Ameresco, Inc. (AMRC) Q2 2023 Earnings Call Transcript

Good day ladies and gentlemen and thank you for standing by. Welcome to the Ameresco, Inc. Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mrs. Leila Dillon, Senior Vice President, Marketing and Communications. Mrs. Dillon, you may begin.

Thank you, Catherine 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 two, 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.

Thank you, Leila and good afternoon everyone. We had another solid quarter, and I’m particularly pleased that our positive momentum continued with the strong growth in project backlog and assets in development, supporting both our 2023 guidance and our longer-term financial targets. Second quarter revenue was well above our guidance, and adjusted EBITDA was at the higher end of our range. Importantly, we ended the quarter with a record total project backlog of $3.2 billion, which was up 9% sequentially. During the quarter, we added $493 million of new project awards, bringing the total adds for the first half of the year to almost $1 billion. This growth is even more impressive as we have now surpassed the total backlog reached when we signed the almost $1 billion SCE battery contracts at the end of 2021. We also added 113 megawatts of assets in development in the second quarter, which is the largest amount added in a single quarter in our company’s history. This represents an impressive 26% sequential growth in assets in development, which we expect will provide substantial EBITDA contributions for many years, once brought into operation. Together, our project and asset wins continue to add to our multi-year visibility of profitable revenues, while supporting our confidence in Ameresco’s long-term growth. Large battery energy storage contract wins represented a major component of this quarter’s growth in both our project backlog and assets in development. In our supplemental slides, you will see that battery assets now comprise 41% of our assets in development compared to under 5% of our existing operating assets. Large battery storage systems are a critical component in the replacement of fossil fuel generated electricity, playing a key role in the storage of renewable energy during times of peak production. Batteries, most importantly, make the electric grid far more resilient and flexible, quickly providing power when needed due to high demand, weather-related events, and a number of other unplanned outages. These factors are driving tremendous growth in battery storage, supported by the mass commercialization of battery technologies, which has helped to drive down costs. In the United States, the Inflation Reduction Act has been a significant catalyst for the rapid adoption of this technology. Before the passage of the IRA, federal tax credits were only available for battery storage when it was paired with a renewable generation technology, such as solar or wind. Now, under the IRA, and similar incentives in Canada, standalone battery storage systems will be eligible for a 30% or greater investment tax credit, significantly enhancing the value proposition of these systems for our customers, thus driving greater adoption. While the ITC is helpful here in North America, we are also proposing and winning standalone battery projects in Europe where the need is just as great. Given our deep technical knowledge, engineering expertise, and supplier relationships, Ameresco has become a recognized leader in the implementation of battery systems. From the transformational Southern California Edison projects to the recently announced, United Power, Middle River Power, and Atura Power Joint Venture wins, Ameresco’s expertise and financially flexible business model allows us to drive both battery project and asset opportunities for many years to come. Another very positive long-term development for Ameresco which occurred during the quarter was the EPA’s ruling concerning the Renewable Fuel Standard targets for 2023 through 2025. In its final ruling, the EPA significantly increased the volume obligations for RNG. This ruling had an immediate impact on the price of the D3 RINs, which we generate from our RNG operations, and prices quickly moved from the low $2 range to above $3. As importantly, the EPA also changed how they calculate the RNG industry average rate of growth, which could support volume calculations even beyond the three-year period of this ruling. We were very pleased with the ruling which increases our long-term visibility into this important line of business. Additionally, we are anticipating the forthcoming guidance from the EPA on eRINs, which could also provide a tailwind to our existing biogas to electricity projects. Before turning the call over to Doran, I want to highlight the publication of our third annual ESG report entitled 'Doing Well by Doing Good - Transformation and Purpose'. We are very proud of the fact that our operations have had a significant positive impact on the global environment as our renewable energy assets and customer projects combined have delivered a cumulative carbon emission reduction of over 95 million metric tons since going public in 2010. Our ongoing asset and project growth will continue to drive this important number even higher. Looking ahead, we have also set a target of achieving net zero from our internal operations for both Scope 1 and Scope 2 emissions by 2040. In support of this target, we have pledged to establish emissions reduction targets through the Science-Based Targets initiative by 2025. I will now turn the call over to Doran to comment on our financial performance and outlook.

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. Total second quarter revenue was $327.1 million, about $37 million above the midpoint of our guidance with faster-than-expected execution on certain projects. Energy Asset revenue grew 17%, largely based on the increased number of operating assets year over year, while our O&M business delivered another solid quarter with 9% growth. In addition, our other line of business was up 4%, driven by increased demand for our utility, SaaS, and consulting businesses. Gross margin expanded to 17.9%, as the lower margin SoCal Ed contract declined as a percentage of our total revenue. We generated adjusted EBITDA of $37.4 million in the quarter, at the higher end of our guidance range. We ended the quarter with approximately $49 million of unrestricted cash, while executing on a record $285 million in financing activity. As George mentioned, we ended the quarter with a record total project backlog of $3.2 billion, a 9% sequential increase, as we added nearly $0.5 billion in new project awards during the quarter. Our energy asset visibility is approximately $2.3 billion, an operating asset revenue backlog metric that includes both contracted revenue as well as a conservative estimate of lifetime uncontracted RNG revenues. These metrics, together with our O&M backlog, give Ameresco visibility to over $6.7 billion of future revenue. This metric does not include any contribution from the 545 megawatts of energy assets in development and construction. As George mentioned, we experienced record adds of 113 megawatts during the quarter, and our assets in development and construction remain well above our current operating energy assets, giving us additional visibility into our long-term growth. The timing of placing these assets into operation can be anywhere from under a year for small, more simple assets to four plus years for more complex assets such as RNG facilities. Listeners will remember that an asset has to meet very strict criteria to be included in this metric, which is much stricter than what most companies consider a pipeline. Historically, approximately 90%+ of our energy assets in development and construction are placed into service and either carried on our balance sheet as an operating asset, primarily with non-recourse financing, or monetized through a sale to a third-party. With the changing interest rate environment, we have been fielding many questions on the impact of increasing interest rates on our Energy Asset business and our expectations for how this business might evolve. As many of you are aware, we use a risk-adjusted levered internal rate of return as a key metric when evaluating energy asset opportunities. We continue to target a mid-teens risk-adjusted levered IRR on our assets. We have been able to achieve this high yield in the solar and battery space by carefully selecting assets that are with repeat or new customers that value our flexible financing approach, vertical integration, and technical expertise, which means we are not always competing solely on price. Or because we are developing larger, more technically complex assets, such as RNG, where Ameresco’s 20+ years in the market give us a significant advantage in winning and executing on the opportunities. We are experiencing a meaningful increase in asset development opportunities, including some assets that may not meet our risk-adjusted return targets, or meaningfully contribute to our net income. That being said, they are still high-quality assets, and we can therefore generate value for Ameresco by developing and selling them to third parties with lower yield targets. In this case, we recycle capital and earn a profit through an EPC contract where the assets convert to projects upon a sale. We will also look to extract additional value by bundling these converted projects with an O&M contract. Even with maintaining our historic mid-teens IRR hurdle rates, we believe there are ample opportunities to continue to grow our owned assets on average by approximately 20% per year, a growth target we’ve discussed before, while selectively monetizing our origination efforts in other ways. This strategy isn’t new to Ameresco, but in the current environment, it may become more prominent. In the end, we believe that our flexible corporate model with both Project and Asset business lines allows us to continue to benefit from the rapid growth of renewables by developing assets which continue to hit our mid-teens IRR target mentioned earlier or developing and selling as a profitable project. Moving back to our operating assets, these assets are funded by fixed or hedged debt, therefore rising interest rates have little to no meaningful impact on this part of our business. Thus, even in an increasing interest rate environment, the flexibility of Ameresco’s business model and our opportunistic approach to the asset business should allow us to continue to benefit from the tremendous demand for renewable energy solutions. We are pleased to reaffirm our 2023 guidance, which anticipates adjusted EBITDA growth of 5% at the midpoint, noteworthy considering the difficult year-on-year comparisons associated with the wind down and completion of the large SCE projects. We have also provided a more detailed mix of our expected Q3 and Q4 results in the press release. We continue to expect to place between 80 and 100 megawatts of energy assets in service in 2023, including two RNG plants. A third plant we originally anticipated to be placed in service in 2023 is expected to be at mechanical completion by the end of the year, and fully commissioned in Q1 2024. Several additional RNG assets are in the late stages of development and construction, and we continue to expect that four or five of these will come online during 2024. Now I’d like to turn the call back over to George for closing comments.

Thank you, Doran. As we have discussed in detail during this call, we have continued to extend our long-term line of sight to significant growth, ending the second quarter with over $6.7 billion in revenue visibility and 545 megawatts of assets in development and construction. Our first half performance, together with our backlog and business development pipeline, supports our confidence in our long-term growth targets. This is an exciting time to be a leading clean tech solution provider and I know we have the technical talent and business acumen to support the energy transition and drive meaningful change. In closing, I would like to once again thank our employees, customers, and stockholders for their continued support. Operator, we would like to open the call to questions.

Thank you. Our first question comes from Noah Kaye with Oppenheimer. Your line is open.

Hi. Thank you for taking the questions. And thank you, by the way, for the granular outlook for the back half. I guess this is a couple of quarters in a row now of faster-than-expected revenue conversion and so my first question, I'm just trying to kind of reconcile that outlook and the full year. I mean just taking the midpoint of Q3 and Q4, you'd be at the high end of the full year revenue range. I mean you're kind of implicitly raising the low end of the full year revenue guidance. Am I missing something or is there something that I'm not doing correctly? Or is that correct?

Yes. Hey Noah, it's Mark Chiplock, how is it going? I don't think we want to change our overall guidance. We are seeing some better performance on the topline due to acceleration, but we're also experiencing a shift in some of our awards and the timing of contract signings. It's not a perfect science as we put these ranges together, but we still expect to be within the original ranges. Could we perform better? Sure. We're trying to use the best visibility available, especially regarding project work to inform Q3 and Q4. The good news for the second half of the year is that over 90% of the project revenue is derived from awarded and contracted work. Therefore, we have good visibility. As we've mentioned before, timing is often the variable that can affect results from quarter to quarter.

Yes. And I want to ask about project margins in the quarter. It's a little light. Was that just mix? And the corollary is what drives the improved operating leverage in the back half and a better operating leverage in the back half from a seasonality perspective, I'm just talking about a better than typical improvement in operating leverage, that's here in the guidance.

Yes, I mean if you look at those net income and EBITDA margins, I think the challenge is, again, when you're looking at last year, you've got certainly higher revenue, higher net income from the SCE projects. We do the line of business reporting, remember, we're doing an allocation of corporate expenses based on revenue share. And so I think our project margins year-over-year, they were going to decline because of the allocation of those corporate expenses, essentially a large fixed allocation of costs on significantly lower revenue year-over-year. We did see some cost overruns on certain projects in the quarter that had a little bit of an impact on our gross margins, but we would expect to see margins continue to expand in the second half of the year, certainly as SCE cycles out, and we would expect to continue to see the trend of the expanding gross margins throughout the second half of the year.

Fantastic. If I could just sneak one more in. That RFS decision, obviously, very positive for RNG assets and I was just curious to what extent the higher RINs we're seeing now factored into the reiteration of the guidance. And there was no impact maybe help us understand would that just be due to hedging or really to kind of conservatism in your assumptions for the back half?

Yes, we are certainly happy to see the RIN prices increasing, and it does have some impact on our numbers for the second half, but I wouldn't describe it as significant or meaningful. We have always aimed to base our assumptions on where the market is currently and where we expect it to go. While this increase offers some advantage, it does not lead us to change the guidance we previously provided.

And you got to remember, that 55% actually, as of today, we are 55% hedged instead of the end of the quarter, actually. So, it's 20, 45% of the future production that can benefit a little bit from the higher prices. But the ones we use in the forecast, it's pretty much a little bit where the market is right now.

Very helpful. Thank you.

Thank you. We have a question from Stephen Gengaro with Stifel. Your line is open.

Thanks. Good afternoon everybody.

Good afternoon Steve.

So, two for me. The first, when you think about the projects and the bidding activity and the orders and backlog build, any insights into kind of what that pricing environment is like currently? And how we should think about the impact that has on project margins over time?

I mean the activity is very, very good and that's why you see our awards and the backlog is developing very, very nicely, which we like to see, and that's why I extended a little bit on my discussion. The projects are indeed to get a little bit larger. The margins, if it's an EPC design-build otherwise project, like we said before, they are lower than the performance contracts margins. But on the other hand, they contribute more in profitability because we usually leverage in the company. The other thing that has happened a little bit, and that's why the OpEx is a little bit higher. Since after COVID, we wanted to push the organization, and spend a little bit more money in development in order to develop a good pipeline and capture a good market share. And I'm glad to say that the proposal activity and the win rate is very, very good. So, I would say the environment is good and the last couple of quarters that we had.

Great. Thanks. And just as a follow-up to that, anything on the order flow flowing out of Europe yet? And just what's the quick update on how your traction is in Europe?

This is very encouraging. The activity is going well, and we're having difficulty keeping up with it. This is why we're investing a bit more money. When a company grows, it can be challenging to manage our operating expenses. However, the potential opportunities are substantial. We're very pleased with the results from our Italian group that we acquired, as they are performing excellently. In Greece, we've completed a few projects, and the chances of us having a presence there look promising. In the UK, there are several upcoming projects that should greatly benefit us. Overall, the activity in that market is impressive, and I've been communicating with Doran about it. I'm pleasantly surprised by how active that market is.

Yes, I think I would only add that it's coming from all technologies. And a lot of the project business, of course, we're getting utility-scale EPC opportunities, and like George said, Greece is looking very strong for us. In the UK, we've come through with some really good wins in advanced technologies that is allowing that business to move beyond traditional energy efficiency into the advanced technologies, just like we've done here in the United States.

Great. Thank you for the color gentlemen.

Yes.

Thank you. And our next question comes from Joseph Osha from Guggenheim. Your line is open.

Hi there everybody.

Hi.

I have a question about the storage business, which is experiencing significant growth. Can you share some insights on how you've been managing cell procurement? I understand there were valuable lessons learned from SCE, so I'd like to know how those lessons are shaping your procurement process for the new storage projects. I also have another question.

Yes, I'll start with the first one, Joe. We are continuing to expand our relationships with battery suppliers as the market remains fragmented. This means we must be very selective about our integration and software partners, as it involves more than just the cells. While we conducted a thorough competitive process for the SCE project, we ultimately chose a partner that could deliver on time due to tight deadlines. Moving forward, we are becoming more selective and are running competitive processes for all the projects that George mentioned. We're making sure our suppliers meet our expectations in terms of pricing, quality, degradation, schedules, and delivery timelines. I'm excited about the market as more companies enter, although the number of battery cell manufacturers remains limited. These manufacturers are starting to cater to a wider range of companies, and their ability to execute, deliver on time, and manage projects comprehensively is crucial, as it's not just about the batteries.

Certainly. Okay. And then I'm actually going to switch my follow-up then in response to that. So, is it fair to say then that as you addition companies like STEM or FlexGen or whoever that then it's their job to go find cells or are you still involved in that procurement process? I just want to understand how exactly this is working now?

Yes, we're directly involved, I'd be quite honest. I mean some of them like to work with certain manufacturers more than others, but some of them are actually a little bit more flexible like we are and want to get the best solution for the customers. So we remain heavily involved in that process.

Okay. Thank you. I'll go back in queue.

Thanks Joe.

Thank you. Our next question is from George Gianarikas from Canaccord Genuity. Your line is open.

Hey everyone. Good afternoon and thanks for taking my question. I'd like to ask about your focus on free cash flow generation. I know you've only guided to 2024 EBITDA, but there was a lot of discussion around potentially selling assets or concentrating a little bit more on projects. I'm curious as to whether that becomes more of a focus as we move into 2025 and 2026 and free cash flow?

So, George, I'll just take a stab at that. My gut reaction was as you look forward past 2024 into 2025 is that there is not a prescriptive strategic move on our part to move toward project revenue and cash flow. We maintain this flexibility when we approach customers. So, if the customers happen to be looking for more project business, that's the direction our company will go for the customer. If they're looking for more asset business, that's the direction we will go. As we said, with the Asset business, we've got a little bit of a regulator here where we can actually monetize the development pipeline and convert those into projects as needed based whether it's on return criteria or the risk adjustments that are part of the determination of the return of criteria, but we're not making a strategic move toward or away from the project business.

No, we'll continue to emphasize the project business as much as possible. And I don't know if you saw in terms of the international energy agency in the paper today, they announced that the least cost alternative to net zero is energy efficiency. Number one, clean fuel is energy free. So, we'll continue that. But we try to take advantage of the full spectrum of the clean tech sector and I think that's helping us a lot. And then as far as the asset is concerned, it's selling some of the assets, we are very pleased that we are signing much more than we can chew really. And that's why we will take some that maybe not have the rate of return that we would like to, but somebody else likes it. So, we say, great, we will flip them to them. But no, we're not getting away from the business, actually, we will focus as much as we possibly can.

Thanks. And as a follow-up, I'd like to ask about this RNG asset that's moved to being fully commissioned in the first quarter of 2024. You reiterated your four or five that will come online in 2024. Are those in addition to this other one that's been pushed into the first quarter?

Go ahead. Yes.

Listen, what happened here? Initially, we were supposed to deliver some equipment in April, then it shifted to June, and then late July, but we finally delivered it. That's the reason some of the projects were delayed, either because of the weather or delivery schedule. We identified this as the main bottleneck. Additionally, we encountered issues with transformers and electrical switchgear. However, regarding the RNG business, we've been operating in it for about 20 years, and I believe we have the best team in the industry. We may miss a quarter or two occasionally, but overall, we will deliver high-quality projects on time.

Thank you.

Thank you. We have a question from William Grippin from UBS. Your line is open.

Great. Thank you very much and good evening. My first question here was just wanted to ask how you're thinking about your approach to RIN monetization now just given the final EPA RVO and we have three years of visibility and obviously, pricing has been a lot better. So, how are you thinking about hedging versus open market?

I think the strategy that we've been using in the past that hedging 50% of the output, then the rest of it in the open market. Now, that we have a three-year visibility, we feel even much better with this strategy. But we're always very optimistic about the RNG market from the beginning because not only the RINs that they have a great value. But in the long-term, I think the voluntary market for renewable natural gas, we have a great place. And we have seen, by the way, the three to five-year contracts that we signed on 50% of the output, the prices are coming up. So, I wouldn't be surprised over the next as we've developed more and more of these RNG facilities that we will not have as much at risk, I would say, down the road. You would see us executing longer-term contracts. As long as the economics dictate and every year, by the way, we're doing an analysis for the Board. And we determined very good analysis what will the cost will be for us if we were to hedge more than what we have done in the past. But look, it's a very, very important part of our business line, and we pay a lot of attention to it. We think we develop great assets, we want to maximize the value of those assets.

Sorry, if you want to get specific about our approach between now and the end of the year, we are mindful of the dynamics of hedging versus waiting and closely monitoring the market. We anticipated a surge in sales right after the RVO was released, so we did not immediately liquidate all our holdings. We will keep monitoring production estimates and assess market conditions. Our team has connections throughout the market, and we will continue to hedge dynamically and opportunistically for the remainder of this year concerning 2023 production. Although you may be new to covering us, we typically do not exceed 90% hedging for the current year to allow for some variability in production.

Got it. And just my follow-up here. Just on the implied fourth quarter earnings ramp in the guidance, that's outside of the range of kind of seasonality that we've seen over the last several years, could you just speak to the drivers of that? Is it really just projects coming online in the fourth quarter that are contributing?

I believe a significant portion of the revenue is influenced by seasonality, but there is also a slight change in the timing of awarded projects. We have good visibility of revenue coming from our project backlog between when projects are awarded and when they are contracted. Some of the timing we're experiencing may delay certain projects from Q3 to Q4, coinciding with when we expect awards to turn into contracts. It's important to note that we are investing in these projects during the award phase by capitalizing on development costs. Once a project transitions to a contract, we instantly recognize revenue as we move these costs into the construction phase, which is included in our budget based on a percentage of completion. Therefore, Q4 appears to be busier than usual, partly due to the shift in converting some awards to contracts, along with the visibility we have from our contracted backlog. While we still need to carry out these plans, we feel optimistic based on that visibility.

Good afternoon and thank you for your questions. I’d like to follow up on the last question. Mark, it seemed you indicated that the awarded conversion is taking longer than anticipated. Could you explain what is causing that delay? I also have another question to ask.

Yes, I mean it's a good question because, quite honestly, I think the trend that we're seeing is our awards are actually converting a bit faster, particularly on the design build and so generally, those take anywhere from 12 to 24 months to convert. We're actually seeing it a bit on the lower side. It's just some larger projects that have taken a little bit longer that we see shifting out. It could vary, will be that, that pulls back in. But I think in terms of just providing the shaping, we're trying to maintain a little bit of a conservative view in terms of when those will convert, but still give us confidence in being able to achieve the full-year numbers.

Thank you for that. My follow-up question is regarding the RNG projects. Can you provide an update on the four or five RNG projects expected to start in 2024? How is construction progressing compared to expectations? What are the chances of delays for those projects? Lastly, considering the RVO ruling, could you share some sensitivity analysis for 2024 in relation to the increased D3 RIN pricing?

We'll begin with the construction and development progress, which we feel is going well for the four to five projects. As mentioned previously, these are in relatively advanced stages of development or already underway. We are optimistic about the timelines for a couple of them, and the others are progressing at the expected pace. Overall, we are pleased with this aspect. Regarding the RINs and the 2024 market, we are not currently selling our 2024 RINs. We are monitoring the market conditions against our production expectations. This situation is part of our strategy to stay informed about supply dynamics and what we anticipate will come to fruition in the market. We will adjust our approach based on those insights. However, we are not ready to provide specific sensitivities related to RIN prices for 2024, especially considering our diverse business operations, with RNG being just one component.

Okay, that’s it from me. Thank you.

Thanks Kashy.

Thank you. Our next question comes from Julien Dumoulin-Smith with Bank of America. Your line is open.

Good afternoon, team. Thank you for your time. I wanted to follow up on a few points. Regarding 2023, I'm noticing some things from your end. Can we discuss the SCE and clarify the full extent of its impact? The Edison 10-Q included comments about shifting timelines, and I want to ensure we have a clear understanding of the financial implications. Additionally, regarding the overall situation for 2023, it seems that based on the dynamics in Q3 and Q4, you're generally comfortable with the outlook for 2023. The reason for not raising the 2023 estimates appears to be related to timing issues that could push some items into Q1. Is that an accurate understanding?

I'll begin with SoCal and then pass it over to Mark. Regarding SoCal, since we are over 95% complete with that project, we are not worried about the financial impact of the changes in the substantial completion dates for 2023. As expected, we are focused on completing the projects, so we do not have any updates on the negotiations of outstanding items with SoCal. The revenue figures are very close, and we are currently in the final commissioning stage of two out of the three projects, as we mentioned earlier. Mark, I'll let you take it from here.

Yes, I believe we have a strong visibility into the second half of the year regarding revenue, as a significant portion comes from our awarded and contracted project backlog. There is still a part that we need to book and burn, but it is relatively small. The projects business can be significantly influenced by timing, and we expect some of the awards to be signed in Q4 due to timing shifts. However, based on the visibility we have, we remain confident in our original estimates for the year.

Got it. To clarify about 2024, considering the increase in RINs prices and the open position you mentioned, which is around 45%, why aren't you being more positive about 2024? I understand there are timing issues involved, but can you provide more details on the factors influencing this outlook? Or are you just being cautious in your approach?

Julien, I believe that is the case. We will provide our full year 2024 guidance when we release Q4 at the beginning of the year. At that time, we will be glad to discuss it further.

Got it. But there's no other offsetting or mitigating factor or starting point assumption on the $300 million that one should be aware of, right? I mean obviously, we're all looking at this higher price. I just want to make sure that we're not missing something about this. It seems like it's $15 million in EBITDA on a dollar move here.

Yes. Julien, I appreciate your math. We're really just not going to comment on the $300 million. We've had that out there for a long time. I think we're going to leave it and address it at the beginning of next year after we report the full year.

All right. Fair enough. All right. Thank you guys very much. I appreciate it.

Yes. Thanks. Most of my questions have been answered at this point. Just stepping back on a bigger picture thing here. I mean I think we've all seen a considerable increase in the dollar value of projects that you're bidding on and winning these days. Just wondering if you could help us understand, is that a reflection more of larger projects being proposed or the reflection of Ameresco purposely targeting larger projects and maybe you wouldn't have been on in the past?

I think it's a bit of both, but the average size of the projects we're currently proposing has increased by about 50%. This increase is necessary because the projects are becoming more complex and now include not only energy efficiency but also solar, battery storage, microgrids, and more, resulting in larger overall projects. Additionally, the projects in the Southern California area have been beneficial for us. We've had three significant wins in battery storage, which are indeed substantial projects.

Okay. Thanks George. And can I just as a follow-up, different subject, but can I get your opinion on the state of the M&A environment, your pipeline, and your appetite at this point in mid-2023 here?

Our appetite continues to be good. We continue to look at them. And we're looking right now in Europe, of course, a little bit more aggressively, but in the United States as well. But they have to be accretive, and we are disciplined. And on the other hand, in order to grow your footprint, especially as you go overseas, it's much easier to get 30, 50, or 75 or 100 people hired in one at a time. So, as we paid for it, it's worth doing it.

Thank you. And our next question comes from Pavel Molchanov with Raymond James. Your line is open.

Thanks for taking the question. Let me ask about CapEx. If we annualize your CapEx from the first half, the full year figure will be well over $500 million. Is that the way we should be thinking about the math? Or was the CapEx kind of overly front-end loaded?

Yes, I believe it’s accurate to say that the spending was likely quite front-loaded, especially with the RNG plants that we have scheduled for this year, including one that will be mechanically finished by the end of the year. A significant amount of capital expenditure has already been invested in those projects. Additionally, we have secured a considerable amount of non-recourse financing, as mentioned in our earlier remarks. Therefore, I don’t think it’s a straightforward comparison between the two halves of the year.

No, because of the timing of the implementation, especially of these larger projects, RNG and so on, it just changed than what it was before because in order to get the equipment on time, if you have to put the deposits down much earlier than you would otherwise have to do transformers and all kinds of equipment that you have to make the down payments. So, that's why they are skewed a little bit in the first half of the year.

Okay. Let me turn to Europe. It was just over a year ago that you guys announced the project in Bristol, which, I guess, in just nominal dollar terms is the largest project in Ameresco's history. Can we just get an update on what year one of that has been like?

We are working on the projects. I will say that their approval is a bit slower than we had expected, but you will see significant progress next year, especially in the fourth quarter of this year and into next year. We have identified at least $400 million worth of projects for which we have secured financing. However, dealing with the government takes time. On the positive side, they are very pleased with our work and have introduced us to several other cities in the UK that may be interested in similar projects.

All right. Thanks very much.

Thank you. Our next question comes from Christopher Souther from B. Riley. Your line is open.

Hey guys. I had a question around the United Power and Middle River Power wins, were those reflected in project-win awards for the quarter? I wasn't sure if the press release came out in July, and then I just wanted to clarify that those were projects, not assets-in-development wins, right?

Sorry, Chris, you mentioned United Power and Middle River? Yes. So, United Power is actually an asset, yes. So, that's reflected in the battery piece, you look in the supplemental slides. And then the Middle River is a project.

Got it. Okay.

So, that would be in the project backlog.

Okay, that makes sense. When considering your approach, it seems like you will be focusing on larger size, lower IRR candidates, mainly in the storage sector. I'm curious about the stage of development at which you plan to sell these projects. How much capital do you think you'll require for what’s in the backlog or development pipeline for the projects you anticipate selling while in construction? Additionally, how many of those projects in the development pipeline are larger initiatives that do not specifically target IRR?

Yes. So, I don't know that there's a CapEx number that I would put in there for that kind of category. Again, we're going to be relatively opportunistic about this to ensure that we get the right results and what we think has the most value for Ameresco. I would say optimal point, probably preconstruction, however, as we've also varied from that theme as well in terms of when we would sell that.

Regarding Middle River Power, the customer is purchasing the batteries, and our role is focused on the design and construction of that project. I expect that construction will likely commence in the next few months.

Okay, very helpful. Congrats guys.

Yes. And the United Power is pretty advanced development.

Thank you. We have a question from Eric Stine with Craig-Hallum. Your line is open.

Hi everyone. I’d like to ask about energy storage. Now that it seems you’ll be acquiring some of these in the future, could you discuss your decision-making process or describe what you would consider an ideal project? Given that these assets generate different value streams compared to your other projects, it would be helpful to understand how you see multiple value streams in play, whether through selling power or gas. Any insights you could provide would be appreciated.

We'll keep it brief. We prefer capacity contracts because they provide a more reliable revenue stream for us. Fixed capacity contracts are particularly appealing. If we can ensure that the numbers add up by considering capital expenditures and the speed of implementing transportation, that's very beneficial for us. We're also obtaining long-term service agreements from our battery manufacturers, which assist us in managing degradation and enhancements. Having a fixed long-term capacity contract gives us reassurance. This is what we consider ideal.

And the return is strong.

Obviously, meeting our return hurdles.

Right. And the return. And so it's not necessarily size. I mean if it checks all the boxes and you've got that the capacity contract, you wouldn't shy away from something just because it's a particular size.

That's correct. In our asset and development metric, particularly with solar and storage, or storage on its own, you will observe a range of project sizes. Some of the battery storage systems we are acquiring for our behind-the-meter solar and storage projects are one megawatt or smaller. Meanwhile, as seen with United Power, some projects are significantly larger. We are comfortable with this range; it is more about the metrics.

Got it. Thank you.

Thank you. We have a follow-up question from Joseph Osha from Guggenheim. Your line is open.

Hi, thanks. I have a follow-up question. We discussed eRINs and what may happen regarding them. Depending on the outcomes, this could lead to a new RIN market. Do you think there will be sufficient market activity to hedge it initially, or will it primarily be a situation where you monetize them as they become available? I'm curious about how you see that market developing if we achieve our goals with the EPA.

Joe, I think there's a lot of wood to chop there still for the EPA, but our understanding is that those RINs will be RINs. They will be the D3 RINs, and they will be needing to introduce an additional amount of RVO associated with that piece of it. But I don't know necessarily at this stage that they're going to create a separate market for the eRINs versus the D3 RINs. We don't know, we don't. But yes, I don't think we have enough clarity at this point, yes.

The only thing that we know that they definitely will do it. They are very serious about it. And as they go more and more, they want to electrify just about everything. And we are in a great, great situation because we have many assets at their landfill gas to electricity. So, it will be a good tailwind for us.

And if I’m sorry, please continue.

And they say it will be done sooner than what people think it will be done because some people may say it will be late next year or so on, we anticipate it's going to be done much sooner than that.

Okay. Thank you.

Thank you. This does conclude today's conference call. Thank you for participating. You may now disconnect.