Ameresco, Inc. (AMRC) Q4 2022 Earnings Call Transcript

Good day, and thank you for standing by. Welcome to the Q4 2022 Ameresco, Incorporated 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. Please be advised that today's conference is being recorded. And I would now like to hand the conference over to your speaker today, Ms. Leila Dillon, Senior Vice President of Marketing. Ms. Dillon, please go ahead.

Thank you, Chris, 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. I’m pleased to report on Ameresco's great performance for 2022. We just completed our fifth consecutive year of record revenue and profits. We achieved revenue growth of 50% and adjusted EBITDA growth of 34%. This robust performance reflected how well our advanced technology portfolio and capabilities are aligned with market demand. The Ameresco team delivered these impressive full-year results while navigating challenging global issues. The fourth quarter was impacted by the push outs related to scheduling changes in implementation, supply chain issues, and unplanned maintenance at two of our RNG facilities. Some of these timing-related issues will likely continue into the first and second quarter of 2023. But we believe that they are short-term and that business will normalize in the second half of the year. Even in light of these push outs and the very difficult comparisons we will face this year from the unusually large Southern California Edison contracts, we are very pleased to be guided to growth in our 2023 adjusted EBITDA. This expected year-over-year growth is a true validation of our diversified clean tech business model. Market activity and demand conditions remain very healthy with high net proposal activity. Our customers continue to evaluate the recently enacted Inflation Reduction Act, and they are working to prioritize the type and timing of their projects. Their support for a very broad range of technologies provided by the IRA greatly favors comprehensive solution providers, such as Ameresco. We believe this is a more transformational legislation affecting our industry, providing a long-term runway for advanced clean technology deployments for years to come. 2022 marked the year of major accomplishments in Europe, including our decarbonization award with the City of Bristol in the U.K. In addition to being selected for this transformational net zero municipal project, our Greek joint venture was also selected as the contractor for the 100 megawatt PV project in Northern Greece. Both of these projects represent very large contracts for Ameresco, but also some of the largest in the respective geographies, thus significantly raising our regional profile. In the fourth quarter, we announced the acquisition of a 5 megawatt wind farm in Ireland. And today, we are excited to announce an agreement to acquire ENERQOS, an Italian-based energy services company. This acquisition further strengthens Ameresco's European footprint by adding local resources, customers, and a new pipeline of work throughout Italy. This also supports our growth strategy for the C&I markets as ENERQOS has a strong portfolio of commercial and industrial customers. They have a history of profitability, and we expect this acquisition to be immediately accretive. Our merger and acquisition strategy generally focuses on acquiring highly regarded companies with great management teams and a strong plan for organic growth in order to create long-term value for our shareholders while minimizing risk. Now, I would like to talk about renewable natural gas. With over 20 years of vertically integrated experience in self-developing biogas plants, we are one of the leading players in the RNG space. Federal incentives in the transportation market plus the push by large institutions, utilities, universities, and corporate customers should make this a very attractive market for many years to come. We believe we have significant competitive advantages in developing, constructing, and operating these plants while navigating the various permitting agencies and equipment suppliers. With 20 biogas plants in our assets in the development pipeline, we believe our RNG franchise will continue to be a significant driver of shareholder value. Now I would like to provide a quick update on the Southern California Arizona project. As we noted in the third quarter of 2022, Southern California, Arizona was distracted as we adjusted the project schedules into 2023. We're also continuing discussions regarding COVID-19 and weather-related force majeure relief. We anticipate the projects to be in service prior to the summer of 2023. Our relationship with Southern California, Arizona continues to be very cooperative. The knowledge and expertise we have gained from this and other large projects make us one of the go-to companies in the industry. We look forward to announcing additional wins in these areas in the future. Finally, our environmental, social, and governance programs and goals remain a top corporate focus. We were very pleased to be named a silver winner in the best place to work awards by the Best in Biz Awards. I am very proud of our company's culture of caring for the communities in which we serve, as well as for our employees, customers, and stockholders. I will now turn the call over to Doran to comment on our financial performance and outlook. 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. The Ameresco team delivered another year of record financial results as all four of our business lines experienced solid growth and profitability. Full year revenue growth of 50% was led by our projects business as we continued to execute on the SoCal projects. This growth was complemented by the strong performance of our other three business lines, energy assets, operations and maintenance, and others, leading to adjusted EBITDA growth of 34% to a record $204.5 million. We started to face difficult year-over-year comparisons in our projects business during the fourth quarter of 2022, given that our work on the largest projects commenced during Q4 of 2021. We expect this to continue through the third quarter of 2023. These difficult quarterly comparisons, together with the challenges that George mentioned previously, resulted in year-over-year declines in project revenue. Energy asset revenue was down year-on-year by 6% due to unplanned maintenance issues at two of our RNG facilities in Q4. But these plants are now operating at their expected output. On the other hand, our operations and maintenance business line delivered another solid quarter of 5% growth as we continue to attach O&M contracts to our projects, especially those with the federal government. Our other revenue line had another quarter of double-digit growth, up 16%. As we expected, our gross margin increased to 18.6%, 150 basis points ahead of the prior year as the lower margin SoCal led contract declined as a percent of our total revenue mix. We generated adjusted EBITDA of $41.3 million in the quarter. It is important to note that the quarter was impacted by higher-than-expected interest expense as the extension of SE projects required us to carry substantial working capital. Our contract allows for cost recovery, and we have included this additional interest expense in the proposed cost recovery that we have been discussing with SoCal. Total project backlog was a healthy $2.6 billion at the end of the quarter, even in light of the substantial conversion of SCE projects backlog to revenue. Of note, our awarded backlog grew 6% compared to last year, continuing to build momentum for future project revenue. Ameresco expanded its portfolio of operating energy assets to 389 megawatts, and our owned assets in development was 470 megawatts at the end of the year. As a reminder, we're disclosing in our supplemental slides both the total assets in development as well as a pro forma of net megawatt total after adjusting for our partners equity interest. Our nationwide Greenfield solar and storage development group continues to build up its pipeline of early-stage front-of-the-meter opportunities. We expect the volume of these opportunities to grow, driven by the numerous IRA incentives related to these assets. Our ability to finance these energy assets remained strong, as we secured $137 million in additional project financing during the quarter, bringing our total financing for the year up to $468 million. We believe Ameresco's unique business model affords us substantial forward visibility, given the combination of project backlog, O&M backlog, and the estimated contracted and market pricing revenue from our energy assets. Together, these lines of business provide a path to over $6 billion in future revenues. In previous quarters, we have only reported estimated contracted revenue and incentives for our operating energy assets. As George noted earlier, we believe that our RNG franchise is a significant driver of value to our stockholders. To help show a more complete picture of our RNG asset value proposition, we’ve started providing an estimate for the uncontracted RNG revenues that we expect to generate over the life of these assets. Using conservative assumptions for asset life and merchant market pricing, for RINs, we estimate these revenues from our operating RNG assets to be an additional $1.2 billion on top of over $1 billion of contracted revenues from all of our operating assets. This projected RNG revenue is based on RIN prices of $1.50 per gallon, brown gas at $3.50 per MMBtu, and LCFs revenue, where applicable, at $3 per MMBtu. We've assumed an average asset life of 20 years. Of course, we still have the option to enter into longer-term contracts if we feel we are creating additional value by doing so. I'll reiterate that the $2.3 million in revenue visibility only relates to our assets that are currently operating and does not include any expected revenue from our 470 megawatts of energy assets in development and construction. As those assets begin operating, we expect to add significantly more revenue visibility to our profile. Turning to Guidance, 2023 guidance anticipates adjusted EBITDA growth of 5% at the midpoint. We're very pleased to be guiding to this growth, even as we face difficult comparisons due to the large SCE projects. We anticipate placing between 80 and 100 megawatts of energy assets in service during 2023. The three RNG plants we had expected to be mechanically complete by the end of 2022 continue to progress, as their schedules were impacted by permitting delays, and longer lead times on certain types of equipment. Looking forward, we expect these three plants to be operational this year, and we also have several additional RNG assets in late stages of development. We expect four or five of those will come online during 2024. Our expected asset CapEx for 2023 is $325 million to $375 million, the majority of which we expect to fund with non-recourse debt. As we look to the first quarter, we estimate revenue to be in the range of $220 million to $240 million and adjusted EBITDA of $20 million to $30 million. We expect non-GAAP EPS to be slightly positive. As George noted, we expect Q1 to be impacted by push outs on a couple of large projects on top of our normal energy asset and project seasonality. Furthermore, net income will be impacted by the continued carrying costs of SCE-related working capital. We expect the remainder of 2023 to follow our normal case with progressive improvement throughout the year. So I'd like to turn the call back over to George for closing comments.

Thank you, Doran. We maintain an excellent pipeline outside of our 2024 target of $300 million in adjusted EBITDA, as governments and institutions around the world invest in solutions addressing climate, geopolitical, and budgetary challenges. Ameresco continues to enhance our expertise to provide those solutions, positioning us for robust, profitable long-term growth. Finally, we look forward to welcoming analysts and institutional investors to our European Investor Day being held in London on May 11. This event will feature presentations and panels by key executives. From our leadership team, discussions will focus on our expanding growth opportunities, including our plans for continued expansion in Europe. Operator, we would like to open the call to questions now.

Our first question will come from Noah Kaye of Oppenheimer & Co. Your line is open.

Good afternoon. Thanks for taking the questions. I wonder if you could start by giving us a little bit more color on some of the timing and scheduling challenges around the RNG development. Obviously, you mentioned permitting supply chain. I don't know the degree to which you can get granular but just your line of sight to those challenges being resolved here in the first half of the year. Anything that we should consider top of mind in terms of key milestones that you have to hit to bring those projects online?

We encountered some challenging permitting issues. Although we obtained the environmental permits in some cases, we faced delays with the building permits that typically take weeks but ended up taking several months, with one delay lasting as long as six months. Additionally, we expected major equipment deliveries for a couple of sites last July and August, but those deliveries were pushed back to late December and early February. Moving forward, we meticulously reviewed the schedule, which is why we are confident that we will have three plants completed this year, all mechanically finished by mid-year. The other four to five plants are currently in the construction or advanced development stages. We are building from the ground up and did not foresee the supply chain issues we encountered. For example, rainstorms in California affected one of our sites, where extensive excavations were wiped out due to floods. I don’t know if Doran wants to add anything further, but we have carefully examined the numbers in the schedule and cannot incorporate these challenges into our guidance for this year or next year.

That's very helpful. Sticking with the theme of RNG development. You talked about having, I think you said 20 biogas projects in development. You said biogas rather than RNG. I’m just wondering with all of the policy developments that are supportive of biogas assets, some perhaps more for RNG, some perhaps more beneficial to landfill gas to electricity. Just how are you thinking now about planning an optionality for your biogas assets? I think it's pretty clear what you're expecting to bring online this year for RNG, yes.

Actually, last year we had said that we would have five to six plants. We think one of two sites, actually one site that was electric, we're going to convert it to renewable natural gas. We stopped that because we think the optionality now to change it is subject to what comes through EPA. We did it with another plan, and we're going to expand it and go to renewable natural gas. Now we are in the preliminary stages and most likely will go electric. So the economics will be the ones that we have right now that we have already put in the four that we talked about. Four to five will be renewable natural gas as we go down the road. I think some other ones might turn out to be landfill electricity. Thank you.

Thank you. Our next question will come from Stephen Gengaro of Stifel. Your line is open.

Thanks. Good afternoon, everybody. I guess two for me. What I'd start with, George, you mentioned some confidence on your $300 million EBITDA target, and that's a pretty steep ramp. I think it's 40% growth in '24 versus '23. Can you talk a little bit about sort of the path to get there?

Yes. I mean we look at it very, very carefully. We look at the contracted backlog, project backlog. The contribution that we will get not only from the RNG assets but from the other assets that we place it into, whether it's solar or battery storage and so on, and we feel very comfortable. The way I look at it, though, it's a 40% jump from 2023 to 2024. But if you were to look at it from 2022 to '24, it's not that much out of line. Between the two years, it's 45% growth, which is 32% growth for each year. And if you go in the past, we are in a little bit of a lumpy business, but building it up to the '24 number, we feel very comfortable because it's basically contracted backlog, awarded backlog, and assets that we have at a very quick level, including the operation.

Great. Thank you, George. And then the other thing I wanted to just ask about was just on the contracting side, in general. It feels like things have progressed pretty well sequentially as far as your backlog is concerned. Just when you're talking to customers and given the inflationary environment and interest rates, what are the conversations like? And have there been any impediments to getting these deals across the finish line?

Yes, the increase in interest rates has affected the business and some of the delays we are experiencing with significant projects, including a $150 million federal facility project. We conducted a detailed energy audit, negotiated the project scope and pricing with the client, and then sought financing. However, due to the rise in interest rates, financing costs increased, impacting the overall project budget. As a result, we are reassessing and renegotiating the project's scope. Another project with a municipality also faced complications because the higher interest rates necessitated the need for new bids. This is concerning, but recently, we've noticed customers prioritizing their projects and timing, especially as some are expecting funding from the Inflation Reduction Act (IRA). They are waiting to see the potential impact of this funding. We anticipate receiving a significant amount from the IRA for a couple of projects, which could lead to growth. However, there is a bit of a wait-and-see approach until more information is available. Nonetheless, the request and activity pipeline is expanding significantly, which gives us confidence in the business's future.

Very good. Thank you for the color.

Thank you. One moment please for our next question. Our next question will come from Greg Wasikowski of Webber Research & Advisory LLC. Your line is open.

Hey, guys. Good afternoon. Thanks for taking our questions. I wanted to ask about Enerqos. Could you just talk about the origination of that relationship? Was Italy a market that you were actively targeting before this? Does it make it easier to expand into additional territories, thinking like France, Spain, Portugal and those areas? And does the business help with any other existing operations that you have in Europe? Kind of thinking probably more like Greece, but just trying to understand any synergies there. Thanks.

That's a very good question. You might recall that we have targeted Italy as one of the countries that we wanted to expand. So we had basically an internal intensive market effort where we identified potential companies that we might want to acquire, and we approached this particular company, and then people made the arrangements to make a Zoom call and meet the management of the team and so on. We had a good meeting where I went over there, met with them, and the whole team was there. They are very, very similar to what we are doing. Basically, they're an energy services company, and they are more focused actually almost exclusively on the commercial and industrial customer. Then I asked them, I said, 'Why are you focused on the C&I?' Because the government edges in Europe are finally beginning to get their act together and do something. But the C&I customers, because of the higher costs, of course, what happened in Europe, they are very conscientious about it, and we have a good program that will help them. So it's a very good little company. And we are very excited about it. We have been doing some other work in Italy with some other partners that we had, and we have some very good traction through those companies. So this one gives us a solid foundation. And what we like most about this company is the world-class management team. Even though it's a small company, it operates like a large company, and we could probably utilize it as a pretty good platform for us in Europe. It's not a great secret; we are looking for other companies, and we don't have anything to talk about it right now, but don't be surprised if we might have something else to announce in the near future.

Got it. Okay. Thank you, George. And I know you guys can't say too much about numbers, but worth asking if you think or if you expect this to be accretive on an EBITDA or earnings perspective in 2023? And if it's included in the guidance.

For 2023, by the time we finalize the deal, it will have a slight positive impact. However, it is currently accounted for in our guidance.

Okay. Got it. All right. Thank you all, guys.

Thanks.

Thank you. And one moment for our next question. Our next question will come from George Gianarikas of Canaccord Genuity. Your line is open.

Hey, good afternoon. Thank you for taking my question. So last quarter, Doran, you spent some time discussing interest rate exposure. First, in regards to how it impacts your capital stack and then how it impacts projects and asset deployment. Can you just kind of go over that again and just remind us exactly how rates are impacting your business and your balance sheet? Thank you.

Yes. Sure, George. Thanks for the question. I mean I think what I'll start with is, broadly speaking, we talk about the SCE piece in a second, but the financing we do on our energy assets is long-term. So we're talking about looking at the longer end of the curve for purposes of interest rate exposure. And as I think you've seen, despite maybe some recent volatility, the overall shift there hasn't been as impactful as what you've seen on the short end of the curve. So that's kind of point one. We did talk a little bit about the high interest expense on the SoCal Edison push outs. I think it's important for folks to recognize that. That's an element that we have the ability to include in the overall settlement of costs related to their change. So we will continue to monitor that, and as you might expect, doing all the calculations and ensuring that information is front and center from the perspective of those discussions. I guess the last piece is just kind of looking at the overall short-term debt. And I think that beyond the working capital required for SCE, we are expecting all of that to normalize so that our interest rate exposure on anything related to SOFR or short-term unhedged rates should be much more muted as we get through the rest of the year, in particular because despite the fact that we do invest some of our capital in construction and development of assets, our ability to hit nonrecourse financing like the large RNG refinancing transaction that we did in Q4 is still there. That lender market hasn't loosened up. We are still able to get great tax equity financing using sale-leasebacks, and we don't expect the overall impact to be long-term.

Thank you. And then just as a follow-up, you talked a lot about scrubbing permits and other potential delays in your '23 and '24 EBITDA guidance. Can you also help us understand how much is dedicated to discussing and trying to analyze movement in RIN pricing? And I'm wondering if you can help us understand how much exposure you have there, and how much we should be monitoring that and potentially handicapping your '23 and '24 EBITDA guidance based on volatility in that index? Thank you.

Well, you know that 50% of the RINs that we plan to generate for the year are hedged. The other 50%, we are in the market, and we sell them as when we feel the market is right. We have incorporated the prices that we think we will be able to get in our guidance right now. Doran, anything to add?

I mean, I think as you might expect, we're heavily engaged in following what's happening with the EPA and what adjustments will be made. And just like you, our eyes are on the summer as to what will happen when they finalize the RVO, but we do feel confident in where we've kind of established our estimates for the year based on the unhedged portion at least.

Thank you. One moment for our next question. Our next question will come from Eric Stine of Craig-Hallum. Your line is open.

Hi, everyone.

Hi, Eric.

Hey. Maybe we can just go back to the 2024 EBITDA outlook and great that you reiterated that, but just want to be clear. So if you're thinking about backlog awards not yet signed plus the operating assets that you've not yet contracted, when you take that all together, is this something where you feel like you’ve got a high level of confidence? Is there stuff that you still need to fill in? Or how should we think about that when looking at '24?

I would say, it's a very high level of confidence because when Mark does his numbers, unless we are at the 70%, 80%, whatever it is in the pipeline, it takes up pretty much. Now, we feel pretty good. If something happens that’s certainly out of our control, that's possible, but we feel pretty good that we'll be able to deliver that number. Because when we established that number way back, I think we were a little bit conservative. We have a little bit, you might say, in the bag. And so that's why even though we had some things happen to us, that number still stands and we feel good about it.

Got it. That is great color. And then I guess last one for me. Just on the SoCal Edison project, I don't know if you're willing to discuss how much of that project is left. But I guess I'm more interested in you mentioned that as a result of that, you've got a growing number of projects in your pipeline. So maybe some color around those projects, maybe not as big as SoCal Edison, but big nonetheless.

Let me start by saying that we are seeing a variety of proposals, both large and small. It's a competitive market, and we feel well positioned to secure many of these projects. Some of these will be assets on our balance sheet, while others will be straight construction contracts, similar to what we did for SoCal Edison and other utilities or asset owners. Although we may not have any individual projects as large as SoCal Edison, the total proposal activity definitely exceeds that when combined. I believe there is more to come, and we will discuss these projects as they enter our awarded backlog. We are also excited to be involved in discussions about some design-build projects. Regarding the SCE project, we expect to be over 90% complete by the end of 2022. Our focus now is on grid integration and reaching substantial completion before the summer.

Okay. Thank you.

Thank you. Again one moment for our next question. Our next question will come from Christopher Souther of B. Riley. Your line is open.

Hey, guys. Thanks for taking my questions here. Maybe just a follow-up on Enerqos. Do they have projects on the balance sheet that you're acquiring? Or is this more of a project business? I'm curious if that kind of evolves over time where you'd be owning assets over there as well. And then can you talk through just from a market-by-market perspective, what other markets are ones where acquisition to kind of gain foothold is most helpful? Thanks.

Yes. We do not have any assets on their balance sheet right now. But basically, let's say, a solar plant and some of the multi-customers that they have, they’ve got them. And then they have a conduit that buys those projects. Also, they look on the balance sheet as design-build projects. And they do very little O&M. That's why we think there's tremendous potential for us to expand the O&M business. And at the end of the day, we might take some of the assets on our balance sheet as well. And I think, with us bringing some more additional financing and management and marketing capabilities, I see we can accelerate the growth of this particular business. And some of the other companies that we are looking at in Europe are similar, similar companies because in Europe, what's happened with the energy price being where they are, especially some of these distributed generation for the commercial industrial customers. And now it's beginning, the institutional accounts of the governments and the cities and towns, the market is picking up. And I think, for us, we've developed a good management team in this particular company. I think we can grow it.

I think if you look at the landscape, having reached out to this company without going through a banker process, this is the kind of outreach we're engaging in; we're aiming to grow our business across the region. We aren't concentrating exclusively on any specific geographies but are instead being opportunistic. We're identifying opportunities where businesses like Enerqos can fit in. You've seen our activities expand in Greece, and we have a positive outlook on Italy. We will avoid markets where we cannot compete. It's all about being opportunistic, and we believe there will be more opportunities for us in the future.

Got it. No, that's very helpful. Regarding the SCE progress, you mentioned last quarter that you expected $35 million in revenue for 2023. However, it seems that costs and estimated earnings in excess of billings have decreased again. I would like to know the timing for when payments might begin reflecting a more normal figure if you have any insights on that.

I mean from an unbilled perspective, you're talking about more or less the bulk of it is on substantial completion.

Admission.

That's right. Yes, we are aiming to complete these projects by the summer, which is when we expect the invoices to start being issued.

Okay. Great. And then maybe just last one. Of the 80 to 100 megawatt equivalent additions for this year, can you give a mix between solar, batteries, and RNG? And then any sense of the cadence would be helpful there, and then I'll hop in.

I think we are looking at, give me a second to get the numbers. So we believe that for RNG, we have 22 megawatts out of the 80 to 100. The remainder will consist of a mix of solar and battery.

All right. Okay. Thanks, guys.

Thank you. One moment please for our next question. Next question will come from Tim Mulrooney of William Blair. Your line is open.

So apologies for the overly simplistic question. But I had in my notes that you expected to complete one RNG plant in 2021, 3 in 2022, and 5 to 6 in 2023. But today, I think you said 3 in '23 and 5 to 6 in 2024. So did the whole RNG completion timeline essentially get pushed out by a year? Or were my notes incorrect?

The completion timeline for the RNG plants did indeed shift. We completed one plant in 2021 and three in 2022 as anticipated. However, for the next phase, we are now looking at four to five plants instead of five to six, as we decided to keep two plants electric rather than converting them to renewable natural gas. The delay we’re experiencing is between four to eight months for the transition from three to the four or five plants.

Got it. Thanks, George. You mentioned the 20% EBITDA CAGR between 2022 and 2024. I understand that, considering the timing of projects, looking at this two-year period might be more insightful. Reflecting on that timeframe, how should we assess the contribution of growth from projects compared to the EBITDA generated by the energy operating assets?

Yes, I believe the project business is a significant driver. It is expected to grow at a compound annual growth rate of 12 to 13% if we consider the period from 2021 onwards, rather than comparing it to the previous year. Additionally, growth is coming from asset management and operations and maintenance, which is performing well, along with other business sectors.

Got it. Okay. Thank you very much.

Thank you. One moment please. Our next question will come from Kashy Harrison of Piper Sandler. Your line is open.

Good afternoon, everyone, and thank you for the question. I wanted to ask about the first quarter guidance. The $230 million in revenues suggests a significant increase in the second, third, and fourth quarters to reach the full year target of $1.5 billion. I understand there were some delays in the first quarter, but could you provide more details on what gives you the confidence for that substantial recovery as we look at the second, third, and fourth quarters? Additionally, can you give some insight into how much of the revenue guidance is already secured through the 12-month projects and operations and maintenance backlog?

Yes, this is Mark. Our confidence in our guidance comes from the visibility we have from the backlog. On the project side, over 80% of our project revenues are from either contracted or awarded projects. Additionally, more than 70% of total revenue is coming from what we consider contracted sources. This gives us strong visibility on how we will be able to achieve the projected ramp throughout the end of the year. While there will always be some revenue from the pipeline, we have a clear understanding of the opportunities available, allowing us to fill the gap between Q1 and the end of the year.

Helpful. Thank you. And then as my follow-up, just a quick question on cash flows. So 2022 adjusted cash flow from operations was $100 million use of cash. I'd imagine that was driven by the Edison project. So with the billings looking to go out in the summer of the year, I was wondering if you could just maybe give us some color on how you're thinking about adjusted cash flow from operations in '23 based on the midpoint of your guidance?

I mean, we haven't generally guided to that. But as Doran was saying, we expect to wrap these projects up by the summer, and a lot of that is tied up right now in the unbilled revenue. Everything to date that we have been able to build contractually, we have been paid for. So we would expect those cash flows to come in soon after the projects are completed, which I think should directionally point to a much improved adjusted cash flow number.

Yes. There is substantial completion, which is the next important milestone. If the weather allows us to continue operating in California, we will finish these projects. Based on the payment terms, you might see some cash flow starting in the third quarter, depending on when the bills are sent out. I can't specify an exact quarter, but that's the timeframe we're looking at, and you'll notice that kind of turnaround.

Got it. Thank you.

Thank you. One moment please for our next question. Our next question will come from Joseph Osha of Guggenheim Partners. Your line is open.

Thank you. It is a pleasure. Following on what Kashy was asking, I'm wondering as we think about that EBITDA run rate, which obviously comes out of 2023 at a considerably higher rate going in, is this just a straightforward cost absorption? Are there some mix shifts on a quarter-by-quarter basis in terms of the revenue mix that we should think about? I just want to understand what the walk from Q1 to Q4 EBITDA looks like.

I don't know that we have anything really granular to share with you there, Joe. The push out that George talked about where we’re kind of going back and recalculating some things, we are expecting contract signing, some of those larger projects carried with them a good amount of costs in preparation for signing. So we get a little bit of revenue charge once the contracts get signed. And this is where having push outs that go not just from one quarter to the next but maybe one quarter to two quarters later. We are seeing a little bit of that here, and that kind of explains some of that ramp, especially as you start to work on full execution in those projects in the latter half of the year. I don't think there's anything really meaningful to share as far as mix, though. For the balance of the year, again, we've got our typical seasonality where we're going to see the ramp-up over the course of the year just kind of progressively moving from Q1 up to what we expect to be a more robust Q3 and Q4.

Yes, I would like to add that some of the projects I mentioned earlier have faced delays. When a significant project is delayed by three months, it typically requires a few additional months to get things organized. This is why I indicated that we could see impacts over two quarters. It takes time for these projects to be signed, mobilized, and for real revenue to start coming in from the construction side. This is why multiple speakers have addressed this issue throughout the process.

Okay. Thank you.

And then as a follow-up, obviously, you've got some additional storage projects in the backlog that we've been talking about. I'm wondering what you all feel like the lessons learned are from SCE and how that's changed your approach to how you source sales for future projects? How you contract? How you’re going to come with this next round of storage projects differently to hopefully maybe avoid replaying what’s happened with SCE? Thank you. I believe the contract was executed very well. The key lessons we learned relate to our preparedness for unexpected events and supply chain disruptions, like those experienced in Shanghai. These issues have been the primary cause of our delays. Additionally, Southern California's preference for synchronizing projects in 2023 has contributed to the setbacks. Maintaining a strong, transparent relationship with our customers is invaluable, and our interactions with SoCal Edison have been open and honest from the start. We hold regular high-level executive meetings, which we consider critically important. When pursuing new proposals and opportunities, we actively engage members of our executive management team early on to build relationships with the management teams of our partners and suppliers. This helps ensure we can effectively manage the processes involved in larger projects. Overall, we are very proud of the project we've developed, which enhances our portfolio. We are focused on analyzing the execution of this project and are using the insights gained from it, along with the resources that contributed to it, as we work on future proposals to ensure a consistent approach to upcoming projects.

I'm sorry, I may add that we have become a go-to company, and we are working on several projects right now along those lines similar to the Southern California Edison contract. And you might recall, when we signed a contract in September 2021, everybody thought we'd come out of the COVID-19 situation, but then we ended up bringing back into it. We had the supply chain issues that we executed that project under what I call unprecedented situations. I think we did pretty well.

Okay. Thank you, guys.

Thank you, George.

Thank you. One moment please for our next question. Our next question will come from Chip Moore of EF Hutton Group. Your line is open.

Thanks. Hey, everybody. I wanted to ask a question on visibility as it relates to the IRA. When do you think customers maybe get better clarity on potential funding opportunities? And then how do you sort of cap risks for any push outs there or potential for acceleration?

I wouldn’t necessarily categorize it as push outs or acceleration. As the Treasury guidance is released, it appears that our customers and their advisors are eagerly anticipating this information. Once the guidance is published, they quickly reach out to us to discuss the next steps. Their eagerness is evident, but the timing of the government's guidance is beyond our control. On the day the Treasury issued guidance for low-income communities, we received emails from clients ready to proceed with their projects and seeking clarification on how it applies to them. This dynamic will be interesting as guidance continues to come out. There may be some urgency, but we must remain realistic about execution timelines with our customers. It's important that once we have clarity on the structure supported by the IRA, we have sufficient time to move forward with execution, procurement of equipment, and so forth.

Got it. Thanks for the clarification.

Thanks for taking the question. You've been asked several times about higher interest rates. I'd like you to also talk about higher utility rates and how that's affecting both the efficiency side of the business and your solar power plant development? Thanks.

The higher interest rates that why it's on any project that we underwrite, let's say, solar or whatever asset we might own ourselves, we take into account the new interest rates. And of course, on the performance contracts; and that's why I mentioned earlier on that contract, we had to go back and renegotiate the baseline energy prices. We use the current prices rather than the old one, and that's what made that project expense even though it's higher interest rates. But they're doing impact us, no question about it. But on the other hand, though, the energy prices have gone up. It gets neutralized with the performance contract. And on the assets we own, we take that into account. So we go out, we shop, and we see what the long-term rates will be, and the long-term rates haven't gone up as much as the short-term rate, but the short-term rates impact us on the working capital that we use in the line.

And I think the higher energy rates elsewhere in the country for purposes of off-take contracts, etc., I do believe there's a little bit of a lag there with respect to those kind of catching up to where the energy prices are going, just given the long development cycle of some of the assets, but our expectation is the same; the same thing will happen there.

Thank you. One moment please for our next question. Next question will come from Ben Kallo of Baird. Your line is open.

Hey, George. You mentioned the ideas for EBITDA next year, but there wasn't any IRA included. Could you discuss what aspects of the IRA could be beneficial for next year compared to what might negatively impact EBITDA? Also, what is the estimated transition from this year's EBITDA to next year's? What are the main factors driving that change? If you could mention the most significant and the second most significant drivers, that would be great. Thank you.

We have not accounted for any potential effects from the IRA. The projections are primarily based on the project itself. A significant portion will result from how well we execute the project, while a considerable amount will come from the assets we put into operation. For instance, we deployed the number of assets we anticipated last year, but we plan to add 40 megawatts of assets in the first quarter, which will make a considerable difference. Additionally, the RNG assets expected to come online by the year's end, with a few starting in early 2024, will also contribute. We're also progressing on a couple of battery projects. Furthermore, our other business areas could contribute positively, along with the support from other lines of business. Mark, would you like to add anything further?

No, I think that pretty much says it. Thanks, George.

Yes.

Thank you. And that will be all the time we have for the Q&A session. This will also conclude today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.