Primoris Services Corp (PRIM) 2009 Q2 法說會逐字稿

Good day, everyone and welcome to the Primoris Services Corporation 2009 second-quarter financial results conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode. I will now turn the conference over to Devin Sullivan. Please go ahead, Mr. Sullivan.

Thank you very much and good morning, everyone. Thanks for joining us today. Our speakers on today's call will be Brian Pratt, Chairman, President and Chief Executive Officer of Primoris Services Corporation and Peter Moerbeek, Executive Vice President and Chief Financial Officer.

Before we get started, I would like to remind everyone that statements made during today's call may contain certain forward-looking statements, including with regard to the Company's future performance. Words such as estimated believes, expects, projects, future or similar expressions are intended to identify forward-looking statements.

Forward-looking statements inherently involve risks and uncertainties, including, without limitation, those described in this morning's press release and those detailed in the Risk Factors sections and other portions of the registration statement, the amendment and other filings with the SEC, including the Company's Form 10-Q. Primoris does not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

I would now like to turn the call over to Brian Pratt. Please go ahead, Brian.

Thank you, Devin and good morning to everyone and thank you for joining us. The results for the second quarter of 2009 continued to demonstrate our ability to pursue and perform profitable business, leverage our relationship, equipment assets and experienced labor force in the face of a challenging and competitive environment.

While revenues were down about $15.5 million quarter-over-quarter, our gross margin increased 620 basis points and our operating margin rose 425 basis points. On an apples-to-apples basis where we are taxed as a C Corporation for both periods, quarterly net income rose 58% to $8.6 million.

We ended the quarter in a strong financial position. Our balance sheet at quarter-end reflected cash and short-term investments of $74.9 million. This was down somewhat from the cash position at year-end and is attributable largely to normal swings in working capital.

I have mentioned several times before a strong balance sheet is very important to us in several ways. First, we can be selective in the projects we choose. In other words, we don't have to chase revenues that will not generate significant profitability. Secondly, our clients and potential clients, especially in this environment, take great comfort in dealing with a company that is well-capitalized. Finally, in these tumultuous times, a strong financial position is paramount in attracting and being able to consummate the right kinds of acquisitions.

Uncertainty tends to create opportunity for well-established and well-capitalized companies not only in the acquisition of companies, but also in talent. It has been my experience that great businesses are built more often in challenging times. To this end, we are finally seeing sellers' multiples in our space declining from the highs of a year or two ago to more appropriate levels.

The conditions created by declining multiples along with the management change we effected several months ago in allowing John Schauerman to focus on growth opportunities should bear fruit for Primoris in the short to medium term.

In the current period, we continue to expand our geographic footprint. Our offices in Canada and Ecuador contributed almost 10% of our revenues in the second quarter of 2009 against less than 3% for the same quarter the year prior. This is the second consecutive quarter in which foreign operations contributed 10% of our total revenues.

As suggested by our results for the first half of the year, we continue to anticipate revenues for '09 will be lower than '08. There continues to be a large degree of uncertainty among many of our customers as to the availability of funding for their projects, especially alternate energy projects. We are still experiencing good opportunity flow in our business development organization without any lack of possibilities to explore. We are finding that some of the more commoditized segments of our markets, there is an intrusion by what could be referred to as nontraditional competitors. This is a situation that almost always occurs in difficult times.

We are fortunate, however, that a large portion of work continues to come from well-capitalized utilities, which at least at this point don't appear to be suffering from lack of funding and are also committed to facility expansions and regulatory mandated expenditures and pulling carefully qualified contractors. We continue to see ample opportunities in backfill and upgrades, expansions, powerplants, utilizing both traditional and renewable applications, ongoing work for our clients, responding to environmental and regulatory agencies and exploitation of new technologies and markets for our engineering group.

We are also seeing great opportunities in the renewable energy markets in the West. We feel this area will bloom when stimulus and financing impetuses are provided. We are not suffering a shortage of potential projects in the market for IPPs and the like, but most appear to be slow starting because of limited availability of quality debt and equity financing. Although just in the last several weeks, we have heard anecdotal evidence that the situation might be improving.

Project acquisition for OnQuest, our engineering group, remains a bit of a challenge. Even though the price of oil has climbed back to more palatable levels for our clients, they apparently are not certain that the price is stable enough yet to predicate large capital investment programs. The size of the project currently available to OnQuest tend to be smaller than those available to us over the last several years, which is a mixed blessing for us. While opportunities available may be limited, the number and size allow us to benefit from the inherent competitive attributes of our smaller, more specialized shop.

We have also seen a strong potential and increase in military and support spending in both our geographical and technical sweet spots and have positioned ourselves to better exploit these opportunities.

Lastly, I would like to briefly comment on the Chevron Richmond Refinery project. For those of you who are not familiar with the project, Primoris' wholly-owned subsidiary, ARB Inc., has been constructing the hydrogen plant at the facility under a contract with Praxair since September of '08 with completion expected first quarter of '10.

As we have announced, the California state judge's ruling halted construction following litigation from environmental groups and what the judge identified as inadequacies in Chevron's environmental impact report. Chevron has appealed and has been granted an expedited appeals process by the court. The parties have also agreed to mediation, which is ongoing.

The future of the project remains in question until there is a legal resolution of some kind. In the interim, we have been notified by our client, Praxair, to demobilize. We are doing so with the current backlog now on the project of approximately $52 million.

In sum, the quarter numbers and information accompanying them are a bit of a mixed bag. To say that there is nothing but sunshine ahead of us would be mischaracterization. The suspension of a job the size of Praxair will almost certainly have a short-term negative impact and there are obvious substantial stresses in several of our markets.

These are conditions, however, that this Company has long managed in prior years. There are times when we have [used] to enhance our market positions and garner new markets. We have a very talented and resilient team, along with a great balance sheet and a very bright, pun intended, mid-term future.

Before turning it over to Pete, I am very pleased to report that since our first-quarter conference call, we qualified for the Russell 2000 index and three new sell side firms initiated coverage of our stock. We are very grateful for their interest in Primoris, as well as the interest you have all taken in joining this call.

So with that, I would like to turn the discussion over to Pete and he will take you through the second-quarter numbers in a little more detail. Pete?

Thank you, Brian and thanks to each of you for taking time to join us on this call. I would like to highlight some of the second-quarter results starting with our revenue. As Brian said, our overall second-quarter 2009 revenue decreased 10.9% from the same quarter last year to $126.9 million from $142.4 million.

In our construction services segment, revenues were $113.5 million, a 5% decline in revenues from 2008, primarily due to the reduction of construction projects in both the refining and water and wastewater sectors. This decline was offset somewhat by higher revenues this quarter in pipeline, cable and conduit projects, as well as an increase in revenues at our subsidiary in Ecuador.

Revenues for the engineering segment declined by 39.6% to $13.4 million from $22.1 million, due primarily to the impact of the near completion of our EPC contract for the clean energy LNG plant. In second quarter 2008, we were in the midst of a major engineering and procurement effort. This quarter, our revenue declined significantly as we are now providing assistance during the startup and acceptance phase of the project.

While companywide revenues decreased, our overall gross profit increased 43% to $20.9 million from $14.6 million in the second quarter of 2008. And gross margin as a percentage of revenues increased significantly from 10.3% to 15.6%.

Gross margins in the construction services segment increased by $6.5 million, or 48.9%, compared to the prior year's second quarter. Gross margin as a percentage of revenue in this segment rose to 17.3% compared to 11% of revenues for the year-ago quarter. The improved gross profit margin increases are primarily due to a shift in the business mix from traditionally lower margin projects in the refining sector last year to higher-margin industrial underground projects in the petroleum and power sectors this year.

The gross profit margin as a percentage of revenues in the engineering segment increased to 9.5% this quarter from 6.5% for the same period in 2008. However, total gross profit for the quarter at the engineering segment decreased 11.5% to $1.3 million from $1.4 million in the prior year due to the decrease in revenue.

We have discussed in earlier quarters that the large clean energy project margins were much lower than our traditional engineering margins and we are now returning to more historical levels. In fact, margin levels in the second quarter of 2009 for both of our segments were in line with historical margin levels.

Our total selling, general and administrative expenses showed an increase this quarter of $1.8 million over the second quarter of 2008. The increase was primarily due to increases in public company expenses, an increase in long-term incentive costs and increased depreciation expenses.

Net income for the quarter was $1.4 million, an increase of $1.4 million, due primarily to increased earnings from our joint venture, Otay Mesa project. That project we attained mechanical completion and are now working with the client and the owner so that we anticipate completing this project before the end of the year.

In addition, we also received a contribution of about $100,000 from our All Day Electric joint venture, a company with which we are partnering in Northern California. These two gains were offset by a reserve of $1 million that we recorded for a joint venture in Mexico.

For the second quarter of 2009, income before taxes was $13.9 million, an increase of $4.9 million from the prior year quarter. As a percentage of revenues, pretax income was 11% compared to 6.3% in the prior quarter. Net income this quarter, when compared to pro forma net income in the prior quarter, was $8.6 million, an increase of $3.1 million for pro forma net income in the prior quarter.

To arrive at pro forma net income for the prior year quarter, we used an effective tax rate of 39.8% compared to our current quarter effective tax rate of 38.3%. We are using a pro forma tax rate for 2008, which assumes that we were taxed as a C Corporation because last year's quarter was the last one we had before becoming a public company and as such, we were taxed as a Subchapter S Corporation under the IRS codes. We believe that pro forma net income for periods prior to the July 8 merger is a better indicator of pro forma for comparison purposes.

Now, turning to our strong balance sheet and cash position. The following are some of our balance sheet highlights at the end of the second quarter 2009. First, cash and cash equivalents and short-term investments were $74.9 million, a decrease of $9.4 million from March 31, 2009. This decrease was the result of normal fluctuations in working capital. We used approximately $10 million of short-term cash to fund an increase in accounts receivable of $11.3 million, a decrease in inventory of $4.7 million, purchases of new plant and equipment of $1.9 million, a reduction of long-term debt of $2 million and a payment of dividend of $800,000. We remain in a strong cash position and the increase in receivables was because of attainment of project milestones, not because of an aging of receivables.

Finally let me go to one of the more fun subjects, backlog, but before giving you the numbers, let me remind you that we do not provide any earnings guidance. As we have discussed before, our backlog is not a complete indicator of future revenues as a significant portion of our revenues are derived from projects that never make backlog such as master service agreements and time and material contracts.

Our backlog as of June 30 was $271 million compared to $352.8 million at March 31. The $271 million number includes approximately $52 million related to the recently announced demobilization of the Chevron Richmond project. Excluding the impact of the Chevron project, we expect that approximately $149 million, or 68% of the backlog at June 30 will be recognized as revenue during the remainder of 2009.

Finally, we expect that we will file our second-quarter Form 10-Q today and we also anticipate filing an S3 registration statement for the warrant. We have about 4.7 million warrant shares outstanding and our goal is to be able to allow conversion of those warrants into common shares sometime around Labor Day.

With that, let me turn the call over to the operator so that we can respond to any of your questions.

(Operator Instructions). Arnie Ursaner, CJS Securities.

Hi, good morning. My question relates to your gross margin in this quarter, which was extraordinarily good. Were there any one-time or project completion factors that had a significant impact on margin in the quarter?

A couple of factors, Arnie. Good morning. As the work has tightened up in some of the more commoditized areas where anybody that owns a paintbrush or a pickup truck can compete with us, our margins -- that work, which is normally less margin work -- as that work has tightened up, the work that we have has been in the higher-margin areas. There was one time completion influence, which was a job that we performed for Boone Pickens' business, Clean Energy, which was a design build on an LNG plant and we finished that. We are very conservative when we look at projects with process guarantees. Basically you have to guarantee you can put out so much LNG at so much energy with so much pollution or without any pollution in this case. And that did affect the quarter, yes.

Can you give us a sense of the quantification or what margin would have looked like without that one-time item?

We are running very close to historical levels right now. So that one project did not have a dramatic impact on changing the margin.

Pete, you mentioned you were running at historic levels and the math that I am looking at as your historic numbers is you had a 7% gross margin, an 8.5% gross margin and an 11% gross margin. And this quarter, 17.6%. So I am not quite sure I agree with your broad statement that 17.6% is in line with normal. Certainly not over the last three years in public filings. So again, can you perhaps clarify a little bit more about how much might have been one-time there?

Well, I know that there was a positive impact on the engineering side. I am not so sure there was that dramatic an impact on the construction side. As we are coming along and finishing some jobs, there are always going to be some changes, increases in margin and as we are working off some backlog, yes, you are going to see that as we get to the end of projects, there are going to be positive impacts and I think that is what you are seeing here.

You are going to see maybe a similar impact on some of the other projects almost every quarter. So this isn't really a big aberration.

And the other question I have relates to your backlog. You did burn through quite a bit of backlog this quarter and I appreciate that MSAs and time and service are probably 50% to 60% of your potential revenue and not in backlog. But you did burn through quite a bit of backlog and one of the messages you have had is the quantity and amount of bidding activity that you were participating in. What is causing that -- are you losing this work to other people because they are taking it on at different pricing or are these bids just not leading to actual orders? Can you give us a little better feel for what did cause the significant rundown of backlog and what actions you may choose to take to reverse that?

Every industry we operate in is a bit different. I can't say we have seen a big intrusion of competitiveness like in a lot of our markets. The parking structure business, as we have always talked about, which is the lowest margin business we are in, has become a lot more competitive because you get general constructors out there thinking they can do parking structures. Then the barrier to entry is significant, but apparently some of them are willing to pay that price to get into new markets right now because there is such a dearth of work in their markets.

I wouldn't say that we are losing any more or less work to our competition than normal. What we are seeing is we are seeing a lot of projects that will be bid upon and then they will be delayed based on financing. As I said in my comments, financing has become tough, permitting has become tough again for some reason and I think the state out here is a little bit -- like to self-inflict wounds. But we are not seeing any big change.

And sewer and water treatment is another very competitive market. People that come out of the subdivision business that were building subdivisions, large ones for developers, two years ago, now they have got a cadre of people they want to try and keep busy and they have got a financial statement and the bonding companies will write bonds, so they will come in and bid water and wastewater work. In a year or two, they will be gone. We will kind of be picking through the bones of their work trying to finish it probably for the owner, a lot of them. But in the power work, the pipeline work, those other areas, we are not seeing a big change in the dynamics of the competitive nature.

We are, I think, in general just suffering from uncertainty in the financing market. There are a lot of projects out there that just can't seem to get financed and they are good projects. We are going to see them get built. We will not backlog a project until we have a signed contract, but we have a lot of good irons in the fire and I think we are going to see a pretty good change in that backlog number in the near future.

If I can ask one final question, the $1 million reserve you set up for Mexico, can you tell us, in the JV, can you tell us a little more about what that is about and if you could expand on that please?

Sure. If you look at our financials at the end of '07, we recorded an other than temporary investment. There is a large claim that we are working with a joint venture and this helped fund some of the expenses needed to make sure we get to the claim discussions. There will be international arbitration on this claim in September and we believe we have a good chance to generate some significant income from that. So this was part of a process of making sure that we would get there.

Okay, thank you very much.

Tahira Afzal, KeyBanc Capital Markets.

Good morning, gentlemen and congratulations on a very good quarter.

Thank you, good morning.

Please excuse the buzzing; that is on my phones. I apologize about that. Number one, just in terms of the Otay Mesa project, I assume you have some contingencies in place there. It seems you haven't fully completed that project in a sense. So do you still have, given that construction has gone largely as per plan, could you see some positive contingency reversals there?

On two fronts, we have certain milestones we need to meet to achieve some bonuses on the project. They are not huge bonuses. Plus we performed the bulk of the work, the fieldwork in the partnership and we have certain thresholds that would incentivize us to complete the work on schedule and within or lower than budget, which allowed us to take a larger share of the partnership's profits. So we see some upside there possibly.

We still have some ongoing negotiations with the clients. As you know, a lot of this equipment comes in from overseas and the more we import from overseas, the more damage the equipment seems to suffer by the time it gets to the job. So there is naturally a bit of a shoving match at the end of the job on repairs and things that we had to make on client-owned or client-provided equipment.

Calpine has been a great customer. The job done has gone exceptionally well. I am anticipating that those shoving matches will be gentlemanly, but you always have those and we always try and put a conservative bent on what we project. I don't like ugly surprises; I like pretty ones.

Fair enough and I think that is the right approach. If you look at that sort of 8% range in terms of historical average and perhaps even higher than that, are you building in any contribution from here from this project?

I'm sorry, we are not recognizing it as part of that margin. It is strictly below the line as a nonconsolidated joint venture.

Oh, sorry about that. Then in terms of your opportunities on the solar side, you alluded to those in the past and we have talked about several sponsors such as BrightSource. Any updates on the [Evanta] project and perhaps some of the other ones that BrightSource is looking at?

I really don't have much on BrightSource. I really couldn't shed any light on them at all. I am a little removed from what you hear. Our guys are talking to them. The fortunate thing for us is we have had relationships with all these utilities out here for 60 years and when all these technology and development companies moved in either from Spain or from somewhere else, they hired for their local contacts people from the utilities. So we have got great relationships with most of these companies. BrightSource is just one of the companies we are following, but I really couldn't give you much insight on what they are doing.

So perhaps you are looking at opportunities not only from BrightSource, but maybe perhaps from a collection of different solar panel players' [entirety]?

Of course, the sweet spot for us is the thermal plants and we have got a lot of conversations going on on large thermal plants. The problem with the thermal plants, as you know, is they require water and for those of you who don't know what a thermal plant is, they take sunlight and they concentrate the heat with a mirror onto a filament that is filled with a heat transfer medium. And then they take that medium and pass it through a transfer station and convert it to steam. So those plants take a lot of water. We think they are longer in coming, but the nice thing about the thermal plants is they provide electricity into the evening. So they will receive a premium for the power that they produce.

The jobs that we are chasing and the people we are chasing them with range all the way from rooftop, commercial sized projects in which we are doing a couple right now to the thermal plants, which thermal plants range up to about $5000 to $6000 a kilowatt. So those are very large, they take a long time to permit. And then you have all the concentrated PV and the highly concentrated PV, photovoltaic, in between.

So there is an incredible amount of great technology out there. The tax credits are important. The IRS has done some things to expedite receiving those tax credits. There is going to be more stimulus money available and it is just a matter of wading through that. These owners need to wade through those things. And also, we still have the interconnect bottlenecks, the grid and those have to be fought through. You can't just find a good site with a lot of sunshine and expect to sell electricity because, in most places in California, the grid is pretty full. Until Edison does their expansion, I think they call it the Tehachapi something or other and Sempra does their expansion, I think there is a bit of a bottleneck on the grid side for these projects.

Got it. Okay. And if you see your opportunities, your large, relatively larger project activities outside of solar for the second half of '09, do you have some prospects in the pipeline that could potentially complement your walk-in work?

When you have got 200 plus or minus people on a project at Richmond Refinery and like I said, the state self-flagellates a lot and the projects cancel, you can't replace that work overnight, volume overnight. That is going to be a struggle. I think in your analysis you were a little concerned about that, at least you reflected on that. That is going to be a struggle for us. We are not at all disappointed with the possibilities and the prospects we see out there, especially considering the competitive landscape. We are very, very excited about projects that fit our skill sets well. We have just got to replace that job and get on with capturing the balance of --.

Got it. Okay, thank you. And I will jump back in the queue with some more questions.

Al Kaschalk, Wedbush Morgan.

Good morning, Brian. Good morning, Pete. I just want to follow up on a previous question, if I may. In terms of looking at the margin and maybe we can compare it to the revenue run rate, what I hear you saying is that the margins we saw in Q2 were heading in the direction of historical peak margins. And you don't believe that those should deteriorate over the next couple of quarters. Is that the message you want shareholders to take away from the Q2 print or how do we think about the trendline given that it is a very lumpy business?

Every industry segment we are in has a different set of margins and as we tried to help educate everybody, when we do a parking structure, those margins are pretty skinny. Those gross margins are 3%, 4%, 5%. An engineering job, if it's straight engineering, can be quite high. If it is engineer and procure, where we buy the equipment, the margins are less. If is it engineer, procure and construct, the margins are even less. A pipeline job or a horizontal drilling job, the margins are very high because the risk is higher because you have a much larger component of labor and many more uncertainties. So our margins -- and you have the day to day run-of-the-mill work where we are installing gas services for PG&E or somebody and those margins are in between.

So to look at this thing monolithically is just a real mistake and I can't tell you that our margins are going to go up or down or anywhere else based on a certain volume of work. It is monolithic. You have got to understand the pieces. So we try and give you guys a feel for it, but short of giving you a Cray computer and all the time in the world to understand what our margins are going to be next month, I couldn't tell you.

I would not want to say that we are continuing up on these margins. Our margins are good. They are going to be other up or down next quarter. I have no idea by how much at this point.

Okay.

I certainly wouldn't want to tell the investors that our margins are going to continue to increase or that this is going to even continue at this level. We are in extremely competitive markets in some areas. Like I said, the water and wastewater, the parking structures, some of those are extremely competitive and those margins are pretty skinny. But we are going to protect our turf and we are going to do what is necessary to keep our place in those markets.

Okay. And then on the acquisition front, it sounded pretty positive in terms of a near term. Maybe you could help just clarify what you meant by short to medium term. Does that mean months, quarters? How are you characterizing the M&A opportunities?

Well, I went from a private company to a public company. You guys only kind of think about next quarter in the public arena, right? The short-term isn't making an announcement on this call. I hadn't planned on doing that, but John is working hard. He used to work for the company you are engaged with up there and he is a good guy. This is what he did for that company for a number of years. He did a great job as our Chief Financial, but he's back at doing what he really knows how to do and the opportunities are certainly there. He combined the lowering of the sellers' perceptions of their value along with uncertain times and difficult times in financing and bonding, it makes for a good mix.

So there is a lot of opportunities. We are ferreting through them and it is a sea change from a quarter ago when a lot of these people thought their companies were worth six or seven or eight times cash flow. It has changed drastically and we are taking advantage of it. So I think I am hoping to have some good news in the next quarter or two.

Okay. Just a clarification, assuming there is an acquisition that is completed in 2009, does that get carved out away from the EBITDA targets that would generate earnout warrants?

Well, I am going to have to hurry if I'm going to capture any -- because our EBITDA target, that is effectively 4.5 months away. So if I announced it today, I really couldn't get it closed in time to really benefit the earnout calculations. I just don't see it being much of an influence.

Okay. And then would you view then the core business or what you have in-house at the moment and see for the last four or five months of 2009 that you are on track to hit the earnout target?

We have never really said that, Al. And obviously with the impact of Richmond, it is going to be more challenging. What I have said is that we have some models that say we make it and we have some that say we don't. There's still 4.5 months to go.

Okay.

I would like to say that we have a natural impetus in the second half of the year. Our work in the underground business and to a great extent in the industrial business seems to crescendo during the second half. But this is such an unpredictable opaque environment we have been in, I wouldn't -- I am not betting on anything right now. I am betting on my management's ability to prevail in this environment. These guys -- I have done it three or four times now, been through some very, very tough financial environments and market environments and I am not seeing a big difference with this one. It may last longer, but if it does, it will be longer for everybody, not just us.

And whether this hits the P&L or gets captured on the balance sheet, are there any type of metrics or dollar values you want us to be thinking about or looking for as it relates to the Chevron/Praxair demobilization? I realize it can change overnight in terms of the timing and you could recommence, but how should we think about charges or potential costs that are going to be tied up on the balance sheet?

Well, I like to talk about the calendar resolution a bit. I think it would be helpful to discuss that and then we can talk about possible charges or whatever. They should reach an agreement tomorrow morning, the politicians. You have got two natural enemies that have been allies in California for about 20 years. That is the construction labor unions and the environmentalists and this issue has certainly split them because Chevron, we are not the only contractor on-site. Chevron has instructed people in the refinery to lay off 1100 union construction workers. So the politicians and the unions and the environmentalists have all had a pretty good brouhaha internally. So there is a lot of pressure on them to resolve this issue.

So ideally this thing could get resolved tomorrow. The expedited appeals process, now this is my understanding, I haven't read the court order, that the expedited appeals process to the appeals court is -- the briefs were to be submitted 60 days from the ruling, which was a week ago. So they would submit briefs, the court would collect them in say 50 days from now or 50 plus days from now and then the ruling would come after that.

The Court of Appeals did grant expedited process, which is not good news for the environmentalists. I would think that would be great impetus to get the issue resolved because nobody wants to put this in the hands of the court again. And then, of course, it could go to the Supreme Court if Chevron -- I think the parties would take it there if it doesn't get resolved. Whether Chevron would restart the process at that point, I would think so. Of the $1 billion, $1.1 billion they were going to spend, over half of it was spent. So they are going to want to make sure that isn't a stranded asset.

The other issue is, of course, they could refile the EIS. I can't believe -- Chevron is pretty smart. They probably already started that process. That is about a nine-month process. So I don't think the job is lost. I think the job will finish. That won't have a big influence over how we treat it financially because we have got it reflected in the way it is, not in the way we hope it is.

We are in the process of gathering that up. There are two -- gathering up what impact it will be. There are two possible scenarios that Praxair could respond under. Both of them are not unfavorable to us. Pete gives me a hard time because I like double negatives. Both of them are not unfavorable to us. But they have to be dealt with and we have got a fairly complex negotiation that will have to be followed in any of these scenarios to resolve this with our client. They are a good client. We have worked for them for 30 years. They have always treated us fairly. I have no doubt they will be as fair as they possibly can on this project. I have not seen any indication they are not going to treat us fairly. Plus, they need us to finish the thing at some point. They have got about, my estimate is about a $250 million invested and that is a very sizable capital investment for Praxair.

But I don't see -- I don't know. Like we always have, we are going to look at it hard. We are going to scratch our head. We are going to reflect what we think the reality is on the books. I don't know what that is yet. We are still trying to figure it out. Plus we still have to wade through these issues with the client. That is going to take at least the next 60 days.

On top of that, we like to recognize cash when it is received in these cases in case somebody gets silly and wants to hold our cash for some reason. So we may reflect some of that risk in the numbers if we think it is appropriate.

Thank you.

Sorry for the long answer.

(Operator Instructions) Rob Young, William Smith & Co.

Hey, guys, good morning.

Good morning, Rob. How are you?

Doing great. How are you doing?

Good.

Good. Hey, just a quick question off one of the last ones. Is there any risk to changing contract if the Chevron situation does come back online?

Changing contracts or -- (multiple speakers)?

Changing contract in terms of what needs to be done, the amount of revenue that you are expecting to see that stuff?

Yes, I mean we were in the process of re-analyzing the backlog number to begin with because there had been a scope [rope]. Our contract is predicated on certain quantities for certain items and we were in the process of adjusting that. And obviously, we didn't have to because we are not going to install those quantities at this point. I think the chances of us not finishing the job are miniscule, but you have to suffer through it. When that is going to happen, who knows?

There is a chance -- when you take a job -- we were up and running -- we were at the peak of the manpower loading. These jobs start out with one person and end up with one person. In the middle, you have got a bell curve where it gets pretty high in terms of manpower. We are at the peak of it, so the impact to productivity, to have to unwind that right in the middle is significant.

Now if the project gets restarted again in the next couple of months, that would be ideal because a lot of that labor is going to be off for the winter anyway. So we will be able to recover or recapture a lot of those people that got laid off.

Our management group that were on the project, the foreman and the superintendents, those are full-time employees, so we haven't lost them. But there will be a pretty good tussle over just what the impact of productivity is.

We though we had been holding the job fairly accurate or in a conservative fashion up to date, but at this point again, we are going to have to circle the wagons and scratch our heads and see what fairly represents the project. And we are deeply in the middle of that, but it is not -- I hope you understand and I hate to belabor it, but it is not just a simple issue of getting a calculator out and saying here is the numbers. We have a lot of moving parts in terms of the demobilization, client anticipations and managing those and the revenue side has to be managed too, not just the cost side.

Okay, okay, great. And then I know that you spoke about it for a while related to the stimulus and renewable impacts on you guys. Can you just briefly talk about kind of balancing in California how the RPS credits are -- there are some coming on for 2010, how that balancing act is going on with the delays related to various permitting and higher utility cost of capital?

Oh, man, you want to get this done in 12 more minutes, huh?

Just briefly.

I would like to start with -- I am a little irreverent, but how would you like to be the guy at the public utility that has to take and balance when the wind is not blowing, the solar when the sun is not shining, with the hydro when the lake is low with the gas plant. All that has to be blended together into a grid that is antiquated and compartmentalized and all kinds of problems. We are going to hit our renewable standards. I mean nobody in this state denies that the utilities -- they get their rate cases every three years and the way they get a favorable rate case so they can charge us more than they should be able to charge us is they satisfy the public utility commission. And the utility commission in this state is a fairly progressive group of guys and these guys are going to make those standards so they can get their rate increases.

Now, we looked at a project the other day that was a -- I like the nontraditional renewables. Everybody runs towards the solar and the wind. I like the thing, animal waste, waste [tea], some of the things that aren't really apparent in the market. One of the problems for example we looked at on this project is they had anticipated about 20% of their revenues to come from greenhouse gas emission credits. And so we analyzed it and we said, yes, you can pretty well define what a pound of CO2 is worth and how much CO2 do you offset by this process. But then we looked at historically what CO2 was s worth and in some cases, it was $3 a ton and in some cases, it was $22 a ton depending on the market. So how do you factor that into your pro forma? It is very, very difficult.

You can somewhat -- you can fix your gas cost, you can fix your electrical revenue and things like that, but there are certain moving parts you can't factor in. Now, you compound that by uncertainty in the lending side of it for debt and equity because all these guys, these developers raise both debt and equity in one form or another. A lot of them sell the tax credits, which right now they can just write a letter to the IRS and the IRS will send them the credit. So they don't have to try and sell them, which is very beneficial.

There is some stimulus money around for these things, but these jobs -- these development projects are tough enough and then you add to that the uncertainty of these times, along with trying to find the right place to connect to the grid, along with trying to figure out under what basis do you sell the CO2 credits. Do you sell them based on Kyoto or Chicago? What basis do you sell these things, or California? There are just so many moving parts, I wouldn't want to be one of these poor developers right now. I can tell you one thing. This stuff is going to get built. We are still seeing a lot, a lot of traditional gas-fired plants under design and construction.

Okay, great. And then just lastly, I understand there is quite a few desalination plants that are likely to be built in California. And I know that a lot of your water, wastewater work comes out of Florida. Are you pursuing some of that work in California at all?

I built a plant for a very, very tough customer about three years ago called Southwest Water right here in San Juan Capistrano and these guys were such -- these guys were just jerks and they were so bad that I actually had to higher their Chief Operating Officer who is Pete Moerbeek, our Chief Financial Officer. So I figured if he is going to be a jerk, he might as well be my jerk.

Yes, we do desal out here. It is a whole different business out here than it is back there. There hasn't been any really, really big ones built out here to speak of. There have been some smaller ones. It is good for business, it is very energy-intensive and very, very difficult to permit because out here you have to get all the [bugs] and bunny people in line and you have to get a permit from -- you have to deal with local people. On top of that, you have to deal with the coastal commission because these salters, you're not going to build them 15 miles inland. So it is a difficult process. The developers are fighting a lot of the same issues the power and the wind guys or the power guys are, but they are going to be built because we are out of water.

Okay, great. Well, I appreciate it and congratulations again on the quarter.

Thanks, Rob. Thanks for picking us up too.

Arnie Ursaner, CJS Securities.

Hi, could you give us a little more comment or view about SG&A for the balance of the year? It was particularly low this quarter and how should we be thinking about it for the balance of the year?

I don't think it was terribly low this quarter. I am sorry. I think we are looking at roughly the place where we are now continuing. We have said we anticipated we would be in the $8.5 million to $9 million a quarter as a reasonable number. That is kind of where we are -- we are at the bottom end of it this past quarter, but that still doesn't change.

We are aggressively looking at places where we can improve on our SG&A costs. We've started that process a month or so ago and it is something we do all the time anyway. But with the changing kind of markets we are in where our revenues are coming from and the size of those revenues, we need to make adjustments and we are going to be doing that. The net effect of that I don't think I can give you insight into. But we look at it every -- I look at it every day where I can save money on SG&A.

Going back to the margin issue, which I think I have sort of beat to death, but I will try one more time. Obviously underground I think you have mentioned is one of your better margin businesses when it is working well. Can you give us perhaps a feel for the percent that came from underground this year versus last year just to perhaps again expand a little bit?

I do not know that off the top of my head. I know that it was much higher that both the revenues and margins.

And is that more of a single project, is it more general within underground?

It is -- most of the underground work we have performed this last two years has been through MSAs and the announcements we have made, like the copper services we are replacing, those are going to continue for a couple of years. That is fairly good margin work. And then you have the lumpiness of large projects. We continue to chase the Plains All American project and some of the projects out here. They are still in negotiations with the port and other people, but we think they have got there EIS. Hopefully some court won't tell them that it is not adequate. But they have their permits in place, they are just trying to finalize their negotiations and we are hoping they will start awarding projects out of there. There is about a -- it is about a 400 -- and I am shooting from the hip right here -- but I think it is about $400 million project of which they will put it out in pieces. They have hired a construction manager to do that and that is typical to a lot of what we do.

But the underground business, I would guess, is probably consistent this year with last in terms of its volume. So if our volume went down by whatever it went down by, obviously the underground portion would have grown commensurately.

Okay, thank you.

Now, as you know, Arnie, as we have talked, a lot of the hidden market in underground is -- when our equipment is all working, we do better because of the utilization factor and so that is why it is so important that that group continues to perform well for us because of our large investment in construction equipment.

And you had invested quite a bit in capital last year when I guess the machines were only made every certain period of time and you had bought quite a few machines. Were they heavily in use? I think you had a project in San Diego that was pretty important to you.

Well, there are two reasons we bought the machines. One was we could utilize them and the other was the California Resources Board ruling that required this higher standard for machine emission. Unfortunately, they relented and they are going to postpone the standards a couple of years based on the economy. But we bought them basically to get ahead of our competitors on replacing these machines and the productivity and it was the right time because we could utilize them.

We are still utilizing a lot of our equipment and the San Diego project is pretty much finished. That was a little pipeline job. We do see a lot of utilization for that equipment, prospects for utilization equipment over the next couple of years. But -- and CARB will eventually take effect. We have received awards of a couple of projects based on the fact we meet the standards. Because you go to the more politicized counties in California, of course, most of you guys on the East Coast think they are all politicized, but if you go to the more politicized environmentally sensitive counties and they demand you meet these CARB rulings even ahead of the CARB -- California Resources Board.

Brian, can you give us an update -- you had talked about doing some pretty sizable potential work at Pendleton. Can you give us an update on the status of that?

They are rolling projects out and they contract under many different forms. We are seeing work about -- a couple years ago, they were going to privatize all these utilities on these bases. And we love utility work all the way from power plants down to the little tiny gas distribution lines going into the house. And at Pendleton, they are talking about -- I think their budget is in the neighborhood of $4 billion over the next four or five years.

We are also looking at work further west and there is a lot of work out there that fits us well. We have been there before. We are also looking at work in the Gulf of Mexico. There is a lot of money to be spent out of the Galveston district for military spending. And we partner with disadvantaged veterans.

Pete had mentioned All Day Electric where that is our partner on some work in the Bay area. They are a great resource to use in contracting with the military. I think it is a real neat -- if I was going to get behind a disadvantaged business enterprise, it would be a veteran's enterprise, a disabled veteran. So we see a lot of work out there, it fits us well.

We have pursued work -- we have done everything from blackbox work at air bases and military base, submarine work, everything else to paving streets at Vandenberg. So we will just have to spin around and do more of that work. It is not our favorite work, but we do okay at it. It is just pretty paperwork burdensome.

Thank you.

Tahira Afzal, KeyBanc Capital Markets.

Sorry, guys. I know we are running out of time, so one quick question. In terms of your outlook on the solar terminal side, should I expect some impact or looking back a month or two, would you say that you are sensing more of a push-out?

It is very, very expensive. Solar is very expensive to begin with, as you know. The CapEx -- to spend $4300 a kilowatt for a power plant that generates power 35% of the day when gas-fired is less than $1000 is just really expensive. It is going to take some very, very heavyweight financing to get into it. It is a perfect fit for California because the electricity used into the evening, like I said.

I can't see it being pushed out. These guys are working these projects are. I can think of two specifically. In the interim though, you have great companies like Amonix, Solar Systems that have really good concentrated photovoltaic and I think they are going to fill the gap in the meantime. But boy, when the sun goes down, the switch gets flipped. So it is a tough technology to sell into California without any kind of energy storage technology.

But yes, I wouldn't see it being pushed out. I would just say it is just a longer haul. Plus, as I said, water is acute in California, Rob asked about desal plants, desalters. Well, the same state that wants to use water for solar is the state that has to be building desalters. So a lot of the big solar we are working is around the fringes of the state because they don't have the constraints on the water that California does like Nevada, Arizona, places like that.

I wouldn't say it is being pushed out, but I wouldn't say it is being rushed to the front either.

Okay, thanks. And do you take part on the concentrated PV side or as you have said in the past, solar terminal is your sweet spot?

Ask that again?

If I look at your sweet spot for Primoris, if I remember correctly in the past, you had said it is more on the solar terminal side versus concentrated PV. Would that still be correct or do you think concentrated PV could also hold some potential for Primoris?

Oh, very much so. We have got lines in the water on a bunch of the CPV. The issues there quite frankly are -- the panel guys are -- they don't offer the best economics. It is the CPV and the HCPV that are the best economics, but the problem is they are great technologies. We have been following, like I say, Amonix, which is right up in Long Beach and they have got a good technology, they are just struggling in getting bankability on it.

So you have a tight financing market and then you have companies with good technologies, but they say show me the last 10 megawatts you have built and they can't. So they are going through bankability studies and doing what is necessary to get people to finance their projects.

The same with Solar Systems. They have a couple megawatts in Australia, a great technology and they are working the country hard to bring their technology here. It is CPV, it is a dish with 100 plus mirrors on it, but the lenders are reticent to lend on something that there is not 100 megawatts built somewhere they can point to.

All right. Thank you very much.

There are no further questions. I would now like to turn the call back over to Mr. Pratt.

I want to thank everybody for good questions and for engaging with us this morning. I would also like to thank you for your continuing hard work and support and your coverage of us and particularly thank the investors for their belief in us and with that, goodbye.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may now disconnect.