Ameresco - Q1 2023
May 1, 2023
Transcript
Operator (participant)
Good day, and thank you for standing by. Welcome to the First Quarter 2023 Ameresco, Inc. Earnings Conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you will need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw the question, simply press star one one again. Be advised that today's conference is being recorded. I would now like to hand the conference over to Leila Dillon, Senior Vice President of Marketing. The floor is yours.
Leila Dillon (SVP of Marketing)
Thank you, Carmen. 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 Josh Baribeau, Senior Vice President, Finance, in for Mark Chiplock, who is traveling today. 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 one of our supplemental financial information. I will now turn the call over to George. George?
George Sakellaris (Chairman, President, and CEO)
Thank you, Leila. Good afternoon, everyone. First quarter results represented a solid start for the year. We were pleased to make significant progress in key areas that support our 2023 guidance as well as our long-term financial targets. The Ameresco team once again executed well, delivering first quarter revenues higher than our expectations and adjusted EBITDA at the higher end of our guidance range. We also continued to lay the foundation for our ongoing success. As such, we were particularly pleased by the addition of new project awards of $472 million in this the first quarter, which increased our total project backlog by 13% sequentially.
We are executing on our contracted backlog and expect to convert a good portion of our awarded backlog to contracts throughout the year, giving us excellent visibility into our expected project revenue ramp in the second half of this year. We are seeing very strong customer interest across all our business lines. In fact, in this year's first quarter, the total value in the proposal we submitted was 50% higher compared with the same period last year. This reflects greater demand as well as a higher level of project complexity and scope. This increased activity is a function of our great value proposition, which addresses customer requirements for resiliency, cost savings, and carbon reduction. We are excited by the recently enacted Inflation Reduction Act, which provides broad and meaningful financial incentives and benefits for a range of clean energy technologies.
Ameresco's technology-neutral business model is perfectly suited to assist customers in finding the best solutions to fit their energy needs and optimize the IRA's benefits. While we are seeing a slight uptick in awards directly attributable to IRA benefits in Q1, we expect to see a greater impact in the coming quarters in the years to come. The Energy Asset Team again made excellent progress in the quarter, bringing 34 MWs online. The recurring revenue model of our energy asset and O&M businesses helps to mitigate some of the timing issues inherent in our project business. Included in the assets we brought online this quarter was the 27 MW solar facility in DePue, Illinois. DePue is our largest operating solar asset to date and is representative of the larger size solar, battery, and RNG assets that we are pursuing.
This year, we expect to add a total of 80 to 100 MW of energy assets into operation. These asset additions, along with continued strong performance in our O&M and other businesses, supports our confidence in our full year 2023 guidance. Doran will provide more detail on our visibility during the financial discussion. As we noted last quarter, Ameresco continues to expand into the European market, building on our successful operations in the United Kingdom and Ireland. We expect our expansion to take several forms, including organic growth, acquisitions, joint ventures, and partnerships. This quarter, we entered the Italian market with our acquisition of Milan-based Enerqos. With a strong management team and market position, Enerqos has been offering energy efficiency and renewable energy solutions to the commercial and industrial markets for more than 15 years.
We also recently announced the expansion of our partnership with the SUNEL Group in Athens-based international developer and EPC contractor for renewable energy projects. Ameresco and SUNEL have established Ameresco SUNEL Energy, which is currently proposing a project pipeline of 1.5 GW with an estimated $500 million in potential contract value in the United Kingdom, Greece, Italy, Spain, and Romania. The joint venture has already been selected as a contractor for a 100-MW solar photovoltaic project in Greece, currently in construction, as well as various other smaller PV projects across commercial and industrial markets. Given the increasing importance of the European market to our future growth strategy and recognizing our large and growing European shareholder base, we are holding our Investor Day in London on May 11th.
The event will primarily focus on our European strategy and the market and policy dynamics that we believe make this a very compelling opportunity for us. Ameresco's European expansion plan will be selective and measured, maximizing potential shareholder value while minimizing execution risk. Given the importance of acquisitions and partners to this plan, we will hold a panel discussion with executives from both Enerqos and SUNEL, as well as members of our finance team. We are also pleased to be hosting Bristol City Councillor Kye Dudd, who will be discussing our transformational Bristol City project from the customer's perspective. We believe our European expansion will be an increasingly important contributor to our revenue and EBITDA growth in the coming years. Finally, we are always honored when our company and the solutions we provide are recognized in the industry.
We recently were awarded the 2023 North American Energy Services Company of the Year by the market research firm Frost & Sullivan. Our expertise in LED street lighting projects was also once again recognized as our Chicago Smart Lighting Program was awarded the Inspiring Efficiency Impact Award by the Midwest Energy Efficiency Alliance. I will now turn the call over to Doran to comment on our financial performance and outlook. Doran?
Doran Hole (EVP and CFO)
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 first quarter revenue was $271 million, about $40 million above our guidance, as we experienced faster execution on certain projects as well as some early contract conversions. Energy asset revenue grew 6%, with the increased number of operating assets and greater production from existing solar assets more than offsetting the weaker end prices in the first quarter. Our O&M business delivered another solid quarter with 10% growth as we continued to win O&M contracts on our completed projects. Our other line of business had another strong quarter of double-digit growth, up 13%, driven by increased demand for our utility, SaaS, and consulting businesses.
Gross margin increased to 18.3% as the lower-margin SoCal Ed contract declined as a percentage of our total revenue. We generated adjusted EBITDA of $27 million in the quarter at the higher end of our guidance. This quarter, our working capital showed significant sequential improvement. We reduced our receivables and unbilled revenue during the quarter through payments from our SCE projects. Company-generated cash flow from operations of $56.7 million and adjusted cash flow from operations of approximately $100 million, ending the quarter with approximately $176 million of unrestricted cash. We anticipate continued improvements in working capital during the coming quarters as the final SCE payments are invoiced and collected.
Speaking of SCE, as disclosed in the press release, during Q1, we agreed on the reimbursement of additional costs incurred by Ameresco related to SCE's request to move the project completions into 2023. As part of this agreement, SCE made a $125 million advance payment to us on future milestones, which is reflected in the improved working capital I just mentioned. Total project backlog was a healthy $3.0 billion, a 13% sequential increase as we added $472 million in new awards during the quarter, a Q1 record. Our energy asset visibility is approximately $2.3 billion. This metric includes both contracted energy asset revenue as well as uncontracted RNG revenues that we expect to generate over the life of these assets.
To reiterate from the last quarter, this is only from our operating assets. We have a line of sight to even more recurring revenue potential from our assets in development pipeline. In calculating the uncontracted part of this metric, we have used conservative assumptions for asset life and merchant market pricing for rents as noted in our release. Our energy asset visibility, together with our project and O&M backlog, gives Ameresco visibility on over $6.5 billion in future revenue. We are pleased to be reiterating our 2023 guidance, which anticipates adjusted EBITDA growth of 5% at the midpoint, which is noteworthy considering the difficult year-on-year comparisons associated with the wind down and completion of the large SCE projects.
I'd now like to give some color around how we're looking at the 2023 Q1-Q4 ramp with a focus on the pattern of revenue recognition. On the project side, we ended Q1 with a 12-month contracted backlog of $639 million, much of which we expect to be recognized as revenue throughout this year. In addition, we typically convert between 10%-15% of our awarded project backlog into revenue in any given year. Furthermore, approximately 5%-10% of our total revenue in a typical year comes from aged proposals, which get awarded, contracted, and converted into revenue in that same year. Our operating assets have a stable base of recurring revenue subject to weather-related seasonality on the solar side.
With the commissioning of 34 MWs of the new Q1 assets contributing for almost the full year, plus 22 MWs of RNG and another 24-44 MWs of solar and storage contributing partially later this year, we expect very healthy growth from our energy assets lines of business. Our O&M and other lines of business tend to be more linear, so the Q1 2023 run rate is a good estimate for the remainder of the year. When you add those items to our already reported Q1 results, we have a clear path to our guidance levels. Recognizing that this is a high-level overview of our near-term visibility, we do plan to elaborate on this during our upcoming Investor Day. Turning to Q2 guidance.
Taking into account Q1 actual performance and considering the ramp described above, we expect second quarter revenue to be in the range of $280 million-$300 million, adjusted EBITDA of $30 million-$40 million, and non-GAAP EPS of $0.10-$0.20. Now I'd like to turn the call back over to George for closing comments.
George Sakellaris (Chairman, President, and CEO)
Thank you, Doran. As we have discussed in detail during this call, we have continued to grow our long-term line of sight with now over $6.5 billion in revenue visibility and over 400 MWs of assets in development and construction. We also maintain an excellent line of sight to both our 2023 guidance and 2024 target of $300 million in adjusted EBITDA. There is no better time to be in our business given the tremendous opportunities both in the U.S. and internationally as governments and institutions around the world invest in solutions addressing carbon and cost reduction, grid reliability, and volatile energy prices. We look forward to seeing investors in London at upcoming conferences and events. 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 floor to questions.
Operator (participant)
Thank you. As a reminder, to ask a question, simply press star one one on your telephone and wait for your name to be announced. To withdraw the question, simply press star one one again. In the interest of time and as a courtesy to other analysts, please keep your questions to one and one follow-up. Please stand by for our first question. It comes from the line of Noah Kaye with Oppenheimer and Company. Please proceed.
Noah Kaye (Managing Director and Senior Research Analyst)
Good afternoon. Thanks for taking the questions.
George Sakellaris (Chairman, President, and CEO)
Noah. First, hi, Noah.
Noah Kaye (Managing Director and Senior Research Analyst)
Hi, how are you? First of all, you know, nice to see the milestone payment acceleration on SoCal Edison contract. I wanted to ask about other EPCM bid activity. I know you had a press release out around some of that activity not so long ago. I don't know if that's included in your comment, George, about the 50% higher dollar value on bid proposal yield to date, or if that was separate.
George Sakellaris (Chairman, President, and CEO)
No.
Noah Kaye (Managing Director and Senior Research Analyst)
You were talking about the traditional project business, so maybe you can clarify that.
George Sakellaris (Chairman, President, and CEO)
Yes, no, that was included in the other 50% increase in the activity level that we have seen so far. What I might add, you know, the business is picking up, and we wanted to make sure we point that out.
Doran Hole (EVP and CFO)
Yeah. When you're talking about the press release for SUNEL, though, Noah?
George Sakellaris (Chairman, President, and CEO)
No, that's. Yeah.
Doran Hole (EVP and CFO)
That, that's not, that's not in that 50%.
George Sakellaris (Chairman, President, and CEO)
No.
Doran Hole (EVP and CFO)
That's upcoming bidding activity that we strategically worked with them to decide we're going after with an aggregate dollar and MW amount there for the market to see.
Noah Kaye (Managing Director and Senior Research Analyst)
Okay, excellent. The bid activity that you talked about is apart from that. Can you maybe characterize the $472 million you received in awards and some of what you're bidding on, just in terms of mix or key trends? I think investors are gonna be interested to get a flavor of what post-IRA has maybe more pull or more focus. Would just love any comments you might have around mix.
George Sakellaris (Chairman, President, and CEO)
Yeah. On the 472, you know, it's across the board, quite a few of the Energy Savings Performance Contracts. I think there is one battery storage project there, a couple small microgrids. On the 50% increase is across the board. The activity level across the board has picked up. I would say more on the battery storage and the microgrids, a very good traction on the C&I and some on the federal as well.
Noah Kaye (Managing Director and Senior Research Analyst)
Yep. You know, just in consideration of time, one more question if I could. You know, maybe it doesn't have any bearing on your near-term RNG development, but did see a report from Reuters today that EPA might split off the rulemaking for e-RINs so that it could, you know, basically wrap up the RVO rulemaking timely for 2023. It's just. Any comment on how you're looking at sort of the regulatory environment now? How you're approaching, you know, project development on landfill gas to electricity versus RNG.
George Sakellaris (Chairman, President, and CEO)
Yeah. On the e-RINs, and I will comment and then Doran can add just a bit more color to it. They're not in our plan, you know, the 2023 or the 2024 for that matter. On the other hand, we wanna point out to everyone that we have over 75 MWs landfill to electricity assets, which down the road, it could be an upside. We have to negotiate the contracts, see how EPA defines e-RINs and so on. The path to it. On the other hand, you know, but if they just, the EPA focuses on the RVO, it might help because we did provide them quite a bit of data showing to them that the analysis that they were using, it wasn't represented, it wasn't current. We are cautiously optimistic that they might increase that number that they've come up with.
Noah Kaye (Managing Director and Senior Research Analyst)
Yep. Thanks very much for the color.
Operator (participant)
Thank you. One moment for our next in queue. It comes from the line of Stephen Gengaro with Stifel. Please proceed.
Stephen Gengaro (Managing Director and Senior Research Analyst)
Thanks. Good afternoon, everybody. Excuse any background noise, still traveling. Two things from me. Where I would start with this first, when you're talking to customers, and you're looking at various projects, how has inflation impacted the discussions? I mean, it feels like from your order flow and your commentary, things look very strong. Just curious, what you're seeing on that front these days. Have you seen it, slowing down a bit as far as the inflationary impact?
George Sakellaris (Chairman, President, and CEO)
Inflation works both ways, you know. What has helped the value proposition is that the energy prices have gone up as well at a faster pace than materials and so on and so forth. The value proposition is still very good. The activity level, they wanna reduce their costs, so they are more conscientious about the energy costs and the infrastructure upgrades and so on.
Doran Hole (EVP and CFO)
Yeah, I think it's the same theme we've talked about before, Stephen. I don't think we've seen it change in conversations with customers.
Stephen Gengaro (Managing Director and Senior Research Analyst)
Okay. Great. Thank you. The second one for me is when we think about the sort of the roadmap to 2024, I'm sure you're gonna talk a little bit more about this in London, which I'm looking forward to, can you just give us some sense how much of that target would have to be driven by incremental acquisitions from where you're sitting today, and how much is, you know, sort of based on existing operations?
George Sakellaris (Chairman, President, and CEO)
No, Most of it, incremental acquisitions is, we never counted too much, even though at the original plan, we had a couple small acquisitions that, we had in the plan. It's, I would say, not very material at all.
Doran Hole (EVP and CFO)
Yeah, not a material amount, Steve.
Stephen Gengaro (Managing Director and Senior Research Analyst)
Okay, great. Thanks. I'll get back in line.
Operator (participant)
Thank you. One moment for our next question, please. It comes from the line of Tim Mulrooney with William Blair. Please proceed.
Tim Mulrooney (Partner and Group Head of Global Services Sector)
Yeah. Hi, Doran, George. Thanks for taking my question.
George Sakellaris (Chairman, President, and CEO)
How are you?
Tim Mulrooney (Partner and Group Head of Global Services Sector)
On the 23 guide, you know, your guidance I think assumes $60 million-$65 million in EBITDA in the first half of the year, implying that you'll need to generate about $150 million in the back half of the year. That's a significant ramp over a short period of time. Can you just help bridge that a little bit for investors by segment? You were helpful, you know, in your prepared remarks, but how much of that EBITDA ramp, you know, do you expect to come from the project segment versus the energy asset side of the business for the second half of the year?
Josh Baribeau (SVP of Finance)
Tim, I think, I logically moving the question from my discussion about revenue ramp into the EBITDA ramp.
Tim Mulrooney (Partner and Group Head of Global Services Sector)
Yep.
Josh Baribeau (SVP of Finance)
I think we're gonna save that for the Investor Day, where we're planning to give some more color about the ramp.
Tim Mulrooney (Partner and Group Head of Global Services Sector)
Okay. All right. Well, we'll leave it for the Investor Day, George. Thank you.
Josh Baribeau (SVP of Finance)
I mean, I think, yeah, when you look at the, when you look at the breakdown on the revenue side, I think we've talked about, generally speaking, what our margins look like in those segments. I think that you can probably, do a little math to get, to get some clarity on it. I think, we'll, you know, we'll hold that for now.
George Sakellaris (Chairman, President, and CEO)
Yeah. The only thing in my head, though, on the ramp that they anticipated that you see the ramp there, even though it looks a little bit ambitious, we have done it before.
Josh Baribeau (SVP of Finance)
And.
Tim Mulrooney (Partner and Group Head of Global Services Sector)
Yeah. Okay. Thanks, George. Just on, you know, sticking on that energy side, you know, the three RNG plants you expect to be completed this year. Can you just help us out with our models by outlining the expected timetables for, you know, the mechanical completion of these three plants?
George Sakellaris (Chairman, President, and CEO)
Yeah. Well, one of them, actually was already mechanically completed, and we are in the commission stage right now. It just started in the commission stage, so it should be fully operational in the next couple of months. The second one, we anticipate to be mechanically complete early third quarter. On that particular one, we saw a little bit of a delay, slight delay to some delivery of some equipment, so it's about a month or two. It will be in commission as mechanical early and commissioned during the third quarter. The other plant will be in mechanical completion early the fourth quarter, fully commissioned before the end of the year.
On that particular plant, that's in the California plant, that was impacted by the unprecedented weather down there, the floods and so on. We had about three months delay on that particular project. The point we wanna point out here is that Ameresco, we have a very diversified business model. If we lose, let's say, three quarters of production on a particular plant, it's not as impactful as it would be. We have other levers we can pull in the company and project construction and so on, or the solar plants, the ones we put in service, couple of them, they were ahead of schedule. It gives us a little bit more flexibility rather than relying on any one or two individual plants.
Tim Mulrooney (Partner and Group Head of Global Services Sector)
Got it. Thanks. If I could just sneak one more in real quick on the RNG. You know, after the three this year and the four-five you have slated for next year, you know, how many RNG plants do you have in the backlog aside from those?
Josh Baribeau (SVP of Finance)
We have.
George Sakellaris (Chairman, President, and CEO)
We still have 20.
Josh Baribeau (SVP of Finance)
20, yeah.
George Sakellaris (Chairman, President, and CEO)
In total.
Josh Baribeau (SVP of Finance)
Yeah.
George Sakellaris (Chairman, President, and CEO)
Yeah.
Josh Baribeau (SVP of Finance)
Yeah.
George Sakellaris (Chairman, President, and CEO)
Including those.
Josh Baribeau (SVP of Finance)
Yeah.
Tim Mulrooney (Partner and Group Head of Global Services Sector)
Okay. Thank you.
Operator (participant)
Thank you. One moment for our next question, please. It comes from the line of Julien Dumoulin-Smith with Bank of America. Please go ahead.
Julien Dumoulin-Smith (Senior Research Analyst)
Hey, good afternoon, team. Thanks for the time. I appreciate it. In fact, if I can.
Josh Baribeau (SVP of Finance)
Hey, Julien.
Julien Dumoulin-Smith (Senior Research Analyst)
Hey, hey. Afternoon, guys. Listen, if I can, just to follow up on the last question quickly. Look, you know, obviously, you've announced some incremental larger scale renewable opportunities in Europe. You're scaling up Europe nicely. RNG, you know, is what it is on timeline with e-RINs, but how much latitude are you effectively creating here against your 2024 guidance? I mean, Folks have tried to prod you in a couple different ways on this, but just curious if you could talk about how much incremental latitude this is versus solving for the 2024 plan with the incremental European announcements, principally.
Josh Baribeau (SVP of Finance)
Julien, this is Josh. Maybe, I wanna make sure I'm understanding your question. When you say incremental European announcement, did you mean the SUNEL announcement?
Julien Dumoulin-Smith (Senior Research Analyst)
Yeah. Sorry. Indeed. The suggestions that there was more to come.
Josh Baribeau (SVP of Finance)
Yeah. When we gave the 2023 target, it was a reflection of the earnings power of our business for 2024. We are constantly proposing activities, some of which we knew about at the time, some of which we had a feeling would come, and some haven't come yet. At the end of the day, it's not like that number you started from March of 2022 and started adding every press release we had on top of that. A lot of that was either built into the target 'cause we knew we'd be coming out with them, or we had a feeling for where the business development would be focused over those next two and a half years. I think in short, A, it's proposal. They haven't been awarded yet.
We think we have a great shot at a lot of them, but the timing is a little uncertain. B, not fully incremental. A lot of that was kind of built into the plan.
Julien Dumoulin-Smith (Senior Research Analyst)
Got it. Then maybe if I can talk about extending the plan and perhaps as part of the rate case, how do you think about the timeline here, whether e-RINs or just frankly executing against the 20-odd projects you have in flight, you know, giving a longer data target? Obviously, 2024 is around the corner here. What kind of duration can we look to? Can the updated plan include kind of the plurality of projects already in flight here when you think about getting some degree of certainty on your RNG program more holistically?
Doran Hole (EVP and CFO)
I think for this quarter.
Julien Dumoulin-Smith (Senior Research Analyst)
Yeah.
Doran Hole (EVP and CFO)
Certainly, we're focusing on the 2023 ramp, the 2024 guide that we've given before. You know, to the extent we get to a point where we're ready to talk about what things look like beyond that, apart from what we put in our kind of traditional slides about our overall revenue and EBITDA growth over time, then we'll do so. We're not talking about it today.
Julien Dumoulin-Smith (Senior Research Analyst)
Got it. At Analyst Day, though, right?
George Sakellaris (Chairman, President, and CEO)
I didn't get the question.
Doran Hole (EVP and CFO)
We'll let you know.
Julien Dumoulin-Smith (Senior Research Analyst)
All right. Fair enough. Duly noted. We'll stay tuned. Thank you, guys.
George Sakellaris (Chairman, President, and CEO)
Thank you.
Operator (participant)
Thank you. Ladies and gentlemen, as a reminder, we ask that you please keep your questions to one and one follow-up. One moment for our next question. It comes from the line of Eric Stine with Craig-Hallum. Please go ahead.
Eric Stine (Senior Research Analyst)
Everyone, thanks for taking the questions.
George Sakellaris (Chairman, President, and CEO)
Hi, Eric.
Eric Stine (Senior Research Analyst)
Hey, just sort of revisiting the joint venture with SUNEL. You know, just curious on the 1.5 GW of bids that you're participating in, how that breaks down, you know, small, medium, large. I guess I'm trying to get at, I would assume that the, you know, the large ones may move slower and be chunky, and the others might be a little quicker. Just any thoughts on how we might see that play out?
Doran Hole (EVP and CFO)
I'll just speak to this for a second. For example, the one that we're executing on in Greece currently with them, probably around a 12-month implementation for a 100-MW project. I think a lot of what we're seeing and what we're gonna propose with them is in a similar size range, some bigger, some a little bit smaller. They're a little bit more granular. You know, clearly we focus a lot on execution risk there. I think also we're pleased to see those spread out amongst the jurisdictions mentioned in the press release. George, I don't know if you wanna add anything.
George Sakellaris (Chairman, President, and CEO)
Well, it's across the board, and most of them, it's with customers that we know that they are on the other side. Otherwise, those projects we build with people that we have relationships with. They still have to go through the competitive process.
Eric Stine (Senior Research Analyst)
Okay. That's right.
George Sakellaris (Chairman, President, and CEO)
May the best person win.
Eric Stine (Senior Research Analyst)
Got it. Maybe just on the follow-up, and I'll keep it to two. You know, what is the competitive environment like? It sounds like you're being selective as to the bids that you're participating in. Just, you know, curious if there are any differences in the European market versus what you've seen in the U.S. I guess still early days.
Doran Hole (EVP and CFO)
Well, you know, it is. There are some differences, obviously, jurisdictionally speaking. However, SUNEL's got a good track record of executing in there. In addition to that, these are customers that Ameresco is a known quantity. That's what gives us the confidence. I think we're really focusing in on the ones that we feel really good about winning, right? I mean, we're not going to just go out there and just do a shotgun blast to as many as we can see in a bunch of jurisdictions where we haven't operated before. You know, we're really focusing on these areas where we feel high likelihood of success is at hand. You know, the customers over there, though, do tend to be some of the larger asset owner developers there, right?
It's not traditional kind of government customers like we see here in the U.S. It's not like there's no competition, we still have to come in with some strength.
Eric Stine (Senior Research Analyst)
Okay, thanks.
Operator (participant)
Thank you.
Doran Hole (EVP and CFO)
Thank you.
Operator (participant)
One moment for our next question. It comes from the line of George Gianarikas with Canaccord Genuity. Please go ahead.
George Gianarikas (Managing Director and Senior Analyst)
Hey, good afternoon, everyone. Thanks for taking my questions.
Doran Hole (EVP and CFO)
Good afternoon, George.
George Gianarikas (Managing Director and Senior Analyst)
Thanks. Can you just talk about any impacts you've seen from, you know, the financial system stresses that we saw over the last 90 days on your business and any projects?
Doran Hole (EVP and CFO)
Yep. Yeah, sure. On any projects, none. You know, we've seen no kind of direct impact, no direct exposure across any of the banks that have been talked about by name in the, you know, with the FDIC taking control. That's kind of step one, right? You know, lenders are starting to get a little bit more careful, but we have disclosed that we, you know, we've actually increased one of the covenants in our credit facility. We closed a very large construction loan. We've closed multiple sale-leaseback. I think it's, you know, kind of the strength of our history and our profile is continuing to carry us through.
You know, the last thing I would say is that our lenders on the non-recourse side for our projects or the assets that are actually going onto our balance sheet are not just banks. We've got a diversified funding pool. We've got insurance companies in there. We do have banks. We've got, you know, non-bank lenders involved, and so that dilutes the impact of what is facing kind of just the banking industry specifically.
George Gianarikas (Managing Director and Senior Analyst)
Thanks. You alluded to this a little earlier, are you seeing any supply chain impacts, any equipment delays, any permitting issues that you'd referenced over the last six months? Are they continuing or has there been any improvement in, you know, the availability of transformers? Is there any electrical equipment that you've seen in short supply?
Doran Hole (EVP and CFO)
I would say some elements we've seen a little bit of improvement. Other elements are remaining relatively stable as manufacturing capacity keeps trying to keep up with demand. Not gonna go into specific types of equipment necessarily, but, broadly speaking, I think there's been, you know, mild improvement, with some others just remaining kind of exactly where they were before. We're watching it very closely, as you can imagine, and we, you know, we manage those time frames very closely.
Josh Baribeau (SVP of Finance)
Thank you.
Operator (participant)
Thank you. One moment, please, for our next question. It comes from the line of Kashy Harrison with Piper Sandler. Please proceed.
Kashy Harrison (Senior Research Analyst)
Good evening. Good evening, everyone. Thanks for taking the question.
Doran Hole (EVP and CFO)
Kashy. Yeah.
Kashy Harrison (Senior Research Analyst)
You know, last quarter, you know, you highlighted that it was taking a little bit longer for projects to convert from awarded to contract just due to interest rate volatility. In the press release, you indicated that you expect to convert a substantial dollar amount of awarded to contract during 2Q. Can you speak to the drivers of that confidence? Have these projects already converted or, you know, what's driving the confidence that we're gonna see a big change in Q2?
Doran Hole (EVP and CFO)
Yeah, these weren't projects that converted in Q1. I think the ones we talked about at the end of Q4, we had mentioned that it was likely end of Q1, beginning of Q2, sort of early Q2. We're expecting to see those come through as well as, you know, kind of just the ordinary pace of award to contract conversions.
George Sakellaris (Chairman, President, and CEO)
Yeah. Our confidence comes because, you know, we see talking to the customers, which stage of the process are we? How many more approval do we need and so on. A good number of this, good size contracts, they will what I would call advanced stage of execution.
Kashy Harrison (Senior Research Analyst)
That's helpful. Thank you.
George Sakellaris (Chairman, President, and CEO)
Yeah.
Kashy Harrison (Senior Research Analyst)
Just maybe a quick follow-up, just a housekeeping item. It looked like your net assets in development declined to 432 MWs from 470 last quarter. What did you sell some projects or did you cancel some projects? What was the driver of the sequential decline in net assets and development MWs?
Josh Baribeau (SVP of Finance)
Well, Kashy, the biggest change, of course, was we placed 34 MWs into service. I wanna make sure that you're comparing apples to apples because we kind of have a gross number and a net number. Net being taking out our joint venture partner share. The quarter or at the end of Q4, I think we were at 460, and we ended this quarter with 431. We had, you take 460 minus 34, and we added a couple. That's how that math works.
Kashy Harrison (Senior Research Analyst)
Got it. Thank you.
Operator (participant)
Thank you. One moment, please, for our next question. It comes from the line of Joseph Osha with Guggenheim. Please proceed.
Joseph Osha (Managing Director and Senior Research Analyst)
Hello, everybody. Thank you for taking my question. I have two. First, you all had indicated to me recently that you felt like, particularly in your asset portfolio, the solar-plus storage portion of the mix was going way up. I'm wondering if you're continuing to see that. Also, just on the sold projects, are you seeing the storage attach rate go up there as well? Does it kind of compare to the rate for your asset portfolio? Thanks. I have a follow-up.
Doran Hole (EVP and CFO)
Okay, Joe. I might just check on the statistic on the attachment rate of storage to projects that are solar-plus storage. As far as the rest of it, if I'm looking forward through the remainder of the year, I do actually expect to continue to see that mix of solar and storage increase versus the overall. The overall mix for certain. George and I both have been directly involved in a number of things that that are out there and, you know, that we look forward to talking about. I think that we'll see that mix continue to increase. Yeah. That's. You know, as you know, we have very narrow standards for what we'll put on the balance sheet in terms of return hurdles, in terms of risk-adjusted returns, but we're still seeing some really attractive stuff.
Joseph Osha (Managing Director and Senior Research Analyst)
Okay.
Doran Hole (EVP and CFO)
Yeah.
Joseph Osha (Managing Director and Senior Research Analyst)
Sorry, go ahead.
Josh Baribeau (SVP of Finance)
Yeah. I was just gonna give you a quick statistic on the storage. We have about 68 MWs of batteries attached to solar systems and then about 57 MWs of just standalone storage.
Joseph Osha (Managing Director and Senior Research Analyst)
Well, that gets to my second question, right? Obviously, as people are continuing to sort of digest this, you know, the storage-only ITC and whatever adders might come out of it and all this kind of stuff, how do you think about your solar attached versus storage-only mix?
Doran Hole (EVP and CFO)
You know, I don't know that I could put the kind of predictive analytics out there, Joe. Again, we're looking at the opportunities on a, you know, item, you know, investment by investment basis. The development is continuing across the board without question.
George Sakellaris (Chairman, President, and CEO)
Yeah.
Doran Hole (EVP and CFO)
You know, plenty of solar in development, standalone solar, as well as solar plus storage and the storage standalone as well. You know, I mean, it's coming from across the board. Really comes down to what are we going to devote our resources to.
George Sakellaris (Chairman, President, and CEO)
Yeah. The only thing I might add is that the storage portion is growing in relation to the solar. Our, you know, doing that large project in Southern California and getting our reputation out there, it has helped us get good traction on even just battery storage alone projects.
Joseph Osha (Managing Director and Senior Research Analyst)
All right. Hey, can I sneak one more in here? I'm sorry. obviously you flipped a positive cash flow from ops from negative and obviously kind of SCE has been swinging it both ways. I'm curious, given this outcome, I mean, do we feel like we have line of sight towards sustainable positive cash flow from operations, say, you know, towards the end of this year or coming into next year?
Doran Hole (EVP and CFO)
Look, I mean, the short answer is yes, because the adjusted cash flow from operations. You take that before allocating how much we're gonna invest in new assets, which as you know, we do invest our excess cash flows in those new assets. You know, we have a small maintenance CapEx piece. As the SCE projects go on through to their full completion, then what we've been seeing for the last several quarters is going to reverse itself, and we feel quite comfortable about that.
Joseph Osha (Managing Director and Senior Research Analyst)
Okay. Thank you very much.
Doran Hole (EVP and CFO)
Thank you, Joe.
Operator (participant)
Thank you. One moment, please. All right. Our next question comes from Pavel Molchanov with Raymond James. Please go ahead.
George Sakellaris (Chairman, President, and CEO)
Please go ahead.
Pavel Molchanov (Managing Director and Equity Research Analyst)
Thanks for taking the question. Back to the partnership with SUNEL in Europe, when you talk about 1.5 GW, is there a timetable for that? In other words, is it going to be, you know, 50 megs a year or 100 megs a year? What kind of run rate are you anticipating?
George Sakellaris (Chairman, President, and CEO)
I would say about two years and maybe three years at most. Two of them, I know they will, maybe to be shorter period time horizon within the next 18 months or so. Generally, these large institutions, even though they are in the same business, we are in the same business, they take time, evaluate the RFPs, and then go into perfection, which takes one-two years anyway. I would say two-three year horizon.
Pavel Molchanov (Managing Director and Equity Research Analyst)
Yeah.
George Sakellaris (Chairman, President, and CEO)
Some of the smaller ones, that's why I wanted to do my commentary. Some of the smaller ones projects for some industrial and commercial customers that we're doing with that particular partnership, which feel very good, they will be completed so within the next year or so.
Doran Hole (EVP and CFO)
Yeah. Those potentially could be faster, the smaller ones. I mean, you've got a little bit of time for proposal converting to award, you know, and signing contracts. Since you're dealing with more like private and commercial customers and not government customers, that cycle is shorter. We move into construction, and then it's all about.
George Sakellaris (Chairman, President, and CEO)
Yeah.
Doran Hole (EVP and CFO)
Timelines to construct, which, I think takes us to that two-three-year period.
Pavel Molchanov (Managing Director and Equity Research Analyst)
About a month ago, you announced that you will be buying batteries from Redflow in Australia, and I think that's the first time you purchased non-lithium ion batteries. Are you confident that, you know, commercial, institutional end users will be comfortable with, you know, what is, after all, a kind of a novel battery chemistry?
Doran Hole (EVP and CFO)
Short answer is with Redflow specifically, actually, we had a customer. Had analyzed the technology and requested that we do it.
Pavel Molchanov (Managing Director and Equity Research Analyst)
Right.
Doran Hole (EVP and CFO)
They wanted to use it. Interestingly, I will correct one thing that you said. This was not the first non-lithium battery that we'd purchased. This was the second.
Pavel Molchanov (Managing Director and Equity Research Analyst)
Right.
Doran Hole (EVP and CFO)
Manufacturer. We've got experience with it before. We do look very, very closely, as you can imagine, at the data, at the ability for these batteries to be deployed commercially before agreeing to do so. I think as I've kind of commented on, I think in an article recently, what we like to do is get ourselves into a position where if we feel good about the product, then our expanded demand for the product will actually kind of trace the expanded manufacturing capacity of a lot of these battery suppliers because they, you know, they tend to be a little bit smaller, right? They're gaining traction as we're gaining traction. We do feel comfortable.
I was recently on an internal expert call with some of our folks talking about those technologies. Yeah, we've done a lot of learning, and we're quite aware of what these batteries are good for, what they're not good for, we know what the right use cases are. You know, it's all about deploying them in the right place, right? At the right cost, for the right customer situation.
George Sakellaris (Chairman, President, and CEO)
This particular customer had done so much due diligence on them.
Doran Hole (EVP and CFO)
Yeah.
George Sakellaris (Chairman, President, and CEO)
That's what they wanted.
Doran Hole (EVP and CFO)
Yeah.
George Sakellaris (Chairman, President, and CEO)
Like Doran said, customer, we will do what the customer wants us, but on the other hand, we're gonna make sure that what we're doing, it stands, it performs well.
Pavel Molchanov (Managing Director and Equity Research Analyst)
Understood. Thank you again.
Doran Hole (EVP and CFO)
Thanks a lot.
Operator (participant)
Thank you. One moment for our next question. It comes from Christopher Souther with B. Riley. Please go ahead.
Christopher Souther (Senior Equity Analyst)
Hey, guys. Thanks for taking my questions here.
Doran Hole (EVP and CFO)
Hey, Chris.
Christopher Souther (Senior Equity Analyst)
It's nice to see an accelerated payment from SCE. Can you give us a sense of, as to what has been paid to date or what is remaining from SoCal Ed? It sounds like they're agreeing, you know, for some of the cost up stuff you've talked about previously potentially being an option. Any sense of the overall margin profile for, you know, those projects and where we think we should be penciling that in at this point would be helpful.
Doran Hole (EVP and CFO)
Yes. I mean, you know, the expectation is we'll end up with completion kind of this summer, right? You kind of follow the cash from there. I would expect our unbilled to come back down to a normalized level sometime in Q3, therefore. That's probably the best pattern I can give to you. Not stating specific dollar amounts, of course, but you would've seen, you know, the increase in unbilled as we got close to the end of 2022, when we have stated in our Q that we, in our K that we've recognized the majority of the revenue from that contract in 2022. Therefore, you know, that should give you a fairly solid unbilled number to compare against.
Christopher Souther (Senior Equity Analyst)
Got it. Okay. No, that's really helpful. On Europe, I imagine a lot of this could be covered next week, but could you just frame, you know, what the revenue contribution is expected to be for 2023 there? It sounds like there's still a lot of moving pieces that could impact 2024, but wanted to get a sense of how you think the European investments are gonna shake out for this year. You called out Europe as one of the drivers of increased OpEx. I'm curious what the magnitude is there and how much we're spending in Europe.
George Sakellaris (Chairman, President, and CEO)
Our numbers guy there.
Josh Baribeau (SVP of Finance)
Europe is currently about 5% of our sales. I think the growth there, at least in the near term, will largely be driven by the Bristol City Leap project. That may go to something like 10% in the next year or two. The acquisition of Enerqos is a nice acquisition, very excited about it, but isn't quite as material as Bristol, for instance.
Christopher Souther (Senior Equity Analyst)
Got it. Okay. That's helpful. I'll hand it back to Keith. Thanks, guys.
Operator (participant)
Thank you. One moment, please, for our next question. It comes from the line of Chip Moore with EF Hutton. Please go ahead.
Chip Moore (Managing Director and Global Head of Sustainability Sector Research)
Hey, everybody. wanted to ask one about that.
Doran Hole (EVP and CFO)
Hi.
Chip Moore (Managing Director and Global Head of Sustainability Sector Research)
Hey. Wanted to ask about that increase in dollar value for proposal activity you're seeing. Great to see that up nicely. Around this trend in growing project complexity, I guess more so around your confidence in the ramp for the back half of the year and then perhaps that $300 million EBITDA target next year?
Doran Hole (EVP and CFO)
Go ahead.
Josh Baribeau (SVP of Finance)
For that proposal.
Doran Hole (EVP and CFO)
I mean, the proposal activity is helping us a lot. As you probably know, it takes six months to 18 months to get from the proposal to actual executed. First, you gotta win the contract, go to the awarded, and then, six months to a year later, we get the actual contract where we can build it out. It's a good indicator that our team, and that's why we get a little bit pick up on the development expense right now there in developing these projects and winning a good share of the projects. Basically give us even more confidence for that particular number for the $300 million EBITDA number. Yep. I think a good part of the proposal activity came out of federal as well.
Josh Baribeau (SVP of Finance)
Yeah.
Doran Hole (EVP and CFO)
Where it had been, it had been a little bit slower for a period of time following COVID. You're starting to see that bounce back pretty strong.
Chip Moore (Managing Director and Global Head of Sustainability Sector Research)
Got it. Yeah. You think you have pretty good line of sight in the back half of the year for those projects that, you know, that you typically award and convert in a year or that's, you know, well embedded in your outlook? Thanks.
Doran Hole (EVP and CFO)
As far as the site from going from the awarded to the contracted, we have very good visibility, and that's why we feel pretty good about the number in 2023. Where we think we're gonna end up for the end of the year on contracted backlog, that's gonna help us a lot for the next year.
Josh Baribeau (SVP of Finance)
Yeah. I mean, that's a, that's a very granular exercise for us, when looking at what the conversion rate's gonna look like over contracted for the remainder of this year. That is not a, general feeling. That is really based on some hard data on the for our awarded backlog, which projects, where do they stand, how far along are they, how close are we to converting new contracts. We look very closely at that. That's what gives us the confidence and that kind of cadence of conversions that I talked about in the ramp.
Chip Moore (Managing Director and Global Head of Sustainability Sector Research)
Perfect. Yeah. Understood. Thanks very much.
Doran Hole (EVP and CFO)
Okay.
Operator (participant)
Thank you. One moment for our next question, please. It comes from Craig Shere with Tuohy Brothers. Please proceed.
Craig Shere (Director of Research)
Good afternoon. Thanks for taking the question.
Doran Hole (EVP and CFO)
Hi.
Josh Baribeau (SVP of Finance)
Sure, Craig.
Craig Shere (Director of Research)
Just really wanna do a bit of a follow-up to Chip and Tim's earlier questions. It's three-part, but really quick, so I'll just blurt it out. First, can you opine on the level of confidence in that updated 2023 RNG rollout? Second, are there any assumptions around improving RINs into the second half built into guidance? Third, if you meet the guidance implied second half of this year, given that's a run rate already meeting your 2024 guide, doesn't ongoing growth suggest you'll beat your 2024 guide?
Doran Hole (EVP and CFO)
Where do you wanna start?
Josh Baribeau (SVP of Finance)
I wouldn't say that.
Doran Hole (EVP and CFO)
Yes. Confidence. We start with confidence.
Josh Baribeau (SVP of Finance)
Yeah.
Doran Hole (EVP and CFO)
In the, in the construction schedule. I think confidence is very high.
Josh Baribeau (SVP of Finance)
Right
Doran Hole (EVP and CFO)
In the construction schedule. With respect to RINs, we don't really talk about specifics on the RIN numbers. I would say that what we're using is following what we believe is our expectation for what we see the outcome for 2023 RINs to look like. Everyone knows we're kind of circling mid-June for the final rules, but that's kind of where we are with that. I think that with respect to the 2024, look, we feel very good about that 2024 number. If we felt like there was some sort of material adjustment that needed to be made, we would make it. Based on what's going on, we feel like there's, you know, there's a lot of contributors there that we feel like we're gonna be bringing to bear to deliver that number. I don't know that I'm gonna jump into any adjustments to that at this time.
Josh Baribeau (SVP of Finance)
No. No, no.
Doran Hole (EVP and CFO)
Actually, all the things, the positive things that we've been seeing in the marketplace, it reinforces that number.
Craig Shere (Director of Research)
Right. I guess my point is, you're implying a second half 2023 that is basically a 2024 full year run rate, and you're saying that business continues to grow.
Josh Baribeau (SVP of Finance)
No, because need to. The third and the fourth quarter is the strongest quarters that we have in, because many, lot of construction schools, colleges, universities, and so on and so forth. The first two quarters of next year, they will be considerably slower than the fourth and the third and the fourth quarter of this year. You cannot have that run rate, you know?
Doran Hole (EVP and CFO)
Yeah. If you look back over the years, this has always been the cycle. Slower Q1, Q2 versus Q3, Q4.
Josh Baribeau (SVP of Finance)
Correct. You cannot extrapolate Q3 and Q4 into the following year.
Doran Hole (EVP and CFO)
No, that's right.
Josh Baribeau (SVP of Finance)
They can't.
Craig Shere (Director of Research)
Understood.
Operator (participant)
Thank you. One moment for our next question, please. It comes from the line of Ben Kallo with Baird. Please proceed.
Ben Kallo (Senior Research Analyst)
Hey, guys. Maybe could you talk about the move internationally and, you know, what's driving it? Cause it seems like in the U.S., you know, with the IRA, we have, you know, some of the biggest, you know, tailwinds here. You know, what's the emphasis to move internationally? Is it returns? Is it, you know, less competitors or what? Just going back to the previous question where we talked about seasonality of the business, one of the things that, you know, y'all have emphasized is, you know, your asset ownership, you know, increases, that we should have better visibility every year 'cause the EBITDA comes from those assets. Why wouldn't it go from a run rate the second half to next year? I mean, if we get 75% of EBITDA or something like that, coming from the assets. Thank you.
Doran Hole (EVP and CFO)
Yep. Okay. I'll start with Europe. Europe is really exciting. There's a lot of areas.
Josh Baribeau (SVP of Finance)
Yep.
Doran Hole (EVP and CFO)
Of Europe where we actually do believe we can compete very, very well. It is and has been primarily on the project side, right? I think the asset side will come, but the project side of the business, there's a significant amount of incentives and funding pushed around by the E.U. They've got extraordinarily aggressive targets, corporates, industrials and governments alike looking to go to net zero, just like the Bristol situation has led to multiple conversations with other municipalities around the region. We do see it as an opportunity for a volume game without, again, significantly increasing our operating base. We're not talking about going out and hiring hundreds of people that we'll just put on the ground to go chase stuff in Europe, right?
We're using our high operating leverage organic business growth model, with the exception of the acquisition of Enerqos, which of course was, you know, opportunistic, but we feel great about. That's the approach we're taking to expanding in Europe. I agree that the U.S. has a tremendous amount of incentives that is gonna increase business volume in the United States as well, right? Again, that too is a volume game. More funding for our customers, so they would like to do more work. However, we're not taking away from.
Josh Baribeau (SVP of Finance)
Right
Doran Hole (EVP and CFO)
The U.S. to expand in Europe. That's not a zero-sum game. It's all a little bit of a magnifier on the expansion capabilities that we have as a company, given the way that we operate. Moving on to your second question, which I've already forgotten.
Josh Baribeau (SVP of Finance)
Yeah, I think I can answer it. I think you're asking kind of why wouldn't that be the run rate on, given the energy assets. I think you have to break our business up into our four lines of business. The energy assets would be the run rate, but the project business, as George was talking about with the previous caller, has some pretty significant seasonality to it. The energy assets, that would be the run rate. When you see that's a reasonable run rate. There's a little bit of solar seasonality around the winter months. And then, you know, add the project business seasonality to Q1 and Q2 of 2024.
Operator (participant)
Thank you, ladies and gentlemen. With that, we conclude our Q&A session and program for today. Thank you for participating, and you may now disconnect.
Doran Hole (EVP and CFO)
Thank you.
Josh Baribeau (SVP of Finance)
Yeah.