What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-04 compared with 2023-05-05 · 134 added, 88 removed, 284 unchanged (44% of the section changed)

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• Grid-Connected (“GC”) :

projects that deploy cleaner energy sources, such as solar and wind to generate power where the off-taker or counterparty is part of the wholesale electric power grid;

renewable energy projects that deploy cleaner energy sources, such as solar, solar-plus-storage, stand-alone storage, and wind, to generate power production where the off-taker or counterparty may be part of the wholesale electric power markets;

• Fuels, Transport, and Nature (“FTN”) :

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For GC assets, the off-takers or counterparties may be utility or electric users who have entered into contractual commitments, such as power purchase agreements (“PPAs”), to purchase power produced by a renewable energy project at a specified price with potential price escalators for a portion of the project’s estimated life.

We completed approximately $389 million of transactions during the three months ended March 31, 2023, compared to approximately $331 million during the same periods in 2022, respectively.

As of March 31, 2023, pursuant to our strategy of holding transactions on our balance sheet, we held approximately $4.7 billion of transactions on our balance sheet, which we refer to as our “Portfolio.” As of March 31, 2023, our Portfolio consisted of over 350 assets and we seek to manage the diversity of our Portfolio by, among other factors, project type, project operator, type of investment, type of technology, transaction size, geography, obligor and maturity.

We completed approximately $426 million and $815 million of transactions during the three and six months ended June 30, 2023, respectively, compared to approximately $340 million and $671 million during the same periods in 2022, respectively.

As of June 30, 2023, pursuant to our strategy of holding transactions on our balance sheet, we held approximately $4.9 billion of transactions on our balance sheet, which we refer to as our “Portfolio.” As of June 30, 2023, our Portfolio consisted of over 350 assets and we seek to manage the diversity of our Portfolio by, among other factors, project type, project operator, type of investment, type of technology, transaction size, geography, obligor and maturity.

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 March 31, 2023, we managed approximately $5.7 billion in assets in these securitization trusts or vehicles that are not consolidated on our balance sheet.

When combined with our Portfolio, as of March 31, 2023, we manage approximately $10.4 billion of assets which we refer to as our “Managed Assets”.

As of June 30, 2023, we managed approximately $5.8 billion in assets in these securitization trusts or vehicles that are not consolidated on our balance sheet.

When combined with our Portfolio, as of June 30, 2023, we manage approximately $10.7 billion of assets which we refer to as our “Managed Assets”.

We make our investments utilizing a variety of structures including:

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• real estate.

Our equity investments in climate solutions projects are operated by various renewable energy companies or by joint ventures in which we participate.

Our equity investments are operated by various renewable energy companies or by joint ventures in which we participate.

These transactions allow us to participate in the cash flows associated with these projects, typically on a priority basis.

Our energy efficiency debt investments are usually assigned the payment stream from the project savings and other contractual rights, often using our pre-existing master purchase agreements with the ESCOs.

Our debt investments in various renewable energy or other sustainable infrastructure projects or portfolios of projects are generally secured by the installed improvements or other real estate rights.

We also own, directly or through equity investments, land which is leased under long-term agreements to renewable energy projects, where our investment returns are typically senior to most project costs, debt, and equity.

We also own, both directly and through equity investments, land which is leased under long-term agreements to renewable energy projects, where our investment returns are typically senior to most project costs, debt, and equity.

We often make investments where we hold a preferred or mezzanine position in a project company where we are subordinated to project debt and/or preferred forms of equity.

Investing greater than 10% of our assets in any individual project company requires the approval of a majority of our independent directors.

Investing greater than 10% of our assets in any individual investment requires the approval of a majority of our independent directors.

We may adjust the mix and duration of our assets over time in order to allow us to manage various aspects of our Portfolio, including expected risk-adjusted returns, macroeconomic conditions, liquidity, availability of adequate financing for our assets, and the maintenance of our REIT qualification and our exemption from registration as an investment company under the 1940 Act.

We believe we have available a broad range of financing sources as part of our strategy to fund our investments.

We may finance our investments through the use of cash on hand, non-recourse debt, recourse debt, convertible securities, or equity and may also decide to finance such transactions through the use of off-balance sheet securitization structures.

We may finance our investments through the use of cash on hand, non-recourse debt, recourse debt, convertible or exchangeable securities, or equity and may also decide to finance such transactions through the use of off-balance sheet securitization structures.

When issuing debt, we generally provide the estimated carbon emission savings using CarbonCount.

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We have a large and active pipeline of potential new opportunities that are in various stages of our underwriting process.

We believe the Inflation Reduction Act signed into law on August 16, 2022, that incentivizes the construction of and investment in climate solutions will result in additional investment opportunities in the markets in which we invest over the next several years, which may result in increases in our pipeline in the future.

We refer to potential opportunities as being part of our pipeline if we have determined that the project fits within our climate solutions investment strategy and exhibits the appropriate risk and reward characteristics through an initial credit analysis, including a quantitative and qualitative assessment of the opportunity, as well as research on the relevant market and sponsor.

We believe the Inflation Reduction Act signed into law on August 16, 2022, incentivizes the construction of and investment in climate solutions and will result in additional investment opportunities in the markets in which we invest over the next several years, which may result in increases in our pipeline in the future.

We refer to potential opportunities as being part of our pipeline if we have determined that the project fits within our investment strategy and exhibits the appropriate risk and reward characteristics through an initial credit analysis, including a quantitative and qualitative assessment of the opportunity, as well as research on the relevant market and sponsor.

Our pipeline of transactions that could potentially close in the next 12 months consists of opportunities in which we will be the lead originator as well as opportunities in which we may participate with other institutional investors.

As of March 31, 2023, our pipeline consisted of more than $5.0 billion in new equity, debt and real estate opportunities.

As of June 30, 2023, our pipeline consisted of more than $5.0 billion in new equity, debt and real estate opportunities.

Of our pipeline, approximately 50% is related to BTM assets and 35% is related to GC assets, with the remainder related to FTN.

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As part of our investment process, we calculate the ratio of the estimated first year of metric tons of carbon emissions avoided by our investments divided by the capital invested to quantify the carbon impact of our investments.

In this calculation, which we refer to as CarbonCount, we use emissions factor data, expressed on a CO 2 equivalent basis, 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.

In this calculation, which we refer to as CarbonCount, we use emissions factor data, expressed on a carbon dioxide equivalent basis representing the locational marginal emissions associated with a projects location to an estimate of a project’s energy production or savings to compute an estimate of metric tons of carbon emissions avoided.

Refer to “MD&A — Environmental Metrics” below for a discussion of the carbon emissions avoided as a result of our investments.

In addition to carbon, we also consider other environmental attributes, such as water use reduction, stormwater remediation benefits and stream restoration benefits.

In addition to carbon emission avoidance, we also consider other environmental attributes, such as water use reduction, stormwater remediation benefits and stream restoration benefits.

We elected and qualified to be taxed as a REIT for U.S.

federal income tax purposes, commencing with our taxable year ended December 31, 2013, and operate our business in a manner that will permit us to continue to maintain our exemption from registration as an investment company under the 1940 Act.

The Company’s management has studied the impact of the Company’s REIT status, together with the Company’s tax and legal advisors, and has made a determination that it would be advisable and in the best interests of the Company to revoke the Company’s REIT status, effective for the tax year 2024, subject to approval by the Company’s board of directors.

Management believes that an alternative tax structure can achieve tax efficiency similar to a REIT, considering the Company’s ability to invest in projects with tax attributes (inclusive of credits and depreciation deductions) as well as the Company’s existing accumulated net operating losses (NOLs).

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 that 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.

We expect that our results of operations will be affected by a number of factors and will primarily depend on the size and transaction mix of 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.

We provide a summary of the factors impacting our operating results in our 2022 Form 10-K under MD&A – Factors Impacting our Operating Results.

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Understanding our accounting policies and the extent to which we make judgments and estimates in applying these policies is integral to understanding our financial statements.

We believe the estimates and assumptions used in preparing our financial statements and related footnotes are reasonable and supportable based on the best information available to us as of March 31, 2023.

Various uncertainties may materially impact the accuracy of the estimates and assumptions used in the financial statements and related footnotes and, as a result, actual results may vary significantly from estimates.

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Our Portfolio

Our Portfolio totaled approximately $4.7 billion as of March 31, 2023 and included approximately $2.5 billion of BTM assets and approximately $2.0 billion of GC assets, with the remainder in FTN assets.

Our Portfolio totaled approximately $4.9 billion as of June 30, 2023 and included approximately $2.5 billion of BTM assets and approximately $2.1 billion of GC assets, and approximately $0.3 billion of FTN assets.

Approximately 47% of our Portfolio consisted of unconsolidated equity investments in renewable energy related projects.

Approximately 46% consisted of fixed-rate commercial and government receivables and debt securities, which are classified as investments on our balance sheet, and 7% of our Portfolio was real estate leased to renewable energy projects under lease agreements.

Our Portfolio consisted of over 350 transactions with an average size of $13 million and the weighted average remaining life of our Portfolio (excluding match-funded transactions) of approximately 18 years as of March 31, 2023.

The table below provides details on the interest rate and maturity of our receivables and debt securities as of March 31, 2023:

The table below provides details on the interest rate and maturity of our receivables and debt securities as of June 30, 2023:

Balance Maturity

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

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

(dollars in millions)

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Interest expense (1)

$ 40 $ 29 $ 77 $ 55

Average balance of debt $ 3,336 $ 2,713 $ 3,216 $ 2,613

Average cost of debt 4.8 % 4.2 % 4.8 % 4.2 %

(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 March 31, 2023:

(1) Excludes any 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 June 30, 2023:

Payment due by Period

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

• the anticipated maturity dates of our receivables and investments and the weighted average yield for each range of maturities as of March 31, 2023,

• the term of our leases and a schedule of our future minimum rental income under our land lease agreements as of March 31, 2023,

• the anticipated maturity dates of our receivables and investments and the weighted average yield for each range of maturities as of June 30, 2023,

• the term of our leases and a schedule of our future minimum rental income under our land lease agreements as of June 30, 2023,

• the Performance Ratings of our Portfolio, and

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Results of Operations

Comparison of the Three Months Ended March 31, 2023 vs.

Three Months Ended March 31, 2022

Three months ended March 31,

Comparison of the Three Months Ended June 30, 2023 vs.

Three Months Ended June 30, 2022

Three months ended June 30,

2023 2022 $ Change % Change

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Net income (loss) $ 13,522 $ (18,538) $ 32,060 (173) %

• Net income decreased by $21 million due to a decrease in equity method investments income of $25 million and a $16 million increase in total expenses, offset by an $11 million increase in total revenue and a $10 million decrease in income tax expense.

• Net income increased by $32 million due to an increase in equity method investments income of $22 million, $12 million increase in total revenue, and a $2 million decrease in total expenses, partially offset by a $3 million decrease in income tax benefit.

• Total revenue increased by $12 million due to a $16 million increase in interest income and securitization income, driven by a higher average Portfolio balance and by higher Managed Assets.

This was partially offset by decreases in gain on sale and other income, driven by a change in the mix and volume of assets being securitized and fewer fee generating opportunities.

This was partially offset by decreases in gain on sale and other income, driven by a change in the mix and volume of assets being securitized.

• Interest expense increased by $11 million primarily due to a larger average outstanding debt balance and a higher average interest rate.

We recorded a $2 million provision for loss on receivables, driven primarily by loans and loan commitments made during the quarter.

• Compensation and benefits and general and administrative expenses increased by $4 million due to share-based compensation recognized upon the grant of awards as a result of our retirement policy, as well as additional investment in corporate infrastructure.

• Income (loss) from equity method investments using HLBV allocations decreased by $25 million primarily due to fewer tax attributes recognized by our co-investors which decreases our HLBV allocation of earnings.

• Income tax expense decreased by $10 million primarily due to the decrease in GAAP net income before taxes.

We recorded a $1 million provision for loss on receivables, driven primarily by loans and loan commitments made during the quarter offset partially by the release of an allowance on loans which we collected in full.

• Compensation and benefits and general and administrative expenses decreased by $6 million primarily due to higher share-based compensation recognized in the prior year for certain awards to employees eligible for retirement, offset partially by a one-time transaction related payment.

• Income (loss) from equity method investments using HLBV allocations increased by $22 million primarily due to 2022 impact of increasing power prices and the resulting unrealized mark to market losses on economic hedges used by some of our projects to reduce the impact of power price fluctuations which did not recur.

• Income tax benefit decreased by $3 million primarily due to the increase in GAAP net income before taxes.

Comparison of the Six Months Ended June 30, 2023 vs.

Six Months Ended June 30, 2022

Six Months Ended June 30,

2023 2022 $ Change % Change

(dollars in thousands)

Interest income $ 91,330 $ 63,601 $ 27,729 44 %

Rental income 12,973 13,108 (135) (1) %

Gain on sale of receivables and investments 30,510 36,762 (6,252) (17) %

Securitization income 7,762 5,540 2,222 40 %

Other Income 860 2,269 (1,409) (62) %

Total Revenue 143,435 121,280 22,155 18 %

Interest expense 77,118 55,479 21,639 39 %

Provision for loss on receivables 2,689 8,685 (5,996) (69) %

Compensation and benefits 32,232 37,176 (4,944) (13) %

General and administrative 18,117 14,546 3,571 25 %

Total expenses 130,156 115,886 14,270 12 %

Income (loss) before equity method investments 13,279 5,394 7,885 146 %

Income (loss) from equity method investments 24,670 27,981 (3,311) (12) %

Income (loss) before income taxes 37,949 33,375 4,574 14 %

Income tax (expense) benefit 171 (6,209) 6,380 (103) %

Net income (loss) $ 38,120 $ 27,166 $ 10,954 40 %

• Net income increased by $11 million due to an increase in total revenue of $22 million and an increase in income tax benefit of $6 million, offset by an increase in total expenses of $14 million and a decrease in income from equity method investments of $3 million.

• Total revenue increased by $22 million due to a $30 million increase in interest income and securitization income driven by a higher average Portfolio balance and by higher Managed Assets.

Gain on sale of receivables and investments and other income decreased by $8 million due to a change in the mix of assets being securitized and fewer fee generating opportunities.

• Interest expense increased by $22 million primarily due to a larger average outstanding debt balance and a higher average interest rate.

We recorded a provision for loss on receivables of $3 million primarily as a result of loans and loan commitments offset partially by the release of allowance on loans which we collected in full.

• Compensation and benefits and general and administrative expense decreased by $1 million primarily due to higher share-based compensation recognized in the prior year for certain awards to employees eligible for retirement, offset partially by a one-time transaction related payment.

• Income from equity method investments decreased by $3 million primarily due fewer tax attributes recognized by tax equity investors in our projects than in the prior year, which decreased our allocation of HLBV income.

• Income tax benefit increased by $6 million due to a decrease in our estimated annual effective tax rate.

Non-GAAP Financial Measures

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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 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.

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), 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 any one period.

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 three months ended March 31, 2023 and 2022.

Three months ended March 31,

We have acquired equity investments in portfolios of 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 three and six months ended June 30, 2023 and 2022.

Three months ended June 30, Six months ended June 30,

2023 2022 2023 2022

(in millions)

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In addition, our methodology for calculating distributable earnings may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures, and accordingly, our reported distributable earnings may not be comparable to similar metrics reported by other companies.

The table below provides a reconciliation of our GAAP net income (loss) to distributable earnings for the three months ended March 31, 2023 and 2022.

Three Months Ended March 31,

The table below provides a reconciliation of our GAAP net income (loss) to distributable earnings for the three and six months ended June 30, 2023 and 2022.

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

(dollars in thousands, except per share amounts)

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Provision for loss on receivables (2)

806 8,064 2,689 8,685

Loss (gain) on debt modification or extinguishment — — — —

Amortization of intangibles

772 761 1,544 1,600

Non-cash provision (benefit) for income taxes

(1,601) (4,789) (171) 6,209

Current year earnings attributable to non-controlling interest

— (89) 492 270

Distributable earnings (3)

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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) Distributable earnings per share are based on 93,266,916 shares for the three months ended March 31, 2023, and 87,206,540 shares for the three months ended March 31, 2022, 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.

(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 99,581,898 and 96,441,450 shares for the three and six months ended June 30, 2023, respectively, and 88,994,421 and 88,100,480 shares for the three and six months ended June 30, 2022, 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 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 the value of the underlying shares upon conversion.

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 the value of the underlying shares compared to the conversion price.

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.

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Distributable Net Investment Income

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

We have a portfolio of investments, which 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 those distributable earnings adjustments that are applicable to distributable net investment income.

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Our non-GAAP distributable net investment income measure may not be comparable to similarly titled measures used by other companies.

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

For further information on the adjustments between GAAP-based net investment income and distributable net investment income, 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:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

(in thousands)

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The following is a reconciliation of our GAAP-based Portfolio to our Managed Assets:

March 31, 2023 December 31, 2022

June 30, 2023 December 31, 2022

(in millions)

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Our management uses portfolio yield this way and we believe that our investors use it in a similar fashion to evaluate certain characteristics of our Portfolio compared to our peers, and as such, we believe that the disclosure of portfolio yield is useful to our investors.

Our Portfolio totaled approximately $4.7 billion as of March 31, 2023.

Unlevered portfolio yield was 7.5% as of March 31, 2023 and 7.5% as of December 31, 2022.

See Note 6 to our financial statements and MD&A - Our Business in this Form 10-Q for additional discussion of the characteristics of our portfolio as of March 31, 2023.

Our Portfolio totaled approximately $4.9 billion as of June 30, 2023.

Unlevered portfolio yield was 7.7% as of June 30, 2023 and 7.5% as of December 31, 2022.

See Note 6 to our financial statements and MD&A - Our Business in this Form 10-Q for additional discussion of the characteristics of our portfolio as of June 30, 2023.

Environmental Metrics

As a part of our investment process, we calculate the estimated metric tons of CO 2 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 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 during the quarter ended March 31, 2023, will avoid annual carbon emissions by approximately 92,000 metric tons, equating to a CarbonCount® of 0.24.

As a part of our investment process, we calculate the estimated metric tons of carbon emissions avoided by our investments by applying emissions factor data representing the locational marginal emissions associated with a projects location 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 during the quarter ended June 30, 2023, will avoid annual carbon emissions by approximately 147,000 metric tons, equating to a CarbonCount® of 0.31.

We estimate that our investments made since 2013 have cumulatively avoided annual carbon emissions by over 23 million metric tons.

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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.

Our sources of liquidity typically include collections from our Portfolio, cash proceeds from asset sales and securitizations, 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 limited partner distributions, 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 typically pay our operating expenses, our debt service, 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 March 31, 2023, with unrestricted cash balances of $142 million, an unsecured revolving credit facility with an unused capacity of $350 million, and $2 million of available capacity in our secured revolving credit facilities.

As of March 31, 2023, we had used the available $100 million capacity in our green commercial paper program.

We have adequate liquidity as of June 30, 2023, with unrestricted cash balances of $127 million, an unsecured revolving credit facility with an unused capacity of $665 million, and $4 million of available capacity in our secured revolving credit facilities.

As of June 30, 2023, we had used the available $100 million capacity in our green commercial paper program.

During 2023, we have issued $358 million in equity.

As of March 31, 2023, we had $404 million of non-recourse borrowings, $1.8 billion of senior unsecured notes, $383 million in term loans, and $344 million of Convertible Notes outstanding.

As of June 30, 2023, we had $399 million of non-recourse borrowings, $1.8 billion of senior unsecured notes, $378 million in term loans, and $344 million of Convertible Notes outstanding.

For further information, see Note 8 to our financial statements of this Form 10-Q.

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.

As of March 31, 2023, the outstanding balance of our assets financed through the use of these off-balance sheet transactions was approximately $5.7 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 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 use off-balance sheet securitization transactions with large institutional investors such as life insurance companies, where we transfer the assets we originate to securitization trusts or other bankruptcy remote special purpose funding vehicles that are not consolidated on our balance sheet.

As of June 30, 2023, the outstanding balance of our assets financed through the use of these off-balance sheet transactions was approximately $5.8 billion.

In addition to general operational obligations, which are typically paid as incurred, and dividends and distributions, which are declared by our board of directors quarterly, we 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

would not be required.

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-Q.

The maturity profile of these obligations are as follows (excluding non-recourse debt):

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.

The maturity profile of our recourse debt obligations are as follows:

(1) Credit facility maturities reflect the July 2023 amendment of our Secured credit facility.

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 or exchangeable 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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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, and the interest rate environment.

As shown in the table below, our debt to equity ratio was approximately 2.0 to 1 as of March 31, 2023, below our current board-approved leverage limit of up to 2.5 to 1.

Our percentage of fixed rate debt was approximately 87% as of March 31, 2023, which is within our targeted fixed rate debt percentage range of 75% to 100%.

As shown in the table below, our debt to equity ratio was approximately 1.6 to 1 as of June 30, 2023, below our current board-approved leverage limit of up to 2.5 to 1.

Our percentage of fixed rate debt was approximately 97% as of June 30, 2023, which is within our targeted fixed rate debt percentage range of 75% to 100%.

Our targeted fixed rate debt range allows for percentages as low as 70% on a short term basis if we intend to repay or swap floating rate borrowings in the near term.

The calculation of our fixed-rate debt and financial leverage is shown in the chart below:

March 31, 2023 % of Total December 31, 2022 % of Total

June 30, 2023 % of Total December 31, 2022 % of Total

(dollars in millions) (dollars in millions)

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Fixed-rate debt (2)

Total debt (2)

3,159 97 % 2,545 86 %

Total debt $ 3,267 100 % $ 2,976 100 %

Equity $ 1,994 $ 1,665

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(1) Floating-rate borrowings include borrowings under our floating-rate credit facilities and commercial paper issuances with less than six months original maturity, to the extent such borrowings are not hedged using interest rate swaps.

(2) Fixed-rate debt includes the portion of debt that is hedged using interest rate swaps.

(2) Included in Fixed-rate debt is the present notional value of debt that is hedged using interest rate swaps and collars.

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

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Sources and Uses of Cash

We had approximately $164 million and $176 million of unrestricted cash, cash equivalents, and restricted cash as of March 31, 2023 and December 31, 2022, respectively.

We had approximately $152 million and $176 million of unrestricted cash, cash equivalents, and restricted cash as of June 30, 2023 and December 31, 2022, respectively.

Cash flows relating to operating activities

Net cash provided by operating activities was approximately $49 million for the three months ended March 31, 2023, driven primarily by net income of $25 million plus adjustments for non-cash and other items of $24 million.

The non-cash and other adjustments consisted of increases of $8 million related to equity-based compensation, $4 million of depreciation and amortization, $3 million related to changes in accounts payable and accrued expenses and other items, $2 million related to provision for loss on receivables, and $37 million in changes in receivables held-for-sale.

These were partially offset by decreases of $11 million related to equity method investments, $7 million related to gains on securitizations, and $12 million related to portfolio accrued interest.

Net cash used in operating activities was approximately $32 million for the three months ended March 31, 2022, driven primarily by net income of $46 million offset by adjustments for non-cash and other items of $78 million.

Net cash provided by operating activities was approximately $66 million for the six months ended June 30, 2023, driven primarily by net income of $38 million plus adjustments for non-cash and other items of $28 million.

The non-cash and other adjustments consisted of increases of $11 million related to equity-based compensation, $8 million of depreciation and amortization, $3 million related to provision for loss on receivables, and $52 million in changes in receivables held-for-sale.

These were partially offset by decreases of $6 million related to equity method investments, $13 million related to gains on securitizations, $15 million related to portfolio accrued interest, and $12 million related to changes in accounts payable and accrued expenses and other.

Net cash used in operating activities was approximately $27 million for the six months ended June 30, 2022, driven primarily by net income of $27 million offset by adjustments for non-cash and other items of $54 million.

The non-cash and other adjustments consisted of $52 million in changes in receivables held-for-sale, decreases of $12 million related to equity method investments, $15 million related to gains on securitizations, $7 million related to portfolio accrued interest, and $4 million related to other items.

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Cash flows relating to investing activities

Net cash used in investing activities was approximately $449 million for the three months ended March 31, 2023.

Net cash used in investing activities was approximately $688 million for the six months ended June 30, 2023.

We made $330 million of investments in receivables and fixed rate debt-securities, made collateral deposits of $14 million, and made $430 million of equity method investments.

We collected $74 million of principal payments from receivables and fixed rate debt-securities, $4 million from equity method investments in excess of income recognized to date under GAAP, and $8 million from the sale of receivables and investments.

Net cash used in investing activities was approximately $95 million for the three months ended March 31, 2022.

We made $35 million of investments in receivables and fixed rate debt-securities, made $79 million of equity method investments, purchased $5 million of real estate, and had $2 million of other investing cash outflows.

We collected $20 million of principal payments from receivables and fixed rate debt-securities and $6 million from equity method investments in excess of income recognized to date under GAAP.

Net cash used in investing activities was approximately $256 million for the six months ended June 30, 2022.

We made $267 million of investments in receivables and fixed rate debt-securities, made $137 million of equity method investments and purchased $5 million of real estate.

We collected $88 million of principal payments from receivables and fixed rate debt-securities, $38 million from equity method investments in excess of income recognized to date under GAAP, and $12 million from the sale of receivables and investments, and withdrew $15 million from escrow accounts.

Cash flows relating to financing activities

Net cash provided by financing activities was approximately $388 million for the three months ended March 31, 2023.

We received $312 million from our credit facilities, $23 million of net proceeds from issuances of common stock and $100 million of net proceeds from the issuance of green commercial paper notes, which were offset by $5 million of payments on credit facilities, $5 million of principal prepayments on non-recourse debt, $1 million for withholding requirements resulting from the vesting of employee shares and payments of $36 million of dividends, distributions and other items.

Net cash provided by financing activities was approximately $32 million for the three months ended March 31, 2022.

We received $50 million of net proceeds from issuances of common stock and $25 million of net proceeds from the issuance of green commercial paper notes, which were offset by $6 million of principal prepayments on non-recourse debt, $3 million for financing costs, $2 million for withholding requirements resulting from the vesting of employee shares and paid $32 million of dividends, distributions and other items.

Net cash provided by financing activities was approximately $598 million for the six months ended June 30, 2023.

We received $467 million from our credit facilities, $358 million of net proceeds from issuances of common stock and $100 million of net proceeds from the issuance of green commercial paper notes, which were offset by $235 million of payments on credit facilities, $10 million of principal prepayments on non-recourse debt, $5 million in principal payments on our term loan, $1 million for withholding requirements resulting from the vesting of employee shares and payments of $76 million of dividends, distributions and other items.

Net cash provided by financing activities was approximately $336 million for the six months ended June 30, 2022.

We received $200 million from the issuance of Convertible Notes, $100 million from our credit facilities, $78 million of net proceeds from issuances of common stock and $50 million of net proceeds from the issuance of green commercial paper notes, which were offset by $14 million of principal prepayments on non-recourse debt, $8 million for financing costs, $3 million for withholding requirements resulting from the vesting of employee shares and payments of $67 million of dividends, distributions and other items.

Off-Balance Sheet Arrangements

We have relationships with non-consolidated entities or financial partnerships, such as entities often referred to as structured investment vehicles, or special purpose or variable interest entities, established to facilitate the sale of securitized assets.

Other than our securitization assets (including any outstanding servicer advances) of approximately $200 million as of March 31, 2023, that may be at risk in the event of defaults or prepayments in our securitization trusts and as discussed below, and except as disclosed in Note 9 to our financial statements in this Form 10-Q, we have not guaranteed any obligations of non-consolidated entities or entered into any commitment or intent to provide additional funding to any such entities.

Other than our securitization assets (including any outstanding servicer advances) of approximately $206 million as of June 30, 2023, that may be at risk in the event of defaults or prepayments in our securitization trusts and as discussed below, and except as disclosed in Note 9 to our financial statements in this Form 10-Q, we have not guaranteed any obligations of non-consolidated entities or entered into any commitment or intent to provide additional funding to any such entities.

A more detailed description of our relations with non-consolidated entities can be found in Note 2 to our financial statements in this Form 10-Q.

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Book Value Considerations

As of March 31, 2023, we carried only our investments, residual assets in securitized financial assets, and derivatives at fair value on our balance sheet.

As of June 30, 2023, we carried only our investments, residual assets in securitized financial assets, and derivatives at fair value on our balance sheet.

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

Other than our investments and the residual assets in securitized financial assets that are carried on our balance sheet at fair value as of March 31, 2023, 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 our investments and the residual assets in securitized financial assets that are carried on our balance sheet at fair value as of June 30, 2023, 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 governmental 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.

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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-Q

Item 2. Management’s Discussion and Analysis