Ameresco, Inc.

everyone. We appreciate you joining us for today's call. Joining me here are George Saccolaris, Amoresco's Chairman, President, and Chief Executive Officer. Doran Hull, Executive Vice President and Chief Financial Officer. Nicole Bulgarino, Executive Vice President and General Manager, Federal and Utility Solutions. Mike Backus, Executive Vice President, Renewable Natural Gas. and Mark Shiplock, 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 of our supplemental information, 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 information. I will now turn the call over to George.

George? Thank you, Lila, and good afternoon, everyone. Before I get started on the Q2 results, I would like to address the statement captured in our earnings release. Toron Hall has resigned as Chief Financial Officer to pursue other opportunities. We greatly appreciate Doran's contributions over the last five years and wish him the best in his future endeavors. Doran will continue to serve as Chief Financial Officer until August 30, at which time Mark Chiplatt could be promoted to the Chief Financial Officer. Mark has been with Maresco for over 10 years and has served in multiple roles with increasing responsibility. I am thrilled. to have Mark step into this role as a seasoned MRESCO leader. In addition, Josh Barabo will assume an expanded role as a Senior Vice President of Finance. I believe our deep bench of seasoned executives will skillfully navigate this transition. And now on to the results. Our momentum continues into the second quarter as the MRESCO team again delivers strong revenue growth across all four of our business lines, led by an impressive 45% growth in projects revenue. At the same time, we continue to build on our excellent long-term visibility, increasing total backlog by 36% year-over-year to a record $4.4 billion, while also bringing a record 655 megawatts of energy assets into operation. And we still have 635 megawatts of assets in development. Demand of our renewables, energy efficiency and resiliency offerings continues to be very strong as our customers see. Clean technology solutions that yield more cost savings and increased reliability. MRSCO's technology-aggressive platform and depth of engineering expertise allows us to stay at the forefront of the energy transition. While our market environment continues to be very strong, we do understand that there is a lot of uncertainty around the upcoming elections. MRSCO was established almost 25 years ago, that has not only grown but thrived under a variety of administrations. The foundation of our business is helping customers, including the government, achieve cost savings and improve their energy infrastructure in a capital-efficient manner. I have asked two key members of our executive team, Nicole Bolgarino and Mike Backus, to join us to discuss their business. Nicole?

Thank you, George, and good afternoon, everyone. As George just mentioned, we are excited for the outlook of both our federal and utility businesses as we expect continued demand for resilient clean energy projects for many years to come. Over the last two decades, while we have seen policy and messaging shift from one administration to another, the key drivers for our business have remained consistent. Our government agency and military customers continue to be focused on mission-critical projects that deliver secure and resilient power to support their bases, ports, facilities, office buildings, and military housing communities. We are uniquely positioned to help our customers achieve these objectives by reducing load through the latest energy efficiency upgrades and by deploying distributed generation solutions. Across multiple administrations, we have delivered large, highly successful, comprehensive energy solutions for the Department of Defense and other government agencies. We have a very strong pipeline of additional projects and assets integrating domestically sourced solutions using third-party financing. For our utility business, our customers are focused on providing cost-effective, reliable electricity while also transitioning to clean energy. In addition, they need to increase capacity to address the load growth driven by electrification and data center development. More recently, utility customers have been utilizing battery energy storage solutions for resiliency and grid stability, providing critical power during peak demand periods and allowing the grid to better handle an increased amount of intermittent renewable energy. We are already experiencing rapid growth of our utility business, as seen by the meaningful increase in the number of significant announcements made in just the last few years. The battery storage systems we recently celebrated with the United Power Team in Colorado last week are a perfect example of this work, as is the large Capenna solar and battery storage system we brought online in June, which is a great example of an integrated solution serving both our federal and our utility customers at the same time. As you can see, our strong reputation for technology expertise and execution places us in a prime position to capitalize on the expanding opportunities in both the federal and utility markets. Our projects save money, enhance efficiency, provide clean, resilient, reliable power while creating jobs and supporting local and national policies. This great value proposition is in high demand regardless of changes in Washington. I will now turn the call over to Mike. Mike.

Thank you, Nicole. Amoresco has been developing biofuel projects since our founding, and I can honestly say that I have never been as excited as I am now about its prospects. For a number of years, RNG's primary market has been the transportation sector, leveraging the RFS program. But as global markets have continued to focus on sustainability, primarily in the electric side of the carbon footprint equation, we are seeing many industries turn their attention to the thermal side. This is a market with huge potential, with natural gas utility consumption over 440 times the volumes used in the transportation sector. And for Amoresco, it is a perfect opportunity, as it involves longer-term profitable off-take contracts while reducing our exposure to rents. Gas utility RFPs for RNG supply agreements have picked up noticeably, as these parties seek to meet their carbon reduction goals. In the end, RNG is the only immediately available drop-in green substitute for natural gas, requiring no changes to the utility's existing infrastructure. This demand is not only driven by the utilities themselves, but also by the states and their regulatory bodies as part of programs to reduce overall carbon impact. In light of this, we are very excited to announce that Amoresco has been chosen by a large California-based natural gas utility to supply RNG to help meet its state-mandated locally sourced renewable content. If final approval is granted by the California Public Utility Commission, this would represent a meaningful portion of our RNG volume. In doing so, this fixed price contract would also help to balance our portfolio to reduce long-term exposure to RIN volatility while benefiting from a five-year profitable revenue stream. And this potential contract represents only one of many opportunities across the country to sell our RNG via longer-term offtake agreements to non-transportation customers. In summary, Amoresco's biofuels business is uniquely positioned to capitalize on this expansion of the addressable market with the entrance of very large industries such as natural gas utilities. Importantly, this asset class also continues to meet our return hurdles without reliance on any IRA-related investment tax credits. We believe our R&G assets will continue to provide significant, stable, profitable growth for years to come. I will now turn the call over to Doran to comment on our financial performance and outlook.

Thanks, Mike, and good afternoon, everyone. Before I start, I just want to say huge thanks to George and the entire Amarisco team for what's been an amazing experience I've had here over the past five years. It is impossible to put into words how much I've learned from this management team and this board. I want to congratulate Mark and Josh on their new roles. It's been a real pleasure working with both of them. I feel very, very confident in their successful futures here at Amarisco. And I have to say the company is in excellent hands. So with that, now let's jump into the numbers. 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 revenues in the quarter grew 34% to $438 million with each of our four business lines experiencing revenue growth. Our project's business revenue grew 45%, reflecting our focus on execution and conversion of our backlog. Energy asset revenue grew 6.8%, largely due to the greater number of operating assets compared to last year, improved production, as well as higher RIN prices. We brought a record 155 megawatts of assets into operation in the second quarter, and are well on our way to meeting our anticipated 200 megawatt target for the year. Our large and growing base of operating energy assets now stands at 661 megawatts, which should provide decades of profitable revenue to the company. Our O&M business had a very strong quarter with revenue growing 13.9% as we continue to win more long-term O&M business. while revenue for our other line of business grew 9.5% with strong performance from our consulting business. Gross margin of approximately 15% dipped as we incurred additional costs of approximately $6.6 million related to our SCE projects, plus a mix of some other lower margin projects. That said, Our underlying gross margins, as well as the expected margins in our backlog, continued to match our historic ranges. In the second quarter, our revenue growth, as well as cost savings and operating leverage, drove adjusted EBITDA growth of 21% to $45.1 million. As George noted, our business development activity on both the project and asset side was very healthy during the quarter. The company's total project backlog was approximately $4.4 billion, growing 36% year-on-year and 9% sequentially. This growth was led by our contracted backlog, which reached $1.6 billion and grew 50% year-on-year and 12% sequential. Turning to our balance sheet and cash flows, We ended the quarter with approximately $150 million in cash and corporate debt of approximately $273 million. Our debt to EBITDA leverage ratio under our senior secured credit facility declined to 2.9 times and remains below the covenant level of 3.5 times. Our energy asset debt advance rate remained at a conservative 73%. Importantly, We believe our access to energy asset capital is excellent with many financing options available as demonstrated by us having secured approximately $170 million in new project financing commitments in the quarter. We also believe our energy assets remain highly attractive to many financing parties interested in teaming with Amoresco given our proven capabilities. And on the corporate side, at the end of the quarter, we were pleased to have successfully raised $100 million in subordinated debt from Nuveen Energy Infrastructure Credit. Our cash flow continued to be strong with positive adjusted cash flow from operations of approximately $154 million during the quarter. Our eight-quarter rolling average, which best represents our implementation cycle, reached almost $45.6 million. In our supplemental slides, we highlight the increased momentum we have seen in the rolling cash flows, and we expect both cash flow metrics to continue to improve, especially as we bill and collect on the SoCalEd battery projects. Speaking of SoCalEd, our performance testing has been approved and we are working together on the final checklist for substantial completion for two of the three projects. The third project, which was more significantly impacted by the 2023 rainfall, is expected to reach substantial completion in September of this year. Now let me spend a few minutes on our new 2024 guidance. We're increasing our revenue range based on the solid financial performance for the first half of the year and our strong visibility for the remainder of the year. Our new gross margin range reflects the expected full-year impact of the cost budget revisions on the SCE projects of approximately $10 million. Our new guidance range would yield revenue and adjusted EBITDA growth of 27% and 35%, respectively, at the midpoints. You can find more details on the revised 2024 guidance in our press release. Now I'd like to turn the call back over to George for closing comments. Thank you, Dora.

Maresco thrives in an environment where customers seek clean energy solutions that result in cost savings and greater resiliency. We believe this environment and the demand for these solutions will continue regardless of the political environment in Washington. We are extremely well positioned with over $8.3 billion in future revenue visibility and We are laser focused on executing our tremendous backlog and cash flow generation. 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.

Thank you. To ask a question at this time, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We ask that you please limit yourself to one question and one follow-up. One moment for our first question, please.

And our first question is going to come from the line of Noah Kay with Oppenheimer & Co.

Your line is open. Please go ahead.

Oh, good afternoon. Thanks for taking the questions. The first one is around cash generation. The trend line here, especially in the last few quarters around the improving cash generation, is really encouraging. Obviously, in the past, there were some conversion headwinds related to specific projects, but I was hoping you could maybe take us a little bit deeper into what you've seen to drive some of the improvement in cash generation and your visibility into that continuing potentially additional levers. You know, you don't necessarily just have to talk on SoCal Edison, but in the business more broadly.

Yeah, I will let Mark get into this, but go ahead, Mark.

Yeah, so I think what we're seeing, so if you look in the quarter, a lot of it's timing in Q2, but some of the things that I found to be encouraging that I think will help us to continue to show the improved cash flow is that a lot of billing milestones, we're front-end loading now in some of our contracts, so we're seeing those come in. You see it on the federal ESPC when you net the liability and the receivable, and you also see it on our deferred revenue line. We also saw the proceeds from the conversion of, or the transfer of ITC in the quarter as well. So I think, you know, those are some of the, you know, I think the positives that are helping that trend. You know, I think, Noah, keep in mind, you know, the quarterly stuff is always going to be lumpy, right, which is why we've started to roll out this, this new metric. But yeah, we're encouraged by some of the things that we're seeing and the changes we're making on the contractual side that are keeping those billing milestones a little bit more front-end loaded to keep the project's cash flow positive throughout.

Yeah, and if I might add a little bit there, Noah, you know, Focusing on a particular issue, you get generally pretty good results. By the way, sending out the bills on time, following up in the collection, and so on. And it just helped a lot because the accounts receivable, it was substantial. And then back then when the interest rates weren't that high, probably we weren't paying as much attention as we should be paying. And the fact that the last I would say now nine, ten months, we've been focusing a lot. We have seen all those metrics come down and the cash generated and going up. And we will continue to focus on that. I still think there is room for improvement in that area. Great.

Thanks. Second question on the RNG business. You know, Mike called out the contract with the large California natural gas utility supply company. RNG. And I think, you know, Mike, you did a good job of talking on these points of why that kind of predictability and visibility is helpful. So we'd just like to understand what is the opportunity and the appetite of the company to continue to increase these fixed contracts as a portion of the RNG exposure? Is there any kind of target we should think about that would be optimal for a portfolio? And then how does this potentially contribute to more favorable financing on the development of the assets?

Very, very good question. I will ask Mike to address it, and then I will come back at the end what percentage we might get into long-term contracts. Go ahead, Mike.

I think generally we've said to the street in the past that we try to fix our pricing 50% of the volume on our new projects. This is a unique contract vehicle in that it's leaving the transportation sector and going to a voluntary market. Obviously, great credit with the utility and the terms will, I think, without a doubt, help on the financing of these projects. And I think we're going to start seeing more and more of our gas going to the non-transportation sector as that market continues to expand.

And the financing, Don, you want to add something?

I mean, no, not surprisingly, when you get fixed price contracts, the banks like the stability of those cash flows and the fact that we're actually now striking these projects, even though this first one might be five years, as more and more of those cash flows get fixed, we would expect that we'll get better advance rates. And obviously, we'll be pushing for tighter spreads in the future, but that's

It's definitely one of those characteristics.

Thank you. And one moment as we move on to our next question.

And our next question is going to come from the line of Stephen Jangaro with Stiefels. Your line is open. Please go ahead.

Thanks. Good afternoon, everybody. I see. George, I thought you might have been about to add something on the – on the last question before I ask mine. Okay, sorry. So I think two things for me, and one I'll start with, and I'm not sure how much you want to get into this, but when you look at your energy assets backlog and you look at your projects backlog and SCE rolling off, at a high level, what should we think about as the big positives and negatives as we go into 2025?

I don't know if I... The big positive and negatives. I mean, the big part of it is the fact that we have a great, great backlog and execution on that backlog. And the other good thing that I wanted to point out, and we're doing the analysis earlier on that backlog, the actual gross profit margin has been growing up every quarter. since we started focusing on screening what kind of projects we'll get, trying to push the margins up. So that's a great, great positive. The backlog that we have on the assets, whether it's the battery storage or the solar plants or the renewable assets, the gas plants that will be coming up, They are a great, great part of this. The only negative is elections, they might have an impact, but on the other hand, And that's why I wanted Nicole and Mike to be here today to explain that the federal business, it has done excellent under any administration. And on the renewable gas, now that the utilities are getting to be more and more, and the states are requiring the utilities to have more renewable natural gas as part of the percentage that they provide their customers. It's a it's very good. So South and with the Southern California rolling off, I think the risks are the negatives are very much lower and the rich and the potential. The goods otherwise the quality much higher.

Thank you.

Great thanks Georgia and maybe just as a follow up to that, When you look at the project's portfolio, you mentioned this a little bit, but the embedded margins, assuming strong execution of the backlog, you should have margin improvement in projects over the next one to two years. Is that a fair assessment?

Yes, that's a fair statement. That's why, and it can become a focus. And what I have found out, especially as the company grows, and we have grown a lot the last five years, and then with the COVID situation, they're bringing some difficulties. I think the team here and there, they took some bad projects that did not have the best margins, so they didn't have all the risks mitigated that they should have. But refocusing the organization, margins, and minimize risks associated with those margins is key, and it's bearing fruit so far. So a lot of positive for XEF.

Thanks. And just one other quick one. You've done this a little bit in the past. Is there anything, what should we consider as we think about seasonality in the back half of the year? You kind of guided for 2020 for just the, how should we think about how that unfolds in the third and fourth quarters?

Any color around that? Yes, good question, and I will let Mark follow up because he's been dreaming about all the numbers.

Yeah, I think maybe just briefly, you know, when it comes to shaping, unlike last year, I think we would expect Q3 and Q4 to be fairly similar. Maybe a small bump in Q3 related to normal seasonality, but they should be a little bit more simple, Q3 and Q4, as opposed to the last year.

Great. Thank you, Mark.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of George Gianerakis with Canaccord Genuity. Your line is open. Please go ahead.

Hi, good afternoon, everyone. Thank you for taking my questions. I'd just like to understand a little bit about the revised revenue and EBITDA guidance just to make sure we're all clear. So there's a 5 million reduction at the midpoint based on increased costs from SCE. Just to be clear, if you didn't have those costs, would you have raised by 5 million? Is there anything else that's pulling down the EBITDA guidance for 2024? Is it just the SCE costs that you alluded to?

Yeah, basically we tried to reflect the impact that the Southern California projects have and even though you know we had some other minor other projects that they adversely impacted however and i let mark explain a little bit more but basically that that that was the impact because we had thought that the project we had been done uh after the last quarter so yeah i think i'm right i think it's it was the modifications were really focused on at least the ebitda were on the

on the assumed cost for S&P. We're certainly having strong revenue performance. But, you know, obviously, you know, you've seen a little bit lower margin profile. So, you know, we took that into account. But I think based on, you know, the first half performance and what visibility we have, you know, we made those changes.

And we feel pretty good about it. Yeah.

Okay. And then maybe just a question on the backlog, the big growth and backlog. I'm curious just to whether you can give us a little bit more detail as to what's going on there, where do you see significant growth, and is anything related to data center opportunities? Thank you.

Yeah, and actually, It's across the board. We see growth across the board, but since Nicole is here and she's the project queen, I will let her talk a little bit.

Sure. I think a large percentage of our growth and backlog is coming from the market drivers that we just described earlier a few minutes ago, really related to the battery energy storage. We're seeing those in our project business. on a lot of our federal utility markets. So that's probably the largest portion of that. And then certainly not captured in the pipeline right now, but there is a lot of work that we're doing to capitalize on batteries for the data centers and energy.

It's a little too early right now for that to be in the awarded pipeline.

Great. Thank you.

Thank you. And one moment as we move on to our next question.

And our next question is going to come from the line of Kashi Harrison with Piper Sandler. Your line is open. Please go ahead.

Good afternoon. Thanks for taking the questions. And, Doran, best of luck with the future endeavors. So, you know, Yeah, so first question is for Mike. Sorry if I missed this, but did you quantify the size of this RNG project you're working on with the California utilities? A megawatt or EBITDA number would be great. Just trying to think of the scale of this project relative to portfolio.

Yeah, there's two projects, and about 22, 23 megawatts between the two. One comes online actually this quarter coming up, and the other one will come online in early 2026. The agreement with the utility doesn't begin actually effective until January 1, 2026. It's a material portion of our portfolio. If those two projects were online today, It would represent probably close to 40% of our supply. And in 2026, we're forecasting it could be around 12%, 13% of our supply.

That's helpful. I appreciate the added color. And then my next question is just a follow-up on the budget revisions to SoCal Ed. You know, I think you flagged $10 million of total revisions in EBITDA. Can you just help us think through the risk of potential further budget revisions? For example, if the project is delayed another quarter, you know, what does that do to that forecast? And then are these overruns separate from the liquidated damages, or are these tied to the liquidated damages? Any color on that would be appreciated. Thank you.

Okay, John.

Yeah, Cassie, I'll start and let other guys chime in. So, the $10 million across the entire year is the expectation. So, you've seen some mention of adjustments already in Q1. We talked about $6.6 million in Q2, you know, primarily related to insurance premiums as the projects continue to get delayed. I don't know that we see a huge risk of that number going up from there. I think we've been, it's a pretty conservative estimate of what we might face as we bring those to substantial completion. That is completely separate from anything related to LDs.

Thank you, and one moment as we move on to our next question.

And our next question comes from the line of Eric Stein with Craig Hallam Capital Group. Your line is open. Please go ahead.

Hey, everyone. So just curious, on the project business, you mentioned that you had some larger projects in this quarter, and that's why the margin came in where it was. But Georgie also talked about some projects that were priced maybe in the past that were rolling through and that that impacted margin. Just curious, I mean, is this trend of larger projects Is that something that you expect to sustain, or is this more about, hey, you just had a mix of that in the corridor plus some of those older contracts, and that's what impacted the margin in the corridor?

Primarily, we had some large portion of the project executed for the corridor. coming from some of the European EPC contracts that we just signed over there. And then when you book the revenue, because we consult on the top line, and then the margin, we account only half of the actual margin, and it impacts it more than normally. But the overall, though, what we have on the backlog, the projects, that's what makes me feel very good. It's going up. But any given quarter, the mixture might change, and that adversely impacts you. Martin, do you want to add anything to that?

I think it's just mix.

Okay.

No, that's great. And then maybe a second one for me, just more high level. Yeah, I know the FCE, the contracts there, a lot of that is out of your control. It's weather-related, et cetera. But as you sign more of these energy storage awards, I'm just curious some of the lessons learned from how you're structuring contracts differently, anything that you might be changing based on what's happened here for SoCal Edison?

We have become the professors of the industry. We learned a lot. And every contract that we sign right now has great, great protections for us. But you can see all the backlog, all the worries that we have, and the execution that we have been able to achieve past Southern Cal. For example, the United Power. You know, we just finished it, and we broke the record within one year from signing the contract to actually getting six out of the eight projects already up and running. And the other two, they are fully contracted. They are being commissioned right now. then you go down to the hawaii the component projects and even with labor difficulty there it's up and running again solar as well as 44 megawatts of various storage and uh the one that we recently announced in uh uk uh it's an excellent excellent project and we have minimized just about all the risks associated with it and uh

Yeah, and I'll add on the one in the UK, it's a really good example of where we're focusing on improving those contracts by front-loading more of the milestones. And so that was, you know, you saw a big part of that come through our deferred revenue line on the cash flow in Q2. So, you know, we're making those changes to improve cash flow and liquidity. Got it.

Okay, thank you.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Joseph OSHA with Guggenheim. Your line is open. Please go ahead.

Sir, your line may be muted. All right, we'll move on to our next question.

And our next question is going to come from the line of Craig Irwin with Roth MKM. Your line is open. Please go ahead.

Good evening. Thanks for taking my question. So, George, I wanted to ask if there's some metrics maybe you can share with us around organic growth either in revenue or contracted backlog away from the energy storage business. The legacy projects business of the company before you started moving into energy storage, you know, maybe if you have a storage contribution to your contracted backlog that could help with visibility, or if you could help us with what the storage contribution to revenue growth is year over year in the quarter.

I will give it on the high level. The battery storage projects right now, They represent about almost 10% of our $4.4 billion. Actually, they are between 350 to 400 million, the battery storage. And the growth on the others is the federal government. It's across the board. It's the traditional core of business. And that's why you see the margins slowly ticking up. And that's why I made the point to clarify that a little bit. Because we're looking at the federal sector, even though we haven't. Usually the revenues, one-third comes from the federal government. And if you do the arithmetic, about one-third of the backlog right now is a federal government project. So it's... But at any given time, especially some of the EPC projects that they come in fast, by the way, from the RFP, and then you start executing. And then especially if you front load them on the execution behind the material and so on. So they impact the margin. They might hit the margin for that particular quarter. But they are contributing great leverage in the gross profit line. Excellent. That's strong progress.

So my second question I wanted to ask is about the assets business, right? So you seem to be outperforming there, some nice growth year over year in EBITDA. Many of the other companies in the sector, both private and public, are having issues, let's just say politely. You know, even a couple of the very large portfolios of projects that were slated to get built, the customers are apparently taking them away from the from the partners that they'd identified. Can you maybe talk to us a little bit about your philosophy about, you know, how you structure these projects that allows you to generate, you know, positive returns in difficult periods? And can you maybe talk about whether or not you'd be interested in these portfolios?

Yeah, it's basically, it starts from the beginning. You know, the assets that we are developing and we try to derisk them. And the ones that we keep, we're looking for higher returns than some other people would look at. And that's why we have said in the past, because we have a very, very good development team. And just think about it, that we are across the country. And that basically gets lots of projects. So the ones that we will keep, A, We do it for all of them, but the ones especially we will keep, not only we do risk them, but we're looking for higher returns that will exceed our cost of capital. And that's why, you know, raising this new VIN capital, even though it was a little bit on the higher cost on interest, we feel very confident that we can invest that at considerably higher returns than what we are paying them. In addition to it's a great company and they're going to be good partners for another project. So I think it's doing our job upfront. And I've been in this business for a long time, and we do risk. And then with Doran's help and Jas' help, we do risk these projects a lot. And that's why the investment committee that we have does all the due diligence and playing all kinds of what-ifs games. What if this happened? What if this happened? And then at the end of the day, we say, okay, we will keep that project or that project is lined up for sale. And that's why we developed a business. We say that... Part of our assets in our portfolio, we develop it. Before we put them on our balance sheet, we will sell them at a very good profit because the market is so liquid out there.

Craig, I'll just add that that's that market for our develop and sell assets is exactly the reason why we're probably not going after any portfolios that are out there as a buyer, because we're kind of taking advantage of the market that's out there at a cost capital, you know, return hurdles that are lower than ours to sell the assets that we're developing. And the development team George mentioned is so strong. It's bringing so many, solid quality megawatts into that asset development metric that we've got the liberty to kind of choose the ones we want to keep on our balance sheet uh and you know other folks in the market also don't have as diversified of a pool of asset types you know we've got one of the best or, you know, arguably the best development group for RNG on the street, you know, and that's not going to fall into the competition that you might see for, you know, some of the others that are more into the solar and battery side.

Understood. Thank you for that, Keller. And I should say, Doran, you know, I hope you're going somewhere where we continue to work together going forward. And, Mark, congratulations on the promotion. Thanks, Greg.

Thank you.

Thank you. And one moment as we move on to our next question. Our next question is going to come from the line of Tim Mulroney with William Blair. Your line is open. Please go ahead.

Yeah, thanks for taking my questions. I wanted to ask about your gross margin guide to start, which I think was about 18% at the midpoint previously, and it's now more in the low 16% range. Can you just help bridge the gaps that led you to adjust your outlook? I know there was a $10 million gap. I think that that probably only accounts for 50 to 60 pips if I'm doing my math right. So just curious what the other moving pieces are.

Remembering Q1, we also took a handful of hits to gross margin just for some legacy projects and some things that were a little bit unexpected, I think. you know, we were able to kind of offset that overall by the performance on the revenue side. But yeah, Q1 and Q2 combined, I think, is really what's driving the margins down. I think that we talked about the SoCal ad impact. I think it's important to come back and really refocus on what we're seeing in operating leverage, which is actually up. So even though we're seeing gross margins down, we're still continuing to grow gross faster than op-eds. So we're seeing improvement in our operating leverage. But, yeah, I think, Tim, that's really the bridge on all we're seeing in margins is there were also some hits that we took on certified and some Q1 as well.

Okay, that's helpful and well understood. Thank you. Secondly, you know, backlog on your projects business is up a lot year over year. I think maybe 36% or something like that. But I'm not sure if you have this number handy. We're curious how much of that's from, you know, switching assets in development over the project side versus completely new wins. Like how much is each of those buckets is driving that increase?

It's all new wins. It's all new wins. Nicole, you want to add something?

Yeah, no, significant wins across multiple business lines, from the federal government to utilities to our UK group. So it's several, nothing to do with converting assets in the last few quarters.

Okay, thank you. Go ahead, George.

Well, basically what I'm going to say, the assets that are in development, they are in development right now. If we convert them to sales, you will see them in that particular quarter. But up to date, they have no impact on the backlog, project backlog that we reported.

Okay, got it. And if you don't mind, I'll sneak one more in, take advantage of having Nicole on the call today. Nicole, specifically on your solar projects, Can you just talk about any differences that you're seeing in projects moving forward between standalone solar versus projects that have solar plus energy storage? Is there any noticeable difference in which types of projects are having an easier time moving forward in this environment? Thank you.

Well, I think in all of them, you're seeing solar with battery storage. And that's really related to peak demand, getting the most maximized PPA price or savings So, and it's just a requirement. I mean, you're using these for, like, our federal government's using these for resiliency. So, they are going to need the battery energy systems with them, coupled with the PV system, to be able to meet that requirement, too.

Got it.

You know, it's not just clean energy, but it's resilient energy as well.

Understood. Thank you. And, Doran, we'll miss you around here, man.

Thank you. One moment as we move on to our next question. And our next question is going to come from the line of William Griffin with UBS. Your line is open. Please go ahead.

Great. Thanks for the time. My first question, just wondering if you could update us on the RNG projects you're expecting to commission in the second half of this year and how those are progressing. And I think previously you provided a rule of thumb on R&G revenue contribution of 2.3 million per megawatt equivalent. Could you talk about how the potential utility deal would impact that figure, if at all?

Yeah, Mike, go ahead on the projects.

Yeah, so we have a project that's about 11.7 megawatts that's being commissioned right now. It's going through final product gas testing. You got approved to go into the pipe. So I would expect sometime this month, early September, that will be fully commercial. And then we have another project that's 15.6 megawatts that should go commercial sometime in October of this year.

And then as far as the metrics, what we have said before, that for the RNG plans, on the revenue side, you see about $1.5 to $3 million top line, and then with ring prices where they are now, $750 to $1.5 million on the EBITDA contribution per megawatt.

We haven't updated for the – you asked about the utility agreements. Those numbers are reflective of the utility agreements. The offtake prices are less than the current spot market in the RFS program, which is trading around $340 right now, but materially better than what we've seen in terms of long-term agreements in the RFS space.

Got it. That's helpful. Could you refresh our memory as to what the underlying assumption was as far as RIN prices for the prior sort of revenue sensitivity?

I don't think we've provided that before, Will. And I think that, you know, broadly speaking, obviously there are puts and takes about the way that this will change the hedging for RINs, et cetera. But I still think those ranges are still good.

Yeah. Got it. And just one last one for me. I think last quarter you had talked about guidance assuming some continued delays in the assets business. It appears you're well on track at this point to hit the 200 megawatt target. So in light of the revised guidance, I mean, where should we kind of think about results falling, assuming you get the 200 megawatts fully online on the Envision timelines?

Yeah, guidance just reflects that.

We feel pretty good about the 200 that we were given before. So far, we have 168, and then we have a few coming up very, very shortly. So we feel good about the 200.

All right. Thanks very much. That's all for me.

Thank you. And one moment as we move on to our next question. And our next question will come from the line of Pavel Molchanov with Raymond James. Your line is open. Please go ahead.

Thanks for taking the question. You offered some commentary earlier in the call about the upcoming U.S. election. Of course, Britain had an election, you know, barely a month ago. And, you know, you talked about some of the battery projects, for example, that you're doing there. So can we get an update on your UK opportunity, you know, including maybe what's going on in Bristol?

Yeah. Yeah, I mean, with the new government over there, especially with the money that they're planning to allocate for clean projects, it's going to help us a lot. It's going to take some time, of course, but it's going to take – time to evolve. But in the long term, though, it's going to be very, very, very helpful. And then on Bristol City, we continue to make good progress. We made some organizational changes over there, hiring a new person to run that particular project. They made some changes from their side, and I think you will see that project going forward, moving at a faster pace. And the overall, the environment, you know, in Europe is very, very good, and that's why you see great growth in the European market for us.

I mean, you know, having talked to the management team over there, the litany of targeted – processes and changes that the new labor government are going to go through. I think, as George said, it's going to take a little bit of time, but there's a lot there, and there's a lot of momentum. It's a great backdrop for the company, and especially because we, over in the UK, our business looks a lot like what it looks like here in the United States. We're across a multitude of technologies, energy efficiency, solar, battery, EV chargers. We're kind of touching it all, and so these incentives are going to come bring some strength. I feel very confident about that.

Let me ask a quick one about Washington. Why do you think the Treasury still has not unveiled the Section 45Z numbers for any of the biofuels, including RNG?

Mike, you want to tackle that one?

If I had an answer for that, there'd be a lot of phone calls. I mean, I'll spin it a little differently. I mean, we're seeing movement. We submitted all our applications on time, and we actually got notified the EPA is going through and reviewing our application as we speak. So we are seeing progress, at least on the administrative side. I can't tell you why Treasury hasn't already rolled something out on not just 45Z, but a number of the other tax credits. What we keep being told is that it should be sometime in this fall that we would get some guidance, but we haven't received anything.

All right. Thanks very much.

Thank you. And one moment as we move on to our next question. And our next question is going to come from the line of Ben Callow with Baird. Your line is open. Please go ahead.

Hey, thank you so much, and thank you, Doran. My question is on the asset business. In this year, I think you had some pull-ins for the 200 megawatts. Is that a big number compared to what we should expect for next year? Could you just give us some kind of color about how we should think about the average number of megawatts that comes on over a year, or if it's better to look at a two-year timeframe, maybe that's some color you could use. Thank you.

No, no, no. We're not pulling in from next year to this year, not at all. Actually, some of these projects, they were delayed, that we didn't bring them on last year because of interconnection and so on. And, you know, we have said that we want to target between 80 to 100, 120 megawatts per year. But like anything else, the business is lumpy. And this year, we were able to bring 200 megawatts, and the next year looks pretty good as well. So he's not pulling any assets from last year to this year. It's basically a couple assets that were delayed from the year before to this year.

Understood. And just when we think about tariffs on Chinese cells starting up, What is your approach? Have you lined up domestic suppliers? And how do you think that that impacts the overall storage market distance? You're getting, you know, a higher mix towards that business. Thank you.

I think Toron can take that because he's been talking tariffs all the time. Yeah.

I think the... I don't know that we're on our back foot here necessarily. I think that keep in mind our purchases, the difficulties of imports. We're not doing large multi-gigawatt installations. So when you're doing DG, the per watt cost is pretty high. The individual components are or less of an impact, and so tariff, you know, in fact, I don't know.

Yeah, I just will add, a lot of our projects have been, or for federal government, where we've been using domestic solutions for quite some time, and I think we'll continue to see that trend for utilities as well, wanting to support the domestic supply chain here, as well as certainly for the IRA business as well.

So when we're doing our pricing, we use primarily domestic balance and domestic pricing, and then that eliminates some of the particular. But what has happened, though, as soon as they talk about tariffs, the prices go up domestic as well as the other ones.

Well, thank you, and congratulations, Mark. Thank you.

Thank you. One moment as we move on to our next question. Our next question is going to come from the line of Julian Dumoulin-Smith with Jefferies. Your line is open. Please go ahead.

Hey, good afternoon, team. Thank you very much, Jordan. It's been a real pleasure. I wish you all the best, sir. So maybe with that, just if I can come back to the RNG numbers you guys were talking about on the call here. I think if I heard this right, you talked about it representing this arrangement representing 40% of the supply today, right? but only 12% to 13% of the supply pro forma for 2026, if I heard that right. I mean, that's a pretty big implied step up in overall volumes. I just want to make sure I understand how you think about the scaling up of the volumes in megawatt terms or what have you from today through that 26 at the outset. And I got a quick follow-up.

And, Julian, what I said was that if those plants were online today, they would represent 40% of our total supply in 2024. They're not online today. When they come online, we start supplying the gas to the utility in 2026. We'll have brought a number of plants online since then, and it will represent about 12% of our forecasted volume in 2026, which means we're growing the business.

Yeah, yeah, yeah. It's kind of like a tripling. That's kind of what I was trying to get at. It's sort of a subtle affirmation of the overall trajectory, right? And if you think about what that implies, if you've got 50 megawatts today, doesn't that suggest you've got that kind of ballpark 150 pro forma for, you know, call a year on 26 when you get this stuff online?

Now, being a human calculator, I won't confirm or deny what you said. No. I think what I would tell you is that our projects are sizable, right? These aren't dairy projects. They're primarily landfill gas. And many of the projects that are in development or construction now are sizable. I'm going to add a lot to our portfolio over the next couple of years.

Right. But there's no reason, I mean, look, the landfill gas, what you've done before as well, You continue to scale at that roughly $1 million per megawatt. Adding 100 megawatts here seems like a pretty significant contributor. Again, look, something novel per se, but you've implicitly reaffirmed that with this latest contract.

I'm not sure I understood what you just asked.

I mean, the plan, Julian, is that we add two to three plants a year. And what happens, a couple of those plans that we had, they're good size, and that's why the numbers get a little bit... Yeah.

I think we're all saying the same thing. It's very sizable, $100 million EBITDA or something like that. Indeed. Excellent. And just to clarify the strategy on RNG, just because obviously you've got this, you know, call it medium-term contract. Is there any thought to change the tenor of the contracts that you have in RNG? I mean, obviously there's some political risk potentially in the RNG universe here. How do you think about your decision tree to take market versus start the contract up on a more term basis here?

We've actually evaluated term already is our first time. We've seen this market evolve. We've picked and choose our term based on optimal value. And I think we'll continue doing that. We've had We've had opportunities to do much longer term than five, but the discount's too steep. It doesn't make a lot of sense. But that market's evolving. And remember, when we first started doing R&G, we were doing these one, two-year deals. Then it got up to three and then five. I think that will continue to evolve over time as the addressable market expands and demand continues to grow for the product.

Thank you. And we're going to move on to our last question. And our last question is going to come from the line of Ryan Finks with B. Riley. Your line is open. Please go ahead.

Yeah. Hey, guys. Thanks for sneaking me in. Maybe I'll just ask one more on RNG for Michael. How much is a potential ERIN pathway affecting your strategy here, if at all? And do you have any high-level thoughts on if and when that might come to pass?

Well, as you're probably aware, we have a fairly sizable electric portfolio that we continue to operate that would benefit from that pathway. We maintain an incredible depth of bench that allows us to pivot any time if we choose to go to electric versus R&G. We have a very dynamic of that because, as you know, with this group, It helps power plants for others as well. Look, the ball's in motion. I mean, you know, it's going to be interesting to see how this moves along. If we have a current administration, you get golly optimistic we'll see that pathway open up. But candidly, with Musk's push with the Republican side, he would benefit greatly with e-rents. So I... You know, we don't count on it. It's never been in any of our forecasts. We don't budget for it. It's upside.

Thank you. That does conclude today's question and answer session. Ladies and gentlemen, this also will conclude today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a great day.