Ameresco, Inc. — Q3 2022 Form 10-Q Summary
Business Context and Reporting Period
Ameresco is a clean-technology integrator providing energy-efficiency, renewable-energy, energy-storage, operations and maintenance, integrated photovoltaic, consulting, and enterprise energy-management solutions. Its customers include commercial, industrial, educational, healthcare, utility, and federal, state, and local government entities. Reported segments are U.S. Regions, U.S. Federal, Canada, Alternative Fuels, and All Other.
This unaudited filing covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods. The company changed its internal segment structure effective January 1, 2022 and recast prior-period segment information for comparison.
Financial Highlights
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Revenue | $441.3 million | $273.7 million | $1,492.7 million | $799.8 million |
| Gross profit | $79.6 million | $58.8 million | $229.2 million | $159.0 million |
| Gross margin | 18.0% | 21.5% | 15.4% | 19.9% |
| Operating income | $38.9 million | $23.6 million | $110.7 million | $63.4 million |
| Operating margin | 8.8% | 8.6% | 7.4% | 7.9% |
| Net income attributable to common shareholders | $27.4 million | $17.4 million | $77.0 million | $42.3 million |
| Diluted EPS | $0.51 | $0.33 | $1.44 | $0.81 |
Q3 revenue increased 61.2% year over year, while nine-month revenue increased 86.6%. Project revenue was the primary driver, including revenue recognized on the Southern California Edison battery-storage project. Gross profit increased, but gross margin declined because the battery-storage project carries lower margins than the company’s overall business mix.
Other expenses increased to $7.5 million in Q3 and $19.9 million for the nine-month period, principally because of higher interest expense. Q3 included a $0.8 million derivative gain versus a $0.7 million loss in the prior-year quarter; the nine-month periods included a $0.2 million derivative gain in 2022 versus a $1.9 million loss in 2021.
Cash Flow, Balance Sheet, Debt, and Liquidity
- Cash, cash equivalents, and restricted cash totaled $163.6 million at September 30, 2022, compared with $87.1 million at December 31, 2021. Cash and cash equivalents alone were $122.5 million.
- Operating cash flow was negative $273.2 million for the first nine months, compared with negative $116.3 million in 2021. The decline primarily reflected a $302.9 million increase in unbilled revenue and a $75.0 million increase in accounts receivable, partly offset by higher accounts payable, accrued liabilities, and net income.
- Investing cash flow was negative $202.7 million, including $182.1 million of investment in new energy assets and $16.1 million for major maintenance.
- Financing cash flow was positive $554.2 million, including $331.1 million of long-term debt proceeds, $139.0 million of net revolver borrowings, and $173.9 million of Federal ESPC project proceeds, partially offset by $111.3 million of debt and financing-lease repayments.
- Total debt and financing lease liabilities were $829.0 million at September 30, 2022, versus $471.5 million at December 31, 2021. Current maturities were $301.2 million, and long-term debt and financing lease liabilities, net of current amounts and issuance costs, were $511.6 million.
- The senior secured revolver had $184.0 million outstanding and only $0.3 million available at September 30, 2022. Senior secured term loans totaled $295.0 million.
- Non-recourse debt and financing facilities totaled approximately $350.0 million, with approximately $376.9 million of remaining availability under related commitments, according to management.
- Management stated that available cash, working capital, revolver capacity, potential incremental revolver capacity subject to lender approval, and access to capital markets should be sufficient to fund operations through at least November 2023.
Material Changes Versus the Prior Comparable Period
- U.S. Regions revenue rose 151.8% in Q3 and 212.1% for the nine-month period, primarily from project timing and the SCE battery-storage projects.
- U.S. Federal revenue declined 4.5% for the nine-month period because supply-chain delays affected project revenue, although Q3 revenue increased 2.6%.
- Alternative Fuels revenue increased 9.8% for the nine-month period, reflecting growth in the operating portfolio and higher renewable natural gas production.
- Gross margin declined by 3.5 percentage points in Q3 and 4.5 percentage points for the nine-month period, mainly because of the higher mix of lower-margin SCE project revenue.
- SG&A increased 15.5% in Q3 and 23.9% for the nine-month period, driven primarily by higher salaries, benefits, headcount, and stock-based compensation. Nine-month stock-based compensation expense was $10.8 million versus $4.3 million in 2021.
- Interest expense increased by approximately $3.2 million in Q3 and $8.2 million for the nine-month period as debt balances increased.
- Costs and estimated earnings in excess of billings increased to $628.5 million from $306.2 million at December 31, 2021, contributing significantly to negative operating cash flow.
Backlog, Outlook, Risks, and Unusual Items
- Contracted backlog was $2.179 billion at September 30, 2022, with approximately 29% expected to be recognized as revenue over the next twelve months. Total project backlog, including awarded but unsigned projects, was $2.627 billion; O&M backlog was $1.246 billion.
- The SCE agreement covers three battery-storage systems with aggregate capacity of 537.5 MW and an engineering, procurement, and construction price of approximately $892 million. Supply-chain delays prevented completion by the original August 1, 2022 guaranteed completion date. SCE requested a schedule adjustment into 2023, and Ameresco expects substantial completion before summer 2023. Potential liquidated damages are capped at an aggregate $89 million, subject to contractual provisions and force majeure claims.
- Management expects the majority of SCE contract revenue to be recognized in 2022, while continuing to fund project expenditures into the first half of 2023. The filing does not provide clear consolidated 2022 revenue or earnings guidance.
- Management planned approximately $40 million to $90 million of additional capital expenditures during the remainder of 2022 and approximately $100 million to $140 million of additional project financings.
- COVID-19 effects, supply-chain disruptions, component shortages, inflation, labor costs, transportation costs, and delays in customer payments adversely affected operations and liquidity. Management expects supply and inflation pressures to continue.
- The Inflation Reduction Act was viewed as favorable for the renewable-energy industry, although the company was still evaluating its project-specific impact and possible sales-cycle delays.
- At September 30, 2022, the company was in default on a $1.4 million non-recourse term loan covenant due to a debt-service-coverage ratio issue; a waiver for the quarter was received in October. The company also exceeded an energy-conservation project-financing limit by approximately $2 million; lenders waived that event of default in October.
- On October 26, 2022, a subsidiary refinanced a non-recourse facility, drew $80.0 million, and obtained a facility with up to $125.0 million of principal capacity and a scheduled maturity in 2037. The filing states that the obligations are otherwise non-recourse to Ameresco.
- A previously disclosed SEC staff review of revenue recognition for the company’s software-as-a-service businesses concluded in August 2022, with no recommendation for further action at that time.
- The company settled a previously disclosed customer legal proceeding during the nine-month period. Management does not believe other pending proceedings will have a material adverse effect, although outcomes cannot be predicted with certainty.
Important Facts for Investors to Verify
- Completion timing, cost recovery, margin, and potential damages or contractual remedies related to the SCE battery-storage projects.
- Conversion of unbilled contract assets and accounts receivable into cash, and the sustainability of the significantly negative operating cash flow.
- Debt covenant compliance, waiver terms, near-term maturities, revolver availability, and the effect of higher interest rates.
- Whether the company achieves planned 2022 capital expenditures, project financings, backlog conversion, and renewable-energy asset growth.
- The effect of supply-chain constraints, inflation, solar-panel trade actions, labor availability, and customer payment timing on project costs and margins.
- How the Inflation Reduction Act affects tax credits, customer demand, project economics, and future backlog.
- The company’s ability to maintain liquidity through November 2023 while continuing to fund SCE and other energy-asset investments.