Ameresco Inc (AMRC) 2022 Q3 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Ameresco Q3 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference call is being recorded.

I would now like to hand the conference call over to your speaker today, Leila Dillon, SVP of Marketing. Please go ahead.

Thank you, Haley, 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 these 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. I am pleased to report that the Ameresco team delivered another quarter of excellent performance with growth across all 4 of our business lines driving an impressive increase in revenue and profits.

We have made great progress since we met at our Investor Day at the end of March. We continue to expand our addressable markets, both domestically and internationally. You will notice that an increasing number of our projects and assets incorporate more comprehensive advanced technologies such as energy storage systems and complex microgrids.

In addition, we are deploying smart solutions for buildings, lighting and water systems. Our recently awarded critical microgrid projects at both Fort Campbell at the White Sands Missile Range and our $92 million Joint Base McGuire energy savings performance contracts are great examples of our latest advanced technologies projects supporting the federal customers' energy security strategy.

And on the asset side, we recently announced a combined 5-megawatt PV and 15 megawatt-hour battery energy storage system at Colorado Mountain College, which will be the largest subsystem in the state of Colorado. We also continue to expand our business in Europe, where there is a pressing need for clean energy solutions, given the geopolitical situation and spiking energy prices.

In the third quarter, we were selected together with a local partner as a contractor for a 100-megawatt PV project in Drama, Greece. This represents the largest project for us in Continental Europe, and we believe it's only the beginning. We are aggressively pursuing multiple other opportunities, and we expect to grow in Europe both organically and through strategic partnerships and acquisitions.

Recent R&D market activity demonstrates the growing interest and importance of this asset class with significant investment and acquisition activity. Ameresco is one of the most experienced players in the biogas industry with a large portfolio of operating assets and a robust development pipeline.

Just this quarter, we added 2 RNG plants to our assets in development. We believe that RNG is an important clean tech solution and will continue to be a significant value driver for Ameresco's shareholders.

We also believe the Inflation Reduction Act or IRA, which was enacted in the third quarter, will be the most impactful environmental legislation affecting the company's long-term performance since our founding. The IRA provides unprecedented amount of fleet energy incentives to ensure energy security, reduce carbon emissions, increase energy innovation and support environmental justice objectives.

The bill includes a wide range of clean energy provisions that support energy efficiency, solar, energy storage, microgrid, electric vehicles and more, with the goal of reducing U.S. carbon emissions by approximately 40% by 2030. This legislation not only creates a 10-year runway for many energy tax incentives, but it also fundamentally revises the tax code to create a technology-neutral approach to incentivize the development of 0 emission technologies.

Some specific provisions that will have a direct impact on our business include: production to tax credits for renewable or 0 carbon electricity and clean hydrogen; investment tax credits for clean electricity and energy projects, including stand-alone energy storage, biogas, microgrids and geothermal heating and cooling; clean vehicle and charging infrastructure tax credits as well as carbon capture credits. It also expands the 179D energy efficiency tax reduction.

While everyone is still evaluating the breadth and depth of the incentives, rents and other benefits from this bill, we do expect it to be a great long-term tailwind for our business. We have already identified a number of ways this bill will directly benefit our customers in Ameresco.

With our customized solutions ranging from solar, microgrids and battery energy storage to renewable natural gas and electric vehicle infrastructure, along with our innovative financing structures, Ameresco is well positioned to be a long-term industry partner and key beneficiary of this legislation. Based on our experience with similar federal legislation bill, we anticipate these benefits will take some time to materialize.

Now I would like to provide an update on the Southern California Edison project. We made continued progress in the quarter with all battery cells and containers on site and early commissioning steps are underway. Recently, however, Southern California Edison instructed us to adjust the project schedules into 2023. Under the terms of the contract, we are entitled to recover costs associated with the scheduled adjustment.

We are working with Southern California Edison to analyze and estimate this cost. We are also continuing discussions regarding the applicability and scope of any force majeure relief. Considering the scheduled adjustments requested by Southern California Edison and the delays disclosed earlier, we anticipate the projects to be in service and achieve substantial completion prior to the summer of 2023. Our relationship with Southern California Edison continues to be very cooperative.

I would now like to highlight that in the third quarter, we were honored to become a Great Place To Work-Certified company for the first time. This designation is based entirely on employee input, making it even more meaningful as it reflects the positive experience of our over 1,300 employees.

Hiring and retention is critical to the company's growth, and we will continue to strive to make Ameresco a great place for our employees to work, thus ensuring that we attract and retain the best and brightest in the industry. I will now turn over the call to Doran to provide some comments on our financial performance. Doran?

Thank you, George, and good afternoon, everyone. For additional financial information, please refer to the press release and supplemental slides that were posted to our website after the market closed today.

As George noted, the Ameresco team delivered another excellent quarter of financial results as all 4 of our business lines experienced solid growth led by our projects business. In addition, the combination of our project backlog and expected future revenues from our contracted energy assets and O&M businesses remains at close to $5 billion, giving us excellent long-term visibility and resilience during these uncertain economic times.

Top line growth was led by our projects business as we continued to execute on the SoCal Ed project. Our O&M business line also experienced strong revenue growth as we attached O&M contracts to our projects, especially with the federal government. Separately, however, I'd like to take this opportunity to highlight our nationwide solar O&M business.

This unit now manages over 564 megawatts, almost 400 megawatts of which are for third parties. When we acquired this business in early 2019, it had only 45 megawatts under management. We're very pleased with the growth of this business, and we'll continue to focus on disciplined approach to acquisitions where we can acquire and grow companies, integrate their solutions and create value for our stockholders.

We also saw continued strong growth from our integrated-PV revenue, which is part of the other revenue line. This unit's performance was driven by increased demand for off-grid solar systems, from the oil and gas, rail and other industries seeking energy solutions where no grid access exists.

As we expected, our gross margin increased sequentially as the lower-margin SoCal Ed contract had a lower contribution to the overall revenue mix. We anticipate similar gross margins in the fourth quarter. We again achieved very strong double-digit year-over-year growth in adjusted EBITDA as a result of our operating leverage, demonstrating our ability to add gross profit dollars without adding direct incremental operating expenses.

Even with the continued working capital needs from the execution of the SoCal Ed projects, the company ended the quarter with $122 million in available cash, having generated $35 million in cash from operations on a GAAP basis. Our adjusted cash flow from operations was $87 million, which takes into account Federal ESPC financing proceeds. We expect that the SoCal Ed projects will continue to impact our near-term working capital needs.

This impact was anticipated from the onset and is one of the reasons why we amended our senior credit facility early in the year. We expect all components of working capital to return to more normalized levels for our business with the completion of the SoCal Ed contract and the collection of the remaining amounts owed.

Total project backlog was a healthy $2.6 billion at the end of the quarter. Of note, we are seeing increased activity from the C&I sector as this market segment focuses on sustainability metrics. In addition, our projects and asset lines of business continue to grow in Europe amidst the ongoing energy crisis. Ameresco grew its portfolio of operating energy assets to 360 megawatts while building its owned assets in development and construction pipeline to 452 megawatts.

As a reminder, we are now reporting both the total assets in development as well as a pro forma net megawatt total after adjusting for our partner's equity interest. This should help investors better understand the positive impact these jointly owned assets are expected to have on our future financial performance.

Even with increasing interest rates and equipment cost inflation, sustained high energy prices continue to create favorable long-term expected returns for a variety of energy asset types deployed by Ameresco. We are seeing an increase in proposals and awards for our energy assets. In particular, our newer nationwide greenfield solar and storage development group has been originating early-stage front-of-the-meter opportunities, which once derisked would grow our assets and development metric.

For a bit of background, a couple of years ago, we began investing in a team of greenfield development experts, and we're pleased to see the results of this organic strategy starting to pay off. Furthermore, with the incentives in the IRA, we expect the pace of these opportunities will continue to accelerate.

With debt being an important portion of our capital stack, I will spend some time discussing our interest rate exposure. About 90% of our nonrecourse debt is protected from rate increases at this time as it is either fixed rate or was swapped at closing. The only material part of our debt structure that is variable is our senior secured credit facility.

While the balance of the facility has increased due to the execution of the SCE contract, our funded debt under this facility is expected to decrease meaningfully following the completion of the projects and receipt of associated cash payments.

This should limit any medium or long-term impact of higher interest rates on our financial results. Higher interest rates also have a potential impact on our projects business. The majority of our project customers fund their implementation under performance contracts with third-party bank financing. Higher interest rates have the potential to reduce project sizes as a greater percentage of energy savings is consumed by interest expense.

Similarly, when looking at new proposed energy assets, higher interest rates have the potential to affect the projected equity returns. However, both our customer projects and our renewable energy assets compete against traditional energy sources, in particular electricity and natural gas, which have seen dramatic price increases this year.

These increases in energy costs have outpaced the year-on-year increase in Ameresco's all-in project delivery costs, financial materials and labor, which we believe on balance is preserving a positive economic outcome for our customers and ourselves in both the project and energy asset businesses. We monitor the pace of change in these macroeconomic factors closely and continue to remain very disciplined with our risk-adjusted returns-based approach.

We are pleased to reaffirm our 2022 annual guidance. Our ability to do so in today's challenging environment speaks to the diversity and resilience of our business model and the hard work of the Ameresco team. As in past years, we plan to provide guidance for 2023 when we report Q4. We remain very optimistic for the strength of our business model and end markets. And we remain confident in our previously stated goal of achieving $300 million of adjusted EBITDA in 2024.

Now I'd like to turn the call back over to George for closing comments.

Thank you, Doran. Government and industry are now taking important steps to address the climate, geopolitical and budgetary issues facing our customers around the world. Ameresco, with our portfolio of comprehensive clean tech solutions, is at the nexus of this strength, positioning us for robust growth for years to come.

I want to once again take a moment to thank the entire Ameresco team for their dedication and outstanding execution. We also want to recognize the ongoing support of our customers and long-term stockholders.

Finally, following our successful Investor Day in March, we are once again welcoming analysts and institutional investors to learn more about Ameresco. We will be hosting a tour at our Phoenix, Arizona RNG facility on November 15. This plant is the largest wastewater treatment biogas to renewable natural gas facility in the U.S. We hope that tour will provide a different understanding not only of this impressive facility, but also the strength of the Ameresco's RNG business.

Operator, I would now like to open the call to questions.

(Operator Instructions) Our first question comes from the line of Noah Kaye from Oppenheimer & Company.

(technical difficulty) The last couple of months following the passage of the IRA. And in terms specifically of where it's really led to changes...

Noah, hold on one second. All right. Go ahead, and ask your question, Noah.

Let's start that again. I was wondering, since you touched on in the prepared remarks, if you go a little bit further on the impacts of the IRA, maybe take us through what the last couple of months have been like in terms of where the customer focus has really picked up, where the pipeline growth opportunities have picked up for you? Are there a couple of areas that you would really highlight? And where do you see that potentially impacting as we look out to -- in the next year or 2?

Yes. And -- it's a great bill, no question about it. It's going to help us tremendously. And -- but it's going to take some time to get the traction. If you recall, back even when we had the recovery plant under the Obama administration, it took us like 6 months to 12 months to really take effect, to get going. But where we're seeing most activity is on the asset base. If the asset business gets accelerated, then we're sailing at a faster pace than everything else.

Some of the other items, like, for example, the cogeneration of ITC, some of the customers now, they're debating whether they should own the facility and take the -- monetize the rebate and otherwise take that cash, thereby own the facility themselves. So it's only 2 months old. I think the customers are trying to figure out how to take the best advantage associated with the bill. And Doran, do you want to add?

Yes. No. I mean, George is right, the asset side of the business is where the focus is going to be. I would say that the last couple of months has involved a tremendous amount of analysis. We're working with several clients on that asset question, especially with the direct pay, and you know our customer base has a lot of government and not-for-profit.

So considering what asset ownership means to those customers and how it would alter the economics, certainly we expect that to continue to be a topic of conversation on our own assets. We've got sort of the immediate look forward, what to do between now and when the guidance comes out.

And then also, we have the longer term, what to do with a lot of the assets that we've got in development where you've got a lot of different things. I mean the list goes on, right, solar ITC, PTC, the battery ITC, biofuels, the direct pay and, then in 2025, the clean electricity, 0 emissions, right? All of this was going to require a lot of planning. And as George said, great tailwinds for the business.

Very helpful color. And you talked a little bit about RNG development, adding a couple of new projects to the pipeline, and you mentioned the market activity. Yesterday, we see Avista come out with their RFP for RNG procurement, and there's been a couple of high-profile deals recently.

I guess how do you assess, particularly post the IRA and the biogas incentives, that competitive landscape and the opportunity set now around RNG? I know we'll probably hear a little bit more about it at your investor event. But just wondering if you could kind of give us the high level in terms of how the landscape is shifting.

I think it's a great, great catalyst, or it's valuable assets for us as we have a great pipeline in development. And we've been working -- we report 30 plants as we have in the development pipeline -- development metric. But if you look at our pipeline, it's substantially higher than that. But we won't put them into the actual development pool until we negotiate some gas agreements, get some more rights of the lenders and so on and so forth, (inaudible).

But look, 40% of the use in the United States is natural gas. Somehow, some way, we have to decarbonize that, the pipeline is what I call. And that's why you saw NextEra making a big step getting into this business. And our bet from back when we said, we were one of the first companies to build the first RNG facility down in San Antonio back in 2012.

And we think it's a great, great catalyst for our business. And what's going on with the IRA is going to help us even more. And what's going in the market, it raises the visibility. But because we have the track record in the marketplace, we're not short of having a good backlog.

Operator, we can move to our next question.

Sorry, [Stephen]. Go ahead and ask your question now.

Okay, can you hear me okay?

Yes.

Two things for me. Maybe Doran, to start with, can you tell us a little bit about the SCE project. I mean the complete delivery is delayed to '23. How does that impact how that project hits the income statement?

So we looked at the overall project and what we're going to be accomplishing before the end of the year and then what is going to move to 2023 in terms of placing those assets into operation, we're still kind of a substantial amount of the profits -- I think we made the statement in our Q -- sorry, the revenues are going to be generated in 2022.

I think we're talking about maybe a push of $30 million to $35 million worth of revenue out into 2023 out of the total. So not a tiny number, but not a substantial portion.

Okay. Great. That's helpful. And I gathered that from the guidance, but I was just curious if there's anything else behind that within the guidance that changed? The other quick thing is, on the RNG front, can you just give us an update on facilities in operation and the time line for the next few to come onstream in 2023 and '24?

Yes. I think one of the plans, most likely, we will have mechanical complete by the end of the year. The other 2, they will be the first quarter of the year of '23. And the thing I want to point out, though, once we get the mechanical complete, it takes 3 to 4 months to really go through the commissioning and so on.

So when you're putting -- generating revenues and income for us, it's 3, 4 months after they are mechanically complete. We did encounter some -- even though we had environmental permits, built-in permit delayed and then some sort of the equipment didn't show up on the site for some time. And then as far as we have said before, we'll have 5 to 6 months mechanical complete by the end of 2023. We continue to maintain that visibility.

Our next question comes from Eric Stine from Craig-Hallum.

So I'm wondering if we could just talk about the Bristol project. Maybe just an update on that. And I think in the last call, you had talked about 2 potential similar projects in the U.S., 1 in Europe. So just curious how the initial project is going, but then update on these new ones.

Yes I mean, look, it's one of the most exciting projects that we have, and we are talking to several other cities. And actually, some -- they have a process in order to get going. But the process, it's a long term, it takes a couple of years. And it took over 2 years to get to where we are today on the Bristol City.

And what I'd like to point out on that particular 1 is that it's a 20-year concession. So even though we have identified over GBP 1 billion investment, it's over 20 years' period. So you will start seeing some projects showing up, some would be EPC, some will be asset.

It will not start showing up until the second quarter of '23, the way we are right now. But everything is moving along. We transferred some people over to our unit now that they were operating -- they were working for the city, now they start working for us. So we're moving along, but we're not going to have anything to talk about till the early next year.

Yes. Understood. Okay. Longer term on the...

And this particular project, even though it's large, it's over GBP 1 billion, it's a 20-year horizon. So we're not going to be talking as much about it every quarter like we did with Southern California, because Southern California was about over $800 million, but we had to implement it in 1 year. So there's much more materiality to the -- yes.

Understood. Okay. And then just interested in your discussion, obviously, the wins in Europe and that organic, but also acquisition potential there. I mean maybe just talk about kind of what you're seeing. Just thinking through the energy landscape there, what the implications are in terms of what's out there, what the valuations you might be looking at? I mean I would assume these are going to be more strategic and bolt-on rather than large, but maybe just some thoughts on the acquisition side.

Eric, I mean, I think that -- so our strategy isn't any different than it is anywhere else. As far as Europe is concerned, we're looking for acquisitions where we're not going to be pushed into overpaying for an asset. We watch the multiples. We look for businesses that we can fold in that are accretive to EPS that we believe strategically fit well.

We like the management team. And I think that we're -- if we had something, we'd be talking about it. At this point in time, we're just -- we're evaluating all different types of opportunities across all of our business lines over there.

Our next question is going to be coming from George Gianarikas from Canaccord Genuity.

I had just a follow-up on the recent M&A activity in the space. I'm curious as to how you think about your portfolio of assets. Are you willing to trade mix and match, take capital from a sale and redeploy that in other directions? How should we think about your portfolio management strategy?

We always evaluate all options available associated with the assets that we own, especially some of the RNG, the prices that people are paying out there and so on. But at this point in time, having the high-margin recurring revenue for us and very good EBITDA and having that tremendous backlog associated with the asset, whether it's turbine power or solar or green gas, we feel they better stay where we are right now.

But that doesn't mean that we won't evaluate all options that come to the table with an open mind. And I think we refinanced some of the projects that we have. And maybe Doran want to add a little bit more color to that. And there's some pretty good cash.

Yes. I mean we did a refi of a few of the operating plants. I think one important point that I'll add to George's comments is the optionality of being the asset owner and controlling those assets going forward. As you see the developments of incentives as they go, year-ends are coming.

We've had a variety of different strategies that we're looking at on the hydrogen front that relate to renewable natural gas. There's a lot of really exciting developments there, and we like to own the assets so that we can pivot and deploy them in the most accretive way for our shareholders.

And just for one follow-up, we get a lot of questions on the potential changing complexion of Congress, i.e., more Republicans and Democrats and the risk associated to renewable elements of the Inflation Reduction Act. Can you just share with us your thoughts on how any change in Congress could change certain elements of the Inflation Reduction Act in 2023?

I'll give you my gut feeling, and Doran can [give that]. Look, we are not in the politics, but I will say this much, we did very well under the previous administration. But with this Inflation Reduction Act, I mean that's low right now. And if Congress, let's say, splits or whatever it might happen, as long as the President is there, I don't think you're going to see any changes to that. So we have a pretty good runway from where we are.

Look, whatever happens to the federal government, the states more and more -- the decarbonation -- the climate change is impacting everyone. The commercial and industrial, they started moving. So I mean we think about it a lot and we are cautious as to what we are doing, but we don't think there's going to be a material change. Doran, you want to add some more color there?

Yes. I mean I agree with George. We're not going to crystal ball the politics of the election and what's going to happen post-election. But the breadth of the provisions in that bill that apply to us, I stare at a page and if I crossed out 2 or 3 lines, I still have a dozen lines left of areas that we're going after. So I don't think we're thinking too hard about that right now. I think we're focusing on what's in there that's going to work for us.

Our next question comes from Christopher Souther.

Maybe just -- you mentioned greenfield solar is kind of a new front-of-the-meter area that you'd be kind of going after. Maybe just high level and kind of the strategy as far as, are these assets you try to own on your balance sheet, maybe some of the region, geographies you're looking at and any specific projects you could share? And what would the working capital needs be for that if that became a more meaningful part of the business here?

Sure. So I think because it's greenfield, there's a lot of early stage. We are going direct to site control and interconnection queue position. It's a variety of markets. We are focusing on the ones that we feel like have really solid either community solar or some other tariff program that we think creates the right amount of value. The approach, generally speaking, as with anything, is that ultimately, we'd like to bring those assets into our asset and development metric and grow the asset portfolio.

We are not going after large utility scale, we're still sticking with this sort of DG. That's why I mentioned community solar. That being said, if those opportunities arise, we can create substantial value. And if the assets ultimately aren't going to meet our return hurdles, then as we are all aware of, there's a substantial market for those types of assets out there and we would, of course, consider monetization, I would say, working capital.

On the development front, working capital is not so substantial. And so your early-stage development going through permitting, going through interconnection, establishing revenue contracts, that's all fairly reasonable. The working capital really kicks in when you go to build the assets and no different than the assets that we build now. We would expect to deploy construction facilities, bank facilities to help us finance that working capital on a nonrecourse basis.

Got it. Okay. No, that all makes sense. So looking at the 50 to 70 megawatts started for the year, would we need that first RNG facility to be completed to be included in there? And I just wanted to get a sense of whether there was any potential some of the solar projects might be slipping into 2023 in order to get a little bit more juice on the ITC and the like? Or if there was any kind of momentum on that front?

Yes. Nothing specific to just talk about there. The RNG is not included in that figure. So we're just looking at the other assets there. But I couldn't pinpoint any that we specifically have identified as wanting to delay for any reason. Currently, with the sort of pre-guidance construct of the IRA, we feel like we're going to just plow right ahead and complete what's ready.

Our next question comes from Tim Mulrooney from William Blair.

Can you guys hear me?

Yes.

So that was a really interesting data point that you gave last quarter when you said blended energy costs were up kind of 40% year-over-year, but blended project costs for your customers were up more like only 10% to 12%. So that gap is pretty compelling, enough so that I was wondering if you could provide an update for what you see for what a blended project cost would be for your customers right now, given some costs may have flattened out, while maybe others like interest rates continue to go up.

I mean I think I put in my comments the fact that it's outpacing. We've taken a look at the numbers, the -- I think this is something that we are continuing to track internally, but we're not expecting to start publishing on a regular basis as we move forward.

The data point and the importance of the trend was, I think, critical for folks to understand that the economic value proposition that we're putting in front of our customers and putting in front of ourselves on the energy assets was still valid. And in fact, it remains that way with the movements recently. But we're -- I don't have any statistical updates for you today.

Okay. No update to the 10% to 12%. Doran, you can't blame a guy for trying. I'll try a different question. Are you seeing higher interest rates have any material impact on project demand today, right now? I'm just curious if you're seeing any signs, whether I don't know, longer sales cycles or changes in customer behavior that would suggest maybe a tougher environment for the projects business until inflation is under control and interest rates can come back down somewhat?

We haven't. The only thing that we have seen lately, once the bill (technical difficulty) everybody is trying to figure out which way they're going to go, how they're going to make maximum utilization of that. But I will tell you this much, some of the projects like a couple of cogen projects before they even penciled out, now with the ITC, although we're up to 30% and maybe a little bit more, they pencil out.

So -- but now we're trying to figure out, we gave him the 6 proposals the other day on a particular customer, which way they're going to go for the project? So we haven't seen it. But what we have seen on the C&I sector, because of the climate change that people wanted to decarbonize, we get more traction in that market.

(Operator Instructions) Our next question right now comes from Pavel Molchanov from the Raymond James.

As we look back at the SoCal Edison effort, it's pretty obvious there have been issues surrounding the project, through no fault of your own of course, is supply chain. Is this a lesson that taking kind of low-margin, very high-volume projects on such as this may be not the best idea for the future?

I'm going to say a resounding no on that. I think it's -- these types of things, when we take on those types of numbers, without increasing in any substantial way our OpEx base, we're reflecting the operating leverage. So when we're seeing proposal activity, which we are seeing here in similar projects, maybe not quite the size, but certainly we're seeing some chunky ones come across our desk.

We're going after those with conviction, because we know the supply chains now. We know what's possible. We know what's realistic. And we're feeling very, very comfortable with our ability to have the cost up, derisk and execute projects like that for multiple types of utility customers and developers alike around the country.

Yes, and one of my heads, we learned a lot for that particular project. We established a great reputation in the industry. And a few other utilities, they are talking to us because of that project. And in addition to that, now with the ITC coming into play for a stand-alone battery storage project, you will see quite a bit going into our balance sheet over the next few years because of that project.

I mean with the increase in other renewable resources, intermittent resources in the grid, the offshore wind that's coming here on the East Coast, everything, storage is really picking up. I mean that is going to be a critical part of our overall clean tech integrator industry going forward. And I think that we'd be remiss to not go after it.

Okay. A follow-up about Europe. Europe was 4% of your revenue in 2021, obviously, before the war and the energy crisis. What do you think that number will be by the time this year is over?

For 2022, I don't -- Mark, just do you have any specifics to -- I don't know that we're going to expect anything substantially different for 2022.

Give me 1 second.

One second, because we're going to take a quick look here.

We'll see an increase, but it's not a substantial increase, and I think this is just timing. But we're seeing some growth year-over-year from '21 to '22.

Okay. So a little bit of growth year-over-year, '21 to '22, modest increase in '22. 2023, we're going to start seeing our share of the revenue from the PV project that we announced come through, and that's -- a portion of that is 2023. So -- and then Bristol City will also see some of that start to kick in.

And then we have a pretty good backlog in the rest of the U.K. operations. So no, you will see it picking up next year.

Our next question is going to come from Julien Dumoulin-Smith from Bank of America.

Could you guys hear me?

Yes.

Listen, I wanted to follow up on the RNG conversation around here. Can I ask you to elaborate -- I mean we've seen some of these transactions of late here in looking at landfill to electric potential conversion, leveraging the ITC.

I mean given the portfolio that you stand on today, how do you think about maximizing and creating the most efficiency to garner the ITC first off, and then secondly, to convert existing projects to qualify for RNG as well, given the newfound economics?

Well, so the short answer is we think about it a lot. As you mentioned, you basically laid out all of the various optionality elements that I was talking about before. There's certainly some programs that are going to be interesting for some of our preexisting assets.

But as far as new developments are concerned, I think that we see the ITC, the potential for RNG, where the RINs are going to go, introduction of eRINs for that matter. We see a lot of different paths for that portfolio of assets.

And given the fact that we've got a funnel of assets behind the 20 that we've kind of already talked about that are in our asset and development metric, we're going to continue to work on the development front to sort of increase the number of assets that we're actually focusing on moving through permitting.

We're talking about evaluation of sites -- from evaluation of sites to negotiation of gas contracts and site control in some of these areas, where those we haven't talked about in the '20 that we previously announced. We feel very good about all of that optionality.

And we're looking at these sites one-by-one when we take a look at how to draw up a pro forma for where we think the economics will go. And we take into account all of these different potential alternative ways to make those projects profitable. And that -- like I said, it applies to some of the existing assets where the PPAs may be rolling off to the new ones that we're developing now.

Well, and especially if the eRINs come to pass, if the eRINs come with the 30-plus existing plants that we have generating electricity. Some of them, they have excess gas. It would be an optionality for us to add a couple of more engines on whatever the case might be or wait until we expand and then we go the RNG route. So it's a great time to own some of those assets. And if eRINs come to pass, I think it would be a great value creation for us.

Got it. But if I can ask you to clarify a little bit -- I mean presumably, when you guys came with your Analyst Day earlier this year, that was prior to the IRA passing. When do you think you'll be in a better position to update the forecast, given the numerous RNG projects you had in your forecast already, to reflect the outcome of these negotiations, as you will, inclusive of some of those credits.

And I understand that you may not fully benefit from the 30% or 40% ITC as it goes. But -- and you might have to share some of that. But seemingly, that would be a pretty sizable delta relative to the Analyst Day earlier this year, at least for the RNG specific piece of growth.

Julien, I think we'll -- that is probably content for when we come out and talk about 2023 guidance when we report Q4. As we announced, we're going to do the tour and do some Q&A on -- presentations on the RNG plant. But at that point in time, I don't think we're expecting to provide any particularly new information.

We need to see our regular cadence through in terms of providing guidance when we report Q4. And furthermore, as you know, the guidance under the IRA is expected by the end of the year as well, which I think, as you might not be surprised to hear, is something we'll be very interested to see.

(Operator Instructions) The next question comes from Greg Wasikowski. He is calling from Webber Research.

Can you hear me okay?

Yes, Greg.

Perfect. Not to beat a dead horse here on SoCal Edison, but just a short point of clarification. Sounds like all the adjustments were at kind of their sole discretion. But do you think -- if there weren't any adjustments made to the schedule or strategy, do you think you guys would have 200 to 300 megawatts of service now with expected completion by the end of the year, which was kind of last quarter's update?

I don't think we're going to go there with respect to what could have been. The nuances of that type of discussion is really kind of speculative in and across multiple projects. So I just -- yes, I don't think we're going to go to a comment on that.

Understood. Totally fair enough. Switching gears, more of a technical question. Could you guys speak a little bit about what you're seeing when it comes to EV charging and solutions for -- or alternatives to thinking about the strain on the grid, whether battery integrated solutions are incorporating alternative fuels like RNG or hydrogen and fuel cells or maybe just like a smarter software solution? Is it something that's on the top of minds of your customers? And what are you seeing as the most elegant solutions that are out there right now?

Well, right now, on the electric vehicle charging stations, we incorporate and test it both in every project we do on the federal government, every project (inaudible) and so on. And going back to what we did with this greenfield development when we hired a couple of specialists then, 2.5 years ago. And now we have a real great group.

We did hire somebody from Tesla to create great experience on the charging stations and so on. So we are going to be very active in that area. And then we have won a contract where we'll convert part of the RNG fuel to a fueling station for hydrogen. And that's going to happen over the next 12 to 24 months.

I mean I think on the RNG front, away from hydrogen, a lot of that connectivity to -- or the biogas or landfill gas to electric vehicle charging might be driven by the eRINs. Not surprisingly, we are looking at not just federal projects but also many in the regions, where we've got some fleet opportunities.

Yes, the integration of batteries, yes, the integration of renewables, we consider ourselves to be kind of at the forefront of our ability to put those projects together. However, the development of that overall business at a scale that's beyond kind of deploying the technology that's part of our solar installations or carport installations is in its early stages.

Our next question comes from Joseph Osha from the Guggenheim Partners.

A couple of questions. First, just a simple one. Doran, you alluded to your project hurdle rate. Obviously, your cost of financing is going up. I'm curious, do you all think about your business in terms of spread of your incremental cost of capital? I'm just wondering if I can get some insight into how that hurdle rate is evolving? And then I've got a couple of follow-ups.

We've seen interest rate fluctuations over the years, and I think that our hurdle is remaining relatively constant as kind of a mid-teens ROE target for assets that are on the balance sheet. As you might expect, with different types of assets in the battery, the solar, the RNG, those tend to move around quite substantially.

When you look at levered returns in situations where you're getting very, very high advance rates on sale-leaseback or tax equity those hurdles tend to move around when you look like an asset class-by-asset class basis. So on a portfolio basis is the kind of the way we're thinking about that.

Okay. But the idea then is not -- just debt rate stays the same and your cost of funding does what it does. But over time, it normalizes, you're not moving your hurdle rate up here in response to your cost of funding necessarily?

No, not necessarily. No, Joe.

Okay. And then the second question, I think this is what Julien was getting at a little bit. One of the things you brought up in the past is that the pricing you get out of a kind of a 20-year utility-grade off-taker for RNG just wasn't there, right? And one, were it there, one of the nice things that you have is the ability to put a different and perhaps more favorable capital structure around an R&D project, right?

So as things evolve here, is it possible that one outcome could be, say, a 20-year off-take with utility-grade off-taker and capital structure that's maybe a little more favorable relative to what we see now?

Joe, at the right price, yes. That's right. Everything has to be taken into account, though, of course, right? So as you can see, a lot of developments, a lot of different incentives floating around, a lot of different parties coming to the table. We're seeing the kind of the 5-year, the 10-year contracts away from the transportation market.

Those aren't the same as a 20-year. When you're looking at project financing and leverage, obviously, the higher interest rate environment, we have to consider that. So it's a calculation, but we still watch that market very closely in the long-term market so that if the right contract comes along.

Yes. And we talked about it before. Ultimately, we think it will come, because the utility, the gas, they have to decarbonize their pipeline. So it's a matter of time. We feel that the prices will come up, and then we will execute longer-term contracts. But we constantly monitor that market, because we agree with you that it will give us better financing.

(Operator Instructions) Our next question comes from Ben Kallo from Baird.

So a question I get a lot is just as the complexity gets -- as the products get more complex, do you get a higher margin? Or how do we deal with that, just thinking about like complex projects and maybe that makes it hard for you guys to execute?

Yes. So it depends on the way the complexity translates into risk, Ben. So we look at pricing on a risk-adjusted basis. So I think there's a lot of different factors in addition to just the complexity of the technologies that are going into. It's not just a direct relationship as the more complex, the higher the margin.

You've got complexity risk associated with time lines, performance guarantees, whatever it might be, that's part of the overall project. And we kind of take all of that into account. And then, of course, the customer and customer type competitive nature of the business, right?

If we need to sharpen our pencils on pricing to win deals that we want, then sometimes we do it, right? So it's more than just the complexity. But generally speaking, if you think about more complex projects that might have a little bit more risk in the execution, then yes.

The complex project give us, I would say, a competitive advantage because not too many people can provide that holistic approach on that particular project. But as far as the margins, the gross profit margins, it doesn't change that much. But what happened, the project gets larger and the contribution to the overall profit -- the gross profit is very, very good.

How do we think about your backlog? Because -- and with IRA, how it grows, is there a pause right now and then we get big increases into the backlog? Or how do we think about that?

Yes. I wouldn't call it the pause. I will tell people evaluating which options to go. Lot of activity. Actually, we're making more proposals and talking to more customers than ever before, but they take a little bit of time in order to get to [the gas]. And this is the way we're going to go. But we are used to that kind of environment, because usually, it takes 6 to 12 months to move a customer from one stage to another.

And then once we get in the award, it takes another 12 months to go to the contract. But like we said earlier, though, the asset part of the business -- because it's a little bit clearer to which way they're going to go, it's moving faster. There's more traction on that right now.

Thank you, everyone, for your participation in today's conference. This does conclude our program. You may all disconnect now. Thank you for your time.

Thank you very much.