Ameresco Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 6, 2023

Key Takeaways

  • Ameresco ended Q3 with a record total project backlog of $3.7 billion—a 14% sequential and 41% year-over-year increase—providing over $7.2 billion of multiyear profitable revenue visibility.
  • Third-quarter results were weighed down by longer award-to-contract sales cycles, supply chain delays, labor shortages and increased downtime at biogas plants due to weather and utility interruptions.
  • The company lowered its 2023 guidance to ~$1.35 billion in revenue, $165 million in adjusted EBITDA and $1.20 EPS and now expects ~120–130 MW of energy assets in service, with 2024 EBITDA revised down to ~$250 million from $300 million.
  • Ameresco secured over $500 million in financing commitments in Q3 (over $1 billion year-to-date) and highlighted its flexible capital model to develop, hold or sell assets to optimize returns and liquidity.
AI Generated. May Contain Errors.
Earnings Conference Call
Ameresco Q3 2023
00:00 / 00:00

There are 17 speakers on the call.

Operator

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 speakers' presentation, there will be a question and answer session. As a reminder, this conference call is being recorded.

Operator

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.

Speaker 1

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 Hull, 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.

Speaker 1

All forward looking statements are subject to risks and uncertainties. Please refer to today's earnings materials, the Safe Harbor language on Slide 2 and our SEC filings for a discussion of the major risk factors that could cause our actual results to differ from those in our forward looking statements. In addition, we use several non GAAP measures when presenting our financial results. We have included the reconciliations to these measures in our supplemental financial information. I will now turn the call over to George.

Speaker 1

George?

Speaker 2

Thank you, Rilla, and good afternoon, everyone. We ended the quarter with a record total project backlog of $3,700,000,000 which was up 14% sequentially and 41% versus last year. We added an impressive $700,000,000 in new project awards during the quarter, bringing our year to date awards of $1,700,000,000 more than double last year's level. And we anticipate that our new awards will continue to grow given the 35% increase in proposal activity as compared to last year's levels. This backlog together with our energy asset and operational remainder visibility gives us over $7,200,000,000 in total multiyear visibility of profitable revenue, supporting Our confidence in Ameresco's long term growth.

Speaker 2

We did, however, face a number Industry wide and company specific challenges, which impacted our 3rd 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.

Speaker 2

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 and 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 On the same sales cycle in moving awards to contracts. And like Now this is the industry, we also continue to face supply chain delays on certain components as well as tightness in the labor market.

Speaker 2

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 R and D. 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 protection timetables have stretched as a result of industry wide component 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.

Speaker 2

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. Further, 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.

Speaker 2

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?

Speaker 3

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 $335,000,000 was below our expectations as project delays and asset downtime impacted revenue. Our project revenue was particularly impacted by a lengthening in the 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.

Speaker 3

These benefits help to offset greater than expected downtime at our biogas facilities as well as delays in bringing some new assets online. Our O and 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 2 years. We generated adjusted EBITDA of $43,300,000 in the quarter.

Speaker 3

Our GAAP results for the quarter include a discrete tax benefit of $7,200,000 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 $3,700,000,000 This is an impressive increase of 41% versus last year and a sequential increase of 14% driven by winning over $700,000,000 in new project awards during this quarter alone. Our operating energy asset visibility is approximately $2,300,000,000 representing both contracted revenue as well as a conservative estimate of lifetime uncontracted RNG revenues.

Speaker 3

These metrics together with our O and M backlog give Ameresco visibility to over $7,200,000,000 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 plus years for more complex assets such as RNG facilities. Unfortunately, this timeframe has recently been Due to labor and equipment availability along with permitting delays. However, we continued our high rate of conversion with approximately 90% plus of our energy assets either successfully placed into service on our balance sheet or monetized through a sale to a 3rd party.

Speaker 3

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. And such a sale would often come with an attached O and 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.

Speaker 3

In the end, We believe that our flexible corporate model with project, O and 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 $500,000,000 in financing commitments, bringing our year to date total to over $1,000,000,000 While the CleanTech industry at large has experienced credit tightening and expansion of spreads, we are particularly pleased and 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.

Speaker 3

We now anticipate full year 2023 revenue, adjusted EBITDA and EPS to be approximately $1,350,000,000 $165,000,000 and $1.20 at the midpoints as detailed in our press release. We now expect to place between 120 megawatts and 130 megawatts of energy assets in service for

Speaker 4

all of

Speaker 3

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. And while we will be providing detailed full year 2024 guidance when we report our Q4 and full year results, We want to take this opportunity to comment on our 2024 adjusted EBITDA target of $300,000,000 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 $250,000,000 I want to make it clear that none of this adjusted EBITDA opportunity has been lost. It is just being delayed.

Speaker 3

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% plus 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. Thank you, Doran.

Speaker 2

As we have discussed in detail during this call, While we continue to face some headwinds, our long term growth opportunities have never been bad. The company is redoubting its focus on profitable execution and cash flow generation, and we look forward to detail in 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 questions now.

Speaker 3

In

Operator

Our first question or comment comes from the line of Noah Kaye from Oppenheimer and Company. Mr. Kaye, your line is open.

Speaker 5

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 the $50,000,000 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.

Speaker 3

Sorry to clarify, no, you're talking about 2024?

Speaker 5

No, 2023 actually. Thanks for clarifying.

Speaker 3

Okay. Thanks. So just 1st 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 Seen us do before.

Speaker 3

So through Q2, we're executing on our Contracted backlog, as you saw, higher than expected revenue performance. But then we also had relatively high Amount of second half twenty twenty three guidance there in the awarded and contracted backlog. And I think with the conversions being delayed, several large projects, I think that was one of the things that just kind of resulted in push out. I don't know that we want to go into any more detail beyond that.

Speaker 2

Well, the operation of the assets contributed to that as well. Asset operation.

Speaker 5

Right, right, right. So not possible to sort of say whether it's going to happen half projects and assets That's you're not going to be able to provide that detail. Understood. You mentioned earlier, one of the benefits 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 Leverage and financing, you mentioned securing a good amount of capital already this quarter, but just want to understand how you're thinking about capital

Speaker 3

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 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 we experienced 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.

Speaker 3

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.

Speaker 5

Sure. Maybe one last question. Sorry, go ahead, Josh.

Speaker 2

No, but still we have so many projects in development, assets in development. So this gives us an opportunity to monetize the Assets in development and still maintain our targets of the ones we hold about at least 20 Percent growth 3rd 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 I will comment too. The project business, the backlog is growing so big, so large. We refocused to generate, to build more of the projects out as we go down the road to generate more cash internally rather Yes.

Speaker 3

I mean, it allows us to maintain that growth rate we're expecting and hold on to our mid teens IRR target. Yes. And at the same time, stay in front of our customers, right? We're continuing to find the right Financing on a non recourse basis for the assets that we want to keep. And if the returns aren't there, we 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.

Speaker 2

In that way, Noah, we don't overstress our balance sheet.

Speaker 5

Right. I know you have a lot of other questions, but I'll take them offline. You got a lot of analysts to get to. So thank you.

Speaker 3

Thank you, Noah.

Operator

Thank you. Our next question or comment comes from the line of Stephen Gengaro from Stifel. Mr. Gengaro, your line is now open.

Speaker 6

Hi. Good afternoon.

Speaker 7

Can you

Speaker 6

hear me okay?

Speaker 2

Yes, sir. Yes.

Speaker 6

Great. Thank you. So I guess my biggest my big future question is when we think about the quarter and obviously 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 kind of Additional momentum traction to 24, which makes those targets realistic?

Speaker 2

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. 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 over performing the first two quarters, even though we I realized that a couple of the awards were not moving to the contracts as fast as we had contemplated. And but then it became, of course, many, many projects, not just the ones that we had seen. And then the other thing that surprised us a lot is the extension of the implementation schedules.

Speaker 2

We got stuck in quite a few of the projects in executing because we couldn't get some materials. On couple of them, we couldn't get the right labor in a timely fashion. And when I said the administrative challenges that we faced, you won't believe it. Some of the permitting I used to take a couple of weeks. It takes more than 3, 4 months because nobody shows up to review the applications.

Speaker 2

So And we feel very good. And that's why the project business and the project backlog now because it's going it's getting to a point That we feel that we can execute on 2024, and especially on the level that We are for a customer at this point in time. And that's why I think we will give more detail when we Talk about the 24 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 We are that we have taken into account what's happening in the marketplace.

Speaker 6

Thanks, George. And my follow-up, it sounds like this, but so you feel like those expectations Or 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?

Speaker 2

That is correct, yes.

Speaker 6

Okay. Thank you.

Speaker 2

And I'm going in my comment, I said we feel very, very good about the future where we are in the front of the business. It's very good. It does it's taking a little bit longer to execute that what we we've been in this business for a long Time and we get the metrics we thought down back. 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 on the equipment With this everything going to be electric, it has bottlenecked not only the capability The various manufacturers in the built in transformers or control panels and so on. And then the beauty, None of our projects have been lost.

Speaker 2

They were all there and we're just moving at a little bit slower pace. And Steve, this is

Speaker 3

the importance of controlling OpEx here, because we're focusing on earnings generation.

Speaker 2

You're going

Speaker 3

to control OpEx and continue to generate the EBITDA that we expect to generate. And frankly, We're still working to execute contracts with our vendors and our suppliers Prior to executing our customer contract to derisk 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.

Speaker 6

I understand. Thank you, both. That's helpful.

Speaker 2

Thank you.

Operator

Thank you. Thank you. Our next question or comment comes from the line of Eric Stine from Craig Hallum. Mr. Stine, your line is now open.

Speaker 8

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 in labor, it's been a pretty 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

Speaker 2

it was

Speaker 8

just a greater impact from those headwinds?

Speaker 2

Great question. And especially that's exactly what happened, especially some of the larger projects, they were already scheduled and you say this particular Contractor now it's going to do X, Y, Z, and all of a sudden that contract was there or, and this is the key, She couldn't get the qualified workers to show up at the worksite at the site. And some of them, we used to go out with another piece of 12 to 16 vendors And sometimes we'll get 1 or 2 responses. And you will find out that one of them is not even qualified. So Labor has become a huge concern.

Speaker 8

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?

Speaker 3

Not really. No. No. We haven't really seen that on the project business. Okay.

Speaker 3

I think that

Speaker 2

yes, go ahead. No, I was just going

Speaker 8

to say, so the $250,000,000 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 anticipating that there's improvement in a lot of these areas.

Speaker 2

That's what we did and Mark did a great due diligence on that. You can make a comment, but that's exactly what we tried to do And we think we have represented it very accurately. Okay. Thank you.

Operator

Thank you. Our next question or comment comes from the line of Tim Mulrooney from William Blair and Company.

Speaker 9

My question is on your 2023 guide. The midpoint of your guide is Suggesting, I think, still a nice ramp up in 4th quarter revenue, up more than 20% sequentially, I think, from the 3rd 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?

Speaker 10

Yes. Tim, this is Mark. It's mostly it's contracted. I mean, it's assuming good execution On our contracted backlog, it assumes very little awarded revenue. And then we took a look at that and we have Take into consideration the slippage that we're seeing.

Speaker 10

But 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.

Speaker 9

Okay. Thank you, Mark. My follow-up, I just wanted to ask about the administrative bottlenecks that you listed as being a factor impacting 3rd quarter results, can you just talk in a little more detail about what those were? If they were specific So 1 or 2 projects or if it's a broader issue that you'll expect will carry into the Q4 and beyond? Thanks.

Speaker 2

Well, I know a couple of the assets that were delayed because of the whether it's a solar plant that they were not connected because of the utility. We didn't get out there to connect the project or some of the renewable the gas plants that we were building, 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. Yes.

Speaker 10

And I think the administrative delays really they're impacting the timing of awards converting to contract. That's that's something that we really started to see a little bit in towards the end

Speaker 2

of Q2 with some awards

Speaker 10

that we expected to convert. We really Felt the impact in Q3. And so to your question, yes, we do expect that to continue in 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.

Speaker 2

Say 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.

Speaker 9

Got it. Thank you.

Operator

Thank you. Our next question or comment comes from the line of Joseph Osha from Guggenheim. Mr. Osha, your line is now open.

Speaker 6

Hi there, everybody. I figured we might Shift gears a little bit here. When I look at where we stand in the current quarter and in your deck you point out that A lot of this is non recourse, but if you annualized Q3, we're now standing at about 8.3 times debt to EBITDA. And on your new guide, it's about 8 times likely debt to EBITDA for 2024. The business hasn't generated even wrapping in ESPC hasn't generated any free cash flow since 2020 and it generated $80,000,000 since the beginning of 2019.

Speaker 6

So I guess I'm just asking, 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?

Speaker 3

Joe, the first thing I'd point out is that the adjusted cash from operations It was positive, right. As we've talked about, we have the discretion to 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 point. And therefore, those figures will end up looking higher than what you would think about from normal corporate credit facility.

Speaker 3

As far as cash flow is concerned, I think that that is something and we've discussed this. We are going to 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 led 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 turnaround, call it Q1 ish To kind of show the cash coming out of the SCE project.

Speaker 3

So that will help us in terms of delevering the corporate facility. At this stage, I don't know how much more I can say to address your question.

Speaker 6

Sure. And I guess Kind of the just to follow on, it's the second part of the same question. And look, this debate has been going on a lot in some companies that are kind of comparable You like some of these residential solar businesses. Yes, it is a question of how you balance growth and cash flow generation. So I guess I'll just ask You or George or whoever, is there a point when it's a $2,000,000,000 company or a $3,000,000,000 company or whatever you say, okay, we're going to Maybe take a slightly different view of how we think about growth versus generating cash flow and maybe ultimately return of capital to shareholders.

Speaker 6

I'm just trying to get a sense to the philosophy here that underpins how you're making these decisions? Thank you.

Speaker 2

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 develop And then focus more in the project business, which generates very 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 asset, all that cash flow generated from projects and existing assets in INM, We will retain some of it to delever the company.

Speaker 6

Okay. Thank you very much.

Operator

Thank you. Our next question or comment comes from the line of Julien Dumoulin Smith from Bank of America. Mr. Dumoulin Smith, your line is now open.

Speaker 11

Hey, good afternoon, Tate. Thank you guys very much. Appreciate it. Just following up on a couple of things here. First off,

Speaker 4

how do you think about the

Speaker 11

timeline Further these projects get back on track, obviously bringing down 'twenty three and 'twenty four by roughly 'fifty. I mean is there a catch up here in 'twenty five? Or are you thinking that categorically we're rolling the ball forward across the forward look here? When do we get kind of that view on 25? And then as you think about 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 where is there any other risk on the SG and A?

Speaker 11

And then maybe also just to clean out on that last 1 on payments and cash,

Speaker 4

do you want to

Speaker 11

just clarify a little bit more about payments on the batteries here and the timeline there?

Speaker 3

2. The 4th June 25. 1st 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.

Speaker 3

We had $700,000,000 in new awards come in the door this quarter, 1.7 for the year, the business is going to grow. The 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.

Speaker 3

However, The IRA and the amount of awards coming through, 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 Kind of 20% per year EBITDA target. That's what we're trying to get to. So, that's the response. The first 2, with respect to SoCal, basically when we hit substantial completion, We've got 60 day payment terms, it's in the contract, it's public, people can see that.

Speaker 3

So you can assume that while we're talking about 2 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, Julie.

Speaker 11

Right. And just timeline wise here, are we confident that you guys have a real sense of when the new timelines are for the project push. I mean, it seems like this has materialized relatively recently. I mean, 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? I

Speaker 2

mean, I would say that from what we have seen so far, like the RNG project, 6 to 8 months delay, pretty much. And then on the other projects, in the construction, We used to say we have 1 to 2 year construction schedule. Now it looks more than that 1.5 to Almost 3 years of construction, it's only $100,000,000 plus projects. I mean, I'll tell you guys something that happened. Projects that they were in construction and we delivered the equipment to the particular air base.

Speaker 2

And then because we're doing work at the North Pole, Somehow, someway, the stuff didn't get loaded into the plane and that's a 6 month delay on the particular project. We lost $12,000,000 of revenue, but It was a loss, but things like that that happened is 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.

Speaker 2

And I think that 20% target that we have on EBITDA In the 5 year growth, I think we feel very comfortable with that. Thanks, guys.

Operator

Thank you. Our next question or comment comes from the line of George Giannakoulis from Canaccord Genuity. Mr. Giannakos, your line is now open.

Speaker 12

Thanks for taking my questions. So I just wanted to Hit on the same points, you talked about delays in contract conversions. 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?

Speaker 2

That is correct. Yes, that's accurate. That is correct. So could you then Some of them just administrative, the boards don't meet or people don't show up Our bureaucratic nightmare is some of the federal contracts. But on the other hand, the awards in that $700,000,000 Once earlier, I just had our contracts.

Speaker 2

We're getting them, but they're moving them. The next stage is getting tougher and then implementing them

Speaker 12

So from the top of the funnel, when you have this awarded project backlog that is now stretched To $2,500,000,000 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 this just where the Administrative issues are showing up.

Speaker 3

No, that's really the administrative side of it, what George was just mentioning. The project delays are Post execution of the contract, actually the construction timelines, the schedule the completion timelines and the schedules are stretching out a bit based on labor and material availability.

Speaker 12

And so this that you have one of your slides, it is 12 to 24 months, the contract, I think you said it's more like 18 to 36 months now and the contract is that right?

Speaker 2

I will let Mark answer the question better than that.

Speaker 10

I mean, we're Seeing in that range, but it's and it's not impacting every one of our awards. But what we've been talking about is, We have several large awards that are in kind of more mature stages of the contracting process, but these administrative delays are dragging them out. On average, we're still within that range overall, but it's really been 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 To the other points we've made, once they have contracted, that implementation period is starting to take a little bit longer to get we need to get So the workforce, we mobilized, get materials to the worksite, that is all 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 push outs.

Speaker 12

Okay. And just maybe a 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, What's your outlook? Anything you can share on the recent surge in D3 RINs and how you Have you missed an opportunity here to monetize some of your wins based on the downtime? Thank you.

Speaker 2

Well, we're taking advantage of the market always. We started the year with about 50% merchant, But right now, what we have left for this year is probably the production of the last couple of months. We've been monetizing Month to month and we got pretty good prices, I would say, and it's been reflected in our guidance This year as well as next year. The other thing I want to point out that I think I did mention in one of the calls last time for 2024, We were always optimistic about the ring prices and what we had used for that old estimate, it was pretty much what the ring prices are today Right now. Thank you.

Speaker 2

Thank you.

Operator

Our next question or comment comes from the line of Moses Sutton from BNP Paribas. Mr. Sutton, your line is now open.

Speaker 13

Thanks for 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 in the table. I guess first question, how do you think about adjusted Margins at the project business, it's 4% for the 9 months year to date. I think of this closer to 10% typically. Is this Is it due to inflation?

Speaker 13

Is it due to certain mismatches on delay? How do we think of that on the project side for adjusted EBITDA?

Speaker 10

Yes. I mean the 10% sounds a little bit high, but I think that it's typically a function of mix, Right. And so when you're comparing year over year, it's going to be a function of the mix of projects that are active at that point that are impacting the margin. I think we've been and probably posted a 6% historically, so we're not that far off. And again, I think we've seen some of our mix more recently I have a little bit lower margin profile even though overall margins have been expanding.

Speaker 10

So, I think we're not far off of kind of where our historical margins have been.

Speaker 13

Got it, got it. That's helpful. And then I guess back on the D3 RIN topic. So as the RINs on the spot base Near the 2021 peak, I know you typically talk about a certain like 50% spot exposure or Spothedges 50% contracted. Is the delay in RNG projects actually offering you the ability to contract More of the future wins 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 $250,000,000 Yes.

Speaker 2

No, Ed, it's a very, very good point. Actually, we are talking to a couple of firms right now. We have a couple of offers on the table. That's why we're not forecasting ring prices for next year and so on, that we might enter into couple of long term contracts With much higher prices than what we had, let's say, entered to the contracts a couple of 3 years back. No, we are looking at it and no question about it.

Speaker 2

And

Speaker 3

as soon as we feel more comfortable with

Speaker 2

The prices, we will execute them.

Speaker 13

That's very helpful. Thank you. And what's long term considered now in terms of tenure, in terms of years?

Speaker 2

We have 3 I'm not sure, up to 15 years.

Speaker 13

Excellent. Thank you. I'll get back in the queue.

Speaker 2

Yes.

Operator

Thank you. Our next question or comment comes from the line of William Griffin from UBS. Mr. Griffin, your line is now open.

Speaker 14

Great. Thanks very much. First question, I was just hoping you could maybe give a little more color around the RNG financing you recently announced with Hassy. My understanding is that 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 3

Hey folks, this is Josh Faribault 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.

Speaker 2

All

Speaker 14

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 3

Yes, that's in the 8 ks and we're accruing at the at that IRR rate.

Speaker 14

Got it. All right. Thanks very much.

Operator

Thank you. Our next question or comment comes from the line of Christopher Souther from B. Riley. Mr. Souther, your line is now open.

Speaker 4

Thanks for taking my questions here. With the Cycle being extended for contracting awards and implementation, I think this year was much more back end loaded with The visibility you're going to have.

Speaker 2

So I'm just kind

Speaker 4

of curious how you're thinking about the visibility today and When you get kind of the full guidance for 2024, should we consider expectation that there's Going to be a lot more kind of visibility on awarded kind of contracted backlog as we kind of enter the year. Is that Maybe wishful thinking on my end is how do you think about like the visibility on that $250,000,000

Speaker 2

I think we have very good visibility and we rely more on contracted and we have asked where we're going to be at the end of the year on the contracted And that gives more impact than anything else and not rely as much. We don't want to have the big hockey stick like we did This year for the last couple of quarters especially where we are.

Speaker 4

Okay. And then maybe on the project, 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 specific areas would you be kind of looking at there? Is it kind of all the above?

Speaker 3

I think not really RNG. I think we're focused mostly on solar certainly and then the hybrid This is batteries, yes. Solar and battery, I wouldn't put it past us to think about some of the standalone battery, Given the fact that 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.

Speaker 3

So I think it's more along those lines versus The RNG. Yes.

Speaker 2

So you guys, I want everybody to understand, with developing assets, whether solar assets, battery assets and Monetizing them, it's no different than developing the energy savings for Commer's 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, they meet our rate of return. And RNG projects, Generally, they are more complicated, no question about it, but at this point in time, they get better returns and solar.

Speaker 4

Thanks a lot.

Operator

Thank you. Our next question or comment comes from the line of Pavel Molchanov from Raymond James. Mr. Malkinov, your line is now open.

Speaker 15

Yes. 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.

Speaker 3

So first, first, cut it that, I will tell you because I was there last week Visiting one of the sites, one of the large sites. There's been a little bit, but not To the tune that we've seen here in the United States with respect to labor availability and materials. I think that we especially on that 100 Megawatt Delfini project that we've got in Greece, that is still kind of cruising along on time. And 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.

Speaker 3

Expectations still remain Strong on availability of materials and labors in those jurisdictions where we're winning projects for them.

Speaker 2

Yes. And that was even in U. K. The only exception there was that the Bristol City contract that we have. And we missed the numbers by good margin there, not because we didn't have the projects, But this is a lesson for us.

Speaker 2

Getting the projects approved through the city council and everybody else, but yes, to approve those We will meet with the board and identify what projects we're going to be doing and have them pretty much approved by the end of this year, what we're going to build next year. So that one, We missed the boat as far as what we thought it was possible and what actually happened. Again, it's administrative, not because they don't want to do or anything else, but

Speaker 3

Yes, administrative and that's about the cycle of just conversion of awards to contract, not anything about actual construction activity. Right. And furthermore, It's a push to the right.

Speaker 13

Yes.

Speaker 3

It's not a change in any of the scope of the awards that we've been slow.

Speaker 15

Okay, clear. Staying on the European theme, you This year, I have to imagine that with some of the macro Issues, multiples on prospective M and A have come down in that context. Are you seeing more opportunities to bulk up your business there via M and A?

Speaker 3

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 yes, the number of opportunities that look interesting has increased.

Speaker 15

Very good. Thank you, guys.

Speaker 2

Thank you. Thank you.

Operator

Our next question or comment comes from the line of Davis Sunderland from Baird. Mr. Sunderland, your line is now open.

Speaker 7

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,

Speaker 3

Fuzzy, but I think I got the question. So the first point is, when something actually is created by a force Your situation, yes, of course, 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 porcelain sewer, 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 $250,000,000 number next year, We've effectively taken into account what is happening in considering the cadence of construction Going forward, 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.

Speaker 3

However, if there are slowdowns, things just kind of push out to the right. So we've adjusted expectations with Back to cadence and we presented numbers on that basis to you all today.

Operator

Thank you. Our next question or comment comes from the line of Greg Wieczkowski from Weber Research Advisory. Mr. Wobackowski, your line is now open.

Speaker 16

Hey, thanks everyone. Just one for me. I just wanted to ask a little bit more about the prospect of selling off some assets in development because I just feel like I might not be drafting it or maybe

Speaker 10

I misheard

Speaker 16

It seems like that would allow you to stay in front of customers and maintain business within projects in O and M, which is great. But If you're trading energy assets business for projects in O and M business, isn't that like trading a high EBITDA margin business for a low one? So in a sense, 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 a fair way of looking at it or am I off base there?

Speaker 3

Yes. So I'll just kind of guide you to the way we think about these things. Couple of important metrics for us when we're evaluating assets that go away from EBITDA generation and levered equity IRR Our cash generation and net income. And as it turns out, some of these assets, when we look at Anything that might have 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 and M contract to generate additional cash flow and recycle that into something that's actually going to look better for us from a cash flow and net income perspective over the long term.

Speaker 3

That's the only kind of modification I might throw there.

Speaker 2

Okay. So it's got layers.

Speaker 16

All right. Thanks, Doren. Appreciate it. That's it.

Operator

Thank you. Ladies and gentlemen, this concludes the Q and A session. And this concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator

Everyone, have a wonderful day.

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