Good day, ladies and gentlemen, and welcome to the Q1 2019 Ameresco, Inc. Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Leila Dillon, Vice President of Marketing. Ma'am, you may begin.

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?

Thank you, Leila, and good morning, everyone. The year is off to a great start. The financial results were ahead of 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 expanded market opportunity. The pipeline built 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 build 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 capabilities to design, develop, build and operate energy assets nationwide, we are starting to see the intended acceleration of our portfolio. Our development teams are now penetrating new industries and new geographies. For example, historically, our energy assets were concentrated in a handful of states, especially in the Northeast. We now have sizable wins across our business units throughout North America. The new asset awards span a 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 totaling over 12 megawatts of capacity. We continue 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…

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 for further building visibility. We had outstanding growth in energy assets in 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 opportunities. 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 diluted 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 year. As we reduce DSO and normalize payables to regular levels over the course of the year, we expect to improve our cash position. We grew modestly at our line of credit to fund some of the investment…

Thank you. [Operator Instructions] Our first question comes from Craig Irwin with Roth Capital Partners. Your line is now open.

Hey, 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? Procedurally, 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?

Actually, we learned quite a bit and the bottleneck on the Phoenix plant had to do more with some of the local issues and the local permitting, the fire inspector and so on. Once we started the plant up and the interconnection with the pipeline, originally, for example, they gave us specifications, where they wanted to have the measuring station and install all the mirrors to make sure that the gas meets all the criteria associated to be connected into the natural gas pipeline. And then after a month we did the test, we proved to them it’s working. They wanted it in a different location. But once we got, this plant started and bringing it or ramping it up to capacity, we did a better job than we did at the first plant that we built 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 a little bit better planning and communication with all the agencies involved, especially on the local permitting and the gas transportation systems. That’s about it, because we have complex projects. But however, I was very encouraged to see how fast they ramped up this – the Phoenix plant, once we got all the issues involved and the permission from the gas pipeline to interconnect

Great. Having relationships…

Having still in the natural gas pipeline different rules and regulation, so we guys paid more attention to that upfront and planned accordingly.

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 sort of permits and 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?

Yes. Because they are complex, and this is the gas, the transportation systems and the routing in order to get the permits for the pipeline to go, let's say, from the landfill side to the pipeline. And because they are in California, you're right, especially with the two plants, the [indiscernible], we are very, very, very careful and conservative. You hit the nail on the head. And then the other one in Texas that we developed, in the McCarty project, I would say this, but we're very 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 wouldn't be surprised that over the next quarter or so, we'll probably put two projects into the pipeline of green gas projects: one, of course, the Texas; and one in California. The other one in California is a little bit further behind because of some local permitting issues of the pipeline interconnected to the transportation system.

Understood. 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?

No. And actually, that was one of the best contributors this quarter. We would expect them to be slightly below 70%. And the performance of the assets we have is they did very, very well. The O&M did very well and also the operating – direct operating expenditures associated with the operating assets was pretty much under budget. It was a 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 at around 65% contributor overall, maybe a little bit higher than that. When we – and that's why we gave the guidance on – a little bit of guidance on the second half of the year. We have some large contracts that will contribute – planned to be executed the second half of this year, and they will contribute to the revenue. So the revenue will pick up. So they will – the percentage of the assets will keep going up, but it's not going to be 75%.

Great. And then last question, if I may. I know it's a 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 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?

On the closeouts, actually, this quarter, we have projects that we actually closed out. I think it was neutral on the closeouts. 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 the better pickup associated with that project once it gets completed and accepted by the customer. When we have seen – you've been with us long enough. We have seen some of those go the other way. Actually, we have a couple of projects close out this quarter that surprised me that we had a negative.

Yes. Understood. And the book-and-burn revenue, fast book and execute revenue. Is that coming through in any material volume? Or is this something that usually materializes later in the year?

I'm not so sure I understand the question.

The revenue, the project 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 2019.

Yes, there's Mark here.

Yes. Craig, this is Mark. So I think, as we look at this point looking forward the rest of the year, 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 awarded backlog. We're – 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.

Great. And congratulations on the strong results.

Thank you, Craig.

Thank you very much.

[Operator Instructions] Our next question comes from Noah Kaye with Oppenheimer. Your line is now opened.

Good morning George and Mark.

Hi Noah.

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 the revenue guide, yes?

There was – the way I will describe it, similar to last year, maybe even a little bit lighter 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. But yes, you want to add?

I agree. I think it will look very similar across the board other than – 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.

Okay. In terms of absolute levels? Just making sure.

Yes.

Got it. All right. So the – a question on the significant step-up in solar assets in development, you had 131 megawatts of solar in development three months ago. Now you have 225 megawatts. So what drove the step-up? How much of this was organic versus the acquisition you completed?

That is a good question. Actually, because we did the acquisition last year, even though they had in their pipeline over 100 megawatts potential, out of that is only two 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 enter though, they did add new assets in development that we will own, operate and maintain. And that was a great performance. And that speaks tremendous about the platform that we have established, and that's what we always had. Before, we would head just in Northeast and federal doing asset which we will 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 the biggest achievement or – this particular quarter. And we feel very good about it, and we have very...

Did you add – you organically add – yes. You organically added over 90 megawatts of solar...

That is correct.

In three months.

Yes.

And just 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 times how close to coming online, so that we can understand how quickly you can convert this 90-megawatt place in service?

The most important is that we get the rights to the land. PPA, well, we know who the customer is that even though the excellent PPA might not be executed, but as far as the business 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 this – so you know, there are RFPs that a customer will go out with a particular RFP. And a couple of them – I cannot disclose the name. But one is a federal and another one is a particular utility. Anyway, here's New York that we won. And then you know that the likelihood of a project going ahead is probably over 90%. And unless we feel that comfortable, we don't put it into backlog. And that's going back to Craig's question, too, why didn't I put a couple of those green gas plants into the development. I want to make sure once we put in there that the likelihood is over 90% that, that will come to reality.

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

Yes. I mean, no, I think, as we said before, I mean, I think we're – 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, from a non-recourse standpoint, we're happy to lever them up by as high as we can.

Yes. And on the equity, Noah, you have to remember, as we monetize the ITC and accelerate depreciation on the solar assets, so the amount of equity that we put in this particular asset is a very small amount. And the other thing with the financing that this might come up, we do have some dry power, what I call, that some of the assets, the landfill assets that we own for sometime now. Some of the debt has been paid off, and we might finance them. And otherwise some projects have zero debt on them. 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 asset portfolio.

Okay. That's very helpful color. And then just last on the ESPC business. I think you're getting out before a little bit in terms of what needs to happen over the course of the year. But just 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 2018?

We have about $150 million to $175 million coming from awarded projects that we think they will be executed the rest of the year, sometimes, like I said, in the third quarter. And because they are large projects, you have to – we have a substantial amount that's capitalized development expense. And then, and as soon as those contracts get executed, then that becomes a part of the revenue associated with that 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 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 have conservative might have a $50 million project that's showing at the backlog as awarded. And after we do the detailed energy audit and negotiate the scope with 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 do not say that it's awarded, it's in the pipeline. We know it. It's within a particular customer that we will convert once the scope of the project has been negotiated with the customer.

That’s very helpful. Thank you so much.

Thank you.

[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.

Thank you, Daniel. To conclude, this year is all about investing and strategically positioning the company for 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 have seen 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?

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