income (loss) that has been allocated using the HLBV method.

However, as a result of the application of the HLBV method, including the impact of tax allocations, the high levels of depreciation and other non-cash expenses that are common to renewable energy projects and the differences between the agreed upon profit and loss and the cash flow allocations, the distributions and thus the economic returns (i.e.

return on capital) achieved from the investment are often significantly different from the income or loss that is allocated to us under the HLBV method.

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.

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 in any one period.

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

We have 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:

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Cash collected (1)

$ 158 $ 53 $ 157

(1) Cash collected during 2022 includes $64 million of debt issuance proceeds from three of our equity method investees, the repayment of which we have guaranteed.

Distributable earnings does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP), or an indication of our cash flow from operating activities (determined in accordance with GAAP), or a measure of our liquidity, or an indication of funds available to fund our cash needs, including our ability to make cash distributions.

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Non-cash provision for loss on receivables (2)

12,798 496 10,096

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

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(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) In addition to these provisions, in the second quarter of 2022 we wrote-off two commercial receivables with a combined total carrying value of approximately $8 million which represented assignments of land lease payments from two wind projects that we had originated in 2014 as a part of an acquisition of a large land portfolio.

In 2017, the operator of the projects terminated the lease, at which time we filed a legal claim and placed these assets on non-accrual status.

In 2019, we received a court decision indicating that the owners of the projects were within their rights under the contract terms to terminate the lease which impacts the land lease assignments to us, at which time we reserved the receivables for their full carrying amount.

In the second quarter of 2022, we received a court decision indicating that our appeal was not successful, and accordingly wrote off the full amount of the receivable.

We have excluded the write off from Distributable earnings due to the infrequent occurrence of credit losses as well as the unique nature of the receivables, as the assignment of land lease payments from wind projects represent a small portion of our total portfolio.

(3) Distributable earnings per share are based on 89,355,907 shares, 84,268,341 shares and 75,588,286 shares for the years ended December 31, 2022, 2021 and 2020, 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.

We include any potential common stock issuances related to share based compensation units in the amount we believe is reasonably certain to vest.

As it relates to Convertible Notes, we will assess the market characteristics around the instrument to determine if it is more akin to debt or equity based on an expectation of the likelihood of conversion based on current conditions.

If the instrument is more debt-like then we will include any related interest expense and exclude the underlying shares issuable upon conversion of the instrument.

If the instrument is more equity-like and is more dilutive when treated as equity then we will exclude any related interest expense and include the weighted average shares underlying the instrument.

Distributable 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 calculate distributable net investment income as shown in the table below by adjusting GAAP-based net investment income for those distributable earnings adjustments that 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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Our non-GAAP distributable net investment income measure may not be comparable to similarly titled measures used by other companies.

Also refer to discussion above related to Distributable Earnings.

For further information, see the discussion above related to Distributable Earnings.

The following is a reconciliation of our GAAP-based net investment income to our distributable net investment income for the years ended December 31, 2022, 2021 and 2020:

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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.

We estimate that our investments originated in 2022 will reduce annual carbon emissions by approximately 600 thousand metric tons, equating to a CarbonCount of 0.35.

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

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The average tenure of our employees as of December 31, 2022, was approximately 4.18 years, and more than 34% 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.

For the year ended December 31, 2022, we had a voluntary employee turnover rate of 7%.

There were no retirements or resignations related to ill health.

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Business - Human Capital and Social Strategy, we are undertaking studies and are focused on continuing to increase the diversity of our workforce at all levels of our organization and are in the process of developing goals to enhance diversity and inclusion.

These metrics are and will continue to be actively managed and will be reported along with the results of the studies to our executive leadership as well as our board of directors.

These metrics are and will continue to be actively managed and will be reported along with the results of the studies to our executive leadership as well as our Board.

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

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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 climate solutions, repay principal and interest on our borrowings, make distributions to our stockholders and fund our operations.

Liquidity is a measure of our ability to meet potential short term (within one year) and long term cash requirements.

We carefully manage and forecast our liquidity sources and uses on a frequent basis.

Our sources of liquidity typically include collections from our Portfolio, proceeds from sales and securitizations (including gains-on-sale), fee revenue, proceeds from debt transactions, and proceeds from equity transactions.

Our uses of liquidity typically include operating expenses (including cash compensation), interest and principal payments on our debt, shareholder dividends, and funding investments.

We maintain sufficiently available liquidity in the form of unrestricted cash and immediately available capacity on our credit facilities to manage our net cash flow.

We typically pay our operating expenses, including interest on our debt, and dividends from collections on our Portfolio and proceeds from sales of Portfolio investments.

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 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 have adequate liquidity as of December 31, 2022, with unrestricted cash balances of $156 million, an unsecured revolving credit facility with an unused capacity of $600 million, $16 million of available capacity in our secured revolving credit facilities, and $100 million of availability under our CarbonCount Green Commercial Paper Notes Program.

During 2022 we issued $189 million in equity.

In March 2022, $8 million of our 2022 Senior Convertible Notes were converted into 282,678 shares of common stock, with the remaining notes redeemed for $0.5 million of cash.

In April 2022, we issued $200 million principal amount of Senior Exchangeable Notes which mature in 2025, have a 0.00% coupon and accrete to a premium at maturity at an effective rate of 3.25% annually.

In November 2022, we entered into a $383 million term loan facility.

As of December 31, 2022, we had $442 million of non-recourse borrowings, $1.8 billion of senior unsecured notes, and $344 million of convertible notes outstanding.

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.

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As of December 31, 2022, the outstanding principal balance of our assets financed through the use of these off-balance sheet transactions was approximately $5.5 billion.

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.

In addition to general operational obligations, which are typically paid as incurred, and dividends, which are declared by our Board quarterly, we will have future cash needs related to the payments due at maturity on our Senior Unsecured Notes and loans under our Term Loan Facility 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 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.

As it relates to the Convertible Notes, those obligations may be settled at maturity with the issuance of shares or 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 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, convertible securities, 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.

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As shown in the table below, our debt to equity ratio was approximately 1.8 to 1 as of December 31, 2022, which is below our current board-approved leverage limit of up to 2.5 to 1.

Our percentage of fixed rate debt was approximately 96% as of December 31, 2021, which is within our targeted fixed rate debt percentage range of 75% to 100%.

Our percentage of fixed rate debt was approximately 86% as of December 31, 2022, which is within our board-approved targeted fixed rate debt percentage range of 75% to 100%.

The calculation of our fixed-rate debt and financial leverage as of December 31, 2022 and 2021 is shown in the chart below:

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Floating-rate borrowings (1)

$ 431 14 % $ 151 6 %

Fixed-rate debt 2,545 86 % 2,342 94 %

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Leverage 1.8 to 1 1.6 to 1

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

(1) Floating-rate borrowings include borrowings under our floating-rate credit facilities, commercial paper notes with less than six months original maturity, and loans under our term loan facility.

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

We intend to use financial leverage for the primary purpose of financing our Portfolio and business activities and not for the purpose of speculating on changes in interest rates.

While we may temporarily exceed the leverage limit, if our board of directors approves a material change to this limit, we anticipate advising our stockholders of this change through disclosure in our periodic reports and other filings under the Exchange Act.

While we may temporarily exceed the leverage limit, if our Board approves a material change to this limit, we anticipate advising our stockholders of this change through disclosure in our periodic reports and other filings under the Exchange Act.

While we generally intend to hold our target assets that we do not securitize upon acquisition as long term investments, certain of our investments may be sold in order to manage our interest rate risk and liquidity needs, to meet other operating objectives and to adapt to market conditions.

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Cash Flows Relating to Operating Activities

Net cash provided by operating activities was less than $1 million for the year ended December 31, 2022, driven primarily by net income of $42 million, offset by adjustments for non-cash and other items of $42 million.

The non-cash and other adjustments consisted of decreases of $63 million related to changes in receivables held-for sale, $29 million related to non-cash gain on securitization, and $33 million in change in accrued interest on receivables and investments and other.

These were partially offset by increases of $16 million related to equity method investments, $13 million related to provision for loss on receivables, $20 million for equity based compensation, $12 million in amortization of financing costs, $4 million of depreciation and amortization, and $18 million related to changes in accounts payable and accrued expenses.

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.

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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.

Cash Flows Relating to Investing Activities

Net cash used in investing activities was approximately $592 million for the year ended December 31, 2022.

We made equity method investments of $402 million, investments in receivables and fixed rate debt securities of $558 million, and funded escrow accounts of $12 million.

We made equity method investments of $128 million, investments in receivables and fixed rate debt securities of $729 million, purchases of real estate of $5 million, funded escrow accounts of $5 million, and had other investing outflows of approximately $2 million.

These were offset by collected payments of $126 million from receivables and fixed rate debt securities and the receipt of $12 million from the sale of financial assets.

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.

We also collected $112 million from equity method investments in excess of income recognized to date under GAAP, withdrew $23 million from escrow accounts, and received $5 million related to the sale of real estate.

Net cash used in investing activities was approximately $703 million for the year ended December 31, 2021.

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.

We made equity method investments of $402 million, investments in receivables and fixed rate debt securities of $558 million, and

funded escrow accounts of $12 million.

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.

Cash Flows Relating to Financing Activities

Net cash provided by financing activities was approximately $516 million for the year ended December 31, 2022.

We received proceeds from the issuance of a term loan of $383 million, proceeds from the issuances of convertible debt of $200 million, net proceeds from common stock issuances of $188 million, and proceeds from credit facilities of $100 million, and issuance of non-recourse debt of $33 million.

These were partially offset by principal payments on credit facilities and commercial paper notes of $200 million, principal payments on non-recourse debt of $31 million, payments of $3 million for withholding requirements as a result of the vesting of employee shares, payment of debt issuance costs of $12 million and payments of dividends, distributions, and other financing activities of $142 million.

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.

Off-Balance Sheet Arrangements

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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.

In the event that our Board determines to make distributions in excess of the income or cash flow generated from our assets, we may make such distributions from the proceeds of future offerings of equity or debt securities or other forms of debt financing or the sale of assets.

To the extent, that in respect of any calendar year, cash available for distribution is less than our taxable income, or our declared distribution we could be required to sell assets, borrow funds or raise additional capital to make cash distributions or make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

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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.

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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As a result, in reviewing our book value, there are a number of important factors and limitations to consider.

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 our investments and the residual assets in securitized financial assets that are carried on our balance sheet at fair value as of December 31, 2022, 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, adjusted for income or loss recognized on such assets.

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.

Accordingly, our book value does not necessarily represent an estimate of our net realizable value, liquidation value or our fair market value.

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