Ameresco, Inc.

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Amoresco Incorporated third quarter 2023 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question at that time, please press star 1-1 on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mrs. Layla Dillon, Senior Vice President, Marketing and Communications. Ms. Dillon, you may begin.

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

Thank you, Leila, and good afternoon, everyone. We ended the quarter with a record total project backlog of $3.7 billion, which was up 14% sequentially and 41% versus last year. We added an impressive $700 million in new project awards during the quarter, bringing our year-to-day awards of $1.7 billion, more than double last year's level. And we anticipate that our new awards will continue to grow given the 35% increase in proposal activity as compared to last year's levels. This backlog together with our energy asset and operation remainder visibility, gives us over $7.2 billion in total multi-year visibility of profitable revenue, supporting our confidence in MRS Corp's long-term growth. We did, however, face a number of industry-wide and company-specific challenges, which impacted our third quarter results. We are very disappointed. We are pleased with the progress we made in building our long-term business momentum. We also added over 50 megawatts of assets in development in Q3, ending the quarter with almost 600 megawatts of assets in development and construction. This is a 30% increase from the 460 megawatts at the end of last year. While our long-term prospects have never been better, I did want to comment on some of the recent industry challenges. In our project business, we are seeing longer cycles when converting our awarded projects into contracted backlog. These contracts are being delayed, and some customers are taking longer to proceed with the actual implementation of project work. It's important to note that we have not experienced any cancellations just a lengthening of the same sales cycle in moving awards to contracts and like others in the industry we also continue to face supply chain delays on certain components as well as tightness in the labor market our energy asset business has been challenged by both downtime at some of our biogas plants, as well as delays in the development and construction of some of our assets, especially our larger, more complicated plants such as RNG. While assets always incur downtime, the levels we have faced over the last few quarters have been considerably greater than budgeted. driven by several factors out of our control, including adverse weather conditions and utility interruptions. The asset construction timetables have stretched as a result of industry-wide component labor shortages, as well as administrative bottlenecks. Again, while these delays are frustrating, it's important to keep in mind that all of these profitable assets will be built It's just taking longer than originally anticipated. As the company continues to grow, we are optimizing the operational structure at MRS Code to bring more uniformity and scalability across all of our geographies and business units. We are making these changes to increase our ability to react to changing market conditions more quickly and to drive increased corporate efficiency. And with our tremendous project backlog, we have increased our focus on project execution and cash flow generation. Further, in light of the continued industry challenges impacting conversion times and execution, we are revisiting some of our assumptions around guidance. Doran will provide more details on the numbers during his financial review. However, even with these challenges, We couldn't be more optimistic about our future. MRSCO is highly profitable, and we continue to expect substantial growth in 2024 and beyond. I will now turn the call over to Doran to comment on our financial performance and outlook. Doran? Thank you, George, and good afternoon, everyone.

For additional financial information, please refer to the press release and supplemental slides that were posted to our website after the market closed today. Total second quarter revenue of $335 million was below our expectations as project delays and asset downtime impacted revenue. Our project revenue was particularly impacted by a lengthening in the cycle of converting awarded backlog to contracted backlog, as well as continued industry-wide supply chain issues that are extending our construction timelines. Energy asset revenue grew 6%, largely due to the greater number of operating assets compared to last year, as well as higher RIN prices. These benefits helped to offset greater than expected downtime at our biogas facilities, as well as delays in bringing some new assets online. Our O&M business delivered another consistent quarter with 4% growth, while our other line of business experienced a slight decline in revenue, driven by end market softness at our off-grid solar business. Gross margin expanded to 19%, but did not meet our expectations as the downtime I just mentioned and project mix impacted our results. I want to emphasize that we have not seen any fundamental change in our overall project gross margins, as the expected margin within our backlog has been quite stable for at least two years. We generated adjusted EBITDA of $43.3 million in the quarter. Our gap results for the quarter include a discrete tax benefit of $7.2 million related to a prior year Section 179D tax deduction allocated from a customer. To maximize our earnings, we'll continue to take advantage of all of the benefits available to us and our customers as part of the IRA and other favorable legislation. Our long-term revenue visibility remains strong as ever. As George mentioned, we ended the quarter with a record total project backlog of $3.7 billion. This is an impressive increase of 41% versus last year and a sequential increase of 14%, driven by winning over $700 million in new project awards during this quarter alone. Our operating energy asset visibility is approximately $2.3 billion. representing both contracted revenue as well as a conservative estimate of lifetime uncontracted RNG revenues. These metrics, together with our O&M backlog, give Amoresco visibility to over $7.2 billion of future revenue. Importantly, this does not include any revenue contribution from the 596 megawatts of energy assets in development and construction. The timing of placing these assets into operation can be anywhere from under a year for small, more simple assets to four plus years for more complex assets such as RNG facilities. Unfortunately, this time frame has recently been increasing due to labor and equipment availability along with permitting delays. However, we continued our high rate of conversion with approximately 90% plus of our energy assets either successfully placed into service on our balance sheet or monetized through a sale to a third party. We continue to field many questions on how higher interest rates will impact Amoresco, especially as it relates to our energy asset business. Compared to many in our industry, the inherent diversity of our business model gives us the flexibility to adjust to changes in the business environment. We have the optionality to develop profitable assets and then either hold them on our balance sheet as an operating energy asset or to sell to a third party and recognize project revenue if the assets do not hit our risk-adjusted levered IRR hurdle rates. While some assets may not hit our own hurdle rates, they're well within the return profile of many energy asset buyers and aggregators ready to add assets to their portfolios. and such a sale would often come with an attached O&M contract. This strategy is not new for Amoresco, as recycling our cash flow through asset sales has been part of our business model for several years. In the end, we believe that our flexible corporate model with project, O&M, and asset business lines allows us to continue to benefit from the rapid growth in the deployment of clean technologies, even in a high interest rate environment. Our ability to finance our growth remains excellent. During the quarter, we secured over half a billion dollars in financing commitments, bringing our year-to-date total to over $1 billion. While the clean tech industry at large has experienced credit tightening and expansion of spreads, we are particularly pleased that in our recent financing, credit spreads for Amoresco's high-quality asset portfolio continue to be stable. We have a number of attractive options for financing our growth, including non-recourse project-level debt, tax equity, and the recycling of capital through asset sales. We are adjusting our 2023 guidance in response to the items which we described earlier. We now anticipate full-year 2023 revenue, adjusted EBITDA, and EPS to be approximately $1.35 billion, $165 million, and $1.20 at the midpoints, as detailed in our press release. We now expect to place between 120 and 130 megawatts of energy assets in service for all of 2023, including the recently acquired Los Alamitos microgrid project and our second 5-megawatt RNG plant. A third RNG plan is expected to be at mechanical completion by the end of the year and fully commissioned in early 2024. And while we will be providing detailed full-year 2024 guidance when we report our fourth quarter and full-year results, we want to take this opportunity to comment on our 2024 adjusted EBITDA target of $300 million, which we originally provided in early 2022. Given the lengthening in the sales and construction cycles in our project and energy asset businesses, we now expect the 2024 adjusted EBITDA could be approximately $250 million. I want to make it clear that none of this adjusted EBITDA opportunity has been lost. It is just being delayed. And this new adjusted EBITDA level still represents impressive growth compared to our expected 2023 results. and still fits in the framework of our long-term 20% plus adjusted EBITDA growth target. Operating leverage remains top of mind as we remain diligent on OPEX, further bolstered by our internal optimizations. Now I'd like to turn the call back over to George for closing comments.

Thank you, Doran. As we have discussed in detail during this call, While we continue to face some headwinds, our long-term growth opportunities have never been better. The company is redoubling its focus on profitable execution and cash flow generation, and we look forward to detailing our success in future quarters. In closing, I would like to once again thank our employees, customers, and stockholders for their continued support. Operator, we would like to open the call to questions now.

Yes, sir. Ladies and gentlemen, if you have a question or comment at this time, please press star 1 1 on your telephone keypad. If your question has been answered or you wish to remove yourself from the queue, simply press star 1 1 again. In the hopes of addressing as many of your questions as possible, we ask that you please limit yourself to one question and one follow-up. Again, please limit yourself to one question and one follow-up. If you have additional questions, you may re-enter the queue again by pressing star 1 1. Please stand by while we compile the Q&A roster. Our first question or comment comes from the line of Noor Kay from Oppenheimer and Company. Mr. Kay, your line is open.

Thanks for taking the questions. I was wondering if I could start off by just trying to get a sense of the bridge between the prior and revised guidance when we look at essentially the $50 million difference. in EBITDA. Can you kind of walk us through what were the main components as quantitatively as you can? Obviously, you commented to both projects and energy assets, but if you could help us get a sense of the bridge, that would be really helpful.

Sorry, to clarify, no, you're talking about 2024? No, 2023, actually. Thanks for clarifying.

Okay, thanks. So, just

First and foremost, I think the point is that the ramp in 2023 really relied on some solid execution and conversions of awards to contracts happening in Q3. That didn't materialize the way we expected it to. And so as a result of that, we've kind of adjusted this guidance to push things to the right, as you might expect, and as you've probably seen us do before. So, you know, through Q2, you know, we're executing on our contracted backlog, as you saw, higher than expected revenue performance. But then we also had, you know, a relatively high amount of, you know, second half 23 guidance there in the awarded and contracted backlog. And, you know, I think with the conversions being delayed, you know, several large projects, I think that was one of the things that just kind of resulted in the push-up. I don't know that we want to go into any more detail beyond that.

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

Right, right, right. So not possible to sort of say whether it's going to happen, have projects and assets. You're not going to be able to provide that detail. I guess that's affirmed. Okay, understood, understood. You mentioned earlier one of the benefits of the model is the ability to be flexible around capital. Can you talk a little bit about your plans for capital recycling here and how you're thinking about leverage and financing? You mentioned securing a good amount of capital already this quarter, but I just want to understand how you're thinking about capital recycling levels and how soon that might occur.

So, look, I think that was really designed as a reminder that this is part of the business model, that we will look to sell assets. I think, as I talked about last quarter, with higher interest rates, we're starting to see a little bit of, you know, a little bit of challenge in the levered IRR targets that we have. And as you know, some of these assets take a while to sort of make their way through the asset and development metric and into something that's in operation. So if we experienced some pressure on the interest rate, what we found is that the market still exists for those assets at return hurdles that are lower than ours. And we will regularly work on kind of turning around entering into sales agreements with those assets pre-construction, so while they're still in development, such that it effectively converts it into project business for us, as opposed to looking at it as a distinct kind of business line. I would say it's fair to say it's going to be consistently kind of dynamic, if that's a good oxymoron for you, as we go forward.

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

No, but still, we have so many projects in development, assets in development, so this gives us an opportunity to monetize those assets in development and still maintain our targets of the ones we hold, about at least 20% growth per year in the ones we hold. and this interest rate in the environment i think it's a good opportunity to recycle some of that cash and that's why on my comment too the project business The backlog is growing so big, so large. We refocus to generate, to build more of those projects out as we go down the road to generate more cash internally rather than looking at it from the outside.

Yeah, I mean, it allows us to maintain that growth rate we're expecting and hold on to our mid-teens IRR target. And at the same time, stay in front of our customers, right? Right. You know, we're continuing to find the right financing on a non-recourse basis for the assets that we want to keep. And, you know, if the returns aren't there, we at least, we're staying in the market. We're staying in front of our customers. We're still developing a good amount of assets.

And that's the way, Noah. We don't overstress our balance sheet.

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

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

Hi. Good afternoon. Can you hear me okay? Yes, sir. Oh, great. Thank you. So, you know, I guess my big picture question is when we think about, you know, the quarter, and obviously you've laid out the challenges you've seen and you kind of gave this preliminary look into 2024. When we think about your handle on the issues and what kind of gives you confidence that you start to get, you know, kind of additional momentum traction to 24, which makes those targets realistic?

Well, we... We took into consideration what happened to us for this particular core, and basically we extrapolated. We assumed that these conditions will continue. for the foreseeable future. And between all of us, that's one of the mistakes that we had made. I think we let our guard down a little bit by overperforming the first two quarters, even though we started realizing that a couple of the awards were not moving to the contracts as fast as we had contemplated. But then it became clear Of course, many, many projects, not just the ones that we could see. And then the other thing that surprised us a lot is the extension of the implementation schedules. We got stuck in quite a few of the projects in executing because we couldn't get some materials. On a couple of them, we couldn't get the right labor in a timely fashion. And when I said the administrative challenges that we faced, you won't believe it. Some of the permitting used to take a couple of weeks. It takes more than three or four months because nobody shows up to review the applications. And we feel very good, and that's why the project business and the project backlog now, because it's getting to a point that we feel that we can execute on 2024, and especially on the level that we afford a customer at this point in time. And that's why I think we will give more detail when we talk about the 24 numbers after the end of the year and give a little bit more color and details to it. But right now, we look pretty good where we are that we have taken into account what's happening in the marketplace.

Thanks, George. And my father, it sounds like this, but you feel like those expectations are or accounting for things that kind of you can control versus what you kind of can't control going into next year. Is that a reasonable way to think about it?

That is correct, yes. Okay. And that's why my comment, you know, I said we feel very, very good about the future, where we are in the trend of the business. It's very good. It just is taking a little bit longer to execute that what we – you know, we've been in this business a long time, and we had the metrics we thought down pat, and – To be honest with you guys, I thought that this supply chain issue will be done by now. But what is happening, I think, and that's why we get stuck on the electrical side, especially with the equipment, with everything going to be electric, it has bottlenecked not only the capability of the various manufacturers in the built-in transformers or control panels and so on. And the beauty... None of our projects have been lost. They were all there, and we're just moving at a little bit slower pace.

And, Steve, this is the importance of controlling OPEX here, you know, because we're focusing on earnings generation. You're going to control OPEX and, you know, continue to generate the EBITDA that we expect to generate. And, you know, frankly, we're still working to execute OPEX, Contracts with our vendors and our suppliers prior to executing our customer contract to de-risk margin, we're still working toward that. It's just that we've had a few of these adjustments come with some of the projects that have been in the backlog for a bit with the kind of lengthening of the cycle.

I understand. Now, thank you both. That's helpful.

Thank you.

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

Hey, everyone. So I just want to dig in here a little bit more just to try to understand this. So, I mean, I know supply chain issues, you know, in labor, it's been a pretty consistent challenge. I mean, is this something where you saw that intensify or is it where you just had a number of larger projects, things you were counting on contributing to the back half of the year that it was just a greater impact from those headwinds?

Great question. That's exactly what happened, especially some of the larger projects. They were already scheduled, and you say this particular contractor now is going to do X, Y, Z, and all of a sudden that contractor was there. Or, and this is the key, she couldn't get the qualified workers to show up at the site. And some of them, we used to go out with an RFP to 12 to 16 vendors, and sometimes we'll get one or two responses. And you will find out that one of them is not even qualified. So labor has become a huge concern.

Got it. And then, I mean, you've had great growth in your project business. I mean, you mentioned permitting and that sort of thing, but, I mean, is this the area of your business where you can safely say interest rate, higher interest rates, that that is having a tangible impact, negative impact?

Not really, no, no. We haven't really seen that on the project business. Okay. I think that, yeah, go ahead.

No, I was just going to say, so the 250 that you're talking about for the early look at 2024, just to confirm, you're not really expecting necessarily improvement in these areas, right? You're kind of expecting status quo from where things stand now, playing that out through 2024 rather than, you know, anticipating that there's improvement in a lot of these areas.

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

Okay, thank you.

Thank you. Our next question or comment comes from the line of Tim Mulroney from William Blair and Company. Mr. Mulroney, your line is now open.

My question is on your 2023 guide. The midpoint of your guide is suggesting, I think, still a nice ramp up in fourth quarter revenue, up more than 20% sequentially, I think, from the third quarter at the midpoint. Can you just talk about the primary factors contributing to that acceleration? Is it collection of unbilled revenue at SCE or other things?

Yeah, Tim, this is Mark. It's mostly, you know, it's contracted. I mean, it's, you know, it's assuming, you know, good execution on our contracted backlog. It assumes very little, you know, awarded revenue. And we took a look at that, and, you know, we have to take into consideration the slippage that we're seeing. But, you know, with the active projects that we currently are working on, we feel like the contracted revenue is a number that we can deliver on in Q4.

Okay, thank you, Mark. My follow up, I just want to ask about the administrative bottlenecks that you listed as being a factor impacting third quarter results. Can you just talk in a little more detail about what those were? You know, if they were specific to one or two projects, or if it's a broader issue that you'll expect will carry into the fourth quarter and beyond. Thanks.

Well, I know a couple of the assets that were delayed because of whether it's the solar plants that they were not connected because of the utility. We didn't get out there to connect the project or some of the renewable, the gas plants that we were building, we got delayed because I think it was three months before somebody went there to review the applications. So that delayed that particular project for about three months. Yeah.

And I think the administrative delays really that are impacting the timing of awards converting to contract, that's something that we really started to see a little bit towards the end of Q2 with some awards to be expected to convert. We really felt the impact in Q3. And so to your question, yeah, we do expect that to continue through Q4 as these are all really just kind of pushing out to the right. But we've taken that into account in our revised guidance.

See what happened, the fact that everybody hasn't turned back to work, it does impact in the implementation of our work and I think many other people.

Got it. Thank you.

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

Hi there, everybody. I figured we might shift gears a little bit here. When I look at where we stand in the current quarter and in your deck, you point out that a lot of this is non-recourse. But if you annualize Q3, we're now standing at about 8.3 times debt to EBITDA. And on your new guide, it's about eight times likely debt to EBITDA for 2024. The business hasn't generated, even wrapping in ESPC, hasn't generated any free cash flow since 2020, and it's generated $80 million since the beginning of 2019. So I guess I'm just asking, you know, we can talk about the growth in the energy assets business here, but at what point does this business begin to generate cash? And how are you thinking about that as we go into 2024?

Yeah. Joe, the first thing I'd point out is that the adjusted cash from operations was positive, right? As we've talked about, you know, we have the discretion to, you know, work on the cadence of asset investment as necessary if we need to effectively match up with our operating cash flow. understand that the higher leverage numbers that you're talking about you pointed out yourself that EBITDA multiples is not a metric that's used when determining advance rates under non recourse debt I think we can all kind of agree on that on that point and therefore those figures will end up looking higher than what you would think about from normal corporate credit facility As far as cash flow is concerned, I think that that is something, and we've discussed this, we are going to be looking at how we can start to talk about the company's history of generating cash and what that looks like versus how much is being invested into assets. However, broadly speaking, the only other thing I would say about the – the leverage overall is that it does remain a bit inflated on the basis of the delayed kind of SoCalEd projects and wrapping those up, getting that cash in. We've actually used quite a bit of our own operating cash flow to pay down the debt, the corporate debt. And so we've got quite a bit of unbilled there that you'll see kind of turn around, you know, call it Q1-ish to kind of

show the cash coming out of the sce project so that will help us in terms of de-levering the uh the corporate facility um i think you know at this stage i don't know how much more i can say to address your question sure and i guess the kind of the just to follow on it's the second part of the same question um and look this debate's been going on a lot and some companies that are kind of comparable to you like you know some of these residential solar you know businesses Yeah, it is a question of how you balance growth and cash flow generation. So I guess I'll just ask you or George or whoever, you know, is there a point when it's a $2 billion company or a $3 billion company or whatever, you say, okay, we're going to maybe take a slightly different view of how we think about growth versus generating cash flow and maybe ultimately return of capital to shareholders. I'm just trying to get a sense into the philosophy here that underpins, you know, how you're making these decisions. Thank you.

Well, that's why the philosophy, especially in this higher interest environment, that's why we want to monetize a good part of the assets we develop and then focus more in the project business, which generates very good cash flow. And basically, rather than issuing new stock to finance potential assets that we own, it comes all from internally generated cash flow. And in addition to that, I think the guideline that we will be using going forward that even that we will not invest all of that asset, all that cash flow generated from projects and existing assets in R&M, we will retain some of it to deliver the company.

Okay. Thank you very much.

Thank you. Our next question or comment comes from the line of Julian Dumoulin-Smith from Bank of America. Mr. Dumoulin-Smith, your line is now open. Hey, good afternoon, team. Thank you guys very much.

Appreciate it. Just following up on a couple things here. First off, how do you think about the timeline for these projects to get, quote-unquote, back on track? Obviously bringing down 23 and 24 by roughly 50. I mean, is there a catch-up here in 25? Or are you thinking that categorically we're rolling the ball forward across the forward look here? When do we get kind of that view on 25? And then as you think about, you know, kind of catching back up here, is there an element of higher OPEX that needs to play into this to get things back on track? Or, you know, is there any other risk on the SG&A? And then maybe also just to clean up on that last one on payments and cash, do you want to clarify a little bit more about, you know, payments on the batteries here and the timeline there?

Sure. Okay. First answer, no on the OpEx. The OpEx will remain under control. We don't need to grow our OpEx in order to grow the company. We had $700 million in new awards come in the door this quarter, 1.7 for the year. The business is going to grow. I don't necessarily view this as a catch-up when you look at 2025 or beyond. Obviously, we don't talk about periods in detail that far into the future, but What we're observing is the timelines are stretching with respect to the sales cycle and the construction cycles, right? Macroeconomically, everyone understands the labor shortage issues that are in the market. We've got to continue to watch those. However, the IRA and the amount of awards coming through, you know, the overall growth of the business is potentially still there. It doesn't necessarily mean that we need those timelines to compress. to really continue to grow at our, you know, kind of 20% per year EBITDA target. That's what we're trying to get to. So that's that's a response to pursue with respect to SoCal. Basically, when we hit substantial completion, you know, we've got 60 day payment terms. It's in the contract. It's public. People can see that. So you can assume that while we're talking about two of the projects being completed in Q4 and then a third one in the first half year, kind of project forward from there. We're not we're not going into deep detail about those cash flows, Julie.

Right, and just timeline-wise here, are we confident that you guys have a real sense of when the new timelines are for the project push? I mean, it seems like this has materialized relatively recently. I mean, quarter over quarter here, just curious, I mean, how do you know the depths of these delays here, if you can speak a little bit more specifically to it, considering some of the larger projects like RNG and how lumpy they can be?

I mean, I would say that... From what we have seen so far, like the RNG project, six to eight months delay, very much. And then on the other projects in construction, you know, we used to say we have a one- to two-year construction schedule. Now it looks more than that, one and a half to almost three years of construction, some of the $100 million-plus projects. I mean, I tell you guys, something that happened, you know. projects that they were in construction and we deliver the equipment to the particular air base and then because we're doing work at the north pole somehow some way the stuff didn't get loaded into the plane and that's a six month delay on the particular project we lost the old million dollars of revenue that but but it wasn't lost but things like that that happened in left and right and that's why uh we felt it was prudent on our part to try to incorporate as much of all this stuff into our forecast. But the business is not lost. It's there, and it will be done. And I think that 20% target that we have on EBITDA in a five-year growth, I think we feel very comfortable with that.

Thank you.

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

Thanks for taking my questions. So I just wanted to hit on the same points. You talked about delays in contract conversions, and I think I heard during the call that you mentioned that you don't think any of those delays are related to the changes in the interest rate regime. Is that what we heard on the call?

That is correct.

Yeah, that's accurate.

That is correct. So can you then explain? Some of them are just administrative. You know, the boards don't meet or people don't show up or bureaucratic nightmare in some of the federal contracts. But on the other hand, you know, the awards of that $700 million, one-third of that is federal contracts. It's bureaucratic. We're getting them, but then moving them the next stage is getting tougher, and then implementing them is getting even more tougher.

So, from the top of the funnel, when you have this awarded project backlog that is now stretched, you know, to $2.5 billion, it's just converting that to contracted. It's strictly a function of just administrative delays, and then somehow project delays are are impacting that conversion as well? Is this just where the administrative issues are showing up?

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

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

I will let Mark answer the question better than me.

I mean, we're still seeing it in that range, but it's not impacting it. every one of our awards. But, you know, what we've been talking about is, you know, we have several larger awards that are in, you know, kind of more mature stages of the contracting process, but these administrative delays are dragging them out. So, you know, on average, we're still within that range overall, but it's really been, you know, several large projects that we had expected to convert to get into that next stage of active construction where we've seen the delays and then you know, to the other points we've made. Once they have contracted, that implementation period is starting to take a little bit longer to get, you know, we need to get the workforce mobilized, get materials to the work site. That is all in taking time. So it's all really kind of stretching between the conversion and then the ramp up in the implementation, which is causing a lot of the push-outs.

Okay. And just maybe the final question, you mentioned that the stronger RIN prices are offsetting some of the unplanned downtime at your RNG facilities. Now, as you ramp those back up, what's your outlook? Anything you can share on the recent surge in D3 RINs and how you plan to monetize those? Have you missed an opportunity here to monetize some of your RINs based on the downtime? Thank you.

Well, We take advantage of the market always. You know, we started the year with about 50% merchant. But right now, what we have left for this year is probably the production of the last couple of months. You know, we've been monetizing month to month. And we got pretty good prices, I would say. And it's been reflected in our guidance. This year as well as next year. The other thing I want to point out, and I think I did mention it in one of the calls last time for 24, we were always optimistic about the ring prices and what we had used for that old estimate. It was pretty much what the ring prices are today, right now.

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

Thank you for taking my questions. And first, for what it's worth, I do not think you should slow growth like a peer of mine noted in order to return cash when there's real growth in the table. I guess first question, how do you think about adjusted EBITDA margins at the project business? You know, it's 4% for the nine months year to date. I think of this closer to 10% typically. Is this due to inflation? Is it due to certain mismatches on delay? How do we think of that on the project side for adjusted EBITDA?

Yeah, I mean, the 10% sounds a little bit high, but I think that, you know, it's typically a function of mix, right? And so when you're comparing year over year, it's going to be a function of, you know, of the mix of projects that are active at that point that are impacting the margin. You know, I think we've been probably closer to 6% historically, so we're not that far off. uh and again i think we've seen you know some of our mix more recently uh have a little bit lower margin profile even though overall margins have been expanding so um you know i think we're not far off of kind of where our historical margins have been got it got it that's helpful and then i guess uh back on the d3 rin topic so as the rins on the spot basis sit near the 2021 peaks i know you typically talk about a certain like 50 percent

spot exposure or spot slash hedges, 50% contracted, is the delay in RNG projects actually offering you the ability to contract, you know, more of the future RINs that you expect as projects roll online next year at a higher contracted price than you would have prior? Is that already embedded in the 250?

Yeah, no, that's a very, very good point. Actually, we are talking to a couple of firms right now. We have a couple of offers on the table. That's why we... not forecasting ring prices for next year and so on, that we might enter into a couple of long-term contracts with much higher prices than what we had, let's say, entered to the contract's fee three years back. So now we are looking at it, and no question about it. And as soon as we feel a little bit more comfortable with the prices, we will execute them.

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

You know, we have up to 15 years. Excellent, thank you. I'll get back in the queue.

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

Great, thanks very much. First question, just hoping you could maybe give a little more color around the R&G financing you recently announced with HACI. My understanding is that that structure is flexible and that there might be a return sharing component to your actual costs to that financing. Is that something you're able to elaborate on?

Hey, folks, this is Josh Barabo here.

So it's not variable. How it works is there's fixed cash component interest rate until the loan is amortized. And then after that, Hannon gets a bit of a cash sweep until they achieve an IRR, internal rate of return, on their initial investment amount.

All right.

Are you able to disclose what the actual, I guess, the upfront rate is for you, the effective rate for you is on that financing?

Yeah, that's in the 8K, and we're accruing at that IRR rate. Got it. All right. Thanks very much.

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

Thanks for taking my questions here. With the cycle being extended for, you know, contracting awards and implementation, you know, I think this year was much more back-end loaded with the visibility you were going to have. So I'm just kind of curious how you're thinking about, you know, the visibility today and, you know, when you get kind of the full guidance for 2024, you know, should we, you know, consider, you know, expectation that there's going to be a lot more kind of visibility on you know awarded kind of contract contracted backlog as we kind of enter the year is that um you know maybe wishful thinking on my end how do you think about like the visibility on that 250. i think we we have pretty good visibility and we rely more on uh contracted than uh we invested where we're going to be at the end of the year and they're contracted

and that gives more impact than anything else and not rely as much we're not going to have the big hockey stick like we did this year for the last um quarter especially uh where we are so okay and then maybe on the the project uh um you know the potential development project sales and

Is there any sector in particular you're seeing that you'd be focused on for potential sales? Is it solar, batteries, R&G? Like, what, you know, specific areas would you be kind of looking at there? Is it kind of all of the above?

I think not really R&G. I think we're mostly on solar, certainly, and then the hybrid. Solar and battery, you know, I wouldn't put it past us to – Think about some of the standalone battery, you know, given the fact that, you know, some of those markets, like I said, we continue to develop in multiple markets. Some of those markets might have more merchant than we like, and so, therefore, we'll work on, you know, an NTP sale of projects like that. So I think it's more along those lines versus the RNG. Yeah. Yeah.

So you guys, I want everybody to understand, developing assets, whether it's solar assets, battery assets, and then monetizing them, it's no different than developing the energy savings performance contracts. Basically, we sell the receivable, and then we get the money, and then the financing, and then at the end of the day, we guarantee the savings. This is even a simpler process. It just takes a little bit longer time. And then we have the option to keep the ones that they have better returns. They limit our health rate of return. And RNG projects, generally, they are more complicated, no question about it. But at this point in time, they have better returns.

That's all.

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

Thanks for taking the question. A lot of commentary about the core domestic business. I'll ask two questions about Europe. First of all, are any of the permitting issues and supply chain complications affecting

any of your work on the other side of the atlantic so first first thought at that uh i will tell you because i was there last week visiting one of the sites one of the large sites um you know There's been a little bit, but not to the tune that we've seen here in the United States with respect to labor availability and materials. I think that we, especially on that 100 megawatt Delphini project that we've got in Greece, that is still kind of cruising along on time. And, you know, we've only had slight variations associated with the timeline there. And I think that what we're projecting on many of the new wins in the awarded category, some of which was there in Europe on the EPC side, expectations still remain strong on availability of materials and labors in those jurisdictions where we're winning projects for them.

Yeah, and that goes even in UK. The only exception there was that Bristol City contract that we have. And we missed the numbers by a good margin there, not because we didn't have the projects, but this is a lesson for us. Getting the projects approved through the City Council and everybody else that has to approve those particular projects, it takes considerably longer than we thought. Now we have incorporated monthly meetings we'll meet with the board and identify what project is going to be doing them and have them pretty much approved by the end of this year what we're going to build next year so that one we missed the boat as far as what we thought it was possible and what actually happened Again, it's administrative, not because they don't want to do anything else.

Yeah, administrative, and that's about the cycle of just conversion of awards to contracts, not anything about actual construction activity. And furthermore, it's a push to the right. It's not a change in any of the scope of the awards that we've discussed.

Okay, clear. Staying on the European theme, you mentioned I have to imagine that with some of the macro issues, multiples on prospective M&A have come down. In that context, are you seeing more opportunities to bulk up your business there via M&A? Yes.

Yes. We don't have anything specific to talk about today, but we would agree with your comment. And we are seeing, again, we're very opportunistic. We're still sticking to our knitting in terms of what we're looking for, management fit, financial valuation, so on and so forth.

But, yeah, the number of opportunities that look interesting has increased.

Very good. Thank you, guys.

Thank you. Thank you.

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

Hey, guys. Thank you very much for putting me in here at the end. Most of my questions are already been asked. I just wanted to ask, is there any possibility of recovering expenses associated with some of these projects in the contracted stage that have been drawn out, similar to SoCal or other deals that you've done in the past? And my follow-up is given the lack of visibility in the labor and component shortages, how are you thinking about these variables in contracts now going forward? Thank you.

Yeah, sure. So sorry, Davis, your line is a little bit fuzzy, but I think I got the question. So the first point is when something actually is created by a force majeure situation, yes, of course, we can claim back costs for certain delays, and that's always contractual. I don't have any particular anecdotes for you or numbers on that, but yes, in general, the contracts generally looking for force majeure, not contractual. necessarily a general slowdown or availability of labor though with respect to looking through the remainder of the year and in talking about thinking about the 250 number next year we've effectively taken into account what is happening in considering the cadence of construction going forward You know, as we talked about, we don't typically lose business out of the awarded backlog or contracted backlog, certainly not out of the contracted backlog. However, if there are slowdowns, things just kind of push out to the right. So we've adjusted expectations with respect to cadence, and we've presented numbers on that basis to you all today.

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

Hey, thanks, everyone. Just one for me. I just want to ask a little bit more about the prospect of selling off some assets in development because I just feel like I might not be grasping it or maybe I misheard it. It seems like that would allow you to stay in front of customers and maintain business within projects in O&M, which is great, but if you're trading energy assets business for projects in O&M business, isn't that like trading a high EBITDA margin business for a low one? So in a sense, it wouldn't be as much pushing it out to the right as much as it would be kind of more like margin erosion for the sake of continuity. Is that a fair way of looking at it or am I off base there?

Yeah, so I'll just kind of guide you to the way we think about these things. A couple of important metrics for us when we're evaluating assets that go away from EBITDA generation and levered equity IRR are cash generation and net income. And as it turns out, some of these assets, when we look at anything that might have a merchant tail on it, others where the unlevered IRR is relatively tight versus the funding costs, we then turn our attention to, well, from an overall cash flow generation perspective, we're probably better served when we look at where the market is pricing some of those assets, to perform the EPC and grab the O&M contract to generate additional cash flow and recycle that into something that's actually going to look better for us from a cash flow and net income perspective over the long term. That's the only kind of modification I might throw there.

Okay. So it's got layers. All right. Thanks, Doran. Appreciate it. That's it.

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