Ameresco, Inc. (AMRC) Q1 2021 Earnings Call Transcript

Thank you for standing by, and welcome to the First Quarter 2021 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. As a reminder today's program may be recorded. And now I’d like to introduce your host for today’s program. Leila Dillon, Vice President, Marketing and Communication. Please go ahead.

Thank you, Jonathan, 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, Senior Vice President and Chief Financial Officer; and Mark Chiplock, 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. This call contains forward-looking information regarding future events and the future financial performance of the company. We caution you that such statements are predictions based on management’s current expectations or beliefs. Actual results may differ materially as a result of risks and uncertainties that pertain to our business. We refer you to the Company’s press release issued this afternoon and to our SEC filings. These documents discuss important factors that could cause actual results to differ materially from those contained in the company’s projections or forward-looking statements. We assume no obligation to revise any forward-looking statements made on today’s call. In addition, we will be referring to non-GAAP financial measures during this call. These non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. A GAAP to non-GAAP reconciliation as well as an explanation behind the use of non-GAAP financial measures is available in our press release and in the appendix of the slides, which can be downloaded from our website. I will now turn the call over to George.

Thank you, Leila, and good afternoon. I hope everyone is staying healthy and safe. The first quarter marked another excellent quarter for Ameresco as we posted great financial results and completed our first equity raise since our initial public offering over 10 years ago. Our first quarter began slowly with inclement weather in some of our project sites and operating plants. Our focus on execution, coupled with the improving weather conditions led to improved performance throughout the period. The results far exceeded our expectations with revenues increasing 19%, net income increasing 80% and adjusted EBITDA up 40%. With this strong start, we are raising our annual guidance. Now, I also want to take this opportunity to thank our employees for their tremendous dedication and hard work despite these challenging times. Our project business had another strong quarter, while our energy assets again posted solid results. And we continue to focus on project execution. We were very pleased to see a meaningful pickup in awards during the quarter, which will lead to future growth in our contracted backlog. We were also very pleased to have successfully executed an equity offering bringing in over $120 million in proceeds to the company. While we historically have found our long-term growth primarily through internally generated cash flows and non-recourse project financing, we decided the timing was right to accelerate our growth by raising additional outside capital. For many years, we have been growing our energy asset portfolio to provide highly profitable recurring revenue that increases our long-term visibility and profitability. Over the last few years, our team has been so successful that our assets in development and construction are now greater than our current operating asset base. In particular, we will accelerate the development of a number of financially compelling renewable natural gas (RNG) assets. With this new capital, we now anticipate building three RNG plants for commissioning during 2022 and another four during 2023. Over the last few years, we have seen a tremendous increase in interest in using RNG from a number of different customers, including large transportation and logistics companies, natural gas utilities, and distributed energy resource owners. Just the other day, Washington State announced the low carbon fuel standard joined in Oregon, California and British Columbia. Back in 2010, Ameresco became one of the first companies in the country to commission an RNG plant. Currently, RNG is the most natural path to reduce or eliminate the carbon footprint for many of these companies. With our current operating RNG assets, and those that we will be adding over the next few years, Ameresco will remain a leader in this environmentally important and profitable technology. Many of the early policies, actions and statements from the new administration in Washington support increased interest in RNG. Additionally, we believe that Ameresco is in an excellent position to benefit from the new administration's focus on a low carbon future. Already we have seen the U.S. re-join the Paris Climate Accord and most recently, they announced a goal to cut U.S. greenhouse gas emissions by up to 52% from 2005 levels by the year 2030. Also, the administration plans to directly fund and invest in the country's low carbon future through another initiative currently working through the legislative process. A good example of this targeted investment is the approximately $1 trillion in the infrastructure package, which will target projects designed to mitigate climate change. This includes expansions of solar and wind power, charging stations for electric vehicles, technologies to capture and store carbon pollution, and equipment to make infrastructure more resilient against severe weather and other contingencies. These new government priorities are beginning to filter through the economy. We're already seeing traction with state and local governments and in the CNI commercial and industrial markets, where we have filled a number of requests from companies looking to report and demonstrate progress on ESG initiatives to reach carbon reduction targets. Ameresco is well positioned to thrive in this new environment. We were recently ranked the #1 energy as a service provider in the Guidehouse Insights Leaderboard report. This highlighted our ambitious energy as a service vision, had expertise in technology solutions, a track record of success across customer segments, and our ability to provide financing for energy as a service projects. The strong Ameresco brand and our reputation as the industry's leading provider of distributed energy resources should enable us to benefit from the very attractive growth opportunities in our clean technology markets. I will now turn the call over to Doran to provide some comments on our financial performance and our increased guidance.

Thank you, George and good afternoon, everyone. I'll ask you to please refer to our press release and supplemental slides that have been posted on our website for additional financial information. Clearly demonstrated our momentum in the first quarter showing strong growth in revenue, net income, and EBITDA. As you may recall, we were somewhat cautious at the beginning of the quarter given the poor weather in key markets around the country. While the weather did have some impact, it was more than offset by strong execution and better business conditions in general, leading to progressive improvement throughout the quarter. Revenue increased 19% year-on-year, again led by the excellent performance of our Federal Group. We also had strong results in our energy asset business due to several factors, namely, the increase in the number of operating assets, favorable production levels, and an increase in RIN pricing in our renewable natural gas operations. This better-than-expected revenue performance, along with tight expense controls from increased operating leverage drove an impressive 80% growth in our net income to approximately $11.2 million and 40% growth in our adjusted EBITDA to approximately $30 million. As George mentioned, we were very pleased with the more than 35% year-over-year growth and 15% sequential growth in our awarded backlog, which now stands at $1.5 billion. The uptick in origination activity and customer engagement we're experiencing now not only helps to build the awarded backlog, but also provides a more normal cadence for converting awards to contracts. As a result, we're confident that our lower contracted backlog, which was attributable in large part to strong execution over the past several quarters, will be more than replenished over the next several quarters. Our assets in development had another quarter of impressive growth, ending the quarter at 386 megawatts represented by multiple technologies and geographies. Our 287 megawatts of operating assets have approximately $940 million in long-term contracted revenue and incentives. Together with our $1.1 billion O&M backlog, we are continuing to grow our higher margin recurring revenue businesses, providing us great long-term visibility. Ameresco’s liquidity has never been stronger and we have ready access to the resources needed to execute our aggressive growth strategy. We have a significant cash balance of $81 million and over $100 million of capacity on our revolver. Additionally, we have broad access to non-recourse project financing and tax equity, as well as the ability to monetize development assets. For example, during the quarter, we expanded one of our committed sale leaseback facilities from $150 million to $350 million. On the back of our outperformance in the first quarter and the noticeable improvement in business conditions, we are raising our 2021 guidance. Our new revenue range is $1.11 billion to $1.16 billion. EPS is now expected to be between $1.22 and $1.30. And we are forecasting EBITDA of $140 million to $150 million. 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 our employees, partners, and customers for their continued commitment and cooperation. Together, we have been able to show tremendous resilience in the face of challenges. With favorable Federal policy momentum and our enhanced financial position Ameresco is uniquely positioned for accelerating long-term growth as our customers continue to prioritize cost savings, resiliency, as well as lowering their carbon footprint. Operator. I will now like to open the call to questions. Thank you.

Certainly, please limit yourself to one question and one follow-up. Our first question comes from Noah Kaye from Oppenheimer. Your question please.

Good afternoon, and thanks for taking the questions. Hi, the first one on the project side of the business. I think it was really nice execution in the quarter. Can you give us some color on what enabled you to capture some of the project revenues in the quarter a little bit higher than you know previously thought? What was just, logistics getting easier. Was there any sort of pull forward? Is there any kind of evidence here of prioritization being given to these projects, just given sustainability considerations? And then how does that impact for the remainder of the year?

Yes, it's a very good question Noah. I’d say we pulled in and Mark can add some more color to it about $30 million from the balance of the year otherwise, for quotas two, three and four. And the primary reason for it even though we had some weather delays in the central region, in the federal group, we were able to, especially with the large projects at Norfolk Naval Shipyard, we were able to get the permit about two and a half months ahead of schedule. And in addition to that, some of the approvals associated with that particular project, they came in a little bit faster it is a matter of fact, we are about $25 million ahead of our advanced scheduling payments coming out from that project. So and then we had a couple of delays in New York in the approvals, but primarily was the Federal Group that they had the ability to pull in some additional revenues about $30 million, which of course it came off the other quarters.

That's great color. Let me ask one about regulation and decarbonization. It strikes me that one good way to decarbonize is actually to regulate carbon. And just a couple of weeks ago, was announced that the EU is going to be introducing a package in June, that adds buildings to the sectors where there is an emissions trading system, where pricing and carbon is actually being captured here. And there's even some movement afoot in some states and the FDA as well. So I guess, are you perhaps more incrementally bullish on the EU market opportunity, just given that dynamic? And then do you see actual regulation of carbon and the carbon emissions of buildings becoming a tailwind for the company in the future?

Yes, I will comment a little better than Doran. Look, I think what's going on in the EU, there's no question about that great tailwind for our business. And I wouldn't be surprised; don’t be surprised. We might accelerate the business in the EU community use the U.K. as a base and then move from that. But more importantly than that, what we are hearing from Washington D.C. and what's happening in this country? We have a great tailwind on the regulation especially on some of the states' initiatives coming out of the United States and especially Canada too. And that's why in my commentary, I feel very, very good about this business where we are right now. Otherwise, the stars align enough to our benefit. There's no question about it. And for us, it is to be cautiously optimistic and diligent in growing the business in a wise manner. But the opportunities are there. And I wouldn't be surprised that you will see us expanding in Europe in the near-term.

Well, great, thank you, George. Looking forward to that. And I'll turn it back over.

Thanks, Noah.

Thank you. Our next question comes from the line of Julien Dumoulin-Smith from Bank of America. Your question please.

Excellent. Thank you and congratulations to the team here. Nicely done at the start of the year.

Thanks Julien.

And you permit me several things here, if I can. First off, you know the additional RNG facilities now in ‘22 and ‘23. How are you thinking about this reconciling in terms of the total contribution of EBITDA growth incrementally? I mean, certainly, your target of double-digit EBITDA growth if you will, certainly seems fairly well founded on these almost alone, but I'm curious as to how you would characterize that piece of it, if you don't mind?

Well so, Julien, it’s Doran. I mean, as you know, we don't give guidance beyond the current year, right. So we kind of have to start with that. The EBITDA contributions I think we've talked about before with kind of a reference to megawatts and with this question, I'll take the opportunity to sort of talk a little bit about that. So we had talked about 750,000 to 1.5 million of EBITDA per megawatt equivalent, translating that into MMBtu that's about $8.50 to $16.50 per MMBtu. That's of course dependent upon RIN prices. It depends on LCFS participation right in mid point representing around 50% margin. So in revenue terms that’s 1.5 million to 3 million of revenue per megawatt or $17 to $33 per MMBtu. When I look at the cadence of the 2022 plants and the 2023 plants, I think 2022, those three plants total, probably around 36 megawatts ish, or 3 million MMBtus, which by the end of 2022, that's 2.5 times what we have now, right. So I think it's an important point, we're looking at the cadence. So I think based on all of that, we continue to take a conservative approach toward the company's medium-term, long-term growth, right. We look at that, now we're into the low double-digits on revenue growth, a little bit over 20 on the EBITDA growth and of course that we're hoping to see that cadence continue but clearly, our investment in these RNG assets is hopefully going to give us a boost.

Excellent. Since you bring up some of the metrics here, can you talk about your hedge position right now on RIN, et cetera. Obviously, RIN has seen a nice uptick. I think early, you guys haven't been fully hedged. Can you talk about how that contributes here to your higher guidance and as well as relative to the math you just described on future projects?

Yes, as we mentioned before, we have approximately 40% of what I would consider forward sales, as we have executed some contracts set to extend over the next five years. As we expand, you will notice us signing shorter-term contracts since we believe that RIN prices are still in the early stages of market development. We prefer not to commit to long-term contracts because we feel that could compromise our economic advantages. However, having short-term contracts covering about 50% of our plants' output provides strong project financing. We believe this approach is more economically favorable, especially as new markets emerge, such as gas utilities, universities, and hospitals with combined heat and power systems, which are perfect candidates for longer-term contracts. We have examined some long-term contracts in the industry and have negotiated on a few, but ultimately decided against them as we think we are still in the early stages of this market's growth. We will monitor it closely. Regarding our projections, as Doran mentioned, we plan to have approximately 12 megawatts next year and increase to about 30 megawatts the following year with the plants we are adding. We will hedge about 50% of the output from those plants for shorter durations, but if a favorable deal arises in six months that can extend for 10 to 15 years, we would definitely consider it.

I would like to mention that by raising equity, we now have a bit more flexibility than we did previously. This has allowed us to feel more confident in moving forward and accelerating the development of our assets. We currently have a substantial backlog, having already constructed six assets in the RNG sector, with another six in our development pipeline, in addition to what we have in the actual pipeline.

Yes, that's right. Right. Julien, and sorry, just because it was part of your question. So I think the impact on RINs for the quarter, probably a couple of million dollars higher. I think, RNG overall probably contributed 3 million to sort of we'll call it over performance. But one of that was just pure output. I mean, the plants just had improved production, higher production and then a couple of million from the higher RIN prices.

And then if I may, just in quick, in brief, if I can, how are you thinking about your disclosure package, as you think about the disparate businesses involved you talk about Europe, you talk about RNG how are you thinking about updating and providing perhaps more specific disclosures on different parts of the business here? I mean it by the way, Doran, thank you for the heuristics just now on the RINs and RNG side. But you know, obviously, as you get yourself involved in different sides of the business here, have you given much thought to that?

Yes, Julien, I think we are continuing to give thought to that. At this point in time, we're staying in the course with; you'll see the supplemental slides, the way that we present the material graphically. I think we felt very good about providing additional color during the Q&A, like I've just given you. But kind of beyond that. I think we're just going to take it one step at a time.

Excellent. Well, again, I emphasize, congratulations, and best of luck.

Thanks, Julien.

Thank you, Julien.

Thank you. Our next question comes from the line of Craig Irwin from ROTH Capital. Your question, please.

Hi, good evening. Thanks for taking my questions. So can you remind us the half dozen plants that you have confirmed into your pipeline on the RNG side? What is the schedule of those buildouts, where and when do you expect to build these? And how should we expect those to come on over the next couple years?

Yes, Craig, Why don’t I take that. So just I mean, as we talked about, we've got the one plant this year, right, which is 12 megawatts or about a million MMBtu. In 2022, we're now kind of scheduling three plants, total of 36 megawatt equivalents or 33 million MMBtu, right. And those are the three California plants we've talked about before, right. The 2021, we're expecting that to be kind of fully commissioned before the end of Q2 this year. In 2023, we've got four more, they're a little bit smaller so 29 megawatts total, 2.5 million MMBtu. And then we've got in our asset development pipeline, six more plants with signed gas and land rights to them. And as you can imagine, there's quite a lot more in kind of the development and negotiation stage behind that. But that's the cadence, we're not ready to talk specifics about the timing within the year 2022 or 2023 as far as those plants are concerned, but we do feel pretty comfortable with that cadence in those years.

Okay. Thank you for that. So there's been a little bit of controversy out there over the last couple of months, about the cash flow of the assets, right. So, Ameresco has greatly improved the disclosure around the assets and helped us understand this quite a lot over the last few years. But can you maybe describe for us what you expect as far as cash generation of these assets over the next couple of years this year 2022 and beyond? I'm not asking for specific numbers, but maybe hurdles that you look at internally, and then how much of the capital budget and if you have specific numbers for us in ‘21, and ‘22 is going to go towards the assets build-out for these projects?

So sorry, starting with the very end of your question, which are these projects. I mean, I think that we dropped some numbers in the press release about our expectations for the rest of the year in terms of CapEx on energy assets overall. RNG plus solar plus microgrids plus whatever else energy as a service. So that range is $165 million to $215 million remaining for the year. As far as the cash flow question, Craig, I don't think we're in a position today to start formally disclosing cash flow or net income kind of on an energy asset category by energy asset category basis. It's something that we are looking at to try to provide a little bit more clarity. But as you know, unlike yield codes or other dividend-paying stocks, we are investing all this cash flow that we're pulling in off of these assets. Furthermore, as we grow the portfolio, like we're doing and increasing our plants for the next few years, much of that cash flow information will largely be driven by ultimately the revenue mix associated with the offtake and the type of project financing or non-recourse financing we apply to these assets. So more to come. I appreciate the question. I understand its importance, and we're going to work on that.

Okay. And then my last question, if I may, with the successful IPO discussions and the evident achievements at Ameresco with your green gas portfolio, it appears that many green gas companies are emerging. Many of them lack substantial experience but are attempting to raise funds to acquire projects at various stages of development. I know there are projects available, but most require individuals to seek them out and develop them as Ameresco has done. Could you provide some insight into how difficult it is to get a project started beyond just the initial paperwork, such as filing permits or making initial agreements? What challenges do these new entrants face in terms of long-term execution?

And that's why some of these companies sometimes when they forecast me some numbers, it's very challenging to, especially in California and quite a few other states to permit besides, as well as get their pipelines in order to interconnect with the utility, the gas companies and so on. And that's a great differentiator that we have in the marketplace. Not only do we have the development capability, because we have the relationships with various landfill owners; we've been doing this for the last 21 years. In addition to that, we've been designing, building, and operating and maintaining them. And from the time that you get started, let's say you identify the customer, and sign a letter of intent and then negotiating the agreement, let's say whether it's a gas agreement and so on, by the time you get the plant up and running, I will say it's a three-year cycle. And I can tell you in California a couple of our earlier projects, it was even longer than that the permitting. But as the regulatory environment changes, little things might change, shorten that cycle a little bit, and that's why we feel very, very good. We see a lot of money going to the RNG, and a lot of funds and so on. But we think we have a competitive advantage because we've been there, we have the relationships. We have the development backlog. I mean, even if we didn't have another project, we have good 2024 I was thinking the other day ‘25. And I know in our pipeline, we have quite a few more. And we have not only built them, but we operate and maintain them. And they are pretty complicated. I give you an example, and why we're a little bit cautious. On this quarter numbers when we made the Annual Report. We had three of our plants out in San Antonio because of the freeze up down there, we estimated it's going to be about three to four weeks out. Our guys, they got it back within 10 days. We had the Woodland plant out estimated for two weeks. We got it back within less than a week. And then the other plan, as you confection we had to demobilize because of the freeze and so on. And we thought we might be out a couple of weeks, we lost four days. But so we have the capability. And that's very, very important to build these assets. They are very complicated.

Great. Well, we have no doubt you're going to stay ahead of the competition. Congratulations on the really impressive performance here George and your team at Ameresco. This is impressive execution.

Thank you, Craig. Thanks, Craig.

Thank you, Craig.

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

Hi, thank you, good evening. My partner, George told me to say happy Dave day to George for yesterday. And I guess my question is….

Thank you.

You’re welcome. And for me too. With the new capital and you've mentioned it the 10 years, you haven't raised any capital until now. And I think all the questions have kind of, bunched your focus on the renewable natural gas opportunity. And I just wonder about the different opportunities, you just said, this is more difficult than solar. And I wonder for the next step of things or maybe that's how you look at batteries or microgrids or what have you, if this capital opens up that…

There's no doubt that we focus on the renewable natural gas property more than others. However, we've indicated that all other renewable assets, including microgrids and combined heat and power, are going to be integral to distributed generation, which I believe is the future. Some people may think that the answer lies in building more transmission lines for resilience, but eventually they will realize that microgrids and distributed generation are the way forward. This is why we are very enthusiastic about energy as a service, and we have made significant progress in this area since it represents another asset class we are developing. We are engaging with various commercial and industrial customers who are pursuing this direct path. This is a capital-intensive endeavor, and when we made our decision, we considered the future direction of the business. Besides renewable natural gas, we also expect solar efforts to accelerate. Although we might not have emphasized this as much in the past, it's clear that generation, energy as a service, and microgrids are the future. You will see us increasingly involved in this market, and I anticipate positive momentum as we have the necessary capabilities.

Well, how are the customer set the same or different and then so how do you attack them between those different opportunities? I guess, because you've been good at what you're good at. And so to open up a new opportunity, you know, how do you pivot? Or do you not have to exit the same customer.

No, we do not. We have been involved in energy as a service for the past ten years. Essentially, it's the same as energy savings performance contracts. Although the financing comes from a third party and appears on the customer's balance sheet, energy as a service typically does not show as off-balance sheet financing. We benefit from the savings generated through other contracts related to the energy performance projects, and we earn our share of the savings from the energy as a service agreements. For instance, in 1981, the first contract I secured was energy as a service; we received over 50% of the savings, along with an additional 40% margin. We have customers who are able to shift from performance contracts to energy as a service contracts.

Yes, Ben I think the asset ownership opportunity will also follow the clean energy goals and the carbon reduction goals that are kind of proliferating across the market. So that's both much market, as well as, obviously, the federal government plus the corporate market. And so I think that that's going to drive a lot of demand, we're going to continue to offer flexibility in the way these things get financed. So if the customer wants an energy as a service, that we put the asset on our balance sheet or a PPA or what have you, we're going to be standing ready to do that. And I think this equity deal provides us with more firepower to just go after it.

And last one and thank you guys very much for that. on the balance sheet, anything else you guys can do or looking at doing from maybe a debt perspective or anything like that just continue to expand your reach? Thank you guys very much.

Sure. So, Ben, I think on the debt side, and I'm not going to project forward but obviously we're continuing to work on non-recourse financings that are meaningful for the company based on the asset portfolio we will continue to do that and certainly, if we decide to do more, we'll be talking about it in the future.

Thank you. Our next question comes from the line of Tim Mulrooney from William Blair. Your question, please.

Good afternoon. Thanks for taking my questions.

Sure Tim.

Hi, Tim.

So I know you're working with a long sales cycle here. But curious if the recent winter freeze in Texas has ticked up more conversations around distributed generation and energy security with your customers or potential customers?

Yes, no question about it. And it started with a Sunday storm way back from especially at New York, New Jersey. But more recently, now it has become pretty much a way of life I would say. I mean, every base that we are doing a project with right now in the United States has some kind of resiliency and solution. Take the Norfolk Naval Shipyard; it has combined heat and power and battery storage. Take the Parris Island, the same thing. We're talking to some clients, commercial industrial customers that talk about which particular ones, but they do colleges, we have three colleges right now that they are committed to have resiliency. Because look at it this way and I think I mentioned this before, I was doing the generation planning for New England electric all the way till 1979. And back then, we were looking at the single contingency, and then we will double contingency basically losing 10% of the load at New England, which that would be two nuclear units. And that will give us a lots of low probability 1 in 100 years. But now, with 30% of the load coming here at wind farms or solar, you get almost 30% of the load going out on a simple contingency, there is no way to admit your line when it can recover that already it is going to be distributed generation and battery storage and microgrid that's going to people, will realize it will be the way to go.

Got it. Thank you.

So they are getting traction.

Okay, thank you. And then, with all the recent headlines around ESG, and corporate responsibility in conjunction with the new administration taking over curious if you're starting to see an uptick in interest from CNI clients even relative to say, this time last year, and if that's resulting in any environmental traction, what about for like, for energy as a service offering, for example, George?

Yes, we are experiencing significant progress with our energy as a service and green energy initiatives. I mentioned in the last call that we received our first request from CNI customers seeking assistance with their emissions reductions. We have the software that helps them assess their current position, which is why I highlighted this activity in my comments.

Great. Thank you so much.

Thanks, Tim.

Thank you. Our next question comes from the line of Eric Stine from Craig-Hallum. Your question please.

Hi, George.

Hi, Eric.

Sorry, maybe to sticking with CNI. You know, since that's an area that you're starting to get traction and obviously as you look out three to five years. I mean, what kind of mix do you think that can be of your overall business? And then do you expect that to fall more on the project side or do you think that that's something that, you'd look at more on the energy asset side as you think about that going forward?

Right now, we have more on the project side than we do on the assets. There is like, we can talk about this Wells Fargo the bank, we started out, we're going to own the 30 megawatts of solar. And then, they said no, you develop a design, build it for us, we will own it. So we can see that. But on the other hand, there are a couple of deals that we will be talking hopefully in the near future that they are going in the other way. So I think it's too early to tell, but I will reserve judgement until we get a little bit more information. I will let Doran wants to add something.

I think it is going to be driven by what the customer is looking for in terms of their financing capacity, and it'll probably differ depending on whether you’re talking about a large strong corporate with a high credit rating and access to low cost of funds, or something that is a little bit more down the credit spectrum so it'll depend.

Got it. And then, just in terms of mix, I mean, do you think three to five years out this is a very meaningful part of your mix or do you think that the majority of business will still be you get more traditional?

I think of the project business, it will be meaningful.

I think it'll be meaningful, it will certainly increase. However, I would say that the municipalities and our traditional merge market and federal government customers are equally increasing their cadence on proposals and RFPs and carbon reduction goals, et cetera. So, yes, I mean, corporate is certainly going to grow faster than the others, but the others are still growing.

Okay, that's great. Thanks.

Certainly. Thank you.

Thank you, Eric.

Our next question comes from the line of Jon Dorsheimer from Canaccord Genuity. Your question, please.

Hi, thanks. Congratulations on strong execution, guys.

Thanks.

Thank you.

I have a question regarding the inflationary pressures on materials. I'm curious about how this is impacting your project business. Are you in a position to pass those increased costs onto customers through a cost-plus contract? However, do you foresee any potential negative consequences if prices exceed a certain threshold that could lead to project cancellations?

No. Not to the point that a project will be cancelled, just the payback period changes, but we do see some pressures in the pricing and then some of the equipment delays, especially on some of the microgrids and some of the sophisticated controls for street lights, we've had some delay when equipment there. And then when the battery storage so, but so far, it hasn’t had a significant impact on the overall business or performance of our company. And the other thing is, you remember, we manage those risks very, very well, because we price the jobs, and then we sign the contract. And generally, we have bought the equipment, and then many times we have actually good as a subcontractor, but on the other hand, some of the contract that take longer periods of time, we do have some exposure there. And we are watching it very, very carefully. By pre-buying panel of lights and so on.

I mean, the only thing I'll add there is that we don't have any particular components that contribute such a large portion of our supply chain, our needs, our procurement needs, right. So one inflationary pressure on steel, for example, right. I mean, was there an impact? Sure, there was an impact, most of our contracts get negotiated. So we've got margin protection, but at the same time, even there that does not represent a substantial portion of our spend on the cost of execution in our cost of goods sold. So I think we're somewhat protected by the diversity of the types of equipment that we're buying.

Great. As a follow-up on the CNI specifically, as companies prepare to return to the office in some capacity, I’ve noticed that occupancy rates in most commercial office buildings and industrial spaces remain quite low. This raises questions about broad resiliency. I’d like to understand if the recent project activity is primarily driven by resiliency factors or by offering specific features and amenities for the workplace, such as charging stations in parking garages or improved HVAC systems. How are these projects categorized in terms of their driving forces within the CNI?

I will say, primarily getting back to the office, it's around the charging stations and then maybe some filtering or new HVAC systems to make sure that people get back and they have a safe environment, and so on. But now you're talking to a data center or a bank or something like that, then the drivers is resiliency. Because I know we're developing some solar, we own a couple of projects because they want the solar, but then we realize that we do microgrids and the battery storage. And that's how we got selected because we gave it a more comprehensive solution.

That's great. Thanks for the color. And congrats again, guys.

Thank you very much.

Thanks.

Thank you. And our final question for today comes from the line of Pavel Molchanov from Raymond James. Your question, please.

Thanks for taking the question. So we've talked about the infrastructure proposal from some of the rhetoric as well. I have a specific question in relation to the Department of Defense. Have you noticed any kind of concrete changes in the contracting approach or the willingness to adopt efficiency solutions by the duty or the army corp of engineers? If we just think about the last 100 days?

Yes, it’s an excellent question. But I asked the same question last week, when she was here. Given your perspective, last year, for the first six months, we had zero requests for RFPs coming over the federal government. So far this year, we have five that's for energy savings, performance contracts, we have other ones designed built many, but specifically, which is the main driver of our business, the energy savings performance contracts. This year, we get five last year for this time plus another three months, because the second quarter of last year was pretty much there anyway. But everything was closed down. But the attitude, which is the driver, and that's why we made it in the comments. It's much, much more positive, and in addition to that incorporating not only resiliency but renewables, I think you will see that even the previous administration, they wanted the infrastructure upgrades because these projects they didn't have to come up with any money. But now the new administration not only will want the infrastructure upgrades, the resiliency, but renewable components in the various projects. And some of the things that we're working on from the infrastructure bill will help considerably. So they will have the option whether to do it, say a solar farm under the energy saving performance contract or they can take it out and do it under a PPA purchase power agreements giving more flexibility to achieve their goals.

Yes, that's an interesting year-over-year comparison, and I appreciate the detail on that. One more question about the DOD. Regarding the contract you highlighted in Norfolk for $173 million, I believe it is the largest in history. Can you explain the sequence of recognizing that revenue between this year and next, including the allocation?

By the way, it's not the largest one it's on the river, way, way back that we did. We took a note that 25 megawatts coal fire cogeneration plant demolish the building a brand new wood-chips Power Plant, it was definitely the energy savings performance contract about a couple of $100 million project so close enough anyway. And it's been worth. And that was a transformative project for us. That $173 million we get paid as a percent complete. Actually, they have a schedule, it's about two years right now.

Yes, for two years, years, 100% complete, right as we deliver that as we deliver the project will recognize that under, we're constructing it, 100% percent complete, and then we'll move into the O&M Phase 1 CET, what that project can deliver?

Right so half and half this year and next?

No I hope I think…

No, I would say less than half of this year.

Yes.

Probably less than half of this year and then more…

And more next year.

Yes. And the reason behind it is because we just, like I said, we got the permits early March, we started moving equipment and so on.

Take some time to start to really ramp up. But yes, so I think we'll see more of it next year.

Okay. Understood. Thank you very much guys.

Okay. Thank you.

Thank you. This does conclude the question and answer session as well as today's program. Thank you for your participation. Ladies and gentlemen, you may now disconnect. Good day.