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Ameresco Inc  (NYSE:AMRC)
Q1 2019 Earnings Call
April 30, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day ladies and gentlemen, and welcome to the Q1 2019 Ameresco, Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Miss Leila Dillon, Vice President of Marketing. Ma'am you may begin.

Leila Dillon -- Vice President, Marketing and Communications

Thank you, Daniel and good morning, everyone. We appreciate your joining us for today's call. Joining me here are George Sakellaris, Ameresco's Chairman, President and Chief Executive Officer; and Mark Chiplock, Interim Chief Financial Officer.

Before I turn the call over to George, I would like to make a brief statement regarding forward-looking remarks. This call contains forward-looking information regarding future events and the future financial performance of the company. We caution you that such statements are predictions based on management's current expectations or beliefs. Actual results may differ materially as a result of risks and uncertainties that pertain to our business. We refer you to the company's press release issued this morning and to our SEC filings. These documents discuss important factors that could cause actual results to differ materially from those contained in the company's projections or forward-looking statements. We assume no obligation to revise any forward-looking statements made on today's call.

In addition, we will be referring to non-GAAP financial measures during this call. These non-GAAP financial measures are not prepared in accordance with Generally Accepted Accounting Principles. A GAAP to non-GAAP reconciliation, as well as an explanation behind the use of non-GAAP financial measures, is available in our press release and in the Appendix of the slides, which can be downloaded from our website.

With that, I will now turn the call over to George. George?

George P. Sakellaris -- Chairman of the Board, President and Chief Executive Officer

Thank you, Leila, and good morning, everyone. The year is off to a great start; the financial results were ahead our expectations, we improved our profitability, and most importantly, we significantly expanded our pipeline of assets in development. Revenue, net income, EPS and adjusted EBITDA, were all above our expectations. Gross margin and adjusted EBITDA as a percent of revenue were both higher than the year ago.

Looking forward, we are very excited about our business. One reason of that excitement is the growth in our pipeline of energy assets in development and the expanding market opportunity. The pipeline build was simply outstanding; we ended Q1 with 267 megawatts in development; this is a 50% jump over the course of the quarter. The size of this pipeline built is an early indication of the strength of our platform and the wisdom of our strategy to invest in energy asset development across all our regions. By putting in place the resources, the talent, and the capability to design, develop, build and operate energy assets nationwide we have started to see the intended acceleration of our portfolio.

Our development teams are now penetrating in new industries and new geographies. For example, historically our energy assets were concentrated in a handful of states, especially the northeast. We now have sizable wins across our business units throughout North America. The new awards spend at variety of industries and national accounts, and even as we penetrate new geographies, we continue to build momentum in more established regions. For example, in Massachusetts alone, we recently announced new solar awards totalling over 12 twelve megawatts of capacity. We've continued to deepen our commitment to energy infrastructure. In January, we announced the hiring of an industry leader to become our new Vice President of Energy Storage, complementing the Vice President of Microgrid Technology who we hired last year.

Also in January, we acquired Maximum Solar, a solar O&M specialists that deepens our capability in operating solar power assets. Energy assets helped to create the foundation of high margin recurring revenues that underpins our business model. We now have 236 megawatts of operating energy assets, including the Phoenix green gas plant which was placed into service in Q1. Our operating portfolio has visibility on over $900 million of contracted revenue and incentives over the next 20 years. If we combine our assets in development and un-contracted revenue sources, we have line of sight to over $3 billion of high margin revenue.

The other major high margin recurring revenue stream operations and maintenance also performed well. Revenue was up and we added another $5 million of new O&M work to our backlog, bringing our top line and backlog to $918 million. The recurring profit managing sales and O&M is only one of the many attractive elements of our business model. And other is the cash generated by our core project business which we reinvest back into energy asset development.

In Q1, our project performance was solid as well, and we again build visibility in our backlog. Total project backlog grew 3% from the start of the quarter and is again over $2 billion. Growth was balanced with both awarded and contracted expanding. Importantly, our anticipated gross margin on the backlog is about 1 percentage points higher than the year ago, driven by large and more complex project. A great example of a technically advanced and comprehensive project is a new award in Canada with an existing customer, this is $9 million utility services agreement where we supply power, gas and water; we will develop, construct and operate a distributor generation which includes solar and geothermal. All of resources will be fed into a campus microgrid. A microgrid includes battery storage for load level and backup, this project is attractive on it's own. However, it's also proof that these advanced technologies bring new growth opportunities to our existing customer portfolio.

Another example of a project using advanced technologies -- excuse me, is our award for Phase 3 of the NASA Wallops Flight Facility in Virginia; this $14 million energy savings performance project includes 4.3 megawatts of solar generation along with ongoing operation and maintenance. And solar is a fortified design for cybersecurity, corrosion and hurricane resistance. We used a single access tracking system to increase output by over 20%. The Canadian Microgrid and NASA Wallops projects are the latest examples in a growing portfolio of projects that utilize advanced technologies to create a robust energy infrastructure. Of course, our project portfolio, we are seeing a growing interest in intelligent controls, the resiliency and microgrids. We have seen these advanced technologies become a larger part of our projects.

Microgrids that use renewable power and battery storage for resiliency and low level are becoming a critical element for energy infrastructure across a wide range of facility types including higher education, military bases, commercial and industrial customers, and the alike (ph). The energy savings performance model, in which efficiency savings help to pay for the infrastructure upgrades is allowing our customers to include this newer technologies.

Let me conclude by reiterating that 2019 is a growing technically strategic year for us. We have billions of dollars of revenue visibility from our core energy infrastructure business, asset portfolio, and in a backlog. Perhaps, more importantly, we have tremendous growth prospects in an expanding total addressable market. We are putting in place the resources to capture these opportunities, maintain our leading market share and accelerate future growth.

With that, I will now turn the call over to Mark for comments on our financial performance and outlook. Mark?

Mark Chiplock -- Vice President, Interim Chief Financial Officer, Treasurer and Chief Accounting Officer

Thank you, George and good morning, everyone. As I review the financials, please keep in mind that all figures refer to the first quarter 2019, and all comparisons are for the year-over-year changes unless I say otherwise. As George mentioned, we had a solid quarter financially, and did a tremendous job of further building visibility. We had outstanding growth in energy assets and development, and steady progress in our project backlog.

Energy sales grew 16%, integrated PV sales grew 11%, O&M was up modestly, and other revenue grew by 25%. Lower project revenues were impacted by revenue recognition timing from active projects. Our strong gross margin performance was driven primarily by a better mix of projects, as well as the growing proportion of energy and O&M revenue. Operating expenses decreased due to a gain of $2.2 million recognized upon the deconsolidation of a variable interest entity. Excluding this one-time gain, operating expenses increased due to higher salary and benefit costs related to planned headcount growth. As George mentioned, we are investing for growth by accelerating our investment in strategic resources to capture growing market opportunity. Our tax rate was higher this year due to the one-time tax benefit realized last year under 179D; that tax benefit has since expired. As a reminder, that tax benefit contributed $3.8 million or $0.08 per deluded share in Q1 2018.

Now let's turn to the balance sheet which is healthy with plenty of liquidity and borrowing power. Cash did decrease as days sales outstanding was up and we reduced payables which is normal at this time of the year. As we reduce DSO and normalized payables to regular levels, over the course of the year we expect to improve our cash position. We grew modestly on our line of credit to fund some of the investments for construction of our energy assets. Recourse corporate debt is only 21% of total debt, the rest is non-recourse project financing. As always, keep in mind, that the Federal ESPC liability is not debt to Ameresco.

Now, let me quickly review the energy assets which represent our primary capital investment. Total energy assets on our balance sheet are $477 million of which 88% are in operation while the balance is in development or construction. During Q1, we placed our 6 megawatt Phoenix RNG plant into service. Because it was ramping up, it did not contribute meaningfully to our results. Later this year once it is operating at full capacity it should contribute approximately $1 million of EBITDA per megawatt on an annualized basis, or $6 million per year at expected RIN prices. This is consistent with the guidelines we gave you for modelling all of our green gas projects.

Our development pipeline is 267 megawatt equivalent which more than doubled from a year ago. Expected CapEx for these assets is approximately $500 million over the next 12 to 30 months. We are fully confident in our ability to finance this pipeline. Of course, we also have assets and even earlier stages of development but those are not yet counted in our formal assets and development metric. For the full year, we still expect to place between 50 megawatt to 60 megawatt equivalents of assets into service.

Let me conclude with our outlook for the year. We are raising the lower end of our earnings range. We now expect EPS in the range of $0.77 to $0.85, and adjusted EBITDA in the range of $95 million to $103 million. We expect revenue to be in the range of $845 million to $885 million. We do not give quarterly guidance, but we will provide some additional color to help shape the remainder of the year. We expect our results to be heavily skewed toward Q3 and Q4 due to the execution of some large projects in the back half of the year. Q2 should be similar to last year.

Keep in mind, that for our GAAP measures like net income and EPS, our tax rate this year is far higher than it was in 2018. As always, we encourage you to focus on our performance over long-term horizon. Our business is lumpy from quarter-to-quarter, especially in the winter month, but overtime, the trend in growth and profitability is consistent and attractive.

That concludes our prepared remarks. So, now we'd like to open the line for your questions. I will turn the call back over to our coordinator, Daniel, to run the Q&A.

Questions And Answers

Operator

Thank you, ladies and gentlemen. (Operator's instructions) Our first question comes from Craig Irwin with ROTH Capital Partners. Your line is now open.

Craig Irwin -- ROTH Capital Partners -- Analyst

Hi, good morning and thanks for taking my questions. First thing I wanted to ask about is the Phoenix plant; can you maybe discuss some of the things that you've learned in the process of commissioning this plant? You know, proceduraly, are there things that will enhance your ability to execute on future projects? What have we learned that translates into the ramp and commissioning of the next couple of plants that come online in California?

George P. Sakellaris -- Chairman of the Board, President and Chief Executive Officer

Actually, we've done quite a bit. In the bottleneck on the Phoenix plant had to do more with some of the local issues and the local permitting; the inspector and so on. Once we started the plant up and the interconnection was the pipeline, originally, for example, they gave us the specifications as where they wanted to have the measuring station and install all the mirrors to make sure that the gas here meets all the criteria associated to be connected into the natural gas pipeline. And then after the monitor we did the test, we proved to them it's working, they wanted in a different location. But once we got this plant started and bringing our output (ph) upto capacity we did a better job than we did at the first plant that we build up in Michigan.

So we are learning and I think as we go forward, it's good to assume that we will keep improving the way we construct. And it has to do sometimes deliver better planning and communication with all the agencies involved, especially on the local permitting and the gas transportation systems; that's about it. And because they are complex projects, but however, I was very encouraged to see how fast they ramped up this particular Phoenix plant once we got all the issues involved and the permission from the gas pipeline to interconnect. Every gas pipeline has different rules and neglect that we've got to pay more attention to prove that upfront and plan accordingly.

Craig Irwin -- ROTH Capital Partners -- Analyst

Yes, excellent. Thank you, George. So then, I know you're really conservative about what you consider a project that's in the pipeline; can you maybe describe for us what is sort of permits and what -- what the checks are that you wait for to include projects in your pipeline? I mean, how far along are these California plants in the permitting process?

George P. Sakellaris -- Chairman of the Board, President and Chief Executive Officer

Yes, because they are complex in there -- you know, these are the gas -- the transportation systems and they are routing in order to get the preference with the pipeline to go let's say from the landfill site to the pipeline. And because they are in California you're right, especially with the two plants, the (inaudible), we are very, very careful and conservative to hit the nail on the head. And then, the other one in Texas that we developed in the McCarty (ph) Project, I will say this but we are pretty close to announce one of them in this particular quarter but it slipped to the next quarter because of a couple of minor issues but we are making good progress. And I would have been surprised that over the next quarter or so we'll probably put two projects into the pipeline of green gas projects; one in the city (ph) of Texas and one in California little bit further behind because of some local permitting issues of the pipeline interconnected to the transportation system.

Craig Irwin -- ROTH Capital Partners -- Analyst

Thank you. So, I also wanted to ask about the stability of EBITDA. So, this quarter 75% of EBITDA from recurring business is nice, stable profitable stream. As we look out over the next few years, do you expect this number to bounce around significantly over the course of 2019? Will we exit 2019 with roughly 75% of EBITDA for the full year coming from your more stable recurring business lines?

George P. Sakellaris -- Chairman of the Board, President and Chief Executive Officer

No. And actually I was one of the big contributors this quarter. We were expecting it to be slightly below 70% and the performance of the assets we have, they did very well at the O&M, did very well; and also the operating direct operating expenditures associated with the operate assets was pretty much under budget, it was very, very good contributor. You have to remember Craig that the first quarter has the lowest top line revenue, so it represents a higher percentage margin. So by the end of the year most likely we will see it around 65% contributor overall, maybe a little bit higher than that.

Because we -- and that's why we gave the guidance on -- little bit of guidance on the second half of the year. We have some large contracts that will contribute the plan to be executed this second half of this year, and they will contribute to the revenue, so the revenue will pick up. So there will -- the percentage of assets will keep growing up but it's not going to be 75%.

Craig Irwin -- ROTH Capital Partners -- Analyst

Great. And then last question if I may; I know it's little early in the year for us to have positive project closeouts but can you maybe update us on book-and-burn revenue; how you feel we're doing? I guess we're one-third of the way through the year right now. Is this potentially something that could be similar to last year? Are we looking at still elevated uncertainty for book-and-burn in 2019? How is that shaping up for the year?

George P. Sakellaris -- Chairman of the Board, President and Chief Executive Officer

On the close out actually in this quarter, the projects that we actually closed out I think it was -- it was neutral on it close out but every quarter though it's customary and we do a better job at the end of the year. We review each and every project that's over 90% complete and then see if there is any budget revision that we will do otherwise if the project is ahead of schedule and below budget, substantially below budget, then we will update the project as to what we think it will finish. But we wait to get a better pickup associated with that project once we get it completed and accepted by the customer. Because we have seen -- you've been with us long enough, we have seen some of those go the other way. Actually we had a couple of projects close out this quarter that surprised me that we had the negative.

Craig Irwin -- ROTH Capital Partners -- Analyst

Yes, understood. And the book-and-burn revenue, you know, fast fast book and execute revenue; is that coming through in any material volume or is it something that usually materializes later in the year?

George P. Sakellaris -- Chairman of the Board, President and Chief Executive Officer

I'm not so sure I understand the question.

Craig Irwin -- ROTH Capital Partners -- Analyst

The revenue, the project's scope that's booked in an individual quarter and burned in that same quarter; I understand that's one of the other elements of uncertainty in the guidance because you don't really know how much of that revenue actually materializes. I know that this is opportunistically executed a lot of the time, I was just wondering if you had an update on whether or not that's been something that's been a positive contribution at all or if the outlook is there for that to be a contribution over the rest of '19?

Mark Chiplock -- Vice President, Interim Chief Financial Officer, Treasurer and Chief Accounting Officer

Craig, this is Mark. So I think as we look through at this point, looking forward at the rest of the year; you know, we still have better than $200 million that we need to convert out of our awarded backlog and into revenue in the back half of the year, and I think that's why we're expecting the second half of the year to be stronger than normal because we do have some large projects that we'll need to execute and deliver out of our backlog. Compared to where we were last year, it's similar but we're probably higher -- we're a bit higher in terms of what needs to be contributed out of our awarded backlog over the remainder of 2019.

Craig Irwin -- ROTH Capital Partners -- Analyst

Thank you very much for that and congratulations on the strong results.

Operator

(Operator Instructions) Our next question comes from Noah Kaye with Oppenheimer. Your line is now open.

Noah Kaye -- Oppenheimer -- Analyst

Good morning, George and Mark. First, just a clarification question on the guidance. You said 2Q would be similar to last year, is that similar in terms of seasonality or similar in terms of absolute levels of new EPS?

George P. Sakellaris -- Chairman of the Board, President and Chief Executive Officer

The way I will describe it similar to last year, maybe even little bit later than the last year because of what Mark said and the guidance we gave. We have some large contracts that we expect to be signed and those will be signed sometime during the summer months and they will contribute a lot to the second half of the year. Mark, you want to add anything?

Mark Chiplock -- Vice President, Interim Chief Financial Officer, Treasurer and Chief Accounting Officer

I agree. I think it will look very similar across the Board other than -- you know, last year we still had in Q2 an additional discrete benefit from the 179D, and so that definitely contributed to a higher EPS last year. Outside of that I think we'd expect them to be to align pretty closely.

Noah Kaye -- Oppenheimer -- Analyst

Okay, in terms of absolute levels; just making sure.

Mark Chiplock -- Vice President, Interim Chief Financial Officer, Treasurer and Chief Accounting Officer

Yes.

Noah Kaye -- Oppenheimer -- Analyst

So then a question on the significant step-up in solar assets and development, you had 131 megawatts of solar in developments 3 months ago, now you have 225 megawatts. So what growth of step-up -- how much of this was organic versus the acquisition you completed?

George P. Sakellaris -- Chairman of the Board, President and Chief Executive Officer

That is a good question. Actually you know, because we did the acquisition last year even though they had it in their pipeline over 100 megawatts potential. Out of that it's only 2 megawatts, the rest of it is all organic and that's why we're very excited about the performance of the company this quarter. The fact that each and every unit across the United States and Canada they entered, they did add new assets in development that we will own and operate and maintain, and that is -- that was a great performance; and that speaks tremendous about the platform that we have established and that's what we all have said, before we would -- again, that's the Northeast and Federal doing assets which we'll own if we manage to expand that capability across our platform it will help us a great deal. And we are glad we are very happy to see that it's helping, and also the investment that we are making, it's paying off already.

To me, that was -- to us, that was the business achievement about this particular quarter and we feel very good about that.

Noah Kaye -- Oppenheimer -- Analyst

Did you organically add -- yes, you organically added over 90 megawatts?

George P. Sakellaris -- Chairman of the Board, President and Chief Executive Officer

That is correct.

Noah Kaye -- Oppenheimer -- Analyst

In 3 months?

George P. Sakellaris -- Chairman of the Board, President and Chief Executive Officer

Yes.

Noah Kaye -- Oppenheimer -- Analyst

And just -- you know, similar to Craig's question before, can you just remind us what checkmarks need to be there for you to add a solar project to your pipeline PPA signs? How close to coming online so that we can understand how quickly you can convert this 90 megawatt placement service?

George P. Sakellaris -- Chairman of the Board, President and Chief Executive Officer

The most important that we get right to the land, PPA is what we know who the customer is; that even though the ultimate action PPA may not be executed but as far as the business of terms or the letter of intent on the PPA has been executed, the interconnection agreement with a particular utility is there even though later on we might have difficulties associated with it. And many of these -- so you know, they are our RFPs; so but the customer will go out with a particular RFP and a couple of them -- I don't disclose the names but the one is the puzzle and another one is a particular utility.

Anyway it's here in New York that we won; and then, you know, that the likelihood of a project going ahead, it's probably over 90%. And unless we feel that comfortable, we don't put it into backlog, and that goes back to Craig's question to why didn't I put couple of those green gas plants into the development. I want to make sure once we put them there that the likelihood is over 90% that that will come to reality.

Noah Kaye -- Oppenheimer -- Analyst

Okay. I guess a related question; you've flagged $500 million of expected capital requirements over the next few years to fund this energy asset pipeline; consolidated leverage trailing 12-months now upto 2.5 times. Look, I totally understand 80% of the debt is non-recourse and presumably the new debt-to-fund energy asset should be predominantly non-recourse. But just so we can have a benchmark, what level are you comfortable going to in terms of consolidated leverage?

Mark Chiplock -- Vice President, Interim Chief Financial Officer, Treasurer and Chief Accounting Officer

Yes. I mean, no -- I think as we've said before, I mean -- I think we're -- because it's non-recourse, we're happy to continue to leverage up these assets as high as the banks will allow us. I think obviously, they're going to have their own checks and balances in place to kind of manage the risk there. But from our perspective, you know, from a non-recourse standpoint we're happy to lever them up as high we can.

George P. Sakellaris -- Chairman of the Board, President and Chief Executive Officer

And on the average noise (ph) you have to remember that we monetize the ATC and accelerate depreciation of these solar assets; so the amount of equity that we've put in this particular asset is pretty small amount. And the other thing when the financing that this may come up, we do have some dry power where I call that some of the assets -- landfill assets that we owned for some time now, some -- the debt has been paid-off and we may finance them. We have otherwise some projects that have zero debt on, and I call them our dry power and down the road, if we need to, we will refinance and put some debt on them and be able to continue accelerating the growth of our assets portfolio.

Noah Kaye -- Oppenheimer -- Analyst

That's very helpful color. And then just last on the SPC business; you know, I think you're getting out for a little bit in terms of -- what needs to happen over the course of the year. But, just can you -- can you remind us what your assumptions were in the revenue guidance around -- basically project level revenues for the full year? And is that an up or down year versus '18?

George P. Sakellaris -- Chairman of the Board, President and Chief Executive Officer

We have about $150 million to $175 million coming from awarded projects that we think they will be executed in the rest of the year, sometimes, like I said in the third quarter. And because they are large projects, we have -- we have a substantial amount that is capitalized development expenses, and that -- and as soon as those contracts get actually good (ph), then that becomes a part of the revenue associated with this particular project. And then in addition to that, we have about $30 million to $50 million of revenues we assume they will come from the pipeline but the projects that we think that they will convert in the short period of time into awards. And some of that will come -- if you remember, we are conservative -- my $80 million project is showing the backlog is awarded. And after we do the detailed energy work and negotiate the scope of the customer, it might become a $75 million project. And we think we have two or three projects in that category.

So even though we did not say that it's awarded, it's in the pipeline; we know it's within a particular customer that we will convert once the scope of the projects has been negotiated with the customer.

Noah Kaye -- Oppenheimer -- Analyst

Very helpful. Thank you so much.

Operator

(Operator Instructions) And I am not showing any further questions at this time. I would now like to turn the call back over to George Sakellaris for any further remarks.

George P. Sakellaris -- Chairman of the Board, President and Chief Executive Officer

Thank you, Daniel. To conclude, this year is all about investing and strategically positioning the company to higher growth in the coming years. We are investing to enable all of our regions to develop the expertise to take advantage of growing markets. We are highly encouraged as we are seeing results from these initiatives already in Q1. Thank you for your attention this morning. I will now turn the call back to the operator. Daniel?

Operator

Thank you ladies and gentlemen. Thank you for your participation in today's conference. This concludes today's program, and you may all disconnect. Everyone, have a wonderful day.

Duration: 34 minutes

Call participants:

Leila Dillon -- Vice President, Marketing and Communications

George P. Sakellaris -- Chairman of the Board, President and Chief Executive Officer

Mark Chiplock -- Vice President, Interim Chief Financial Officer, Treasurer and Chief Accounting Officer

Craig Irwin -- ROTH Capital Partners -- Analyst

Noah Kaye -- Oppenheimer -- Analyst

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