What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-08-02 compared with 2024-05-08 · 174 added, 98 removed, 313 unchanged (46% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this Form 10-Q, unless specifically stated otherwise or the context otherwise indicates, references to “we,” “our,” “us,” and the “Company” refer to Hannon Armstrong Sustainable Infrastructure Capital, Inc., a Maryland corporation, Hannon Armstrong Sustainable Infrastructure, L.P., and any of our other subsidiaries.

In this Form 10-Q, unless specifically stated otherwise or the context otherwise indicates, references to “we,” “our,” “us,” and the “Company” refer to HA Sustainable Infrastructure Capital, Inc., a Delaware corporation formerly known as Hannon Armstrong Infrastructure Capital, Inc.

prior to July 2, 2024, Hannon Armstrong Sustainable Infrastructure, L.P., and any of our other subsidiaries.

Hannon Armstrong Sustainable Infrastructure, L.P.

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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 $562 million of transactions during the three months ended March 31, 2024, respectively, compared to approximately $389 million during the same period in 2023, respectively.

As of March 31, 2024, pursuant to our strategy of holding transactions on our balance sheet, we held approximately $6.4 billion of transactions on our balance sheet, which we refer to as our “Portfolio.” As of March 31, 2024, our Portfolio consisted of approximately 500 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 $260 million and $822 million of transactions during the three and six months ended June 30, 2024, respectively, compared to approximately $426 million and $815 million during the same period in 2023, respectively.

As of June 30, 2024, pursuant to our strategy of holding transactions on our balance sheet, we held approximately $6.2 billion of transactions on our balance sheet, which we refer to as our “Portfolio.” As of June 30, 2024, our Portfolio consisted of approximately 500 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, 2024, we managed approximately $6.5 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, 2024, we manage approximately $12.9 billion of assets which we refer to as our “Managed Assets”.

As of June 30, 2024, we managed approximately $6.8 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, 2024, we manage approximately $13 billion of assets which we refer to as our “Managed Assets”.

Our equity investments in climate solutions projects 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 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.

These transactions allow us to participate in the cash flows associated with these projects,

typically on a priority basis.

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.

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.

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

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

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

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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, 2024, our pipeline consisted of more than $5.5 billion in new equity, debt and real estate opportunities.

As of June 30, 2024, our pipeline consisted of more than $5.5 billion in new equity, debt and real estate opportunities.

Of our pipeline, approximately 55% is related to BTM assets and 22% is related to GC assets, with the remainder related to FTN.

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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, 2024.

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 $6.4 billion as of March 31, 2024 and included approximately $3.1 billion of BTM assets and approximately $2.4 billion of GC assets, and approximately $0.9 billion of FTN assets.

Our Portfolio totaled approximately $6.2 billion as of June 30, 2024 and included approximately $3.0 billion of BTM assets and approximately $2.4 billion of GC assets, and approximately $0.8 billion of FTN assets.

Approximately 52% of our Portfolio consisted of unconsolidated equity investments in renewable energy related projects.

Approximately 41% consisted of fixed-rate receivables and debt securities, which are classified as investments on our balance sheet, approximately 4% consisted of floating-rate receivables, and 3% of our Portfolio was real estate leased to renewable energy projects under lease agreements.

Our Portfolio consisted of over 500 transactions with an average size of $12 million and the weighted average remaining life of our Portfolio (excluding match-funded transactions) of approximately 17 years as of March 31, 2024.

The table below provides details on the interest rate and maturity of our receivables and debt securities as of March 31, 2024:

The table below provides details on the interest rate and maturity of our receivables and debt securities as of June 30, 2024:

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,

2024 2023 2024 2023

(dollars in millions)

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Interest expense (1)

$ 60 $ 40 $ 121 $ 77

Average balance of debt $ 4,218 $ 3,336 $ 4,299 $ 3,216

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(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 March 31, 2024:

The following table provides a summary of our anticipated principal repayments for our receivables and investments as of June 30, 2024:

Principal 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, 2024,

• the term of our leases and a schedule of our future minimum rental income under our land lease agreements as of March 31, 2024,

• the anticipated maturity dates of our receivables and investments and the weighted average yield for each range of maturities as of June 30, 2024,

• the term of our leases and a schedule of our future minimum rental income under our land lease agreements as of June 30, 2024,

• the Performance Ratings of our Portfolio, and

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Results of Operations

Comparison of the Three Months Ended March 31, 2024 vs.

Three Months Ended March 31, 2023

Three months ended March 31,

Comparison of the Three Months Ended June 30, 2024 vs.

Three Months Ended June 30, 2023

Three months ended June 30,

2024 2023 $ Change % Change

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Net income (loss) $ 26,944 $ 13,522 $ 13,422 99 %

• Net income increased by $100 million due to an increase in income from equity method investments of $136 million and an increase in total revenue of $37 million, offset by a $28 million increase in total expenses, and a $45 million increase in income tax expense.

• Total revenue increased by $37 million due to a $27 million increase in interest income and securitization asset income, driven by a higher average Managed Assets and higher average interest rate.

• Net income increased by $13 million due to an increase in revenue of $20 million and an increase in income from equity method investments of $25 million, offset by a $19 million increase in total expenses, and a $12 million increase in income tax expense.

• Total revenue increased by $20 million due to a $15 million increase in interest income and securitization asset income, driven by a higher average Managed Assets balance and higher average interest rate.

Rental income decreased by $6 million due to the sale of real estate assets in 2023 and 2024.

Gain on sale and other income increased by $11 million, driven by a change in the mix and volume of assets being securitized.

• Interest expense increased by $20 million primarily due to a larger average outstanding debt balance and a higher average interest rate.

We recorded a $4 million benefit for loss on receivables and securitization assets, driven primarily by a reduction in our reserve related to the contribution of assets into a co-investment vehicle.

• Compensation and benefits and general and administrative expenses increased by $5 million primarily due to growth of the company and to a change in our retirement policy, resulting in the acceleration of share-based compensation expense.

• Income (loss) from equity method investments using HLBV allocations increased by $25 million primarily due to allocations of income in the current period related to tax credits allocated to other investors.

• Income tax expense increased by $12 million primarily due to higher pre-tax book income.

Comparison of the Six Months Ended June 30, 2024 vs.

Six Months Ended June 30, 2023

Six Months Ended June 30,

2024 2023 $ Change % Change

(dollars in thousands)

Interest income $ 131,471 $ 91,330 $ 40,141 44 %

Rental income 1,929 12,973 (11,044) (85) %

Gain on sale of assets 54,405 30,510 23,895 78 %

Securitization asset income 10,116 7,762 2,354 30 %

Other Income 2,411 860 1,551 180 %

Total Revenue 200,332 143,435 56,897 40 %

Interest expense 121,403 77,118 44,285 57 %

Provision for loss on receivables (2,177) 2,689 (4,866) (181) %

Compensation and benefits 41,490 32,232 9,258 29 %

General and administrative 17,007 18,117 (1,110) (6) %

Total expenses 177,723 130,156 47,567 37 %

Income (loss) before equity method investments 22,609 13,279 9,330 70 %

Income (loss) from equity method investments 185,424 24,670 160,754 652 %

Income (loss) before income taxes 208,033 37,949 170,084 448 %

Income tax (expense) benefit (56,541) 171 (56,712) (33,165) %

Net income (loss) $ 151,492 $ 38,120 $ 113,372 297 %

• Net income increased by $113 million due to an increase in income from equity method investments of $161 million and an increase in total revenue of $57 million, offset by an increase in total expenses of $48 million and an increase in income tax expense of $57 million.

• Total revenue increased by $57 million due to a $42 million increase in interest income and securitization income driven by higher Managed Assets.

Rental income decreased by $11 million due to the sale of real estate assets in 2023 and 2024.

Gain on sale and other income increased by $25 million, driven by a change in the mix and volume of assets being securitized, which included the balance sheet rotation of certain land and government receivable assets.

• Interest expense increased by $44 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 and securitization assets, driven primarily by loans and loan commitments made during the quarter.

• Compensation and benefits and general and administrative expenses increased by $3 million primarily due to growth of the company.

• Income (loss) from equity method investments using HLBV allocations increased by $136 million primarily due to allocations of income in the current period related to tax credits allocated to other investors in a grid-connected utility-scale solar project, as those tax credits reduced the tax equity investors ongoing claim on the net assets of the project, as well as due to an allocation of income related to mark-to-market income related to a power price derivative held by one of the projects in which we have invested.

• Income tax benefit (expense) increased by $45 million primarily due to larger income before income taxes driven primarily by income from equity method investments discussed above.

We recorded a benefit for loss on receivables of $2 million driven primarily by a reduction in our reserve related to the contribution of assets into a co-investment vehicle.

• Compensation and benefits and general and administrative expense increased by $8 million primarily due to growth of the company.

• Income from equity method investments increased by $161 million primarily due to allocations of income in the current period related to tax credits allocated to other investors in a grid-connected utility-scale solar project, as those tax credits reduced the tax equity investors ongoing claim on the net assets of the project, as well as due to an allocation of income related to mark-to-market income related to a power price derivative held by one of the projects in which we have invested.

• Income tax expense increased by $57 million primarily due to larger income before income taxes driven primarily by income from equity method investments discussed above.

Non-GAAP Financial Measures

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

These non-GAAP financial measures, as calculated by us, may not be comparable to similarly named financial measures as reported by other companies that do not define such terms exactly as we define such terms.

These non-GAAP financial measures, as

calculated by us, may not be comparable to similarly named financial measures as reported by other companies that do not define such terms exactly as we define such terms.

Adjusted Earnings

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

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

We also make an adjustment to eliminate our portion of fees we earn from related-party co-investment structures, and for our equity method investments in the renewable energy projects as described below.

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

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Thus, in calculating adjusted 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.

understand the economic performance of these investments where HLBV income can differ substantially from the economic returns in any one period.

We believe this equity method investment adjustment to our GAAP net income (loss) in calculating our adjusted earnings measure is an important supplement to the income (loss) from equity method investments as 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 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, 2024 and 2023.

Three months ended March 31,

The following table provides results related to our equity method investments for the three and six months ended June 30, 2024 and 2023.

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

2024 2023 2024 2023

(in millions)

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In addition, our methodology for calculating adjusted earnings may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures, and accordingly, our reported adjusted 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 adjusted earnings for the three months ended March 31, 2024 and 2023.

Three Months Ended March 31,

The table below provides a reconciliation of our GAAP net income (loss) to adjusted earnings for the three and six months ended June 30, 2024 and 2023.

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

2024 2023 2024 2023

(dollars in thousands, except per share amounts)

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Equity method investments earnings adjustment (2)

59,291 38,461 114,753 72,419

Elimination of proportionate share of fees earned from co-investment structures (3)

(111) — (111) —

Equity-based expenses 8,282 3,438 17,341 12,873

Provision for loss on receivables (4)

(4,198) 806 (2,177) 2,689

Amortization of intangibles

3 772 174 1,544

Non-cash provision (benefit) for income taxes

10,346 (1,601) 56,541 (171)

Current year earnings attributable to non-controlling interest

404 — 1,926 492

Adjusted earnings (5)

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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 adjusted earnings per share.

(2) In addition to these provisions, in the current period, we concluded that an equity method investment along with certain loans we had made to this investee, were not recoverable.

(2) This is a non-GAAP adjustment to reflect the return on capital of our equity method investments as described above.

(3) This adjustment is to eliminate the intercompany portion of fees received from co-investment structures that for GAAP net income is included in the Equity method income line item.

Since we remove GAAP Equity method income for purposes of our Adjusted Earnings metric, we add back the elimination through this adjustment.

(4) In addition to these provisions, in the six months ended June 30, 2024, we concluded that an equity method investment along with certain loans we had made to this investee, were not recoverable.

The equity method investment and loans had a carrying value of $0 due to the losses already recognized through GAAP income from equity method investments as a result of operating losses sustained by the investee.

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The loss associated with this investment is included in our Average Annual Realized Loss on Managed Assets metric disclosed below.

(3) Adjusted earnings per share are based on 115,400,151 shares for the three months ended March 31, 2024, respectively, and 93,266,916 shares for the three months ended March 31, 2023, 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.

(5) Adjusted earnings per share are based on 117,506,065 shares and 116,453,108 shares for the three and six months ended June 30, 2024, respectively, and 99,581,898 shares and 96,441,450 shares for the three and six months ended June 30, 2023, 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.

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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.

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.

We will consider the impact of any capped calls in assessing whether an instrument is equity-like or debt like.

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

Three Months Ended March 31,

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

2024 2023 2024 2023

(in thousands)

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

March 31, 2024 December 31, 2023

June 30, 2024 December 31, 2023

(in millions)

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Assets held in securitization trusts 6,724 6,060

Assets held in co-investment structures 57 $ —

Managed Assets $ 12,967 $ 12,253

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We evaluate Adjusted Cash Flow from Operations plus Other Portfolio Collections on a trailing twelve month (“TTM”) basis, as cash collections during any one quarter may not be comparable to other single quarters due to, among other reasons, the seasonality of projects operations and the timing of disbursement and payment dates.

For the year ended, For the three months ended, For the three months ended, For the TTM ended,

December 31, 2023 March 31, 2024 March 31, 2023 March 31, 2024

Cash available for reinvestment is a non-GAAP measure which is calculated as adjusted cash flow from operations plus other portfolio collections less dividend and distribution payments made during the period.

We believe Cash available for reinvestment is useful as a measure of our ability to make incremental investments from reinvested capital after factoring in all necessary cash outflows to operate the business.

Management uses Cash available for reinvestment in this way, and we believe that our investors use it in a similar fashion.

For the year ended, For the year ended, For the six months ended, For the six months ended, For the TTM ended,

December 31, 2022 December 31, 2023 June 30, 2024 June 30, 2023 June 30, 2024

(in thousands)

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Equity method investment distributions received 110,064 30,140 11,426 4,203 37,363

Proceeds from sales of equity method investments 1,700 — 2,107 — 2,107

Principal collections from receivables 125,976 197,784 470,788 74,328 594,244

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170 3,805 (75) 85 3,645

Proceeds from sales of investments and securitization assets 7,020 — — — —

Principal payments on non-recourse debt (30,581) (21,606) (69,958) (10,069) (81,495)

Adjusted cash flow from operations and other portfolio collections 265,908 237,910 38,321 465,497

Adjusted cash flow from operations plus other portfolio collections 287,129 265,908 632,085 90,369 807,624

Dividends (132,198) (159,786) (93,280) (72,129) (180,937)

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(1) Included in Other in the cash provided (used in) investing activities section of our statement of cash flows.

For the year ended, For the year ended, For the six months ended, For the six months ended, For the TTM ended,

December 31, 2022 December 31, 2023 June 30, 2024 June 30, 2023 June 30, 2024

(in thousands)

Components of adjusted cash flow from operations and plus portfolio collections:

Cash collected from our Portfolio 424,301 442,322 603,545 182,864 863,004

Cash collected from sale of assets (1)

46,673 34,034 226,086 24,845 235,275

Cash used for compensation and benefit expenses and general and administrative expenses (64,187) (78,681) (48,798) (48,192) (79,287)

Interest paid (2)

(98,704) (138,418) (90,836) (68,167) (161,087)

Securitization asset and other income 18,897 28,189 9,988 13,488 24,688

Principal payments on non-recourse debt (30,581) (21,606) (69,958) (10,069) (81,495)

Other (9,270) 68 2,058 (4,400) 6,526

Adjusted cash from operations plus other portfolio collections $ 287,129 $ 265,908 $ 632,085 $ 90,369 $ 807,624

(1) Includes cash from the sale of assets on our balance sheet as well as securitization transactions.

(2) For the six months and TTM ended June 30, 2024, interest paid includes a $19 million benefit from the settlement of a derivative which was designated as a cash flow hedge.

Other Metrics

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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 $6.4 billion as of March 31, 2024.

Unlevered portfolio yield was 8.0% as of March 31, 2024 and 7.9% as of December 31, 2023.

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, 2024.

Our Portfolio totaled approximately $6.2 billion as of June 30, 2024.

Unlevered portfolio yield was 8.0% as of June 30, 2024 and 7.9% as of December 31, 2023.

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, 2024.

Average Annual Realized Loss on Managed Assets

Average Annual Realized Loss on Managed Assets represents the average annual rate of our incurred losses, calculated as the amount of realized losses incurred in each year as a percentage of each year’s average annual Managed Assets.

This metric is calculated on the ten year period ending March 31, 2024.

This metric is calculated on the ten year period ending June 30, 2024.

Incurred losses include both realized losses on equity method investments and realized credit losses on receivables and investments.

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Our management uses it in this way and we believe that our investors use it in a similar fashion to evaluate our investment performance, and as such, we believe that its disclosure is useful to our investors.

The table below shows these metrics as of March 31, 2024 is:

The table below shows these metrics as of June 30, 2024 is:

Average Annual Recognized Loss on Managed Assets (GAAP)

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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 avoiding carbon emissions.

We estimate that our investments originated during the quarter ended March 31, 2024, will avoid annual carbon emissions by approximately 520,000 metric tons, equating to a CarbonCount® of 0.92.

We estimate that our investments originated during the quarter ended June 30, 2024, will avoid annual carbon emissions by approximately 60,000 metric tons, equating to a CarbonCount® of 0.26.

We estimate that our investments made since 2013 have cumulatively avoided annual carbon emissions by over 7 million metric tons.

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Our uses of liquidity typically include funding investments, operating expenses (including cash compensation), interest and principal payments on our debt, stockholder 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, 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, 2024, with unrestricted cash balances of $61 million, an unsecured revolving credit facility with an unused capacity of $707 million, and $35 million of available capacity in our green commercial paper program.

During 2024, we have issued $31 million in equity, issued an additional $200 million principal amount of 2027 Senior Unsecured Notes for proceeds of $204 million, and issued $94 million of non-recourse debt secured by equity method investments.

As of March 31, 2024, we had $137 million of non-recourse borrowings, $2.5 billion of senior unsecured notes, $696 million in term loans, and $603 million of Convertible Notes outstanding.

Subsequent to March 31, 2024, we increased the available capacity available under our unsecured revolving credit facility to $1.25 billion, and extended the maturity of the facility to April 2028.

Also subsequent to March 31, 2024, we extended the maturity of our unsecured term loan facility to April 2027, and used proceeds from the unsecured revolving credit facility to partially prepay our unsecured term loan facility by $275 million.

Also subsequent to March 31, 2024, we increased the maximum amount outstanding under our green commercial paper program to $125 million, and extended the term of the facility to April 2026.

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

As discussed in Note 14 to our financial statements in this Form 10-Q, subsequent to March 31, 2024, we entered into a strategic partnership with KKR, where we each have committed to invest $1 billion in climate solutions projects.

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 March 31, 2024, the outstanding balance of our assets financed through the use of these off-balance sheet transactions was approximately $6.5 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 finance our investments primarily with non-recourse or recourse debt, equity and off-balance sheet securitization or co-investment structures.

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.

Below is a summary of our available liquidity by source:

As of June 30, 2024

(in millions)

Unrestricted cash $ 146

Unused capacity under our unsecured revolving credit facility 927

Unused capacity under our commercial paper program 15

Unused capacity under our senior secured credit facility 22

Total liquidity $ 1,110

Capital markets activity during the six months ended June 30, 2024

During the six months ended 2024, we increased the available capacity available under our unsecured revolving credit facility to $1.25 billion, and extended the maturity of the facility to April 2028.

We also extended the maturity of our unsecured term loan facility to April 2027, and used proceeds from the unsecured revolving credit facility to partially prepay our unsecured term loan facility by $275 million.

We also increased the available capacity under our green commercial paper program to $125 million, and extended the term of the facility to April 2026.

Also in June 2024, we established a senior secured credit facility, designed to warehouse climate solutions assets until they achieve key technical milestones, at which point we may consider them for sale to large institutional investors under our established securitization programs.

During the six months ended June 30, 2024, we issued $82 million in equity, issued an additional $200 million principal amount of 2027 Senior Unsecured Notes for proceeds of $204 million, and issued $94 million of non-recourse debt secured by equity method investments.

As discussed in Note 8 to our financial statements in this Form 10-Q, we entered into a strategic partnership with KKR called CarbonCount Holdings 1, LLC (“CCH1”), under which we each have committed to invest $1 billion in climate solutions projects over an 18 month period.

Subsequent to June 30, 2024, we issued $700 million of senior unsecured notes due 2034 at a yield to maturity of 6.476% and used the net proceeds from such offering to temporarily repay a portion of the outstanding borrowings under our unsecured revolving credit facility and to redeem our 6.00% Senior Notes due 2025.

Maturities of recourse debt obligations

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 of our Senior Unsecured Notes, and our term loan facilities, and the balances of our short-term commercial paper program, and our 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.

However, as it relates to the non-recourse debt, to the extent there are not sufficient cash flows received from investments pledged as collateral for such debt, 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 Convertible Notes, those obligations may be settled at maturity with cash, or with the issuance of shares to the extent that the market price of our common stock exceeds the strike price on our Convertible Notes.

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

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

(1) Includes the impacts of April 2024 financing activities described above.

We plan to continue to issue debt which may be either recourse or non-recourse and either fixed-rate or floating-rate as a means of financing our business and may issue additional equity.

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

sheet securitizations.

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

The decision on how we finance specific assets or groups of assets is largely driven by risk and portfolio and financial management considerations, including the potential for gain on sale or fee income, as well as the overall interest rate environment, prevailing credit spreads and the terms of available financing and market conditions.

As of June 30, 2024, the maturity profile of our recourse debt obligations was as follows:

(1) Amounts presented include adjustments for the issuance of the 2034 Notes on July 1, 2024, and the use of proceeds from such offering to redeem our 2025 Notes and to temporarily repay our unsecured revolving credit facility.

Additional borrowings and financial leverage management

As a means of financing our business, we plan to continue to issue debt which may be either recourse or non-recourse and either fixed-rate or floating-rate and may issue additional equity.

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

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

The decision as to how we finance specific assets or groups of assets is largely driven by risk and portfolio and financial management considerations, including the potential for gain on sale or fee income, as well as the overall interest rate environment, prevailing credit spreads, the terms of available financing, and financial market conditions.

During periods of market disruptions, certain sources of financing may be more readily accessible than others which may impact our financing decisions.

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

The amount of financial leverage we may deploy for particular assets will depend upon our target capital structure and 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 1.9 to 1 as of March 31, 2024, below our current board-approved leverage limit of up to 2.5 to 1.

Our percentage of fixed rate debt including the impact of our interest rate derivatives was approximately 97% as of March 31, 2024, 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 1.8 to 1 as of June 30, 2024, below our current board-approved leverage limit of up to 2.5 to 1.

Our percentage of fixed rate debt including the impact of our interest rate derivatives was approximately 99% as of June 30, 2024, 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, 2024 % of Total December 31, 2023 % of Total

June 30, 2024 % of Total December 31, 2023 % of Total

(dollars in millions) (dollars in millions)

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Sources and Uses of Cash

We had approximately $77 million and $75 million of unrestricted cash, cash equivalents, and restricted cash as of March 31, 2024 and December 31, 2023, respectively.

Cash flows relating to operating activities

Net cash provided by operating activities was approximately $21 million for the three months ended March 31, 2024, driven primarily by net income of $125 million and adjustments for non-cash and other items of $104 million.

The non-cash and other adjustments consisted of increases of $7 million related to equity-based compensation, $4 million of depreciation and amortization, $2 million related to provision for loss on receivables, and $69 million related to changes in accounts payable and accrued expenses and other items.

These were partially offset by decreases of $146 million related to equity method investments, $22 million related to gains on securitizations, and $18 million related to portfolio accrued interest.

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.

Cash flows relating to investing activities

Net cash used in investing activities was approximately $70 million for the three months ended March 31, 2024.

We made $231 million of investments in receivables and fixed rate debt-securities and made $127 million of equity method investments.

We collected $142 million of principal payments from receivables and fixed rate debt-securities, received $115 million from the sale of real estate, $4 million from equity method investments in excess of income recognized to date under GAAP, received $3 million of returned hedge collateral previously posted, and received $24 million from the sale of receivables and investments.

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

We made $97 million of investments in receivables and fixed rate debt-securities, made collateral deposits of $21 million, and made $363 million of equity method investments.

We collected $23 million of principal payments from receivables and fixed rate debt-securities, $1 million from equity method investments in excess of income recognized to date under GAAP, and $8 million from the sale of receivables and investments.

Cash flows relating to financing activities

Net cash provided by financing activities was approximately $51 million for the three months ended March 31, 2024.

We received $250 million from our credit facilities, $30 million of net proceeds from issuances of common stock, $206 million from the issuance of senior unsecured notes, $35 million of net proceeds from the issuance of green commercial paper notes, $94 million of net proceeds from the issuance of non-recourse debt, and collected $69 million of hedge collateral, which were offset by $450 million of payments on credit facilities, $69 million of principal prepayments on non-recourse debt, $35 million in principal payments on our term loan, $7 million for payment of financing costs, $25 million for the posting of hedge collateral, and payments of $47 million of dividends, distributions and other items.

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.

We had approximately $161 million and $75 million of unrestricted cash, cash equivalents, and restricted cash as of June 30, 2024 and December 31, 2023, respectively.

The following table summarizes our cash flows for the six months ended June 30, 2024 and 2023.

See our statements of cash flows for full details on the components of each category of cash flows.

As discussed above, Adjusted cash from operations plus other portfolio collections was $632 million for the six months ended June 30, 2024.

For the six months ended,

June 30, 2024 June 30, 2023

(in millions)

Cash provided by (used in) operating activities $ (4) $ 66

Cash provided by (used in) investing activities 185 (688)

Cash provided by (used in) financing activities (95) 598

Increase (decrease) in cash and cash equivalents $ 86 $ (24)

Discussion of changes in cash provided by (used in) operating activities

Cash provided by (used in) operating activities for the six months ended June 30, 2024 was $70 million lower than the same period ended June 30, 2023.

Net income was $113 million higher in the current period, which was offset by higher net negative adjustments to net income of $183 million when compared to the prior period.

Discussion of changes in cash provided by (used in) investing activities

Cash provided by (used in) investing activities for the six months ended June 30, 2024 was $873 million higher than the same period ended June 30, 2023.

This was driven by $397 million higher principal collections from receivables in the current period, $209 million of which was driven by a large, one-time prepayment.

We received $92 million more from the sales of receivables in the period ended June 30, 2024 than the same period in the prior year.

We invested $261 million less in equity method investments in the period ended June 30, 2024 than the same period in the prior year.

Discussion of changes in cash provided by (used in) financing activities

Cash provided by (used in) financing activities for the six months ended June 30, 2024 was $693 million lower than the same period ended June 30, 2023, primarily driven by lower borrowings net of principal repayments of approximately $403 million than in the prior period, and lower equity issuances of $276 million.

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 $224 million as of March 31, 2024, 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 $247 million as of June 30, 2024, 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, 2024, we carried only our investments, residual assets in securitized financial assets, and derivatives at fair value on our balance sheet.

As of June 30, 2024, 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, residual assets in securitized financial assets, and derivatives that are carried on our balance sheet at fair value as of March 31, 2024, 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, residual assets in securitized financial assets, and derivatives that are carried on our balance sheet at fair value as of June 30, 2024, 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 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.

1 unchanged sentence

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