HA Sustainable Infrastructure Capital, Inc.

Good afternoon to everyone joining us today for HACI's third quarter 2025 conference call. Earlier this afternoon, HACI distributed a press release reporting our third quarter 2025 results, a copy of which is available on our website, along with the slide presentation we will be referring to today. This conference call is being webcast live on the investor relations page of our website, where a replay will be available later today. Some of the comments made in this call are forward-looking statements, which are subject to risks and uncertainties described in the risk factor section of the company's Form 10-K and other filings with the SEC. Actual results may differ materially from those stated. Today's discussion also includes some non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is available in our earnings release and presentation. Joining us on the call today are Jeff Lipson, the company's president and CEO, as well as Chuck Melko, our chief financial officer. And also available for Q&A are Susan Nicky, our chief client officer, and Mark Pangburn, our chief revenue and strategy officer. To kick things off, I will turn it over to our president and CEO, Jeff Lipson. Jeff?

Thank you, Aaron, and thank you, everyone, for joining the call. Welcome to the HACI Q3 2025 earnings call. Before we discuss the prepared slides, I'd like to start the call today by reiterating four aspects of our business model and how they interact with recent market developments. One, the demand for energy continues to increase, and virtually all forecasts expect this trend to continue. This demand will clearly result in greater supply, facilitating ongoing development by our clients, which in turn increases HACI's total addressable market. Therefore, the current underlying economic trends are a tailwind for our business. Additionally, if demand causes power curves to increase, our existing portfolio of investments will become increasingly more valuable. Two, the operating environment remains conducive to business as usual activities. Capital markets have experienced relatively low recent volatility, and our clients' pipelines continue to be active and growing. Therefore, the backdrop remains very supportive for expanding our investment volumes. Three, we continue to demonstrate that our business is able to achieve meaningful EPS growth in all interest rate environments. Since interest rates began to rise in 2022, we've been able to continue to grow our earnings with higher yielding investments, prudent hedging strategies, and opportunistic debt issuances. With three investment grade ratings and our CCH1 co-investment vehicle, we have become even less exposed to changes in interest rates. If the yield curve steepens going forward, we do not expect any material impact on our profitability. And four, virtually all of our investment markets are currently providing attractive opportunities. Utility-scale renewables and storage, distributed solar and storage, energy efficiency, renewable natural gas, and transportation have all been active markets for us in 2025 and continue to be well-represented in the pipelines. and we remain excited with the emergence of our pipeline of next frontier opportunities. In summary, these four items reinforce the framework of our successful business model, further evidenced by our outstanding results this quarter. We just completed the most profitable quarter in our history and closed the largest investment in our history as we continue to consistently achieve our goals and provide outstanding returns to our investors. Now let's turn to the slides, beginning on slide three, and highlight a few key metrics. Our adjusted earnings per share in Q3 was 80 cents, the highest quarterly EPS we have ever reported. This result was driven by strong growth in all of our components of revenue, which Chuck will discuss in more detail. Adjusted recurring net investment income, the new financial measure we introduced last quarter, is 27 percent higher year-to-date over last year. And our managed assets, which includes our portfolio, as well as our partners' assets in CCH1 and the assets we have securitized off balance sheet, we're up 15% year-over-year to $15 billion. And our year-to-date adjusted ROE also has experienced significant year-over-year growth, rising to 13.4%. We are reaffirming our guidance for 8% to 10% compound annual EPS growth through 2027, and noting that we expect to achieve roughly 10% adjusted EPS growth in 2025. As detailed on slide four, we continue to make progress in the key areas of value creation for our business. One, originating new investments. Two, optimizing return on our existing assets. And three, managing our liabilities and lowering our cost of capital. First, in terms of new investments, as the box on the left indicates, Both volumes and returns have been strong year to date. Not only did we close more than $650 million of new transactions in Q3 for a total of $1.5 billion through the first three quarters of 2025, but we closed on a $1.2 billion investment early in Q4 that has put us on a path to close more than $3 billion for the full year 2025, up more than 30% year over year. We will discuss this investment in greater detail later in the call. Importantly, it is not only volumes that have been elevated, but our returns as well, with new asset yield in Q3 greater than 10.5% for the sixth quarter in a row. Meanwhile, our pipeline remains above $6 billion, even after taking into account the large October transaction. Second, we do not simply create value originating investments but also in how we optimize returns over the life of the investment. One example of this is the targeted asset rotation strategy we executed in 2024, through which we were able to monetize certain lower yielding assets in our portfolio for a gain, while generating cash that we were able to recycle into higher yielding assets. In Q3 of this year, we refinanced the senior ABS debt within the SunStrong residential solar lease portfolio resulting in significant pay down of our mezzanine debt investments and a meaningful cash distribution to the SunStrong equity owners of which we are 50%. This distribution created significant earnings in the quarter as we began to monetize the increasingly valuable SunStrong platform. We have also maintained a strong risk return profile in our portfolio as evidenced by minimal annual realized loss rate of under 10 basis points. This low level of losses reinforces the predictability of our cash flow and our ability to effectively underwrite investment opportunities. And lastly, we maximize value in our business with our low-cost, diversified, and efficient debt and capital platform. It's notable to highlight that even after refinancing a portion of our low-cost debt due in 2026 at today's higher market rates, the increase in our cost of debt was only 10 basis points, at 5.9% in Q3. In addition, we opportunistically added $250 million in hedges in September that reduced the base rate risk for our next debt issuance. Turning to slide five, as I briefly mentioned a moment ago, we are excited to announce a new investment that closed in October, but is significant enough to mention on our Q3 call. It is a $1.2 billion structured equity investment in a major component of what will be the largest clean energy infrastructure project in North America once completed in Q2 of next year. HACI's involvement in providing capital to this project is truly a milestone event for our company and a reflection of the transaction size we can now accommodate given our access to capital. Developed and managed by one of the world's largest developers and owners of clean energy and transmission infrastructure, The project has several components. Our specific investment is for 2.6 gigawatts of wind power supplied by the largest U.S. turbine manufacturer and backed by PPAs with a weighted average life of almost 15 years, including counterparties spanning energy majors, utilities, community electricity providers, and universities. Consistent with our discussion last quarter, we are investing at a de-risk stage, as most of our funding will occur in the first half of 2026. The expected return on the investment is consistent with our typical return targets on recent utility scale investments. The total investment commitment is $1.2 billion. However, the net impact to HACI's balance sheet will be much lower due to the investment closing in CCH1. resulting in an initial proportional commitment of approximately $600 million. Subsequently, we may add back leverage to the investment, further reducing our long-term hold. As noted earlier, this is not included in our Q3 financials and will be considered a closed transaction in Q4 with the vast majority of funding expected in Q2 of 2026. Turning to slide six, our pipeline remains above $6 billion. including a pro forma adjustment to remove the $1.2 billion project just discussed, as other investment opportunities have replaced this amount in the pipeline. Our pipeline of new investments remains highly diversified, with strong undercurrents of demand in each of our key end markets. Higher retail electricity rates are facilitating demand in our BTM asset classes, including not just rooftop solar, but importantly, energy efficiency as well. Meanwhile, residential solar leases are expected to gain market share from loans and cash sales following the expiration of the 25D ITC at year end. And our business is largely focused on leases and serving this end market. In addition, the grid-connected end market is experiencing larger project sizes to accommodate the growth in U.S. power demand, clearly driven by data centers, but also domestic manufacturing, and the expanding use cases of electrification in general. Likewise, demand underpinning our fuels, transport, and nature end market remains strong with RNG facilities in construction or in development expected to double the current installed base in North America. And finally, our next frontier asset classes remain an exciting new opportunity. And with that, I will ask Chuck to discuss our financial results.

Thank you, Jeff. On slide 7, we highlight our Q3 profitability, and as you can see, we had meaningful growth in many of our key metrics. Jeff already highlighted our record quarterly adjusted EPS of $0.80, and our year-to-date adjusted EPS is at $2.04, up 11% year-over-year. This growth is driven largely by our primary source of revenue, adjusted recurring net investment income, which grew year-over-year by 42% in the quarter and 27% year-to-date. We are growing the recurring earnings portion of our adjusted EPS, and our equity efficiency has also helped us increase our year-to-date adjusted ROE to 13.4% compared to 12.7% for the same period last year. This growth in our adjusted ROE is demonstrating the meaningful benefits from our CCH-1 co-investment vehicle which I will speak to in a few slides. One last point on our metrics. Our GAAP net investment income does not include the earnings from our equity investments. Therefore, the adjusted recurring NII will continue to be greater than our GAAP NII. Now that I have highlighted the key results for the quarter, some additional context is useful. Jeff mentioned our diversified business model earlier, and I will add that it is also versatile. where we can generate value in different ways, such as through recurring earnings from the underwritten returns on our investments, and also optimization transactions, where we capture additional value that is embedded in our portfolio, such as through project-level refinancing activities, which we saw this quarter. These optimization transactions may not occur every quarter, but we consistently identify these opportunities year after year. Now on to slide eight. Through the first three quarters of this year, we have closed $1.5 billion of transactions, which is greater than the same period last year. And when incorporating the transaction that Jeff spoke to earlier, we are on track to meaningfully exceed last year's total closed transactions. While transaction closings on their own are not an indicator of profitable growth, if you take into account our ability to generate new balance sheet transaction yields at an attractive level above 10.5%, We are also setting the stage for continued growth in adjusted EPS and ROE. Even as interest rates and our own cost of debt have risen over the last couple years, it is important to note that we have been able to maintain our margins through the increase in our new asset yields and our hedging program. We expect we will continue to maintain attractive margins as well in a declining interest rate environment given our approach to investment, funding, and managing interest rate risk. Next on slide nine, we are experiencing double-digit growth in our managed assets as well as our portfolio. They have grown 15 percent and 20 percent, respectively, from a year ago. This is the base of assets from which we generate our recurring income. As we have discussed previously, we are migrating to a business model that is less dependent on new equity issuance to generate earnings growth. And the factor in accomplishing this is our CCH1 co-investment vehicle. As of the end of Q3, CCH1 has completed funding of $1.2 billion of investments, leaving $1.4 billion of available capital for future investment with the potential to increase it to $1.8 billion with additional debt at the CCH1 level while keeping its leverage level below a debt-to-equity ratio of 0.5. Our portfolio yield is at 8.6%, up from 8.3% last quarter. as we are starting to see the new asset investments with yields greater than 10.5% start to come through our portfolio. The portfolio yield is the largest contributor to the growth in our adjusted recurring net investment income that is illustrated on the next slide. On to slide 10. We provide a buildup of our new financial measure that we introduced last quarter, adjusted recurring net investment income. We are now utilizing this metric in addition to our adjusted EPS to measure the profitability of our managed assets as a whole, inclusive of both the net investment income from our portfolio, as well as the recurring fee income from the other assets we manage that are not on our balance sheet. Our year-to-date adjusted recurring net investment income of $269 million has grown 27%. This component of revenue is a consistent source of earnings generated from our existing managed assets. Turning to slide 11, We highlight a few items that will contribute to managing our liquidity and liability structure and further reduce our cost of capital. Over the past couple years, we have significantly broadened our sources of capital in between our bank facilities, commercial paper program, and our investment grade ratings, we have a capital platform that is well positioned to fund our growth needs at an attractive cost. First to mention is a $250 million term loan they close after quarter end that will provide another source of potential liquidity for the refinancing of our senior bonds due next year. As we reported last quarter, we retired a large portion of the upcoming maturity through a tender offer. With our current liquidity at $1.1 billion at the end of the quarter, this term loan, and our access to the investment grade debt market, we are well positioned to retire the remaining notes outstanding. Next, In furtherance of our focus on managing our interest rate risk, we executed an additional $250 million of SOFR-based hedges related to anticipated debt issuances and now have hedged up to $1.4 billion of our future debt issuance. On to slide 12. This slide is a good illustration of the changes we have made to the business over the past couple years that is accelerating our growth and returns for shareholders. We have historically just provided the total adjusted ROE metric that is highlighted in the dark blue. And while it was steadily increasing over time, it is not painting the complete picture on where our business is headed. With the introduction of CCH1 last year and obtaining our investment grade ratings, we have meaningfully changed the profile of our adjusted ROE for new transactions. It may take some time for the higher profitability from our incremental business to fully show up in our adjusted ROE, given the previous transactions on our balance sheet, so we wanted to illustrate where our business is headed with the adjusted ROE from incremental business by period. As you can see with our current business model, since the start of CCH1 early in 2024, our newer transactions are generating a higher adjusted ROE, with year-to-date being 19.6%. We expect this trend to continue and even increase as CCH1 investments are funded from debt at CCH1. Over time, you will see our adjusted ROE increase to the higher ROE that we are generating from our new business. I will now turn the call back to Jeff for closing remarks.