Q4 2020 Ameresco Inc Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Q4, 'twenty and 'twenty I'm a rescue incorporated earnings conference call. At this time, all participants are in and listening only mode. After the speaker's presentation. There will be a question and answer session and you ask a question during the session you will need.
Press Star one on your telephone.
If you require any further assistance. Please press star zero and these be advised that today's conference is being reported thank you and without further Ado I would like China from since over to MS. Leila Dillon Senior Vice President corporate marketing Ma'am you may begin.
Thank you Paul and good afternoon, everyone. We appreciate you joining us for today's call. Joining me here are George talk hilarious, MRI, <unk>, Chairman, President and Chief Executive Officer, Doran Hole, Senior Vice President and Chief Financial Officer and Mark.
Chip Clark, 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. 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.
Elite.
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 afternoon 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 and.
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 and the appendix of the slides, which can be downloaded from our website.
I'll now turn the call over to George George.
Thank you Leila and good afternoon, I hope, everyone is staying healthy and safe.
First I would like to thank our employees customers and partners and we all continue to effectively manage through these complex times.
2020 was a year filled with both difficulties and opportunities and now people rose to the challenge delivering outstanding results.
And this year, we increased revenues by 19% and EPS by 42%.
And also like to briefly comment on the recent changes and administration in Washington D C.
While we work hard to make sure that day more ethical thrives, regardless of the person or party and charge.
We are very pleased with some of the early steps taken by the New administration and.
Improved and then rejoin you and the Paris climate accord.
And the emphasis placed on and low carbon future.
We believe these leadership and direction from the top we will create significant additional business opportunities.
Only with the federal government, but also with our client base and climate considerations become a key element.
The C zone.
Making process.
Well environmental initiatives and.
And then a strong project driver for some of the markets we serve.
We are now seeing significant interest from the commercial and industrial market segment and as companies prepare their strategies to achieve carbon neutrality.
The fourth quarter capped a year of record performance driven by our comprehensive and advanced technology solutions across our regions and markets delivering results above expectations.
Despite the challenging business environment due to COVID-19, our team came together and executed across all levels pooling and construction work possible securing opportunistic work when available and the focus and squarely from their dynamic needs of our customers.
Yeah.
Even with.
The particularly strong fourth quarter in 2019, we were able to continue to show year over year revenue growth led by a federal solutions group and.
And as in previous quarters. This year, we took advantage of continued improved access to work sites to execute on our contracted backlog.
Our energy assets and operation and maintenance business that continued to provide them or basketball with predictable long term recurring revenue, which is especially important during these economically uncertain times.
It's two businesses support our visibility with operational and maintenance contracted backlog at one point and $1 billion and estimated energy acid contracted revenues and incentives to from $900 million.
We were particularly pleased to have increased our energy assets and development and construction to over 350 megawatts.
And notably we added two and you Orange you opportunities with a line of sight to additional projects and this fast growing sector.
I would just like to point out.
Thus, we havent utilizing energy as a service and contract structure to implement comprehensive solutions.
We see and accretion interest not only with our existing much more customers, but also with the larger undo.
Penetrated from a medical and industrial markets and corporate E. S. G mandates and economics have Illinois.
Our.
Under our energy as a service offering and my uncle delivers energy infrastructure and improvements and related technologies directly to and end use customer.
Under a long term service agreement much like many of our long term federal and energy savings performance contracts.
Our customers have no upfront capital cost and then my other school. He is paid by the customer out of the energy savings and other deliverables and determined by each contract.
Alright, and then did you as a service offering is flexible in order to accommodate the broad range of customer needs.
Projects include the full spectrum of energy conservation measures and renewable assets, while others may only include one or two technologies.
And our customers benefit from this pressure on their borrowing capacity current metrics and balance sheets.
And what gains and other profitable long term recurring revenue stream.
We also achieved another important milestone during the quarter with the publication of our first and environmental social governance, ESG report entitled doing well by doing good.
As reported highlights 20 years, well ESG achievements and importantly defines a comprehensive list of V. S. Your goals for the future.
ESG has always been part of and the DNA well, then I'm going to ask school with over 60 million metric tons of steel to offset by all projects and that's it.
Objectivity, and our solutions and diversity and our team are key components of who we are as a company.
And then children, we have the best talent.
And my school is always our top priority.
And we will continue to invest heavily and social programs and focus from the policies that create and healthy and diverse workforce.
Workplace for our employees.
We are reinforcing al.
And our commitment to their communities and which we operate tours and focusing on our volunteerism months and expanding regional policies and programs went into from the new hurdles to students.
Our management is aligned to achieve our ambitious yes your goals and we look forward to updating everyone and now ESG achievements.
This year, we continued to build our contracted and awarded backlog with Green technology solutions for all clients.
With a growing need for green power balanced with the need for grid stability, we continue to integrate and smart infrastructure battery storage and other clean technology solutions and many projects at Fort Bragg Book Project is a great example, with flow to solar and battery storage.
And a micro grid.
Also announced our first wind farm and talented carry other one.
We've completed several solar installations are closer to the U S, including San Joaquin County is Foothill landfill, and California, and Washington, Just School District in New York, and the 11 sites within their new bed Force housing authority and Massachusetts.
We work with several smart series from Natalie delight and conversions, including the Oregon Department of transportation and the studio a net 40 notable and.
The studio of Phoenix, and Arizona, and cereal and the G.
Virginia, and Minnesota, and the city of low density and Massachusetts.
In addition, many smart series focused on all of American made it literally all American water metering infrastructure upgrades and Tony.
And our project with the city of Gainesville, and the Woodlands project, what our project and both in Texas.
All of these projects demonstrate and more exclusivity Lucio and nuclear and comprehensive Greentech integrator and.
And renewable asset developer and owner and operator.
And the industry is going through a great transformation.
And even at the energy resources, Michael Vincent renewables and becoming more.
More and more prevalent as we move.
The awards, the resiliency carbon neutrality and as the economics become even more compelling I will now turn the call over to Doron to provide some comments and our financial performance Doron.
Thank you George and good afternoon, everyone.
I will now go through the company's fourth quarter and financial performance and our 2021.
Please refer to our press release and supplemental slides posted on our website for additional financial information.
During the fourth quarter, and we saw continued revenue growth and increased operating leverage which contributed to another quarter and strong EBITDA growth.
You May recall Q4 of 2019 had particularly strong revenue due to the large federal contract slippage. So we were very pleased to have achieved year over year growth.
Revenue grew 3% year on year and over 11% sequentially with growth across our core businesses again led by the strong performance of our federal solutions group.
We continued to prioritize contracted backlog execution.
And your advantage of improved access to sites across our footprint as we navigated the COVID-19 work environment.
Gross margin remained consistent as the growth of higher margin O&M and asset revenue continued to offset the increase and our growing design build work.
<unk> benefited from our past investments and the highly scalable nature of our business model.
Revenue growth higher utilization and reduced spending levels, including travel related expenses were key drivers of our net income and EBITDA performance.
And while SG&A expenses will increase and a post pandemic environment. We believe a portion of the savings are permanent and will benefit our operating leverage and the future.
Net income attributable to common shareholders was $23 $5 million and increase of 5% adjust.
Adjusted EBITDA and non-GAAP measure was $35 7 million or 21% increase year over year.
As mentioned above during the quarter, we focused on executing on our contracted backlog converting a significant amount of revenue.
Our year over year decline and contracted backlog was due to four large federal contract signed in Q4 last year.
However, we had a very strong new awards this quarter as our awarded backlog saw a 14% year over year growth increasing to approximately $1 $3 billion at year end.
Our total project backlog stands at $2 2 billion.
Our assets and development grew to over 350 megawatts with strong contributions across several business units and representing multiple technologies.
Figure that exceeds our 282 megawatts of operating energy assets.
We have approximately $2 billion and long term contracted revenue and incentives between O&M and our operating energy assets.
These higher margin recurring revenue businesses accounted for approximately two thirds of our 2020 EBITDA and <unk>.
We believe will provide us with high quality recurring revenue streams for years to come.
<unk> cash flows and liquidity remains strong with ample cash and available credit to support our growing project business and execute our asset development pipeline.
We ended the quarter with over $66 million of cash on hand.
Adjusted cash flow from operations was $35 million for the quarter and $146 million for the year.
In addition to strong working capital, we have broad access to project financing and tax equity.
And we also have the ability to monetize development assets.
During the quarter, we secured over $70 million and project financing and generated $16 million from energy asset sales.
Before turning to our full year 2021 outlook I'd like to make a quick comment on Q1 2021.
During the first quarter last year, and we saw a discrete tax benefit from the cares act favorable weather conditions and a proactive revenue pull forward and response to the onset of the COVID-19 pandemic.
This year first quarter weather patterns have impacted production and commissioning of some of our energy assets, which may result in less favorable comparisons.
All of this has been factored into our annual guidance.
Yes.
With that let's now turn to our full year outlook.
We expect 2021 total revenue to be and the range of $1, one to 1.15 billion, representing 9% year on year growth at the midpoint.
We are forecasting adjusted EBITDA to be between 135 and $145 million.
Presenting 19% growth at the midpoint.
Non-GAAP EPS is expected to be and the range of $1 18 to $1 26.
Which after adjusting for 2020 EPS from onetime tax items realized.
<unk> represents 16% growth at the midpoint.
We expect a higher effective tax rate of approximately 12% to 18% for the year.
During 2021, we anticipate commissioning between 60 and 80 megawatts of energy assets.
And expect total capital expenditures to be $200 million to $250 million.
The bulk of this investment will be funded through project financing.
Now I would like to turn the call back over to George for closing comments.
Thank you Doron and closing I want to again take a minute to thank our customers and partners.
And employees for their exceptional efforts in 2000 and Tony.
During the time and unprecedented challenges we were fortunate to safely execute on the work we set out to do and.
And together with our customers we demonstrated the resiliency at its finest.
We are in the early stages of this great energy transformation and <unk> is well positioned to take advantage of the evolving opportunities.
I look to the future with tremendous excitement.
Investing in the health and by environment has become a focus for so many of our current and prospective customers.
Our backlog and our new proposals are full of advanced technologies, including distributed energy resources Solar battery energy storage micro grids, and smart buildings Smart series and more.
The economics give shifted and enabling us to integrate and implement game changing and environmentally transformative clean technology projects, we believe and what else can he is very well positioned for 2021 and beyond and operator.
I would now like to open the call to questions.
Thank you Sir as a reminder, ladies and gentlemen, if you have a question. Please press star one on one and telephone keypad again hit Star one and your telephone keypad. Please standby, while we compile the Q&A roster.
Yeah.
Our first question is from Noah Kaye with Oppenheimer. Your line is open.
And good afternoon, everyone. Thank you for taking the questions.
I appreciate the commentary and your remarks around the backlog dynamics and some of the puts and takes you're over a year and.
You know maybe you know first of all do you expect to exit 2021 with higher backlog and particular on the contracted side.
Can you comment around any contracting dynamics associated with that.
The transition and the administration and then just broadly what you're seeing in terms of the pipeline given the dynamics you pointed around about around a broad base sustainability drivers.
Sure.
Good to talk to you in store and.
Try and take this first one.
So the contracted backlog.
The key element of that has to do with conversion timing right. We have been awarded backlog, that's built up quite substantially and I think that I've mentioned this in prior quarters, where the awarded backlog was actually building and increasing and we werent, we werent really expecting it to be.
And so because of the Covid crisis, but as people shift shifted and and adjusted to that working environment. The Rfps and the awards kept going now the contract negotiation is something that is there's a lot of hard work to get all the way through to to converting awards to contracts and so I think there is.
There's not a.
No and overarching.
Theme to the way we see this year going in terms of contract conversion, we expect it to kind of continue at pace.
As we discussed executing.
Executing on our contracted backlog is empty.
Contracted backlog.
And going into revenue, but the awarded backlog is building and I think that our expectation is we'll see those conversions.
Come through.
Throughout the year and.
What I would call it and ordinary pace and think again hard to look at it on a quarter by quarter basis of course, because of the lumpiness of execution.
Sorry, and Lumpiness of converting awards to contracts.
But other than that I think it should be a pretty well normalized.
Yeah.
And from my level you know.
And the activity is picking up.
The market of course is expanding and thereby I think you will see its first and the awards and then ultimately and execute and.
Contracts, but it does take some time.
And everything that's going on with the administration and I'd like to point out it creates a great great environment, and you will see probably the federal sector and moving but it does take two to three years to see that the impact and exit you actually because it's contracts, but and Thats why I pointed out the C&I markets because of the theme.
So changing and.
And it comes from the top we see more activity and that level and other.
And I'm, just surprised that you will see more and less contracts coming to fruition sooner.
Any other contracts.
Very helpful. Thank you just turning to the energy assets and the gross trajectory there and I think.
One point worth considering as you know you put a very high probability of completion on your assets and development. So you've added to our LNG projects in the pipeline here, we should assume you've got a pretty good line of sight to getting those done.
What is sort of reasonable to expect now in terms of the run rate on on getting new projects LNG projects done and how many do you think you can add to the portfolio per year say over the next two to three years. What is what is the run rate look like.
Look we've been trying to grow our asset portfolio at least 20 per cent per year, and a little bit better, but what do you see what has happened and now that's.
This year, we said 60 to 80 megawatts installed on share.
And it is because we had about 20 mega was that slipped because of the interconnections with utilities and you get them.
Understand that with the COVID-19 situation that are very hard to interconnect them. So we have about 20 Mega was that shifted from last year to this year, which most likely will be up and running in the middle of the second quarter or so.
No.
And that business, we transformed the whole company and ought to be able to develop assets across the country, where before we want to hit the east.
And the federal.
And I think one of our and people and put it best I think we are getting into what I will call. It in Pennsylvania and selection pain and when we place.
Point, we developed and some of these assets and.
And are we getting pretty good infection, and the marketplace and you'll see a very good pickup although we're very happy to see the addition of tour and Julia.
Assets into the development of this last quarter.
And daughter, and you might windows and Noah.
You are correct. The funnel is actually pretty healthy on both the R&D side as well as other other energy assets.
Technologies.
I think we mentioned that were you know.
And.
$2 million to $250 million and Capex on on assets. This year I would say that the cadence we're expecting as per.
Two plants.
Being placed into service in 2022, and then after that call. It two to three more years that is the cadence that we're aiming for.
But beyond.
Beyond that I don't think we can give them a whole lot more color.
Right. So you can see getting to play and it's done this year and then another two and 2022 or are you actually going to do one one and this year one wanted to share. Okay. Yes, one one that hit and mechanical completion in December but <unk>.
Yeah.
And there'll be two next year.
Alright, great. Thanks, I'll turn it over.
Thank you.
Our next question is from Eric Stine with Craig Hallum. Your line is open.
Hi, everyone.
Hi, Eric.
So maybe just following up on the R&D question or line of question there.
When you think about it going forward I mean is there any way to break down the pipeline or how you think things might play out.
Landfill versus dairy RMG, just thinking about how much more valuable the credits are especially LTE FFS.
Yeah sure I mean, I think it's fair to say that on the dairy side, what the activity. We've been seeing is early stage and.
And we're evaluating opportunities there.
We've got we've got a couple of a couple of interesting things that we're looking at but nothing thats included in our our 351 megawatts and our.
And our focus is based on the historical relationship we have with landfill companies.
We have.
The expertise on the development construction operation and maintenance for these plants at the wastewater treatment plants, and and landfills and we're obviously trying to capitalize on that and that's where the bulk of our pipeline and oil will come from I think however on the AG side.
We're evaluating it for sure.
Got it okay.
That's helpful. And then maybe just back to results and the previous questions you were talking about backlog expectations for the year, but just as you think about 2021.
Pretty pretty impressive that you continue to pull forward, but yet you gave a guidance for pretty substantial growth year over year. So you've called out C&I, but just wondering what are some of the other areas that you think leading results and 2021.
Well 2021, starting point.
Our 12 month.
Contracted backlog is sitting around $600 million right, which is better than it was less yeah. And then we have contracted O&M contracted PPA revenue et cetera, which we.
It helps us build up that revenue projection there.
And then.
The rest of it I can't I can't say that it's a particular.
Sector that that will bring and the additional the additional growth.
However.
I think the broad based momentum behind the industry and the business and what we see and our funnel is what drives us to believe and kind of the numbers that we put forward.
George I don't know if you know basically.
And the form of course, the original share and of course, the customer segments, and one and one that I would say, it's picking up a little bit faster pace than.
The rest of the segments and the C&I market of course, we were starting with a smaller base.
Base to begin with but the activity level is very good.
I wanted to draw back with those people and so that they move fast, but most of the projects and.
<unk> designed and built.
And but they move faster through the pipeline and thereby of course.
And they help a lot the top line as well as the profitability of it will we leverage otherwise and the organization.
Yes, and you meant.
And.
Administrative back backdrop, you mentioned some improvement yes things recovering.
As we come out of Covid.
Other thoughts about why now is it.
Ni customers you've focused on it more.
They realize increasingly embarassed those capabilities or I mean.
Just curious why because it sounds like 'twenty and 'twenty, one is really going to be an inflection point and that business.
Nick.
Many of those companies now they are worried about it.
And about sustainability.
<unk> reported.
Themselves and in addition to beginning to talk about it and the.
Once and message is driven from the top and that.
And I mean the administration.
People listen.
And react to it but in addition to that and that's why I pointed out and my remarks the economics.
For example.
So all of the distributed energy generation solar installations across the country right now and some of the largest commercial and industrial customers and it makes economic sense for them.
And then get to take lots of battery storage menu of them. They are concerned about the resiliency and.
And that's become a big issue and I think.
And as we move forward and this market.
Might become one of the dominant issues because distributed energy resources, and resiliency will probably be the driving force behind having a reliable.
Energy resource.
And the future and I think lot of people and the industrial commercial customers and I gave you concerned and.
And the developing projects.
And the economics, and the FEMSA and I can tell the situations where.
Customers, they save and let them money.
And while they installed and some of them.
Our liabilities.
Got it thank you very much.
And welcome.
Thank you Sir.
Our next question is from the line of Chris <unk> with B Riley Your line is open.
Hey, guys and thanks for taking.
My question here and congrats on the results and the outlook here.
Maybe you can just touch quickly on I guess, the cadence for the year. It sounds like the first quarter is going to be a bit weaker.
Would you be able to provide just a bit more color on what the cadence you think will be for the year at this point based on what's contracted.
And how.
And the visibility might've been improving with some other weather stuff starting to improve over the last week or two here.
Yeah, I mean, I think that the bit that I can talk about is that as you may have appreciated from prior year's busy.
Our business does tend to be a little bit back and.
You know towards the towards the latter half of the year.
And in terms of energy assets, Yes of course, the weather will impact production et cetera, and as we look at completing the LNG plant. This year, obviously that will result in and a pick up that's going to be back ended.
Furthermore, I think our installation.
The installation and the commercial operation date of a lot of the energy assets. The other energy assets were going to be putting and service.
Also be somewhat back ended so you might see some some additional pick up there later in the year kind of beyond that I'm not sure. Marc if you have any additional comments on seasonality no I think we would expect it to follow normal seasonal patterns. So like said.
I think we identified some of the unusual items in Q1, just from a year over year, but yeah. The cadence of the year should play out.
Over and normal seasonal pattern.
Got it Okay and then.
Looking at the backlog being kind of down year over year, obviously, the moving pieces with other large contracts last year.
And.
Having more contracted backlog for this year compared to a year ago.
Maybe you can come and just walked through.
Mix within the contracted backlog between commercial federal and any kind of color you can provide there and I'm kind of curious if.
And the fourth quarter based on the election, there was any kind of slowdown and the Federal award just kind of waiting to see what the new administration wanted to do or anything like that where we could see kind of a pickup from the federal side over the next couple of weeks months here with executive order and different things like that.
And when you see what your thoughts from there.
Good couple a couple of things from that.
Last quarter last year, the fourth quarter, we had the huge three large.
Total contract. So that's got to be signed excellent Mark has pointed out there were four contracts large contracts signed and by the way those contracts and by themselves they contribute and as soon as it were science $80 million too. So the top line and a very good profitability, but this year because of COVID-19, we had a couple of large.
And with contracts that day.
Slipped from.
We were expecting them to be executed last quarter, but now most likely there will be actually good. This quarter. So we did have some slippage on the executed contracts.
Because of the COVID-19 situation, but.
And it indicates even though we had all those constraints.
The awarded backlog did pick up and the 12 month and the driving force with the numbers for this year is the 12 months' cold cuts and backlog and we still.
And the core at a higher level and we.
Started last year and other things, that's very telling and in addition, and feel that of course, we have higher vehicles a day O&M.
Revenues coming from the assets we operate so we are.
What are you asking and pretty good year.
And I think as time goes on and we get out of the COVID-19, I think the market and drivers are strong enough that you will see it pick up.
COVID-19, and goes away by the middle of the year was a little later.
Okay.
And that's very helpful and maybe just how are you seeing any impacts from the recent activity and Texas obviously.
Bring them to the forefront some of the solutions you might be able to provide around resiliency and things like that I'm. Just curious are you seeing increased interest.
And this California other places that are above that.
No question about it and then.
As Lauren pointed out in his remarks.
Yeah.
And whether the weather affected us this year.
The San Antonio and plan for a few weeks.
And so we lost there.
Woodland.
<unk> due to cold weather.
Few days, but we get a hard time getting into.
Some of the equipment delivery to the site. So it did it did.
We had some impact because of the weather, but we took into account by the end of the year, we will catch up.
And then.
And our metrics, so well and whats worrying about that but.
This is why I am so excited about it and distributed energy resources and where the market is going.
For example, you see what happens.
What I call. It simple contingency, which is the weather can take out the whole grid and.
And just picture when we have all of the wind farms up and down.
They used to call our switches are estimated to be 30000 megawatts.
If we do not have some kind of backup.
And the distributed generation and some guy and distributed.
Energy storage, we are going to be big trouble and.
And 1965 block alethia, so the Mississippi will be.
Read the obligated and Thats why we feel and that's why you see more and I mean look every base though.
And we do right now.
And that's one of the driving forces.
And with some other colleges universities and so on and they are all concerned about the resiliency because what we saw in Texas, we sold the fires in California, and don't forget we sold the Sandy storm up here and the New Jersey, and you won't few years back and I think youre going to see the list of occurrences.
Come to pass more often and unless we do something about it.
That's very helpful commentary I'll hop in the queue. Thanks, guys.
Thank you Chris.
Our next question is from Jed doors Hymer from Canaccord. Your line is open.
Hey, guys. Congratulations on just a fantastic quarter and year nice to see.
Thank you.
So.
Just a couple of questions I mean, a lot of and ask but.
I guess.
Maybe just in a different way.
And the Covid redundancies door and in terms of.
Opex.
Can you place.
And.
How should we think about that in terms of.
Duplicity of.
Work that needs to occur.
To keep your employees safe once we kind of get through the <unk>.
The virus and on the other side.
No I haven't.
Just to be honest I haven't really been thinking about it and in terms of.
Duplication of any particular element I think that when I look at Opex and <unk>.
Look at productivity.
As we kind of emerge and we start to see potentially essentially more people.
At the offices and certainly more people and the field.
There is an element of productivity associated with the continued what I'll call hyper and engagement of employees, who work from home.
All of the technological savvy.
Savi this and that's come with everybody kind of reacting the way that they have is going to carry through and frankly, I think is going to make and make the company not just our company, but businesses as a whole more productive.
I think that we'll see.
Some creep back up and the travel budgets.
Which will be necessary, but nevertheless, I think that.
Not something that I'm necessarily.
Putting a putting my finger on a number I think it gives me comfort in terms of the stability of our Opex.
Got it.
I'm assuming guidance was done post.
And our card issue and in Texas.
And so I'm just wondering.
As you think about <unk> and.
And George maybe for both of you as you think about 'twenty. One you were probably just on the heels of.
And of kind of seeing that or you are still in process in terms of the fallout and.
Thats exactly what went on in that market is that fair to say I'm, just trying to figure out how much of that.
And is probably baked into the expectations.
Well I think we.
As you might expect we did a pretty deep dive and we figured we figured out where we are where we're going to be and because we have people on the ground.
And we get we get a pretty quick reaction in terms of.
Finding out all the all the different elements of the puts and takes of operating these plants what was impacted what wasn't impacted how quickly it's going to come online.
We did we did a pretty quick deep dive. So we've taken all of that into account here.
Got it.
And then George if.
I mean, you mentioned probably my favorite.
Topic, which is resiliency versus efficiency and the two are paradoxically opposed.
And so I'm just we've been talking so much about efficiency and the move to more efficient systems I think many.
Mistake the idea that that move is it the cost of resiliency. So.
And.
In essence any of these systems, we want to think about what the trade off is on on how we are moving to efficiency and what that means in terms of the cost of the resiliency and you bring up a great point in terms of distributed.
And sort of centralized versus distributed which has a major role and that but our policies right now don't reflect that level of understanding so I'm just wondering.
I'm, assuming is kind of a trusted partner as you go through and the discussions.
Did you are able to really help those customers and and I guess my question is how much do you see sort of start of project versus what the customer thinks they want versus the value that you are able to create in terms of where are you and where they end up.
Yeah.
Very very good questions and I will agree with you that some of the energy policies and some of the state programs and so on but they continue to favor.
What I would call large renewable assets development from <unk>.
Example, is a great resource to develop all those wind farms, along the up and down the east coast, which they used to make 30000 megawatts and every time, we have a hurricane or and ice storm wherever all of those will be out.
At the end of the day I think that people realize that the distributed energy resources with a battery storage will make much more economic sense. So you will see more policies and that's why I started to bring it up but are you can interrupt because not too many people think about it and I. Thank you.
We will see it change when the attitude and distributed energy resources well the other thing though.
Well, the energy efficiency, and resilient and see them very well related and actually if you tackle and particular facility with the energy efficiency, you reduce their consumption by 30% and thereby the demand by like 30% and now you have to back up to 30% less will rule and that you would otherwise have to be.
Up.
In addition to that was a smart controls and we have today and that's the way the micro grids.
And importantly, now and you can shut off some of the loans, they're not as critical so what did you have to back up it's even less than that so they are.
Very very interrelated, but I agree with you people and not focus and yes, because before when I used to be a planner for the new England electric system, we get some from the systems with a single contingency and otherwise lose one of the largest power price was 1200 megawatts net back then she broke a unit and.
And then and we'll have to what you have been a couple of hours and we had we wanted to double.
But not only a single contingency you take 30 per cent of the low dose.
So.
The market and it's one of them.
And I was going to develop its market and it's one of the wall and develop.
Much faster than people anticipated because of resiliency.
And then one way its going to work.
Yes go ahead.
And that's what I've been saying that puzzle the missing puzzle and it's going to put that that's going to force.
And as your transformation to work is effective storage and storage.
Great I'll jump back in queue. Thank you guys.
Thank you.
Our next question is from Craig Irwin with Roth Capital. Your line is open.
And good evening and thanks for taking my questions.
So I wanted to discuss discuss the operating expenses a little bit so in 2020 on a full year basis.
And we're actually down a couple of hundred thousand over 2019 levels. So I imagine COVID-19 a lot of the travel and some of the other business development expenses, probably probably coming off but can you maybe describe what contributed to that and then and they turn on day 220 basis point leverage you saw on revenue.
For operating expenses.
Well Greg.
I think the Covid related.
Travel.
Savings were.
We're definitely a portion of it the other thing when you look at all the line items across our operating expenses one of the largest items has to do with the utilization both staff and so when you look at our utilization.
When when we have folks working on proposals.
They're kind of human capital cost ends up and Opex.
If folks are working on awarded projects or contracted projects.
Those costs actually end up being capitalized into the projects.
So in 2020 because of Covid I think as we all know proposal activity was down.
But construction and contracted backlog execution was up.
So you kind of saw a little bit of a shift.
And that number I would suspect that that accounts for most of that with the exception of maybe the the travel reduced travel expenses.
I think this is.
Of course, the primary driver was the shift.
Because look when we when the COVID-19 came to pass and we said okay.
We did see a slowdown on basically having access to the customers and they did and evolve into the internet and the.
Zoom calls and so on until about six to 10 months into the COVID-19 and so.
We said, okay, we will share some of those people that they work in developing projects to exit goods and projects and Thats why you saw the pickup and our revenue and last year. The way, we did and the execution that we had and it has helped a lot and refocus and good chunk of the people and I'm really from.
Non consolidated anymore color and stuff.
That's right.
So then just to follow up on that is it fair that that obviously continues in 2021.
We see similar dynamics and very strong work activity out there and most of US are working from home or at least a social distancing at Edwards yeah. Okay.
And we thought about that and when we developed and the planning of those couple of months ago for this year and and beyond but we felt that we.
We have to refocus and again and developing the pipeline and the awards and that's why we saw a little bit of a pickup this last quarter and we continue that look we want and become a dominant player in this marketplace and we have to make these investments and developed in the pipeline and the business.
Understood understood. So then.
This quarter, if we look at your implied guidance for the quarter. He was $32 million above the top end of the range or $52 million above the middle of the range.
So very nice finish to the year and you.
You actually saw a.
Gross margin improvement sequentially.
30 basis points last year, you were sort of middle of the range and you saw gross margin deterioration sequentially and the fourth quarter can you talk about the contributions whats different this year versus last year. It just really business mix or is there maybe and execution component and.
Are there any project change outs and this.
18, 5% gross margin number that you printed.
No it wasn't a project change outs.
Partly because last year.
Yeah. So so last year, if you remember at the very end of the year and Q4 margins deteriorated because we had some.
Adjustments related to the grain prices.
I think Q4, obviously it looks like it's quite low, but but I think if you look through 2020 I think the margin.
No what I would characterize as one time unusual items. It was really just a function of the mix of the projects that we had.
So I think that.
And we've been talking about this as a pretty good mix of design build and our projects, but some of that is offset by some of that.
The advanced technology projects and some of our federal net.
Projects. So yeah, I think when you come into 2020, and he was a little bit more normalized coming out of the end of last year, just simply because of the RIN prices and then and of course during 2020, there was certainly some improvement and the Brent prices that helped contribute to a gradual improvement over time with the with the margin.
Okay excellent and then my last question you know everybody wants to talk about renewable gas and I too should express my congratulations for the new projects and the pipeline but.
And I guess the most important question is where are you hedged right now can.
Can you maybe update us on whether or not you've taken the opportunity with the nice rebound and <unk> RIN prices to go ahead and lock away more.
And of your of your longer term exposure.
Do you have much exposure to the spot market. If you can approximate that.
And.
And.
What other what other key items on the on the risk side either to the plus or minus do you think we need to look at for those three projects that are operating.
I will give us a shot and then the door and we can probably add some more color to it.
And look marine.
RIN prices.
And up to $2 50 Bucks right now.
We should point out that we have hedged almost 40% and.
And as we came into last quarter of last year. If you recall we have.
Hedge up to 78%. So we've tried to be a little bit conservative and don't put.
And we have a sufficient sufficient and hedge it.
And the long term contract opportunities out there, but the discounts are so large that at this point and time.
And we will wait for a few more months to see what's happening with watching the markets very very closely and.
We still think it's a great market.
And it contributes much more to the profitability of the overall business then.
The other is as we are doing.
We're watching it very carefully the markets I think is developing its evolving and.
And one of the immediate impacts because of this new administration, where the RIN prices and.
Of course, it's going to help a lot this year, but we wasn't it very carefully because we wanted the end of the day to hedge or have longer term contracts.
Ultimately seven years, plus and thereby will be able to get better project financing for those particular projects and.
And the other way we leverage our equity.
It takes us a little bit further and that we do the other was cool so.
Doron and might want to add some color to that but it's a key issue.
We address every day.
Yeah, I mean I think the.
The pattern that we've had over the last couple of years I think we're likely to continue it because what George mentioned above the GAAP between.
The discounts that the long term contracts are looking for so I think we will continue to be partially hedge partially on some sort of medium term off take contracts and the rest of it.
Well, we'll continue to monetize or.
<unk>.
Or hedge on other short term and over one year basis as we go and.
Blushing.
And not just the RIN price.
Activity in Washington D C.
What's the next move might be for RVO et cetera.
Excellent well very happy to hear you're only 40% hedged.
You know the clothing clothing number today with $2 60 for 'twenty and 'twenty, one rents and that is a robust price after where we started last year.
Gratulation really saw and closeout for 'twenty and 'twenty.
Team really executed.
Thanks, Greg Thank you very much Greg.
Our next question is from Shar <unk>.
And with Guggenheim Partners. Your line is open.
Hey, guys just share.
Hey, George.
Just a follow up on the energy assets and sort of the cadence of new projects.
Any thoughts sort of about using your own currency to kind of speed. This up given where shares are trading right now I mean, what's sort of the governor would not increase and that cadence given the opportunity set that's out there both on the solar and R&D side, especially as we're thinking about beyond 'twenty, one COVID-19 impacts.
So on the energy asset side, I mean, just the door and I'll just and it was just kind of.
Speaking for a second so.
On the energy asset side as you probably have seen some market activity. One thing that we don't want to do is overpay for assets.
No I don't think that the company has gotten to where it is today without the strong ability to actually develop projects on a greenfield basis. So we're going to continue to do that and that allows us to map out our capex as needed on development as well as construction as we actually develop these things are.
Sales.
That's kind of first and foremost what I would say is taken.
Particularly on the solar side, you have to be very very careful when you're looking at and.
Inorganic situations right.
And then in terms of financing we have.
Obviously.
The.
A multitude of financing sources that we can and we can tap you talked about project financing and talked about tax equity.
And certainly the capital markets are our friendly.
We are.
And we consider ourselves to have a lot of options, but we're not.
We're not being impatient.
Got it and then just lastly, the Newport News project and the O&M opportunity and looked like a strong win how do we sort of think about maybe the cadence for other opportunities like Norfolk heading into the new year and maybe just the general shaping up.
Rfps over the course of the year.
Okay.
It's very healthy.
And it will pick up even more.
And I think what you will see.
And she's administration resiliency can become the number one issue and the infrastructure upgrades.
I think it's when they happen and Louis administration module and he will continue on that but you will see more and more projects have and.
More renewable.
Aspect and a request for proposals because in order to achieve the kind of and when you had signed a deal with energy efficiency and maybe we get you up to 50% otherwise.
And a reduction and the rest of engineered some guy and a renewable resource and the basis and the federal government.
Deal flow locate and whether it's solar.
Biomass biogas battery storage and so on so I think they can.
And established a great Great example, and driving the market and other way.
And so I don't think business and any particular pattern that we can point to in terms of the way that the year is going to go. The good thing about <unk> is that they're very highly diversified business.
Operating and multitude of regions, including Canada, The U K.
Across the United States, plus the federal government business.
And as energy asset opportunities being generated out of all of those regions. There is energy as a service opportunity is being generated out of all of those regions and when you look at the way that the proposal funnel is and backlog funnel.
Kind of illustrates itself.
The projects large and small and diverse diverse pool of opportunities. It just means like al and the whole year.
We're going to see kind of steady progression throughout the year with what you might appreciate it from looking at past years as you know.
Occasionally you will have whether it's federal or otherwise a lumpy project that moves one quarter to the next quarter or what have you but.
Looking over the long term I think that we're comfortable with a pretty pretty smooth cadence and.
And growing.
Yeah sure.
Perfect. Thanks, guys questions were answered appreciate it.
Thanks, Thank you.
Our last question is from <unk> <unk> with Raymond James Your line is open.
Thanks for taking the question.
So one more about R&D.
Traditionally of course, California has been the epicenter of the R&D landscape because of the <unk> and I guess the headlines recently is Washington state.
And maybe next in establishing and I'll CFS.
And I'm curious, how you evaluate that opportunity and if you've started to scope out any potential locations in Washington Ethan.
If indeed that legislation and burn and a path.
No. It's a good question, yes, it's a good question I mean, and I don't think we can go specific on whats in the or.
Alright, and what's not in the 351 megawatts.
Talk about particulars here, but.
And the move in Washington, and Bye.
By the by the House there Great News obviously.
Watching very closely the other markets, where we anticipate.
Similar moves to be made it's fair to say that the development funnel is looking at El CFS markets and non L. CFS markets for potential development opportunities, we scope and we run pro forma.
And if you consider everything in multiple jurisdictions, so and L. CFS is certainly a.
A great add on to the to the revenue stack, but in many of these circumstances. If the designers right is the distance to the pipeline is right.
Distance to the landfill is right you might not and <unk>.
So we're developing.
And kind of across the board. So I think that situates us quite nicely to take advantage of these situations when they arise or when they come to their conclusion, which I think we're all hoping and Washington will.
But.
But yes it is.
Pretty exciting.
And this is where we take great advantage of it.
Thoughtful that we get developed and Embarassed, let's say that particular states opens up we do have the resources, we have the local presence and so on and that's what gives us and maresco great.
Great Great leverage basically one good solid program and comes let's say and Colorado, we have the local presence we can deliver the same with green gas and so on.
And in.
In order to be effective and getting those projects and you have to have local presence and to.
And that's why I keep telling the organization we have a great platform right now that's maximizes us as he is very as I call them incentives.
Develop across the country.
Having asked about Washington State.
Also ask about the other Washington Congress back in December and extended the section 179.
<unk> C deduction.
And I realize.
And there's a little more obscure compared to the solar and wind credits.
But im curious do you guys recognize.
And 179 D in your financials.
Or do your customers.
Customers recognize that on their financials, how does it work.
Yes, and Thats Great question and this is mark.
Yes, we do for our from municipal and federal customers.
There, where they have allocated the benefit.
Cannot realize the benefit of that taxpayer.
And with them to get that benefit allocated on certain projects and then we.
Yes, we certainly recognize that within our provision and have for some time.
And I think we've been fortunate to see.
Over time that that.
And that that deduction and be extended and now having it be a permanent.
And yes certainly.
It's certainly nice to have going forward and so on yes that uncertainty and QR.
Our tax rate.
And we're very pleased to see it Kathryn.
Yeah.
Thank you guys.
Thank you and thank you for.
That's the end of our Q&A session, ladies and gentlemen, and thank you for your participation. Today. This concludes today's conference call. You may now disconnect have a great day. Thanks.
Thank you. Thank you.
Okay.
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