Ameresco, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Amoresco, Inc. Second Quarter 2023 Earnings 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. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mrs. Leila Dillon, Senior Vice President, Marketing and Communications. Mrs. Dillon, you may begin.

Thank you, Catherine, and good afternoon, everyone. We appreciate you joining us for today's call. Joining me here are George Sakalaris, MRSCO'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. 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 on the major risk factors that could cause our actual results to differ from those in our forward-looking statements. In addition, we use several non-GAAP measures when presenting our financial results. We have included the reconciliations to these measures in our supplemental financial information. I will now turn the call over to George. George?

Thank you, Lila, and good afternoon, everyone. We had another solid quarter, and I'm particularly pleased that our positive momentum continued. with a strong growth in project backlog and assets in development, supporting both our 2023 guidance and our long-term financial targets. Second quarter revenue was well above our guidance and adjusted EBITDA was at the higher end of our range. Importantly, we ended the quorum with a record total project backlog of $3.2 billion, which was up 9% sequentially. During the quorum, we added $493 million of new project awards, bringing the total ads for the first half of the year to almost $1 billion. This growth is even more impressive as we now have surpassed the total backlog reached when we signed the almost billion-dollar Southern California Arizona battery contract at the end of 2021. We also added 113 megawatts of assets in development in the second quarter, which is the largest amount added in a single quarter in our company's history. This represents an impressive 26% sequential growth in assets in development, which we expect will provide substantial EBITDA contributions for many years once brought into operation. Together, our project and asset wins continue to add to our multi-year visibility of profitable revenues while supporting our confidence in Amoresco's long-term growth. Large battery energy storage contract wins represented a major component of this quarter's growth in both our project backlog and assets in development. In our supplemental slides, you will see that battery assets now comprise 41% of our assets in development compared to 25% of our existing operating assets. Large battery storage systems are a critical component in the replacement of fossil fuel-generated electricity, playing a key role in the storage of renewable energy during times of peak production. Batteries, most importantly, though, make the electric grid far more resilient and flexible, quickly providing power when needed due to higher demand, weather-related events, and a number of other unplanned averages. These factors are driving tremendous growth in battery storage, supported by the mass commercialization of battery technologies, which help to drive down costs. In the United States, the Inflation Reduction Act has been a significant catalyst for the rapid adoption of this technology. Before the passage of the IRA, Federal tax credits were only available for battery storage when it was paired with a renewable generation technology such as solar or wind. Now, under the IRA and similar incentives in Canada, standalone battery storage systems will be eligible for a 30% or greater investment tax credit, significantly enhancing the value proposition of these systems for our customers. thus driving greater adoption. While the ITC is helpful here in North America, we are also proposing and winning standalone battery projects in Europe, where the need is just as great. Given our deep technical knowledge, engineering expertise, and supplier relationships, Maresco has become a recognized leader in the implementation of battery systems. From the transformational Southern California Arizona projects to the recently announced United Power, Middle River Power, and Atura Power joint venture wins, Maresco's expertise and financially flexible business model allows us to drive both battery project and asset opportunities for many years to come. Another very positive long-term development for Maresco which occurred during the quarter was the EPA's ruling concerning the renewable fuel standard targets for 2023 through 2025. In its final ruling, the EPA significantly increased the volume obligation for RNG. This ruling had an immediate impact on the price of the D3 rings, which we generate from our RNG operations, and prices quickly moved from the low $2 range to above $3. As importantly, the EPA also changed how they calculate the RNG industry average rate of growth, which could support volume calculations even beyond the three-year period of this ruling. We were very pleased with the ruling, which increases our long-term visibility into this important line of business. Additionally, we are anticipating the forthcoming guidance from the EPA on earrings, which could also provide a tailwind to our existing biogas to electricity projects. Before turning the call over to Dora, I want to highlight the publication of our third annual ESG report entitled, Doing Well by Doing Good, Transformation and Purpose. We are very proud of the fact that our operations have had a significant positive impact on the global environment as our renewable energy assets and customer projects combined have delivered a cumulative carbon emissions reduction of over 95 million metric tons since public 2010. Our ongoing asset and project growth will continue to drive this important number even higher. Looking ahead, we have also set a target of achieving net zero from our internal operations for both Scope 1 and Scope 2 emissions by 2040. In support of this target, we have pledged to establish emission reduction targets through the science-based targets initiative by 2025. I will now turn the call over to Doran to comment on our financial performance and outlook. Doran?

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. The total second quarter revenue was $327.1 million, about $37 million above the midpoint of our guidance, with faster than expected execution on certain projects. Energy asset revenue grew 17%. largely based on the increased number of operating assets year over year, while our O&M business delivered another solid quarter with 9% growth. In addition, our other line of business was up 4%, driven by increased demand for our utilities, SaaS, and consulting businesses. Gross margin expanded to 17.9% as the lower margin SoCal Ed contract declined as a percentage of our total revenue. We generated adjusted EBITDA of $37.4 million in the quarter at the higher end of our guidance range. We ended the quarter with approximately $49 million of unrestricted cash while executing on a record $285 million in financing activity. As George mentioned, We ended the quarter with a record total project backlog of $3.2 billion, a 9% sequential increase, as we added nearly half a billion dollars in new project awards during the quarter. Our energy asset visibility is approximately $2.3 billion, an operating asset revenue backlog metric that includes both contracted revenue as well as a conservative estimate of the lifetime uncontracted R&G revenues. These metrics, together with our O&M backlog, give Amoresco visibility to over $6.7 billion of future revenue. This metric does not include any contribution from the 545 megawatts of energy assets in development and construction. As George mentioned, we experienced record ads of 113 megawatts during the quarter, and our assets in development and construction remain well above our current operating energy assets. giving us additional visibility into our long-term growth. The timing of placing these assets into operation can be anywhere from under a year for small, more simple assets to four-plus years for more complex assets, such as RNG facilities. Listeners will remember that an asset has to meet very strict criteria to be included in this metric, which is much stricter than what most companies consider a pipeline. Historically, approximately 90-plus percent of our energy assets in development and construction are placed into service and either carried on our balance sheet as an operating asset, primarily with non-recourse financing, or monetized through a sale to a third party. With the changing interest rate environment, we have been fielding many questions on the impact of increasing interest rates on our energy asset business. and our expectations for how this business might evolve. As many of you are aware, we use a risk-adjusted levered internal rate of return as a key metric when evaluating energy asset opportunities. We continue to target a mid-teens risk-adjusted levered IRR on our assets. We've been able to achieve this high yield in the solar and battery space by carefully selecting assets that are with repeat or new customers that value our flexible financing approach, vertical integration, and technical expertise, which means we're not always competing solely on price. Or, because we're developing larger, more technically complex assets, such as RNG, where MRS goes 20-plus years in the market, give us a significant advantage in winning and executing on the opportunities. We are experiencing a meaningful increase in asset development opportunities, including some assets that may not meet our risk-adjusted return targets or meaningfully contribute to our net income. That being said, they are still high-quality assets, and we can therefore generate value for Amoresco by developing and selling them to third parties with lower yield targets. In this case, we recycle capital and earn a profit through an EPC contract where the assets convert to projects upon a sale. We will also look to extract additional value by bundling these converted projects with an O&M contract. Even with maintaining our historic mid-teens IRR hurdle rates, We believe there are ample opportunities to continue to grow our owned assets on average by approximately 20% per year, a growth target we've discussed before, while selectively monetizing our origination efforts in other ways. This strategy isn't new to Amoresco, but in the current environment, it may become more prominent. In the end, we believe that our flexible corporate model with both project and asset business lines allows us to continue to benefit from the rapid growth of renewables by developing assets, which continue to hit our mid-teens IRR target mentioned earlier, or developing and selling them as profitable projects. Moving back to our operating assets, these assets are funded by fixed or hedged debt, Therefore, rising interest rates have little to no meaningful impact on this part of our business. Thus, even in an increasing interest rate environment, the flexibility of Amoresco's business model and our opportunistic approach to the asset business should allow us to continue to benefit from the tremendous demand for renewable energy solutions. We are pleased to reaffirm our 2023 guidance which anticipates adjusted EBITDA growth of 5% at the midpoint, noteworthy considering the difficult year-on-year comparisons associated with the wind down and completion of the large SCE projects. We have also provided a more detailed mix of our expected Q3 and Q4 results in the press release. We continue to expect to place between 80 and 100 megawatts of energy assets in service in 2023, including two RNG plants. A third plant we originally anticipated to be placed in service in 2023 is expected to be at mechanical completion by the end of the year and fully commissioned in Q1 2024. Several additional RNG assets are in the late stages of development and construction And we continue to expect that four or five of these will come online during 2024. Now I'd like to turn the call back over to George for closing comments.

Thank you, Doran. As we discussed in detail during this call, which have continued to extend our long-term line of sight to significant growth ending the second quarter with over $6.5 billion in revenue visibility and 545 megawatts of assets in development and construction. Our first half performance, together with our backlog and business development pipeline, supports our confidence in our long-term growth targets. This is an exciting time to be leading a clean tech solution provider. And I know we have the technical talent and business acumen to support the energy transition and drive meaningful change. 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.

Thank you. To ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, press star 1-1 again. Please stand by while we compile the Q&A roster.

Our first question comes from Noah Kay with Oppenheimer.

Your line is open.

Kyle, thank you for taking the questions. And thank you, by the way, for the granular outlook for the back half. I guess this is a couple quarters in a row now, faster than expected revenue conversion. And so my first question is just trying to kind of reconcile that outlook and the full year. I mean, just taking the midpoint of 3Q and 4Q, be at the high end of the full year revenue range. I mean, you're kind of implicitly raising the low end of the full year revenue guidance. Am I missing something or is there something that I'm not doing correctly or is that correct?

Yeah, I mean, hey, no, it's Mark Chiplock. How's it going? Yeah, I mean, you know, I don't think that we're We didn't want to change the overall guidance. I mean, I think we are seeing some better performance on the top line, you know, because we have seen some of that acceleration. But, you know, we're also seeing a shift in some of our awards and the timing of signing those to contracts. So, yeah, I mean, you know, it's not a perfect science. I think when we're trying to put these ranges together, I think we still expect to be – you know, within the original ranges, you know, could we do better? Sure. But, you know, I think we're trying to use the best visibility that we have, particularly on the project stuff to, you know, to shape Q3 and Q4. You know, I think that, you know, the good news on the second half of the year with the visibility is that, you know, over 90% of that project revenue is coming out of awarded and contracted. So, again, we have good visibility, you know, the timing, as we've talked about in the past, is always kind of the variable that can impact anything from a quarter-to-quarter basis.

Yeah. And I wanted to ask about project margins in the quarter. Was that just mix? And, you know, the corollary is what drives, you know, the improved operating leverage in the back half? I mean, even better operating leverage in the back half from a seasonality perspective. I'm just talking about better than typical improvement in operating leverage. That's here in the guide.

Yeah, I mean, if you look at those net income and EBITDA margins, I think the challenge is, again, when you're looking last year, you've got certainly higher revenue, higher net income from the FCE projects. you know, when we do the line of business reporting, remember we're, you know, we're doing an allocation of corporate expenses based on, you know, based on revenue share. And so, you know, I think our project margins year over year, they were going to decline because of the allocation of those corporate expenses, you know, essentially a large fixed allocation of costs on significantly lower revenue year over year. You know, we did see some cost overruns on certain projects in the quarter that, you that had a little bit of an impact on our gross margins. But we would expect to see margins continue to expand in the second half of the year, you know, certainly as CE cycles out. And we would expect to continue to see the trend of the expanding gross margins throughout the second half of the year.

Fantastic. If I could just sneak one more in. You know, that RFS decision, obviously very positive. for RNG assets. And I was just curious to what extent the higher RINs we're seeing now factored into, you know, the reiteration of the guidance. And if there was no impact, maybe help us understand would that just be due to hedging or really to kind of conservatism in your assumptions for the back half?

Yeah, I think, you know, certainly we're pleased to see the RIN prices coming up. You know, it has some impact, you know, kind of in the second half of our numbers, but I wouldn't call it, you know, significant or meaningful. You know, I mean, we've always kind of tried to carry our assumptions somewhere where the market is going and where we would anticipate the market going. So while it has some benefit, you know, nothing that would – Nothing that was, you know, kind of put us in a position to want to, you know, change the guidance that we provided.

As you can remember, Noah, that 55 actually, as of today, we have 55% hedge as of the end of the quarter, actually. So it's only 45% of the future production that can benefit a little bit from the higher prices. But the ones we use in the forecast, it's pretty much a little bit where the market is right now.

Very helpful. Thank you.

Thank you. And one moment for our next question.

We have a question from Steven Gengaro with Stifel. Your line is open.

Thanks. Good afternoon, everybody. So two for me. The first, when you think about the projects and the bidding activity and the orders and backlog build, any insights into kind of what that pricing environment is like currently and how we should think about the impact that has on project margins over time?

I mean, the activity is very, very good, and that's why you see our awards and the backlog is developing very, very nicely, which we like to see. And that's why I accented a little bit on my discussion. The projects are indeed getting a little bit larger. The margins, if it's an EPC, design-built, otherwise a project, like we said before, they are lower than the performance contracts margins. But on the other hand, they contribute more in the profitability because we use their leverage in the company. The other thing that has happened a little bit, and that's why the OPEX is a little bit higher, since after COVID, we wanted to push. uh the organization has spent a little bit more money in development in order to develop a good pipeline and capture a good market share and i'm glad to see that the proposal activity and the win rate is very very good so i would say the environment is good and it's just the last couple of quarters that we had great thanks and just as a follow-up to that anything on the order flow

flowing out of Europe yet? What's the quick update on how your traction is in Europe?

It's very, very good. The activity is very well. We're having a hard time keeping up with it. And that's why we spend a little bit more dollars. You know, when a company grows, sometimes it's It's very hard to control your APEX. But on the other hand, the opportunities are very large. Our Italian group that we acquired, we are very, very pleased the way they have turned out. They're doing very, very well. In Greece, we have done a couple of projects, and I think the likelihood that we will have some more there is very, very good. In the U.K., again, there are a few things down the pipeline that are coming along that it's going to help us a lot. So the activity over there, and Doron has spent some time, as you might want to say a few words, and I'm going back and forth. I'm pleasantly surprised how active that market is.

Yeah, I think I would only add that it's coming from all technologies. And a lot of the project business, of course, we're getting, you know, utility scale EPC opportunities. And like George said, Greece is looking very strong for us. And the UK, you know, we've come through with some really good wins in advanced technologies that is allowing that business to move beyond traditional energy efficiency into the advanced technologies, just like we've done here in the United States.

Great. Thank you for the call, gentlemen.

Yep. Thank you.

And our next question comes from Joseph Ocha from Guggenheim. Your line is open.

Hi there, everybody. Hi. Hi. Yeah, some questions on this storage business, which is growing so robustly. First, I'm wondering if you can talk a little bit about what it's been like handling self-procurement. I know there were some learnings from SCE, so I'm just wondering if you can update us on how those learnings inform how you're handling the procurement process for all of these new storage projects. And then I do have another question.

Yeah, I'll start with the first one, Joe. So, you know, the procurement, we're continuing to expand our number of relationships with battery suppliers. You know, as you know, that market remains fragmented. And so we've got to be very, very selective when it comes to who our partners are with the integration side of that, the software side of that. It's not just the cells. It's really everything. And so while we took a, you know, kind of took a close look and did a, you know, did a competitive process when we were putting together the SCE project, you know, given the timeline constraints, we, you know, we went with who was going to be able to deliver on time. Now, I think it's fair to say we can be more picky. And we are running competitive processes more or less in all of the projects that we announced that George talked about in his script. And we're ensuring that our suppliers are, you know, stepping up to the plate in terms of pricing, quality, degradation, you name it, schedule, delivery timelines, everything. And I'm excited about the market because there's more and more companies kind of coming to the fray. Yes, there is still a limited number of battery cell manufacturers. However, they're continuing to supply more different types of companies. And it's those skill sets in terms of their ability to execute, deliver on time, commission projects, everything is soup to nuts. You know, it's not just the batteries.

Certainly.

Okay. And then I'm actually going to switch my follow-up then in response to that. So is it fair to say then that, you know, as you audition companies like, you know, STEM or FlexGen or whoever, that it's their job to go find sales? Or are you still involved in that procurement process? I just want to understand how exactly this is working now.

Yeah, we're directly involved. I'll be quite honest. You know, I mean, some of them like to work with certain manufacturers more than others, but some of them are actually a little bit more flexible like we are and want to get the best solution for the customers. So we remain heavily involved in that process.

Okay. Thank you. I'll go back and queue. Thanks, Joe.

Thank you. Our next question.

is from George Giannarikas from Canaccord Genuity. Your line is open.

Hey, everyone. Good afternoon, and thanks for taking my question. I'd like to ask about your focus on free cash flow generation. I know you've only guided to 2020, 40, but there was a lot of discussion around potentially selling assets or concentrating a little bit more on projects. I'm curious as to whether that becomes more of a focus as we move into 2025 and 2026 and free cash flow.

So, George, I'll just take a stab at that. My gut reaction as you look forward past 24 into 25 is that there is not a prescriptive strategic move on our part to move toward project um project revenue and cash flow uh you know we we maintain this flexibility when we approach customers so if the customers happen to be looking for more project business that's the direction our company will go for the customer. If they're looking for more asset business, that's the direction we will go. As we said, with the asset business, we've got a little bit of a regulator here where we can actually monetize the development pipeline and convert those into projects as needed based whether it's on return criteria or the risk adjustments that are part of that determination, the return criteria. But we're not making a strategic move toward or away from the project business?

No. No, we will continue to emphasize the project business as much as possible. And I don't know if you saw it on the International Energy Agency. In the paper today, they announced that the least cost alternative to net zero is energy efficiency. Number one, clean fuel is energy efficiency. So we will continue that. But we try to take advantage of the full spectrum of the cleantech sector. And I think that's helping us a lot. And then as far as the assets are concerned, selling some of the assets, we are very pleased that we are signing much more than we can chew, really. And that's why we will take some that maybe do not have the rate of return that we would like to, but somebody else likes it, so we'll say great. we will flip them to them. But no, we're not getting away from the business. Actually, we will focus as much as we possibly can.

Thanks. And as a follow-up, I'd like to ask about this RNG asset that's moved to being fully commissioned in the first quarter of 24. You reiterated your four or five that'll come online in 24. Are those in addition to this other one that's been pushed into the first quarter?

Correct. Correct, yeah, correct. And listen, what happened on this one, you know, originally they're supposed to deliver Some of the equipment in April, then it was June, then it was late July, and then it just got delivered. So that's why some of the projects, they move either due to the weather or to the delivery schedule. That's what we see in the biggest bottleneck. And then we have some problems with the transformers and electrical switchgear and so on. But at the end of the day, as far as the energy business concerns, we've been in it for about 20 years now. And I think the team that we have is the best in the business. And we might miss a quarter or two here and there. But overall, we will deliver top quality projects in a timely fashion.

Thank you.

Thank you. One moment for our next question. We have a question from William Gripen from UBS.

Your line is open.

Great. Thank you very much, and good evening. My first question here was just wanted to ask how you're thinking about your approach to RIN monetization now, just given the final EPA RVO, and we have three years of visibility, and obviously pricing has been a lot better. So how are you thinking about hedging versus open market

I think the strategy that we've been using in the past, you know, that hedging 50% of the output and then the rest of it in the open market. Now that we have a three-year visibility, we feel even much better with this strategy. But we're always very optimistic about the RNG market from the beginning, because not only the RINs, they have a great value, but in the long term, I think the voluntary market for renewable natural gas will have a great place. And we have seen, by the way, the three- to five-year contracts that we signed on 50% of the output, the prices are coming up. So I wouldn't be surprised over the next, as we've developed more and more of these RNG facilities, that we will not have as much at risk, I would say, down the road. You would see us executing longer-term contracts as soon as the economics dictate. And every year, by the way, we do an analysis for the board, and we determine, pretty good analysis, what the cost will be for us if we were to hedge more than what we have done in the past. But, look, it's a very, very important issue. part of our business line, and we pay a lot of attention to it. And we think we develop great assets. We want to maximize the value of those assets.

Yeah, Will, sorry, just to, if you want to get micro between now and the end of the year, you know, the sort of dynamics of hedging versus waiting. We are kind of watching the market. We knew that right after the RBO, you know, it came out as we expected. There would be a lot of people going to sell. So we didn't go straight in to, you know, to liquidate all the budgets. We'll continue to keep our ear to the ground in terms of production estimates and see what we think is going to happen with the market. We've got our feelers out everywhere in this market, and so we'll continue to hedge dynamically and opportunistically for the rest of the year on these 2023 production. And I know that you're relatively new to the coverage. We generally don't go over 90%. in the current year, generally speaking, to leave a little bit of a gap for production variability.

Got it. And just my follow-up here, just on the implied fourth quarter earnings ramp and the guidance, that's outside of the range of kind of seasonality that we've seen over the last several years. Could you just speak to the drivers of that? Is it really just projects coming online in the fourth quarter that are contributing?

I think a large part of the revenue is, you know, again, part of it is some seasonality, but we have a little bit of a shift on the awarded timing. So, you know, again, I mentioned that we have some real good visibility of revenue coming out of the project backlog between awarded and contracted. But I think some of the timing that we're seeing that's maybe pushing something out from Q3 into Q4 is the timing of when we anticipate some awards converting to contracts. What I think is important to remember with that is that, you know, we're capitalizing. Once a project's in the awarded state, you know, we are capitalizing project development costs for that project. As soon as it converts to a contract, there's an immediate pickup in revenue as we move those costs into the construction phase and as part of that cost budget, you know, because our revenue is on a percentage completion basis. So, So, yeah, I think Q4 looks a bit heavier than it normally would. Part of that is going to be the shifting of awards, converting the contracts, and then the rest of it is just the visibility we have coming out of our contracted backlog. Obviously, we still need to execute on that, but we feel pretty good based on that visibility.

Great. Thanks very much.

Thank you. Our next question comes from Hashi Harrison with Piper Sandler.

Your line is open.

Good afternoon, and thanks for taking my questions. So maybe just a follow-up to the last question. Can you maybe – it sounded like you – you know, Mark, it sounded like you suggested maybe there's a little bit of the awarded conversion taking a bit longer than you expected. Can you speak to maybe what the driver – Behind there, and then I have a follow up question.

Yeah, I mean, it's a good question because because quite honestly, I think the trend that we're seeing is our awards are actually converting a bit. A bit faster, particularly on the design build and and so generally those take those take anywhere from 12 to 24 months to convert. We're actually seeing it a bit on the lower side. It's just some larger projects that have taken a little bit longer that we see shifting out. It could very well be that that pulls back in, but I think in terms of just providing the shaping, we're trying to maintain a little bit of a conservative view in terms of when those will convert, but still give us confidence in being able to achieve the full year numbers.

Got it. Thank you. And my follow-up question is on the R&G side. Can you discuss just the progress on the four or five RNG projects that are expected to come online in 2024? How are those, you know, how is construction tracking relative to expectations? You know, what's the risk of delays on those four or five projects? And then finally, just in light of the RVO ruling, can you give us some sensitivities for 2024 from the higher D3 RIN pricing?

We'll start on the construction progress, the development progress. Actually, I'm feeling very good about the four to five. As we've talked about, those are in relatively late stages of development or already in construction. And therefore, we have a couple of them that we feel very good about. The timelines and the others are moving along in the pace where we we expected them to move, right? So I think we feel pretty good about that piece of it. As with the RIN and the 2024, I think the point here is that we're not selling our 2024 RINs yet, right? We are watching where that market sits vis-a-vis what we expect production to look like. overall across the market. But that falls straight into the category where I talked before about we're keeping our ear to the ground. We're going to see where those numbers come out in terms of the supply and what we see finishing in the market and what we see not finishing in the market. And then we'll hedge accordingly. But I don't think we're prepared to start providing sensitivities to the overall businesses You know, we're a very diversified business. You know, R&G is one piece of it. I don't think we're ready to start providing sensitivities on RIM prices for 2024.

Okay, that's it for me.

Thank you. Thanks, Kashi.

Thank you. Our next question comes from

Julian Dumoulin-Smith with Bank of America. Your line is open.

Hey, good afternoon, team. Thank you guys very much for the time. I appreciate it.

Look, I wanted to follow up on a couple – hey, afternoon, guys. Look, just wanted to flag a couple things. So on 23, if we go back to that really quickly, I'm hearing a couple things from you guys. But first, can we talk about the SCE and just understanding the full extent of the impact that the Edison 10Q had some commentary about some shifting timelines. So I want to make sure we understood and you guys had kind of a clear definitive view about what that financial impact was. And then also just on 23 altogether, it sounds like given the 3Q and 4Q dynamic we started talking about at the top of the call here, it sounds like you're still on balance net quite comfortable on 23. And the reason why you wouldn't raise 23 is more about a timing issue, that things could slip into one queue. Is that the right interpretation?

I'll start with SoCal, and then maybe kick the other piece to Mark and Julian. As far as SoCal is concerned, because we're 95 plus percent complete with that project, the financial impact of the movement and the substantial completion dates is not anything that we're concerned about for 2023. As you might expect, we're heavily focused on finishing the projects. And therefore, we don't have any updates as far as, you know, negotiation of open, uh, open items with, uh, but the, uh, the revenue amounts are kind of down to the down to the wire. And, you know, we're just in the final commissioning of 2 out of the 3 projects, as we mentioned in our, uh, uh, disclosure. Mark, maybe I'll throw it to you, but yeah, sure.

I mean, I think the answer your question is yes. Like, I feel like we have, we have really good visibility on to the second half of the year with respect to revenue because a large percentage of it is coming from, you know, are awarded and contracted. Backlog project backlog, uh, there is still a portion that, um, that, you know, we still would need to to to, well, say, book and burn. Um, but it's but it's a relatively small piece and and yeah, I think that, you know, there we talk about the project's business, uh, can be heavily impacted by timing. And so I think, um, you know, some of the awards we anticipate, um. You know, signing in Q4, could the timing shift? You know, absolutely. But I think right now, based on the visibility that we have, you know, we're maintaining confidence in our original estimates for the year. Got it.

And then on 24 itself, I mean, just to understand, I mean, with the mark-to-market increase in our, you know, the rinse prices, et cetera, I mean, and the open position that you guys alluded to here earlier at, I think, 45%, I mean, why not be more constructive on 24? Again, I get timing issues that clearly seem to be part of this. But can you explain a little bit more of the puts and takes here as to why it would not be overall more constructive? Or, again, is this just you guys, you know, holding back, if you will, in some respect?

Julian, I think it's exactly that. I think the full year 2024 guidance will come when we release Q4 in the beginning of the year. And at that point in time, we'll be happy to talk more about it.

Got it. But there's no other offsetting or mitigating factor or starting point assumption on the $300 million that one should be aware of, right? I mean, obviously, we're all looking at this higher price. I just want to make sure that we're not missing something about this. It seems like it's $15 million in EBITDA on a dollar move here. Yeah.

Julian, I appreciate your math. We're really just not going to comment on the 300. You know, we've had that out there for a long time. I think we're going to leave it and address it at the beginning of next year after we record the full year.

All right. Fair enough. All right. Thank you guys very much. I appreciate it.

Thank you.

Our next question comes from Tim Mulroney with William Blair. Your line is open.

Yeah, thanks. Most of my questions have been answered at this point. Hi. Just stepping back on a bigger picture thing here, I mean, I think we've all seen a considerable increase in the dollar value of projects that you're bidding on and winning these days. Just wondering if you could help us understand, is that a reflection more of larger projects being proposed, or the reflection of Amarasko purposely targeting larger projects that maybe you wouldn't have been on in the past?

I think both a little bit, but the average size of the project we propose right now, it's almost, correct me if I'm wrong, 50% up the size? Yeah. Yeah. And it's the needs because the projects are getting more complex and they involve not only energy efficiency, but solar, battery storage, microgrid, and so on and so forth. So they're getting larger and larger. And then, of course, I think the Southern California Arizona project helped us a lot. So we had three good wins on the battery storage side, which is a very good-sized project.

Okay, thanks, George. And can I just as a follow up different subject, but can I get your opinion on, you know, the state of the M&A environment, your pipeline and your appetite at this point in mid 2023 here?

Our appetite continues to be good. We continue to look at them, and we're looking right now in Europe, of course, a little bit more aggressively, but in the United States as well. But they have to be accretive, and we are disciplined. And on the other hand, though, in order to grow your footprint, especially as you go overseas, it's much easier to get 30, 50, or 75, or 100 people hiring one at a time. As long as you don't have to pay for it, it's worth doing it.

Got it. Thanks so much.

Thank you.

And our next question comes from Pavel Molchanov with Raymond James. Your line is open.

Thanks for taking the question. Let me ask about CapEx. If we annualize your CapEx from the first half, the full year figure will be well over $500 million. Is that the way we should be thinking about the math, or was the CapEx kind of overly front-end loaded?

Yeah, I think, although it's fair to say that it probably was pretty heavily front-end loaded, as we talked about the R&G plants that we have coming in this year and even the one that's going to be mechanical complete by the end of the year, substantial amounts of capex already spent on those. And not surprisingly, we've got a tremendous amount of non-recourse financing that we've raised. that we talked about in the script as well. So, I don't think it's a, you know, Ian and Stephen look at the two halves of the year.

No, because the timing of the implementation, especially of these larger projects, RNG and so on, it just changed than what it was before. Because in order to get the equipment on time, you have to put the deposits down much earlier than you would otherwise have to do. Transformers, all kinds of equipment that you have to make the down payments. So that's why they are skewed a little bit on the first half of the year.

Okay, let me turn to Europe. It was just over a year ago that you guys announced the project in Bristol, which I guess in just nominal dollar terms is the largest project in MRSCO's history. Can we just get an update on what year one of that has been like?

We are doing work on them. I would say that them approving projects a little bit slower than what we had anticipated, but you will see it picking up considerably next year, for the fourth quarter of this year and next year. But we have identified at least, I think we mentioned it before, $400 million of projects in which we have found the financing associated with them too. But again, you're dealing with the government. It takes time. But on the other hand, they are very, very happy with us. They have introduced us to several other cities in the UK that they might be interested in doing something similar.

All right.

Thanks very much. Thank you. Our next question.

comes from Christopher Souther from B. Reilly. Your line is open.

Hey, guys. Thank you. I had a question around the United Power and Northern Up Power wins. Were those reflected in project win awards for the quarter? I wasn't sure since the press release came out in July, and I just wanted to clarify that those were projects, not assets and development wins, right?

Sorry, Chris, so you mentioned United Power and Middle River? Yeah, Middle River. Okay, so United Power is actually an asset. Yep. So that's reflected in the battery piece. We look in the supplemental slides. And then the Middle River is a project.

Got it.

Okay. So that would be in the project backlog. Okay.

Okay, makes sense. So when we're looking at, you know, it seems like you guys are going to be pursuing some of these larger size, lower IRR candidates, you know, mostly on the storage side, it seems like. I'm curious at what stage of development would you guys be looking to sell those? How much, you know, capital do you think, you know, you'd need for, you know, whatever is in the backlog or the development pipeline there for ones you think that You'd probably end up selling at some point in construction. And how much of that kind of development pipeline is larger projects that are not necessarily the IRR that you're looking for?

Yeah, so I don't know that there's a CapEx number that I would put in there for that kind of category. Again, we're going to be relatively opportunistic about this to ensure that we get the right result and what we think adds the most value for Amoresco. I would say optimal point, probably pre-construction. However, we've also varied from that theme as well in terms of when we would sell that.

On the mid-river power, we are not buying the batteries. The customer is buying the batteries, and it's just design-built, that particular project. And that project is pretty much, I would say, will probably start construction in the next couple of months.

Right. Okay. Very helpful. Congrats, guys.

Yeah. And the United Power is pretty advanced development.

Thank you. One moment for our next question.

We have a question from Eric Stein with Craig Hallam. Your line is open.

Hi, everyone. I'll just sneak one in here at the end here on energy storage. Now that it looks like you're going to own some of these going forward, can you just talk about the decision or maybe what you would see as kind of an ideal project just because you've got different value streams from these assets versus some of your others, and maybe multiple value streams versus either selling the power or selling the gas? Anything that you could share along those lines would be great.

Sure. I mean, I will keep it short. We like capacity contracts. That's really, you know, the fewer merchant revenue streams, the better for us. We like the fixed capacity contracts. And if we can make the numbers work by virtue of, you know, looking at CapEx, looking at, you know, transportation, implementation speed with which we can get these things underway with a capacity contract, that's a better looking thing for us. You know, we're getting long-term service agreements from our battery manufacturers that help us with managing degradation and or augmentation. And when you've got a fixed long-term capacity contract, that really helps keep us comfortable. So I think that's the ideal. And the return, good return. Well, obviously meeting our return hurdles.

Right, and the return. And so it's not necessarily size. I mean, if it checks all the boxes and you've got that, you know, the capacity contract, you wouldn't shy away from something just because it's a particular size.

That's right. I think in our asset and development metric with solar and storage or just storage standalone, you're going to see a variety of sizes of projects. Some of these, you know, some of the battery stores that we're buying for our behind-the-meter solar plus storage is, you know, a megawatt or less. And then as you saw from United Power, it's, you know, quite a bit larger. So we're good with the range. It's more about the metrics.

Got it. Thank you.

Thank you. One moment.

We have a follow-up question from Joseph Osha from Guggenheim. Your line is open.

Hi. Yeah, thanks. I had a follow-up. We talked a little bit about eRINs and what is or is not going to happen. Depending on what happens, this is going to be a new RIN market. I'm wondering, do you guys think there will be enough of a market to hedge it initially or not? Is this basically going to be something where you're just going to kind of monetize them as they become available? I'm just wondering how you think that market's going to evolve, assuming we get what we want as EPA. Okay.

Joe, I think there's a lot of wood to chop there still for the EPA, but our understanding is that those RINs will be RINs. They will be the D3 RINs, and that they will be needing to introduce an additional amount of RVO associated with that piece of it. But I don't know necessarily at this stage that they're going to create a separate market for the ERINs versus the D3 ERINs. We don't know. We don't know. But, yeah, I don't think we have enough clarity at this point.

Yeah. The only thing that we know is that they definitely will do it. You know, they are very serious about it. And as they go more and more, they want to electrify just about everything. And we are in a great, great situation because we have – many assets that they are landfill gas to electricity. So it will be a good tailwind for us. And if I... Sorry, go ahead. And they say it will be done sooner than what people think it will be done. For some people, they say it will be late next year or so on. We anticipate it's going to be done much sooner than that.

But I guess if I, if I, what I'm trying to get at, how long after they, what do you think is the gap between when they announce and when you get an actual functioning market given, you know, all of these additional questions? Based on what we know right now, it's 25.

Yeah. Joe, I think that's going to take some time.

Yeah.

Okay. Because they're going to need to, they're going to need to align it with the cycle of the calendar, you know. Okay.

We didn't say anything until at least 25. Yes. Okay, thank you. Thank you.

Thank you. This does conclude today's conference call. Thank you for participating.

You may now disconnect.