Ameresco, Inc. annual report, FY2019

Ameresco, Inc. — FY2019 Form 10-K Summary

Business context and reporting period

Ameresco provides energy-efficiency, infrastructure, energy-security, operations and maintenance, and renewable-energy solutions across North America and Europe. Its customers include government entities, educational and healthcare institutions, housing authorities, and commercial and industrial organizations. The filing covers the fiscal year ended December 31, 2019; fourth-quarter figures are included in the unaudited quarterly information.

More than 1,100 employees and 99 owned and operated renewable-energy plants with aggregate capacity exceeding 259 megawatt equivalents at year-end.
Approximately 75% of revenue historically came from government entities; the U.S. federal government represented 33.2% of 2019 revenue.
Fully contracted backlog was $1.108 billion, awarded but unsigned projects were $1.160 billion, and total backlog including long-term O&M obligations was approximately $2.250 billion.

Financial performance and key metrics

Metric	FY2019	FY2018	Change
Revenue	$866.9 million	$787.1 million	10.1% increase
Gross profit	$168.1 million	$173.6 million	3.2% decrease
Gross margin	19.4%	22.1%	Down 270 basis points
Operating income	$51.6 million	$59.1 million	12.7% decrease
Net income	$40.3 million	$37.6 million	7.2% increase
Net income attributable to common shareholders	$44.4 million	$38.0 million	17.0% increase
Diluted EPS	$0.93	$0.81	Increase of $0.12
Cash flow from operations	$(196.3) million	$(53.2) million	Greater use of cash
Cash flow from investing	$(142.2) million	$(133.2) million	Greater use of cash
Cash flow from financing	$317.4 million	$224.5 million	Higher inflow

The 2019 effective tax rate was negative 10.3%, compared with 11.4% in 2018. The tax benefit primarily reflected approximately $29.7 million of energy-related credits and deductions, including the retroactive extension of the Section 179D energy-efficiency deduction for 2018 and 2019.

Project revenue increased to $611.1 million from $545.1 million; O&M revenue increased to $66.7 million from $65.2 million; energy-asset revenue increased to $98.0 million from $95.8 million.
U.S. Federal segment revenue increased 16.7% to $287.4 million and pretax income increased 11.6% to $40.6 million.
U.S. Regions revenue increased 9.2% to $365.1 million, but pretax income declined 22.5% to $15.9 million because of lower-margin projects and higher operating expenses.
Non-Solar Distributed Generation pretax income fell 71.6% to $3.8 million, primarily because of lower-margin project and energy/incentive revenue and lower environmental-attribute pricing.
Approximately 92% of 2019 revenue was recognized over time under the cost-based input method or other over-time methods.

Liquidity, debt and capital resources

Cash and cash equivalents were $33.2 million at December 31, 2019, compared with $61.4 million a year earlier. Cash, cash equivalents and restricted cash totaled $77.3 million.
Total assets increased to $1.374 billion from $1.162 billion, including energy assets of $579.5 million versus $460.0 million.
Long-term debt and financing lease liabilities were $343.1 million before current maturities and deferred financing fees; total debt carrying value excluding financing leases was approximately $307.5 million.
The amended senior secured facility matures in June 2024 and includes a $115 million revolver and a $65 million term loan. At year-end, $50.1 million was drawn on the revolver, $62.6 million was outstanding under the term loan, and $29.1 million remained available; $13.1 million of letters of credit were outstanding.
Project financing loans totaled approximately $204.5 million and generally were non-recourse to Ameresco, although the company may provide support to subsidiaries in certain circumstances.
Capital expenditures were $140.6 million in 2019. Management planned approximately $200 million to $250 million of 2020 capital expenditures, principally for renewable-energy plants, with additional 2020 financings of approximately $125 million to $175 million.
Management stated that cash, revolving-credit availability, and access to credit markets were expected to fund operations through at least March 2021.

Reported operating cash flow was materially affected by federal ESPC financing. In 2019, $199.4 million of federal ESPC cash advances were recorded as financing inflows, while $188.1 million of related project expenditures reduced operating cash flow. Federal ESPC receivables were $230.6 million and corresponding federal ESPC liabilities were $245.0 million at year-end.

Material changes versus the prior comparable period

Revenue grew 10.1%, led by U.S. Federal and U.S. Regions project activity.
Gross margin declined from 22.1% to 19.4% because of a greater mix of lower-margin projects and lower-margin energy and incentive revenue.
Operating income declined despite higher revenue, while net income attributable to common shareholders increased because of the tax benefit and lower net other expenses.
Operating cash use increased substantially, driven partly by a $188.1 million use related to federal ESPC receivables and increased contract assets.
Costs and estimated earnings in excess of billings increased to $202.2 million from $86.8 million, reflecting timing differences between revenue recognition and customer billings.
Debt increased materially, including higher revolver borrowings, new project financing, a $27.5 million December 2019 term loan for solar-module financing, and $13.7 million of solar project sale-leaseback financing recorded as liabilities.
Ameresco adopted the new lease standard in 2019, recognizing $32.8 million of operating lease assets and $34.9 million of operating lease liabilities at year-end.
The company acquired nine solar projects and a Massachusetts solar O&M firm; it also entered into a definitive agreement to acquire ten additional solar projects.

Outlook, commentary, risks and unusual items

Management emphasized substantial backlog, recurring O&M revenue, renewable-energy asset expansion, and planned 2020 investment as principal growth drivers. The filing does not provide a formal revenue or earnings guidance range.
Backlog conversion is subject to long sales and contracting cycles, customer financing, project timing, contract modifications, termination or deferral rights, and government appropriations. Historically, approximately 90% of awarded projects ultimately converted to signed contracts, but this is not guaranteed.
Government concentration is significant: more than 75% of revenue and a substantial portion of backlog relate to government customers. Government contracts may be terminated, reduced, delayed, or affected by appropriations and procurement rules.
Renewable-energy profitability depends partly on renewable energy certificates, solar RECs, RINs and other environmental attributes. Pricing, regulatory changes, production shortfalls, and the absence of long-term offtake contracts could adversely affect results.
Fixed-price project contracts expose the company to construction delays, cost overruns, labor and supplier issues, permitting risks, equipment performance, and ESPC energy-savings guarantees.
The company is subject to debt covenants, including total funded debt to EBITDA below 3.25 to 1.0 and a debt-service coverage ratio of at least 1.5 to 1.0. Defaults could restrict borrowing or accelerate debt.
Seasonality is pronounced, with generally stronger revenue and operating income in the third and fourth quarters and weaker first-quarter results.
Tax benefits materially affected 2019 earnings. The solar investment tax credit declines from 30% after 2019 to 26% in 2020, 22% in 2021 and 10% thereafter; the Section 179D deduction was extended through 2020 but future extensions are uncertain.
Unusual 2019 items included a $2.2 million gain from deconsolidating a variable-interest entity, a $2.160 million gain on disposal/deconsolidation activity, and increased redeemable non-controlling interests to $31.6 million from $14.7 million.
Legal proceedings were described as ordinary-course matters that management did not believe would have a material adverse effect. Internal control over financial reporting was deemed effective by management and the independent auditor.

Important facts for investors to verify

Reconcile backlog, awarded projects, O&M backlog and total remaining performance obligations; assess expected conversion timing and cancellation or deferral exposure.
Evaluate whether gross margins recover from the 2019 decline and whether lower-margin project and environmental-attribute revenue remains elevated.
Analyze operating cash flow excluding the unusual federal ESPC financing presentation and monitor the growth of contract assets and receivables.
Verify 2020 capital spending and financing requirements against revolver availability, debt maturities and covenant headroom.
Assess the sustainability of the negative effective tax rate and the contribution of Section 179D, energy credits and other tax attributes.
Review exposure to U.S. federal procurement, appropriations, renewable-credit pricing, project performance guarantees, permitting, construction costs and environmental liabilities.
Track solar-project acquisitions, project-financing obligations, redeemable non-controlling-interest put options and potential support for subsidiary debt.
Note that the filing is an annual 10-K for FY2019, not a standalone quarterly filing; fourth-quarter results are unaudited.