Ameresco Inc
NYSE:AMRC
Earnings Call Analysis
Q3-2023 Analysis
Ameresco Inc
The focal point of this earnings call was the announcement of a record project backlog totaling $3.7 billion for the company, marking an increase of 14% sequentially and 41% year-over-year. This growth is propelled by the addition of $700 million in new project awards during the quarter and exemplifies an upward trend with year-to-date awards doubling compared to the previous year. Furthermore, proposal activities have surged by 35%, indicating potential continuity in backlog growth. Despite these positive indicators, the company acknowledged the presence of operational hurdles such as extended sales cycles for awarded projects and industry-wide supply chain issues, which have elongated the lead times for converting awarded projects into contracted work. Additionally, labor market tightness and delays caused by environmental factors, utilities, and administrative procedures have further delayed project execution, especially for larger and complex energy assets like Renewable Natural Gas (RNG) plants.
The company reported second-quarter revenue of $335 million, falling short of expectations due to project delays and asset downtime, which affected revenue streams. Notably, energy asset revenue grew by 6%, benefiting from increased operating assets and higher RIN prices. Despite some declines in other business lines, a modest 4% growth was observed in Operations & Maintenance (O&M) business. Gross margin expanded to 19%, though it did not align fully with expectations. Adjusted EBITDA for the quarter stood at $43.3 million. Notwithstanding the challenges of higher interest rates and their impact on the energy asset business, Ameresco's diverse business model and the flexibility it provides play a crucial role in sustaining the rapid growth in clean technology deployments. The long-term revenue visibility remains robust with $7.2 billion in total future revenue visibility, including operating energy assets valued at approximately $2.3 billion.
For the upcoming year, the company has adjusted its full-year revenue, EBITDA, and EPS projections to approximately $1.35 billion, $165 million, and $1.20 at the midpoints, respectively. Looking forward to 2024, the company has revised its adjusted EBITDA target from the previously stated $300 million down to approximately $250 million. This revision reflects the extension of sales and construction cycles within the project and energy asset sectors, which has resulted in delayed revenue recognition. However, it is important to note that the company perceives these delays not as lost opportunities but as deferred ones, which suggests a robust growth trajectory continuing into the future, still fitting within their long-term growth target of over 20% for adjusted EBITDA.
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Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Ameresco, Inc. Third Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host, Mrs. Leila Dillon, Senior Vice President, Marketing and Communications. Ms. Dillon, you may begin.
Thank you, Howard, and good afternoon, everyone. We appreciate you joining us for today's call. Joining me here are George Sakellaris, Ameresco's Chairman, President and Chief Executive Officer; Doran Hole, Executive Vice President and Chief Financial Officer; and Mark Chiplock, Senior Vice President and Chief Accounting Officer.
Before I turn the call over to George, I would like to make a brief statement regarding forward-looking remarks. Today's earnings materials contain forward-looking statements, including statements regarding our expectations. All forward-looking statements are subject to risks and uncertainties. Please refer to today's earnings materials, the safe harbor language on Slide 2 and our SEC filings for a discussion of the major risk factors that could cause our actual results to differ from those in our forward-looking statements.
In addition, we use several non-GAAP measures when presenting our financial results. We have included the reconciliations to these measures in our supplemental financial information.
I will now turn the call over to George. George?
Thank you, Leila, and good afternoon, everyone. We ended the quarter with a record total project backlog of $3.7 billion, which was up 14% sequentially and 41% versus last year. We added an impressive $700 million in new project awards during the quarter bringing our year-to-date awards of $1.7 billion, more than double last year's level. And we anticipate that our new awards will continue to grow given the 35% increase in proposal activity as compared to last year's levels. This backlog, together with our energy asset and operation remained visibility gives us over $7.2 billion in total multiyear visibility of profitable revenue supporting our confidence in Ameresco's long-term growth.
We did, however, face another wide and company-specific challenges, which impacted our third quarter results. We are very disappointed. We are pleased with the progress we've made in building our long-term business momentum. We also added over 50 megawatts of assets in development in Q3 ending the quarter with almost 600 megawatts of assets in development and construction. This is a 30% increase from the 460 megawatts at the end of last year.
While our long-term prospects have never been better, I did want to comment on some of the recent industry challenges. In our Projects business, we are seeing longer cycles when converting our awarded projects into contracted backlog. These contracts are being delayed as some customers are taking longer to proceed with the actual implementation of project work. It's important to note that we have not experienced any cancellations, just a lengthening of the sales cycle in moving awards to contracts. And like others in the industry, we also continue to face supply chain delays on certain components as well as tightness in the labor market.
Our energy asset business has been challenged by both, downtime at some of our biogas plants as well as delays in the development and construction of some of our assets, especially our larger, more complicated plants such as RNG. Where assets always incurred downtime and the levels we have faced over the last few quarters have been considerably greater than budgeted. Driven by several factors out of our control, including adverse weather conditions and utility interruptions. The asset for structure timetables have stretched as a result of industry-wide component labor shortages as well as administrative bottlenecks. Again, well, these delays are frustrating, it's important to keep in mind that all of these profitable assets will be built. It's just taking longer than originally anticipated.
As the company continues to grow, we are optimizing the operational structure at more as good to bring more uniformity and scalability across all of our geographies and business units. We are making these changes to increase our ability to react to changing market conditions more quickly and to drive increased corporate efficiency. And with our tremendous project backlog, we have increased our focus on project execution and cash flow generation. Further, in light of the continued industry challenges impacting conversion times and execution, we are revisiting some of our assumptions around guidance. Doran will provide more details on the numbers during his financial review. However, even with these challenges, we wouldn't be more optimistic about our future. Ameresco is highly profitable, and we continue to expand substantial growth in '24 and beyond.
I will now turn the call over to Doran to comment on our financial performance and outlook. Doran?
Thank you, George, and good afternoon, everyone. For additional financial information, please refer to the press release and the supplemental slides that were posted to our site after the market closed today. Total second quarter revenue of $335 million was below our expectations, as project delays and asset downtime impacted revenue. Our project revenue was particularly impacted by a lengthening in the cycle of converting awarded backlog to contracted backlog as well as continued industry-wide supply chain issues that are extending our construction time lines. Energy asset revenue grew 6%, largely due to the greater number of operating assets compared to last year as well as higher RIN prices. These benefits helped to offset greater-than-expected downtime at our biogas facilities as well as delays in bringing some new assets online.
Our O&M business delivered another consistent quarter with 4% growth, while our other line of business experienced a slight decline in revenue driven by end market softness at our off-grid solar business. Gross margin expanded to 19%, but did not meet our expectations as the downtime I just mentioned and project mix impacted our results. I want to emphasize that we have not seen any fundamental change in our overall project gross margins as the expected margin within our backlog has been quite stable for at least 2 years. We generated adjusted EBITDA of $43.3 million in the quarter.
Our GAAP results for the quarter include a discrete tax benefit of $7.2 million related to a prior year Section 179 tax deduction allocated from a customer. To maximize our earnings, we'll continue to take advantage of all of the benefits available to us and our customers as part of the IRA and other favorable legislation.
Our long-term revenue visibility remains strong as ever. As George mentioned, we ended the quarter with a record total project backlog of $3.7 billion. This is an impressive increase of 41% versus last year and a sequential increase of 14%, driven by winning over $700 million in new project awards during this quarter alone. Our operating energy asset visibility is approximately $2.3 billion, representing both contracted revenue as well as a conservative estimate of lifetime uncontracted R&G revenues. These metrics, together with our O&M backlog give Ameresco visibility to over $7.2 billion of future revenue.
Importantly, this does not include any revenue contribution from the 596 megawatts of energy assets in development and construction. The timing of placing these assets into operation can be anywhere from under a year for small, more simple assets to 4-plus years for more complex assets such as RNG facilities. Unfortunately, this time frame has recently been increasing due to labor and equipment availability, along with permitting delays. However, we continued our high rate of conversion with approximately 90% plus of our energy assets, either success placed into service on our balance sheet or monetized through a sale to a third party.
We continue to field many questions on how higher interest rates will impact Ameresco, especially as it relates to our energy asset business. Compared to many in our industry, the inherent diversity of our business model gives us the flexibility to adjust to changes in the business environment. We have the optionality to develop profitable assets and then either hold them on our balance sheet as an operating energy asset or to sell to a third party and recognize project revenue if the assets do not hit our risk-adjusted levered IRR hurdle rates. While some assets may not hit our own hurdle rates, they're well within the return profile of many energy asset buyers and aggregators ready to add assets to their portfolios. And such a sale would often come with an attached O&M contract. This strategy is not new for Ameresco as recycling our cash flow through asset sales has been part of our business model for several years.
In the end, we believe that our flexible corporate model with project, O&M and asset business lines allows us to continue to benefit from the rapid growth in the deployment of clean technologies even in a high interest rate environment.
Our ability to finance our growth remains excellent. During the quarter, we secured over $0.5 billion in financing commitments bringing our year-to-date total to over $1 billion. While the clinic industry at large has experienced credit tightening and expansion of spreads, we are particularly pleased that in our recent financing, credit spreads for Ameresco's high-quality asset portfolio continue to be stable. We have a number of attractive options for financing our growth including nonrecourse project level debt, tax equity and the recycling of capital through asset sales.
We are adjusting our 2023 guidance in response to the items which we described earlier. We now anticipate full year 2023 revenue, adjusted EBITDA and EPS to be approximately $1.35 billion, $165 million and $1.20 at the midpoints as detailed in our press release. We now expect to place between 120 and 130 megawatts of energy assets in service for all of 2023, including the recently acquired Los Alamitos microgrid project and our second 5-megawatt RNG plant. A third RNG plant is expected to be at mechanical completion by the end of the year and fully commissioned in early 2024.
And while we will be providing detailed full year 2024 guidance when we report our fourth quarter and full year results, we want to take this opportunity to comment on our 2024 adjusted EBITDA target of $300 million, which we originally provided in early 2022. Given the lengthening in the sales and construction cycles in our project and energy asset businesses, we now expect the 2024 adjusted EBITDA could be approximately $250 million. I want to make it clear that none of this adjusted EBITDA opportunity has been lost. It is just being delayed. And this new adjusted EBITDA level still represents impressive growth compared to our expected 2023 results and still fits in the framework of our long-term 20% plus adjusted EBITDA growth target. Operating leverage remains top of mind as we remain diligent on OpEx further bolstered by our internal optimizations.
Now I'd like to turn the call back over to George for closing comments.
Thank you, Doran. As we have discussed in detail during this call, while we continue to face some headwinds, our long-term growth opportunities have never been bet. The company is redoubling its focus on profitable execution and cash flow generation. And we look forward to detail in our success in future quarters.
In closing, I would like to once again thank our employees, customers and stockholders for their continued support.
Operator, we would like to open the call to questions now.
[Operator Instructions] Our first question or comment comes from the line of Noah Kaye from Oppenheimer & Co.
I was wondering if I could start off -- just trying to get a sense of the bridge between the prior and revised guidance. When we look at the -- essentially the $50 million difference in EBITDA. Can you kind of walk us through -- what were the main components as quantitatively as you can? Obviously, you commented to both projects and energy assets. But if you could help us get a sense of the bridge, that would be really helpful.
Sorry, to clarify, no, you're talking about 2024?
No, 2023, actually. Thanks for clarifying.
So just -- first and foremost, I think the point is that the ramp in 2023 really relied on some solid execution and conversions of awards to contracts happening in Q3. That didn't materialize the way we expected it to. And so as a result of that, we've kind of adjusted this guidance to push things to the right as you might expect. And as you've probably seen us do before. So through Q2, we're executing on our contracted backlog as you saw higher-than-expected revenue performance. But then we also had a relatively high amount of second half '23 guidance there in the awarded and contracted backlog. And I think with the conversions being delayed several large projects, I think that was one of the things that just kind of resulted in the push out. I don't know that we want to go into any more detail beyond that?
Well, the operation of the assets contributed to that as well.
That's at operation.
Yes.
Right, right, right. So not possible to sort of say whether it was going to half and half projects and assets that you're not going to be able to provide that detail. I think that's a firm, okay. Understood. Understood. You mentioned earlier, one of the benefits of the model is the ability to be in flexible around capital. Can you talk a little bit about your plans for capital recycling here and how you're thinking about leverage and financing? You mentioned securing a good amount of capital already this quarter. But just wanted to understand how you're thinking about capital recycling levels? And how soon that might occur?
So look, I think that was really designed as a reminder that this is part of the business model that we will look to sell assets. I think as I talked about last quarter, with higher interest rates, we're starting to see a little bit of challenge in the levered IRR targets that we have. And as you know, some of these assets take a while to sort of make their way through the asset and development metric into something that's in operation. So we experienced some pressure on the interest rate. What we found is that the market still exists for those assets as return hurdles that are lower than ours. And we will regularly work on kind of turning around and entering into sales agreements with those assets preconstruction. So while they're still in development, such that it effectively converts it into project business for us as opposed to looking at it as a distinct kind of business line. I would say it's fair to say it's going to be consistently kind of dynamic if that's a good obviously more on for you as we go forward.
Sure. Maybe one last question. Sorry, go ahead, George.
No, that's still -- we have so many projects in development, assets and development. So it gives an opportunity to monetize the assets in development. And still maintain our target of the ones we hold about at least 20% growth per year in the ones we hold. And this interest rate environment, I think it's a good opportunity to recycle some of that cash. And that's why on my quest. The project business -- the backlog is growing so big, so large, we will refocus to generate -- to build a the projects out as we go down the road to generate more cash internal rather than looking at from the outside.
Yes. I mean it allows us to maintain that growth rate we're expecting and hold on to our mid-teens IRR target. And at the same time, stay in front of our customers, right? We're continuing to find the right financing on a non-recourse basis for the assets that we want to keep. And if the returns aren't there, we -- at least we're staying in the market, we're staying in front of our customers. We're still developing a good amount of assets.
And that's the way we don't overstress our balance sheet.
I know you -- I have a lot of other questions, but I'll take them offline. You got a lot of analysts to get to.
Our next question or comment comes from the line of Stephen Gengaro from Stifel.
So I guess my big picture question is, when we think about the quarter and obviously, you've laid out the challenges you've seen and you kind of gave this preliminary look into 2024. When we think about your handle on the issues and what kind of gives you confidence that you start to get kind of additional momentum traction to '24, which makes those targets realistic?
Well, we took into consideration what happened to us for this particular quarter. And basically, we operate, we assume that these conditions will continue for the foreseeable future. And between all of us, that's not the mistakes that we had made. I think we let our guard down a little bad by overperforming the first 2 quarters, even though we start realizing that a couple of the awards were not moving to the contracts as first, and we had contemplated. And -- but then it became across many, many projects, not just the ones that we can see. And then the other thing that surprised us a lot is the extension of the implementation schedules. We got stuck in quite a few of the projects in executing because we couldn't get some materials. On a couple of them, we couldn't get the right labor in a timely fashion. And when I said the administrative challenges that we face, you don't believe it's some of the permitting. It used to take a couple of weeks. It takes more than 3, 4 months because nobody shows up to review the applications. So -- and we feel very good that's why the project business and the project backlog now because it's going -- it's getting to a point that we feel that we can execute on 2024 and especially on the level that we afford our customer at this point in time. And that's why I think -- and we will give more detail when we talk about the '24 numbers after the end of the year, and give a little bit more color and details to it. But right now, we feel pretty good where we are that we have taken into account what's happening in the marketplace.
And though it sounds like this, but -- so you feel like those expectations are accounting for things that kind of you can control versus what you kind of can't control going into next year. Is that a reasonable way to think about it?
That is correct, yes. And my comment, I said we feel very, very good about the future where we are in the trend of the business. It's very good. It just, is taking a little bit longer to execute that what we -- we've been in this business a long time, and we had the metrics we thought that on pack. And to be honest with you guys, I thought that this supply chain issue will be done by now. But what is happening, I think, and that's why we get stuck on the electrical side, especially on the equipment with obviously -- everything going to be electric, it as bottlenecks of not only the capability of the various manufacturers and built in transformers or control panels and so on. And then the beauty, one of our projects have been lost. They're all there, and we're just moving at a little bit slower pace.
And Steve, this is the importance of controlling OpEx here because we're focusing on earnings generation, you're going to control OpEx and continue to generate the EBITDA that we expect to generate. And frankly, we're still working to execute contracts with our vendors and our suppliers prior to executing our customer contract to derisk margin. We're still working toward that. It's just that we've had a few of these adjustments come with some of the projects that have been in the backlog for a bit with the kind of lengthening of the cycle.
Our next question or comment comes from the line of Eric Stine from Craig Hallum.
So I just want to dig in here a little bit more, just to try to understand the I mean I know supply chain issues in labor, it's been a pretty consistent challenge. I mean, is this something where you saw that intensify? Or is it where you just had a number of larger projects, things you are counting on contributing to the back half of the year that it was just a greater impact from those headwinds?
Great question. Especially that's exactly what happened, especially some of the larger projects. They were already scheduled and you say this bio contract, so now it's going to do XYZ, and all of a sudden that contract or whether there or this is the key. She could get the qualified workers to show up at the work site at the site. And some of them we used to go out with an RF to 12 to 16 vendors and sometimes we'll get 1 or 2 responses. And you will find out that one of them is not even qualified. So it's labor original has become a huge concern.
Got it. And then, I mean, you've had great growth in your project business. I mean the -- you mentioned permitting and that sort of thing. But I mean is this the area of business where you can simply say, interest rate -- higher interest rates that, that is having a tangible impact, negative impact?
Not really. No, no. We haven't really seen that on the project business.
Okay. And then...
I think -- yes, go ahead.
No, I was just going to say, so the $250 million that you're talking about for the early look at 2024, just to confirm, you're not really expecting necessarily improvement in these areas, right? You're kind of expecting status quo from where things stand now, playing that out through 2024 rather than anticipating that there's improvement in a lot of these areas.
That's what we did. And Mark, there's a great due diligence on that. You can make a comment. But that's exactly what we try to do and -- and we think we have represented very accurately.
Our next question or comment comes from the line of Tim Mulrooney from William Blair & Company.
My question is on your 2023 guide. The midpoint of your guide is suggesting, I think, still a nice ramp up in fourth quarter revenue, up more than 20% sequentially, I think, from the third quarter at the midpoint. Can you talk about the primary factors contributing to that acceleration? Is it collection of unbilled revenue at SCE or other things?
Yes. Tim, this is Mark. It's mostly -- it's contracted. I mean it's assuming good execution on our contracted backlog. It assumes very little awarded revenue. And we took a look at that, and we have to take into consideration the slippage that we're seeing. But with the active projects that we currently are working on, we feel like the contracted revenue is a number that we can deliver on in Q4.
Okay. My follow-up, I just wanted to ask about the administrative bottlenecks that you listed as being a factor impacting third quarter results. Can you just talk in a little more detail about what those were? If they were specific to 1 or 2 projects or if it's a broader issue that you expect will carry into the fourth quarter and beyond?
Well, I know a couple of the assets that were delayed because whether it's a solar plants that they were not connected goof the utility. We didn't get out there to connect the project or some of the renewable. The gas plants that we were built in, we got delayed because I think was 3 months before somebody when they are to review the applications. So that delayed that particular project for about 3 months.
And I think the administrative delays really that are impacting the timing of awards converting to contract. It's something that we really started to see a little bit towards the end of Q2 with some awards that we expected to convert. We really felt the impact in Q3. And so to your question, yes, we do expect that to continue through Q4 and as these are all really just kind of pushing out to the right. So -- but we've taken that into account in our revised guidance.
Say what happened, the fact is that everybody has it turned back to work, it does impact in the implementation of our work, and I think many other people.
Our next question or comment comes from the line of Joseph Osha from Guggenheim.
I figure we might shift gears a little bit here. When I look at where we stand in the current quarter and then your deck you point out that a lot of business is nonrecourse. But if you annualize Q3, we're now standing at about 8.3 debt-to-EBITDA. And on your new guide, it's about 8x likely debt-to-EBITDA for 2024. The business hasn't generated even wrapping in hasn't generated any free cash flow since 2020 and it's generated $80 million since the beginning of 2019. So I guess I'm just asking, we can talk about the growth in the energy assets business here. But at what point does this business begin to generate cash? And how are you thinking about that as we go into 2024?
Okay. Joe, the first thing I'd point out is that the adjusted cash from operations was positive, right? As we've talked about, we have the discretion to work on the cadence of asset investment as necessary if we need to effectively catch up with our operating cash flow. Understand that the higher leverage numbers that you're talking about, you pointed out yourself, that EBITDA multiples is not a metric that's used when determining advance rates under nonrecourse debt. I think we can all kind of agree on that point. And therefore, those figures will end up looking higher than what you would think about from normal corporate credit facility. As far as cash flow is concerned, I think that, that is something, and we've discussed this. We are going to be looking at how we can start to talk about the company's history of generating cash and what that looks like versus how much is being invested into assets. However, broadly speaking, the only other thing I would say about the leverage overall is that it does remain a bit inflated on the basis of the delayed kind of so-called projects and wrapping those up, getting that cash in. We've actually used quite a bit of our own operating cash flow to pay down the debt -- the corporate debt. And so we've got quite a bit of unbilled there that you'll see kind of turnaround, call it, Q1-ish to kind of show the cash coming out of the SCE project, so that will help us in terms of delevering the corporate facility. At this stage, I don't know how much more I can say to address your question.
Sure. And I guess, kind of the -- just the follow-on, it's the second part of the same question. And look, this debate has been going on a lot and some companies that are kind of comparable to you like some of these residential solar businesses. It is a question of how you balance growth and cash flow generation. So I guess I'll just ask you or George or whoever, is there a point when it's a $2 billion company or a $3 billion company or whatever you say, okay, we're going to maybe take a slightly different view of how we think about growth versus generating cash flow and maybe ultimately return of capital to shareholders. I'm just trying to get a sense as to the philosophy here that underpins how you're making the decision.
Well, that's why the philosophy, especially in this higher interest environment. That's why we want to monetizes a good part of the assets we develop and then focus more in the project business, which generates very good cash flow and basically rather than issuing new stock, to finance potential assets we own, it comes all from internally generated cash flow. And in addition to that, I think the guideline that we will be using going forward that even that we will not invest all of that asset -- all that cash flow generated from projects and existing assets and O&M, we will retain some of it to delever the company.
Our next question or comment comes from the line of Julien Dumoulin-Smith from Bank of America.
Just following up on a couple of things here. First off, how do you think about the time line for these projects to get "back on track?" Obviously, bringing down '23 and '24 by roughly [ 50% ]. I mean, is there a catch-up here in '25? Or are you thinking that categorically, we're rolling the ball forward across the forward look here when do we get kind of that view on '25? And then as you think about kind of capping back up here, is there an element of higher OpEx that needs to play into this to get things back on track? Or where -- is there any other risk on the SG&A? And then maybe also just to clean up on that last -- on payments and cash. Do you want to clarify a little bit more about payments on the batteries here and the time line there -- '25?
First answer, no on the OpEx. OpEx will remain under control. We don't need to grow our OpEx in order to grow the company. We had $700 million in new awards come in the door this quarter, [ 7 ] for the year. The business is going to grow. The -- I don't necessarily view this as a catch-up when you look at 2025 or beyond, obviously, we don't talk about periods in detail that far into the future. But what we're observing is the time lines are stretching with respect to the sales cycle and the construction cycles, right? Macroeconomically, everyone understands the labor shortage issues that are in the market. We've got to continue to watch those. However, the IRA and the amount of awards coming through, the overall growth of the business is potentially still there. It doesn't necessarily mean that we need those time lines to compress to really continue to grow at our kind of 20% per year EBITDA, that's what we're trying to get to. So that's the response. First, with respect to SoCal, basically, when we hit substantial completion we've got 60-day payment terms that's in the contract that's public, people can see that. So you can assume that in while we're talking about 2 of the projects being completed in Q4 and then a third one in the first half of the year kind of project forward from there. We're not going into deep detail about those cash flows, Julia.
Right. And just time line-wise here, are we confident that you guys have a real sense of when the new time lines are for the project push? I mean it seems like this has materialized relatively recently. I mean quarter-over-quarter here. Just curious, I mean, how do you know the depth of these delays here, if you can speak a little bit more specifically to it, considering some of the larger projects like RNG and how lumpy they can be?
I mean I would say that from what we have seen so far like the RNG projects, 6 to 8 months delay pretty much. And then on the other projects in construction, we just to say we have a 1- to 2-year construction schedule. Now it looks more than 1.5 to almost 3 years of construction on $100 million-plus projects. I mean something that happened. Projects that they were in construction, and we deliver the equipment to the particular air base. And then because we're doing work on the North Wall somehow, some way, the stuff didn't get loaded into the plane, and that's a 6-month delay in the particular project. We'll sell million of revenue but it wasn't lost. But things like that happen is left and right, and that's why we felt it to put on our part to try to incorporate as much of all this stuff into our forecast. But the business is not lost is there, and it will be done. And I think that 20% target that we have on the EBITDA in a 5-year growth, I think we feel very comfortable with that.
Our next question comment comes from the line of George Gianarikas from Canaccord Genuity.
So I just wanted to hit on the same points. You talked about delays in contract conversions. And I think I heard during the call that you mentioned that you don't think any of those delays are related to the changes in the interest rate regime. Is that correct? Is that what we heard on the call?
That is correct.
That's accurate.
That is correct.
So can you then explain...
Some of them just administrative. The Boards do meet or people don't show up or bureaucratic nightmare in some of the federal contracts. But on the other hand, the award of that $700 million, 1/3 of that is fetal contracts. It's -- we're getting them, but they're moving them the next stage is getting tougher and then implementing them is getting even more tougher.
So from the top of the funnel when you have this awarded project backlog that is now stretched to $2.5 billion, it's just converting that to contracted. It's strictly a function of just administrative delays and then somehow project delays are impacting that conversion as well? Is this just where the administrative issues are showing up?
No, that's really the administrative side of it, what George was just mentioning the project delays are post execution of the contract, certainly, the construction time lines, the adulation time lines and the schedules are stretching out a bit based on labor and material availability.
And so this -- you have one of your slides is 12 to 24 months the contract, I think you said it's more like 18 to 36 months now and on track, is that right?
I will let Mark answer the question better than...
I mean we're still seeing in that range, but -- and it's not impacting every one of our award. But what we've been talking about is we have several large awards that are in kind of more mature stages of the contracting process, but these administrative delays are dragging them out. So on average, we're still within that range overall, but it's really been several large projects that we had expected to convert to get into that next stage of active construction where we've seen the delays. And then to the other points we've made once they have contracted that implementation period is starting to take a little bit longer to get we need to get the workforce mobilize, get materials to the worksite. That is all and taking time. So it's all really kind of stretching between the conversion and then the ramp-up in the implementation, which is causing a lot of the push.
Okay. And just maybe a final question. You mentioned that the stronger RIN prices are offsetting some of the unplanned downtime at our R&G facilities. Now as you ramp those back, what's your outlook, anything you can share on the recent surge in any 3 RINs and how you plan to monetize those? Have you missed an opportunity here to monetize some of your wins based on the downtime?
Well, we're taking advantage of the market older. We started the year with about 50% merchant. And -- but right now, what we have left for this year is probably the production of the last couple of months. We've been monetizing month to month, and we got pretty good prices, I would say. And it's been reflected in our guidance this year as well as next year. And the other thing I want to point out, and I think I did mention one of the calls last time for '24. We were always optimistic about the RIN prices and what we had used for that old estimate, it was pretty much what the RIN prices are today right now.
Our next question comment comes from the line of Moses Sutton from BNP Paribas.
And first, for what it's worth, I do not think you should slow growth like Perfin noted in order to return cash when there's real growth in the table. I guess first question, how do you think about adjusted EBITDA margins at the project business? It's 4% for the 9 months year-to-date. I think of this closer to 10% typically. Is this due to inflation? Is it due to certain mismatches on delay? How do we think of that on the project side EBITDA?
Yes. I mean the 10% sounds a little bit high, but I think that it's typically a function of mix, right? And so when you're comparing year-over-year, it's going to be a function of the mix of projects that are active at that point that are impacting the margins. I think we've been probably closer to 6% historically. So we're not that far off -- and again, I think we've seen some of our mix more recently have a little bit lower margin profile, even though overall margins have been expanding. So I think we're not far off of kind of where our historical margins have been.
Got it. Got it. That's helpful. And then I guess back on the D3 RIN topic, so as the RINs on the spot basis sit near the 2021 peaks, I know you typically talk about a certain like 50% spot exposure or spot hedges 50% contracted. Is the delay in R&D projects actually offering you the B to contract more of the future RINs that you expect as projects roll online next year -- at a higher contracted price than you would have prior. Is that already embedded in the [ 250 ]...
It's a very, very good point. Actually, we are talking to a couple of fires right now. We have a couple of offers on the table. That's why we not forecasting ring prices for next year and so on, that we might enter into a couple of long-term contracts with much higher prices than what we had, let's say, entered to the contracts couple 3 years back. No, no, we are looking at it. And no question about it. And as soon as we feel a little bit more comfortable with the prices, we will execute them.
That's very helpful. And what's long term considered now in terms of -- tenor in terms of years?
We have up to 15 years.
Our next question or comment comes from the line of William Grippin from UBS.
First question, just hoping you could maybe give a little more color around the RNG financing you recently announced with My understanding is that, that structure is flexible and that there might be a return sharing component to your actual costs to that financing? Is that something you're able to elaborate on?
Folks, this is Josh Baribeau here. So it's not variable. How it works is there's a fixed cash component interest rate until the loan is amortized. And then after that, and it gets a bit of a cash sweep until they achieve an IRR, internal rate of return on their initial investment out.
Are you able to disclose what the actual -- I guess, the upfront rate is for you? The effective rate for you is on that financing?
Yes, that's in the 8-K, and we're accruing at that IRR rate.
Our next question comment comes from the line of Christopher Souther from B. Riley.
With the cycle being extended for contracting awards and implementation, I think this year, we're much more back-end loaded with the visibility you're going to have. So I'm just kind of curious how you're thinking about the visibility today and when you get kind of the full guidance for 2024, should we consider expectation that there's going to be a lot more kind of visibility on awarded kind of contracted backlog as we kind of enter the year? Or is that maybe wishful thinking on my hand just how do you think about like the visibility on that [ 250 ] .
I think we have pretty good visibility, and we're relying more on contracted and we invest where we're going to be at the end of the year and the contracted and that gives more impact than anything else and not rely as much. We're not going to have the big attack what we did this year for the last couple of quarters, especially where we are.
Okay. And then maybe on the project, the potential development project sales. Is there any sector in particular you're seeing that you'd be focused on for potential sales? Is it solar, batteries, RNG? Like what specific areas will you be kind of looking at there? Or is it kind of all the above?
I think not really RNG. I think we're mostly on solar, certainly and then the hybrid -- solar and battery, I wouldn't put it past us to think about some of the stand-alone battery given the fact that some of those markets, like I said, we continue to develop in multiple markets. Some of those markets might have more merchants than we like. And so therefore, we'll work on an NTP sale of projects like that. So I think it's more along those lines versus the RNG.
I want everybody to understand with developing assets, whether it's solar assets, battery assets and monetizing them. It's no different than the probably the energy sale becomes contract. Basically, we sell the receivable and then we get the money and then the financing and then at the end of the day, we guarantee the savings. This is even a simpler process. It just takes a little bit longer time. And then we have the option to keep the ones that they have with better returns and remit or have a rate of return. And RNG projects, generally, they are more complicated, no question about it. But at this point in time, they get better returns.
Our next question or comment comes from the line of Pavel Molchanov from Raymond James.
A lot of commentary about the core domestic business. I'll ask 2 questions about Europe. First of all, are any of the permitting issues and supply chain complications affecting any of your work on the other side of the Atlantic?
So first coat that I will tell you because I was there last week visiting one of the sites, one of the large sites. The -- there's been a little bit but not to the tune that we've seen here in the United States with respect to labor availability and materials. I think that we -- especially on that 100-megawatt Delphine project that we've got in Greece, that is still kind of cruising along on top. And we've only had slight variations associated with the time line there. So -- and I think that what we're projecting on many of the new wins in the awarded category, some of which was there in Europe on the EPC side. Expectations still remain strong on availability of materials and labors in those jurisdictions where we're winning projects for them.
And that goes even in U.K. The only exception was the Bristol City contract that we have. And we wish the numbers by good margin there, not because we didn't have the projects, but -- and this is a lesson for us. getting the projects approved through the city council and everybody else that has to approve those particular projects, it take considerably longer than we thought. Now we have incorporated monthly maintenance will emit the word and identify what projects are going to be doing them and have them are pretty much approved by the end of this year what we're going to build the next year. So that one, we missed the boat as far as what we thought it was possible and what actually happened. Again, it's administrative, not because they don't want to do or anything else, but...
Yes. Administrative and that's about the cycle of just conversion of awards. So I guess not anything about actual construction activity and furthermore, is a push to the right. It's not a change in any of the scope of the awards that we give...
Okay. Clear. Staying on the European theme, you -- for this year, I have to imagine that with some of the macro issues, multiples on prospective M&A have come down. In that context, are you seeing more opportunities to bulk up your business there via M&A?
Yes. We don't have anything specific to talk about today, but we would agree with your comment. And we are seeing -- again, we're very opportunistic. We're still sticking to our knitting in terms of what we're looking for management fit, financial valuation and so on and so forth. But yes, the number of opportunities that look interesting has increased.
Our next question comment comes from the line of Davis Sunderland from Baird.
Most of my questions have already been asked. I just wanted to ask, is there any possibility of recovery expenses associated with some of these projects in the contracted stage that have been drawn out? Similar to SoCal or other deals that you've done in the past? And my follow-up is, given the lack of visibility in the labor and component shortages, how are you thinking about these variables and contracts now going forward?
Yes. Sure. So sorry, David, your line is a little bit fuzzy, but I think I got the question. So the first point is when something actually is created by a force majeure situation. Yes, of course, we can claim back costs for certain delays, and that's always contractual I don't have any particular anecdotes for you or numbers on that. But yes, in general, the contracts -- generally looking for force mature, not necessarily a general slowdown or availability of labor, though.
With respect to looking through the remainder of the year and in talking about -- thinking about [ 250 ] number next year, we've effectively taken into account what is happening in considering the cadence of construction going forward. As we talked about, we don't typically lose business at the awarded backlog or contracted backlog, certainly not out of the contracted backlog. However, if there are slowdowns, things just kind of push out to the right. So we've adjusted expectations with respect to cadence, and we've presented numbers on that basis to you all today.
Our next question or comment comes from the line of Greg Wasikowski from Webber Research Advisory.
Just one for me. I just wanted to ask a little bit more about the prospect of selling off some assets in development because I just feel like I might not be grasping it or maybe I misheard it. It seems like that would allow you to stay in front of customers and maintain business within projects in O&M, which is great. But if you're trading energy assets business for projects and L&M business, isn't that like trading a high EBITDA margin business for a low one. So in a sense, it wouldn't be as much pushing it out to the right as much as it would be kind of more like margin erosion for the sake of continuity. Is that a fair way of looking at it? Or am I off base there?
Yes. So I'll just kind of guide you to the way we think about these things. A couple of important metrics for us when we're evaluating assets that go away from EBITDA generation and levered equity IRR or cash generation and net income. And as it turns out, some of these assets, when we look at anything that might have a merchant tail on it, others were the unlevered IRR is relatively tight versus the funding costs. We then turn our attention to, well, from an overall cash flow generation perspective, we're probably better served when we look at where the market is pricing some of those assets to perform the EPC and grab the O&M contract to generate additional cash flow and recycle that into something that's actually going to look better for us from a cash flow and net income perspective over the long term. That's the only kind of modification I might throw there.
Thank you. Ladies and gentlemen, this concludes the Q&A session. And this concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.