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| AMRC > SEC Filings for AMRC > Form 10-Q on 8-Aug-2012 | All Recent SEC Filings |
8-Aug-2012
Quarterly Report
energy efficiency and renewable energy solutions, strengthened our geographical
position in the southwest U.S. Our acquisition of the xChangePoint® and energy
projects businesses from Energy and Power Solutions, Inc., which we operate as
Ameresco Intelligent Systems, or AIS, expanded our service offerings to private
sector commercial and industrial customers. AIS offers energy efficiency
solutions to customers across North America encompassing the food and beverage,
meat, dairy, paper, aerospace, oil and gas and REIT industries.
Recent Developments
On July 31, 2012, our wholly owned subsidiary Ameresco Canada Inc. acquired FAME
Facility Software Solutions Inc., a privately held company offering
infrastructure asset management solutions serving both public and private sector
customers primarily in western Canada.
Energy Savings Performance and Energy Supply Contracts
For our energy efficiency projects, we typically enter into energy savings
performance contracts, or ESPCs, under which we agree to develop, design,
engineer and construct a project and also commit that the project will satisfy
agreed-upon performance standards that vary from project to project. These
performance commitments are typically based on the design, capacity, efficiency
or operation of the specific equipment and systems we install. Our commitments
generally fall into three categories: pre-agreed, equipment-level and whole
building-level. Under a pre-agreed energy reduction commitment, our customer
reviews the project design in advance and agrees that, upon or shortly after
completion of installation of the specified equipment comprising the project,
the commitment will have been met. Under an equipment-level commitment, we
commit to a level of energy use reduction based on the difference in use
measured first with the existing equipment and then with the replacement
equipment. A whole building-level commitment requires demonstration of energy
usage reduction for a whole building, often based on readings of the utility
meter where usage is measured. Depending on the project, the measurement and
demonstration may be required only once, upon installation, based on an analysis
of one or more sample installations, or may be required to be repeated at agreed
upon intervals generally over up to 20 years.
Under our contracts, we typically do not take responsibility for a wide variety
of factors outside our control and exclude or adjust for such factors in
commitment calculations. These factors include variations in energy prices and
utility rates, weather, facility occupancy schedules, the amount of energy-using
equipment in a facility, and failure of the customer to operate or maintain the
project properly. Typically, our performance commitments apply to the aggregate
overall performance of a project rather than to individual energy efficiency
measures. Therefore, to the extent an individual measure underperforms, it may
be offset by other measures that over perform. In the event that an energy
efficiency project does not perform according to the agreed-upon specifications,
our agreements typically allow us to satisfy our obligation by adjusting or
modifying the installed equipment, installing additional measures to provide
substitute energy savings, or paying the customer for lost energy savings based
on the assumed conditions specified in the agreement. Many of our equipment
supply, local design, and installation subcontracts contain provisions that
enable us to seek recourse against our vendors or subcontractors if there is a
deficiency in our energy reduction commitment. From our inception to June 30,
2012, our total payments to customers and incurred equipment replacement and
maintenance costs under our energy reduction commitments, after customer
acceptance of a project, have been less than $100,000 in the aggregate. See "We
may have liability to our customers under our ESPCs if our projects fail to
deliver the energy use reductions to which we are committed under the contract"
in Item 1A, Risk Factors in our Annual Report on Form 10-K.
Payments by the federal government for energy efficiency measures are based on
the services provided and the products installed, but are limited to the savings
derived from such measures, calculated in accordance with federal regulatory
guidelines and the specific contract's terms. The savings are typically
determined by comparing energy use and other costs before and after the
installation of the energy efficiency measures, adjusted for changes that affect
energy use and other costs but are not caused by the energy efficiency measures.
For projects involving the construction of a small-scale renewable energy plant
that we own and operate, we enter into long-term contracts to supply the
electricity, processed landfill gas, or LFG, heat or cooling generated by the
plant to the customer, which is typically a utility, municipality, industrial
facility or other large purchaser of energy. The rights to use the site for the
plant and purchase of renewable fuel for the plant are also obtained by us under
long-term agreements with terms at least as long as the associated output supply
agreement. Our supply agreements typically provide for fixed prices or prices
that escalate at a fixed rate or vary based on a market benchmark. See "We may
assume responsibility under customer contracts for factors outside our control,
including, in connection with some customer projects, the risk that fuel prices
will increase" in Item 1A, Risk Factors in our Annual Report on Form 10-K.
Project Financing
To finance projects with federal governmental agencies, we typically sell to the
lenders our right to receive a portion of the long-term payments from the
customer arising out of the project for a purchase price reflecting a discount
to the aggregate amount due from the customer. The purchase price is generally
advanced to us over the implementation period based on completed work or a
schedule predetermined to coincide with the construction of the project. Under
the terms of these financing arrangements, we are required to complete the
construction or installation of the project in accordance with the contract with
our customer, and the debt remains on our consolidated balance sheet until the
completed project is accepted by the customer. Once the completed project is
accepted by the customer, the financing is treated as a true sale and the
related receivable and financing liability are removed from our consolidated
balance sheet.
Institutional customers, such as state, provincial and local governments,
schools and public housing authorities, typically finance their energy
efficiency and renewable energy projects through either tax-exempt leases or
issuances of municipal bonds. We assist in the structuring of such third-party
financing.
In some instances, customers prefer that we retain ownership of the renewable
energy plants and related project assets that we construct for them. In these
projects, we typically enter into a long-term supply agreement to furnish
electricity, gas, heat or cooling to the customer's facility. To finance the
significant upfront capital costs required to develop and construct the plant,
we rely either on our internal cash flow or, in some cases, third-party debt.
For project financing by third-party lenders, we typically establish a separate
subsidiary, usually a limited liability company, to own the project assets and
related contracts. The subsidiary contracts with us for construction and
operation of the project and enters into a financing agreement directly with the
lenders. Additionally, we will provide assurance to the lender that the project
will achieve commercial operation. Although the financing is secured by the
assets of the subsidiary and a pledge of our equity interests in the subsidiary,
and is non-recourse to Ameresco, Inc., we may from time to time determine to
provide financial support to the subsidiary in order to maintain rights to the
project or otherwise avoid the adverse consequences of a default. The amount of
such financing is included on our consolidated balance sheet.
In addition to project-related debt, we currently maintain a $100 million senior
secured credit facility with a group of commercial banks to finance our working
capital needs. See "-Senior Secured Credit Facility-Revolver and Term Loan"
below.
Effects of Seasonality
We are subject to seasonal fluctuations and construction cycles, particularly in
climates that experience colder weather during the winter months, such as the
northern United States and Canada, or at educational institutions, where large
projects are typically carried out during summer months when their facilities
are unoccupied. In addition, government customers, many of which have fiscal
years that do not coincide with ours, typically follow annual procurement cycles
and appropriate funds on a fiscal-year basis even though contract performance
may take more than one year. Further, government contracting cycles can be
affected by the timing of, and delays in, the legislative process related to
government programs and incentives that help drive demand for energy efficiency
and renewable energy projects. As a result, our revenue and operating income in
the third quarter are typically higher, and our revenue and operating income in
the first quarter are typically lower, than in other quarters of the year. As a
result of such fluctuations, we may occasionally experience declines in revenue
or earnings as compared to the immediately preceding quarter, and comparisons of
our operating results on a period-to-period basis may not be meaningful.
Our annual and quarterly financial results are also subject to significant
fluctuations as a result of other factors, many of which are outside our
control. See "Our operating results may fluctuate significantly from quarter to
quarter and may fall below expectations in any particular fiscal quarter" in
Item 1A, Risk Factors in our Annual Report on Form 10-K.
Backlog and Awarded Projects
Total construction backlog represents projects that are active within our ESPC
sales cycle. Our sales cycle begins with the initial contact with the customer
and ends, when successful, with a signed contract, also referred to as
fully-contracted backlog. Historically, our sales cycle typically has averaged
12 to 36 months. Awarded backlog is created when a potential customer awards a
project to Ameresco following a request for proposal. Once a project is awarded
but not yet contracted, we typically conduct a detailed energy audit to
determine the scope of the project as well as identify the savings that may be
expected to be generated from upgrading the customer's energy infrastructure. At
this point, we also determine the sub-contractor, what equipment will be used,
and assist in arranging for third party financing, as applicable. Historically,
awarded projects typically have taken 6 to 12 months to result in a signed
contract and thus convert to fully-contracted backlog. It may take longer,
however, depending upon the size and complexity of the project. After the
customer and Ameresco agree to the terms of the contract and the contract
becomes executed, the project moves to fully-contracted backlog. The contracts
reflected in our fully-contracted backlog typically have a construction period
of 12 to 24 months; this is the period over which we expect to recognize revenue
for customer contracts. Fully-contracted backlog begins converting into revenue
generated from backlog on a percentage-of-completion basis once construction has
commenced. See "We may not recognize all revenue from our backlog or receive all
payments anticipated under awarded projects and customer contracts" in Item 1A,
Risk Factors in our Annual Report on Form 10-K.
As of June 30, 2012, we had backlog of approximately $391 million in future
revenue under signed customer contracts for the installation or construction of
projects, which we sometimes refer to as fully-contracted backlog; and we also
had been awarded projects for which we do not yet have signed customer contracts
with estimated total future revenue of an additional $909 million. As of
June 30, 2011, we had fully-contracted backlog of approximately $507 million in
future revenue under signed customer contracts for the installation or
construction of projects; and we also had been awarded projects for which we had
not yet signed customer contracts with estimated total future revenue of an
additional $648 million.
Financial Operations Overview
Revenue
We derive revenue from energy efficiency and renewable energy products and
services. Our energy efficiency products and services include the design,
engineering and installation of equipment and other measures to improve the
efficiency and control the operation of a facility's energy infrastructure. Our
renewable energy products and services include: the construction of small-scale
plants that produce electricity, gas, heat or cooling from renewable sources of
energy and the sale of such electricity, processed LFG, heat or cooling from
plants that we own, which, for those plants that we own and operate, we refer to
collectively as small scale infrastructure; and the sale and installation of
photovoltaic solar energy products and systems, or integrated-PV.
While in any particular quarter a single customer may account for more than ten
percent of revenue, for the three and six months ended June 30, 2012 and the
three months ended June 30, 2011, no one customer accounted for more than ten
percent of our total revenue. For the six months ended June 30, 2011, one
customer, the U.S. Department of Energy, Savannah River Site, accounted for
10.5% of our total revenue.
Direct Expenses and Gross Margin
Direct expenses include the cost of labor, materials, equipment, subcontracting
and outside engineering that are required for the development and installation
of our projects, as well as preconstruction costs, sales incentives, associated
travel, inventory obsolescence charges, amortization of intangible assets
related to customer contracts, and, if applicable, costs of procuring financing.
A majority of our contracts have fixed price terms; however, in some cases we
negotiate protections, such as a cost-plus structure, to mitigate the risk of
rising prices for materials, services and equipment.
Direct expenses also include O&M costs for the small-scale renewable energy
plants that we own, including the cost of fuel (if any) and depreciation
charges.
As a result of our acquisitions in 2011, we now have intangible assets related
to customer contracts; these are amortized over a period of approximately one to
five years from the respective date of acquisition. This amortization is
recorded as a direct expense for energy efficiency. Amortization expense for the
three and six months ended June 30, 2012, related to customer contracts was $0.6
million and $1.6 million, respectively, and is included in energy efficiency
expenses in the condensed consolidated statements of income.
Gross margin, which is gross profit as a percent of revenue, is affected by a
number of factors, including the type of services performed and the geographic
region in which the sale is made. Renewable energy projects that we own and
operate typically have higher margins than energy efficiency projects, and sales
in the United States typically have higher margins than in Canada due to the
typical mix of products and services that we sell there.
Operating Expenses
Operating expenses consist of salaries and benefits, project development costs,
and general, administrative and other expenses.
Salaries and benefits. Salaries and benefits consist primarily of expenses for
personnel not directly engaged in specific
project or revenue generating activity. These expenses include the time of
executive management, legal, finance, accounting, human resources, information
technology and other staff not utilized in a particular project. We employ a
comprehensive time card system which creates a contemporaneous record of the
actual time by employees on project activity. We expect salaries and benefits to
continue to increase on a year-over-year basis as we continue to incur
additional costs related to operating as a publicly-traded company, including
accounting, compliance and legal, as well as related to executing our growth
plans.
Project development costs. Project development costs consist primarily of sales,
engineering, legal, finance and third-party expenses directly related to the
development of a specific customer opportunity. This also includes associated
travel and marketing expenses.We intend to hire additional sales personnel and
initiate additional marketing programs as we expand into new regions or
complement existing development resources. Accordingly, we expect that our
project development costs will continue to increase on a year-over-year basis,
but will moderate as a percentage of revenue over time.
General, administrative and other expenses. These expenses consist primarily of
rents and occupancy, professional services, insurance, unallocated travel
expenses, telecommunications, office expenses and amortization of intangible
assets not related to customer contracts. Professional services consist
principally of recruiting costs, external legal, audit, tax and other consulting
services. We expect general, administrative and other expenses to continue to
increase on a year-over-year basis as we continue to incur additional costs
related to operating as a publicly-traded company, including increased audit and
legal fees, costs of compliance with securities, corporate governance and other
regulations, investor relations expenses and higher insurance premiums,
particularly those related to director and officer insurance, as well as related
to executing our growth plans. For the three and six months ended June 30, 2012,
we recorded $0.8 million relating to the sale of an asset. Amortization expense
for the three and six months ended June 30, 2012 related to customer
relationships, non-compete agreements, technology and trade names was $0.7
million and $1.3 million, respectively, and is included in general,
administrative and other expenses in the condensed consolidated statements of
income.
Other Expenses, Net
Other expenses, net consists primarily of interest income on cash balances,
interest expense on borrowings and amortization of deferred financing costs.
Interest expense will vary periodically depending on the amounts drawn on our
revolving senior secured credit facility and the prevailing short-term interest
rates.
Provision for Income Taxes
The provision for income taxes is based on various rates set by federal and
local authorities and is affected by permanent and temporary differences between
financial accounting and tax reporting requirements.
Critical Accounting Policies and Estimates
This discussion and analysis of our financial condition and results of
operations is based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these condensed consolidated financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue, expense and related
disclosures. The most significant estimates with regard to these condensed
consolidated financial statements relate to estimates of final contract profit
in accordance with long-term contracts, project development costs, project
assets, impairment of goodwill, impairment of long-lived assets, fair value of
derivative financial instruments, income taxes and stock-based compensation
expense. Such estimates and assumptions are based on historical experience and
on various other factors that management believes to be reasonable under the
circumstances. Estimates and assumptions are made on an ongoing basis, and
accordingly, the actual results may differ from these estimates under different
assumptions or conditions.
The following are certain critical accounting policies that among others, affect
our more significant judgments and estimates used in the preparation of our
condensed consolidated financial statements. For a more complete discussion of
our critical accounting policies and estimates, please read Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of our Annual Report on Form 10-K.
Revenue Recognition
For each arrangement we have with a customer, we typically provide a combination
of one or more of the following services or products:
• installation or construction of energy efficiency measures, facility
upgrades and/or a renewable energy plant to be owned by the customer;
• sale and delivery, under long-term agreements, of electricity, gas, heat, chilled water or other output of a renewable energy or central plant that we own and operate;
• sale and delivery of photovoltaic, or PV, equipment and other renewable energy products for which we are a distributor, whether under our own brand name or for others; and
• O&M services provided under long-term O&M agreements, as well as consulting services.
Often, we will sell a combination of these services and products in a bundled arrangement. We divide bundled arrangements into separate deliverables and revenue is allocated to each deliverable based on the relative selling price. The relative selling price is determined using vendor specific objective evidence, third party evidence or management's best estimate of selling price. We recognize revenue from the installation or construction of a project on a percentage-of-completion basis. The percentage-of-completion for each project is determined on an actual cost-to-estimated final cost basis. In accordance with industry practice, we include in current assets and liabilities the amounts of receivables related to construction projects that are payable over a period in excess of one year. We recognize revenue associated with contract change orders only when the authorization for the change order has been properly executed and . . .
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