Good day, and thank you for standing by. Welcome to the Q3 2023 Aecon Group Inc Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that this conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Borgatti. Please go ahead.
Thank you, Kevin, and good morning, everyone. This is Adam Borgatti speaking, and presenting to you this morning are Jean-Louis Servranckx, President and CEO, and David Smales, Executive Vice President and CFO. Our earnings announcement was released yesterday evening, and we posted a slide presentation on the investing section of our website, which we will refer to during this call. Following our comments, we'll be glad to take questions from the analysts, and we ask that analysts keep to one question and a follow-up before getting back into the queue to ensure all have a chance to contribute. As noted on slide two, listeners are reminded that the information we're sharing with you today includes forward-looking statements. These statements are based on assumptions that are subject to significant risks and uncertainties.
Although Aecon believes the expectations reflected in these statements are reasonable, we can give no assurance that these expectations will prove to be correct. With that, I'll now turn the call over to Dave.
Thank you, Adam, and good morning, everyone. I'll touch briefly on Aecon's consolidated results, review results by segment, and then address Aecon's financial position before turning the call over to Jean-Louis. Turning to slide 3, revenue for the Q3 of CAD 1.2 billion, with CAD 81 million or 6% lower compared to the same period last year, primarily due to the impact of the sale of Aecon Transportation East or ATE in the Q2 this year. Adjusting for the sale of ATE, revenue increased on a like-for-like basis by CAD 46 million or 4% in the quarter. Adjusted EBITDA of CAD 32 million, a margin of 2.6%, compared to CAD 93 million, a margin of 7% last year. An operating profit of CAD 140 million, compared to an operating profit of CAD 61 million in the Q3 of 2022.
Excluding the impact of the four legacy projects on results in the Q3 , Adjusted EBITDA from the balance of the business was CAD 123 million, a margin of 11.6%. Diluted earnings per share in the quarter of CAD 1.63, compared to diluted earnings per share of CAD 0.45 in the same period last year. The improvement in operating profit and diluted earnings per share was likely due to a gain related to the sale of a 49.9% interest in the Bermuda International Airport concessionaire of CAD 139 million, including a fair value remeasurement gain of CAD 80 million on Aecon's 50.1% retained interest.
Reported backlog of CAD 6.2 billion at the end of the quarter, after removing CAD 447 million of backlog in Q2 related to the sale of ATE, compared to backlog of CAD 6.3 billion at the end of the third quarter of 2022. New contract awards of CAD 591 million were booked in the quarter, compared to CAD 991 million in the prior period. Now looking at results by segment. Turning to slide 4, construction revenue of CAD 1.2 billion in the Q3 was CAD 83 million or 6% lower than the same period last year.
This was due to lower revenue in Civil operations, driven by a lower volume of road building construction work in Eastern Canada as a result of the sale of ATE in the Q2 of 2023, partially offset by an increase in major project work in Western Canada. After adjusting for the impact of the sale of ATE, construction revenue was CAD 41 million or 3% higher than the same period last year. New contract awards of CAD 563 million in the Q3 , compared to CAD 966 million in the same period last year. Backlog at the end of the quarter of CAD 6.1 billion, compared to CAD 6.2 billion at the same time last year. Turning to slide 5, Adjusted EBITDA in the construction segment of CAD 17 million was CAD 65 million unfavorable compared to the Q3 of last year.
The decrease was driven by negative gross profit of CAD 42 million from a fixed-price legacy project in Civil operations, versus a gross profit of CAD 1 million in the same period last year from the same project, and by a negative gross profit of CAD 50 million from one of the four fixed-price legacy projects in Urban Transportation Solutions, compared to a negative gross profit of CAD 23 million in the same period last year from the same project. Other than the impact of fixed-price legacy projects in the quarter, lower operating profit in the balance of the construction segment was driven by lower operating profit from road building construction work due to the sale of ATE in the Q2 this year, largely offset by higher gross profit margin in Nuclear operations and Urban Transportation Solutions and lower MG&A in Utilities operations.
At September 30, the remaining backlog to be worked off on the four legacy projects was CAD 528 million, compared to CAD 1.1 billion at the end of 2022. These projects comprised 14% of consolidated revenue in the Q3 , compared to 16% in the full year 2022... and 9% of backlog at September 30, compared to 17% at the end of 2022. Turning to slide 6, concession revenue for the Q3 was CAD 26 million, compared to CAD 22 million in the same period last year, primarily due to an increase in airport operations at the Bermuda International Airport. Bermuda continues to operate at a reduced volume compared to pre-pandemic levels, but continued to recover in the first nine months of 2023 from the more severe impacts experienced in 2020, 2021.
This recovery was evidenced by the fact that traffic in the Q3 averaged 75% of the pre-pandemic level in the Q3 of 2019, compared to average traffic in the Q3 of 2022, being 63% of the pre-pandemic level. Adjusted EBITDA in the concession segment of CAD 27 million, compared to CAD 21 million in Q3 last year, primarily due to results from the Bermuda Airport and an increase in management and development fees. As noted previously, operating profit and concessions reflect a gain on sale in the quarter of CAD 139 million. Turning to slide 7. At the end of the Q3 , Aecon had net cash of over CAD 400 million, including cash in joint operations.
On December 31, 2023, convertible debentures with a face value of CAD 184 million will mature, and we expect to repay these debentures at maturity or before. At this point, I'll turn the call over to Jean-Louis.
Thank you, Dave, and good morning, all. The impact of the four Fixed-Price Legacy Projects being performed by joint ventures, in which Aecon is a participant, was felt again in our Q3 results. However, we have made significant progress during 2023 on driving these projects toward completion. One of the four projects reached substantial or mechanical completion in the Q3 , as committed with our client, with two of the remaining three projects currently expected to be substantially complete by date between late 2023 and mid 2024, and the final one currently expected to be substantially complete during 2025.
Aecon and its joint venture partners remain focused on dedicating all necessary resources to complete those four legacy projects, and in the meantime, continue to pursue fair and reasonable settlement agreements with the respective clients in each case. In this respect, we have also made progress in recent quarters. The most recent settlements reached and agreed to between the relevant joint ventures and the respective clients on each of the four projects, including one in the Q3 and two in the Q3 of 2023, have brought additional clarity on schedule, compensation, construction costs, and other potential liabilities. We would be the first to acknowledge that despite this progress and the adjustments we've taken in recent quarters, the risk remains in the event that assumptions, estimates, and all circumstances change.
But we and our joint venture partners are fully focused on completion, pursuing further recoveries, and putting those legacy project behind us. Every day, we are getting closer to the end. Turning to slide 9, demand for Aecon services across Canada continues to be strong. While volatile global and Canadian economic conditions are impacting inflation, interest rates, and overall supply chain efficiency, those factors have stabilized to some extent and have largely been, and will continue to be reflected in the pricing and commercial terms of Aecon's recent and prospective project awards and bids. Despite results having been impacted by the 4 legacy projects in recent periods, there are positive revenue and profitability trends in the balance of Aecon's business that reflect the underlying demand dynamics in the market and strong execution across the balance of our project.
Turning to slide 10, with backlog of CAD 6.2 billion at September 30, 2023, and recurring revenue programs continuing to see robust demand, Aecon believes it is positioned to achieve further revenue growth over the next few years. As a reminder, the major scopes of the GO Expansion On-Corridor Works project, the Scarborough Subway Extension project, the Darlington New Nuclear Project, will only be reflected in backlog at the successful conclusion of the Alliance development phases. Aecon, including joint ventures in which we are participant, is also pre-qualified on a number of project bids due to be awarded during the next 12 months and have a considerable pipeline of opportunities to further add to backlog over time. Trailing twelve months, recurring revenue of CAD 1.1 billion was up 40% versus the prior period and 69% versus two years ago.
Utilities operation and contributions from the GO Expansion On-Corridor Works and Scarborough Subway Extension projects during the respective development phases were the primary drivers of this growth. Utilities operation and further advancement from this project, as we continue through the development phases, are expected to contribute to future growth in recurring revenue. The concession segment is also expected to see airport traffic in Bermuda continue its recovery in 2023 and 2024. Turning to slide 11, Aecon continues to support the energy transition to build and operate sustainable infrastructure. In the Q2 of 2023, the Oneida Energy Storage Project achieved financial close, with Aecon Concessions as an 8.35% equity partner.
Earlier this year, Aecon was awarded a CAD 141 million EPC contract by Oneida Limited Partnership to build this 250-megawatt, 1,000-megawatt-hour advanced stage grid-connected battery storage project, representing the largest clean energy storage project in Canada. Projects such as Oneida Energy Storage, GO Expansion, Scarborough Subway Extension, and Darlington SMR demonstrate the path Aecon is on to embrace the opportunities linked to decarbonization, sustainability, and the energy transition. Turning to slide 12. With strong demand, growing recurring revenue programs, diverse backlog in hand, Aecon is focused on achieving solid execution on its projects and selectively adding to backlog through a disciplined bidding approach that supports long-term margin improvement in the construction segment.
In the concession segment, in addition to expecting an ongoing recovery in travel through the Bermuda International Airport through the remainder of 2023, there are a number of opportunities to add to the existing portfolio of Canadian and international concessions in the next 12-24 months, including projects with private sector clients that support a collective focus on sustainability and the transition to a net zero economy. The GO Expansion On-Corridor Works project and the Oneida Energy Storage Project noted above are examples of the role Aecon's concession segment is playing in developing, operating, and maintaining assets related to this transition. Finally, on slide 13, as disclosed on October 23, Aecon announced a strategic investment by Oaktree Capital Management in Aecon Utilities. The investment closed on October 24.
Oaktree acquired a 27.5% ownership interest in Aecon Utilities by way of a net CAD 150 million investment. This equates to a valuation of CAD 750 million and a trailing twelve-month adjusted EBITDA multiple of 9.3x. The investment positions the business to address attractive industry growth opportunities across utility end markets in Canada and in the U.S., provides financial flexibility to accelerate Aecon Utilities acquisition strategy, introduces a recognized value-added partner in Oaktree, with a successful track record in utility infrastructure investing, and strengthens Aecon's balance sheet, providing Aecon the financial flexibility to fund our strategic growth initiative. We are delighted to partner with an experienced and value-added investor in Oaktree to continue to grow Aecon Utilities across North America. Thank you. We will now turn the call over to analysts for questions.
Thank you, ladies and gentlemen. If you have a question or a comment at this time, please press star one one on your telephone. If your question has been answered, or you wish to remove yourself from the queue, please press star one one again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Yuri Lynk with Canaccord Genuity. Your line is open.
Hey, good morning, guys. Dave, maybe just give us your thoughts on when we might see the... or how do we—what we should expect in terms of the cash impact of the CAD 92 million writedowns taken in the quarter. You did have over CAD 110 million of positive operating cash flow in the quarter. So, what should we expect in terms of operating cash flow in the next couple of quarters? Thanks.
Yeah. So in terms of the agreements we've reached, as Jean-Louis referred to in Q2 and Q3, the positive outcome from those agreements is it deals with settling all the outstanding claims and compensation on a number of items where, to some extent, cost has already been incurred, and so the compensation we're now receiving is positive from a cash flow perspective. So you saw some of that in Q3 with the CAD 100 million improvement in working capital in what is usually a seasonally a seasonal quarter that draws on working capital. Some of that will also be in Q4 and some of it in the first half of 2024. So based on the various agreements, there's some upfront payments and then some attached to milestones along the way.
But they effectively compensate us for working capital that has built up on the balance sheet, for a period of time and will be cash flow positive over the next, 6-9 months.
Okay. So the cash impact of this quarter's write-downs were... was largely reflected in past quarters?
From a cash perspective, yes.
Yeah. Okay. Just a clarification on your liquidity position. I think your operating line's been expanded from CAD 600 million to CAD 850 million. How much of that CAD 850 million is available to AGI?
Yeah. So the facilities are now split into two. So the previous 600 million facility is now a CAD 450 million facility at the AGI level, and 400 million facility at Aecon Utilities level.
The four hundred at the utilities level is not accessible to AGI?
It's accessible to a subsidiary of AGI in terms of Aecon Utilities, but no, the rest... The balance of AGI's business doesn't draw on that facility. Obviously, as we generate cash flow from the utilities business, we can distribute from utilities to AGI, but AGI can't- doesn't draw directly on Aecon Utilities facility.
Okay. It's on that 450 AGI facility that you're gonna put the, the converts, right?
Yes, correct.
So pro forma, you're, call it just under CAD 300 million on that facility available at the end of the year. All else equal.
Pro forma, pro forma, right, I mean, right now, obviously, the end of September, the end of Q3, the position doesn't reflect the CAD 150 million investment from Oaktree and doesn't reflect the, just over CAD 200 million, distributed from utilities to AGI as part of the transaction. And so that cash effectively, will fund the redemption of the convertible debentures, and the balance will be, cash on the balance sheet.
Okay. I'll get back in the queue. Thanks.
One moment for our next question. Our next question comes from Jacob Bout with CIBC. Your line is open.
Good morning. There's about CAD 520 million backlog left of the four legacy fixed-price projects. Just sort of minus how you expect to work down that in the balance of 2023 and 2024 and 2025. Maybe just as a follow-on there, you know, how are you thinking about the risk of further negative costs reforecasts? When do you expect that to subside?
Maybe I take this one, Jacob. So, yes, we are around CAD 500 million of remaining backlog for this four legacy project. In terms of declared backlog of CAD 6.2 billion, it represent a little less than 10%, but when you add to this backlog, what is going to come most probably from the progressive design-build, it's not even 5%. As you know, on those four projects, one has reached mechanical completion. The three other ones, I mean, two will be completed in 2024, and we are really nearing completion, and the other one around 2025. It just means that this will steadily decrease in the two to three quarters to come.
On another hand, let's maybe come back a little on the, on the situation of those legacy projects. So you have noted we reached three major settlement agreements on, on three of those projects. Those contractual negotiations are extremely complex with a lot of parameters, but what is important is that they allow to have a much better clarity on schedule to completion and eventual attached liquidity damages. They allow to have additional revenue and much more clarity on the way it's gonna be distributed, I mean, the cash associated with it. And Dave spoke about it, I mean, we have favored in agreement a quick disposal of the cash from our client, and then it give us a better knowledge of the cost, of the cost to come.
On the last one, I mean, you remember, we have reached mechanical completion, and we were protected from early 2023 in terms of cash, because our costs were covered on those one. To come back to Yuri's question, cash is preserved on this job for the quarters to come, and it is, and it is important. Maybe my third point will be about, what else? What else on, when you take out the loose legacy project from our result, I mean, you have noted the EBITDA for Q3 would have been CAD 123 million. I mean, trailing twelve months, CAD 375 million. I mean, I don't know a lot of company with the structure of Aecon that can deliver 12% EBITDA.
It just means that the large majority of our business is very strong. And and it is very strong in a world where there is less and less contractors. And this is what is important. I mean, we just have to stick to our strategy. We just have to stick to our discipline. You have noticed that the name of legacy project has not been invented by chance. I mean, from September 2018, we have not entered in any dangerous project. At Aecon, we have limited the size of our lump sum job. We have convinced a lot of our client to go to Progressive Design-Build, and this is important.
I mean, we have invested money in our Project Management Academy, in our continuous improvement program, in our Gate Zero, to understand that when we decide to pursue a new job, what are the risks? What are the risks associated, and how can we tackle correctly those risk? So I think it is important also to note it.
Jacob, just one other-
Thank you.
Point of reference. One other point of reference, going back to the part of the question on, on working off that backlog. By the middle of next year, we expect that backlog number to be roughly half of where it is now. So that kind of gives you a sense of the work off of that over the next three quarters.
That's helpful. Thank you.
One moment for our next question. Our next question comes from Benoit Poirier with Desjardins Capital Markets. Your line is open.
Yeah. Good morning, everyone. Just in terms of charges around the legacy project, you took almost CAD 300 million over the last year and a half. Could you talk about the kind of the worst-case scenario on what we might be looking forward, especially given the better disclosure that you've made in your MD&A and the fact that you were successful to reach a few settlements already?
Yeah, so obviously, you know, a big factor in the last couple of quarters has been the agreements reached on a number of these, these projects. As Jean-Louis said in his comments, that gives us a lot of clarity around compensation for past issues, schedule going forward, and other kind of terms and conditions around these settlements that mean, while we've had to make some adjustments in the last couple of quarters, we do feel that that takes a lot of uncertainty off the table. It positions us well to execute going forward. And, you know, from an overall comfort level in terms of the amount of variability in our forecast, we think that's been reduced by each one of these settlements.
So, you know, we certainly certainly expect it to be less noisy going forward, and we're very focused now just on execution. We really don't expect there to be any big developments on these projects in terms of further significant agreements or changes to what we've recently agreed with our clients in the foreseeable future. So, you know, the positions we have at the end of Q3 are based on everything we know at this date, and we think those positions are reliable, and based on all the information we've got at our fingertips, based on those settlements in the last two quarters.
... Okay, okay. And just in terms of capital deployment, when we look at your leverage, you were at 2.3 at the end of Q3. I understand the leverage will come down with the proceeds from Oaktree. Just wondering about what kind of optimal level you see Aecon operating, the covenant, the cushion you have, and also in terms of capital deployment, what about the availability to deploy that capital towards M&A around Aecon Utilities, which was a reason why you strike a deal with Oaktree?
Yeah. So, as you say, at the end of Q3, we're at 2.3 times, including the convertible debentures pro forma for the Aecon Utilities transaction. That will be around 1.2 times. We're very comfortable in a leverage range up to kind of 2-3 times in terms of you know, the long-term support of bonding companies and performance security requirements. So we think we have plenty of room to invest in the business. We have significantly strengthened the balance sheet this year, and we are very focused on growing the utility business, M&A; we expect to play a role in that.
We're already active in terms of opportunities in the US for the utilities business, and we're very comfortable that we can deploy capital to support that M&A alongside our partner.
Okay. And last one for me. You've been successful in selling half of Bermuda at twice the street expectation. If you look at the road building business, that was less strategic, and also margin dilutive. You sold it close to 9x EBITDA. Aecon Utilities also, you monetized at 9x. Stock still trading below 3x in terms of EV to EBITDA, or the rest of the business. So are there any reason that do not allow Aecon to look at creating further value, given the valuation at these levels and your track record in monetizing some of those assets over the last years?
Well, my answer would be that we are very comfortable with the divestiture we have been doing. I mean, there was a reason for Aecon Transportation East in terms of an extremely competitive market, capital intensive, and it was a clear decision from us, and we are very happy with the valuation we could get. Bermuda, it was a rather different way of looking at it. I mean, we consider that at Aecon, that we can be successful and make money on the totality of the value chain. It means developing, financing, engineering, building, and operating our assets when the contract allows it. This is a normal rotation of our assets. It's necessary to allow us to go to other projects that will create more value.
What was important for us was to keep this 50.1% and the management contract. At the end of the day, we have to go on building and developing infrastructures, and we think that the balance of activity that we have at the moment is perfectly fit with what we need in front of the market that we envisage.
Okay, and given the valuation these days, how do you look at the buyback, given the valuation these days?
So I think our focus is on a few areas when it comes to capital deployment. Obviously, we need to deal with the Convertible Debentures at the end of this year. We've been very consistent around our dividend program. And as we've talked about, we see significant growth opportunities, both organic and through M&A, particularly focused on the utilities business. So that's the focus right now from a capital perspective. Obviously, the disconnect you highlighted in your initial question around the valuation of the dispositions that we've done this year and where the share price is trading.
You know, we feel that the best way to highlight future value is to continue to execute on the balance of the business, continue to highlight the fact that the underlying business is generating CAD 375 million of EBITDA on a trailing twelve-month basis and get these legacy projects behind us. I think once we've done all that, we would hope that that would be reflected in valuation. And if it's not, then obviously we would look at share buybacks or anything else that made sense. But there's some strategic immediate uses of capital that we're more focused on right now.
Okay. Thanks for the comment.
... One moment for our next question. Our next question comes from Chris Murray with ATB Capital Markets. Your line is open.
Yeah, thanks, folks. Good morning. Maybe following on, I think, I—Dave, I don't know if you wanna try to take this one or, or Jean-Louis, but, but thinking about the business on a go-forward basis, with the, you know, with the, with the projects, I guess maybe ring-fenced or at least kind of stabilized now from a financial perspective and the cash flows coming in, you talked a little bit about a, call it a, a low teens type EBITDA margin with the remaining business. Can you talk a little bit how we should think about what the margin profile is gonna look like in 2024? Let's assume that you run off, you know, the first half of that legacy project backlog, probably at a zero margin.
But is it fair to think that those margins you've been talking about are sustainable as we go into 2024 and 2025?
We'll begin, maybe, and, and Dave may add, a few other comments. I mean, what is important for us is the predictability of our margins, and, and we think we, we are relentlessly positioning Aecon toward a, a better predictability of our, of our margins. We have been advocating with our clients about this Progressive Design-Build, project, which are the kind of animals that, that we like. So you, you, you think that we have, we have been awarded, I would say, the three first one, the, the small modular reactor, the GO Train expansion, and, and, Scarborough. But, but a lot of other projects are also under those progressive schemes.
For example, Oneida , as I've mentioned, we have been awarded a CAD 141 million EPC contract, which is at a fixed price, but it was progressive. I mean, we spent two years being awarded to optimize the project with the battery suppliers, with all our transformer suppliers. It just means that this was progressive. I mean, with BC Hydro, we have now entered in the execution phase of the John Hart rehabilitation project, following nine months of co-development with our client. Predictability is also, of course, given by our recurring revenue. I mean, you have noted more than 40%, 2023 against 2022.
It's also given by the fact that our backlog, that was in 2018, almost 70% fixed price, is now around 47% fixed price. So this gives predictability. And I'm asking you to look at the new Aecon that is emerging. I mean, just give you another example. I mean, within a few weeks, we most probably will embark in the transition period for the GO Train operation. You remember that we have a joint venture with Deutsche Bahn, which is probably one of the best European operators, especially for this kind of network. And with our joint venture, we'll begin to operate trains and to optimize the operation of those trains under a cost reimbursable plus fee scheme.
So all this, just, I mean, is a relentless effort from the last years to bring Aecon toward a much more, predictable, margin profile. David, you want to add something?
Yeah, and in terms of, you know, thinking about the underlying margin that you talked about, and how that looks going forward, obviously, we always say, don't look at one quarter in isolation, but look at kind of at the last 12 months. I think if you do that, you can see a very healthy margin, ex the legacy projects of close to 10%. I think other than the impact of Bermuda, and the disposition of half of Bermuda, I think if you look at just on a construction segment basis, and we think as we go through 2024, that kind of margin level is sustainable.
Okay. That's, that's helpful. Thank you, folks.
One moment for our next question. Our next question comes from Ian Gillies with Stifel. Your line is open.
Morning, everyone.
Hey.
The dividend's obviously been a core part of the story for a long time, but can you maybe talk a little bit about the merits of keeping the level where it is now, given some of the cash requirements perhaps going forward and some of the growth opportunities, and whether perhaps that could be better allocated elsewhere, whether it be through M&A or new growth projects, et cetera?
Yeah, as you say, it's been a long-term component of our capital allocation. Been very consistent and tried to be very consistent over a long period of time around how we think about dividends. We think it brings, you know, a certain amount of discipline to the business when it comes to capital allocation. You know, and as we think about it going forward, you know, we're focused on the long term. We're focused on the fact that the vast majority of the business is producing significant EBITDA with good cash flow dynamics. We talked about earlier, the fact that we feel we turned the corner from a working capital perspective on the legacy projects.
So, our view is the dividend is a key part of the capital allocation program, and we have plenty of other options around growing the business and M&A, and we're not worried about constraints in the context of the dividend policy.
Okay. With respect to the deal announced with Oaktree on Monday, there's a fair bit of leverage being put on the Aecon Utilities business on a trailing twelve-month basis for what is expected to be a growth business. Can you maybe talk a little bit about the thought process about how much leverage you want to put on that business, and why you chose to go that route?
Yeah. So a big component of this is thinking about the free cash flow profile of that utility business. The utility business is a, as we talked about before, a kind of different profile of business to a lot of what we do in the construction segment, in that it's very much recurring revenue, long-term MSAs, predictable work programs, predictable margins, and along with that is predictable cash flow. We believe the cash flow profile of that business will draw down that leverage as we move forward. And we're very comfortable as our Oaktree, that we have the capacity within Aecon Utilities and at the AGI level, to make the investments we're looking to make to grow that business.
So, you know, obviously, as we look at the balance between AGI and AUGI, we felt that the best approach was to bring some capital back to Aecon, to pay off the convertible debentures, that we're very comfortable that going forward, we can grow the utilities business from the balance sheet and the facility it has. And obviously, you know, from an Oaktree perspective, they're coming into this investment with the same goal as us, which is to grow the business, create significant value, and M&A is part of that. And if they weren't comfortable with everything I've just talked about in terms of capacity and cash flow profile and utilities, then we wouldn't have done the distribution that we did.
Both us and Oaktree are very comfortable with how that business is positioned.
Maybe I can add something. We-- of course, we can discuss about the 12%, the return, the leverage, I mean, but what we have to focus on is the strategy behind this. I mean, it has been a long selection process, and I have to say that we are extremely happy with the partner with whom we are now. I mean, it was our favorite partner. It was by far the one with the best knowledge of this industry, of the different networks in United States, but also in Canada. And by far, I mean, strategically, it was our preferred future partners. And I think this is important.
Our life is about agility, is about detecting it, where we can put our core competency at work, where we can make more money, be more profitable, be more predictable. And definitely, we think it is an excellent move, and we are extremely happy about it.
That's helpful. Maybe if I could just reframe the question a little bit, just to understand. There's been a lot of transition in the business over the last 12 months with respect to asset sales. Could you maybe highlight a little bit of where you think the right net debt to EBITDA metric is for the business, fully consolidated? And then maybe where you think the right metric is for Aecon Utilities, or where you think that max metric is if you were to do some M&A.
Yeah. So at the Aecon level, I touched on this a little bit earlier. We've always said we're comfortable with leverage up to 3 times. We typically aim to keep it in that kind of 1-2 times range. But we're comfortable going above that for strategic investments that we believe will lead to being able to delever the business again going forward. So typically, we try and stay in that 1-2 times range at the Aecon group level. From a utility perspective, you know, as I talked about earlier, very different profile of that business. Part of the rationale for creating a separate vehicle for growth in the U.S. through that utilities business-...
With a separate balance sheet, separate facilities, we think the utilities model can support higher leverage if needed to fund M&A, with strong operating cash flow below that to bring that leverage back down again as we operate the business and create synergies from the M&A that we look to do. So, I don't want to put a max number on the utility side, but certainly a fair bit higher than we're comfortable with at the Aecon level.
Okay, thanks very much. That's helpful. I'll turn the call back over.
One moment before our next question. Our next question comes from Jonathan Lamers with Laurentian Bank Securities. Your line is open.
Good morning. Earlier this year, David, you'd indicated that free cash flow for the full year could be positive, depending on the outcome of some of the settlements. So, you know, following the settlements in Q2 and now Q3, would you expect positive free cash flow for the year?
Yeah, I mean, I think we'll certainly be close to it. There's always a few things at the end of the year that if they come in, they swing it one way. If they don't come in, it comes in early the next year, and it slightly swings the other way. But I think we'll be at least relatively close to free cash flow break even this year. You know, Yeah, the scope for it to be a little bit either way, but fairly close to free cash flow neutral for the year. As I said, part of the cash flow from these recent agreements will come in in the first half of 2024.
That trend should continue as we go into next year in terms of unwinding the working capital from those projects.
Do you have an estimate for the cash from the recent agreements that will come in 2024? Apologies if I missed that.
No, we haven't, we haven't disclosed specific numbers on settlements and agreements. Obviously, each one of these agreements is confidential in terms of partners and clients, et cetera, so we haven't quantified the exact amounts.
Okay, one more topic, if I can. Just on the legacy projects, so I understand that the backlog related to those is expected to be roughly half by mid-next year. My understanding is there could be arbitration processes that continue longer. Is the larger risk at this point from to the income statement really related to those potential arbitrations now and the outcomes there? Can you just help us sort of rank the magnitude of the potential risks remaining in the four?
I would say that there are a few risks. I mean, the first one on which all our teams are focusing is the execution and the completion of those projects to get them substantially complete. This is one for the fourth one. I mean, it was extremely important as committed to be mechanically completed at the end of September. So completing those job is a point of focus for our team. On another hand, yes, I mean, there will be arbitration, and there will be other negotiations. There will be other commercial settlements within the months and the years to come. We, as I've told you already, we have put the best teams within our company and also as external external partners.
So we are confident that we are aligning very strong team for this second phase, which may lead to negotiation, what we would prefer, but also arbitration, because we think that we have quite strong cases.
I'll leave it there. Thanks for your comments.
One moment before our next question. Our next question comes from Sean Jack with Raymond James. Your line is open.
Hey, morning, guys. Looking forward, do you see any opportunities out there to do a, like, a JV-style project to help grow the utilities business faster? Or is that something that you guys would even consider for that line of business?
I think, across all of our businesses, including utilities, we're always comfortable entering into joint ventures for specific projects, or with indigenous groups for longer-term relationships. And we have some joint ventures that we work through, with various First Nations. So, project by project, that's very usual for us. In terms of longer-term joint ventures for specific opportunities, I mean, sure, we would look at whatever makes most sense, based on the specific circumstances, what clients are looking for, what works best in a particular market, et cetera, et cetera. So, already in the U.S., some of the initial work our utilities group is doing down there, as we've established a presence, is in a joint venture with Southland, for example. So yeah.
Yeah, I mean, we're open to whatever structure is best suited for the opportunity and whatever makes the most sense in terms of creating value and growing the business.
Okay, perfect. Thanks. That's it for me.
I'm not showing any further questions at this time. I'd like to turn the call back over to Adam for any closing remarks.
That's great. Thanks, Kevin. I appreciate everyone's time today. Have a good rest of the day, and as always, if there are follow-up questions, feel free to reach out to our team. We shall speak with you all soon.
Ladies and gentlemen, this concludes today's presentation. You may now disconnect and have a wonderful day.