Ameresco - Q3 2022
November 1, 2022
Transcript
Operator (participant)
Perfect. Good day, and thank you for standing by. Welcome to the Ameresco Q3 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker presentation, there will be a question-and-answer session. To ask the questions during the session, you will need to press star one one on your telephone, and then you'll hear the automated message advising you that your hand is raised. Please be advised that today's conference call is being recorded. I would now like to hand the conference call over to your speaker today, Leila Dillon, SVP of Marketing. Please go ahead.
Leila Dillon (SVP of Marketing)
Thank you, Haley, 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 these reconciliations to these measures in our supplemental financial information.
I will now turn the call over to George. George?
George Sakellaris (Chairman, President, and CEO)
Thank you, Leila, and good afternoon, everyone. I am pleased to report that the Ameresco team delivered another quarter of excellent performance with growth across all four of our business lines, driving an impressive increase in revenue and profits. We have made great progress since we met at our Investor Day at the end of March. We continue to expand our addressable markets, both domestically and internationally. You will notice that an increasing number of our projects and assets incorporate more comprehensive advanced technologies, such as energy storage systems and complex microgrids. In addition, we are deploying smart solutions for buildings, lighting, and water systems. Our recently awarded critical microgrid projects at both Fort Campbell at the White Sands Missile Range and our $92 million Joint Base McGuire Energy Savings Performance Contract are great examples of our latest advanced technologies projects supporting the federal customers' energy security strategy.
On the asset side, we recently announced a combined 5 MW PV and 15 MW hour battery energy storage system at Colorado Mountain College, which will be the largest such system in the state of Colorado. We also continue to expand our business in Europe, where there is a pressing need for clean energy solutions given the geopolitical situation and spike in energy prices. In the third quarter, we were selected together with a local partner as a contractor for a 100-MW PV project in Drama, Greece. This represents the largest project for us in continental Europe, and we believe it's only the beginning. We are aggressively pursuing multiple other opportunities, and we expect to grow in Europe, both organically and through strategic partnerships and acquisitions. Recent RNG market activity demonstrates the growing interest and importance of this asset class with significant investment and acquisition activity.
Ameresco is one of the most experienced players in the biogas industry with a large portfolio of operating assets and a robust development pipeline. Just this quarter, we added two RNG plants to our assets in development. We believe that RNG is an important clean tech solution and will continue to be a significant value driver for Ameresco's shareholders. We also believe the Inflation Reduction Act, or IRA, which was enacted in the third quarter, will be the most impactful environmental legislation affecting the company's long-term performance since our founding. The IRA provides unprecedented amounts of clean energy incentives to ensure energy security, reduce carbon emissions, increase energy innovation, and support environmental justice objectives. The bill includes a wide range of clean energy provisions that support energy efficiency, solar, energy storage, microgrids, electric vehicles, and more, with a goal of reducing U.S. carbon emissions by approximately 40% by 2030.
This legislation not only creates a 10-year runway for many energy tax incentives. It also fundamentally revises the tax code to create a technology neutral approach to incentivize the development of zero emission technologies. Some specific provisions that will have a direct impact on our business include production tax credits for renewable or zero carbon electricity and clean hydrogen. Investment tax credits for clean electricity and energy projects, including stand-alone energy storage, biogas, microgrids, and geothermal heating and cooling. Clean vehicle and charging infrastructure tax credits, as well as carbon capture credits. It also expands the 179D energy efficiency tax deduction. While everyone is still evaluating the breadth and depth of the incentives, grants, and other benefits from this bill, we do expect it to be a great long-term tailwind to our, for our business.
We have already identified a number of ways this bill will directly benefit our customers and Ameresco. With our customized solutions, ranging from solar, microgrids, and battery energy storage, to renewable natural gas and electric vehicle infrastructure, along with our innovative financing structures, Ameresco is well-positioned to be a long-term industry partner and key beneficiary of this legislation. Based on our experience with similar federal legislation, though, we anticipate these benefits will take some time to materialize. Now, I would like to provide an update on the Southern California Edison project. We made continued progress in the quarter, with all battery cells and containers on site and early commissioning steps underway. Recently, however, Southern California Edison instructed us to adjust the project schedules into 2023. Under the terms of the contract, we are entitled to recover costs associated with the schedule adjustment.
We are working with Southern California Edison to analyze and estimate this cost. We are also continuing discussions regarding the applicability and scope of any force majeure relief. Considering the schedule adjustments requested by Southern California Edison and the delays disclosed earlier, we anticipate the projects to be in service and achieve substantial completion prior to the summer of 2023. Our relationship with Southern California Edison continues to be very cooperative. I would now like to highlight that in the third quarter, we were honored to become a Great Place To Work-Certified company for the first time. This designation is based entirely on employee input, making it even more meaningful as it reflects the positive experience of our over 1,300 employees.
Hiring and retention is critical to the company's growth, and we will continue to strive to make Ameresco a great place for our employees to work, thus ensuring that we attract and retain the best and brightest in the industry. I will now turn over the call to Doran to provide some comments on our financial performance. 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. As George noted, the Ameresco team delivered another excellent quarter of financial results as all four of our business lines experienced solid growth led by our projects business. In addition, the combination of our project backlog and expected future revenues from our contracted energy asset and O&M businesses remains at close to $5 billion, giving us excellent long-term visibility and resilience during these uncertain economic times. Top line growth was led by our projects business as we continued to execute on the Southern California Edison projects. Our O&M business line also experienced strong revenue growth as we attached O&M contracts to our projects, especially with the federal government.
Separately, however, I'd like to take this opportunity to highlight our nationwide solar O&M business. This unit now manages over 564 MWs, almost 400 MWs of which are for third parties. When we acquired this business in early 2019, it had only 45 MWs under management. We're very pleased with the growth of this business and will continue to focus on disciplined approach to acquisitions, where we can acquire and grow companies, integrate their solutions, and create value for our stockholders. We also saw continued strong growth from our integrated PV revenue, which is part of the other revenue line. This unit's performance was driven by increased demand for off-grid solar systems from the oil and gas, rail, and other industries seeking energy solutions where no grid access exists.
As we expected, our gross margin increased sequentially as the lower margin SoCalEd contract had a lower contribution to the overall revenue mix. We anticipate similar gross margins in the fourth quarter. We again achieved very strong double-digit year-over-year growth in adjusted EBITDA as a result of our operating leverage, demonstrating our ability to add gross profit dollars without adding direct incremental operating expenses. Even with the continued working capital needs from the execution of the SoCalEd projects, the company ended the quarter with $122 million in available cash, having generated $35 million in cash from operations on a GAAP basis. Our adjusted cash flow from operations was $87 million, which takes into account federal ESPC financing proceeds. We expect that the SoCalEd projects will continue to impact our near-term working capital needs.
This impact was anticipated from the onset and is one of the reasons why we amended our senior credit facility early in the year. We expect all components of working capital to return to more normalized levels for our business with the completion of the Southern California Edison contract and the collection of the remaining amounts owed. Total project backlog was a healthy $2.6 billion at the end of the quarter. Of note, we are seeing increased activity from the C&I sector as this market segment focuses on sustainability metrics. In addition, our projects and asset lines of business continue to grow in Europe amidst the ongoing energy crisis. Ameresco grew its portfolio of operating energy assets to 360 MWs while building its owned assets in development and construction pipeline to 452 MWs.
As a reminder, we are now reporting both the total assets in development as well as a pro forma net megawatt total after adjusting for our partner's equity interest. This should help investors better understand the positive impact these jointly owned assets are expected to have on our future financial performance. Even with increasing interest rates and equipment cost inflation, sustained high energy prices continue to create favorable long-term expected returns for a variety of energy asset types deployed by Ameresco. We are seeing an increase in proposals and awards for our energy assets. In particular, our newer nationwide greenfield solar and storage development group has been originating early-stage front-of-the-meter opportunities, which once de-risked, would grow our assets in development metric.
For a bit of background, a couple of years ago, we began investing in a team of greenfield development experts, and we're pleased to see the results of this organic strategy starting to pay off. Furthermore, with the incentives in the IRA, we expect the pace of these opportunities will continue to accelerate. With debt being an important portion of our capital stack, I will spend some time discussing our interest rate exposure. About 90% of our non-recourse debt is protected from rate increases at this time, as it is either fixed rate or was swapped at closing. The only material part of our debt structure that is variable is our senior secured credit facility.
While the balance of the facility has increased due to the execution of the SCE contract, our funded debt under this facility is expected to decrease meaningfully following the completion of the projects and receipt of associated cash payments. This should limit any medium or long-term impact of higher interest rates on our financial results. Higher interest rates also have a potential impact on our projects business. The majority of our project customers fund their implementation under performance contracts with third-party bank financing. Higher interest rates have the potential to reduce project sizes as a greater percentage of energy savings is consumed by interest expense. Similarly, when looking at new proposed energy assets, higher interest rates have the potential to affect the projected equity returns.
However, both our customer projects and our renewable energy assets compete against traditional energy sources, in particular electricity and natural gas, which have seen dramatic price increases this year. These increases in energy costs have outpaced the year-on-year increase in Ameresco's all-in project delivery costs, financial, materials, and labor, which we believe on balance is preserving a positive economic outcome for our customers and ourselves in both the project and energy asset businesses. We monitor the pace of change in these macroeconomic factors closely and continue to remain very disciplined with our risk-adjusted returns-based approach. We are pleased to reaffirm our 2022 annual guidance. Our ability to do so in today's challenging environment speaks to the diversity and resilience of our business model and the hard work of the Ameresco team.
As in past years, we plan to provide guidance for 2023 when we report Q4. We remain very optimistic for the strength of our business model and end markets, and we remain confident in our previously stated goal of achieving $300 million of adjusted EBITDA in 2024. Now I'd like to turn the call back over to George for closing comments.
George Sakellaris (Chairman, President, and CEO)
Thank you, Doran. Governments and industry are now taking important steps to address the climate, geopolitical, and budgetary issues facing our customers around the globe. Ameresco, with our portfolio of comprehensive clean tech solutions, is at the nexus of this trend, positioning us for robust growth for years to come. I want to once again take a moment to thank the entire Ameresco team for their dedication and outstanding execution. We also want to recognize the ongoing support of our customers and long-term stockholders. Finally, following our successful investor day in March, we are once again welcoming analysts and institutional investors to learn more about Ameresco. We will be hosting a tour at our Phoenix, Arizona RNG facility on November 15th. This plant is the largest wastewater treatment biogas to renewable natural gas facility in the U.S.
We hope the tour will provide a deeper understanding not only of this impressive facility, but also the strength of Ameresco's RNG business. Operator, I would now like to open the call to questions.
Operator (participant)
Wonderful. Thank you. At this time, we will conduct the question-and-answer section. As a reminder, to please ask your question, you need to press star one one on your telephone and wait for your name to be announced. With limited time, we will only have time for one question and one follow-up question per person. Please stand by as we compile the Q&A roster. Our first question comes from the line of Noah Kaye from Oppenheimer & Co. Inc.
Noah Kaye (Managing Director and Senior Analyst)
The last couple of months following the passage of the IRA and in terms specifically of, you know, where it's really led to changes.
Operator (participant)
Noah, hold on one second. All right, go ahead and ask.
Noah Kaye (Managing Director and Senior Analyst)
Can't hear you.
Operator (participant)
Ask your question, Noah.
Noah Kaye (Managing Director and Senior Analyst)
Thanks very much. Let's start that again, and thanks for taking the questions. I was wondering, since you touched on the prepared remarks, if you'd go a little bit further on the impacts of the IRA and maybe take us through what the last couple of months have been like in terms of, you know, where the customer focus has really picked up, where the pipeline growth opportunities have picked up for you. Are there a couple of areas that you would really highlight, and where do you see that potentially impacting as we look out to, you know, the next year or two?
George Sakellaris (Chairman, President, and CEO)
Yes. You know, it's a great bill. No question about it. It's gonna help us tremendously. It's gonna take some time to get the traction. If you recall back even when we had the recovery plan under the Obama administration, it took us, like, six months to 12 months to really take effect to get going. Where we see most activity is on the asset base. The asset business has accelerated, I would say, at a faster pace than everything else. Some of the other items, like for example, the cogeneration ITC, some of the customers now, they're debating whether they should own the facility and monetize the rebate and otherwise take that cash and therefore thereby own the facility themselves.
It's only two months old, and I think the customers are trying to figure out how to take the best advantage associated with the bill. Doran, you might wanna-
Doran Hole (EVP and CFO)
Yeah, no, I mean, George is right. The asset side of the business is where the focus is going to be. I would say that the last couple of months has involved a tremendous amount of analysis. We're working with several clients.
George Sakellaris (Chairman, President, and CEO)
Yeah
Doran Hole (EVP and CFO)
On that asset question, especially with the direct pay. You know our customer base has a lot of government and not-for-profit. Considering what asset ownership means to those customers and how it would alter the economics, certainly we expect that to continue to be a topic of conversation. On our own assets, you know, we've got sort of the immediate look forward to what to do between now and when the guidance comes out. Then also we have the longer term, you know, what to do with a lot of the assets that we've got in development, where you've got a lot of different things. I mean, the list goes on, right? Solar ITC, PTC, the battery ITC, biofuels, the direct pay, and then in 2025, the clean electricity, zero emissions, right?
All of this was gonna require a lot of planning. You know, as George said, great tailwinds for the business.
George Sakellaris (Chairman, President, and CEO)
Yeah.
Noah Kaye (Managing Director and Senior Analyst)
Yep. Very helpful color. You know, you talked a little bit about RNG development, adding a couple of new projects to the pipeline, and you mentioned the market activity. You know, yesterday we see Avista come out with their RFP for RNG procurement, and there's been a couple of high-profile deals recently. I guess, you know, how do you assess, particularly post the IRA and the biogas incentives, the competitive landscape and the opportunity set now around RNG? I know we'll probably hear a little bit more about it at your investor event, but just wondering if you could kind of give us the high level in terms of how the landscape is shifting.
George Sakellaris (Chairman, President, and CEO)
I think it's a great catalyst or it's valuable assets for us, and we have a great pipeline in development. We report 30 plants that we have in the development pipeline, development metric. If you look at our pipeline, it's substantially higher than that. We won't put them into the actual development pool until we negotiate some gas agreements, get some more rights to the land, and so on and so forth, de-risk them. Look, 40% of the use in the United States is natural gas. Somehow, some way, we have to decarbonize that, the pipeline is what I call. That's why you saw NextEra making a big step getting into this business.
Our bet from back when we started, we were one of the first companies to build the first RNG facility built down in San Antonio back in 2012. We think it's a great catalyst for our business. What's going on now with the IRA is gonna help us even more. What's going on in the market, it raises the visibility. Because we have the track record in the marketplace, we're not short of having a good backlog.
Doran Hole (EVP and CFO)
Operator, we can move to our next question if you'd like.
Operator (participant)
Sorry, Stephen. Go ahead and ask your question now.
Speaker 14
Oh, can you hear me okay?
Operator (participant)
Yes.
George Sakellaris (Chairman, President, and CEO)
Yes.
Doran Hole (EVP and CFO)
Yes.
Speaker 14
Oh, great.
Doran Hole (EVP and CFO)
I do.
Speaker 14
Great. Thank you. Hello, everybody. Two things for me. Maybe Doran to start with. Can you tell us a little bit about, you know, the SCE project? I mean, the complete delivery is delayed into 2023. How does that impact how that project hits the income statement?
Doran Hole (EVP and CFO)
We looked at the overall project and what we're gonna be accomplishing before the end of the year, and then what is going to move to 2023 in terms of placing those assets into operation. We're still kind of, you know, a substantial amount of the revenues are gonna be generated in 2022. I think we make the statement in our Q. I think we're talking about, you know, maybe a push of, you know, $30-35 million worth of revenue out into 2023 out of the total. Not a tiny number, but not a substantial portion.
Speaker 14
Okay, great. Now that's helpful. I gathered that from the guidance, but I was just curious if there's anything else behind that within the guidance that changed. The other quick thing is on the RNG front, can you give us an update on facilities in operation and the timeline for the next few to come on stream in 2023 and 2024?
George Sakellaris (Chairman, President, and CEO)
Yeah. I think one of the plants most likely we will have mechanically complete by the end of the year. The other two, they will be the first quarter of the year of 2023. The thing that we wanna point out, though, once we get mechanically complete, it takes three to four months to really go through the commissioning and so on. When you put in generating revenues and income for us, it's three, four months after they are mechanically complete. We did encounter some even though we had environmental permits, built-in permit delays, and then some so that the equipment didn't show up on the site for some time.
We had said before, we'll have five to six plants operate in mechanical complete by the end of 2023. We continue to maintain that visibility.
Operator (participant)
Wonderful. Our next question comes from.
George Sakellaris (Chairman, President, and CEO)
Next question.
Operator (participant)
Eric Stine from Craig-Hallum. All right, Eric, you're online.
Eric Stine (Senior Research Analyst)
Okay.
Doran Hole (EVP and CFO)
Eric, hi.
Eric Stine (Senior Research Analyst)
Can you hear me? Great. I'm wondering if we could just talk about the Bristol project, maybe just an update on that. I think on the last call, you had talked about two you know potential similar projects in the U.S., one in Europe. You know, just curious how the initial project is going, but then update on these new ones.
George Sakellaris (Chairman, President, and CEO)
Yeah. I mean, look, it's one of the most exciting projects that we have, and we are talking to several other cities. Actually some, they have approached us in order to get going. The process is. It's a long term. It takes a couple of years. It took over two years to get to where we are today on the Bristol City. What I'd like to point out on that particular one is that it's a 20-year concession. Even though we have identified over GBP 1 billion investment, it's over 20 years period. You will start seeing some projects showing up. Some will be EPC, some will be asset.
They will not start showing up till the second quarter of 2023, the way we are right now. Everything's moving along. We transfer some people over to our unit now that they were operating, they were working for the city, now they start working for us. We're moving along, but we're not gonna have anything to talk about it until early next year.
Eric Stine (Senior Research Analyst)
Yep, understood. Okay. Longer term on the wins.
George Sakellaris (Chairman, President, and CEO)
This particular project, even though it's large and it's over GBP 1 billion, it's a 20-year horizon, so we're not gonna be talking as much about it every quarter like we did the Southern California Edison, because Southern California Edison was about $800 million, but we had to implement it in one year. That was much more material.
Eric Stine (Senior Research Analyst)
No, understood.
George Sakellaris (Chairman, President, and CEO)
to it. Yeah.
Eric Stine (Senior Research Analyst)
Understood. Okay. Just interested in your discussion, obviously the wins in Europe, and that, you know, organic but also acquisition potential there. I mean, maybe just talk about.
Kind of what you're seeing, just thinking through the energy landscape there, you know, what the implications are in terms of what's out there, you know, what the valuations you might be looking at. I mean, I would assume these are gonna be more strategic and bolt-on rather than large, but maybe just some thoughts on the acquisition side.
Doran Hole (EVP and CFO)
Eric, I mean, I think, so our strategy isn't any different than it is anywhere else as far as Europe is concerned. We're looking for acquisitions where we're not gonna be pushed into, you know, overpaying for an asset. We watch the multiples. We look for businesses that we can fold in that are accretive to EPS, that we believe strategically fit well, that we like the management team. I think that we're, you know, if we had something, we'd be talking about it. At this point in time, we're evaluating all different types of opportunities across all of our business lines over there.
Operator (participant)
Perfect. All right. Thank you, guys. Our next question is going to be coming from George Gianarikas from Canaccord Genuity. Go ahead, George.
George Gianarikas (Managing Director and Senior Analyst)
Hey, good afternoon, everyone, and thanks for taking my question. I had just a follow-up on the recent M&A activity in the space. I'm curious as to how you think about your portfolio of assets. Are you willing to trade, mix and match, you know, take capital from a sale and redeploy that in other directions? How should we think about your portfolio management strategy?
Doran Hole (EVP and CFO)
I mean, we evaluate all options available associated with the assets that we own, especially some of the RNG, the prices that people are paying out there and so on. At this point in time, having the high margin recurring revenue for us and pretty good EBITDA, and having that tremendous backlog associated with the asset, whether it's combined power or solar or green gas, we feel that they better stay where we are right now. That doesn't mean that we won't evaluate all options that come to the table. We're keeping an open mind, and I think we refinance some of the projects that we have, and maybe Doran wanna add a bit more color to that. There is some pretty good cash.
Yeah, I mean, we did a refi of a few of the operating plants. I think, one important point that I'll add to George's comments is the optionality of being the asset owner and controlling those assets going forward. As you see the developments of incentives as they go, you know, eRINs are coming. You know, we've had a variety of different strategies that we're looking at on the hydrogen front that relate to renewable natural gas. There's a lot of really exciting developments there, and we like to own the assets so that we can pivot and deploy them in the most accretive way for our shareholders.
George Gianarikas (Managing Director and Senior Analyst)
Thanks. Just for one follow-up. Yeah, we get a lot of questions on the potential changing complexion of Congress, i.e., you know, more Republicans than Democrats, and the risk associated to renewable elements of the Inflation Reduction Act. Can you just share with us your thoughts on how any change in Congress could change, you know, certain elements of the Inflation Reduction Act in 2023? Thanks.
Doran Hole (EVP and CFO)
I mean, I'll give you my gut feeling, and then Doran can give it. Look, we are not into politics, but I will say this much. We did very well under the previous administration. But with this Inflation Reduction Act, I mean, that's the law right now. If Congress, let's say, splits or whatever might happen, as long as the President is there, I don't think you're gonna see any changes to that. We have a pretty good runway for where we are. Look, whatever happens to the federal government, the states more and more, the decarbonization, the climate change is impacting everyone, the commercial, industrial, they start moving. I mean, we think about it a lot, and we are cautious as to what we are doing, but we don't think it's gonna be material change.
Add some more color there. Yeah. I mean, I agree with George. We're not gonna crystal ball the politics of the election and what's gonna happen post-election. The breadth of the provisions in that bill that apply to us, you know, I would stare at a page, and if I crossed out two or three lines, I still have, you know, a dozen lines left of areas that we're going after. I don't think we're thinking too hard about that right now. I think we're focusing on what's, you know, what's in there that's gonna work, what.
George Gianarikas (Managing Director and Senior Analyst)
Thanks.
Operator (participant)
Perfect. All right. Our next question comes from Christopher Tucker. Hold on one second. All right, Christopher, go ahead.
Speaker 15
Excellent. Thanks for taking my question here. Maybe just you mentioned greenfield solar as kind of a new front of the meter area that you'd be kinda going after. You know, maybe just high level on kind of the strategy as far as, you know, are these assets you'd try to own on your balance sheet, maybe some of the region geographies you're looking at and any specific projects you could share? You know, what would the working capital needs be for that if that became a more meaningful part of the business here?
Doran Hole (EVP and CFO)
Sure. I think, because it's greenfield, you know, there's a lot of early stage. We are going direct to site control, interconnection queue position. It's a variety of markets. We are focusing on the ones that we feel like have really solid, either community solar or some other tariff program that we think creates the right amount of value. The approach, generally speaking, as with anything, is that ultimately we'd like to bring those assets into our asset and development metric and grow the asset portfolio. We are not going after large utility scale. We're still sticking with the sort of DG. That's why I mentioned community solar. That being said, you know, if those opportunities arise, we can create substantial value.
If the assets ultimately aren't gonna meet our return hurdles, then as we are all aware of, there's a substantial market for those types of assets, out there, and we would of course consider monetization. I would say, working capital. On the development front, working capital is not so substantial. You know, your early stage development going through permitting, going through interconnection, you know, establishing revenue contracts, that's all fairly reasonable. The working capital really kicks in when you go to build the assets. No different than the assets that we build now, we would expect to deploy, you know, construction facilities, you know, bank facilities to help us finance, that working capital on a non-recourse basis.
Speaker 15
Got it. Okay. No, that all makes sense. Looking at the 50-70 MWs started for the year, would we need that first RNG facility to be completed to be included in there? I just wanted to get a sense of whether there was any potential some of the solar projects might be slipping into 2023 in order to get a little bit more juice on the ITC and the like, or you know, if there was any kind of momentum you know on that front. Thanks.
Doran Hole (EVP and CFO)
Yeah. Nothing specific to talk about there. The RNG is not included in that figure, so we're just looking at the other assets there. But I couldn't pinpoint any that we specifically have identified as wanting to delay for any reason. You know, currently with the sort of pre-guidance construct of the IRA, we feel like we're gonna just plow right ahead and complete what's ready.
Operator (participant)
Perfect. Thank you. Our next question comes from Tim Mooney from William Blair. Go ahead, Tim.
Tim Mooney (Analyst)
Hey, good afternoon. Can you guys hear me?
Doran Hole (EVP and CFO)
Yes.
George Sakellaris (Chairman, President, and CEO)
Hi, Tim.
Tim Mooney (Analyst)
Hey. I thought it was a really interesting data point that you gave last quarter when you said blended energy costs were up kinda 40% year-over-year, but blended project costs for your customers were up more like only 10%-12%. That gap's pretty compelling, enough so that I was wondering if you could provide an update for what you see a blended project cost would be for your customers right now, given some costs may have flattened out while maybe others like interest rates continue to go up.
Doran Hole (EVP and CFO)
I mean, I think I put in my comments the fact that it's outpacing. We've, you know, taken a look at the numbers. I think this is something that we are continuing to track internally, but we're not expecting to start publishing on a regular basis as we move forward. You know, the data point and the importance of the trend was I think critical for folks to understand that the economic value proposition that we're putting in front of our customers and putting in front of ourselves on the energy assets was still valid. In fact, it remains that way with the movements recently. We're, you know, I don't have any statistical updates for you today.
Tim Mooney (Analyst)
Okay. No update to the 10-12, Doran, but you can't blame a guy for trying. I'll try a different question. Are you seeing higher interest rates have any material impact on project demand today, right now? I'm just curious if you're seeing any signs whether, I don't know, longer sales cycles or changes in customer behavior that would suggest maybe a tougher environment for the projects business until inflation's under control and interest rates can come back down somewhat.
George Sakellaris (Chairman, President, and CEO)
No. We haven't. The only thing that we have seen lately is once the bill of the IRA's. Everybody's trying to figure out which way they're gonna go, how they're gonna make maximum utilization of that. I will tell you this much, some of the projects, like a couple of cogeneration projects before didn't pencil out. Now with the ITC all the way up to 30%, maybe a little bit more, they pencil out. But now they're trying to figure out, we gave them six proposals the other day on a particular customer, which way they're gonna go for the project. We haven't seen it.
What we have seen on the C&I sector, because of the climate change and people wanting to decarbonize, we get more traction in that market.
Operator (participant)
Thank you for your question. All right, just to remind everybody that if you do have a question and you wanna be put into the queue, to please press star one one on your telephone and wait for your name to be called. Again, we have time for one question and one follow-up. Our next question right now comes from Pavel Molchanov from Raymond James. Go ahead, Pavel.
Pavel Molchanov (Sr. Investment Strategist)
Yeah, thanks for taking the question. Yeah. As we look back at the Southern California Edison effort, it's pretty obvious there have been, you know, issues surrounding the project through no fault of your own, of course, just supply chain. Is this a lesson that, you know, taking kinda low margin, very high volume projects on such as this may be not the best idea for the future?
Doran Hole (EVP and CFO)
I'm gonna say a resounding no on that. I think it's, you know, these types of things when we take on those types of numbers without increasing in any substantial way our OpEx base, we're reflecting the operating leverage. When we're seeing proposal activity, which we are seeing here in similar projects, maybe not quite the size, but certainly we're seeing some chunky ones come across our desk, we're going after those with conviction because we know the supply chains now. We know what's possible. We know what's realistic. We're, you know, we're feeling very, very comfortable with our ability to at a cost up, de-risk and execute projects like that for multiple types of utility customers and developers alike, around the country.
George Sakellaris (Chairman, President, and CEO)
Yeah. Where am I at? We learned a lot on that particular project. We established a great reputation in the industry and quite a few other utilities. They are talking to us because of that project. In addition to that, now with the ITC come into play for a standalone battery storage project, you will see cash back going into our balance sheet over the next few years because of that project.
Doran Hole (EVP and CFO)
I mean, with the increase in other, renewable resources, intermittent resources in the grid, the offshore wind that's coming here on the East Coast, everything, storage is really picking up. I mean, that is gonna be a critical part of our overall clean tech integrator industry, going forward, and I think that we'd be remiss to not go after it.
Pavel Molchanov (Sr. Investment Strategist)
Okay. A follow-up about Europe. Europe was 4% of your revenue in 2021, obviously before the war and the energy crisis. What do you think that number will be by the time this year is over?
Doran Hole (EVP and CFO)
For 2022? I don't know that Mark used to have any specific statistics. I don't know that we're gonna expect anything substantially different for 2022.
Mark Chiplock (SVP and Chief Accounting Officer)
Give me one second.
Doran Hole (EVP and CFO)
One second. We're gonna take a quick look here.
Mark Chiplock (SVP and Chief Accounting Officer)
Next year it goes up.
We'll see an increase, but you know, it's not a substantial increase, and I think it's just timing. You know, we're seeing some growth year-over-year from 2021 to 2022.
Doran Hole (EVP and CFO)
Okay. A little bit of growth year-over-year, 2021-2022. Modest increase in 2022. 2023, we're gonna start seeing our share of the revenue from the PV project that we announced come through, and that's a good portion of that is 2023.
George Sakellaris (Chairman, President, and CEO)
The Bristol City.
Doran Hole (EVP and CFO)
Bristol City, we'll also see some of that start to kick in.
George Sakellaris (Chairman, President, and CEO)
We have pretty good backlog on the rest of the UK operation. No, you will see it picking up next year.
Pavel Molchanov (Sr. Investment Strategist)
Very good. Thank you, guys.
George Sakellaris (Chairman, President, and CEO)
Thank you.
Operator (participant)
Perfect. Our next question is gonna come from Julien Dumoulin-Smith from Bank of America. Go ahead, Julien.
Julien Dumoulin-Smith (Senior Research Analyst)
Hey, good afternoon, team. Thanks for the time. Can you guys hear me?
Doran Hole (EVP and CFO)
Yes.
George Sakellaris (Chairman, President, and CEO)
Yeah.
Doran Hole (EVP and CFO)
Julien, hi.
Mark Chiplock (SVP and Chief Accounting Officer)
I do.
Julien Dumoulin-Smith (Senior Research Analyst)
Hey. Thank you guys. Listen, I wanted to follow up on the RNG conversation throughout here. Can I ask you to elaborate? I mean, we've seen some of these, the transactions of late here in looking at landfill to electric potentially conversion leveraging the ITC. I mean, given the portfolio that you stand on today, how do you think about maximizing and creating the most efficiency to garner the ITC first off, and then secondly, to convert existing projects to qualify for RNG as well, given the newfound economics?
Doran Hole (EVP and CFO)
The short answer is we think about it a lot. As you mentioned, you basically laid out all of the various optionality elements that I was talking about before. You know, there's certainly some programs that are going to be interesting for some of our preexisting assets, but as far as new developments are concerned, I think that you know, we see you know, the ITC, the potential for RNG, where the RINs are gonna go, introduction of eRINs for that matter. We see a lot of different paths for that portfolio of assets.
Given the fact that we've got a funnel of assets behind the 20 that we've kind of already talked about that are in our asset and development metric, we're gonna continue to work on the development front to sort of increase the number of assets that we're actually focusing on moving through permitting. You know, we're talking about evaluation of sites. You know, from evaluation of sites to negotiation of gas contracts, you know, and site control, you know, in some of these areas where, you know, those we haven't talked about in the 20 that we previously announced.
We feel very good about all of that optionality, and we're looking at these sites one by one when we take a look at how to draw up a pro forma for where we think the economics will go. We take into account all of these different potential alternative ways to make those projects profitable. That, like I said, it applies to some of the existing assets where the PPAs may be rolling off.
George Sakellaris (Chairman, President, and CEO)
Yeah.
Doran Hole (EVP and CFO)
to the new ones that we're developing now.
George Sakellaris (Chairman, President, and CEO)
Well, especially if the eRINs come to pass.
Doran Hole (EVP and CFO)
Yeah, if the eRINs come.
George Sakellaris (Chairman, President, and CEO)
Some of the very elastic existing plants that we have generating electricity, some of them they have excess gas. It would be an optionality for us to add a couple more engines or one, whatever the case might be, or wait until they expand and then we go the RNG route. It's a great time to own some of those assets. If eRINs come to pass, I think it would be a great value creation for us.
Julien Dumoulin-Smith (Senior Research Analyst)
Got it. Yeah, but if I can ask you to clarify a little bit. I mean, presumably when you guys came with your analyst day earlier this year, that was prior to the IRA passing. You know, when do you think you'll be in a better position to update the forecast given the numerous RNG projects you had in your forecast already to reflect the outcome of these negotiations as well, inclusive of some of those credits. I understand that you may not fully benefit from the 30% or 40% ITC as it goes, but you might have to share some of that, but seemingly that would be pretty sizable delta relative to the analyst day earlier this year. At least for the RNG specific piece of growth.
Doran Hole (EVP and CFO)
Julien, I think that is probably content for when we come out and talk about 2023 guidance.
Julien Dumoulin-Smith (Senior Research Analyst)
Right.
Doran Hole (EVP and CFO)
When we report Q4. You know, as we announced, we're gonna do the tour and do some Q&A on, you know, presentations on the RNG plant. But at that point in time, I don't think we're expecting to provide any particularly new information. We need to see our regular cadence through in terms of providing guidance, when we report Q4. Furthermore, as you know, the guidance under the IRA is expected by the end of the year as well.
Julien Dumoulin-Smith (Senior Research Analyst)
Right.
Doran Hole (EVP and CFO)
Which I think is, you might not be surprised to hear, something we'll be very interested to see.
Operator (participant)
Perfect. All right. We have just to remind some folks, if you would like to ask a question to our speakers today, to please press star one one on your keypad and you'll be put into the queue to ask them a question. The next question comes from Craig Shere. He is calling from Tuohy Brothers. Go ahead, Craig.
Craig Shere (Director of Research)
Hey, good afternoon, guys. Can you hear me okay?
Doran Hole (EVP and CFO)
Yeah. Craig, hi.
Craig Shere (Director of Research)
Perfect. Thanks for taking the questions. Not to beat a dead horse here on SoCal Edison, but just a short point of clarification. Sounds like all the adjustments were at kind of their sole discretion, but do you think if there weren't any adjustments made to the schedule or strategy, do you think you guys would have 200-300 MWs of service now, with expected completion by the end of the year, which was kind of last quarter's update?
Doran Hole (EVP and CFO)
You know, Craig, I don't think we're gonna go there with respect to what could have been. You know, the nuances of that type of discussion is really kind of speculative in and across multiple projects. I just, yeah, I don't think we're gonna be able to comment on that.
Craig Shere (Director of Research)
Understood. Totally fair enough. Switching gears, more of a technical question. Could you guys speak a little bit about what you're seeing when it comes to EV charging and solutions for, or alternatives to, thinking about the strain on the grid, whether it's, you know, battery integrated solutions or incorporating alternative fuels like RNG or hydrogen and fuel cells or maybe just a like a smarter software solution. Is it something that's on the tops of minds of your customers? And what are you seeing as the most elegant solutions that are out there right now?
George Sakellaris (Chairman, President, and CEO)
Right now on the electric vehicle charging stations, we incorporate them just about in every project we do on the federal government, every project we do in colleges and universities, so on. Going back to what we did with this greenfield development when we hire a couple of specialists and then 2.5 years ago, and now we have a real great group. We did hire somebody from Tesla, that's a great experience on the charging stations and so on. We are going to be very active in that area. We have won a contract where we'll convert part of the RNG to a fueling station for hydrogen.
Doran Hole (EVP and CFO)
Mm-hmm.
George Sakellaris (Chairman, President, and CEO)
That's gonna happen over the next 12-24 months.
Doran Hole (EVP and CFO)
Yeah. I mean, I think, on the RNG front, away from hydrogen, a lot of that connectivity to biogas or landfill gas to electric vehicle charging might be driven by the eRINs. Not surprisingly, we are looking at not just federal projects, but also many in the regions where we've got some fleet opportunities. Yes, the integration of batteries, yes, the integration of renewables. We consider ourselves to be kind of at the forefront of our ability to put those projects together. However, the development of that overall business at a scale that's beyond kind of deploying the technology as part of our solar installations or, you know, carport installations is in its early stages.
Operator (participant)
Wonderful. Thank you for the question. Our next question comes from Joseph Osha from Guggenheim Partners. Go ahead, Joseph.
Joseph Osha (Senior Managing Director)
Oh, hi there. Thanks. Hello, everyone. A couple of questions. First, just a simple one. Doran, you alluded to your project hurdle rate. You know, obviously, your cost of financing is going up. I'm curious, did you all think about your business in terms of, you know, a spread over your incremental cost of capital? I'm just wondering if I can get some insight into how that hurdle rate is evolving. Then I've got a couple follow-ups.
Doran Hole (EVP and CFO)
You know, we've seen interest rate fluctuations over the years, and I think that our hurdle is remaining relatively constant as a you know, kind of mid-teens ROE target for assets that are on the balance sheet. You know, as you might expect with different types of assets and the battery, the solar, the RNG, those tend to move around quite substantially. You know, when you look at levered returns in situations where you're getting very, very high advance rates on sale-leaseback for tax equity, you know, those hurdles tend to move around when you look at an asset class by asset class basis. On a portfolio basis is the kind of way we're thinking about that.
Joseph Osha (Senior Managing Director)
Okay, the idea then is not debt rate stays the same and your cost of funding does what it does, but over time, it normalizes. You're not moving your hurdle rate up here in response to your cost of funding necessarily.
Doran Hole (EVP and CFO)
No, not necessarily. No, Joe.
Joseph Osha (Senior Managing Director)
Okay. Thanks. The second question, I think this is what Julien was getting at a little bit. You know, one of the things you've brought up in the past is that, the pricing you get, you know, out of a kind of a 20-year utility-grade offtaker for RNG just wasn't there, right? You have one. You know, it wasn't there. You know, one of the nice things that you have is the ability to put a different and perhaps more favorable capital structure around, you know, an RNG project, right?
as things evolve here, is it possible that, you know, one outcome could be, say, you know, a 20-year offtake with, you know, utility-grade offtaker and, you know, capital structure that may be a little more favorable relative to, what we see now?
Doran Hole (EVP and CFO)
Joe, at the right price, yes.
Joseph Osha (Senior Managing Director)
Okay.
Doran Hole (EVP and CFO)
That's right. You know, everything has to be taken into account, though, of course, right? As you can see, a lot of developments, a lot of different incentives floating around, a lot of different parties coming to the table. You know, we're seeing, you know, the kind of the five-year and the 10-year contracts away from the transportation market. Those aren't the same as a 20-year. When you're looking at project financing and leverage, obviously the higher interest rate environment, we have to consider that.
Joseph Osha (Senior Managing Director)
Exactly.
Doran Hole (EVP and CFO)
It's a calculation, but we still watch that market very closely, the long-term market, so that if the right contract comes along.
George Sakellaris (Chairman, President, and CEO)
Yeah, we talked about it before. Ultimately, we think it will come because the utilities, the gas, they have to decarbonize their pipeline. It's a matter of time. We feel that the prices will come up, and then we will execute longer-term contracts. We constantly monitor that market because, like, we agree with you that it will give us better financing.
Operator (participant)
Great questions. All right, just a reminder to our audience here, if you would like to ask a question, to please press star one one on your phone to be put into the question queue. Our next question comes from Ben Kallo from Baird. Go ahead, Ben.
Benjamin Kallo (Managing Director)
Hey, good afternoon, everyone. Good evening.
Doran Hole (EVP and CFO)
Good evening.
Benjamin Kallo (Managing Director)
Hey, guys. A good question I get a lot is, just as the complexity gets, as the projects get more complex, do you get a higher margin, or how do we deal with that? Just thinking about, like, complex projects and maybe that makes it harder for you guys to execute.
Doran Hole (EVP and CFO)
It depends on the way the complexity translates into risk, Ben. You know, we look at pricing on a risk-adjusted basis. I think there's a lot of different factors in addition to just the complexity of the technologies that are going into. It's not just a direct relationship as the more complex, the higher the margin. You know, you got complexity, risk associated with, you know, timelines, performance guarantees, whatever it might be that's part of the overall project, and we kinda take all of that into account. Of course, the customer and customer-type competitive nature of the business, right? If we need to sharpen our pencils on pricing to win deals that we want, then sometimes we do it, right? It's more than just the complexity.
Generally speaking, if you think about more complex projects that might have a little bit more risk in the execution.
George Sakellaris (Chairman, President, and CEO)
Yeah. The complex project is given, I would say, a competitive advantage because not too many people can provide that holistic approach on that particular project. As far as the margins, the gross profit margins, it doesn't change that much. What's happened is the project gets larger and the contribution to the overall profit, the gross profit is based very, very good.
Benjamin Kallo (Managing Director)
How do we think about your backlog? 'Cause with the IRA, how it grows. Is there a pause right now and then we get you know a big increase into the backlog? Or how do we think about that? Thank you.
George Sakellaris (Chairman, President, and CEO)
Yeah, I wouldn't call it a pause. I'll tell you, people evaluating which options to go. A lot of activity. You know, actually, we're making more proposals and talking to more customers than ever before. They take a little bit of time in order to get to the yes, and this is the way we're gonna go. We are used to that kind of environment because usually it takes us 6-12 months to move a customer from one stage to another. Then once they get the award, it takes another 12 months to go through the contract. Like we said earlier, though, the asset part of the business, it's because it's a little bit clearer which way they're gonna go, it's moving faster.
There's more traction on that right now.
Operator (participant)
All right. Wonderful. Thank you everyone for your participation in today's conference. This does conclude our program. You may all disconnect now. Thank you for your time.
George Sakellaris (Chairman, President, and CEO)
Thank you very much.