Ameresco is a well-managed, owner-operated business that is likely to grow significantly over the next five years. Ameresco is what is commonly referred to as an “ESCO” (energy service company), founded in 2000 by the current CEO George Sakellaris. Sakellaris is a key piece of the thesis - he is a pioneer in the industry, owns 50.4% of the company, never sells shares and has added to his stake in the business numerous times.
At a high level, Ameresco can be broken down into two main segments: services and owned assets. Please note that in this report, we use adjusted numbers to estimate the financials of each segment, though the company reports in a different manner – we are happy to go into that detail in the Q&A. A concerted effort to expand the company’s ownership of small-scale, renewable energy assets during the last five years has resulted in this business becoming a material proportion of the total value of the company.
We expect the company to triple EBITDA from company-owned assets during the next five years. Combined with a modestly growing services business, an equity owner ought to be able to achieve returns approaching 20% compounded during the period. Given the substantial visibility in the services business from the company’s growing, higher-margin backlog and the long-term contracted nature of the owned assets, the return offered by Ameresco is particularly attractive on a risk-adjusted basis, and we believe it can continue to compound at attractive returns beyond the next five years.
Summary Return Potential
Ameresco’s backlog of existing projects, owned asset pipeline, continued growth of the owned asset pipeline, and modest earnings growth in the company’s services business combine to provide attractive returns over a multi-year period.
By 2023 we estimate that nearly 2/3 of the company’s value will reside in its owned asset portfolio. As previously mentioned, base case returns approaching 20% appear attractive in relation to the predictability of the business:
Why Does Opportunity Exist?
- While Ameresco is by no means a micro-cap, the high insider ownership limits the float to approximately $280 million. There is limited analyst coverage and conference calls are usually brief.
- Ameresco doesn’t screen as immediately cheap. On a P/E, P/B or EV/EBITDA basis, the company doesn’t immediately stand out. The shares have also tripled from the 2016 lows. It takes a deeper appreciation of the ongoing business transition (from pure energy efficiency contractor toward owning significant producing assets) and of the meaningful growth in pipeline assets yet to be delivered.
- It is easy to take a cursory glance at the business and assume that the company is highly levered to federal energy policy that, in the current climate, may be a poor place to be exposed. And while Ameresco does have exposure to tax and regulatory policies at the national level, its exposures are more nuanced. In particular, the company is highly exposed to state policies that, while a risk, appear quite supportive.
- The accounting at Ameresco, admittedly, is complex. The cash flow statement looks awful on the surface, and it is easy to take a quick pass on that basis alone. On top of the accounting peculiarities, given the nature of the services business, earnings from quarter to quarter can be quite lumpy. There are valid reasons for this complexity and the company has not raised equity capital since its 2010 IPO.
Management and Incentives
- Ameresco is led by founder and majority shareholder, George Sakellaris. Sakellaris is 71 years old and founded the company in 2000. He immigrated to the United States from Greece to attend college and ultimately built a distinguished career in the energy efficiency management space. Sakellaris owns 50.4% of the equity, and, by virtue of super-voting B shares, controls 80.4% of the vote.
- Sakellaris began his career at New England Electric Corporation (“NEEC”) and in 1979 convinced the utility to launch an energy efficiency consulting business named NEES Energy. He later pioneered the use of the energy savings performance contract (“ESPC”) model and bought NEES from NEEC in 1990. Sakellaris renamed the company Noresco and built the company for several years before selling to Equitable Resources in 1997 for $77 million. Noresco was later bought by United Technologies and remains a competitor today. In 2000, he founded Ameresco. The company made a number of acquisitions over the years, including several efficiency subsidiaries of major utilities at, reportedly, attractive prices. Sakellaris has been instrumental in the development of two of the top energy efficiency firms in the industry.
- Sakellaris was compensated with a $733,000 base salary and earned total compensation of approximately $1.17 million in 2018. His equity stake of approximately $336 million at recent prices is 458 times his most recent base salary and 287 times his most recent total compensation. Sakellaris is well-incentivized to focus on the long-term, per share equity value of the company.
- We believe Sakellaris would be open to a sale of the business at the right price and, in the absence of a transaction, will continue to take steps to maximize shareholder value. A few years ago, the company investigated the creation of a yield-co for the company-owned assets when favorable market conditions existed, and he previously sold a business in this very industry. In an interview shortly after the company’s IPO, Sakellaris told a Forbes reporter that he kept voting control of the company to be able to negotiate the best possible price in case the company is sold.
- Sakellaris and the remainder of the team are incentivized on a variety of well-defined metrics versus targets. Metrics include revenue, EBITDA, new contracts and new awards by business line, SG&A expenses, and growth. The team is also incentivized on achieving total EBITDA above certain thresholds to an unlimited degree. The thoroughness and specificity of the targets is laudable, though one might take issue with the significance of EBITDA in a business that is rapidly becoming more dependent on the efficient deployment of capital into owned assets. Management, nonetheless, appears focused on making rational decisions in the asset business despite the reliance on EBITDA.
- We utilized Tegus to speak with a former VP at Ameresco, who said the following about Sakellaris: “I guess the first thing I'll say is the CEO was, not only founded the companies, kind of almost founded of the industry. Just conceptually, I believe he was one of the first people to identify this potential with ESPC. And that is a business that he loves and wants to do as much of that as possible. I don't know what his current age is, 72 or 73. And I expect him to, my expectation is he is going to stay in that position for quite a while. He's very healthy, he's very mentally quick. Great with numbers, good financial mind.”
From a high level, Ameresco owns two different business, a services business and an owned assets business.
In the services business, a client, like a university or DoD defense base, will solicit proposals seeking to reduce energy consumption and build redundancy into their energy network. Ameresco will conduct audits, propose a series of improvements and guarantee certain performance outcomes. If successful in its bid, Ameresco will implement the solution and, in some cases, provide long-term oversight, repairs and maintenance via the company’s operating and maintenance (“O&M”) business. The investment in the efficiency project is financed either by the client with the assistance of Ameresco (in the case of non-federal clients) or by Ameresco selling its rights to payments from a federal entity to third parites (in the case of federal clients).
In the owned assets business, Ameresco seeks small-scale energy projects in solar and “green gas” (low carbon natural gas) to develop for its own balance sheet. It must finance a project, design a solution and find a third party offtake customer for the energy production, while assuring itself an appropriate return on its equity.
Services Business Details
- The services business has two components: an energy efficiency business and an operating and maintenance (“O&M”) business.
- Ameresco’s energy efficiency business helps clients overhaul major building systems, including heating, ventilation, cooling and lighting. Lighting, heating, and cooling represent approximately 50% of the addressable market. Measures taken include water reclamation, installing LED lighting, smart metering, micro-grid and storage implementations, combined heat and power development, and installation of renewable energy production.
- Ameresco also operates a business that provides operation and management services (“O&M”) to client projects under multi-year contracts. These services are often associated with projects the company has completed in its energy efficiency business. While Ameresco now discloses an O&M backlog, it does not segment these results. In this report, the O&M business is included within the services business.
- Competition in the company’s energy efficiency business is material. The top five or six players represent approximately 50% of the industry, and there is a long-tail of perhaps 100 smaller players. There are some modest barriers to entry to large ESPC contracts given the qualifications contractors must achieve and the financial investment required to continually bid and quote projects with varying odds of success on a per project basis. Depending on the year, Ameresco is either the number one or two player in the industry and distinguishes itself from the other large players given its independence from any equipment manufacturer. On the other hand, those manufacturers have large installed bases that, in certain circumstances, provide an advantage. At approximately an 8.5% EBITDA margin (and modest D&A), margins are reflective of the competition. Much to the company’s benefit, Ameresco is seeing the emergence of contracts requiring more integrated solutions that require deeper engineering expertise. This may lead to further industry concentration and higher margins.
Source: Internal and Ameresco Investor Presentation
- The market for energy efficiency is more than $7 billion annually and has been growing for several years. The potential for a long runway seems to exist. The charts below illustrate some of the historical progression of the industry. More recently, growth has slowed and industry revenues are likely flat during the last few years, but energy efficiency projects remain one of the cheapest forms of energy production, and Navigant Research sees the market compounding at about 7% through 2024. In a landmark report in 2009, McKinsey estimated an incremental $50 billion of spending per year for ten years (25% of which would be in Ameresco’s commercial end market) would be required to close the gap on an estimated $1.2 trillion in savings that could be had in the United States from energy efficiency alone.
Source: The Edison Foundation
- Backlog progress in the services business during the last three and a half years has been promising. Below is a chart of “fully-contracted backlog” (where the progress is more pronounced) and “awarded backlog” (where the progress is more muted). Fully contracted backlog has grown at an average of 22% annually since the start of 2016. Disclosures on backlog duration (12 month versus post 12 month) suggest some extension of the duration of the fully contracted backlog over this period. Also below is the recently disclosed backlog progress in the company’s O&M business. While it has shown modest growth year-over-year, the backlog has declined marginally each of the last few quarters. The company is confident that this is the underlying lumpiness and timing associated with adding to the backlog, as opposed to a worrying trend.
Source: Internal and Ameresco
- Ameresco is optimistic about margin growth as a result of the improving quality of the services backlog. It appears the market is moving toward, and Ameresco is capturing, more technical, engineering intensive solutions at higher margins. Here is a selection of recent quotes:
“Importantly, we are seeing an increase in gross margins embedded in our backlog as lower-margin contracts progress and are replaced with higher-margin contracts. We believe the increasing complexity of both government and institutional projects will continue to lead to not only larger but higher-margin awards.”
- 2019 Q2 Conference Call
“Importantly, our anticipated gross margin on the backlog is about 1 percentage point higher than a year ago driven by large and more complex projects.”
- 2019 Q1 Conference Call
- A 1% increase in margin would raise EBITDA (and EBIT) at the unit level by approximately 12%.
Owned Assets Business Details
- In the owned asset business, Ameresco is primarily a developer of new projects and it participates in two distinct markets: solar and green gas (mostly landfill natural gas). A diagram of the relevant competition in each field is below (solar left, green gas right). In the solar development business there are many small developers beyond these top players. Competition for projects is generally intense, and the barriers to entry at the local level are minimal. On the other hand, the company's green gas projects face much less competition, and industry dynamics provide some barriers to entry. In landfill gas, for example, the company typically works with a landfill which faces significant liability issues from poor project development (puncturing landfill caps for instance). Given the small incremental economics for the landfill operator and the higher degree of custom engineering on a project (relative to solar), landfills work with a small number of proven firms. Ameresco is one of those developers and its reputation in the niche is quite strong. Returns to equity in this business are, as a result, more attractive.