Ameresco, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Leases

Leases

9 Months Ended

Sep. 30, 2019

LEASES

On January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842), using the modified retrospective approach. The Company elected the package of practical expedients available in the standard and as a result, did not reassess the lease classification of existing contracts or leases or the initial direct costs associated with existing leases. The Company has also elected the practical expedient to not separate lease components and non-lease components and will account for the leases as a single lease component for all classes of leases.

As a result of the adoption of ASC 842, the Company recognized an increase in lease ROU assets of $31,639, current portions of operating lease ROU liabilities of $5,084 and an increase to long-term portions of operating lease liabilities of $28,480. There was no net impact to the condensed consolidated statements of income or retained earnings for the adoption of ASC 842. No impairment was recognized on the ROU asset upon adoption. These adjustments are detailed as follows:



	As of January 1, 2019
	As Reported		842 Adjustment		Adjusted Balances
Operating Leases:
Operating lease assets	$	—	$	31,639	$	31,639
Current portions of operating lease liabilities	—		5,084		5,084
Long-term portions of operating lease liabilities	—		28,480		28,480
Total operating lease liabilities	$	—	$	33,564	$	33,564
Weighted-average remaining lease term					10 years
Weighted-average discount rate					6.0		%

Financing Leases:
Energy assets, net	$	38,263	$	—	$	38,263
Current portions of financing lease liabilities	4,956		—		4,956
Long-term financing lease liabilities, less current portions and net of deferred financing fees	28,407		—		28,407
Total financing lease liabilities	$	33,363	$	—	$	33,363
Weighted-average remaining lease term					18 years
Weighted-average discount rate					11.7		%

The Company enters into a variety of operating lease agreements through the normal course of its business including certain administrative offices. The leases are long-term, non-concealable real estate lease agreements, expiring at various dates through fiscal 2025. The agreements generally provide for fixed minimum rental payments and the payment of utilities, real estate taxes, insurance and repairs. The Company also leases certain land parcels related to our energy projects, expiring at various dates through fiscal 2044. The office and land leases make up a significant portion of the Company’s operating lease activity. Many of these leases have one or more renewal options that allow the Company, at it’s discretion, to renew the lease for six months to seven years. Only renewal options that the Company believed were likely to be exercised were included in our lease calculations. Many land leases include minimum lease payments that increase when the related project becomes operational. In these cases, the commercial operation date was estimated by the Company and used to calculate the estimated minimum lease payments.

The Company also enters into leases for IT equipment and service agreements, automobiles, and other leases related to our construction projects such as equipment, mobile trailers and other temporary structures. The Company utilizes the portfolio approach for this class of lease. These leases are either short-term in nature or immaterial.

A portion of the Company’s real estate leases are generally subject to annual changes in the Consumer Price Index (“CPI”). The Company utilized each lease’s minimum lease payments to calculate the lease balances upon transition. The subsequent increases in rent based on changes in CPI were excluded and will be excluded for future leases from the calculation of the lease balances, but will be recorded to the condensed consolidated statement of income as part of our operating lease costs.

The Company has elected the practical expedient to not separate lease and non-lease components for existing leases for real estate and land leases. Going forward if a lease has non-lease components the Company will allocate consideration based on price information in the agreement or, if this information is not available, the Company will make a good faith estimate based on available pricing information at the time.

The discount rate was calculated using an incremental borrowing rate based on financing rates on secured comparable notes with comparable terms and a synthetic credit rating calculated by a third party. The Company elected to apply the discount rate using the remaining lease term at the date of adoption.

The Company has a number of leases that are classified as financing leases, which relate to transactions that are considered sale-leasebacks under ASC 840. See the sale-leaseback section below for additional information on the Company’s financing leases.

Supplemental balance sheet information related to leases at September 30, 2019 is as follows:



	September 30, 2019
Operating Leases:
Operating lease assets	$	32,540
Current operating lease liabilities	5,935
Long-term portions of operating lease liabilities	28,799
Total operating lease liabilities	$	34,734
Weighted-average remaining lease term	10 years
Weighted-average discount rate	6.3		%

Financing Leases:
Energy assets, net	$	36,666
Current portions of financing lease liabilities	5,008
Long-term financing lease liabilities, less current portions and net of deferred financing fees	26,098
Total financing lease liability	$	31,106
Weighted-average remaining lease term	17 years
Weighted-average discount rate	11.8		%

The costs related to our leases are as follows:



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating Lease:
Operating lease costs	$	1,913	$	5,660

Financing Lease:
Amortization expense	533		1,597
Interest on lease liabilities	854		2,750

Total lease costs	$	3,300	$	10,007

The Company’s estimated minimum future lease obligations under our leases are as follows:



	Operating Leases		Financing Leases
Year ended December 31,
2019	$	1,851	$	4,302
2020	7,523		7,881
2021	6,156		6,775
2022	5,600		5,173
2023	4,348		3,686
Thereafter	22,977		26,799
Total minimum lease payments	$	48,455	$	54,616
Less: interest	13,721		23,510
Present value of lease liabilities	$	34,734	$	31,106

The Company has determined that certain power purchase agreements (“PPAs”) contain a lease component in accordance with ASC 840, Leases. The Company recognized $2,243 and $6,737 of operating lease revenue under these agreements during the three and nine months ended September 30, 2019, respectively, which was reflected in revenues on the condensed consolidated statements of income. PPAs signed after January 1, 2019 no longer meet the definition of a lease upon the adoption of ASC 842, Leases, and are instead accounted for in accordance with ASC 606, Revenues From Contracts With Customers.

Sale-Leaseback

For solar PV projects that the Company has determined not to be integral equipment, the Company then determines if the leaseback should be classified as a financing lease or an operating lease. All solar PV projects sold to date under the sale-leaseback program have been determined by the Company to be financing leases. For leasebacks classified as financing leases, the Company initially records a financing lease asset and financing lease obligation in its condensed consolidated balance sheets equal to the lower of the present value of the Company’s future minimum leaseback payments or the fair value of the solar PV project. For financing leasebacks, the Company defers any gain or loss, representing the excess or shortfall of cash received from the investor compared to the net book value of the asset in the Company’s condensed consolidated balance sheets at the time of the sale. The Company records the long term portion of any deferred gain or loss in other liabilities and other assets, respectively, and the current portion of any deferred gain and loss in accrued expenses and other current liabilities and prepaid expenses and other current assets, respectively, in its condensed consolidated balance sheets and amortizes the deferred amounts over the lease term in cost of revenues in its condensed consolidated statements of income. Net amortization expense in cost of revenues related to deferred gains and losses was $57 and $48 of net gains for the three months ended September 30, 2019 and 2018, respectively. Net amortization expense in cost of revenues related to deferred gains and losses was $172 and $153 for the nine months ended September 30, 2019 and 2018, respectively.

During the third quarter of 2018, the Company entered into an agreement with an investor which gives us the option to sell and contemporaneously lease back solar photovoltaic (“solar PV”) projects through August 2019 up to a maximum funding amount of $100.0 million. The Company amended this agreement to extend the term through November 2019. As of September 30, 2019, $90.2 million remained available under the lending commitment.

A summary of amounts related to sale leasebacks in the Company’s condensed consolidated balance sheets is as follows:



	September 30,		December 31,
	2019		2018
Financing lease assets, net	$	36,666	$	38,263
Deferred loss, short-term, net	115		115
Deferred loss, long-term, net	1,830		1,917
Total deferred loss	$	1,945	$	2,032
Financing lease liabilities, short-term	5,008		4,956
Financing lease liabilities, long-term	26,098		28,407
Total financing lease liabilities	$	31,106	$	33,363
Deferred gain, short-term, net	345		345
Deferred gain, long-term, net	5,549		5,808
Total deferred gain	$	5,894	$	6,153

Leases

LEASES



	As of January 1, 2019
	As Reported		842 Adjustment		Adjusted Balances
Operating Leases:
Operating lease assets	$	—	$	31,639	$	31,639
Current portions of operating lease liabilities	—		5,084		5,084
Long-term portions of operating lease liabilities	—		28,480		28,480
Total operating lease liabilities	$	—	$	33,564	$	33,564
Weighted-average remaining lease term					10 years
Weighted-average discount rate					6.0		%

Financing Leases:
Energy assets, net	$	38,263	$	—	$	38,263
Current portions of financing lease liabilities	4,956		—		4,956
Long-term financing lease liabilities, less current portions and net of deferred financing fees	28,407		—		28,407
Total financing lease liabilities	$	33,363	$	—	$	33,363
Weighted-average remaining lease term					18 years
Weighted-average discount rate					11.7		%

Supplemental balance sheet information related to leases at September 30, 2019 is as follows:



	September 30, 2019
Operating Leases:
Operating lease assets	$	32,540
Current operating lease liabilities	5,935
Long-term portions of operating lease liabilities	28,799
Total operating lease liabilities	$	34,734
Weighted-average remaining lease term	10 years
Weighted-average discount rate	6.3		%

Financing Leases:
Energy assets, net	$	36,666
Current portions of financing lease liabilities	5,008
Long-term financing lease liabilities, less current portions and net of deferred financing fees	26,098
Total financing lease liability	$	31,106
Weighted-average remaining lease term	17 years
Weighted-average discount rate	11.8		%

The costs related to our leases are as follows:



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating Lease:
Operating lease costs	$	1,913	$	5,660

Financing Lease:
Amortization expense	533		1,597
Interest on lease liabilities	854		2,750

Total lease costs	$	3,300	$	10,007

The Company’s estimated minimum future lease obligations under our leases are as follows:



	Operating Leases		Financing Leases
Year ended December 31,
2019	$	1,851	$	4,302
2020	7,523		7,881
2021	6,156		6,775
2022	5,600		5,173
2023	4,348		3,686
Thereafter	22,977		26,799
Total minimum lease payments	$	48,455	$	54,616
Less: interest	13,721		23,510
Present value of lease liabilities	$	34,734	$	31,106

Sale-Leaseback

A summary of amounts related to sale leasebacks in the Company’s condensed consolidated balance sheets is as follows:



	September 30,		December 31,
	2019		2018
Financing lease assets, net	$	36,666	$	38,263
Deferred loss, short-term, net	115		115
Deferred loss, long-term, net	1,830		1,917
Total deferred loss	$	1,945	$	2,032
Financing lease liabilities, short-term	5,008		4,956
Financing lease liabilities, long-term	26,098		28,407
Total financing lease liabilities	$	31,106	$	33,363
Deferred gain, short-term, net	345		345
Deferred gain, long-term, net	5,549		5,808
Total deferred gain	$	5,894	$	6,153

Leases

LEASES



	As of January 1, 2019
	As Reported		842 Adjustment		Adjusted Balances
Operating Leases:
Operating lease assets	$	—	$	31,639	$	31,639
Current portions of operating lease liabilities	—		5,084		5,084
Long-term portions of operating lease liabilities	—		28,480		28,480
Total operating lease liabilities	$	—	$	33,564	$	33,564
Weighted-average remaining lease term					10 years
Weighted-average discount rate					6.0		%

Financing Leases:
Energy assets, net	$	38,263	$	—	$	38,263
Current portions of financing lease liabilities	4,956		—		4,956
Long-term financing lease liabilities, less current portions and net of deferred financing fees	28,407		—		28,407
Total financing lease liabilities	$	33,363	$	—	$	33,363
Weighted-average remaining lease term					18 years
Weighted-average discount rate					11.7		%

Supplemental balance sheet information related to leases at September 30, 2019 is as follows:



	September 30, 2019
Operating Leases:
Operating lease assets	$	32,540
Current operating lease liabilities	5,935
Long-term portions of operating lease liabilities	28,799
Total operating lease liabilities	$	34,734
Weighted-average remaining lease term	10 years
Weighted-average discount rate	6.3		%

Financing Leases:
Energy assets, net	$	36,666
Current portions of financing lease liabilities	5,008
Long-term financing lease liabilities, less current portions and net of deferred financing fees	26,098
Total financing lease liability	$	31,106
Weighted-average remaining lease term	17 years
Weighted-average discount rate	11.8		%

The costs related to our leases are as follows:



	Three Months Ended September 30, 2019		Nine Months Ended September 30, 2019
Operating Lease:
Operating lease costs	$	1,913	$	5,660

Financing Lease:
Amortization expense	533		1,597
Interest on lease liabilities	854		2,750

Total lease costs	$	3,300	$	10,007

The Company’s estimated minimum future lease obligations under our leases are as follows:



	Operating Leases		Financing Leases
Year ended December 31,
2019	$	1,851	$	4,302
2020	7,523		7,881
2021	6,156		6,775
2022	5,600		5,173
2023	4,348		3,686
Thereafter	22,977		26,799
Total minimum lease payments	$	48,455	$	54,616
Less: interest	13,721		23,510
Present value of lease liabilities	$	34,734	$	31,106

Sale-Leaseback

A summary of amounts related to sale leasebacks in the Company’s condensed consolidated balance sheets is as follows:



	September 30,		December 31,
	2019		2018
Financing lease assets, net	$	36,666	$	38,263
Deferred loss, short-term, net	115		115
Deferred loss, long-term, net	1,830		1,917
Total deferred loss	$	1,945	$	2,032
Financing lease liabilities, short-term	5,008		4,956
Financing lease liabilities, long-term	26,098		28,407
Total financing lease liabilities	$	31,106	$	33,363
Deferred gain, short-term, net	345		345
Deferred gain, long-term, net	5,549		5,808
Total deferred gain	$	5,894	$	6,153