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| AMRC > SEC Filings for AMRC > Form 10-Q on 9-Nov-2012 | All Recent SEC Filings |
9-Nov-2012
Quarterly Report
APS Energy Services Company, Inc., which we renamed Ameresco Southwest, a
company that provides a full range of integrated 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.
In 2012, our acquisition in the third quarter of infrastructure asset management
solutions provider FAME Facility Software Solutions Inc. expanded our offerings
and our geographical position in western Canada.
Recent Developments
On October 19, 2012, Ameresco Asset Holdings IV LLC, or Holdings IV, a holding
company for 18 renewable energy project companies and a wholly owned subsidiary
of Ameresco, Inc., entered into a credit and guaranty agreement with Union Bank,
N.A. and CoBank ACB. Holdings IV's subsidiaries collectively own 22 renewable
energy projects, 16 of which are currently operating and the remaining 6 of
which are at various stages of construction. The credit and guaranty agreement
provides for a $47.2 million construction-to-term loan credit facility. At the
closing, Holdings IV drew down construction loans for an aggregate of $33.5
million with respect to 20 of the projects. A portion, $13.5 million, of the
proceeds of the initial draw down was used to pay down the revolving credit
facility. Additional information about the credit facility is available in the
Company's Current Report on Form 8-K dated October 19, 2012 and filed with the
Securities and Exchange Commission on October 24, 2012.
On October 24, 2012, the Company acquired Seldera LLC, a privately held company
offering intelligent sensing solutions for building energy efficiency that
involve rapid reasoning and automation using sensor and online data.
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
September 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. Further, at
times in the past we have experienced periods during which the portion of the
sales cycle for converting awarded project to signed contracts has lengthened;
we have been experiencing lengthened conversion times, a trend we expect to
continue into 2013. 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 September 30, 2012, we had backlog of approximately $318 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 $1.1 billion. As of
September 30, 2011, we had fully-contracted backlog of approximately $438
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 $782 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 nine months ended September 30, 2012 and
the three and nine months ended September 30, 2011, no one customer accounted
for more than ten percent 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 nine months ended September 30, 2012, related to customer contracts
was $0.4 million and $2.0 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 nine months ended September 30, 2012, we
recorded $0.8 million relating to a gain on sale of an asset. For the three
months ended September 30, 2011 and 2012, the Company recorded amortization
expense of $0.5 million and $0.7 million, respectively, related to customer
relationships, non-compete agreements, technology and trade names. For the nine
months ended September 30, 2011 and 2012, the Company recorded amortization
expense of $0.5 million and $2.1 million, respectively, related to customer
relationships, non-compete agreements, technology and trade names. Amortization
expense related to these intangible assets 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
. . .
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