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Hannon Armstrong Sustainable Infrastructure Capital Inc (NYSE:HASI)
Q2 2020 Earnings Call
Aug 6, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to Hannon Armstrong's Conference Call on its Q2 2020 Financial Results. Leadership will be utilizing a slide presentation for this call, which is available now for download on the company's Investor Relations page at investors.hannonarmstrong.com. [Operator Instructions]

At this time, I would like to turn the conference over to Chad Reed, Vice President, Investor Relations and ESG. Please go ahead.

Chad Reed -- Vice President, Investor Relations & ESG Strategy

Thank you, operator. Good afternoon, everyone, and welcome. Earlier this afternoon, Hannon Armstrong distributed a press release detailing our second quarter 2020 results, a copy of which is available on our website. This conference call is being webcast live on the Investor Relations page of our website where a replay will be available later today.

Before the call begins, I would like to remind you that some of the comments made in the course of this call are forward-looking statements. And within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended. The company claims the protection of the Safe Harbor for forward-looking statements contained in such sections. The forward-looking statements made in this call are subject to the risks and uncertainties described in the Risk Factors section of the company's Form 10-K and other filings with the SEC. Actual results may differ materially from those described during the call.

In addition, all forward-looking statements are made as of today and the company does not undertake any responsibility to update any forward-looking statements based on new circumstances or revised expectations. Please note that certain non-GAAP financial measures will be discussed on this conference call. Presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. A reconciliation of GAAP to non-GAAP financial measures is available on our posted earnings release and slide presentation. Joining me on today's call are Jeff Eckel, the company's Chairman and CEO; and Jeff Lipson, our CFO.

With that, I'd like to turn the call over to Jeff who will begin on Slide 3.

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

Thank you, Chad, and good afternoon, everyone. Today we are announcing another strong quarter with 33% year-on-year growth in core earnings of $0.40 per share and a 29% year-on-year increase of core net investment income for the first half of 2020 to $49 million total. Declaration of a dividend of $0.34 per share. And please note that from this call forward, earnings and dividend announcements will be combined.

We announced, after the quarter-end, another partnership with NG where we will invest approximately $540 million over the next few quarters. I will speak more on this partnership in a bit, but it does certainly contribute to our confidence that we will once again exceed our annual target of investing $1 billion in climate change solutions. All of this, despite COVID-19 disruptions.

And finally we're announcing that we've launched multiple Diversity, Equity, Inclusion and Justice initiatives, which we'll shorthand as diversity for the purposes of this call and including a multi-year plan for diversity impact. We understand that even as we continue to make progress in our mission to invest in climate change solutions, our nation is hurting. A deadly pandemic continues to threaten the health and safety of an increasing number of American families and has left millions jobless and many more far less financially secure. In our long and painful fight against systemic racism and inequality has rightfully taken on renewed urgency in the aftermath of recent injustices.

At Hannon Armstrong our intense focus on the environmental aspects of ESG is at the core of our mission and value proposition, but the multiple crises affecting our nation have given even more urgency to expanding our focus on a durable social fabric, the S in ESG. This includes efforts toward a healthy, diverse, engaged and fairly compensated staff as well as proactive support and engagement with our local community. These were material factors in our financial success before this crisis and will become even more so in the future.

Turning to Slide 4, I want to share some thoughts on the continued resilience of our business. We've always said that we tend to perform well in periods of economic volatility, and this quarter is another example of that. I think it is important to reiterate factors that enable the Hannon Armstrong business to prosper in this unprecedented environment.

First, all of our investments save the obligor money. This is a profoundly important credit positive distinction that is often overlooked in more normal times. Second, our clients, the leading energy and infrastructure companies in the world, are large responsible corporate citizens who will survive and even prosper when we exit from the pandemic. Finally, the investment pipeline, which drives our growth remains intact, not only because these investments save people money and are sponsored by high quality clients, but because the underlying theme of investing in climate change solutions is proving a durable asset class, and one that we believe will come out of this crisis even stronger. For example, there is little doubt that distributed solar plus storage or enhanced HVAC solutions will be perceived as more valuable during and after this pandemic for reasons related to energy, security and health. All of these things add up to a business model that has substantial protection from the general economy, as we have shown in this process.

Turning to Slide 5, we provide an update on our 12-month pipeline, which remains greater than $2.5 billion even after adjusting for the execution of the NG investment, which to be clear, occurred in Q3. The behind the meter portion of our pipeline remains robust and is weighted toward energy efficiency opportunities. However, the BTM pipeline also includes a healthy balance of residential, C&I and community solar projects, many with storage attached.

Turning to Slide 6, we highlight our July partnership with NG. We've committed to invest approximately $540 million of equity with a preference on cash flows in a portfolio of 13 wind and solar projects totaling 2.3 gigawatts. The portfolio has a weighted average contract life of 13 years, with large investment-grade corporate and utility counterparties including Amazon, Ingersoll Rand, Microsoft, Target, Walmart and Xcel Energy.

Located across five states, the portfolio is 75% onshore wind and 25% utility-scale solar. The portfolio enjoys an expected carbon count of more than 2.0, which indicates our capital is being deployed relatively efficiently to reduce carbon. With this into context, our equity investment will avoid an estimated $1.1 million metric tons of carbon dioxide equivalent in the first full year of operations or approximately 150,000 railcars filled with coal over the life of the assets. Partnership grows and diversifies our balance sheet portfolio, provides operating leverage for continued earnings growth and provides additional programmatic opportunities with this large ambitious partner focused on the North American market.

On Slide 7, we provide a comparison of our balance sheet portfolio as of the end of the second quarter with and without the NG investment, as if all of the funding occurred on June 30. We're doing this as it means to show the impacts of the NG partnership. On a pro forma basis with the investment, our balance sheet portfolio expands almost 25%, $2.6 billion with an increase in the average life of our assets by four years. All other metrics such as portfolio yield, number of investments and the average investment size are substantively unchanged. As the pie chart on the right also makes clear, the investment further diversifies our portfolio. We had another price slice utility-scale solar equity in the grid-connected market and this combined with an increase in onshore wind, reduces our concentration in any one market.

Now, I'll turn it over to Jeff to detail our financial performance.

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

Thanks, Jeff. Summarizing our second quarter results on Slide 8, we recorded core earnings per share prior to any seasonal provisions of $0.40, an increase of 33% over the same period last year as higher portfolio yield and gain on sale income were only partially offset by an increase in interest expense. Note that for the quarter, in accordance with CECL, we increased our allowance by approximately $3 million, primarily as a result of the potential impact of the COVID-19 pandemic on our commercial receivables, which brings our core earnings per share to $0.36.

I'll also note that core net investment income for the first half of the year increased 29% year-over-year to $49 million. This increase was despite the fact we maintained an outsized low yielding cash balance during the second quarter. This cash balance was a result of the debt and equity raising we did in March and April that allowed us to remain liquid during the crisis and to pre-fund the NG transaction. Further, we recorded significant growth and income from gain on sale and fees in the second quarter of $18.5 million. The growth in both, NII and gain on sale this quarter highlight the strength of our dual revenue model, as we continue to generate strong results despite the pandemic and recession.

As we turn to Slide 9, I want to highlight the continued growth we've seen in core NII and we expect this growth will continue as we fund several of our closed transactions and correspondingly increase the size of our portfolio. Portfolio yield of 7.7% in the first half of 2020 remains consistent with 2019. Therefore, growth in core NII, which over the past several quarters has been primarily due to an increase in portfolio yield, we expect over the next few quarters will be primarily the result of portfolio growth.

Turning to Slide 10, we can see that our balance sheet did expand in the second quarter to $2.8 billion, as we maintained a more liquid profile in this period with over $500 million of cash. We expect to convert a significant portion of the cash into earning investments in the second half of the year. Towards that end, on July 1, we funded $150 million of the approximately $540 million NG investment and expect to fund the majority of the remainder by the end of this year.

The table on the bottom left of the page highlights that despite the economic headwinds and several gain on sale transactions, our portfolio remained at $2.1 billion at June 30 and is poised to achieve growth as we just discussed. This chart is also a good reminder that many of our transactions fund over time. For example, in the second quarter, we closed $178 million of transactions, but as reflected in the chart, $26 million funded in the quarter.

As we turn to Slide 11, we continue to confirm that our portfolio of high quality assets have performed within our expectations, despite the adverse macroeconomic conditions that existed throughout the second quarter. This performance is driven in part by the credit quality of our counterparties and the structure of our investments. All of our government and the vast majority of our commercial obligors maintain investment-grade ratings.

In addition, the obligors of our residential solar assets, include over 150,000 high credit quality consumers located across 22 states. And in our equity method investments, such as the recent University of Iowa and NG grid-connected transactions, we are typically preferred in this structure. And as Jeff detailed earlier, our investments typically, reduce cost for the obligor, creating a strong incentive to continue making payments.

Turning to Slide 12, I'll note that all of our funding sources remain open and accessible to us and we expect to continue to raise capital to fund our pipeline. Our debt ratings were affirmed by the rating agencies in the second quarter and our April debt issuance is trading at a substantial premium. We also have a well-laddered maturity profile and have no material recourse debt maturities until September 2022 when our convertible bonds mature. And given these may be settled in shares, this maturity does not necessarily reflect the cash need. And finally, we have limited interest rate risk as a vast majority of our assets and liabilities are fixed rate. In summary, during a quarter in which various macroeconomic metrics reflected unprecedented negative levels, our earnings, liquidity and asset quality remained resilient.

With that, I'll turn the call back over to Jeff.

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

Thank you, Jeff, for your leadership in Q2; it was terrific team effort. Turning to Slide 13, we've received a number of inquiries as to the impact of the upcoming federal elections. I think there are three key takeaways in this question. First, the assets in which we invest, including renewables are already cost-competitive with competing technologies, as shown in the chart on the right, in most of the markets in which we invest. So their continued expansion is expected. Second, while we support an extension of the tax credits, Hannon Armstrong is not a tax equity investor. Indeed, our customary piece of the capital stock remains sizable and attractively priced irrespective of what happens to the tax credits.

Finally, we are continuing to engage in a bipartisan manner with legislators across the spectrum to drive acceptance and adoption of a national price on carbon; ideally, one that is revenue neutral to the government and includes a dividend or cashback to citizens. This market-based approach will drive investment to the most efficient technologies and companies that reduce carbon emissions at the scale required to avoid the worst impacts of climate change.

Any federal climate and energy bill will have to pass the U.S. Senate and will likely require the support of Red State Democrats as well as Blue State and/or Purple State Republicans. So we believe that this policy, in addition, an optimal from both the climate and economic perspective is the one that could garner the bipartisan support required to be enacted into law.

We'll finish up on Slide 14, where I will highlight notable recent developments on the ESG front. In the second quarter, led by a significant number of our employees, we raised funds virtually to the Chesapeake Bay Foundation. We also increased our previously disclosed donations to local COVID-19 relief organizations who are addressing rising food insecurity and providing support for victims of domestic violence and the homeless. In addition, we bolstered our efforts on diversity as part of our multi-year plan. Among other actions, we are implementing efforts to further advance diversity in our hiring practices and expanded our employee charitable giving match for donations made to organizations addressing racial and economic justice.

We believe our strong performance as a public company has demonstrated to our shareholders the importance of fully integrating ESG factors into the business. And while we have a long way to go on our journey, I've been inspired by how our team has responded to the national spotlight on injustice and inequality and remain confident in the ability of our entire team, including the board, to build a more just inclusive and equitable company.

Thank you for joining us today. Operator, please open the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Noah Kaye with Oppenheimer & Company. Please go ahead.

Noah Kaye -- Oppenheimer & Co. -- Analyst

Good afternoon. Thanks so much for taking the questions. And appreciate all the incremental details on the NG investments; this is the largest single investment in the company's history. And so the question I'm going to ask may be a little bit unfair following that, but can't help but notice that, in its own press release, NG talked about ambitions to commission nine gigawatts of renewable energy capacity by the end of next year; so this two gigawatts is great progress toward that. I was just wondering, you typically don't comment on individual partners, whether additional opportunity beyond this portfolio is in the 16% of pipeline, the 12-month pipeline that's grid-connected or would that be incremental?

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

Well, generally it's going to be incremental. We've been pretty conservative, Noah, with the pipeline and until we kind of actually identify a transaction and put a name on it and a number, it's generally not in there. So we would look at that as incremental.

Noah Kaye -- Oppenheimer & Co. -- Analyst

Okay, great. And then just kind of for modeling purposes, I think you mentioned $150 million of the investment you funded in early July. Should we sort of air toward 3Q or 4Q for funding the remainder? And how do we think about layering in the contribution from that to the financials this year?

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

It will fund us as the projects come online. So we have a funding schedule, but that in and of itself is subject to change. I think, assuming the vast majority comes in in the third quarter and fourth quarter with the little slippage into the first quarter is probably the best way to model it. And as we said, we're not disclosing our yield on the portfolio, but I think in Jeff's comments, we reiterated it doesn't change the overall portfolio yield. So that gives you perhaps a bit of a range to speculate for the yield maybe.

Noah Kaye -- Oppenheimer & Co. -- Analyst

It does. Thanks. And just to switch gears for a sec, can you expand a little bit on what factors regarding the commercial receivables drove you to take the credit provision. What are you looking at here that drove that? Any increases and past dues, any assessment of macro factors? And I guess, I would just, lumping here, Jeff, I think you made a great point earlier about your agnostic attempt to policies around renewables. But as you look at your customer base, do you need any kind of stimulus to the economy to help support the portfolio performance? As you pointed out, there is millions of folks unemployed and hurting. Just wondering if you can kind of give us a little bit of insight here.

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

Maybe I'll take the first part of that question, Noah. And -- so the allowance process includes many factors, some macroeconomic, some specific, of course, to the investment. And I think in my prepared remarks, I alluded to that the increase in the quarter was primarily the result of the macroeconomic factors that are not specific to the investment, but do going to the allowance calculation.

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

And then do we need a stimulus bill -- what would this be? Number 6, I think the country needs it. And at the risk of sounding pollyannaish, I don't actually think our obligor is needed, but it's reckless to say it would not have any positive impact on us, of course it will, but generally -- and you've seen this from the residential solar earnings calls, portfolios are performing. People are really focused on having a reliable source of power on their house that they can control, that's why everybody's reporting more storage. For a lot of reasons, residential solar, which is what we particularly worry about with credit has performed quite well.

Noah Kaye -- Oppenheimer & Co. -- Analyst

Yeah. It's good to see. Thank you very much.

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

Thank you.

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

Thanks, Noah.

Operator

Our next question comes from Julien Dumoulin-Smith with Bank of America. Please go ahead.

Anya Shelekhin -- Bank of America Merrill Lynch -- Analyst

Hi, guys. This is Anya Shelekhin for Julien here.

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

Hi, Anya.

Anya Shelekhin -- Bank of America Merrill Lynch -- Analyst

Hey, how are you? So first question is on the NG transaction. Just wanted to see if you could give some more color on the variance between net investment income and distribution? And basically what I'm referring to there is, any sense of the step-down in cash flows? And then timing for that decline as well? Just the magnitude of the step down, if you're able to?

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

We haven't disclosed that, Anya, so it's -- net actually -- I'm not even sure what the question is when you say the step down.

Anya Shelekhin -- Bank of America Merrill Lynch -- Analyst

Well, I guess just anything more on the variance between net investment income and distribution and how you expect that to trend?

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

I don't think we necessarily envision any variance there. So we have a grid at which we'll accrue income on the investment based on our expectations. And that will drive revenue, which in turn drives net investment income, which of course includes the interest expense component.

Anya Shelekhin -- Bank of America Merrill Lynch -- Analyst

Okay, thanks. And then second, I just wanted to ask about the -- looking forward to 2021, just how much you expect to expand in renewables and solar? And I know you've mentioned your pipeline is still over $2.5 billion. How much expansion do you see so far into behind the meter assets? And how could that translate to the EPS CAGR as you think about rolling that forward?

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

Let's see. There is a lot in there. Again, the pipeline is three quarters behind the meter. So we definitely expect that to be -- you would expect that to be the lion's share of 2021. And with respect to earnings, we haven't given guidance for 2021, so really can't comment on that. Anything else in the question, Jeff, I missed or?

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

No.

Anya Shelekhin -- Bank of America Merrill Lynch -- Analyst

Okay. I think I was looking more in terms of the sense of how much of that pipeline do you see -- I guess, how optimistic are you about the growth prospects as you see today in the pipeline in terms of renewables, maybe more of a focus on resi solar even?

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

I think as we're talking about the durability of this asset class, I think we see all of our clients and virtually all of their markets being cautiously optimistic whether it's renewables or efficiency. That's not to say there aren't challenges doing things in the Built Environment in a COVID environment, but you've -- I don't know that you cover Ameresco, but they're talking about COVID -- HVAC improvements in response to COVID. Things that have to get done before buildings open up. So just like the resi solar industry did such a phenomenal job of converting to a virtual selling, I think every one of our clients is trying to figure out how to go faster and with less costs in this environment. Whether it's wind, solar, utility-scale or distributed and efficiency, everybody is working hard to develop projects, and I think our clients will be very successful.

Anya Shelekhin -- Bank of America Merrill Lynch -- Analyst

Okay. Great. Thank you.

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Our next question comes from Christopher Souther with B. Riley, FBR. Please go ahead.

Christopher Souther -- B. Riley FBR, Inc. -- Analyst

Hey, thanks for taking my question. On the uptick in gain of sale during the quarter, can you talk a little bit about what drove that? Were these opportunistic sales? Just basically what was driving that?

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

Let me take a shot at it. So the gain on sale transactions historically have been less profitable during really stable times and slightly more profitable in more volatile times. It happened in '08 and '09, and tends to happen. I mean, we certainly see some of that phenomenon now. And the transactions that should be securitized gets securitized, we weren't really so opportunistic as we were. The transactions are just a bit more profitable.

Christopher Souther -- B. Riley FBR, Inc. -- Analyst

Got it. Okay. Around the -- you put the table in there that showed kind of the cash funding versus the $178 million in originations. Is the initial NG $150 million included in the $178 million for the quarter? I was just kind of curious on why there was like a larger difference I think than usual of funding versus the origination volumes?

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

So, NG was not in the headline number for the quarter because it closed in July. And when you say there's a larger difference than normal, there was no way for the outside investor to know that historically, which is part of the reason we added the table. So...

Christopher Souther -- B. Riley FBR, Inc. -- Analyst

Okay.

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

As we engage in more transactions that tend to have delayed funding, we thought the enhanced disclosure would be helpful that the headline number we announced, which is an important number related to commitments and activity of the business and one that everyone is used to would be supplemented with how much funding. So that's why we went to the new disclosure.

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

And Chris, when we talked about programmatic investments, we closed the transaction and it's got X number of investments to be made. Not all of them get made on day one. This table is meant to give a little bit more of that granularity that the deals we closed will fund over time and provide more continuous investments.

Christopher Souther -- B. Riley FBR, Inc. -- Analyst

Understood. That's all I had. I'll hop back in the queue. Thanks.

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

Thanks, Chris.

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from Philip Shen with Roth Capital. Please go ahead.

Philip Shen -- Roth Capital Partners -- Analyst

Hey guys, thanks for taking the questions. First one is on the tax equity -- hey guys, can you hear me OK?

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

Yes.

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

Yes.

Philip Shen -- Roth Capital Partners -- Analyst

Great. Thanks for taking the questions. The first one is on tax equity and we -- tax equity is starting to sound like it's getting much more scarce for '21, and just wanted to see if you think that might impact your business in any way. I know you have a diversity of end markets that you can pivot and shift to, but any impact do you see to your potential originations either later this year or even in '21, do you think could happen from the constraints around tax equity?

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

I don't think there's any doubt that when you have banks like Wells Fargo going on profitable that that affects their 2020 and 2021 tax bill and thus their appetite for tax equity. Again, one of the strengths of our business is working with the top-tier clients. To the extent there is a scarcity in tax equity, it's going to get allocated to those top-tier clients. And it's still early days and figuring it out, but I think it's -- we do not see an impact now; that doesn't mean there won't be. And certainly, smaller companies, I'm sure will be, if not already, struggling to get tax equity.

Philip Shen -- Roth Capital Partners -- Analyst

Thanks, Jeff. Staying with resi solar for just a bit, last quarter I think you guys gave a lot of nice detail on how the asset class has been performing. I've been bouncing between earnings calls, so apologies if you guys have already talked about it or perhaps it was in the deck already. But I was wondering if you could give an update on what you're seeing? Has it stay -- has it remained in the similar -- in the same levels or similar levels as where you guys sort of last time and what do you expect to hedge for the asset class?

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

So Phil, we have really nothing new to disclose there. Still no significant elevation in delinquencies or deferral requests or defaults. And I think that's consistent with the residential solar sponsors who've done their earnings call already as well. So really, nothing new incremental to what we said last quarter. And we continue to watch it closely and are increasingly confident as days go by that the original thesis that this was a priority payment. We come more and more confident in that thesis with each passing month data.

Philip Shen -- Roth Capital Partners -- Analyst

Fantastic. So with that, I can imagine you guys might be ever more close to the potential for an investment-grade rating. So I was wondering if you might be able to talk through at all the -- since you have been meaningfully tested, as every company has been through COVID, but you guys have performed quite well. And so I was wondering if you might be able to share any thoughts on what the timing of what that could look like? And if things have potentially accelerated a bit at all or -- I know it's tough to talk about these things, but in so far as you can provide some color that would be great.

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

Sure. So our ratings were affirmed in the second quarter and they do get affirmed every time we do a debt issuance. And the agencies, both recently published as part of that affirmation, a report on Hannon Armstrong, which is public and I encourage people to read. There is no timetable that will probably ever exist on being upgraded. It's just a continuous process of their review and our advocacy. As we talked about it and it was part of your question, performing well in a downturn could be a catalyst there, but it would be impossible for me to put any timing on that.

Philip Shen -- Roth Capital Partners -- Analyst

Okay. Thanks, Jeff. I'll pass it on.

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

Our next question comes from Ben Kallo with Baird. Please go ahead.

Ben Kallo -- R.W. Baird -- Analyst

Hey, guys. Thanks for the questions. Maybe just following on Phil there, just on the leverage ratio and how that wraps in, how do you think about your target leverage ratio? And then also, moving up to investment-grade, because that was one of my questions that he stole from me.

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

It's certainly a factor. And in those reports that I alluded to a moment ago, the rating agencies do mention leverage as one of their primary metrics. I think in our earnings PowerPoint on Page 9, you can see over the last three years, leverage has been very flat. I don't think there is meaningful expectation. It will deviate much from that 1.5-ish range here in the intermediate term. As we've discussed, we have a policy of not going above 2.5, but I think the current range is much more likely to be relatively consistent over the intermediate term here.

Ben Kallo -- R.W. Baird -- Analyst

And then -- thank you, Jeff. And Jeff Eckel, maybe as you think about, you call out NG as a partner, obviously, for the -- because of the big deal there. How do we think about that partnership evolving? So we start following NG and everything they do and you're the number one partner because you guys came to that without bake-off or how should we think about that?

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

I'd like to think that we are following all of our clients and trying to be responsive to their needs. We've talked a lot about our partnership, Armstrong with SunPower and at the risk of excluding some great clients. It's a good relationship, we're very compatible companies. And with their announcements in their quarterly earnings call, I think it just reaffirms their interest in the North American market. It's not like they give this investment away for free, but it's a good partnership. So we are committed to doing everything we can to be a good partner and help these projects really, really perform. And I think if we do that, we're going to get our fair share of the business from NG.

Ben Kallo -- R.W. Baird -- Analyst

My last two questions -- thank you, Jeff. My last two questions, just on the REIT status. Is that anything that you guys evaluate right now to that change or is there a better way to do that? Number one. And then I guess, our number two, just like your long-term guidance, how you guys are very conservative. You had this big deal there that seems very accretive. When do we see you guys kind of revisit your guidance with big chunky deals like that? Thanks.

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

So on the REIT tests and the REIT status, there is really nothing new to report. There is no current plan to change status. And clearly, we are in compliance with all the REIT tests. In terms of guidance, you should expect us in the fourth quarter call that would likely occur in February or perhaps March of '21 that we will update the guidance on that call.

Ben Kallo -- R.W. Baird -- Analyst

All right, great. Thanks, guys. Congrats.

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

Thank you, Ben. Stay well.

Operator

Our next question comes from Jeff Osborne with Cowen and Company. Please go ahead.

Jeffrey Osborne -- Cowen & Co. -- Analyst

Yeah. Good afternoon, guys. Most of them have been asked, but I had two. One is on, you mentioned HVAC a few times, but putting UV-C lights in an HVAC unit, how do you structure energy performance guarantee and just replacing existing units for the health benefit? Is that something that you could finance for Johnson Controls or other partners if you're angling after health as opposed to energy?

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

Yeah. I think, Jeff, if you look at it as you want to increased airflow and you're going to do something whether it's UV lights or there's other technologies, you may be using more energy to do that, but the way the energy service companies, I'm sure will think of it is, well, that's just the new baseline. That's now like what you have to have. So I think you would adjust the baseline for the fact that you need more airflow and more lighting in the duck work and you can structure -- and again, I'm making this up based on your question, but I'm pretty sure knowing ESCOs and how they work, that's the right way to think of it, is the energy baseline went up because of the new requirement.

Jeffrey Osborne -- Cowen & Co. -- Analyst

Got it. I hadn't thought of that angle. My last question for you, Jeff, is just philosophically, a lot of focus in America and around the world on green hydrogen and with the California law around electric trucking, you'll start seeing corporate fleets having to transform. So I was just curious what your thoughts were on funding if a UPS or FedEx came to you about funding depots with solar on the roof and EV charging? Is that something that you would be interested in?

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

Absolutely.

Jeffrey Osborne -- Cowen & Co. -- Analyst

Are you seeing anything in your backlog in that nature yet or no?

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

You know, we don't talk about the backlog that specifically, but it's just the amount of activity on green hydrogen is -- has been fascinating to me. And I certainly think there will be terrific opportunities to make a dent in carbon in the transport sector because of green hydrogen.

Jeffrey Osborne -- Cowen & Co. -- Analyst

Got it. That's all I had. Thank you.

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

Thank you, Jeff. Stay well.

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

Thanks, Jeff.

Operator

Our next question comes from Greg Lewis with BTIG. Please go ahead.

Gregory Lewis -- BTIG -- Analyst

Yes, and thank you and good afternoon, everybody. Yeah, I just had a quick one and following up on kind of the hydrogen a different way. As you guys look out in the marketplace right now, one of the things that's been gaining a little bit of momentum has been renewable natural gas. Just kind of curious, is there opportunities at this point for you guys to kind of get involved in that market or just kind of trying to understand how you view renewable natural gas, just as it is still kind of -- it's from a hydrocarbon?

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

I think we're definitely looking at it. The area where we get a little concerned are the state subsidies that can fluctuate the RINs and that's sort of like early days for SRX until you know how they actually work. We really want to understand the parallel market for RINs and -- but otherwise, I mean, renewable natural gas should definitely be increasing and it's certainly a very good carbon story if you're repurposing methane, that's otherwise leaking so.

Gregory Lewis -- BTIG -- Analyst

Okay, perfect. That's all for me. Thank you very much.

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

Thank you.

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

Thanks, Greg.

Operator

[Operator Closing Remarks]

Duration: 42 minutes

Call participants:

Chad Reed -- Vice President, Investor Relations & ESG Strategy

Jeffrey W. Eckel -- Chairman and Chief Executive Officer

Jeffrey A. Lipson -- Executive Vice President and Chief Financial Officer

Noah Kaye -- Oppenheimer & Co. -- Analyst

Anya Shelekhin -- Bank of America Merrill Lynch -- Analyst

Christopher Souther -- B. Riley FBR, Inc. -- Analyst

Philip Shen -- Roth Capital Partners -- Analyst

Ben Kallo -- R.W. Baird -- Analyst

Jeffrey Osborne -- Cowen & Co. -- Analyst

Gregory Lewis -- BTIG -- Analyst

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