Ameresco, Inc.

Good day, ladies and gentlemen, and welcome to the fourth quarter and full year 2018 AmeriSkill Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star then zero on your touchtone telephone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Lela Dillon, Vice President of Marketing. You may begin.

Thank you, and good morning, everyone. We appreciate your joining us for today's call. Joining me here are George Sakolaris, Ameresco's Chairman, President, and Chief Executive Officer, and Mark Chiplock, Interim Chief Financial Officer. Before I turn the call over to George, I would like to make a brief statement regarding forward-looking remarks. This call contains forward-looking information regarding future events and the future financial performance of the company. We caution you that such statements are predictions based on management's current expectations or beliefs. Actual results may differ materially as a result of risks and uncertainties that pertain to our business. We refer you to the company's press release issued this morning and to our SEC filings. These documents discuss important factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. We assume no obligation to revise any forward-looking statements made on today's call. In addition, we will be referring to non-GAAP financial measures during this call. These non-GAAP financial measures are not prepared in accordance with generally accepted accounting principles. A gap to non-gap reconciliation, as well as an explanation behind the use of non-gap financial measures, is available in our press release and in the appendix of the slides, which can be downloaded from our website. I will now turn the call over to George. George?

Thank you, Lila, and good morning, everyone. Q4 was another outstanding, profitable quarter. We expanded gross margin by 300 basis points to over 22%. When you exclude the one-time benefit in 2017 due to the tax cuts and JABS Act, net income grew by 33%. We grew adjusted EBITDA by 35%. We placed 14 megawatts of solar projects in service and added 59 megawatts to our assets in development. The strong performance concluded another outstanding year. We again achieved our objective of growing profit faster than revenue. For the full year, we grew revenue by 10%, gross profit by 20%, net income by 8%, and adjusted EBITDA by 44%. Important to note, Excluding the Q4 2017 one-time tax benefit, net income growth was closer to 80%. And we generated adjusted cash from operations of over $100 million, including the proceeds from federal ESPC liabilities. Furthermore, we increased project backlog by 11% to $2 billion and more than doubled energy assets in development to 178 megawatts. As we look back on the accomplishments of 2018, I want to share key elements that we think make Maresco a remarkable business and an attractive investment for you, our shareholders. The first element is resiliency, a quality we discuss in the context of microgrids, but rarely in the context of our business model. Our performance this year highlights why resiliency is so important. As in any business, something usually goes wrong. In general, we can now absorb those unexpected challenges because we have a large, diversified backlog of projects underpinned by notably stable and high-margin recurring revenue streams. At the start of 2018, we anticipated EPS in the range of 55 to 65 cents and adjusted EBITDA in the range of 75 to 85 million dollars. The midpoint of that range represented an increase of 17 million dollars in adjusted EBITDA. We expected the vast majority of that incremental EBITDA to come from our renewable gas plants in Michigan and Arizona. As it turned out, our 16 MW Michigan plant only started contributing meaningfully to earnings in the second half of the year, and the 6 MW Arizona plant just started generating revenue in the first quarter of 2019. In the project business, we also encountered some normal disruptions. For instance, We had budgeted revenue from a large Convention Center project for the second half of 2018. However, we did not convert this award to contract by the end of the year. We expect this contract to be signed in the first half of this year. Another large contract is the ongoing Chicago Street Light project. Implementation and revenue recognition. slowed down in the second half due to shortages of parts. In addition, the New York City Housing Authority requested that our focus was to make sure that the residents had no disruption in heat during the winter season. As a result, other originally scheduled measures were pushed further out in the implementation schedule. These types of delays are normal in our project business, especially when you retrofit in buildings that they are in use. These are the types of challenges we have dealt with regularly for years. To counteract these challenges, we now have a broad set of revenue opportunities with other projects, services, and activities that can absorb the shortfall. During the year, our federal group demonstrated outstanding execution. converting very large projects, such as island-bound communities and Joint Bay San Antonio. Our geographic expansion strategy, with a focus on under-penetrated parts of the country, like the Southwest, is also bringing in new revenues. The Southwest region topped $100 million of revenue in 2018, the first time ever for that region. This team is actively driving activity, notably in repeat business, including a large Texas university system and multiple streetlight projects across the region. So, despite the project setbacks I mentioned, solid execution enabled us to deliver net income of $38 million and adjusted EBITDA of $91 million. The second important element of our business is visibility. Our visibility is measured in years and in billions of dollars. The leading edge of our pipeline is filled with revenue that will be recognized two or three years from now. This level of visibility is uncommon and is critically differentiating MResco as an investment. We improved. our visibility in 2018 across all dimensions. The most important is recurring revenue. For years, we have focused on building a portfolio of long-term recurring revenue streams. We have now reached a critical mass in that portfolio, which gives us an outstanding foundation for stability and high margins. Our portfolio of operating energy assets now stands at 229 megawatts. Based on contracted power purchase agreements and incentive revenue, this portfolio has solid visibility on $900 million of revenue over the next 20 years. Important note, this figure does not include merchant revenue and also does not include any contributions from our extensive pipeline of assets in development and construction. If we include those likely sources, we have a line of sight of at least $3 billion of revenue. The energy revenue visibility is complemented by contracted operations and maintenance, where we will realize revenue of $930 million over 15 years. Importantly, we are accelerating the build-out of energy asset portfolio. We are exiting the year with an outstanding development pipeline, which is well distributed throughout the U.S. These assets should be placed into service over the next 12 to 30 months. Renewable natural gas, also known as RNG or green gas, is an important new opportunity in our energy portfolio. RNG is incremental to our extensive historical activity in solar and landfill gas. The Michigan and Arizona RNG plants are now in service, and we have a strong pipeline of additional green gas opportunities. We have talked about one plant in Texas entering our assets and development metric In Q3, we are now happy to report that we have formally added two additional plants to this metric in Q4. Of the 178 megawatts of assets in development, approximately 23% are green gas projects. Beyond that, we still have five to six additional green gas opportunities we are actively pursuing. All of these projects are approximately 10 to 12 megawatts each. We are identifying creative new approaches to energy sales. For instance, in Canada, we are implementing a battery storage asset that will help balance the grid, storing energy during low demand hours and selling it back to the grid at peak demand. This asset is based in Ontario and will consist of two facilities, with a capacity of two megawatts each. Of course, visibility is not limited to recurring revenue streams. We ended the year with total project backlog of almost $2 billion, including contracted backlog of $727 million. As we often mention, project sizes are getting larger, and we are being We are seeing more and more repeat business. For instance, we have signed contracts for two phases of the New York City Housing Authority, and we are in good position to pursue additional work there. NYCHA is the biggest housing authority in the country, and our strategic relationship with them has produced revenue for over two years now. The third quality that makes Amoresco an attractive investment is our large and growing market opportunity. First of all, we are transforming our business model. Market demand is shifting from simple energy conservation measures to sophisticated infrastructure upgrades that reflect the new smart energy economy. Efficiency is always part of the plan, since cost savings finally work. but projects are getting larger and more comprehensive. So as our traditional efficiency customers, we have leveraged HVAC upgrades, water reclaimed and advanced building controls are now adding resiliency, distributed energy, battery storage, microgrid controls and more. According to Navigant research, These technologies expand our total addressable market from approximately $6 to $8 billion per year to between $20 to $30 billion per year. A few years ago, for example, the Joint Base San Antonio or Island Pound project might have been half the size that they are today without microgrids, infrastructure upgrades, resiliency, distributed generation, and the additional advanced technologies in our portfolio. Our opportunity is also growing as we penetrate new geographies. We continue to target the Southwest and now the Southeast, which have been underserved by us historically. In Canada, we're beginning to see positive performance from the new team and structure we put in place in 2017. Finally, we are also gaining meaningful traction in the UK. To take full advantage of the growing market opportunities, we are stepping up our investments. We are expanding our team with more people that have in-depth technical expertise. Also, we are adding more people with deep expertise in project and energy asset development. To conclude, We are optimistic about 2019 and the years beyond. As we have stated before, we plan on a three-year basis and see revenue growing in high single digits and even growing high double digits. As we exit 2019 with the strategic resource investments that we have made, the additional PV assets and the Texas RNG plan coming online, We are well-positioned for strong growth in 2020 and 2021. With that, I will now turn the call over to Mark for comments on our financial performance and outlook. Mark?

Thank you, George, and good morning, everyone. As George mentioned, we concluded the year with outstanding fourth quarter financial performance. We grew revenue double digits and achieved our goal of growing profit faster than revenue. Our growing project backlog and recurring revenues continue to bring increased visibility and long-term predictability to our business model. I will start with some brief comments about our Q4 results, then turn to our full-year 2018 results. All figures refer to Q4 2018, and all the comparisons are for the year-over-year changes, unless I say otherwise. As George mentioned, with the delayed conversion of a large awarded convention center project and NYCHA's request to parse out our work, project revenues came in lower than expected. Despite these delays, however, total revenue was up 3%, supported by increased energy and O&M sales. The recurring revenues from these lines of business continue to help offset the natural variability that exists in our projects business. Strong gross margin performance was driven by high margin energy sales and a better mix of projects. we continued to demonstrate the operating leverage inherent in our business. Operating expenses grew only $2.2 million from last year, while gross profit grew by $7.7 million. This resulted in our operating margin expanding by 230 basis points. Both net income and EPS were below the amounts reported last year. However, keep in mind that in Q4 of 2017, we had a $14 million, or 30 cent per share benefit, due to the Tax Cut and Jobs Act. Excluding this one-time benefit, non-GAAP net income grew 35% and non-GAAP EPS grew 28%. Now let's look at the full year results. These figures all refer to the full year 2018 and all comparisons are with 2017 unless I state otherwise. Revenue grew by 10% and gross margin expanded 200 basis points to 22.1% due to a favorable mix of our recurring revenues and higher margin projects. For 2019, we expect gross margin to revert to more normal levels in the 20 to 21 percent range for the following reasons. First, we are converting the existing LFG plant in Texas to RNG. In doing so, we will take this asset offline for a significant portion of the year, costing us $2 to $3 million in contribution. we expect a greater proportion of revenue to come from certain lower margin projects. We demonstrated solid operating leverage, keeping operating expenses under tight control. Operating margin expanded by over 200 basis points. Looking at 2019, George noted that we are accelerating our investment in strategic resources to capture the growing market opportunities. As such, we are planning to invest an incremental $3 to $5 million above than normal growth in operating expenses. Our balance sheet remains strong. Our liquidity is excellent, with $61 million of cash on hand and over $70 million available on our corporate revolver. We have over $1 billion in assets and corporate debt of only $43 million. The rest of our debt is non-recourse project financing. It's also important to reiterate that the federal ESPC liability is not debt to Amoresco. Shifting to cash flow performance, this year marked an important milestone for Amoresco. While GAAP cash used in operations was $53 million, when you add back the proceeds from federal ESPC projects, we generated over $100 million of adjusted cash from operations. Let me quickly review the energy assets, which represent our primary capital investment. Total energy assets on our balance sheet are over $450 million. of which 83% are in operations, while the balance are assets in construction. During 2018, we placed 39 megawatts into service during the year. Our development pipeline is 178 megawatt equivalent, which more than doubled from a year ago. Of course, we also have assets in even earlier stages of development, but those are not yet counted in our formal assets and development metric. We are fully confident in our ability to finance this pipeline. As energy assets are becoming an important driver of our growth, we thought it would be important to help shape how those assets will contribute to our results. We will not comment on specific plans, but can provide approximate guidelines for your modeling. Keep in mind the mix of incentives and contract structures can vary from asset to asset. In general, RNG plans at current RIN prices and at full capacity can generate approximately $1 million of EBITDA per megawatt annually. Our solar plants at full capacity can generate approximately $200,000 of EBITDA per megawatt annually. For 2019, we expect to place between 50 and 60 megawatts of assets into service. Our Texas project is expected to come online in the second half of 2020, and the two additional RNG projects recently awarded in California are expected to come online in 2021. As these projects are still in the permitting stage, the timelines are subject to change. Finally, let me explain likely changes in our tax rate. Our effective tax rate for 2018 was 11.4%. This included a tax benefit from the extension of the energy efficiency deductions available under 179 . The benefit was approximately $5.8 million, or 12 cents per diluted share. That tax benefit has since expired, and it is not clear if it will be extended. As such, in 2019, we are assuming a higher tax rate in the range of 18 to 20 percent. We expect another solid year of revenue and profit growth. We expect 2019 revenue to be in the range of $845 to $885 million. Our gross margin in 2018 was higher than normal, so we expect a return to more normal levels akin to what we reported in 2017. We expect EPS in the range of 75 to 85 cents. Adjusted EBITDA should grow again, likely to the range of 93 to 103 million dollars. Like last year, we are not offering quarterly guidance due to the variability of project revenue timing. I will remind you that Q1 2018 was unusually strong due to benefits in both revenue and earnings. Therefore, We expect Q1 of 2019 to look more like Q1 of 2017. However, we expect the full year to follow the normal pattern of sequential growth each quarter. That concludes our prepared remarks, so now we would like to open the line for your questions. I will turn the call back over to our coordinator, Heather, to run the Q&A session. Heather?

Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star and 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. And your first question will come from Carter Driscoll with B. Riley FDR. Your line is open.

Good morning, gentlemen. Congratulations. Very strong 2018 first off. Maybe could George and Mark talk about the puts and takes and the conversion of the Texas plant to make sure I understand the timing of that and kind of like the incremental contribution from converting it over to green gas?

Okay. Both of us will cover it. I will cover the timing, and then Mark will cover the contribution. The timing right now is contemplated to come online the second half of next year. And we are in the process of getting all the appropriate permits, and that's why sometimes we – So it depends what happens to the permitting schedule. Right now, based on what we know, it looks like we will be in the second half, but something could happen. As you probably recall, on the Phoenix plant, even though the project was completed, The fourth quarter of last year, it didn't fully operate until the first quarter of this year because of local permitting issues.

Right. Yeah, and just to reiterate, so in 2019, Carter, right, we're going to take that offline. And as we mentioned, so that's probably going to have an impact of about $2 million to $3 million in lost contribution this year. But then, you know, again, when that comes back online and we're at full run rate, as we mentioned in the prepared remarks, you know, that plant will be about 12 megawatts, 10 to 12 megawatts, and, you know, we would anticipate, you know, about a million dollars of EBITDA per megawatt annually.

So just an apples to apples from one feedstock to another, would it be roughly, I guess, about a 50% increase in contribution in EBITDA?

Is that fair? Yeah, about 5%. 5%. Five times, I'm sorry.

Yeah, okay, all right. If we ask the question correctly, I mean, we're losing $2 to $3 million of EBITDA this year, and it will be pretty much $10 to $12 million of EBITDA once it's fully operational. And those numbers, I want to question a little bit, everyone, that when we talk in 10 to 12, the $1 million contribution EBITDA is at the current ring prices, and the plants operating at full capacity. And sometimes you might see it from quarter to quarter. We have some variability.

Yeah, just trying to get a sense of the magnitude of the change in investment taken offline. Okay, maybe just talk about some of the newer geographies. You mentioned having real success incrementally in the Southwest Territory. Southeast has been more of an under-serviced territory for you. As you mentioned, Canada looks like it's come back online. Can you just kind of give your thoughts, whether you see more incremental impact in the second half of 2019 or 2020 in the mix of types of projects you're going after by region?

Yes, and that's why I mention it, because we have said in the past we have underserved in the southwest and the southeast. And I mean, we reached over $100 million for the Southwest group, and that's an outstanding performance for them for the year. And they have very good backlog, established good backlog, especially in Texas. But in addition to that, we are not talking much about California, but we have made great strides in California as well. We have 10 operating LFG plants in California, and now, as you saw, two of the new ones. The green gas plants, they are in California, and we did not put them in the backlog until we have clear visibility as to the connection with the gas pipelines to the local utility there, as well as the gas contracts. And in addition to that, we're developing several projects there for assets of solar plants that will be in our provider's visibility in a year or so. So we're making good strides. The southeast Even though we have done some projects in the southeast like Florida and Georgia, we think there is more potential. So part of the investment we make in there, we're putting more people in additional resources in those particular groups.

And I'm assuming the connection for the California plants is not BG&E territory? Yes. Okay. Okay. I'll get back to you. I'll take the rest offline. Thanks, guys. Thank you.

Thank you. Your next question comes from Craig Irwin with Roth Capital Partners. Your line is open.

Good morning, and thanks for taking my questions. So, George, if we could look back to this time a year ago when you gave guidance originally of $75 to $85 million in EBITDA, you know, your actual result for the year was $11 million higher than the midpoint of the guidance you issued at the beginning of the year. You've already touched on a couple of the things that maybe went the wrong way. in 2018, but can you maybe talk to us about the contingencies you had that were unnecessary and maybe the projects that outperformed in 2018 and how this is factored into your guidance for 2019? Are you expecting the same conservative outlook for some of these projects that obviously went better than expected over the last 12 months?

Okay, look, we try to be conservative in our guidance, but on the other hand, we try to be realistic because we are in the project business and we implemented this project and many things happened. For last year, we updated our guidance three times actually during the year and we got better visibility. When we started out at the beginning of the year, we had over $150 million that we were planning to get for the year. that was coming from projects that they were not signed yet. Otherwise, I awarded the projects and they had to move into the executive category. So that was one. The other one, if you remember, we had some issues in the beginning with Woodland Asset. And, you know, I was reluctant to step up to the plate and give a broader guidance on that. But as the year moved on, though, And we got more information. We upgraded our guidance. And the one that I will pay more attention to in our guidance is the EBITDA. And the EBITDA, the last one that we gave, the top line was $89 million, and we came in at $91 million EBITDA. And the revenues that we lost, they are lower margin revenues, as Mark pointed out. And they were about $12 to $15 million dollars. All the projects I mentioned together, if you bundle them up. But the contribution for those projects, the bottom line, most likely would have been $1 million. So that explains last year. This year, again, we try to be very cautious because, for example, the Arizona plant is up and running right now. For example, yesterday we were at full capacity. Today we have taken it out to do some modifications. Part of the course in ramping up this facility is It takes some time. In addition to that, again, like last year, this year we have slightly more amount of revenues that we have in our plan that comes from awarded projects that have to be converted to contracts, execution in order to go ahead and implement them. Mark, do you want to add anything else to that?

No, I think you hit on a lot of great points. If I just come back, Craig, to your question regarding the 2018 closeouts, we don't plan for the pickups from project closeouts. As you know, our recent history has shown that we've had some, but that's not a guarantee. With all aspects of our project business, the size and timing is going to vary from quarter to quarter and year to year. In 2019, we don't plan for pickups from that.

Okay, excellent. And just a follow-up question here. You mentioned $150 million in business executed last year that was both awarded and executed in 2018. Can you share whether or not you've included a similar assumption for 2019, or have you factored something maybe on the conservative side like you did at the beginning of last year?

Yeah, I mean, again, as George mentioned, we are assuming a certain amount converted from – from awarded into contracted in our numbers. Probably not as large as last year, but still we are gonna have to rely on a fairly sizable amount coming from awarded. We have good visibility from our contracted backlog contributing into the project revenue, but yeah, we're still gonna rely on converting awards this year.

Okay, and my next question is about the Phoenix plant, the new G&G plant that you brought online this quarter. Congratulations about getting that thing up. Can you maybe clarify for us, was this a headwind for EBITDA in the quarter? Will it be a headwind in the first quarter? Would you expect to maybe see a modest profit contribution in the March quarter for that plant as it starts to ramp and go through the –

You will not see much impact at all in the first quarter, but it will start ramping up the second quarter and, of course, the balance of the year. Like I said, I think so far even more color. We got it up to full operation two, three days ago. We operated for a couple of days. Then we took it down because we're going to do some minor modifications, so it might take a few days to a week. So it would be my very small contribution this quarter, but then you will see it picking up the second, the third quarter, and so on. Great. One of the good things, you know, and the other thing I might point out, you know, even the Michigan plan, we had a hard time getting it up and running, and this last quarter, I would say, overperformed the last quarter. I'm talking about the last quarter of last year. Overperformed what we expected. Otherwise, excellent performance on that particular plant the fourth quarter of the year.

Those are amazing plants, which is why I've been so focused on them for the last 18 months.

They're great, and that's why we call them out, because they are so significant, and they have such a contribution to the EBITDA for the year, even though their timing might not be exact. We wouldn't be able to predict it exactly correctly. but when they come online, but they are becoming a catalyst for the year or for the course, they show up and they are fully operational. And that's why we call them out in order to help everyone out understand, you know, how much potential contribution we have. In addition to that, to give a better color what it's going to look like in the next two to three years going forward.

Great. And the last question, if I may, the two plants you mentioned in California, you moved into your backlog for the G&G pipeline, right, 41 megawatts. Can you maybe discuss with us what changed over the last couple of months? Were there specific permits issued or were there preliminary design engineering plans that were formulated and approved? Or what had you booked these into backlog now? what gives you the confidence that this has changed, and how should we look for potential bookings of the remaining five or so, which actually seems to point to a little bit of growth in the total headcount there, right? But what should we look for those other plans to potentially come into your backlog as you build out this portfolio?

I'll be very specific. For example, the two plans, the Keller and Forward that we put in service last I mean, one of the services in our awarded backlog this last quarter that made a significant impact, we had to execute the agreements with the utility, in addition to that, the gas contracts with the client. Now, the client, of course, there is the landfill owners. And so, and the other ones we are looking right now, once we execute those gas contracts, you probably see them on the awarded category. In addition to that, on the PV, the last quarter, we did acquire some projects from developers that they were not able to complete them at the early stage of development. Then we acquired them, and then we executed them. So that's why you saw a major impact. Going forward, again, and Mark might want to add some more color to it, but we will use the same guidelines we used in the past. The pipeline is large, but... We are careful when we put them in the awarded category. We want to make sure that the probability of getting them up and running is much better than 50%.

Yeah, no, I agree. I think the only thing I'd add, I mean, you know, once we get them into the asset and development metric, it's generally a pretty high probability, better than 90%, that those will go to a project. So we feel pretty good about that once they get into the metric.

Great. Thanks again for taking my questions. Yep, that's great.

Thank you. Your next question comes from Noah Kay with Oppenheimer. Your line is open.

Thanks. Good morning, George and Mark. Maybe just a clarifying question since we're talking a lot about the RNG asset portfolio. What are the total RNG assets in operation today in megawatts or megawatt equivalents, including Phoenix?

Bear with me just a minute. About 22 megawatt equivalents in service today.

Right, including Phoenix. And assuming the Texas conversion and the two California plants come online, what does that grow to at the end of 2021?

Yeah, so another 10 to 12 each for the three of those, so another 30-plus megawatts on top of that.

Okay. Okay. And, you know, just to understand here, you know, as we're thinking about the puts and takes, the guidance, I mean, you're getting a full year of Michigan now, which, you know, correct you said that's a 16-megawatt plant. Did I hear that right? Yeah. And Arizona 6, right? Okay. So let's just say we're getting – you know, let's be conservative and say we're getting, you know, 8 megawatts or 8 million or so of kind of year-over-year benefit from Michigan. That's already, that alone is the bridge to the midpoint of your guidance in a vacuum. But there are a lot of other puts and takes that you, yeah, sorry, go ahead.

We have to take $3 million off that because of converting the Texas plan from brown gas to green gas. In addition to that, you have to take another $5 million of investments that we make in primarily additional people in order to be able to increase our development business, whether it's assets. For example, even the RNG assets, in order to be able to execute on them, we need more development engineers as well as more construction managers. and so on, the same with battery storage. We had, we brought a couple people on, the same with microgrids and so on. So we have a, so you gotta take eight, we started, I will say it in the hallway, eight million bucks for last year to this year.

Yeah, and I would say, you know, just, I think that, sorry, go ahead, Mark. No, yeah, sorry, I was just gonna add, you know, I think that the estimate probably in Michigan is a little high. We're probably looking at around $8 you know, 8 million total between the two incremental. Because remember, the Michigan plant was running in the early part of the year. It was ramping up through Q2 and then fully running in Q3 and Q4. So, you know, it's probably, I think that estimate on that one particular plant is a little high, and we're probably looking at something around 8 million between the two of those incrementally.

That's perfect. That's really where I was going with this, that we're getting about 8 million of benefit from the gas projects incremental. you know, sub out the eight that you called out, and then we're basically getting another $8 million of EBITDA growth on the remaining part of the business. Is that the right way to think about the growth?

That's probably a little bit less. I mean, because the project mix, again, as we mentioned, you know, we expect a higher proportion of that is going to be at margins that are lower than our average. So, you know, again, it's probably closer to, you know, six on the project side just given the mix.

Okay. Okay. All right, so let me just ask you, yeah, I'm sorry, go ahead, George.

The margin, you know, we ended up last year over 22% gross profit margin, and we estimated this year would be closer to 20 to 21. So we're losing well over a point there, and that's substantial. Yep, yep, understood.

Go ahead, George. Let me just switch gears for a second here and talk about the project business. We just went through the longest federal government shutdown in history. You had a strong quarter in terms of the revenue and the performance. How did it impact the business and the business going forward?

This is a good thing about our business. As you know, all these federal ESPC contracts are funded through a third party, Bank of America, whatever the case might be, and so on. So the money goes into an escrow account, and then as we build them out, we draw from that line. So we had no interruption through the government shutdown. It did not impact our projects. And the other thing that helped there is the fact that we were doing the projects all of them in construction, they were in basis. There was no impact on that. If, for example, we were doing a GSA built-in and it was not occupied during that time, I'm sure we would not be able to do construction. So we didn't see any impact at all on the implementation side. What we saw an impact was on executing a contract that was ready to be signed, and there was nobody there to sign it. So that got moved into this quarter. Other than that, we didn't see any impact. We saw some impact on local government elections, switching a governor in a particular state, and the contract got shifted to this quarter from last year. Because the projects get funded through third-party financing, they don't have to come up with the money. The bottom line is that it helps our business models.

Yeah, I mean, because that's something that I think we all wanted to understand because, you know, the fully contracted backlog is up very nicely, you know, year over year, but obviously did step down sequentially by a fair amount, and the new contracts and awards were lighter than, you know, a year ago. So really the question is, should we expect maybe an above-average average kind of amount of bookings and contract conversion in one queue relative to last year really due to the timing?

It's good timing and it's lumpiness. It's lumpiness on the awards. But what is impacting a little bit the backlog is the fact that we shifted the business model from more projects to more assets. And a good part, for example, the southwest region, we transform in that unit for built-in assets for others, built-in assets for us. So some of the awards, they get shifted now into the assets in development. As we try to retain them for our own balance sheet, we don't show them as projects anymore. We show them as assets in development. And that's why I will look at the total. That's why I started... pointing out the essence in development because there is a shift in our business model, and that impacts the project awards.

Yeah, the only thing I'll say on the awarded, you know, I mean, the optics there with the year-over-year growth are small, but 2017 had some large awards, you know, so I think, you know, it's a tough comp year-over-year, but, you know, we're continuing to backfill with projects. You know, we had over $700 million of new awards in the year, and, you know, we continue to see some strong quoting activity in federal and CNI, so... I think we feel pretty confident we'll continue to grow the backlog in order to meet our revenue goals going forward. Perfect.

Thanks so much for taking the question. Thank you. Got it.

Thank you. Your next question comes from Chip Moore with Canaccord. Your line is open.

Hey, morning, folks. Thanks for taking the question. Maybe we could talk a bit more about the solar asset pipeline. How are things trending there? You did buy a firm in California during the quarter. What do they bring? You've had them for four months or so. What have you seen since you've acquired them?

They have a very good pipeline of 100 megawatts or so. It's only two individuals, and part of the – resources, we are increasing the development capability of that group associated with engineers. And so far, I think they haven't moved any projects to what I will call to the awarded category yet. But we contemplate that they will put some in service this year. And they're primarily focused in the central, even though they're located in California. Our primary focus for that group is in the central. And that's why when I talked about transforming all the company to be able to compete in the new environment and part of the additional investments that we are making resources, it has to do with that particular group, as well as the southwest and southeast. And the east.

Yeah, no, absolutely. Understood. Thanks, guys. Thank you. Thank you.

Thank you. And this concludes our question and answer session. I'd like to turn the call back over to George Sakolaris, CEO, for closing remarks.

Thank you, Heather. To conclude, we are optimistic about the years ahead. Our pipeline is strong, our growth opportunity is solid, our technical expertise is proven, and our team is highly engaged. Our strategy is sound, and our track record of execution is excellent. We look forward to report more success to you in the course ahead. Thank you for your attention this morning, and I will now turn the call back to the operator, Helen.

Thank you. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you all may disconnect. Everyone have a wonderful day.