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spk08: Thank you for standing by and welcome to the first quarter 2021 MRSCO Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. As a reminder, today's program may be recorded. And now I'd like to introduce your host for today's program, Lila Dillon, Vice President, Marketing and Communications. Please go ahead.
spk00: Thank you, Jonathan, and good afternoon, everyone. We appreciate you joining us for today's call. Joining me here are George Sakolaris, MRSCO's Chairman, President, and Chief Executive Officer. Doran Hull, Senior Vice President and Chief Financial Officer. And Mark Chiplock, 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. 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 afternoon 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.
spk09: Thank you, Lila, and good afternoon. I hope everyone is staying healthy and safe. The first quarter marked another excellent quarter for MRSCO as we posted great financial results and completed our first equity raise since our initial public offering over 10 years ago. Well, the first quarter began slowly with inclement weather in some of our project sites and operating plants. Our focus on execution, coupled with the improving weather conditions, led to improved performance throughout the period. The results far exceeded our expectations, with revenues increasing 19%, net income increasing 80%, and adjusted EBITDA up 40%. With this strong start, we are raising our annual guidance. And now, I also want to take this opportunity to thank our employees for their tremendous dedication and hard work despite these challenging times. Our project business had another strong quarter, while our energy assets again posted solid results. And while we continue to focus on project execution, we were very pleased to see a meaningful pickup in awards during the quarter, which will lead to future growth in our contracted backlog. We were also very pleased to have successfully executed an equity offering bringing in over $120 million in proceeds to the company. While we historically have funded our long-term growth primarily through internally generated cash flows and non-recourse project financing, we decided the timing was right to accelerate our growth by raising additional outside capital. For many years, we have been growing our energy asset portfolio to provide highly profitable recurring revenue that increases our long-term visibility and profitability. Over the last few years, our team has been so successful that our assets in development and construction are now greater than our current operating asset base. In particular, we will accelerate the development of a number of financially compelling renewable natural gas, RNG, assets. With this new capital, we now anticipate building three RNG plants for commissioning during 2022 and another four during 2023. Over the last few years, we have seen a tremendous increase in interest in using RNG from a number of event customers, including large transportation and logistic companies, natural gas utilities, and distributed energy resource owners. Just the other day, Washington State announced a low-carbon fuel standard, joining Oregon, California, and British Columbia. Back in 2010, Maresco became one of the first companies in the country to commission an RNG plan. Currently, RNG is the most natural path to reaching a reduced or zero-carbon footprint for many of these companies. With our current operating RNG assets and those that we will be adding over the next few years, Maresco will remain a leader in this environmentally important and profitable technology. Many of the early policies, actions, and statements from the new administration in Washington support this increased interest in RNG. Additionally, we believe that Maresco is in an excellent position to benefit from the new administration's focus on low-carbon future. Already, we have seen the U.S. rejoin the Paris Climate Accord and, most recently, the announced goal to cut U.S. green gas emissions greenhouse gas emissions by up to 52% from 2005 levels by year 2030. Also, the administration plans to directly fund and invest in the country's low-carbon future through a number of bills currently working through the legislative process. A good example of this targeted investment is the approximately $1 trillion dollars of the $2.3 trillion infrastructure package, which will target projects designed to mitigate climate change. This includes expansion of solar and wind power, charging stations for electric vehicles, technologies to capture and store carbon pollution, and equipment to make infrastructure more resilient against severe weather and other contingencies. These new government priorities are beginning to filter through the economy. We have already seen traction with state and local governments and in the commercial and industrial markets where we have filled in a number of requests from companies looking to report and demonstrate progress on ESG initiatives to reach carbon reduction targets. Maresco is well positioned to thrive in this new environment. We were recently ranked the number one energy as a service provider in the GuideHouse Insights Leaderboard Report. This highlighted our ambitious energy as a service vision, expertise in technology solutions, track record of success across customer segments, and our ability to provide financing for energy as a service projects. The strong Amoresco brand and our reputation as the industry's leading provider of distributed energy resources should enable us to benefit from the very attractive growth opportunities in our clean technology markets. I will now turn the call over to Doran to provide some comments on our financial performance and our increased guidance. Doran?
spk07: Thank you, George, and good afternoon, everyone. I'll ask you to please refer to our press release and supplemental slides that have been posted on our website for additional financial information. Clearly demonstrated our momentum in the first quarter, showing strong growth in revenue, net income, and EBITDA. As you may recall, we were somewhat cautious at the beginning of the quarter, given the poor weather in key markets around the country. While the weather did have some impact, It was more than offset by strong execution and better business conditions in general, leading to progressive improvement throughout the quarter. Revenue increased 19% year on year, again led by the excellent performance of our federal group. We also had strong results in our energy asset business due to several factors, namely the increase in the number of operating assets, favorable production levels, and an increase in RIN pricing in our renewable natural gas operations. This better-than-expected revenue performance, along with tight expense controls and increased operating leverage, drove an impressive 80 percent growth in our net income to approximately $11.2 million and 40 percent growth in our adjusted EBITDA to approximately $30 million. As George mentioned, we were very pleased with the more than 35 percent year-over-year growth and 15% sequential growth in our awarded backlog, which now stands at $1.5 billion. The uptick in origination activity and customer engagement we're experiencing now not only helps build the awarded backlog, but also provides a more normal cadence for converting awards to contracts. As a result, we're confident that our lower contracted backlog which was attributable in large part to strong execution over the past several quarters, will be more than replenished over the next several quarters. Our assets in development had another quarter of impressive growth, ending the quarter at 386 megawatts, represented by multiple technologies and geographies. Our 287 megawatts of operating assets have approximately 940 million in long-term contracted revenue and incentives. Together with our $1.1 billion O&M backlog, we are continuing to grow our higher margin recurring revenue businesses, providing us great long-term visibility. Amoresco's liquidity has never been stronger, and we have ready access to the resources needed to execute our aggressive growth strategy. We have significant cash balance of $81 million and over $100 million of capacity on our revolver. Additionally, we have broad access to non-recourse project financing and tax equity, as well as the ability to monetize development assets. For example, during the quarter, we expanded one of our committed sale leaseback facilities from $150 million to $350 million. On the back of our outperformance in the first quarter and the noticeable improvement in business conditions, we are raising our 2021 guidance. Our new revenue range is $1.11 billion to $1.16 billion. EPS is now expected to be between $1.22 and $1.30, and we are forecasting EBITDA of $140 to $150 million. Now I would like to turn the call back over to George for closing comments.
spk09: Thank you, Doran. In closing, I want to again take a moment to thank our employees, partners, and customers for their continued commitment and cooperation. Together, we have been able to show tremendous resilience in the face of challenges. With favorable federal policy momentum and our enhanced financial position, Maresco is uniquely positioned for accelerating long-term growth as our customers continue to prioritize cost savings and resiliency as well as lowering their carbon footprint. Operator, I would now like to open the call to questions. Thank you.
spk08: Certainly. Ladies and gentlemen, if you have a question at this time, please press star then 1 on your touchstone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. We also ask that you please limit yourself to one question and one follow-up. Our first question comes from the line of Noah Kay from Oppenheimer. Your question, please.
spk02: Good afternoon, and thanks for taking the questions. Good afternoon, sir. Noah, hi. Hi. The first one on the project side of the business, you know, I think it was really nice of the execution in the quarter. Can you give us some color on that? what enabled you to capture some of the project revenues in the quarter a little bit higher than, you know, previously thought? You know, what was just, you know, logistics getting easier? Was there any sort of pull forward? Is there any kind of evidence here of prioritization being given to these projects, just given sustainability considerations? And then how does that impact your thinking for the remainder of the year?
spk09: Yes, that's a very good question, Noah. I would say we pulled in, and Mark can add some more color to it, about $30 million from the balance of the year, otherwise for chorus two, three, and four. And the primary reason for it, even though we had some weather delays in the central region, in the federal group we were able to, especially on the large projects, the Norfolk Naval Shipyard, we were able to get the permit about two and a half months ahead of schedule. And in addition to that, some of the approvals associated with that particular project, they came in a little bit faster. As a matter of fact, we are about $25 million ahead of our advance schedule in payments coming out from that project. And then we had a couple of delays at New York on the approvals, the New York housing there is. But primarily it was the federal group that – they had the ability to pull in some additional revenues, about $30 million, which, of course, it came off the other quarters.
spk02: That's great, Collar. Let me ask one about regulation and decarbonization. It strikes me that one good way to decarbonize is actually to regulate carbon, and Just a couple of weeks ago, it was announced that the EU is going to be introducing a package in June that adds buildings to the sectors where there is an emissions trading system, where pricing on carbon is actually being captured here, and there's even some movement afoot in some states in the U.S. to do that as well. So I guess, you know, are you perhaps more incrementally bullish on the EU market opportunity, just given that dynamic, and then You know, do you see actual regulation of carbon and the carbon emissions of buildings becoming a tailwind for the company in the future?
spk09: Yeah, I will comment a little bit and then Dora might add. Look, I think what's going on in the EU, it's no question about it, it's a great, great tailwind for our business. And I wouldn't be surprised that, or don't be surprised, we might accelerate the business there. in the EU community, use the UK as a base, and then move from that. But more importantly than that, you know, what we are hearing from Washington, D.C., and what's happening in this country, we have a great tailwind on the regulation, especially on some of the states that's coming out of the United States, and especially Canada, too. So that's why in my commentary, I I feel very, very good about this business where we are right now. Otherwise, the stars are lining up to our benefit. There's no question about it. And for us, it's to be cautiously optimistic but diligent in growing the business in a wise manner. But the opportunities are there. And I wouldn't be surprised that you will see us expanding in Europe in the near term.
spk02: Well, great. Thank you, George. Looking forward to that, and I'll turn it back over.
spk08: Thanks, John. Thank you. Our next question comes from the line of Julian Smith from Bank of America. Your question, please.
spk12: Excellent. Thank you, and congratulations to the team here. Nicely done at the start of the year. Thank you. And you'll permit me several things here if I can. First off, You note the additional R&G facilities now in 22 and 23. How are you thinking about this reconciling in terms of the total contribution of EBITDA growth incrementally? I mean, certainly your target of double-digit EBITDA growth, if you will, certainly seems fairly well-founded on these almost alone. But I'm curious how you would characterize that piece of it, if you don't mind.
spk07: Well, so Julian, yeah, Julian, it's Doran. I mean, as you know, we don't give guidance beyond the current year, right? So we'll kind of have to start with that. The EBITDA contributions, I think we've talked about before with, you know, kind of a reference to megawatts. And, you know, with this question, I'll take the opportunity to sort of talk a little bit about that. So we had talked about 750,000 to 1.5 million of EBITDA per megawatt equivalent. Translating that into MMBTU, that's about $8.50 to $16.50 per MMBTU. That's, you know, of course, dependent upon RIN prices. It depends on LCFS participation, right, and midpoint representing around, you know, a 50% margin. So, you know, in revenue terms, that's, you know, million and a half to $3 million of revenue per megawatt or $17 to $33 per MMBTU. When I look at the cadence of the 2022 plants and the 2023 plants, you know, I think 2022, those three plants total probably around 36 megawatts-ish or 3 million MMBTUs, which you know, by the end of 2022, that's, you know, that's two and a half times what we have now, right? So I think it's an important point when you're looking at the cadence. So I think based on all of that, you know, we continue to take a conservative approach toward the company's medium term growth, right? We look at that, you know, Now we're into the low double digits on revenue growth, a little bit over 20 on the EBITDA growth. And, of course, you know, we're hoping to see that cadence continue. But clearly our investment in these RNG assets is hopefully going to give us a boost.
spk12: Excellent. Since you bring up some of the metrics here, can you talk about your hedge position right now on RINs, et cetera, Obviously, RINs have seen a nice uptick. I think earlier you guys hadn't been fully hedged. Can you talk about how that contributes here to your higher guidance, as well as relative to the map you just described on future projects?
spk09: Yes. As we pointed out last time, we have about 40%, what I would call, forward sale. Actually, we executed some contracts as they go out this five years. And as we grow, you will see us executing contracts in the short range, though. Because I think the ring prices and the market overall is developing now. We are in the early stages. So we don't want to sign long-term contracts because we think we sacrifice too many economics. But hedging about or having short-term contracts about 50%, five years or so for about 50% of the output of our plants, it gives us pretty good project financing, and we think the economics are better. However, as all these new markets, whether it's the gas utilities or with the universities or hospitals that they have combined heat and power plants, and they want to reduce their carbon footprint, they are ideal candidates for longer-term contracts. And I know some people in the industry, they quote in long-term contracts, And some of them, we have looked at them, and we negotiated for some time, but we passed because we thought we are in early stages of this market developing. So we're going to be watching very carefully. But, however, from the long – because we are adding, like Doran said, 12 megawatts next year and about that much – about 30 megawatts the following year on the plans that we're adding. we will hedge about 50% of that output of those plants. But for a shorter period of time, but if let's say six months from now, if we have a good deal and it goes out 10 years or 15 years, we will do it. And the other thing I want to add, you know, by raising the equity, we have a little bit more flexibility now than we had before, and that's why we felt more comfortable in going ahead and accelerating the development of this because we have a tremendous backlog on that. We have, okay, we're building six assets now on the RNG, and we have another six in the development pipeline. And forget what we have in the actual pipeline.
spk07: Yeah, that's right. Julian, and sorry, just because it was part of your question. So I think, you know, the impact on RINs for the quarter, you know, probably a couple of million dollars. higher you know i think we you know rng overall probably um contributed you know three million to to sort of we'll call it over over performance um and but one of that was just pure output i mean the the the plants just you know had improved production you know higher production and then a couple of million of from the higher rental prices
spk12: And then if I permit me just in brief, if I can, how are you guys thinking about your disclosure package? As you think about the, you know, disparate businesses involved, you talk about Europe, you talk about RNG. How are you thinking about updating and providing perhaps more specific disclosures on different parts of the business here? I mean, by the way, Doran, thank you for the heuristics just now on the RNG side. But, you know, obviously you get yourself involved in different sides of the business here. Have you given much thought to that?
spk07: Yeah, you know, Julian, I think we are continuing to give thought to that. At this point in time, you know, we're staying the course. You'll see the supplemental slides, the way that we present the material graphically. I think we felt very good about providing additional color during the Q&A like I've just given you. But kind of beyond that, I think we're just going to take it one step at a time.
spk12: Excellent. Well, again, I emphasize congratulations and best of luck.
spk08: Thanks, Julian. Thank you, Julian. Thank you. Our next question comes from the line of Craig Irwin from Roth Capital. Your question, please.
spk03: Good evening. Thanks for taking my questions. So, George, can you remind us the half-dozen plans that you have confirmed into your pipeline? on the R&G side. What is the schedule of those build-outs? Where and when do you expect to build these, and how should we expect those to come on over the next couple years?
spk07: Yeah, Craig, why don't I take that? So just, I mean, as we've talked about, we've got the one plant this year, right, which is 12 megawatts or about a million mm BTU. In 2022, we're now kind of scheduling three plants, total of 36 megawatt equivalents, or 3 million MMBTU, right? And those are the three California plants we've talked about before, right? You know, the 2021, we're expecting that to be kind of fully commissioned before the end of Q2 this year. In 2023, we've got four more. They're a little bit smaller, so 29 megawatts total. $2.5 million in MMBTU. And then we've got in our asset and development pipeline six more plants with signed gas and land rights to them. And as you can imagine, there's quite a lot more in kind of the development and negotiation stage behind that. But that's the cadence. We're not ready to talk specifics about the timing within the year 2022 or 2023, as far as those plants are concerned. But we do feel pretty comfortable with that cadence in those years.
spk03: Thank you for that. So there's been a little bit of controversy out there over the last couple months about the cash flow off the assets, right? So, you know, MRSCO has greatly improved the disclosure around the assets and And, you know, helped us understand these quite a lot over the last few years. But can you maybe describe for us what you expect as far as cash generation off these assets over the next couple years, this year, 2022 and beyond? You know, I'm not asking for specific numbers, but maybe hurdles that you look at internally. And then how much of the capital budget, and if you have specific numbers for us, in 21 and 22 is going to go towards the asset build-out for these projects?
spk07: So, sorry, starting with the very end of your question, which is these projects. I mean, I think that we dropped some numbers in the press release about our expectations for the rest of the year in terms of CapEx on energy assets overall. RNG plus solar plus microgrids plus whatever else, energy as a service. So that range is $165 to $215 million remaining for the year. The, you know, as far as the cash flow question, Craig, I don't think we're in a position today to start formally disclosing cash flow or net income kind of on a, you know, energy asset category by energy asset category basis. It's something that we are looking at to try to provide a little bit more clarity. But as you know, unlike yield codes or other dividend-paying stocks, we are investing all this cash flow that we're pulling in off of these assets. Furthermore, as we grow the portfolio like we're doing and increasing our plans for the next few years, you know, much of that cash flow information will largely be driven by ultimately the revenue mix associated with the offtake and the type of project financing or non-recourse financing we apply to these assets. So more to come. I appreciate the question. I understand its importance. And we're going to work on that.
spk03: Okay. And then last question, if I may. You know, with the successful IPO of Montauk and the obvious success at Amoresco with your green gas portfolio, it seems like there's dozens of these green gas companies out of the woodwork, coming out of the woodwork. Many of them don't have much as far as an experience base, but are trying to raise cash to acquire projects in development in different stages of development. I do know that there are projects that are being shopped, but most of these are items that people actually have to go out and find themselves and develop the way Amoresco has. Can you maybe give a little color on how challenging it is to get a project up and running beyond the initial paperwork of just maybe filing some permits or initial agreements? Can you maybe just handicap for us what these new entrants are really looking at as far as longer-term execution challenges.
spk09: And that's why some of these companies sometimes when they're forecasting some numbers, it's very challenging, especially in California and quite a few other states, to permit these sites as well as get the pipelines in order to interconnection with the gas companies and so on. And that's a great differentiator that we have in the marketplace. Not only we have the development capability because we have the relationships with various landfill owners. We've been doing this for the last 21 years. In addition to that, we've been designing, building them, operating them, and maintaining them. And from the time that you get started, let's say you identify the customer. and sign a letter of intent and then negotiating the agreement, let's say, whether it's a gas agreement and so on. By the time you get the plan up and running, I would say it's a three-year cycle. And I can tell you in California, a couple of our earlier projects, it was even longer than that, the permitting. But as the regulatory and the environment changes a little bit, things might change, shorten that cycle a little bit, but And that's why we feel very, very good. You know, we see a lot of money going to the RNG and a lot of funds and so on. But we think we have a competitive advantage because we've been there. We have the relationships. We have the development backlog. I mean, even if we didn't sell another project, we are good 2024. I was figuring the other day, 25. And I know in our pipeline, we have quite a few more. And we have not only built them, but we operate and maintain them. And they are pretty complicated. I'll give you an example. And... why we were a little bit cautious on this quarter numbers when we made the annual report. We had three of our plants out. San Antonio, because of the freeze-up down there, we estimated it was going to be about three to four weeks out. Our guys, they got it back within 10 days. We had the woodland plant out, estimated for two weeks. We got it back with less than a week. And then the other, the Macaulay Road that's in construction, we had to demobilize because of the freeze-up and so on. And we thought you might be out a couple of weeks. We lost four days. But so we have the capability, and that's very, very important to build these assets. They are very complicated. They are not like solar that they are much easier. And we feel very good about this. But on the other hand, You probably read the book by Andy Grove, The Paranoid Survived, with all this money coming into this market. I am paranoid, and I always try to stay ahead of the competition.
spk03: Great. Well, we have no doubt you're going to stay ahead of the competition. Congratulations on the really impressive performance here, George, and to the whole team at Amoresco. This is impressive execution.
spk09: Thank you. Great. Thanks, Craig. Thank you, Greg.
spk08: Thank you. And once again, ladies and gentlemen, as a reminder, please lend me yourself to one question and one follow-up. Our next question comes from the line of Ben Callen from Baird. Your question, please.
spk06: Hi. Thank you. Good evening. My partner, George, wanted me to say happy name day to you, George, for yesterday. And I guess my question is... Thank you. You're welcome. Uh, and for me to, um, uh, you know, with the, with the new capital and you, you've mentioned that, you know, the 10 years, uh, you haven't raised any capital until now. Um, and I, and I think that all of the questions have kind of, uh, are a bunch of focus on, on, uh, on the, uh, renewable natural gas opportunity. And I just wonder about, you know, the different opportunities you just said, you know, this is more difficult than solar. And I wonder, you know, for the next step of things, or maybe that's not how you look at it, you know, batteries or microgrids or what have you, if this capital opens up that opportunity. No question about it.
spk09: I know we emphasize the RNG probably more than any other ones, but I think somewhere we made the statement and all other renewable assets or microgrids Look, combined heat and power is here to stay. Distributed generation, I think it's the way of the future. And some people, they think it's going to be by building more transmission lines for resiliency. At the end of the day, they will find out that it will be microgrids and distributed generation. And that's why we are very excited about energy as a service. And we're getting some very, very good traction because basically, that's another asset class that we will have. We're talking to some commercial industrial customers that they're going down that direction. So, no, this capital, and that's why when we made the decision, this is what we looked at, where the business is going, not only on the green gas, but also the solar, that will get accelerated as well. But we have talked about that in the past, I thought, and that's why we didn't emphasize it as much. But, The distributed generation, the energy and the service, and the microgrids, I think is the way of the future, and you're going to see us play more and more role in that particular market. I envision very good traction as well because we have the capabilities.
spk06: How are the customer outcomes? set the same or different, and so how do you attack them, you know, between those different opportunities, I guess, because, you know, you've been good at what you're good at, and so to open up a new opportunity, you know, how do you pivot or do you not have to because it's the same customer?
spk09: Well, we do not. We do not. Energy as a service, we've been doing that for the last 10 years. Basically, it's no different than what we call energy savings performance contracts. because all those get financed through a third party, and that shows on the customer's balance sheet. Energy as a service, it does not show generally on the customer's off-balance sheet financing. And we guarantee you on the savings on the other contracts, on the energy performance contracts, and we get paid out of the savings on the energy as a service contracts. So, by the way, Back in 1981, the first contract that I did, it was energy as a service done by the Quincy Market, the Mercantile Wolf Building, that we were getting over 50% of the savings. We were making over 40% margin. And we have customers that they can pivot from the performance contract to energy as a service contracts.
spk07: Yeah. Ben, I think the asset ownership opportunity will also follow the You know, the clean energy goals and the carbon reduction goals that are kind of proliferating across the market. So that's both much market as well as obviously the federal government plus the corporate market. And so I think that that's going to drive a lot of demand. We're going to continue to offer flexibility in the way these things get financed. So if the customer wants an energy as a service that we put the asset on our balance sheet or a PPA or what have you. we're going to be standing ready to do that. And I think this equity deal provides us with more firepower to just go after it.
spk06: And last one, and thank you guys very much for that. Just on the balance sheet, anything else you guys can do or looking at doing from maybe a debt perspective or anything like that, just continue to expand your reach. Thank you guys very much.
spk07: Sure. So, Ben, I think on the debt side, I'm not going to project forward, but obviously we're continuing to work on non-recourse financings that are meaningful for the company based on the asset portfolio. We'll continue to do that, and certainly if we decide to do more, we'll be talking about it in the future.
spk08: Thank you. Our next question comes in the line of Tim Marooney from William Blair. Your question, please.
spk01: Good afternoon. Thanks for taking my questions. Sure, Tim. Hi, Tim. Hey. So I know you're working with a long sales cycle here, but curious if the recent winter freeze in Texas has kicked up more conversations around distributed generation and energy security with your customers or potential customers? Sure.
spk09: Yes, no question about it. And it started with a Sandy storm way back from, especially at New York and New Jersey. But more recently now, it has become pretty much a way of life, I would say. I mean, every base that we are doing a project with right now in the United States, it has some kind of resiliency solution. Take the Norfolk Naval Shipyard. It has a combined heat and power and battery storage. Take the Paris Island, the same thing. We're talking to some clients, commercial and industrial customers. I cannot talk about which particular ones, but they do colleges. We have three colleges right now that they are committed to have resiliency. Because look at it this way, and I think I mentioned this before. I was doing the generation planning for New England Electric all the way until 1979. And back then, we were looking at the single contingency, and then we were in a double contingency, basically losing 10% of the load in New England, which that would be two nuclear units, Seabrook and Millstone. And that would give us a loss of load probability one in 100 years. But now, with 30% of the load coming either wind farms or solar, you get almost 30% of the load going out to an A single contingency. There is no way transmission lines are going to recover that or anything. It's going to be distributed generation. And battery storage and microgrids, people will realize it will be the way to go.
spk01: Got it. Thank you.
spk09: We are getting traction.
spk01: Okay. Thank you. And then, you know, with all the recent headlines around ESG and corporate responsibility and in conjunction with the new administration taking over, I'm curious if you're starting to see an uptick in interest from CNI clients, even relative to, say, this time last year, and if that's resulting in any incremental traction. What about for energy as a service offering, for example, George?
spk09: Yeah, we're getting some pretty good traction associated with that energy as a service, and we're getting – And I think I mentioned it in the last call or told somebody that the first time that we had calls from C&I customers say, hey, guys, we need help. We got to do something about our carbon footprint reduction, and we have the software to tell them where they are and so on. And that's why I made it in my comments. I heard it in my comments that we do get some activity. Great.
spk01: Thank you so much.
spk09: Thank you, Tim.
spk08: Thank you. Our next question comes from the line of Eric Stein from Craig Callum. Your question, please. Hi, everyone. Hey, Craig.
spk10: Hey, maybe just sticking with C&I, you know, since that's an area that you're starting to get traction in, obviously, as you look out three to five years, I mean, what kind of mix do you think that can be of your overall business and then I mean, do you expect that to fall more on the project side, or do you think that that's something that, you know, you'd look at more on the energy asset side? What do you think about that going forward?
spk09: Right now, we have more on the project side than we do on the asset. Like, we can talk about this, Wells Fargo, the bank, we started out, we're going to own 30 megawatts of solar, and then at the end of the day, they said, no, you develop it, design it, build it for us. We will own it. So we have seen that. But on the other hand, there are a couple of deals that we will be talking hopefully in the near future that are going the other way. So I think it's too early to tell, but I will reserve judgment until we get a little bit more information. unless Doran wants to add something.
spk07: I think it's going to be driven by what the customer is looking for in terms of their financing capacity, and it'll probably differ depending on whether you're talking about a large, strong, you know, corporate with a high credit rating and access to low cost of funds or something that is a little bit more down the credit spectrum. So it'll depend. Got it.
spk10: And then just in terms of mix, I mean, do you think three to five years out this is a, this is a very meaningful part of your mix, or do you think that the majority of your business will still be more traditional?
spk09: I think of the project business, I think it will be meaningful.
spk07: I think it will be meaningful. It will certainly increase. However, I would say that the municipalities and our traditional mush market and federal government customers are equally increasing their cadence on proposals and RFPs and, you know, carbon reduction goals, et cetera. So, yeah, I mean, corporate's certainly going to grow faster than the others, but the others are still growing. Okay, that's great. Thanks.
spk08: Certainly. Thank you. Our next question comes from the line of Ted Dorsheimer from Canaccord Genuity. Your question, please.
spk04: Hi, thanks. Congratulations on strong execution, guys.
spk08: Thank you.
spk04: I guess first question, just curious, we're seeing inflationary pressures on the materials side of things, and so I'm just wondering how you're thinking about that in terms of project business. Are you able to, I'm assuming based on structure or contract, you're able to push those prices onto the customer in a cost-plus type relationship, but at some point, do you see any negative impact in terms of getting over a certain threshold where the project gets canceled or, you know, given where you're at?
spk09: Not to the point that the project will be canceled, you know, just the payback period changes, but we do see some... some pressures in the pricing, and then some equipment delays, especially on some of the microgrids and some of the sophisticated controls for street lights. We had some delay on equipment there. And then on the battery storage. But so far, it hasn't had a significant impact in the overall business or performance of our company. The other thing is, you remember, we manage that risk very, very well because we price the jobs, and then we sign the contract. And generally, we have bought the equipment, and then many times we have executed the subcontracts. But on the other hand, some of the contracts that take longer periods of time, we do have some exposure there, and we are watching it very, very carefully by pre-buying panels, lights, and so on.
spk07: I mean, the only thing I'll add there is that we – We don't have any particular components that contribute such a large portion of our supply chain, our needs, our procurement needs. So one, inflationary pressures on steel, for example. I mean, was there an impact? Sure, there was an impact. Most of our contracts get negotiated, so we've got margin protection. But at the same time, even there, that does not represent a substantial portion of our spend. on the cost of execution and our cost of goods sold. So I think we're somewhat protected by the diversity of the types of equipment that we're buying.
spk04: Great. And then just as a follow-up question, on the CNI in particular, you know, as we prepare to – as companies are preparing to go back to the office or some type of structure – I'm wondering that the occupancy of most of the buildings are rather low on the commercial office side. And also on the industrial side, you know, I would think that ERCOT, you know, has brought resiliency top of mind. I'm wondering if you could just parse out for me the delta in terms of the driver in is it more resiliency that's driving some of that project business or offering, you know, features and functions to an office like, you know, a charging station in the parking garage or, you know, better HVAC system? How are the projects kind of categorized in terms of the driver on the CNI?
spk09: I would say primarily getting back to the office. It's around the charging stations and then maybe some filtering or new HVAC systems to make sure that people get back and they have a safe environment and so on. But now you're talking to a data center or a bank or something like that, then the driver is resiliency. Because I know we're developing some solar systems We won a couple of projects because they wanted solar, but then they realized that we do the microgrids and the battery storage, and that's how we got selected because we gave them a more comprehensive solution.
spk04: That's great. Thanks for the color, and congrats again, guys. Thank you very much. Nice to see things work out.
spk08: Thanks. Thank you. And our final question for today comes from the line of Pavel Manchenov from Raymond James. Your question, please.
spk03: Thanks for taking the question. So we've talked about the infrastructure proposal from Biden, some of the rhetoric as well. I have a specific question in relation to the Department of Defense. Have you noticed any kind of concrete changes in the contracting approach or the willingness to adopt efficiency solutions by the DOD or the Army Corps of Engineers, if we just think about the last 100 days?
spk09: Yeah, that's an excellent question because I asked Nicole Bulgarino the same question last week when she was here. To give you a perspective, last year, For the first six months, we had zero requests for RFPs coming over the federal government. So far this year, we have five. That's for energy savings performance contracts. We have other ones designed, built, many, but specifically, you know, which is the main driver of our business, the energy savings performance contracts. This year, we had five. Last year, for this time, plus another three months because of the The second quarter of last year was pretty much dead anyway because everything was closed down. But the attitude, which is the driver, and that's why we made it in the comment, it's much, much more positive. And in addition to that, incorporating not only resiliency but renewables. I think you will see that even the previous administration, They wanted the infrastructure upgrade because these projects, they didn't have to come up with any money. But now, the new administration, not only will want the infrastructure upgrades, the resiliency, but renewable components in the various projects. And some of the things that we're working on, this infrastructure bill will help considerably so that we have the option whether to do it, let's say, a solar farm under the energy saving performance contract or They can take it out and do it under a PPA, purchase power agreement. Give them more flexibility to achieve their goals.
spk03: Yeah, that's an interesting year-over-year comparison, and I appreciate the detail on that. One more DOD-themed question. The contract that you specifically highlighted in Norfolk, $173 million, how will, I think it's the largest contract In Amoresco's history, correct me if I'm wrong, what's the sequence of recognizing that revenue between this year and next, kind of the allocation?
spk09: By the way, it's not the largest one. It's Savannah River, way, way back that we did. We took an old 25 megawatt coal-fired cogeneration plant, demolished it and built a brand-new wood chips power plant. And it was done under the energy savings performance contract, about a couple hundred million dollar project. So close enough anyway. And it's been working. That was a transformative project for us. The $173 million, you know, we get paid and the percent complete. Actually, they have a schedule. It's about two years right now? Yeah, about two years.
spk11: Yep. It's just 100% complete. Right. As we deliver the project, we'll recognize that as we're constructing it under the percent complete, and then we'll move into the O&M phase once that project's been delivered.
spk09: Right. And there is an extra O&M contract on that particular project once it's completed. Right.
spk03: So half and half this year and next?
spk09: No.
spk11: I don't know if I'd say that.
spk09: No, I would think less than half this year.
spk11: Yeah, probably less than half this year and then more.
spk09: And more next year. And the reason behind it is because we just, like I said, we got the permits early March. We started moving equipment and so on.
spk11: Yeah, it takes some time to start to really ramp up. But, yeah, so I think we'll see more of it next year. Okay.
spk03: Understood. Thank you very much, Guy. Thank you.
spk08: Thank you. Thank you. This does conclude the question and answer session as well as today's program. Thank you for your participation. Ladies and gentlemen, you may now disconnect. Good day.
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