Ameresco, Inc.: Form 10-Q for the period ended Sep 30, 2023

You should read the following discussion and analysis of our financial condition and results of operations together with our unaudited condensed consolidated financial statements and the related notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2022 included in our Annual Report on Form 10-K (“2022 Form 10-K”) for the year ended December 31, 2022 filed on February 28, 2023 with the U.S. Securities and Exchange Commission (“SEC”). This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward looking statements include statements regarding our strategy, future operations, future financial position, future revenues, projected costs, prospects, plans, objectives of management, expected market growth and other characterizations of future events or circumstances. All statements, other than statements of historical fact, including statements that refer to our expectations as to the future growth of our business and associated expenses; our expectations as to revenue generation; the future availability of borrowings under our revolving credit facility; the expected future growth of the market for energy efficiency and renewable energy solutions; our backlog, awarded projects and recurring revenue and the timing of such matters; our expectations as to financing and acquisition activity; the impact of any restructuring; the uses of future earnings; our intention to repurchase shares of our Class A common stock; the expected energy and cost savings of our projects; the expected energy production capacity of our renewable energy plants; the impact of supply chain disruptions, shortage and cost of materials and labor, and other macroeconomic and geopolitical challenges; our expectations related to our agreement with SCE including the impact of any delays; the impact of a possible U.S. federal government shutdown and the U.S. Department of Commerce’s solar panel import investigation and other characterizations of future events or circumstances are forward-looking statements. Forward looking statements are often, but not exclusively, identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” “target,” “project,” “predict” or “continue,” and similar expressions or variations. These forward-looking statements are based on current expectations and assumptions that are subject to risks, uncertainties and other factors that could cause actual results and the timing of certain events to differ materially and adversely from future results expressed or implied by such forward-looking statements. Risks, uncertainties, and factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section titled “Risk Factors,” set forth in Part I, Item 1A of our 2022 Form 10-K. Subsequent events and developments may cause our views to change. However, while we may elect to update these forward-looking statements at some point in the future, we have no current intention of doing so and undertake no obligation to do so except to the extent required by applicable law. You should, therefore, not rely on these forward-looking statements as representing our views as of any date subsequent to the date of this Quarterly Report on Form 10-Q.

Overview

Ameresco is a leading clean technology integrator with a comprehensive portfolio of energy efficiency and renewable energy supply solutions. We help organizations meet energy savings and energy management challenges with an integrated comprehensive approach to energy efficiency and renewable energy. Leveraging budget neutral solutions, including energy savings performance contracts (“ESPCs”) and power purchase agreements (“PPAs”), we aim to eliminate the financial barriers that traditionally hamper energy efficiency and renewable energy projects.

Drawing from decades of experience, Ameresco develops tailored energy management projects for its customers in the commercial, industrial, local, state, and federal government, K-12 education, higher education, healthcare, public housing sectors, and utilities.

We provide solutions primarily throughout North America, the U.K., and Europe and our revenues are derived principally from energy efficiency projects, which entail the design, engineering, and installation of equipment and other measures that incorporate a range of innovative technology and techniques to improve the efficiency and control the operation of a facility’s energy infrastructure; this can include designing and constructing a central plant or cogeneration system for a customer providing power, heat and/or cooling to a building, or other small-scale plant that produces electricity, gas, heat or cooling from renewable sources of energy. We also derive revenue from long-term O&M contracts, energy supply contracts for renewable energy operating assets that we own, integrated-PV, and consulting and enterprise energy management services.

In addition to organic growth, strategic acquisitions of complementary businesses and assets have been an important part of our growth enabling us to broaden our service offerings and expand our geographical reach. During 2022, we entered into joint venture arrangements in Greece and California and acquired an operating wind farm in Ireland. On March 30, 2023, we closed on the acquisition of Enerqos Energy Solutions S.r.l., a renewable energy and energy efficiency company headquartered in Milan, Italy. With this acquisition, we expect to expand our portfolio of clean energy projects and solutions throughout Italy. The pro forma effects of this acquisition were not material to our operations for the fiscal periods presented.

Key Factors and Trends

The Inflation Reduction Act (“IRA”)

The IRA was signed into law by President Biden on August 16, 2022. The bill invests nearly $369 billion in energy and climate policies. The provisions of the IRA are intended to, among other things, incentivize domestic clean energy investment, manufacturing, and deployment. The IRA incentivizes the deployment of clean energy technologies by extending and expanding federal incentives such as the ITC and the Production Tax Credit (“PTC”). We view the enactment of the IRA as favorable for the overall business climate for the renewable energy industry. While we are seeing an increase in engagement as customers assess and prioritize their projects to optimize the potential benefits of the IRA, we have also experienced some delays in projects as a result of delays in IRA funding and longer periods to convert awarded backlog into contracted backlog. The IRA may increase the competition in our industry and as such increase the demand and cost for labor, equipment and commodities needed for our projects.

Overall Business Environment and Global Factors

We continue to monitor the impact of global and domestic economic conditions on our operations, financial results, and liquidity, including supply chain challenges, the war in Ukraine, the Israel-Gaza conflict, evolving relations between the U.S. and China, possible U.S. federal government shutdowns and other geopolitical tensions. These conditions are contributing to an increase in the cost of labor and equipment, supply chain and labor challenges and a shortage of certain components needed for our business, such as lithium-ion battery cells, semiconductors, electrical transformers, and other components required for our clean energy solutions. These challenges may continue or become more pronounced and their impact on our future business and results of operations remains uncertain.

Furthermore, for nine months ended September 30, 2023, approximately 24% of our revenue is derived from work for the U.S. federal government, and as such government spending levels influence our financial performance. Based on actions by Congress, federal funding at fiscal year 2023 appropriated levels continues through November 17, 2023. If Congress and the President do not take further action to fund government departments and agencies thereafter, a government shutdown could result. In the event of a shutdown, requirements to furlough employees in government agencies could result in payment delays, impair our ability to perform work on existing contracts or otherwise impact our operations, negatively impact future orders, and/or cause other disruptions or delays. There is uncertainty regarding which government functions would shut down or continue operations during a lapse in appropriations, and corresponding uncertainty regarding the extent or magnitude of potential impacts to our operations.

Our operations and financial results may also be impacted by the previously disclosed investigation by the U.S. Department of Commerce’s into whether imports of crystalline silicon photovoltaic cells and modules manufactured in Cambodia, Thailand, Vietnam, or Malaysia using components from China were circumventing existing Chinese tariffs. President Biden issued an executive action under which additional duties would not be imposed on imports by U.S importers between June 2022 and June 2024. While legislation has been introduced seeking to overturn President Biden’s executive action., we do not believe this investigation will have a material impact on our business in the near term. However, any resulting duties or other trade restrictions imposed may disrupt the solar panel supply chain, increase the cost for solar cells and panels, and ultimately impact the demand for clean energy solutions. We are closely monitoring the investigation and any regulations issued in connection with it.

During the nine months ended September 30, 2023, we were impacted by supply chain disruptions, labor shortages, and varying levels of inflation, causing delays in the timely delivery of material to customer sites and delays and disruptions in the completion of certain projects, and increased shipping and transportation costs, as well as increased component and labor costs. This negatively impacted our results of operations during the nine months ended September 30, 2023. We expect the trends of supply chain challenges and inflationary pressures to continue beyond this year. We continue to monitor macroeconomic conditions to remain flexible and to optimize and evolve our business as appropriate to address the challenges presented from these conditions.

Climate Change and Effects of Seasonality

The global emphasis on climate change and reducing carbon emissions has created opportunities for our industry. Sustainability has been at the forefront of our business since its inception, and we are committed to staying at the leading edge of innovation taking place in the energy sector. We believe the next decade will be marked by dramatic changes in the power infrastructure with resources shifting to more distributed assets, storage, and microgrids to increase overall reliability and resiliency. The sustainability efforts are impacted by regulations, and changes in the regulatory climate may impact the demand for our products and offerings. See “Our business depends in part on federal, state, provincial and local government support or the imposition of additional taxes, tariffs, duties, or other assessments on renewable energy or the equipment necessary to generate or deliver it, for energy efficiency and renewable energy, and a decline in such support could harm our business” and “Compliance with environmental laws could adversely affect our operating results” in Item 1A, Risk Factors in our 2022 Form 10-K.

Climate change also brings risks, as the impacts have caused us to experience more frequent and severe weather interferences, and this trend is expected to continue. 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, and climates that experience extreme weather events, such as wildfires, storms or flooding, hurricanes, or at educational institutions, where large projects are typically carried out during summer months when their facilities are unoccupied. Over the past few months, weather related events have more frequently delayed our ability to complete projects, increased costs, and have impacted the operations of our owned-energy assets. We continuously assess risks from weather related events on our projects and assets and adapt our strategy, but with the effects from climate change becoming more pronounced, we expect this trend to continue.

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 revenues and operating income in the third and fourth quarter are typically higher, and our revenues and operating income in the first quarter are typically lower, than in other quarters of the year, however, this may become harder to predict with the potential effects of climate change and potential government shutdowns. As a result of such fluctuations, we may occasionally experience declines in revenues 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 business is affected by seasonal trends and construction cycles, and these trends and cycles could have an adverse effect on our operating results” in Item 1A, Risk Factors in our 2022 Form 10-K.

The Southern California Edison (“SCE”) Agreement

As discussed in our 2022 Form 10-K, in October 2021, we entered into an agreement with SCE to design and build three grid scale battery energy storage systems (“BESS”) throughout SCE’s service territory in California with an aggregate capacity of 537.5 MW (“SCE Agreement”). As previously disclosed, our ability to complete these systems by the guaranteed completion date of August 1, 2022 was impacted by supply delays related to COVID-19 lockdowns and changes in Chinese transportation safety policies as well as from unprecedented weather events. As a result of these events, we made certain force majeure claims under the SCE Agreement. SCE also instructed us to adjust the project schedules into 2023. We are continuing to work with SCE to evaluate our force majeure claims and costs related to the schedule changes. If we cannot reach agreement with SCE about the applicability of force majeure relief, we may be required to pay liquidated damages up to an aggregate maximum of $89 million and may not be able to recover costs associated with schedule changes.

Despite the delays, two of the three SCE projects are currently in the commissioning stage and are expected to reach substantial completion by the end of 2023. The third project, which was significantly impacted by the heavy rainfall in California, is expected to reach substantial completion in the first half of 2024.

A majority of our revenues under this contract were recognized in 2022 based upon costs incurred in 2022 relative to total expected costs on this project.

Stock-based Compensation

During the nine months ended September 30, 2023, we granted 140,000 common stock options 66,247 RSUs to certain employees and directors under our 2020 Plan. Our unrecognized stock-based compensation expense was $39.6 million at September 30, 2023 compared to $46.7 million at December 31, 2022 and is expected to be recognized over a weighted-average period of two years. See Note 16 “Stock-based Compensation” for additional information.

Backlog and Awarded Projects

Backlog is an important metric for us because we believe strong order backlogs indicate growing demand and a healthy business over the medium to long term, conversely, a declining backlog could imply lower demand.

The following table presents our backlog:

(In Thousands)

Total project backlog represents energy efficiency projects that are active within our 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. Our sales cycle averages 18 to 42 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 subcontractors, what equipment will be used, and assist in arranging for third party financing, as applicable. It takes an average of 12 to 24 months to convert our awarded backlog to fully-contracted backlog. It may take longer, as it depends on the size and complexity of the project. Historically, approximately 90% of our awarded backlog projects have resulted in a signed contract. After the customer and Ameresco agree to the terms of the contract and the contract is executed, the project moves to fully-contracted backlog. The contracts reflected in our fully-contracted backlog typically have a construction period of 12 to 36 months and we typically expect to recognize revenue for such contracts over the same period.

Our O&M backlog represents expected future revenues under signed, multi-year customer contracts for the delivery of O&M services, primarily for energy efficiency and renewable energy construction projects completed by us for our customers.

We define our 12-month backlog as the estimated amount of revenues that we expect to recognize in the next twelve months from our fully-contracted backlog. See “We may not recognize all revenues from our backlog or receive all payments anticipated under awarded projects and customer contracts” and “In order to secure contracts for new projects, we typically face a long and variable selling cycle that requires significant resource commitments and requires a long lead time before we realize revenues” in Item 1A, Risk Factors in our 2022 Form 10-K.

Assets in Development

Assets in development, which represents the potential design/build project value of small-scale renewable energy plants that have been awarded or for which we have secured development rights, were estimated at $1.8 billion and $1.4 billion, net of amount attributable to a non-controlling interest at September 30, 2023 and 2022, respectively. The portion of assets in development related to spending for Energy as a Service assets was approximately $41.2 million and $36.4 million at September 30, 2023 and 2022, respectively. This is another important metric because it helps us gauge our future capacity to generate electricity or deliver renewable gas fuel which contributes to our recurring revenue stream.

Results of Operations

All financial result comparisons made below are against the same prior year period unless otherwise noted.

The following tables set forth certain financial data from the condensed consolidated statements of income for the periods indicated:

(In Thousands)

Our results of operations for the three months ended September 30, 2023 are due to the following:

• Revenues: total revenues for the three months ended September 30, 2023 decreased over 2022 primarily due to a $108.8 million, or 31%, decrease in our project revenues attributed to the timing of revenue recognized as a result of the phase of active projects versus the prior year, including our SCE battery storage project.
• Cost of Revenues and Gross Profit: the decrease in cost of revenues and gross profit is primarily due to the decrease in project revenues described above. However, our gross profit as a percent of revenues increased due to lower revenue contribution from our lower margin SCE battery storage project.
• Selling, General and Administrative Expenses (“SG&A”): SG&A expenses for the three months ended September 30, 2023 increased over 2022 primarily due to project development costs not realized on projects, higher professional fees, and amortization expense related to acquired intangible assets, partially offset by decreased salaries and related benefits, and miscellaneous expenses.
• Other Expenses, Net: Other expenses, net for the three months ended September 30, 2023 increased over 2022 primarily due to higher interest expenses, net of $2.0 million related to an increase in the amount of non-recourse project financing outstanding and higher interest rates, $2.1 million in accounts receivable factoring related costs, an increase in foreign currency transaction losses, partially offset by higher gains from derivatives transactions.
• Income Tax (Benefit) Provision: the provision for income taxes is based on various rates set by federal, state, provincial and local authorities and is affected by permanent and temporary differences between financial accounting and tax reporting requirements. We expect the effective tax rate will be lower in 2023 as compared to 2022 primarily due to the effects of a large Section 179D Energy Efficient Building deduction documented and made available, additional investment tax credits which we are entitled to from solar, storage, and RNG plants placed into service or are forecasted to be placed into service during 2023, higher level of compensation deductions related to employee stock option exercises, and generally higher Section 179D deductions available in 2023 under the IRA.
• Net Income and Earnings Per Share: Net income attributable to common shareholders decreased due to the reasons described above. Basic earnings per share for the three months ended September 30, 2023 was $0.41, a decrease of $0.12 per share compared to the same period of 2022. Diluted earnings per share for 2023 was $0.40, a decrease of $0.11 per share compared to last year.

(In Thousands)

Our results of operations for the nine months ended September 30, 2023 are due to the following:

• Revenues: total revenues for the nine months ended September 30, 2023 decreased over 2022 primarily due to a $579.3 million, or 47%, decrease in our project revenues attributed to the timing of revenue recognized as a result of the phase of active projects versus the prior year, including our SCE battery storage project, partially offset by a $12.0 million increase in energy assets revenues.
• Cost of Revenues and Gross Profit: the decrease in cost of revenues is primarily due to the decrease in project revenues described above. Gross profit decreased due to decreased revenue, however, our gross profit as a percent of revenues increased due to the lower revenue contribution from our lower margin SCE battery storage project.
• Selling, General and Administrative Expenses (“SG&A”): SG&A expenses for the nine months ended September 30, 2023 increased over 2022 primarily due to project development costs not realized on projects, higher professional fees, and IT and telecommunications costs. These were partially offset by decreased miscellaneous expenses as the nine months ended September 30, 2022 included costs related to a settlement of an outstanding legal proceeding.
• Other Expenses, Net: Other expenses, net for the nine months ended September 30, 2023 increased over 2022 primarily due to higher interest expenses, net of $5.4 million related to an increase in the amount of non-recourse project financing outstanding and higher interest rates, $3.3 million in accounts receivable factoring related costs, lower government incentive income, partially offset by higher gains from derivatives transactions.
• Income Tax (Benefit) Provision: the provision for income taxes is based on various rates set by federal, state, provincial and local authorities and is affected by permanent and temporary differences between financial accounting and tax reporting requirements. The effective tax rate was lower in 2023 as compared to 2022 primarily due to the effects of a large Section 179D Energy Efficient Building deduction documented and made available, additional investment tax credits which we are entitled to from solar, storage, and RNG plants placed into service or are forecasted to be placed into service during 2023, higher level of compensation deductions related to employee stock option exercises, and generally higher Section 179D deductions available in 2023 under the IRA.
• Net Income and Earnings Per Share: Net income attributable to common shareholders decreased due to the reasons described above. Basic earnings per share for the nine months ended September 30, 2023 was $0.55, a decrease of $0.93 per share compared to the same period of 2022. Diluted earnings per share for 2023 was $0.54, a decrease of $0.90 per share compared to last year. The results for the nine months ended September 30, 2023 and 2022 reflect a non-cash downward adjustment of $2.1 million and $2.9 million, respectively, related to non-controlling interest activities.

Business Segment Analysis

Our reportable segments for the three and nine months ended September 30, 2023 were U.S. Regions, U.S. Federal, Canada, Alternative Fuels and All Other. These segments do not include results of other activities, such as corporate operating expenses not specifically allocated to the segments. See Note 17 “Business Segment Information” for additional information about our segments.

All financial result comparisons made below relate to the three and nine-month period and are against the same prior year period unless otherwise noted.

Revenues

(In Thousands)

• U.S. Regions: revenues decreased primarily due to lower project revenues resulting from the timing of revenue recognized based upon costs incurred to date relative to total expected costs on active projects, including our SCE battery storage projects, versus the prior period.
• U.S. Federal: the decrease in revenue versus the prior year is primarily due to lower project revenues. Project revenues decreased year-over-year resulting from the timing of revenue recognized based upon costs incurred to date relative to total expected costs on active projects.
• Canada: revenues increased primarily due to higher project revenues resulting from the timing of revenue recognized based upon costs incurred to date relative to total expected costs on active projects compared to the prior period.
• Alternative Fuels: the decrease is primarily due to lower production resulting from unplanned downtime at certain facilities.
• All Other: All other revenues increased year-over-year primarily due to higher project revenues in the United Kingdom and Europe resulting from the timing of revenue recognized based upon costs incurred to date relative to total expected costs on active projects.

Income before Taxes and Unallocated Corporate Activity

(In Thousands)

• U.S. Regions: the decrease is primarily due to the lower revenues described above, partially offset by lower SG&A expenses and other expenses, net.
• U.S. Federal: the decrease is primarily due to the lower revenues described above.
• Canada: the increase is primarily due to the higher revenues described above partially offset by higher project development costs.
• Alternative Fuels: the decrease is primarily due to higher direct costs related to unplanned maintenance, higher depreciation expense related to the timing of assets placed in operations, and increased interest expense, net.
• All Other: the decrease is primarily due to higher SG&A expenses and accounts receivable factoring related costs, partially offset by the higher revenues described above.
• Unallocated corporate activity includes all corporate level selling, general and administrative expenses and other expenses not allocated to the segments. We do not allocate any indirect expenses to the segments. Corporate activity increased primarily due to higher net salaries and benefit costs.

Liquidity and Capital Resources

Overview

Since inception, we have funded operations primarily through cash flow from operations, advances from Federal ESPC projects, our senior secured credit facility, various forms of other debt and equity offerings. See Note 8 “Debt and Financing Lease Liabilities” for additional information.

Working capital requirements can be susceptible to fluctuations during the year due to timing differences between costs incurred, the timing of milestone-based customer invoices and actual cash collections. Working capital may also be affected by seasonality, growth rate of revenue, long lead-time equipment purchase patterns, advances from Federal ESPC projects, and payment terms for payables relative to customer receivables.

We expect to incur additional expenditures in connection with the following activities:

• equity investments, project asset acquisitions and business acquisitions that we may fund from time to time
• capital investment in current and future energy assets
• material, equipment, and other expenditures for large projects

We regularly monitor and assess our ability to meet funding requirements. We believe that cash and cash equivalents, working capital and availability under our revolving senior secured credit facility, combined with our right (subject to lender consent) to increase our revolving credit facility by $100.0 million, plus asset sales, tax equity transfers, and our general access to credit and equity markets, will be sufficient to fund our operations through at least November 2024 and thereafter. With the adjustments to the anticipated timeline for completing the SCE battery storage projects, we have requested an additional extension to the maturity date for the remaining principal amount of the delayed draw term loan A under our senior secured credit facility, which is scheduled to mature on December 15, 2023. As of the filing date of this Form 10-Q, the remaining principal balance was $90.0 million.

We continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate and that we can meet our capital and debt service requirements. This may include limiting discretionary spending across the organization and re-prioritizing our capital projects amid times of political unrest, the duration of supply challenges, and the rate and duration of the inflationary pressures. For example, recent increases in inflation and interest rates have impacted overall market returns on assets. We have therefore been particularly prudent in our capital commitments over the past few quarters, ensuring that our assets in development continue to align with our hurdle rates.

August 2023 Purchase and Sale Agreement

On August 4, 2023, we entered into a purchase and sale agreement to acquire an energy asset project and to acquire 100% of the stock of Bright Canyon Energy Corporation (“BCE”) in a two-phased transaction. Phase 1, the purchase of the energy asset project, closed on August 4, 2023 and did not constitute a business in accordance with ASC 805-50, Business Combinations.

The adjusted purchase price for phase 1, net of $11.2 million cash acquired, was $76.8 million, of which $5.0 million was paid in cash, $46.7 million was financed by the seller, and we assumed a construction loan on the energy asset project for $36.3 million. Upon completion of the project, this loan will be converted to a term loan. In September 2023, we paid $12.5 million in principal on the seller’s note. As of September 30, 2023, the balance of the seller’s note was $34.2 million, which is expected to be paid with $5.9 million in cash before the end of this fiscal year and the remaining $28.3 million will be paid in January 2024. We have also agreed to sell back to the seller energy credits for the projects acquired as part of this transaction for the fair market value of these credits in early in 2024. We also assumed a land lease for the energy asset project. See Note 7. Leases for additional information on the lease.

In the second phase, we plan to acquire BCE, including its interest in a consolidated joint venture and its interests in project subsidiaries developing or with rights to develop solar, battery, and microgrid assets for a purchase price of $39.1 million of which $6.6 million would be paid at the closing of the second phase and the remaining $32.5 million would be financed by a seller note accruing interest of 5.0% and payable in August 2024. The completion of the second phase is subject to a number of conditions and third-party consents and is targeted to close late in 2023 or early 2024. We may be required to make additional contingent payments for this acquisition based on certain projects achieving commercial operation and if the projects qualify for higher energy tax credits than expected.

Senior Secured Credit Facility — Revolver and Term Loans

On March 17, 2023, we entered into a second amendment to our fifth amended and restated senior secured credit facility, which increased the total funded debt to EBITDA covenant ratio from a maximum of 3.50 to 4.00 for the quarters ended March 31, 2023 and June 30, 2023, and 3.50 thereafter.

On August 24, 2023, we entered into a third amendment to our fifth amended and restated senior secured credit facility, which extended the maturity date of our $220.0 million delayed draw term loan A, such that after paying $55.0 million in connection with the amendment, $45.0 million is due November 15, 2023, and the remaining principal amount is due December 15, 2023. The amendment also increased the total funded debt to EBITDA covenant ratio from a maximum of 3.50 to 4.25 for the quarter ended September 30, 2023, and 3.50 thereafter. As of September 30, 2023, the balance on the senior secured term loans was $240.0 million, the balance on the senior secured revolving credit facility was $67.9 million, and we had funds available of $38.3 million.

Project Financing

Non-recourse Construction Revolvers and Term Loans

We have entered into a number of construction and term loan agreements for the purpose of constructing and owning certain renewable energy plants. The physical assets and the operating agreements related to the renewable energy plants are generally owned by wholly owned, single member “special purpose” subsidiaries of Ameresco. These construction and term loans are structured as project financings made directly to a subsidiary, and upon commercial operation and achieving certain milestones in the credit agreement, the related construction loan converts into a term loan. While we are required under GAAP to reflect these loans as liabilities on our condensed consolidated balance sheets, they are generally non-recourse and not direct obligations of Ameresco, Inc.

On March 31, 2023, we entered into a credit agreement for a construction facility with a total commitment of CAD$100.0 million and as of September 30, 2023, no funds were drawn under this facility.

On May 31, 2023, we entered into the first amendment to a loan agreement that increased the original commitment of $125.0 million by $90.0 million to $215.0 million and at closing we drew down the $90.0 million and on September 28, 2023 we entered into the second amendment to this loan agreement that increased the maximum commitment from $215.0 million to $500.0 million, increased the interest rate to 6.70% and changed the maturity date to August 31, 2039. At closing we drew down an additional $135.5 million.

On April 18, 2023, one of our consolidated joint venture subsidiaries (“JV”) entered into a construction loan agreement with two lenders for a principal amount of up to $140.8 million under a non-recourse credit facility. At the closing, the JV drew down $90.9 million for construction of an energy asset and subsequently drew down an additional $32.2 million. Monthly payments of interest only on the loan will be due and payable in accordance with the provisions as set forth in the agreement. Any outstanding principal of the loan and unpaid interest shall be paid in full no later than the maturity date, July 2024. The loan will be repaid after the energy asset project achieves provisional acceptance, through a sale-leaseback financing under lease agreements to be entered into between the same parties, the form of which were included in the closing documents.

On August 18, 2023, we entered into a construction and development loan agreement which provides a loan in a principal amount of up to $300.0 million. At the closing, we drew down $200.0 million under this facility, of which approximately $187.0 million was used to reimburse Ameresco for development and construction costs. Subsequent to closing, we drew down an additional $15.2 million.

The loan bears interest at a rate of 4.00% plus the greater of (i) Term SOFR for a one-month tenor and (ii) the 10-year United States treasury rate and a fee equal to 0.25% of any unused committed principal amount. The loan matures on August 31, 2026, with a one-year extension option that can be exercised if certain circumstances are met, including payment of a $3.0 million extension fee.

Net proceeds from non-recourse construction revolvers and term loans during the nine months ended September 30, 2023 totaled $566.4 million.

Non-recourse Sale-leasebacks

During the nine months ended September 30, 2023, we sold and leased back eight energy assets for $100.3 million in cash proceeds under our master sale-leaseback agreements.

Federal ESPC Liabilities

We have arrangements with certain third-parties to provide advances to us during the construction or installation of projects for certain customers, typically federal governmental entities, in exchange for our assignment to the lenders of our rights to the long-term receivables arising from the ESPCs related to such projects. These financings totaled $486.0 million as of September 30, 2023. 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 liability remains on our condensed consolidated balance sheets until the completed project is accepted by the customer.

We are the primary obligor for financing received, but only until final acceptance of the work by the customer. At this point recourse to us ceases and the ESPC receivables are transferred to the investor. The transfers of receivables under these agreements do not qualify for sales accounting until final customer acceptance of the work, so the advances from the investors are not classified as operating cash flows. Cash draws that we received under these ESPC agreements were $107.3 million during the nine months ended September 30, 2023, and are recorded as financing cash inflows. The use of the cash received under these arrangements is to pay project costs classified as operating cash flows and totaled $143.6 million during the nine months ended September 30, 2023. Due to the manner in which the ESPC contracts with the third-party investors are structured, our reported operating cash flows are materially impacted by the fact that operating cash flows only reflect the ESPC contract expenditure outflows and do not reflect any inflows from the corresponding contract revenues. Upon acceptance of the project by the federal customer the ESPC receivable and corresponding ESPC liability are removed from our condensed consolidated balance sheets as a non-cash settlement.

Cash Flows

The following table summarizes our cash flows from operating, investing, and financing activities:

(In Thousands)

Our service offering also includes the development, construction, and operation of small-scale renewable energy plants. Small-scale renewable energy projects, or energy assets, can either be developed for the portfolio of assets that we own and operate or designed and built for customers. Expenditures related to projects that we own are recorded as cash outflows from investing activities. Expenditures related to projects that we build for customers are recorded as cash outflows from operating activities as cost of revenues.

Cash Flows from Operating Activities

Our cash flows from operating activities during the nine months ended September 30, 2023 improved over the same period last year primarily due to a decrease of $330.3 million in unbilled revenue (costs and estimated earnings in excess of billings) due to the timing of when certain projects are invoiced, including our SCE battery storage project and a $105.4 million decrease in accounts receivable, which were partially offset by decreases of $181.5 million in accounts payable, accrued expenses and other current liabilities and $49.1 million in net income when compared to the prior year period.

Cash Flows from Investing Activities

During the nine months ended September 30, 2023 we made capital investments of $445.5 million in new energy assets and $8.0 million in major maintenance of energy assets compared to $182.1 million and $16.1 million, respectively, in 2022. In addition, during the nine months ended September 30, 2023 we paid $9.2 million, net of cash received, for the acquisition of Enerqos.

We currently plan to invest approximately $25 million to $50 million in additional capital expenditures during the remainder of 2023, principally for the construction or acquisition of new renewable energy plants, the majority of which we expect to fund with project finance debt.

Cash Flows from Financing Activities

Our primary sources of financing for the nine months ended September 30, 2023 were net proceeds from long-term debt of $720.0 million, net proceeds received from Federal ESPC projects and energy asset receivable financing arrangements of $119.8 million, partially offset by payments on our senior secured credit facility of $115.0 million and payments on long-term debt of $162.7 million.

Our primary sources of financing for the nine months ended September 30, 2022 were net proceeds from long-term debt financings of $328.2 million, net proceeds received from Federal ESPC projects and energy assets of $181.5 million, and proceeds from our senior secured credit facility of $139.0 million, partially offset by payments on long-term debt of $111.3 million.

We currently plan additional project financings of approximately $50 million during the remainder of 2023 to fund the construction or the acquisition of new renewable energy plants as discussed above.

Critical Accounting Estimates

Preparing our condensed consolidated financial statements in accordance with GAAP involves us making estimates and assumptions that affect reported amounts of assets and liabilities, net sales and expenses, and related disclosures in the accompanying notes at the date of our financial statements. We base our estimates on historical experience, industry and market trends, and on various other assumptions that we believe to be reasonable under the circumstances. However, by their nature, estimates are subject to various assumptions and uncertainties, and changes in circumstances could cause actual results to differ from these estimates, sometimes materially.

Income Taxes

We have reviewed all tax positions taken as of September 30, 2023 and there were no additional uncertain tax positions taken during the three and nine months ended September 30, 2023. We believe our current tax reserves are adequate to cover all known tax uncertainties.

Other than as noted above, there have been no material changes in our critical accounting estimates from those disclosed in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2022 Form 10-K. In addition, refer to Note 2 “Summary of Significant Accounting Policies” for updates to critical accounting policies.

Recent Accounting Pronouncements

See Note 2, “Summary of Significant Accounting Policies” for a discussion of recent accounting pronouncements.

As of September 30, 2023, there have been no significant changes in market risk exposures that materially affected the quantitative and qualitative disclosures as described in Item 7A to our 2022 Form 10-K.

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this quarterly report, or the evaluation date. Disclosure controls and procedures are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, after evaluating the effectiveness of our disclosure controls and procedures as of the evaluation date, concluded that as of the evaluation date, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

During the year ended December 31, 2022, we implemented a new Enterprise Resource Planning (“ERP”) system. In connection with this ERP implementation, we updated and will continue to update our internal control over financial reporting, as necessary, to accommodate modifications to our business processes and accounting procedures. .

During the nine months ended September 30, 2023, two leases commenced under lease agreements that contained in-kind consideration in the form of services. In connection with these complex lease agreements unique to Ameresco, we updated the design of existing lease controls to support modifications to our business processes and related accounting procedures.

Except as disclosed above, there were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our business is subject to numerous risks, a number of which are described below and under “Risk Factors” in Part I, Item 1A of our 2022 Form 10-K.

You should carefully consider these risks together with the other information set forth in this report, which could materially affect our business, financial condition and future results. The risks described in Part I, Item 1A of our 2022 Form 10-K are not the only risks we face. Risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and operating results.