The climate of uncertainty caused by deadlock in Washington is leading to penny-wise, pound foolish behavior at all levels of government, and Ameresco, Inc. (NYSE:AMRC) felt the pain severely in the third quarter.

Framingham, MA based Ameresco helps institutions, mostly government entities, improve their energy infrastructure and reduce energy use without capital outlays or increases in energy budgets.  It does this by using the cost savings from energy efficiency to finance the capital outlays, allowing schools, hospitals, and the like to insulate or install solar panels while sticking to existing budgets, and often producing some savings.  To take three examples announced in the last month,

  • Four schools in Newton, MA will get solar panels, paying Ameresco only for the electricity generated over the next twenty years.  According to the school chief administrative officer, the schools could see cost savings over the life of the agreement.
  • Reed College in Oregon signed a comprehensive agreement to improve energy efficiency and water savings at the century old campus, which is expected to save the college $2.7 million over the 10 year life of the agreement, compared to projected energy costs of $7.2 million over the period.
  • The city of Longview on the Columbia river in Oregon will spend $3.9 million (or $3 million after a state grant and utility incentives) to replace aging boilers, lighting, and mechanical systems in city buildings.  The remaining $3 million will be financed by a loan that will be completely paid off in 15 years solely by the energy cost savings, which are guaranteed by Ameresco.  After 15 years, the city will have paid off the debt, but the equipment will have years of life left, and will have already saved $564,000.  The city would not have been able to afford to replace the equipment without the Energy Savings Performance Contract.

These sorts of win-win contracts should make sense at any time, but are even more welcome when budgets are tight, as they are today.  But the deadlock in Washington, and worries over the possibility of drastic automatic Federal cuts caused by the fiscal cliff (or the compromise measures which may replace them) are causing Ameresco’s customers to delay signing contracts.  For an in-depth look at Ameresco’s business, see my profile of the company.

Ameresco management had already expected their quarter 2012 results to be less than 2011, but they did not see just how bad things were likely to get.  While Ameresco has continued to execute well on projects, maintaining or improving operating margins and increasing their backlog of awarded projects to a record level, third quarter revenue plunged as the climate of uncertainty and greater concerns about debt led customers to proceed with extreme caution finalizing projects.

Total revenue was down 28% in the third quarter to $163.9 million, with operating income dropping 34.7%.  While the election may have eased some uncertainty, the uncertainty caused by the fiscal cliff will almost certainly continue through the end of the fourth quarter, and its effects are likely to persist through December.  Hence, Ameresco revised guidance sharply downward to $640-$660 million for 2012 (compared to $728 million in 2011) with a profit of $22 to $26 million (compared to $35 million in 2011).

Conclusion

Unsurprisingly, Ameresco stock opened sharply lower today, and is currently down 18% at $8.70.  While I attempted to sell my holdings at $10.30, I was unsurprised that many investors had a much more bearish outlook than I do about Ameresco.

In the mid-term, Ameresco’s prospects are bright.  Obama’s re-election will ensure four more years of strong demand for Ameresco’s services from the Federal government, while the company’s strong backlog shows that 2012 revenue has just been delayed, not lost.  Tight budgets and improving energy efficiency and renewable energy technology can only expand the demand for the company’s services, while the current market conditions are likely to cause some of Ameresco’s competitors (most of which are divisions of conglomerates like United Technologies (NYSE:UTX) and Chevron (NYSE:CVX)) to exit the performance contracting business.

At the state level, Republicans have made slight gains in governors’ races, but these wins were due to “Republican governors… providing the type of results-oriented leadership that is absent in Washington, D.C.,” as Republican Governors Association chairman Bob McDonnell, governor of Virginia put it.  Results-oriented leadership and fiscal conservatism are exactly what Ameresco needs to win new customers at the state level.   Meanwhile, Democrats gained control of more state legislators, so we can expect to see more environmentally friendly policies at the state level, which will also boost the attractiveness of Amereso’s services.

With the long term bright, and the stock price looking increasingly attractive, I plan to increase my holdings of Ameresco over the next few months, after the market finishes digesting the bad news.  I’m not buying yet, however, since I would not be surprised to see Ameresco drop into the $7 range over the next few days, and fourth quarter results are also likely to be bleak.

Disclosure: Long AMRC

This article was first published on the author's Forbes.com blog, Green Stocks on November 8th and AltEnergy Stocks and was republished with permission.

DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results.  This article contains the current opinions of the author and such opinions are subject to change without notice.  This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

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