Good day and welcome to the Q1 2022 Ameresco, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded.

I would now like to turn the call over to Leila Dillon, Senior Vice President of Marketing. You may begin..

Thank you, Michelle, and good afternoon, everyone. We appreciate you joining us for today's call. Joining me here are; George Sakellaris, Ameresco's Chairman, President and Chief Executive Officer; Doran Hole, Executive Vice President and Chief Financial Officer; and Mark Chiplock, Senior Vice President and Chief Accounting Officer.

Before I turn the call over to George, I would like to make a brief statement regarding forward-looking remarks. Today's earnings materials contain forward-looking statements, including statements regarding our expectations. All forward-looking statements are subject to risks and uncertainties.

Please refer to today's earnings materials, the safe harbor language on Slide 2, and our SEC filings for a discussion of the major risk factors that could cause our actual results to differ from those in our forward-looking statements. In addition, we use several non-GAAP measures when presenting our financial results.

We have included the reconciliations to these measures in our supplemental financial information. I will now turn the call over to George.

George?.

Thank you, Leila, and good afternoon, everyone. We started 2022 with excellent quarterly performance as the team executed on our contracted backlog; we are also booking significant future opportunities across all of our lines of business.

Its execution by our own employees, together with our customers were all the more impressive given the well-publicized supply chain and inflationary challenges faced by our industry. Now, I want to take some time to talk about our Southern California Edison project.

First, as a reminder, the Southern California Edison project is actually three separate contracts which we are executing independently when it comes to individual budgets, procurement items and completion schedules. Second, Ameresco has a proven track record for completing some of the most complex energy projects in our industry.

The actual engineering and construction of these battery projects are nowhere near as complex as well as we have successfully achieved in our other projects, such as the Savannah River Biomass plant or our various green gas plants, which we have been constructing and operating since 2001.

I remain confident in our ability to deliver these three battery projects to our customer in a satisfactory and profitable manner. Third, when we signed the contract last year, we knew we were operating in a challenging COVID environment with a potential for supply chain disruptions.

And like in all of our projects, we do risk materials and labor as much as possible before going to contract. However, given the scale of the Southern California Edison battery projects, we took extra precautions. We negotiated contract protections for potential COVID delays and included an appropriate contingency in our budget.

In terms of the battery supply, we pre-negotiated firm very supply terms with priority slots at a factory for our bid. The majority of these customer batteries have been constructed, paid for, and the first shipment is already on the go as of this call.

Importantly, the COVID delays that we are experiencing in China for the remaining batteries are not related to the battery cells, all of which have already been manufactured for us. We are actively working with Southern California Edison regarding the COVID -- the impact of the COVID related delays.

Our contract with them allows for financial and delayed relief for force majeure events such as COVID, and we are in discussions with Southern California Edison. Based on this, together with the contingencies built into the projects, we do not expect our margin to be materially impacted by these delays.

As noted in the April 10 press release, and as shown in our quarterly results, many significant milestones in the Southern California Edison projects progressed during the quarter, driving Q1 revenue ahead of our expectations.

Major equipment has been sourced and construction-related activities are proceeding at all sites in preparation for battery delivery. Ameresco continues to actively work with the suppliers and Southern California Edison to avoid or mitigate potential delays; included working with the ports on the West Coast on expedited ship and container heavily.

Apart from the battery deliveries, we expect to complete all other aspects of the three projects construction by the original, August 1 deadline, including the installation of the batteries that are currently in transit. We expect upto 300 megawatt of capacity to be online in August 2022 and the remainder to be online this year.

While recent events might cause a shifting of our expected core revenue cadence, we remain confident in our annual guidance. Lastly, I would like to take a minute to recognize Southern California Edison as a true partner. They have been very helpful with the design and execution of the overall project.

We wish to thank them and the State of California for their cooperation. Turning back to our Q1 highlights; the first quarter strong revenue growth was led by our projects business as we continue to execute through the Southern California Edison contracts.

But equally important, we achieved good growth and profitability across all of our lines of business. And we not only have a great quarterly results but also continue to build upon our strong multi-year visibility.

We added 60 megawatts of energy assets in development, including a 50-megawatt battery asset and a new R&D [ph] opportunity, while our O&M business booked over $100 million in additional multi-year contracts.

During the quarter, we also added over $400 million in new project awards as customers continue to seek solutions to address their increasing energy costs, resiliency needs, and carbon reduction goals. One of these awards that I wanted to highlight is our currently announced partnership with the City of Bristol in U.K.

This project is actually the second largest award in Ameresco's history, only behind the Southern California Edison contract. Once contracted, the unique 20-year partnership will encompass a full range of advanced technologies, energy efficiency and renewable solutions involving project work, O&M, as well as energy asset ownership.

The Bristol City Leap project is targeting an ambitious 2030 carbon neutrality goal and is designed to attract approximately GBP1 billion of inward investment that could be shared between us and our partner [indiscernible]. We anticipate that this project will service a blueprint for other series, campuses and corporations across the U.S.

and Europe as they develop their own net zero and cost-savings initiatives. We are particularly excited about other similar opportunities in Europe given the elevated energy prices there, ongoing geopolitical risks, and the drive to net zero.

As one of the largest energy services companies in the U.K., Ameresco is very well positioned to continue winning and executing on such transformative projects. I will now turn over the call to Doran to provide some comments on our financial performance.

Doran?.

Thank you, George, and good afternoon, everyone. For additional financial information, please refer to the press release and supplemental slides that were posted to our website after the market closed today. As George noted, the Ameresco team overcame continued industry-wide supply chain and inflationary pressures to deliver excellent results.

And while our projects business led to very impressive top line growth, it is important to note that all four of our lines of business grew nicely during the quarter.

Just as important, our continued robust new business activity allowed us to grow our total project backlog even while converting a record amount of backlog to revenue during the quarter. Our total project backlog along with the expected future revenues from our energy assets and O&M businesses gives us over $5.3 billion in revenue visibility.

The impressive growth in our Q1 total revenue was led by our projects business. Aspects of the SoCalEd project's custom procurement and construction milestones progressed more quickly than anticipated, driving stronger revenue during the quarter.

Adjusted cash from operations was impacted by the working capital needs of the SoCalEd project; though subsequent to quarter-end, we collected $99 million that we had previously invoiced.

Overall, we had anticipated these temporary uses of cash from the onset of the contract, and I'm pleased to announce that during the quarter, we amended our senior credit facility to improve our short-term liquidity needs and provide more financial flexibility to continue to scale our business.

The amendment resulted in a $262 million increase, bringing the Ameresco's credit facility total to $495 million. Not unlike recent quarters, the year-over-year increase in revenue from our energy asset business was driven by improved performance of our existing operating assets, the growth of new assets placed in service and strength in RIN prices.

Despite lower overall gross margins due to the SoCalEd project, we still achieved an impressive year-over-year adjusted EBITDA growth. This contract is a prime example of our strong operating leverage in practice, demonstrating our ability to add gross profit dollars without adding direct incremental operating expenses.

Now, I'll move to our project backlog. We're very pleased to have increased our total project backlog to a record $3.1 billion, increasing 1% sequentially and 34% year-over-year.

Customer interest in bidding activity remains strong, and we are pursuing and winning many large complex projects, including our recently announced Bristol City collaboration in the U.K. During the quarter, we placed 10 megawatts of assets into operation while also backfilling our assets in development, which now stands at 464 megawatts.

I'd like to provide some commentary around the high-profile industry-wide supply chain and inflation issues, and the ways that Ameresco has been able to overcome many of these challenges. First and foremost is the tremendous flexibility inherent in our diversified business model.

As our investors know, Ameresco leverages the most advanced technologies across all suppliers to meet the unique needs of each customer; this reduces our exposure to any one manufacturer or technology. Our projects are also comprehensive, incorporating dozens or more different technologies in any given installation.

So if there is a delay in receiving one type of product, work can generally continue on other aspects of the project. Likewise, because we are working on so many projects around the country, plus Europe and Canada, every quarter we're able to also opportunistically move products and human capital around to maximize execution efficiency.

And finally, our contracts generally provide force majeure type protections if we face disruptions, like the delivery delays caused by the COVID-related shutdowns in Shanghai.

Ameresco proactively protects itself by securing and contracting a significant portion of the products and labor needed for any given project, well in advance of moving from an award into a contract, helping us to mitigate unanticipated cost overruns.

We also leverage our scale and balance sheet to volume purchase critical components for our projects and assets. For example, Ameresco proactively purchased a large supply of solar panels in previous years, and we still have a supply of these panels in the U.S. to meet our near-term needs.

Lastly, as a reminder, approximately 60% to 70% of our EBITDA generally comes from contracted recurring revenue business lines demonstrating the overall resiliency inherent in our business model. As George discussed above, the delays arising from COVID restrictions in China are impacting the delivery of certain batteries to the SoCalEd sites.

To be clear, the issue at hand is timing, and we have contractual protections for force majeure events such as COVID, which we believe apply here. Importantly, the widely observed recent increase in the prices of raw materials used in battery cells have not impacted the pricing of the batteries for the SoCalEd project.

And we, again, did not anticipate any material impact on our margin on these projects. So while we certainly see and even experience some of these global issues, the diversified business model that we have created, the processes we have in place, and our excellent team of professionals helped to minimize the impact on the company's results.

I'm therefore pleased to reaffirm our 2022 annual guidance and can provide our current outlook for the remaining quarterly cadence. We now expect Q2 revenue to be about 10% to 15% higher than Q1, with gross margins still expected to be approximately 14%.

Q3 revenue is expected to be slightly greater than Q4, and we expect gross margins to be approximately 18% for both quarters. Now, I'd like to turn the call back over to George for closing comments..

Thank you, Doran. In closing, I want to again, take a moment to thank the entire Ameresco team for the dedication and outstanding execution. We also want to recognize the ongoing support of our customers and long-term stockholders. As we discussed during our recent Investor Day, we continue to benefit from a large and growing addressable market.

Our portfolio of innovate solutions matched with our technical and financial expertise makes Ameresco a preferred partner for the most complex and comprehensive advanced clean tech solutions. Operator, I would now like to open the call to questions..

[Operator Instructions] Our first question comes from Joseph Osha with Guggenheim Partners. Your line is open..

Hello and thank you for taking my question. I just wanted to refer to the line in your press release that talked about continuing discussions with SCE. When might we get some clarity on SCE's position as regards to these force majeure issues? Thank you..

Well, it's very hard to say exactly when we will get completely resolve the situation there. But we are in discussions with them, we do believe we have a COVID situation and the contract provides for relief. And if I were a betterment [ph], I would say most likely the third quarter. We will get to know -- we have a clear indication of where we stand..

Our next question comes from Noah Kaye with Oppenheimer. Your line is open..

Thank you. Just one related to the SCE contract and then one not related, and it's really just around puts and takes of the guide. So with some of the associated battery storage project revenue shifting into 2H, but keeping the gross margin guide at 14%.

Is there anything else we should be attentive to for the second quarter in terms of mix or different revenue streams coming online, any seasonality to be aware of?.

No, this is Mark. No, I don't think so. I mean Q2 will still have -- will still be substantially impacted by the SoCalEd project, but nothing outside of that that would -- that's notable, that would impact the margins. So that's why we felt pretty good about kind of giving that guidance back out again..

Our next question comes from Stephen Gengaro with Stifel. Your line is open..

Thanks. Good afternoon, everybody..

Good afternoon..

I'm curious, you talked a little bit about this in the prepared remarks, but I'm curious if you could add a little bit of color and help us understand the City of Bristol contract and agreement, and sort of how that relationship will play out? And also, is that reflected in the backlog? And if so, just curious by what amount at this point?.

Yes. I would say about half of the awards that we mentioned in our press release and our scripts comes from that contract. It's basically a concession [ph] agreement, and we have [indiscernible] as our partners.

And those are -- they are very -- they have great expertise in the steam [ph] distribution system, so I will most likely see a good part of the work comes through them.

And the projects that we have identified today and we reported as awards is projects we identified were very with them -- that they will be done and that's what we would be doing, the work that we would be doing associated that we reported. And we have basically a 10-year plan where we will get them to carbon neutrality..

Our next question comes from Eric Stine with Craig-Hallum. Your line is open..

Hi, everyone. Maybe just sticking with City of Bristol; just curious if you could comment on whether that was a competitive win.

And then, as you think about this potentially expanding to other areas in Europe, maybe if you could just think about -- or just talking about what the pipeline might look like?.

Sure. No, it was a very, very competitive -- competition there. It took us two years; they did superb job hiring consultants and evaluating the various proposals that they had. I think the fact that we've been -- have established Ameresco now as a U.K. as one of the top energy services companies.

We rate as number one, two or three depending on what analysis you look at.

It just as tremendously and the fact that we have developed the company to be able to do what I call, the holistic approach of the particular solutions, whether it's a [indiscernible] or a particular industrial customer, not do only the energy efficiency, but all the renewables associated with all the advanced technologies, and that helped us a lot in order to be able to win this particular project.

And like I said in my commentary, I think this is only the beginning. Of what's going on in the industry; I think this will become a blueprint for other major cities, towns [ph].

And I would say this much, after the win, we mentioned a couple of members in the United States, they said they loved the concept but it takes time for institutional momentum for those people to move; it will take some time but at the end, it's going to happen.

In Europe, because of the energy prices, the way they are right now, I don't know if it's exactly the same form, but you will see more projects coming out of Europe. And we are focusing core in that part of the world..

[Operator Instructions] Our next question comes from Greg Wasikowski with Webber Research. Your line is open..

Hey guys, thanks. I was wondering, can you clarify the breakout of the 300 megawatts expected to be in service in August? Is that going to be one full site or is it going to be like partial completion for all three? Thanks..

At the end of the day, it depends what the customer wants. And we've been working very, very closely with Southern California. Actually, we did ask that question, and they haven't decided exactly how they will allocate the particular containers for the battery storage, which sites.

But as I pointed in my remarks, all sites will be ready to receive as many batteries that we have available..

Our next question comes from Tim Mulroney with William Blair. Your line is open..

Hey, this is Sam [ph] filling in for Tim. Thanks for taking our question here. With component parts for many projects rising, whether they be batteries or solar panels, for instance, I was wondering if you could comment on how sensitive your customers might be to rising prices.

Are most of the projects you work on are of such a critical nature that customers are willing to just bite the bullet? Or would they consider delaying projects further into the future? Thanks..

Sure. I'll take that one, Sam. So I'd be remiss to say that customers are not price sensitive; the ones that are not in a huge rush may kind of slow walk projects. But just generally speaking, the nature of our business in public procurements, there's a lot of time element built into the award and contracting process.

And as I talked about, we tend to derisk before we sign a contract. And so as we approach that contract date, we work with our customers so that they completely understand what the pricing is looking like. And that's -- you know, I think, equally across the project business as well as the energy asset business.

With energy prices going up like they are, of course, you would imagine there's multiple adjustments to those pro formas as you get closer to contract. So, we're -- we feel good about our cadence for handling those price increases that you mentioned..

Our next question comes from Chris Suva with B. Riley. Your line is open..

Yes. Just to touch on SCE a little bit more.

Assuming they didn't take issue with the force majeure, can you give us a sense of the timeline you'd need to hit to avoid penalties on the project? And what would that look like? And I assume -- can we assume that the gross margin profile you guys are reiterating doesn't have any penalties on one out of the three projects not being done? Is that kind of a good way to think about it now? And then, maybe just kind of a follow-up on that is, are you seeing any slowdown in your pipeline of new opportunities based on the delay here or are customers pretty understanding of the fact that this is out of your control? Thanks..

So I'll just address SCE upfront. I don't think we can provide any further details beyond what we've got in the press release and what are in the prepared remarks. So I think we're going to have to leave it at that. In terms of slowdowns, and I'm sure George will echo this, we're not seeing anything like that..

That's why we wanted a 50-megawatt battery asset, and we have several other ones in the pipeline. It's important to note that until the end of March when we got the notification from cadre [ph] that they would be delayed on the batteries. We were ahead of schedule and on the particular projects in Southern California.

So -- and as we pointed out, we will be on schedule with the exception of some batteries not being there..

Our next question comes from Chip Moore with E.F. Hutton. Your line is open..

Hi, thanks. I guess, first, just really nice execution; it's not the easiest of environment. I wonder maybe you can update us on the RNG development pipeline, where those projects stand; I think one of them crafting the development megawatts. Thanks..

Yes, sure. We still -- as we pointed out before, we will have three RNG plants mechanically completed by the end of the year. And then our business plan, the way we are planning right now, five to six per year thereafter.

As we stand right now; however, we plan to work hard to increase that capability going down the road because as you've seen some of our other comments, we have about 18 of them right now in the development asset pipeline..

Our next question comes from Ben Kallo with Baird..

Hi, thank you guys. Two quick questions, one on Europe. You talked, George, about scaling there.

I know you have operations there in the U.K., but in Continental Europe; how do we get comfortable with you guys being able to scale and do all the good things you do here in the United States there? And then the second one is outside of batteries, I heard you say you feel comfortable with that.

What about new technologies, maybe fuel cells or anything else that we should pay attention to? Thank you..

Yes. I'm going back to the first question on Europe. I think we have a very, very good shape, scale in at least in three countries, which I will reserve for the time being; and those are the ones we would be targeting. And we are looking for some potential acquisitions, small ones, and we will leverage a lot our local partners there.

Like [indiscernible] that we teamed up with, it's an excellent, excellent company and that complements a lot to what we are doing. And a couple of other locations where we are not in a position to announce them yet, but we are given with a couple of other companies.

And I think you will see some things coming down the pipe pretty soon associated with that..

Our next question comes from Pavel Molchanov with Raymond James. Your line is open..

Thanks for taking the questions.

On the M&A front, if there are some solar developers in this country that are running into trouble because of AD-CVD and lack of module supply, would you look opportunistically at these situations from an M&A perspective?.

Yes, no question about it. And -- and I think we had -- I answered that before a few months ago, or if you -- or let's say, a year; what some of the people they were looking at was very, very high prices, and that's why we didn't do.

And I will always tell our group that wait, the prices might change, and they might go down, and we have some -- and so we are looking at some, no question about it. And Doran is following up a lot of this, so you might be able to give some more color..

Yes, Pavel. I mean, we're opportunistic in general about M&A inside and outside of solar. And as George mentioned, if the pricing or the valuations cool off because of this investigation, then maybe some of those -- maybe some of those opportunities seem more attractive to us..

Our next question comes from Kashy Harrison with Piper Sandler. Your line is open..

Hi, good afternoon everyone and thanks for taking the question. This is Luke Tilkens [ph] filling in for Kashy. Our question is about your solar panel sourcing strategy. And any color you can give on availability and pricing that you're seeing in the market? Thank you..

Doran..

Yes. I don't think we can go too much into detail about availability and pricing for competitive reasons. Of course, we do tend to focus on what we consider to be highly reliable and high-quality suppliers when it comes to sourcing of modules.

As I mentioned in my script, we did pull in some inventory in prior years, and we're continuing to work for and work through, and we've got that advantage working for us, I guess, in addition to the fact that we're not a solar-only company; so the impact on Ameresco isn't what it might be on some of our competitors in that space..

Our next question comes from Julian Demulan-Smith with Bank of America. Your line is open..

Hi guys, thanks for taking my question. This is actually Anya [ph] stepping in for Julian. I wanted to ask about -- I was wondering if you could provide an update on your RNG hedging strategy.

What are your expectations for D3 RIN prices, if you can talk about that maybe over the next year or so?.

Well, as I said we're going to place three plants in service in mechanical complete this year and then five to six thereafter..

I think the approach generally speaking, as we've talked about in the past, is we contract about 50% of the output from the projects as they're put in place and then we hedge over the course of the year, the remaining RIN and LCFS credits that are generated from there.

We are constantly monitoring where those RIN prices sit, and we consider that a little bit dynamically over the course of the year based on the RIN pricing.

I don't think we want to sit here and provide any predictions on where we think that will go, except to say that when we evaluate projects and when we are developing projects, we take relatively conservative approaches to RIN pricing for purposes of not only establishing our 2022 guidance, for example, but also for the target returns that a certain project will be able to meet when we evaluate risk-adjusted returns, we tend to be relatively conservative.

I think that's about all I can say there..

[Operator Instructions] Our next question comes from Joseph Osha with Guggenheim Partners. Your line is open..

Hello, I'm back again. I wanted to ask a little bit about sell pricing and how you come at thinking about that relative to your customers.

Are you able at this point to write a contract that, for example, allows you to pass through any volatility on, say, lithium carbonate pricing or cobalt pricing or something like that? How are you coming at insulating yourself from the volatility that exists in inputs for those products?.

So Joe, I think we're flexible with respect to the way we approach contracting with our customers. That's a risk our customers are looking to absorb because they believe that perhaps it will change in their favor, we're willing to entertain that approach.

I think for competitive reasons, I won't necessarily talk about exactly what we do and what proportion fits what model but I would say that we -- as -- like any type of project, we tend to prenegotiate that pricing and lock things in before we sign a customer contract so that we don't put ourselves at risk for pricing moves, especially when it comes to raw materials and batteries..

Yes. And the other thing that we have to remember is our value proposition on our contracts, and it has happened on a couple of examples right now because energy prices are going up much faster than the materials.

Many of the projects actually -- actually one of the excellent example of the contract group once we inputed the new energy supply -- energy prices versus the cost of the projects are going up too but the simple payback was lower than it was before.

And that has to do with the same with the interest rates, interest rates go up, but if energy prices go up faster, the project expenses are a lot better..

Our next question comes from Stephen Gengaro with Stifel. Your line is open..

Thanks, gentleman, a quick follow-up.

I just sort of thinking about longer-term modeling; the Bristol project, when does that start to hit the income statement? And does it accelerate? Or how should we think about that impact?.

That one -- it will start showing next year. And I don't think we'll have any impact on the numbers this year but next year, definitely we'll have. And actually, the $200 million plus or minus, half of what we booked right now, I think it's over four, five years.

But at the close of the projects we have identified today because the next stage, we actually get the contract. And then we do more detailed energy or instance execute and develop the plan and thereby all those numbers, and the schedule will be fine-tuned.

So we'll be able to give you better color by the end of the year as to what that project would look like. But it's over a billion pounds of potential project value, you might call it.

How much of that will be funded by third-party? How much is funded by them? The first page, by the way, the funding is already third-party funding, and it's already identified by them..

Our next question comes from Greg Wasikowski with Webber Research. Your line is open..

Hey guys, thanks for the follow-up.

Given the [indiscernible] followed the Analyst Day, are you still thinking about the $300 million 2024 adjusted EBITDA guidance the same way? And could you comment on roughly how much of that $300 million is coming from forecasted larger scale, more traditional EPC-type contracts, like the SoCal Edison project? Thanks..

Yes. The 300, no question about it, that we're still on-track, and we feel pretty good about it, where we are. And I think the Southern Cal project helps this year, but that's about it as far as I'm concerned about that particular target.

As to how much comes from projects, how much comes from the asset business or the recurring line of business, I would say this much. That 60% to 70% and sometimes maybe a 75% will come from the asset business or the recurring business lines and the balance will be from the projects.

And on the other hand, we have great visibility on the projects because we have that $3 billion total backlog today. And as I pointed out, and Doran pointed out in his remarks, the activity level is picking up, and the fact that we've just begun to have face-to-face meetings, it's helping the company.

And of course, energy prices being what they are and continue to go up, it's very, very good for our business..

Thank you. This concludes our question-and-answer session. Thank you for participating in today's conference. You may now disconnect. Everyone, have a great day..