Ameresco - Q3 2023
November 6, 2023
Transcript
Operator (participant)
Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Ameresco Incorporated third quarter 2023 earnings 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 at that time, please press star one one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mrs. Leila Dillon, Senior Vice President, Marketing and Communications. Ms. Dillon, you may begin.
Leila Dillon (SVP in Marketing and Communications)
Thank you, Howard, and good afternoon, everyone. We appreciate you joining us for today's call. Joining me here are George Sakellaris, Ameresco's Chairman, President, and Chief Executive Officer, Doran Hole, Executive Vice President and Chief Financial Officer, and Mark Chiplock, Senior Vice President and Chief Accounting Officer. Before I turn the call over to George, I would like to make a brief statement regarding forward-looking remarks. Today's earnings materials contain forward-looking statements, including statements regarding our expectations. All forward-looking statements are subject to risks and uncertainties. Please refer to today's earnings materials, the safe harbor language on slide two, and our SEC filings for a discussion of the major risk factors that could cause our actual results to differ from those in our forward-looking statements. In addition, we use several non-GAAP measures when presenting our financial results. We have included the reconciliations to these measures in our supplemental financial information.
I will now turn the call over to George. George?
George P. Sakellaris (Chairman, President, and CEO)
Thank you, Leila, and good afternoon, everyone. We ended the quarter with a record total project backlog of $3.7 billion, which was up 14% sequentially and 41% versus last year. We added an impressive $700 million in new project awards during the quarter, bringing our year-to-date awards of $1.7 billion, more than double last year's level. We anticipate that our new awards will continue to grow, given a 35% increase in proposal activity as compared to last year's levels. This backlog, together with our energy asset and operational maintenance visibility, gives us over $7.2 billion in total multiyear visibility of profitable revenue, supporting our confidence in Ameresco's long-term growth. We did, however, face a number of industry-wide and company-specific challenges which impacted our third-quarter results. We are very disappointed.
We are pleased with the progress we made in building our long-term business momentum. We also added over 50 megawatts of assets in development in Q3, ending the quarter with almost 600 megawatts of assets in development and construction. This is a 30% increase from the 460 megawatts at the end of last year. While our long-term prospects have never been better, I did want to comment on some of the recent industry challenges. In our projects business, we are seeing longer cycles when converting our awarded projects into contracted backlog. These contracts are being delayed as some customers are taking longer to proceed with the actual implementation of project work. It's important to note that we have not experienced any cancellations, just a lengthening of the sales cycle in moving awards to contracts.
Like others in the industry, we also continue to face supply chain delays on certain components, as well as tightness in the labor market. Our energy asset business has been challenged by both downtime at some of our biogas plants, as well as delays in the development and construction of some of our assets, especially our larger, more complicated plants, such as RNG. While assets always incur downtime, the levels we have faced over the last few quarters have been considerably greater than budgeted, driven by several factors out of our control, including adverse weather conditions and utility interruptions. The asset construction timetables have stretched as a result of industry-wide component and labor shortages, as well as administrative bottlenecks. Again, while these delays are frustrating, it's important to keep in mind that all of these profitable assets will be built. It's just taking longer than originally anticipated.
As the company continues to grow, we are optimizing the operational structure at Ameresco to bring more uniformity and scalability across all of our geographies and business units. We are making these changes to increase our ability to react to changing market conditions more quickly and to drive increased corporate efficiency. And with our tremendous project backlog, we have increased our focus on project execution and cash flow generation. In light of the continued industry challenges impacting conversion times and execution, we are revisiting some of our assumptions around guidance. Doran will provide more details on the numbers during his financial review. However, even with these challenges, we couldn't be more optimistic about our future. Ameresco is highly profitable, and we continue to expect substantial growth in 2024 and beyond. 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 second quarter revenue of $335 million was below our expectations, as project delays and asset downtime impacted revenue. Our project revenue was particularly impacted by a lengthening in the cycle of converting awarded backlog to contracted backlog, as well as continued industry-wide supply chain issues that are extending our construction timelines. Energy asset revenue grew 6%, largely due to the greater number of operating assets compared to last year, as well as higher RIN prices. These benefits helped to offset greater-than-expected downtime at our biogas facilities, as well as delays in bringing some new assets online.
Our O&M business delivered another consistent quarter with 4% growth, while our other line of business experienced a slight decline in revenue, driven by end-market softness at our off-grid solar business. Gross margin expanded to 19%, but did not meet our expectations as the downtime I just mentioned and project mix impacted our results. I want to emphasize that we have not seen any fundamental change in our overall project gross margins, as the expected margin within our backlog has been quite stable for at least two years. We generated adjusted EBITDA of $43.3 million in the quarter. Our GAAP results for the quarter include a discrete tax benefit of $7.2 million related to a prior year's Section 179D tax deduction allocated from a customer.
To maximize our earnings, we'll continue to take advantage of all of the benefits available to us and our customers as part of the IRA and other favorable legislation. Our long-term revenue visibility remains strong as ever. As George mentioned, we ended the quarter with a record total project backlog of $3.7 billion. This is an impressive increase of 41% versus last year and a sequential increase of 14%, driven by winning over $700 million in new project awards during this quarter alone. Our operating energy asset visibility is approximately $2.3 billion, representing both contracted revenue as well as a conservative estimate of lifetime uncontracted RNG revenues. These metrics, together with our O&M backlog, give Ameresco visibility to over $7.2 billion of future revenue.
Importantly, this does not include any revenue contribution from the 596 megawatts of energy assets in development and construction. The timing of placing these assets into operation can be anywhere from under a year for small, more simple assets, to 4+ years for more complex assets, such as RNG facilities. Unfortunately, this timeframe has recently been increasing due to labor and equipment availability, along with permitting delays. However, we continued our high rate of conversion with approximately 90%+ of our energy assets either successfully placed into service on our balance sheet or monetized through a sale to a third party. We continue to field many questions on how higher interest rates will impact Ameresco, especially as it relates to our energy asset business.
Compared to many in our industry, the inherent diversity of our business model gives us the flexibility to adjust to changes in the business environment. We have the optionality to develop profitable assets and then either hold them on our balance sheet as an operating energy asset, or to sell to a third party and recognize project revenue if the assets do not hit our risk-adjusted Levered IRR hurdle rates. While some assets may not hit our own hurdle rates, they're well within the return profile of many energy asset buyers and aggregators ready to add assets to their portfolios. Such a sale would often come with an attached O&M contract. This strategy is not new for Ameresco, as recycling our cash flow through asset sales has been part of our business model for several years.
In the end, we believe that our flexible corporate model with project O&M and asset business lines allows us to continue to benefit from the rapid growth in the deployment of clean technologies, even in a high-interest rate environment. Our ability to finance our growth remains excellent. During the quarter, we secured over $500 million in financing commitments, bringing our year-to-date total to over $1 billion. While the clean tech industry at large has experienced credit tightening and expansion of spreads, we are particularly pleased that in our recent financing, credit spreads for Ameresco's high-quality asset portfolio continue to be stable. We have a number of attractive options for financing our growth, including non-recourse project-level debt, tax equity, and the recycling of capital through asset sales. We are adjusting our 2023 guidance in response to the items which we described earlier.
We now anticipate full year 2023 revenue, Adjusted EBITDA and EPS to be approximately $1.35 billion, $165 million, and $1.20 at the midpoints, as detailed in our press release. We now expect to place between 120 and 130 megawatts of energy assets in service for all of 2023, including the recently acquired Los Alamitos microgrid project and our second 5-megawatt RNG plant. A third RNG plant is expected to be at mechanical completion by the end of the year and fully commissioned in early 2024.
While we will be providing detailed full year 2024 guidance when we report our fourth quarter and full year results, we want to take this opportunity to comment on our 2024 Adjusted EBITDA target of $300 million, which we originally provided in early 2022. Given the lengthening in the sales and construction cycles in our project and energy asset businesses, we now expect the 2024 Adjusted EBITDA could be approximately $250 million. I want to make it clear that none of this Adjusted EBITDA opportunity has been lost. It is just being delayed, and this new Adjusted EBITDA level still represents impressive growth compared to our expected 2023 results, and still fits in the framework of our long-term 20%+ Adjusted EBITDA growth target.
Operating leverage remains top of mind as we remain diligent on OpEx, further bolstered by our internal optimizations. Now I'd like to turn the call back over to George for closing comments.
George P. Sakellaris (Chairman, President, and CEO)
Thank you, Doran. As we have discussed in detail during this call, while we continue to face some headwinds, our long-term growth opportunities have never been better. The company is redoubling its focus on profitable execution and cash flow generation, and we look forward to detailing our success in future quarters. In closing, I would like to once again thank our employees, customers, and stockholders for their continued support. Operator, we would like to open the call to question now.
Operator (participant)
Yes, sir. Ladies and gentlemen, if you have a question or comment at this time, please press star one, one on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press star one, one again. In the hopes of addressing as many of your questions as possible, we ask that you please limit yourself to one question and one follow-up. Again, please limit yourself to one question and one follow-up. If you have additional questions, you may reenter the queue again by pressing star one, one. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Noah Kaye from Oppenheimer and Company. Mr. Kaye, your line is open.
Noah Kaye (Managing Director and Senior Analyst in Sustainable Growth and Resource Optimization)
Thanks for taking the questions. I was wondering if I could start off by just trying to get a sense of the bridge between the prior and revised guidance. When we look at the essentially $50 million difference in EBITDA. Can you kind of walk us through what were the main components as quantitatively as you can? Obviously, you commented to both projects and energy assets, but if you could help us get a sense of the bridge, that would be really helpful.
Doran Hole (EVP and CFO)
Sorry, to clarify, Noah, you're talking about 2024?
Noah Kaye (Managing Director and Senior Analyst in Sustainable Growth and Resource Optimization)
No, 2023, actually. Thanks for clarifying.
Doran Hole (EVP and CFO)
Okay, thanks. So just first and foremost, I think the point is that the ramp in 2023 really relied on some solid execution and conversions of awards to contracts happening in Q3. That didn't materialize the way we expected it to, and so as a result of that, we've kind of adjusted this guidance to push things to the right, as you might expect, and as you've probably seen us do before. So, you know, through Q2, you know, we're executing on our contracted backlog as you saw higher than expected revenue performance. But then we also had, you know, a relatively high amount of, you know, second half 2023 guidance there in the awarded and contracted backlog.
And, you know, I think with, with the conversions being delayed, you know, several large projects, I think that, that was one of the things that just kind of resulted in the pushout. I, I don't know that we want to go into any more detail beyond that.
George P. Sakellaris (Chairman, President, and CEO)
Well, the
Operator (participant)
Understood
George P. Sakellaris (Chairman, President, and CEO)
... the operation of the assets contributed to that as well.
Doran Hole (EVP and CFO)
Yes. Asset operation. Yeah.
Noah Kaye (Managing Director and Senior Analyst in Sustainable Growth and Resource Optimization)
Right. Right, right. So not possible to sort of say whether it was in a half and half projects and assets, that's, you're not gonna be able to provide that detail? I guess, I guess that's affirmed. Okay, understood. Understood. You know, you mentioned earlier, or one of the benefits of the model is the ability to be kind of flexible around capital. Can you talk a little bit about your plans for capital recycling here and how you're thinking about—you know, leverage and financing. You mentioned, you know, securing a good amount of capital already this quarter, but just want to understand how you're thinking about capital recycling levels, and how soon that might occur.
Doran Hole (EVP and CFO)
So, look, I think that was really designed as a reminder that this is part of the business model, that we will look to sell assets. I think as I talked about last quarter, with higher interest rates, we're starting to see a little bit of, you know, a little bit of challenge in the levered IRR targets that we have. And as you know, some of these assets take a while to sort of make their way through the asset and development metric and into something that's in operation.
So if we experience some pressure on the interest rate, what we found is that the market still exists for those assets at return hurdles that are lower than ours, and we will regularly work on kind of turning around and entering into sales agreements with those assets pre-construction, so while they're still in development, such that it effectively converts it into project business for us, as opposed to looking at it as a distinct kind of business line. I would say it's fair to say it's going to be consistently kind of dynamic, if that's a good oxymoron for you, as we go forward.
Noah Kaye (Managing Director and Senior Analyst in Sustainable Growth and Resource Optimization)
Sure. Maybe one last question. Sorry, go ahead, George.
George P. Sakellaris (Chairman, President, and CEO)
No, but still, we have so many projects in development, assets in development, so this gives us an opportunity to monetize those assets in development and still maintain our targets of, the ones we hold, about at least 20% growth per year in the ones we hold. And, this interest rate environment, I think it's a good opportunity to recycle some of that, cash. And that's why on my comment too, the project business, the backlog is growing so big, so large, we refocused to generate, to build, build more of the projects out as we go down the road to generate more cash internally rather than looking at it from the outside.
Doran Hole (EVP and CFO)
Yeah. I mean, it, it allows us to maintain that growth rate we're expecting and hold on to our mid-teens IRR target.
George P. Sakellaris (Chairman, President, and CEO)
Yep.
Doran Hole (EVP and CFO)
At the same time, stay in front of our customers, right?
George P. Sakellaris (Chairman, President, and CEO)
Right.
Doran Hole (EVP and CFO)
We're, you know, continuing to find the right financing on a non-recourse basis for the assets that we want to keep.
George P. Sakellaris (Chairman, President, and CEO)
Yeah.
Doran Hole (EVP and CFO)
You know, if the returns aren't there, at least we're staying in the market, we're staying in front of our customers. We're still developing a good amount of assets.
George P. Sakellaris (Chairman, President, and CEO)
That way, Noah, we don't overstress our balance sheet. You know?
Noah Kaye (Managing Director and Senior Analyst in Sustainable Growth and Resource Optimization)
Right. I know you, I have a lot of other questions, but I'll take them offline. You got a lot of analysts to get to.
George P. Sakellaris (Chairman, President, and CEO)
Yeah.
Noah Kaye (Managing Director and Senior Analyst in Sustainable Growth and Resource Optimization)
Thank you.
Doran Hole (EVP and CFO)
Thank you, Noah.
Operator (participant)
Thank you. Our next question or comment comes from the line of Stephen Gengaro from Stifel. Mr. Gengaro, your line is now open.
Stephen David Gengaro (Managing Director and Senior Equity Analyst)
Hi. Good afternoon. Can you hear me okay?
Doran Hole (EVP and CFO)
Yes, sir.
George P. Sakellaris (Chairman, President, and CEO)
Yeah.
Stephen David Gengaro (Managing Director and Senior Equity Analyst)
Oh, great. Thank you. So, you know, I guess my biggest, my big picture question is when we think about, you know, the quarter, and obviously you, you've laid out the challenges you've seen and you kind of gave this preliminary look into 2024. When we think about your handle on the issues and what kind of gives you confidence that you start to get, you know, kind of additional momentum traction to 2024, which makes those targets realistic?
George P. Sakellaris (Chairman, President, and CEO)
Well, we took into consideration what happened to us for this particular quarter, and basically we extrapolated. We assume that these conditions will continue for the foreseeable future. And between all of us, that's one of the mistakes that we had made. I think we let our guard down a little bit by overperforming the first two quarters, even though we start realizing that a couple of the awards were not moving to the contracts as fast as we had contemplated. But then it became across many, many projects, not just the ones that we could see. And then the other thing that surprised us a lot is the extension of the implementation schedules. We got stuck in quite a few of the projects in executing because we couldn't get some materials.
On a couple of them, we couldn't get the right labor in a timely fashion. When I said the administrative challenges that we faced, you won't believe it. Some of the permitting used to take a couple of weeks. It takes more than 3-4 months because nobody shows up to review the applications. So we feel very good, and that's why the project business and the project backlog now, because it's getting to a point that we feel that we can execute on 2024. And especially on the level that we afford a customer at this point in time.
And that's why I think, and we will give more detail when we talk about the 2024 numbers, after the end of the year and give a little bit more color and details to it. But right now, we feel pretty good where we are, that we have taken into account what's happening in the marketplace.
Stephen David Gengaro (Managing Director and Senior Equity Analyst)
Thanks, George. And I thought it sounds like this, but so you feel like those expectations are accounting for things that kind of you can control versus what you kind of can't control going into next year. Is that a reasonable way to think about it?
George P. Sakellaris (Chairman, President, and CEO)
That is correct, yes.
Stephen David Gengaro (Managing Director and Senior Equity Analyst)
Okay.
George P. Sakellaris (Chairman, President, and CEO)
That's why in my comment, you know, I said we feel very, very good about the future, where we are in the trend of the business. It's very good. It just is taking a little bit longer to execute than what we— You know, we've been in this business a long time, and we have the metrics we thought down pat. And to be honest with you guys, I thought that this supply chain issue will be done by now. But what is happening, I think, and that's why we get stuck on the electrical side, especially with the equipment, with this everything going to be electric. It has bottlenecks of not only the capability of the various manufacturers in building transformers or control panels and so on.
The beauty, none of our projects has been lost. They're all there, and we're just moving at a little bit slower pace.
Mark A. Chiplock (SVP and Chief Accounting Officer)
Mm-hmm.
Doran Hole (EVP and CFO)
And Steve, this is the importance of controlling OpEx here.
George P. Sakellaris (Chairman, President, and CEO)
Yeah.
Doran Hole (EVP and CFO)
You know, because we're focusing on earnings generation, we're going to control OpEx and, you know, continue to generate the EBITDA that we expect to generate. You know, frankly, we're still working to execute contracts with our vendors and our suppliers prior to executing our customer contract to de-risk margin. We're still working toward that. It's just that we've had a few of these adjustments come with some of the projects that have been in the backlog for a bit, with the kind of lengthening of the cycle.
Stephen David Gengaro (Managing Director and Senior Equity Analyst)
Got. Understand. Now, thank you both. That's helpful.
George P. Sakellaris (Chairman, President, and CEO)
Thank you.
Doran Hole (EVP and CFO)
Thank you.
Operator (participant)
Thank you. Our next question or comment comes from the line of Eric Stine from Craig-Hallum. Mr. Stein, your line is now open.
Eric Stine (Senior Research Analyst)
Hey, everyone. So I just want to dig in here a little bit more just to try to understand this. So, I mean, I know supply chain issues, you know, and labor, it's been a pretty consistent challenge. I mean, is this something where you saw that intensify, or is it where you just had a number of larger projects, things you were counting on contributing to the back half of the year, that it was just a greater impact from those headwinds?
George P. Sakellaris (Chairman, President, and CEO)
Great, great question. And especially, that's exactly what happened, especially some of the larger projects. They were already scheduled, and you say this particular contract, so now it's going to do XYZ, and all of a sudden, that contract was there. Or, and this is the key, you couldn't get the qualified workers to show up at the work site, at the site. And some of them, we used to go out with an RFP to 12-16 vendors, and sometimes we'll get one or two responses. And you will find out that one of them is not even qualified. So it, labor issue has become a huge concern.
Eric Stine (Senior Research Analyst)
Got it. And then, I mean, you've had great growth in your project business. I mean, the you mentioned permitting and that sort of thing, but I mean, is this the area of your business where you can safely say interest rate- higher interest rates, that that is having a tangible impact, negative impact?
Doran Hole (EVP and CFO)
Not really. No, no.
Eric Stine (Senior Research Analyst)
No.
Doran Hole (EVP and CFO)
We haven't really seen that on the project business.
Eric Stine (Senior Research Analyst)
Okay.
Doran Hole (EVP and CFO)
I think-
Eric Stine (Senior Research Analyst)
And then-
Doran Hole (EVP and CFO)
I think that, it's... Yeah, go ahead.
Eric Stine (Senior Research Analyst)
No, I was just going to say, so the $250 that you're talking about for the early look at 2024, just to confirm, you're not really expecting necessarily improvement in these areas, right? You're kind of expecting status quo from where things stand now, playing that out through 2024, rather than, you know, anticipating that there's, that there's improvement in a lot of these areas.
George P. Sakellaris (Chairman, President, and CEO)
That's, that's what we did, and, and Mark did a great due diligence on that. You can make a comment, but, that's exactly what we tried to do, and, and, and we think we have represented it very accurately.
Eric Stine (Senior Research Analyst)
Okay, thank you.
Operator (participant)
Thank you. Our next question or comment comes from the line of Tim Mulrooney from William Blair & Company. Mr. Mulrooney, your line is now open.
Tim Mulrooney (Senior Analyst)
My question is on your 2023 guide. The midpoint of your guide is suggesting, I think, still a nice ramp up in fourth quarter revenue, up more than 20% sequentially, I think, from the third quarter at the midpoint. Can you just talk about the primary factors contributing to that acceleration? Is it collection of unbilled revenue at SCE or other things?
Mark A. Chiplock (SVP and Chief Accounting Officer)
Yeah, Tim, this is Mark. Yeah, it's mostly, you know, assuming good execution on our contracted backlog. It assumes very little, you know, awarded revenue. And then we took a look at that, and, you know, we have to take into consideration the slippage that we're seeing. But, you know, with the active projects that we currently are working on, we feel like the contracted revenue is a number that we can deliver on in Q4.
Tim Mulrooney (Senior Analyst)
Okay. Thank you, Mark. My follow-up, I just wanted to ask about the administrative bottlenecks that you listed as being a factor impacting third quarter results. Can you just talk in a little more detail about what those were? You know, if they were specific to one or two projects, or if it's a broader issue that you'll expect will carry into the fourth quarter and beyond? Thanks.
George P. Sakellaris (Chairman, President, and CEO)
Well, I know a couple of the assets that were delayed because of whether it's the solar plants that they were not connected because of the utility. We didn't get out there to connect the project or some of the renewable gas plants that we were built in. We got delayed because I think it was 3 months before somebody went there to review the applications. So that delayed that particular project for about 3 months.
Mark A. Chiplock (SVP and Chief Accounting Officer)
Yeah. And I think the administrative delays really that are impacting the timing of awards converting to contract, that's, yeah, that's something that we really started to see a little bit in towards the end of Q2 with some awards that we expected to convert. We really felt the impact in Q3. And so to your question, yeah, we do expect that to continue, continuing through Q4. And as these are all really just kind of pushing out to the right, so, but we've taken that into account in our revised guidance.
George P. Sakellaris (Chairman, President, and CEO)
See, what happened, the fact that everybody hasn't turned back to work, it does impact in the implementation of our work, and I think many other people.
Mark A. Chiplock (SVP and Chief Accounting Officer)
Got it. Thank you.
Operator (participant)
Thank you. Our next question or comment comes from the line of Josh- Joseph Osha from Guggenheim. Mr. Osha, your line is now open.
Joseph Amil Osha (Managing Director and Senior Research Analyst)
Yeah. Hi there, everybody. I figured we might shift gears a little bit here. When I look at, you know, where we stand in the current quarter, and in your deck, you point out that a lot of business is non-recourse. But, you know, if you annualize Q3, we're now standing at about 8.3 times debt EBITDA. And on your new guide, it's about 8 times likely debt EBITDA for 2024. The business hasn't generated, even wrapping in ESPC, any free cash flow since 2020, and it's generated $80 million since the beginning of 2019.
So I guess I'm just asking, you know, we can talk about the growth in the energy assets business here, but at what point does this business begin to generate cash? And how are you thinking about that as we go into 2024?
Mark A. Chiplock (SVP and Chief Accounting Officer)
Yeah.
Doran Hole (EVP and CFO)
Joe, the first thing I'd point out is that the adjusted cash from operations was positive, right? As we've talked about, you know, we have the discretion to, you know, work on the cadence of asset investment as necessary if we need to effectively match up with our operating cash flow. Understand that the higher leverage numbers that you're talking about, you pointed out yourself, that EBITDA multiples is not a metric that's used when determining advance rates under non-recourse debt. I think we can all kind of agree on that, on that point, and therefore, those figures will end up looking higher than what you would think about from normal corporate credit facility.
As far as cash flow is concerned, I think that that is something, and we've discussed this, we are gonna be looking at, how we can start to talk about, the company's history of generating cash and what that looks like versus how much is being invested into assets. However, broadly speaking, the only other thing I would say about the leverage overall is that it does remain a bit inflated on the basis of the delayed kind of SoCal Ed projects and wrapping those up, getting that cash in.
We've actually used quite a bit of our own operating cash flow to pay down the debt, the corporate debt, and so we've got quite a bit of unbilled there that you'll see kind of turn around, you know, call it Q1-ish, to kind of show the cash coming out of the SCE project. So that will help us in terms of delevering the corporate facility. You know, at this stage, I don't know how much more I can say to address your-
Joseph Amil Osha (Managing Director and Senior Research Analyst)
Sure.
Doran Hole (EVP and CFO)
Your question.
Joseph Amil Osha (Managing Director and Senior Research Analyst)
Sure. And I guess, kind of, just to follow on, it's the second part of the same question. And look, this debate's been going on a lot in some companies that are kind of comparable to you, like, you know, some of these residential solar, you know, businesses. Yeah, it is a question of how you, you balance growth and, and cash flow generation.
So I guess I'll just ask you or George or whoever, you know, is there a point when it's a $2 billion-dollar company or a $3 billion-dollar company or whatever, you say, "Okay, we're gonna maybe take a slightly different view of how we think about growth versus generating cash flow and maybe ultimately return of capital to shareholders?" I'm just trying to get a sense as to the philosophy here that underpins, you know, how you're making these decisions. Thank you.
Doran Hole (EVP and CFO)
Yeah.
George P. Sakellaris (Chairman, President, and CEO)
Well, that's why, the philosophy, especially in this higher interest environment, that's why we want to monetize a good part of the assets we have we develop, and then focus more in the project business that's which generates pretty good cash flow. And basically, rather than issuing new stock to finance potential assets that we own, it comes all from internally generated cash flow. And in addition to that, I think the guideline that we will be using going forward, that even that we will not invest all of that all that cash flow generated from projects and existing assets and O&M, we will retain some of it to delever the company.
Joseph Amil Osha (Managing Director and Senior Research Analyst)
Okay. Thank you very much.
Operator (participant)
... Thank you. Our next question or comment comes from the line of Julian Dumoulin-Smith from Bank of America. Mr. Dumoulin-Smith, your line is now open.
Julien Dumoulin-Smith (Managing Director)
Hey, good afternoon, team. Thank you, guys, very much appreciate it. Just following up on a couple things here. First off, how do you think about the timeline for these projects to get, quote-unquote, back on track? Obviously, bringing down 2023 and 2024 by roughly 50. I mean, is there a catch-up here in 2025, or are you thinking that, you know, categorically, we're rolling the ball forward across the four, across the forward look here? When do we get kind of that view on 2025? And then as you think about, you know, kind of catching back up here, is there an element of higher OpEx that needs to play into this to get things back on track? Or, you know, where is there any other risk on the SG&A?
And then maybe also just to clean up on that last one on payments and cash, do you want to just clarify a little bit more about, you know, payments on the batteries here and the timeline there?
George P. Sakellaris (Chairman, President, and CEO)
Sure.
Julien Dumoulin-Smith (Managing Director)
But that will support 25.
George P. Sakellaris (Chairman, President, and CEO)
First answer, no, on the OpEx. The OpEx will remain under control. We don't need to grow our OpEx in order to grow the company. We had $700 million in new awards come in the door this quarter, $1.7 billion for the year. The business is going to grow. I don't necessarily view this as a catch-up when you look at 2025 or beyond. Obviously, we don't talk about periods in detail that far into the future, but what we're observing is the timelines are stretching with respect to the sales cycle and the construction cycles, right? Macroeconomically, everyone understands the labor shortage issues that are in the market. We've got to continue to watch those. However, the IRA and the amount of awards coming through, you know, the overall growth of the business is potentially still there.
It doesn't necessarily mean that we need those timelines to compress to really continue to grow at our, you know, kind of 20% per year EBITDA target. That's what we're, that's what we're trying to, you know, trying to get to. So, that's the response to the first two. With respect to SoCal, you know, basically when we hit substantial completion, you know, we've got 60-day payment terms. It's in the contract, it's public, people can see that. So you can assume that, you know, while we're talking about two of the projects being completed in Q4, and then a third one in the first half of the year, kind of project forward from there. We're not going into deep detail about those cash flows, Julian.
Julien Dumoulin-Smith (Managing Director)
Right. And just timeline-wise here, are we confident that, you know, you guys have a real sense of when the new timelines are for the project push? I mean, seems like this has materialized relatively recently. I mean, if, you know, quarter over quarter here, just curious, I mean, how do you know the depths of these delays here? If you can speak a little bit more specifically to it, considering some of the larger projects like RNG and how lumpy they can be.
George P. Sakellaris (Chairman, President, and CEO)
I mean, I would, I would say that, from what we have seen so far, like the RNG project, 6-8 months delay, pretty much. And then on the, the other projects, in construction, you know, we used to say we have 1-2-year construction schedule. Now it looks more than that, 1.5 to almost 3 years of construction, some of the $100 million-plus projects. And, I mean, I tell you guys something that happened, you know. Projects that they were in construction, and we deliver the equipment to the particular air base, and then because we're doing work on the North Pole, somehow, some way, the stuff didn't get loaded into the plane, and that's a 6-month delay on the particular project. We lost $12 million of revenue on that one, but it was a loss.
But things like that are happening left and right, and that's why we felt it was prudent on our part to try to incorporate as much of all this stuff into our forecast. But the business is not lost, it's there, and it will be done. And I think the 20% target that we have on EBITDA in a five-year growth, I think we feel very comfortable with that.
Julien Dumoulin-Smith (Managing Director)
Thanks, guys.
Operator (participant)
Thank you. Our next question or comment comes from the line of George Gianarikas from Canaccord Genuity. Mr. Gianarikas, your line is now open.
George Gianarikas (Managing Director)
Hi, thanks for taking my questions. So I just wanted to get on the same points. You talked about delays in contract conversions, and I think I heard during the call that you mentioned that you don't think any of those delays are related to the changes in the interest rate regime. Is that correct? Is that what we heard on the call?
George P. Sakellaris (Chairman, President, and CEO)
That is, that is correct.
Julien Dumoulin-Smith (Managing Director)
Yeah, that's accurate.
George P. Sakellaris (Chairman, President, and CEO)
That is correct.
George Gianarikas (Managing Director)
Can you then explain-
George P. Sakellaris (Chairman, President, and CEO)
Some of them, some of them are just administrative, you know. The boards don't meet or, people don't show up, or bureaucratic nightmare in some of the federal contracts. But on the other hand, you know, the awards are that $700 million. One third of that is federal contracts. It's getting them, but then moving them the next stage is getting tougher, and then implementing them is getting even more tougher.
George Gianarikas (Managing Director)
So from the top of the funnel, when you have this awarded project backlog that is now stretched, you know, to $2.5 billion, it's just converting that to contracted. It's strictly a function of just administrative delays, and then somehow project delays are impacting that conversion as well? Is that... Is this just where the administrative issues are showing up?
Doran Hole (EVP and CFO)
... No, that's really the administrative side of it, what George was just mentioning. The project delays are post-execution of the contract.
George Gianarikas (Managing Director)
Right.
Doran Hole (EVP and CFO)
Actually, the construction timelines-
George Gianarikas (Managing Director)
The schedule.
Doran Hole (EVP and CFO)
Implementation timelines and the schedules are stretching out a bit-
George Gianarikas (Managing Director)
Right.
Doran Hole (EVP and CFO)
-based on labor and material availability.
George Gianarikas (Managing Director)
So this that you have on one of your slides, so this 12-24 months to contract, you, I think you said it's more like 18-36 months now, and the contract, is that right?
George P. Sakellaris (Chairman, President, and CEO)
I will let Mark answer the question better than me.
Mark A. Chiplock (SVP and Chief Accounting Officer)
Yeah, I mean, we're still seeing in that range, but it, you know, and it's not impacting every one of our awards. But, you know, what we've been talking about is, you know, we have several larger awards that are in, you know, kind of more mature stages of the contracting process, but these administrative delays are dragging them out. So, you know, on average, we're still within that range overall, but it's really been, you know, several large projects that we had expected to convert to get into that next stage of active construction, where we've seen the delays.
And then, you know, to the other points we've made, once they have contracted, that implementation period is starting to take a little bit longer to get, you know, we need to get the workforce labor mobilized, get materials to the work site. That is all then taking time. So, it's all really kind of stretching between the conversion and then the ramp up in the implementation, which is causing a lot of the pushouts.
George Gianarikas (Managing Director)
Okay. And just maybe the final question, you mentioned that the stronger RIN prices are offsetting some of the unplanned downtime at your RNG facilities. Now, as you ramp those back up, what's your outlook? Anything you can share on the recent, you know, surge in D3 RINs and how you plan to monetize those? Have you missed an opportunity here to monetize some of your RINs based on the downtime? Thank you.
George P. Sakellaris (Chairman, President, and CEO)
Well, we're taking advantage of the market always. You know, we started the year with about 50% merchant in. But right now, what we have left for this year is probably the production of the last couple of months. You know, we've been monetizing month to month, and we got pretty good prices, I would say. And it's been reflected in our guidance. For this year as well as next year. The other thing I want to point out, and I think I did mention it in one of the calls last time for 2024, we were always optimistic about the RIN prices and the what we had used for that old estimate. It was pretty much what the RIN prices are today, right now.
Operator (participant)
Thank you.
George Gianarikas (Managing Director)
Thank you.
Operator (participant)
Our next question or comment comes from the line of Moses Sutton from BNP Paribas. Mr. Sutton, your line is now open.
Moses Sutton (Managing Director)
You're taking my questions, and first, for what it's worth, I do not think you should slow growth like a peer of mine noted, in order to return cash when there's real growth on the table. Yeah, you know, I guess first question, how do you think about Adjusted EBITDA margins at the project business? You know, it's 4% for the nine months year-to-date. I think of this closer to 10% typically. Is this, is this due to inflation? Is it due to certain mismatches on delay? How, how do we think of that on the project side for Adjusted EBITDA?
Mark A. Chiplock (SVP and Chief Accounting Officer)
Yeah, I mean, the 10% sounds a little bit high, but I think that, you know, it's typically a function of mix, right? And so when you're comparing year-over-year, it's gonna be a function of, you know, the mix of projects that are active at that point that are impacting the margin. You know, I think we've been probably closer to 6% historically, so we're not that far off.
And again, I think we've seen, you know, some of our mix more recently have a little bit lower margin profile, even though overall margins have been expanding. So, you know, I think we're not far off of kind of where our historical margins have been.
Moses Sutton (Managing Director)
Got it. Got it. That's helpful. And then I guess, back on the D3 RIN topic. So as the RINs on the spot basis sit near the 2021 peaks, I know you typically talk about a certain, like, 50% spot exposure or, or, or spot/hedges, 50% contracted. Is the delay in RNG projects actually offering you the ability to contract, you know, more of the future RINs that you expect as projects roll online next year at a higher contracted price than you would have prior? Is that already embedded in the 250-
George P. Sakellaris (Chairman, President, and CEO)
Yeah, no, it's a very, very good point. Actually, we are talking to a couple of firms right now. We have a couple offers on the table. That's why we're not forecasting RIN prices for next year and so on. That we might enter into a couple of long-term contracts with much higher prices than what we had, let's say, entered to the contracts a couple of three, what, three years back. So no, we are looking at it, and no question about it. And as soon as we feel a little bit more comfortable with the prices, we will execute them.
Moses Sutton (Managing Director)
That's very helpful. Thank you. And what's long term considered now in terms of tenure, in terms of years?
George P. Sakellaris (Chairman, President, and CEO)
You know, we have... Oh, my God, up to 15 years.
Moses Sutton (Managing Director)
Excellent. Thank you. I'll get back in the queue.
George P. Sakellaris (Chairman, President, and CEO)
Yeah.
Operator (participant)
Thank you. Our next question or comment comes from the line of William Griffin from UBS. Mr. Griffin, your line is now open.
Griffin Smith (Financial Professional)
Great, thanks very much. First question, was just hoping you could maybe give a little more color around the RNG financing you recently announced with HASI. My understanding is that structure is flexible and that there might be a return sharing component to your actual costs to that financing. Is that something you're able to elaborate on?
Speaker 18
... Hey, folks, this is Josh Baribeau here. So, it's not variable. How it works is there's fixed cash component interest rate until the loan is amortized. And then after that, Hannon gets a bit of a cash sweep until they achieve an IRR, internal rate of return, on their initial investment amount.
Pavel Molchanov (Managing Director)
All right. Are you able to disclose what the actual, I guess, the upfront rate is for you, the effective rate for you is on that financing?
Speaker 18
Yeah, that's in the 8-K, and we're accruing at that IRR rate.
Pavel Molchanov (Managing Director)
Got it. All right, thanks very much.
Operator (participant)
Thank you. Our next question or comment comes from the line of Christopher Souther from B. Riley. Mr. Souther, your line is now open.
Christopher Souther (Senior Equity Analyst)
Thanks for taking my questions here. With the cycle being extended for, you know, contracting awards and implementation, you know, I think this year was much more back-end loaded with the visibility you were gonna have. So I'm just kind of curious how you're thinking about, you know, the visibility today and, you know, when you give kind of a full guidance for 2024, you know, should we, you know, consider expectation that there's, you know, gonna be a lot more kind of visibility on, you know, awarded kind of contracted backlog as we kind of enter the year? Or is that, you know, maybe wishful thinking on my end? Just how do you think about, like, the visibility on that 250?
George P. Sakellaris (Chairman, President, and CEO)
I think we have very good visibility, and we're relying more on contracted than we invest where we're gonna be at the end of the year on the contracted, and that gives more impact than anything else, and not rely as much... We're not gonna have a big hockey stick like we did this year for the last couple of quarter, especially where we are, so.
Christopher Souther (Senior Equity Analyst)
Okay. And then maybe on the project, you know, the potential development project sales, is there any sector in particular you're seeing that you'd be focused on for potential sales? Is it solar, batteries, RNG? Like, what you know, specific areas would you be kind of looking at there, or is it kind of all the above?
Doran Hole (EVP and CFO)
I think, not really RNG. I think we're-
Christopher Souther (Senior Equity Analyst)
No
Doran Hole (EVP and CFO)
- mostly on solar, certainly, and then the hybrid-
George P. Sakellaris (Chairman, President, and CEO)
Batteries, yeah.
Doran Hole (EVP and CFO)
Solar and battery. You know, I wouldn't put it past us to think about some of the standalone battery, you know, given the fact that, you know, some of those markets, like I said, we continue to develop in multiple markets. Some of those markets might have more merchant than we like, and so therefore, we'll work on, you know, an NTP sale of projects like that. So I think it's more along those lines versus the RNG.
George P. Sakellaris (Chairman, President, and CEO)
Yeah. Yeah, so you guys, I want everybody to understand, with developing assets, whether solar assets, battery assets, and then monetizing them, it's no different than developing the energy savings and performance contracts. Basically, we sell the receivable, and then we get the money, and then the financing, and then at the end of the day, we guarantee the savings.
This is even a simpler process, just takes a little bit longer time. And then we have the option to keep the ones that they have better returns than they meet our rate of return. And RNG projects, generally, they are more complicated, no question about it, but they, at this point in time, they have better returns than solar.
Christopher Souther (Senior Equity Analyst)
As well.
Operator (participant)
Thank you. Our next question or comment comes from the line of Pavel Molchanov from Raymond James. Mr. Molchanov, your line is now open.
Pavel Molchanov (Managing Director)
Yeah, thanks for taking the question. A lot of commentary about the core domestic business. I'll ask two questions about Europe. First of all, are any of the permitting issues and supply chain complications affecting any of your work on the other side of the Atlantic?
Doran Hole (EVP and CFO)
So first, first part of that, I will tell you, 'cause I was there last week visiting one of the sites, one of the large sites. You know, there's been a little bit, but not to the tune that we've seen here in the United States-
George P. Sakellaris (Chairman, President, and CEO)
Yeah
Doran Hole (EVP and CFO)
... with respect to labor availability and materials. I think that we, you know, especially on that 100-megawatt Delfini project that we've got in Greece, that is still kind of cruising along on time. And, you know, we've only had slight variations associated with the timeline there. So, and I think that what we're projecting on many of the new wins in the awarded category, some of which was there in Europe on the EPC side, expectations still remain strong on, availability of materials and labor in those jurisdictions where we're winning projects for them.
George P. Sakellaris (Chairman, President, and CEO)
Yeah, and that goes even in U.K. The only exception there was the Bristol City contract that we have. And we missed the numbers by a good margin there, not because we didn't have the projects, but and this is a lesson for us. Getting the projects approved through the city council and everybody else-
Doran Hole (EVP and CFO)
Mm-hmm
George P. Sakellaris (Chairman, President, and CEO)
- that has to approve those particular projects, it take considerably longer than we thought. Now we have incorporated monthly meetings, where we meet with the board and identify what projects we're gonna be doing, and have them, pretty much approved by the end of this year, what we're gonna build next year. So that one, we missed the boat as far as what we thought it was possible and what actually happened. Yeah, again, it's administrative, not because they don't wanna do or anything else, but- Yeah, administrative, and that's about the cycle of just conversion of awards to contracts.
Pavel Molchanov (Managing Director)
Yeah.
Doran Hole (EVP and CFO)
Not anything about actual construction activity.
Pavel Molchanov (Managing Director)
Right.
Doran Hole (EVP and CFO)
Furthermore, it's a push to the right.
Pavel Molchanov (Managing Director)
Yeah.
Doran Hole (EVP and CFO)
It's not a change in any of the scope of the awards that have been. We've been slowed.
Julien Dumoulin-Smith (Managing Director)
Yeah.
Pavel Molchanov (Managing Director)
Okay, clear. Oh, staying on the European theme, you, this year, I have to imagine that with, you know, some of the macro issues, multiples on prospective M&A have come down. In that context, are you seeing more opportunities to bulk up your business there, via M&A?
Doran Hole (EVP and CFO)
Yes. We don't have anything specific to talk about today, but we would agree with your comment, and we are seeing... Again, we're very opportunistic. We're still sticking to our knitting in terms of what we're looking for, management fit, financial valuation, so on and so forth. But yeah, the number of opportunities that look interesting has increased.
Pavel Molchanov (Managing Director)
Very good. Thank you, guys.
Mark A. Chiplock (SVP and Chief Accounting Officer)
Thank you.
Doran Hole (EVP and CFO)
Thank you.
Operator (participant)
Thank you. Our next question or comment comes from the line of Davis Sunderland from Baird. Mr. Sunderland, your line is now open.
Davis Sunderland (Equity Research Associate)
Hey, guys. Thank you very much for fitting me in here at the end. Most of my questions have already been asked. I just wanted to ask, is there any possibility of recovering expenses associated with some of these projects in the contracted stage that have been drawn out, similar to SoCal or other deals that you've done in the past? And my follow-up is: given the lack of visibility into labor and component shortages, how are you thinking about these variables in contracts now going forward? Thank you.
Doran Hole (EVP and CFO)
Yeah, sure. So sorry, Davis, your, your line is a little bit fuzzy, but I think I got, I think I got the question. So-
Davis Sunderland (Equity Research Associate)
I did.
Doran Hole (EVP and CFO)
The first point is, when something actually is created by a force majeure situation, yes, of course, we can, you know, we can claim back costs for certain delays, and that's always contractual. I don't have any particular anecdotes for you or numbers on that, but yes, in general, the contracts generally looking for force majeure, not necessarily a general slowdown or availability of labor, though.
With respect to looking through the remainder of the year and in talking about, thinking about that $250 number next year, we've effectively taken into account what is happening in considering the cadence of construction going forward. You know, as we talked about, we don't typically lose business out of the awarded backlog or contracted backlog, certainly not out of the contracted backlog. However, if there are slowdowns, things just kind of push out to the right. So we've adjusted expectations with respect to cadence, and we've presented numbers on that basis to you all today.
Operator (participant)
Thank you. Our next question or comment comes from the line of Greg Wasikowski from Webber Research & Advisory. Mr. Wasikowski, your line is now open.
Greg Wasikowski (Senior Analyst)
Yeah. Hey, thanks, everyone. Just one for me. I just wanna ask a little bit more about the prospect of selling off some assets and development, 'cause I just feel like I might not be grasping it or maybe I misheard it. It seems like that would allow you to, you know, stay in front of customers and maintain business within projects and O&M, which is great.
But if you're trading energy assets business for projects and O&M business, isn't that like trading a high EBIT margin business for a low one? So in a sense, you know, it wouldn't be as much pushing it out to the right as much as it would be kind of more like margin erosion for the sake of continuity.Is that, is that a fair way of looking at it, or am I off base there?
Doran Hole (EVP and CFO)
Yeah. So I'll just kind of guide you to the way we think about these things. A couple of important metrics for us when we're evaluating assets that go away from EBITDA generation and levered equity IRR are cash generation and net income.
As it turns out, some of these assets, when we look at, you know, anything that might have, you know, a merchant tail on it, others where the unlevered IRR is relatively tight versus the funding costs, we then turn our attention to, well, from an overall cash flow generation perspective, we're probably better served when we look at where the market is pricing some of those assets to perform the EPC and grab the O&M contract to generate additional cash flow and recycle that into something that's actually gonna look better for us from a cash flow and net income perspective over the long term. That's the only kind of modification I might throw there.
Greg Wasikowski (Senior Analyst)
Okay, so it's got layers. All right. Thanks, Doran. Appreciate it. That's it.
Operator (participant)
Thank you. Ladies and gentlemen, this concludes the Q&A session, and this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.