Primoris Services Corp (PRIM) 2012 Q3 法說會逐字稿

Greetings and welcome to the Primoris Services Corporation 2012 third-quarter financial results. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Kate Tholking, Director of Investor Relations. Thank you, Ms. Tholking, you may now begin.

Thank you, Rob. Good morning everyone. Thank you for joining us today. Hopefully this won't interfere with your civic duty too much. Our speakers today will be Brian Pratt, our Chairman, President and Chief Executive Officer at Primoris Services Corporation; and Pete Moerbeek, our Executive Vice President and Chief Financial Officer.

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

Forward-looking statements inherently involve risks and uncertainties including without limitations those discussed during this call and those detailed in the Risk Factors section and other portions of our quarterly report on Form 10-Q for the period ended September 30, 2012, which we filed this morning, and other filings with the Securities and Exchange Commission.

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 by applicable securities laws.

I would now like to turn the call over to Brian Pratt.

Thanks, Kate. Good morning everyone. As you saw from this morning's press release, Primoris had a record third quarter. Our revenue of $432 million was our highest quarterly revenue ever and represents a 15% growth over the third quarter of 2011. This growth was driven by strength in all our core markets. Our operating margin grew from 6.1% in the second quarter of 2012 to 7% in the third.

Our backlog grew to $1.1 billion resulting in a bill-to-book ratio of 1.2. This number excludes our $241 million TxDOT award that many of the analysts have written about. That contract was executed yesterday.

We achieved this growth while maintaining a strong balance sheet. We increased our working capital by 9%. The decline in our cash balance is a result of the type and the volume of work we have and continue to perform, and the pressure that it puts upon ours and our clients' staff to manage within the seasonality of some of our markets.

Let me remind you that we perform the majority of our work with our own forces rather than using subcontractors. As the work ramps up in the late spring/early summer our workforce and its commensurate costs and associated cash flows grow significantly.

Moving on to our operating segments, I will start with the West segment where revenues grew by 4.8% compared to third quarter of 2011.

Scott Summers' Underground Group has done a magnificent job of managing this season's ramp-up in pipeline integrity work. In addition to this, the Group signed contracts for new pipeline construction, electric and gas distribution projects (inaudible) the breadth of their service offerings.

ARB Industrial continued work on two merchant plants and a peaker. As we told you last quarter, one merchant plant and the peaker plant should be completed in 2012 and the second merchant plant - a repowered El Segundo, California - should be completed near the end of the first half of 2013.

We acknowledge the possibility of a gap between the completion of these projects and the commencement of new projects for these teams. We are actively bidding and negotiating post-bids for several substantial opportunities that would fit our workload nicely.

We continue to see solar and renewable projects as a driving force in the California market. Our solar joint venture projects are progressing well and there remains a reasonable flow of projects available to us.

The longer-term market for power in California remains a strong one between the renewable push, new technologies and gas turbines that once through [logging] will generate a very substantive reconfiguration, repowered drive starting in 2014. We are actively working prospects related to these market drivers.

Our Structures Group still faces challenging market conditions. Mark Thurman, our Group President, continues to diligently [hang] with a tough market, evidenced by his recent awards of $16 million of new work for his group.

Rounding out the West segment, our Rockford group, led by Frank Welch, should generate roughly $130 million from shale-related projects on the Marcellus and CO2 injection and natural gas-related projects in the Powder River Basin of Wyoming for 2012. This is actually a little bit better than our original modeling of Rockford.

These are exactly the type of midsized projects we envisioned in our Rockford acquisition and fits our core competencies well. Along with several of our peers, we see a significant ramp-up in large capital projects on the scale of Ruby Pipeline in the second half of 2013.

I am aware that we are a little bit more conservative than some of our peers in their estimates of when these projects will begin construction, but it is our nature to be so.

Our Engineering segment revenue declined by $5.3 million compared to third quarter 2011, mainly due to the completion of several furnace upgrades and refurbishment projects for two major US chemical companies. However, the Group signed seven new contracts during the quarter which will carry them into 2013. And in the next month we hope to announce a new $35 million to $40 million mini LNG facility which will be constructed through an EPC model.

The East segment saw revenue growth of 39% compared to the third quarter of 2011. One of the main drivers behind this growth is the March acquisition of Sprint, which added $33 million in revenue during the quarter.

When we bought Sprint we modeled approximately $70 million in annualized revenues and we now expect a run rate of around $85 million. This growth and associated profitability is largely due to excellent execution by Robert Grimes and his team. Primoris has helped Sprint to improve and expand its systems, construction fleet, and improve its cost and capital structure, allowing them to more successfully win and execute larger projects, such as the previously announced $25 million project in the Eagle Ford Shale region.

William McDevitt's Cardinal Contractors has faced several years of challenging water and wastewater markets, but similar to our Structures Group in the West, we are seeing signs that the worst is behind us. The Group has recently secured approximately $15 million in reasonably priced work in Florida, along with several current awards in the Texas market. I feel we are finally seeing significant signs, if only anecdotal, of improvement in Bill's markets.

James Industrial (sic) Group is seeing the benefit of substantially improving markets for their services in the Gulf of Mexico region. The improvements in this market are driven by perceived long-term, low natural gas prices, somewhat stable and adequate oil prices, clients' pent-up capital and maintenance needs - including system integrity - and a shortage of qualified contractors and personnel.

We believe that our substantial contractors for Conrad, [Borg] and James Industrial, along with a new subsidiary - Saxon - should grow their presence in the region.

The James Civil Group continued to have a strong year in Louisiana. LDOT accounted for 12% of our total revenue for the third quarter. While bidding opportunities and awards of new contractors -- new contracts in Louisiana has slowed, the Texas market is going strong. We believe the LDOT work -- the slowing of the LDOT work is a temporary circumstance that will begin to turn around in the next year or two.

The 2013 TxDOT budget includes over $6 million for construction and maintenance. Danny Hester and the James Heavy Civil Group had the foresight to increase their focus on the TxDOT market several years ago, and as of December 30, James was the second-largest awardee of TxDOT contracts for the year. Again, this does not include the $240 million Belton contract.

James' LA1 bridge construction project won recognition during the quarter including an Award of Excellence from the Associated Builders and Contractors. Also, [iron] work on I-35 near Belton was [storied] in ENR, the construction industry's main journal. I am glad to see Danny and his team getting the recognition they deserve.

As to acquisitions, Saxon, our most recent, is a company we both worked with and competed with for years. They are a good industrial company that ran into serious trouble on projects. They are offering geographies and markets we like.

We feel we paid a fair price on an asset purchase. We are excited about working with Jeni Bogdan and her team to serve markets together that perhaps neither of us accessed as well before.

As I mentioned earlier in the year, we would aspire to complete 2.5 acquisitions. In the remainder of the year we are hoping to get one more sizable acquisition accomplished.

Before I hand the call over to Pete to dig into the numbers a little bit more, I want to stress that while there continues to be uncertainty in the greater macroeconomic environment, the core markets of Primoris are still experiencing strong positive trends.

While the political climate may be getting to a turn a corner within the next 24 hours, we see substantial opportunities in our markets regardless of who receives the most votes. Primoris will succeed in spite of political outcomes. Remember, moving to Texas recently and becoming a Cowboy fan has taught me well how to gracefully deal with disappointment.

Now I would like to turn the call over to Pete Moerbeek, our Chief Financial Officer.

Thank you, Brian, and thanks to each of you for taking time to join us on election day. Hopefully by this point you have had a chance to glance at our very nonpartisan Form 10-Q, which was filed this morning and which provides the detail about our quarterly financial performance. I would like to take a few minutes to highlight several areas and go deeper into some of the numbers.

The bottom line for the quarter is that our earnings per share of $0.34 compares to $0.38 in the third quarter of last year. Last year the St. Bernard Levee project contributed $2.9 million to other income in the third quarter and effectively nothing this year. After taxes that accounts for over $0.03 of the difference.

But focusing only on other income would ignore the strong performance that we had. In this quarter we achieved a record revenue level and effectively put a large, unnamed project out of our rearview mirror. That project is mentioned prominently in the Form 10-Q.

For the quarter revenues were $432 million. Our largest customer, a Northern California utility, represented $69.3 million of that total. Year-to-date our revenues from that customer are $144.3 million, which is almost $50 million ahead of where we were last year at the nine-month point. While we don't anticipate as hectic a fourth quarter as last year, we do expect that total 2012 revenues for the customer will exceed the $165 million from last year.

Our second-largest customer for the quarter was the Louisiana Department of Transportation with revenues of $47 million. And while we expect to see long-term, strong performance in our Texas area, our TxDOT revenues for the quarter at $23.7 million were only half of that in Louisiana.

Our total revenues for the first nine months of 2012 were almost $1.1 billion, with end market revenue distribution as follows -- 40% is Underground revenue consisting mainly of pipeline integrity and pipeline construction. This percentage is up from 34% as of June 30, again demonstrating the highly seasonal nature of this work.

Our Industrial projects, which are power plant, refinery and chemical work, were 22% of our revenues. Our Heavy Civil work was 25%. Our Engineering segment was 3%, and our Other, which includes parking structures, water and wastewater facility construction and mine maintenance, was 10% of revenue.

Our operating margin for the quarter increased to 7% of revenues. At the gross margin level we achieved a 13% margin for the quarter and for the year our overall gross margin has remained consistent at 13% of revenue.

While the overall level of SG&A expenses increased during the quarter, we maintained sufficient operating leverage to increase the operating margin from 6% for the first two quarters of 2012 to 7% for this third quarter.

One of the reasons for the increase in the level of SG&A expenses is the increased volume of service orders and work authorizations, both in the California Underground Groups and Sprint. As one indicator, for the year we increased the number of work orders from 2,146 for the first nine months of 2011 to 3,443 for the first nine months of 2012. Sprint's portion of that increase was 656 work orders.

During the quarter we changed the accounting for our Blythe joint venture. We are consolidating the venture and reflecting the minority interest, now called noncontrolling interest, at the bottom of the income statement and balance sheet. None of the balance-sheet amounts of the joint venture were material at the end of the third quarter.

The provision of income taxes for the quarter was $11 million. After adjusting for the joint venture partnership, our effective tax rate was roughly 38.5% of taxable income. At this time that is the same rate that we expect our effective income tax rate to be for the fourth quarter.

On the last day of the quarter we closed on a small acquisition, that of the Saxon Group. We paid $3 million in cash at closing, which included the payoff of a $2.5 million note. The acquisition agreement included an earnout provision of $2.5 million contingent on Saxon achieving either EBITDA - as that term is defined in the asset purchase agreement - of at least $4 million for the 12 months ending December 2013, or EBITDA of at least $4.75 million for the 18 months ending June 30, 2014.

With that acquisition our expected expenses for amortization are as follows, assuming that everyone makes their earnout target. For Rockford, $193,000 of Other expense and $345,000 of SG&A expense in the fourth quarter of 2012 with payment of $6.9 million next March.

For Sprint, Other expenses of $200,000 and an SG&A expense of $200,000 in the fourth quarter this year, with a payment of $4 million in March 2013, and Other expense of $383,000 and an SG&A expense of $600,000 in the fourth quarter of 2013 with payment of another $4 million in 2014. For Saxon we will have spent $550,000 over the next six quarters.

With the strong seasonal component of our business the end of the third quarter is always challenging from a working capital viewpoint. During the quarter our accounts receivable increased by $88 million and our costs in excess of billings increased by $18.5 million. These increases reflect the activity levels and not a correction or billing concern.

Our receivable days' sales outstanding at the end of September were virtually the same as those at the end of last year. And our CIE increase reflects our need to accumulate information for cost-reimbursable projects at the end of the quarter.

During the quarter our capital expenses were $11 million and we still anticipate our 2012 year-end total expenditures to be approximately $30 million net of proceeds of sales.

During the quarter the sales proceeds were approximately $1 million for a gain of $620,000. Our depreciation and amortization for the quarter was $9 million.

As of September 30 our total outstanding debt was $82 million and our debt-to-equity ratio was 25.8%. Of our total debt, $74 million represents notes secured by equipment and the remainder of the debt is capitalized leases.

In October we amended our credit line, increasing our revolver to $49 million throughout the end of the current year.

Year-to-date we have spent $38 million in cash for Sprint, Silva and Saxon, and we still have dry ammunition for a third or fourth acquisition.

We paid out $1.5 million in dividends in the third quarter. In our press release this morning please note that we changed the payment date for the next dividend to the end of December instead of early January.

We did not repurchase any shares under the share-repurchase plan, and approximately $19 million still remains under that plan through the end of this year.

Our ending backlog of $1.1 billion represents a 5% sequential increase over the second quarter of this year. Both the East and West segments saw an increase in backlog. As always, remember that we do not include a job in backlog unless we have a signed contract with known revenue amounts; therefore, we do not include cost-reimbursable projects or anticipated MSA revenues in our backlog. During the third quarter approximately 18% of our revenues were not derived from backlog.

For the East segment, of the $753 million in backlog $366 million is from four projects in the Belton area, which does not include the $241 million project. In our press release we identify the anticipated revenues for both the fourth quarter of 2012 and estimates for 2013.

I would like to now turn the call over to the operator so we can get to your questions.

(Operator Instructions). Lee Jagoda, CJS Securities.

Can you try to break out, Pete, the revenue contribution from the large unnamed project and the work that you had in PG&E in Q4 of 2011?

Well, it was minimal from the large project, because it ended for all practical purposes in -- at the end of Q3. There was some, and off the top of my head I don't remember. I mentioned that we were -- we ended up at 165 for PG&E last year, and we were at $94 million -- $95 million, so we had a huge quarter from them. We don't expect quite as big a fourth quarter this year.

How do you expect the fourth quarter to trend sequentially as it relates to the PG&E work?

I'm sorry, I didn't understand your question.

So in terms of Q4 over Q3, what trends should we see in the PG&E work?

You traditionally see a pretty significant drop-off in December. I think last year was somewhat of an aberration in that we had a very large amount of work for the hydro testing and a lot of that hit in fourth quarter. I don't think you'll see quite that large an increase in fourth quarter this year.

Okay, and just with --.

It is pretty hard to speculate about it, because traditionally you have to put the lines back in service for the winter. But at the same time based on the numbers, I think Dan [and his men were] saying out there, there's the - and that we validated them - they're way behind on their spending curve, PG&E is, so I don't know if they have a way to expedite that and put more work in the pipeline or not.

But every year it remains difficult to predict what fourth quarter is going to be like. So far we haven't seen a big drop-off in our headcount.

Okay, that is helpful. Just switching gear a little bit to Rockford, do you have the nine-month number on Rockford? I know you said they will do 130 for the full year.

Rockford revenue for the first nine months. Not quite $90 million.

Okay. And then one more question and then I will hop back in queue. Did I hear you correct, Brian, when you said we should expect one more sizable acquisition coming before the end of the year?

Well, I promised you guys 2.5 was our goal, and we have kind of gone one and two halves. Our problem is we've run out of time and finding another company that starts with S. You know, we did Sprint, Silva and Saxon, so if we -- we have got a real tight criteria there to find a fourth company with S. But we're optimistic that we can get one more done that is of reasonable size. It is not a $300 million or $400 million company, but it is good enough size that we are interested in it.

Okay, very good. Thanks very much.

Richard Paget, Imperial Capital.

Brian, in the press release you talk about you feel relatively confident that backlog should grow towards the end of the year and into next year. Now, I realize part of that is that last Belton leg of I-35 that is going to go into backlog in the fourth quarter. What other areas are you fairly confident about hitting backlog, especially as you burn off some of these other larger projects going into next year?

Well, we just had an internal kind of lesson on this couple of days ago. The way the public work goes is you bid the job, you are announced as the apparent low bidder, which gives you time to see if your bid is accurate, true, correct. And then you go to awardee and they award you the job. And then they start their due diligence on - did you meet your disadvantaged business enterprise numbers, and is your bond good, and is it a sound-enough bonding company? Is your budget okay? And then they go to a contract.

So we announce stuff when we get it to the contract stage and then we execute it, which you will see an announcement on Belton job in the next couple of days.

All of the private guys have their own various processes. But when I look at the work that is in the pipeline between the bid or the negotiated stage, and where we're going to have contracts executed, I am very optimistic that we will see a good increase in our backlog. Already starting with a $241 million Belton job through the quarter doesn't hurt any.

Okay, I know you mentioned the LNG project, are there any other -- is there any other particular area that these are coming out of or is it widespread?

You have got the LNG projects. You've got several large industrial projects on the West Coast I mentioned coming off these big power jobs and the opportunities here. You have got -- when we originally were committed to these garbage-to-energy projects in Puerto Rico and the Caribbean and then several in the US Mainland, we put those to backlog, because we had a contract on [every] one of them. And then we took it out of backlog because they decided to go to an EPC structure.

And those projects have been held up, based on what the client is telling me, due to the election and things and the politics around them. We feel confident that they're going to be awarded and move forward. Those are sizable backlog. Those are now -- the smaller ones at $60 million plus and the other ones are larger than that.

And then you've got the normal process of the highway work. You've got a job that we have been awarded in Texas for $20 million for Bill McDevitt's Water and Wastewater group. That goes before the city Council, I think, Thursday, next week on November 14. That is kind of perfunctory. We are within budget. We have met all the requirements.

So we just see enough in the pipeline there just I am comfortable with where we are, and it is very much across the board.

All right, and then, Brian, you mentioned the election and it's -- regardless of the outcome your end markets will still do well. Now personal views aside, and I am not sure you can do that, but what should we think about if Obama wins? Is that good for alt energy and heavy civil? If Romney wins is it a pipeline and energy? What should we be focusing on with the binary event?

And then the second part, are there any specific issues being voted on in some of your big markets like California or Texas or Louisiana that we should look at that that could benefit you depending upon their outcome?

I will go backwards -- backwards on the question, because that is the easiest. The answer is no on specific issues. Obviously there are little areas here and there with a bond and those things for funding towards the industry, but nothing specific to us.

I am still trying to figure out what the current administration's energy policy is, so I can't tell you whether -- I know they're not going to be helpful towards coal. They had been a little bit harmful towards LNG, because they don't seem to have -- they are trying to hurt coal, so they are trying to suppress the prices of natural gas. And the best way to do that is suppress demand, which the best way to do that is not grant permits for export of natural gas or LNG.

So they pretty well have stymied the larger projects for export -- for manufacture and export of LNG. That has been a negative. I do see them pushing towards renewables moreso than they have. I don't know that they're going to write any more stupid loan guarantees, but they like -- they don't like natural gas. They like it less -- they dislike it less than coal.

I think there will be less new pipelines granted permits, but they will be stricter. They will have tighter environmental restrictions. The existing pipelines will have much more onerous environmental and operating restrictions, which will be good from a maintenance standpoint, but you're going to see a suppression of perhaps new work, while an increase in remedial work and mitigation work.

On the road side, I think either group would have to - the only way they're going to get parts of this economy going is to juice the construction business. And I think either group would probably be looking at some kind of infrastructure act or -- I don't think the loan guarantee bank that they talked about is worth discussing, because it is a crappy idea.

But to generate the kind of jobs they want to do, and for the Obama administration to pay back to the labor unions they are going to have to juice the highway work, which is easy to do. In every recession we have ever been in that has been the primary way to get out of it for the feds.

So it is a menagerie of stuff. I think natural gas just by the sheer impetus of the price and the market and its availability and the economics, it has to get developed. It will just be developed under much more tighter restrictions under Obama than it would under Romney, which for us it actually is kind of a positive because coming out of California with a lot of our operating people, they know how to work with those tight environmental restrictions. You got to worry about killing turtles and lizards and flies and stuff, and that kind of stuff we operate well coming out of the environment we're in -- we have been in.

So, sorry to give you a long answer that didn't get to the point.

All right, thanks, Brian.

Tahira Afzal, KeyBanc.

Congratulations, that was a great quarter. So I guess my first question is could you talk a bit about your utilization rates in your different segments? And that is just from the aspect of demand for a lot of your work. Stock needs to grow going forward. I would love to get an idea of how much you can sustain organically.

Wow. Well, I think that - you know, that is a big question, because you got to deal with every market.

I think the Engineering Group has plenty of room to expand. The Pipeline Group is -- you hear a lot of people talk about various -- our competitors and how many spreads they can stand up and equipment that they own. We have enough equipment to stand probably 3 to 4 spreads, depending on the size of the pipe and how fast you have to go.

But the restraint becomes how many crews do you have to man the equipment? And you have to have a bit of extra equipment, because it always seems to be in the wrong place for the next job. And so I think generally speaking we have the ability to grow organically very significantly based on equipment.

Based on people I say the same thing. The industry is really going to head into some high demand for good people. And we have a lot of them, but that doesn't keep our competitors from trying to hire them. I think we're pretty good at retention without having to overpay people.

But I think that is going to be very, very acute for the construction business. And it will be nasty. They are predicting the need of maybe 150,000 craftsmen into the Houston market, the ship channel market there over the next couple of years.

And you can say, well, that is one market, but when we get slow in -- we get busy in California we need welders to build a power plant. Typically they drive from Houston or from Texas or Oklahoma, because the pay in California is more and they like living out there; they can work year-round.

But if the market in Houston heats up it is going to impact every industrial market throughout the country in terms of availability of people. And I think that is not just the industrial market, but when they are laying pipe, and they are doing foundations for refineries that impacts the heavy civil guys, because those guys will quit you to go to work for a couple dollars more in a different market.

So I think we are very well set to grow organically. I am very comfortable we can attain the numbers we want to attain organically. We are going to continue to be acquisitively, although I think we're going to take a deep breather after doing four of these -- excuse me -- two and two halves so far this year. We're going to take a deep breadth, and say, okay, we need to work on our systems and make sure we assimilate well.

But we are going to continue to grow our capability organically too. But in general if a contractor tells you he has got plenty of room, and competition doesn't influence him, and we are not going to see a labor shortage, he is not in the right kind of business.

Right, okay. And, Brian, we started to see some early petrochem awards flow-through. You guys provide heat exchangers in all sorts of businesses from the front-end side, I assume you do some work there. So can you give us color on timing-wise how you see this whole petrochem cycle playing out?

And clearly as for the last set of questions, whoever then follows does [assumes] that, but I would love to get your thoughts -- whether this looks like a late 2013 ramp-up or more like a mid 2014?

It is nice to hear you give me questions that can be used for the thesis of an answer. The ramp that's already here - Conrad Industrial Group is already - he's already ramped up. I think he said he had well over 300 guys in the field, which is a pretty good ramp-up for him. And those jobs are just starting. He has got some work there for Westlake Chemical.

And his real expertise, along with Saxon's, is more on gas processing. And that side is already ramping up with these LNG -- the possibilities of these LNG plants and these refinery retrofits and everything else.

So I really couldn't give you a feel. I don't follow that industry that closely. We are just now beginning to penetrate it more and more with the James guys.

But it is already in short supply. We are already seeing welders coming in from the Philippines and places like that, which is pretty hard to believe when you have got a 7.9% unemployment rate. But the ramp-up is upon us, and it is going to grow quickly.

And the shortages will be felt very soon. So what you have to watch out for is pricing the work to try and stay ahead of the cost ramp-up, because as the demand for our services ramps up, our labor is going to feel that, and we are going to be hiring less-efficient labor. Our subs will feel that. They're going to get a little pickier about their prices and terms. And the order is to stay ahead of all that with your client and make sure you have got it adequately priced and reflected in your deal with him. And the guys that don't do that are going to -- I think they're going to struggle over the next year, year and a half.

But the ramp-up is already here. The pipeline business is going to exacerbate that. All the welders who work pipeline work industrial. The clients are going to feel it because they're going to have to reach into the depths of their companies, and put people in charge of capital expenditures that aren't qualified. That means we are going to struggle pulling guys -- dragging guys through projects that don't know how to be drug through projects. It is going to be a lot of fun. We are really looking forward to it.

Are your customers amenable to cost-plus projects if the tightness is building up or would you, because you are such good experts at doing fixed-price continue to want to do it that way? Is it -- as you look into 2014 do you think it is a cost-plus mix and does that impact your margin trajectory?

Yes, and I think we have talked about this before, I actually prefer lump-sum work unless you are in a real dynamic market. At the same time, if these clients are anticipating budgets that are unreasonable and we do the work cost-reimbursable, that is a new set of risks. So you know how I feel about that.

But many of the projects we are pursuing -- we just signed one with Saxon the other day which is a blend of contract which they have a very engineered and defined scope of work on a portion of the project. And the balance of the project is reimbursable because your engineering is running behind and the scope is a little bit squishy.

So we will work either way. When you work open book with a client, your margins are less, but allegedly your risk is less. But a lot of times if that open book permeates into a busted budget then your risk is the same or greater.

Thank you very much.

Rich Wesolowski, Sidoti & Company.

Regarding the competitive dynamics for gathering-line work in the Marcellus and the Williston areas outside of Sprint's areas, I understand that the owners are tapping the same contractors that they used for successive small task orders or projects rather than putting everything out for RFP. Is that accurate? And if so, how is it possible to expand the business or establish yourself there?

In our case it is kind of accurate in the Marcellus. We are working for one client up there, and these guys were putting out a little flow line here and a little flow line there. And by the time they paid a contractor to mold and demold and get to the job and there's a lot of fixed cost involved in that, their cost were way too high. Their administration efforts were kind of nightmarish.

So we negotiated with the client, kind of a package deal. And we negotiate each project. And then it allows us to get this kind of stream of projects put together where we can coordinate the flow from one to the other. And the client is then exceptionally pleased - at least that is what my guys are telling me - they have been exceptionally pleased with the results. It seems to be the case because the client keeps coming back to us for more. Your margins are less in that circumstance, but it is always good to have a happy client. We are seeing that.

I think the strain is going to come as this capital work comes on, and some of these clients are tempted to take these better crews that they have kept busy in these areas and trade them out for a big capital job where they can make more money. And we grew up with the mantra to never trade an old friend for a new friend, and that has probably cost us some real profits over the years, but it has kept our core clients pretty happy with us.

But that is when you're going to be able to upscale these market you are in. And then even these guys that have been fortunate and had a good run with clients, even they screw up from time to time. A safety issue or an unhappy landowner, something like that, can go a long way to get you chased off of a project or off of a bid list.

We see our real growth opportunity -- we think we have kind of gotten what we want up in Marcellus on the reimbursable. There are a couple of projects up there we are working shortlisted with some clients on that are really, really good projects for us -- large capital projects.

But we are actually looking at -- Sprint's first project was in the Eagle - that we just got awarded for Pocono was really their first large capital project in the Eagle Ford. Most of their other work has been in and around Houston up towards Mississippi.

So we are taking the existing clients, this is for Pocono, and people like them and enterprise and energy transfer, and we are trying to exploit new areas for them where they have been disappointed with their current stable of contractors.

That is not only always easy because you go into these new areas and if you can't bring new labor and you are the same old labor with a different colored pickup on the right-of-way. But we think there is an opportunity there to continue to expand, because the Sprint guys were underutilized. They're good guys.

Grimes has been in the business forever. No - I'm forever; he is a couple of years shorter than forever. He knows the clients. He knows the workforce. He can execute well. The work we have gotten is going exceptionally well. We think we can lever that to get him into areas that he is not currently working in as much as we would like, like West Texas, places like that.

If Primoris wins long-haul pipeline work in 2013 will that be wholly additive to your West sales or will some of that labor necessarily detract from your gathering-line business?

Let me correct you. When Primoris wins the long-haul pipeline work, some of it in 2013 --.

I would never be so presumptuous.

(laughter). Hey, I am a pessimist compared to my guys! Obviously, you don't go through a little slower time and lay off out of your better people and work all the guys you've worked secondarily. We're going to have to spread out and bring more people. I think some of the advantages we have is that we did nothing the first half of last year. I mean, Rockford did, what, $13 million first-half, Pete?

$17 million.

$17 million. Some of that was Ruby, the rest is residual. So they ramped up pretty quickly in the second half. And we didn't nearly begin to tap our entire resources, so I think we have got some good capability we haven't used yet.

I don't think we are going to allow our gathering-line and flowline clients to suffer with less than what we have given them in the past in terms of quality.

There seems to be a lot of opportunity stretching out, but I'm wondering with the pending completion of the couple of gas-fired plant projects that have been in the pipeline for a while, should we expect a lull in your West revenue growth in early 2013?

There is two issues that tie into that. The answer to one of them is their work, and yes there is work. There is three issues. Is there work? Yes, there is. Can we win it? Yes, we can. We're in the process of doing so. Will it start on time? And that is the real question, because these enviro Nazis on the West Coast - I'm pretty sure they are not listening to this earnings call.

Hopefully.

You can't get them out of the way. Even -- a example, it's not on the West Coast, but the trash burner we are talking about in Puerto Rico was interceded -- the permit process was interceded by the Sierra Club.

Now here you've got a process that takes garbage you were burying in the ground and creating methane and all kinds of nasty stuff, and here we are going to clean it up and make clean power with it - as clean as you can make - and the enviro Nazis are getting in the way of the deal. So that is the third part of the equation.

So we would have thought we would've had a couple of jobs already teed up by now. I don't think the election is impeding those like they are the jobs in Puerto Rico. But I am comfortable the work is there. I am comfortable we will win our share. Whether it starts within a reasonable time or not, I can't say.

Thanks a lot. I appreciate the time.

Dan Mannes, Avondale Partners.

So, first, I want to touch on large pipe as well. You give kind of a conservative tone that maybe the large pipe wouldn't really pick up until the second half of next year, but given where you sit now, how do you see it progressing to that, i.e., some of your competitors have talked maybe about more negotiated deals rather than true bids, maybe some shift towards cost-reimbursable rather than fixed-price. How do you see that playing out, and could this -- how much better should it be getting from where we are now?

How long is a piece of string, I think is the answer. We are seeing negotiated deals. We are currently shortlisted on a couple of projects that are hard bid that go to the first half of 2013 or the second half or the first half. So deep into the second quarter, I guess, is better said.

I don't think anybody is going to be in a hurry to go up and start a job in the Northeast or up near the Bakken in the middle of winter. It is just really tough. So logically it is going to be the second half of 2013 before it really gets going.

It is there. We are bidding it; and we are bidding the work. We have been invited to negotiate some. We will do that too. Whether it ends up -- I mean, every job we do is a bid -- a bid of [hard dire] and a bid of cost-plus. For us the biggest issue is does the client have a reasonable expectation as to what this work is going to cost him? There has been a couple of jobs recently bid where the client pulled back and gasped, because it basically took his breath away in terms of the cost, for lump-sum work.

Some of that is the nature of work, because it is in tough areas during the middle of winter. Some of it is the financial terms that the client expected. Some of it is just the fact that I think most of the bigger contractors are anticipating a tight market for labor over the next couple of years, and they are going to be picky about what they take on. God bless them. I think the first couple of guys to get work maybe regret it if they picked the wrong client or the wrong job or the wrong price. At the same time the first couple of guys to get work will kind of have a good labor pool and maybe they can take it to the next job.

So it is a mixed bag. I think it is going to get pretty exciting. I think typically when you go into these kinds of booms, if you look to 2008, 2009, which was when the vast majority of the money was made, the money isn't made in these booms in the first year or two; it is made in the later years as costs get understood and spread out and you understand the labor shortage and you start reflecting that in your terms, and the client understands it and appreciates it.

It hasn't -- that market -- that great market hasn't been gone that long, but the clients have kind of a bitter memory of some of it, because they paid dear prices for it. So it is tougher to get the kind of terms you're going to want on a reimbursable job.

And then you always face the danger -- we were very conservative -- you always face the danger even on a reimbursable job that the client come in and he hires a forensic auditor and pays him a success fee if he finds something he can back charge you for.

It is -- both delivery systems -- both cost-plus and lump-sum are fraught with risks. And you mitigate those by writing good contracts, and more than that you mitigate them by working for the right client. And we think we are pretty good at picking -- doing both.

Okay, a quick segue on the pipe side, because most of what we talked about on the large-pipe side is Rockford, but when you think about Sprint and going after big jobs, it sounds like you have plused off some. How big jobs can you go after with Sprint, and how could that play out in terms of participating in some of the bigger things maybe in the Gulf Coast region on the pipe side?

Well, when we analyze the size of the job we look more at the difficulty of execution. And technically the jobs that you do in the Marcellus are much more challenging than the jobs you do at the Eagle Ford. Eagle Ford is what we call potato dirt, where you just dig it with a trenching machine and it doesn't have a lot of interferences in the right-of-way or in the alignment of the pipe. So you roll it up in big long strains, then you lower it in and you go like a house afire. There is days down there on midsize pipe or even large pipe you can lay two miles a day.

Now you go to Marcellus and it is vastly different. It is tough country. You got some farmland up there but -- and you're dealing with farmers and cows falling in your ditch, and the guys chasing the farmer's daughter. It is exciting.

But the work is technically much more challenging. There is a lot of rock. There is a lot of drilling. Just your access is more difficult because you're going over older bridges and shorter sections. But in general Sprint is good up to about 100 million, maybe more, on the right kind at the Eagle Ford or the West Texas kind of work.

I would never dream of taking them someplace like the Marcellus. They are very good at it, but that is just not their environment. They do a lot of that kind of work around Houston, but they are not dealing with the hard rock and the hills that you deal with up in West Virginia, Pennsylvania and Ohio. There is some really steep country up in that part of the world.

I was thinking more of things like Seaway and Texas Express and some of the bigger jobs that are coming.

I think we have got a bid submitted on a portion of Texas Express with Sprint, but it is not up in Ohio, it is down south.

Okay. And then real quick on Saxon, it seems like this should give you some leverage to potential big jobs on the power side. How big jobs are you comfortable going after with that business, or just given maybe some of the issues they have had prior to acquisition, you're going to start small and build up?

Well, they have done a serious amount of Power work. A lot of it was ESPs and for coal. They also -- where they are really strong is on process work on air-separation units and stuff like that for people like Praxair and Air Products.

We are going to -- I won't say we are going to dip our toe in but we will probably put our whole foot in, and we may get scalded and we may not. I doubt because I think we have got some pretty smart guys.

We are just now beginning to feel our way around with flanging up the Saxon guys with the James guys -- the James Industrial guys. And we've competed them a long time. We understand how they bid. On the one job they got that we kind of inherited with -- we signed it post the acquisition. James was second, Saxon was low.

There is a great opportunity there for Power. I think it is going to be a long -- there is going to be a long project stream, so I don't think we have to jump into it immediately. I think if we get four more years of Obama, the coal guys are dead. They are not going to build much more coal. The coal that is there is going to generate quite a bit of work, because we are going to have to put air-pollution devices on the existing plants, and that is a lot of work, and it is big capital work.

If we get Romney then the gas work is going to explode. Either way you're going to see a lot of gas-processing work. So it opens up a big market, but if you think we're going to be bidding $400 million or $500 million coal jobs next year, well, that ain't going to happen. We are going to run before -- we are going to walk before we run.

Okay, and then if you'll indulge me one last question. A couple of comments in terms of a potential gap on the ARB Industrial business, particularly with El Segundo finishing up next year. But in the scheme of things my understanding was ARB Industrials may be 10% in total of the West business or maybe a little bit more.

I guess I am just trying to understand when you talk about the gap how big a risk is that to being able to grow in total or is that -- or you are just flagging it as just maybe one area of headwinds where everything else seems to be going pretty well?

Well, they're a little more than 10%. I'd guess they're more like --

20% -- 15% to 20% of total.

15% to 20% of which (multiple speakers).

Of West, okay.

No, total.

No, they are not that big of a total.

Okay.

Hang on just a second and we will do the number.

Call it 15% of Primoris total, of which about two-thirds of that is power. But remember we do a lot of work for the Kinder Morgans of the world and down in the harbor in the port for material processing and stuff like that.

And I've got -- I think we will end up filling at least one of the teams. We have 2.5 teams coming available. Don't forget though that these teams can be committed to this work in Puerto Rico and some of that kind of work. And then you have got the solar work that is not really what we consider conventional power work, and it has got some good opportunities out there yet to be let.

Okay, got it. Thanks a lot.

I don't look at it -- I am not lying awake at night. Here in about four months if we don't land at least one, I will be laying awake at night. I think we can more than make it up with these other acquisitions if there is a bit of a hiatus here. I don't think it will happen, though.

Yes, thanks, Brian.

Adam Thalhimer, BB&T Capital Markets.

The call is getting a little long here, but just a few more for you. Number one, on the East Construction segment, the gross margins averaged, call it, 10% over the last year. I just wonder, are you happy with that? Is that a good run rate or how do you think about the gross margin there?

I am never happy with margins. Did you want more color?

Please, yes.

Well, you have got to remember that when we put a job into work-in-process we put it in two tranches. We have a profit and we have a contingency. And when you have got 1% of the job worked off you recognize about 1% of the profit, but you still got 99% of the contingency left.

So we're pretty conservative how we recognize profit. And what happened in the last couple of quarters is we have had bigger jobs where the contingencies -- we were able to recognize those things, so the margin kind of increases. That happened towards the end of last year.

As we got into this year, we started a bunch of new work. So we are kind of recognizing a moderate or reasonable profit, but we are holding back on the contingency due to a whole lot of things that could impact us. That is just the way we are. We always seem to be very careful about how we recognize things.

We actually did that even on the bigger reimbursable jobs because you always worry about this forensic accountant that is going to come in. So we actually -- as you saw -- we actually recognized profit in first quarter on Ruby after the job had been done for six months. And once we got a full and final release, we were able to recognize that.

So what you have seen on the Heavy Civil is that process. We are starting a bunch of new bigger work and we are pretty cautious about what we recognize.

Now if we get the new revenue recognition rules out of the gas people, God knows when we'll be recognizing at that point.

Okay, that is helpful. And then --.

It is hard to get the margins up. I am never happy with margin. It is a marathon for me. And we constantly look at ways to increase margin. And the guys are good at it. They really -- they are figuring out better ways to make money -- on the last day of the job they are figuring out better ways to make money. They are just great at what they do. I can't imagine a better group of people to work with than the guys we have.

Okay, good. That is helpful. And then did you comment on the PG&E alliance agreement? I thought that ended at the end of 2012. Can you update us on that? And maybe just talk more broadly about competition for that work.

Well, they change operating methods every couple of years, I think just to prove (technical difficulty) more than anything else. They have tried to - let's bid it all thing and that hasn't worked well for them, I guess, because they are obviously changing back to the alliance method.

We have been in some form of alliance or working for PG&E for 60, 70 years. I think we are pretty ingrained into the market. The process is in play right now. I think submittals go in, oh, probably -- I think I remember it was mid-September or mid-December. And then there will be a big kind of dark period where they will study and hem and haw and scratch their chin and then we will get results. So that is also the reason we are a little bit suspect as to how long the volume of work will continue at the current pace.

Some of it is weather, some of it is process. And sometimes they actually expedite work under the old system so they can get it done, knowing that the new system is going to be slow starting it up under the alliance. I don't know whether that will happen this time. I am betting that it will, because they are so far behind the curve on their capital-expenditure-required budget.

But we're in the process right now. I couldn't shed off any light on who might be - how they're even going to split it off. The last time they did all right, they split it by areas. We got the heart of the area, which is the Bay Area. Some of the guys got Eureka and Northern California, which is tough to service, because you have got -- you spend a lot of windshield time.

But I don't know how to break it up. I'm confident we're going to be in the hub, whether we get any or all of it or we are standby or we are just going to be able bid work, I don't know. I think they would be hard-pressed without us, but that doesn't mean they won't try.

Okay, and then, lastly, you are doing a lot of work in the Marcellus now. Should we bake in any kind of impact from Hurricane Sandy just in Q4?

We were -- we were down because of weather for a couple of days, but it was a couple of days; it wasn't a major impact.

Okay, great. Thanks, Brian.

John Rogers, D.A. Davidson.

Of your backlog right now, the 1.1 or at the end of the third quarter, how much is pipeline work?

Probably -- there is a little bit of Sprint in there, and there's a little bit of PG&E work, so probably about -- between $50 million and $100 million.

Sorry, how much?

$50 million to $100 million.

Okay. And the projects that you see coming in 2013, are they expected to be large backlog projects? Ryan, you talked about bidding them and negotiating them both ways. I'm just time to think about how much visibility we are going to have as we go through 2013?

Part of our balance sheet right now is the shift from cash to AR and cost-in-excess. Let's take an example of the one that we are hopefully going to end up with. It is a $120 million job that would start late spring and be done by September. So do the math. You come up burning off $15 million to $20 million a month.

It is just it burns off quickly. So, yes, I see backlog one quarter. The next time you look at it the next quarter it is half done. It doesn't burn off like your traditional backlog. If it is reimbursable work we are not going to get it into backlog unless we change our MO. I don't think we will.

But it is going to -- the bigger jobs, you get above $200 million, $250 million, you're probably going to see those probably going to more reimbursable, although we will bid them.

And those will hit backlog. And then when you get to a certain level, and depending on who the client is and what kind of work, for example, if we get a awarded this project, it will probably hit backlog before the end of the quarter, but it wouldn't start until -- it really wouldn't start meaningfully until third quarter.

So it is -- it is out there a long time before it starts, as is the Heavy Civil. But it goes quick, so I'm not real sure how much backlog you get -- how much visibility you get now.

Okay. And in terms of just thinking about margins. And I know you're not satisfied, but are the large -- is there is distinction when you're doing large diameter and some of the smaller diameter projects, and I am thinking more especially how the materials flow through your income statement?

We provide very, very little material. We provide what we call consumables, which is drilling mud and welding rods and things like that -- concrete for the foundations, but we don't provide any pipe.

Even on the small projects?

Well, on some -- we are doing a project for a little town up near Morro Bay in Los Osos, and we are providing all the pipe for that. But, in general, even the small ones you don't provide a heck of a lot of material. Even the big power jobs, we will provide some -- a little bit of the small diameter pipe and a little bit of the steel, but the engines and the (inaudible) rigs and stuff come from the client, because of the lead time.

But even the smaller -- now on some of the smaller industrial work we will provide some of the pipe, but it is kind of meaningless in terms of the value; I mean, 10% at the most in a pipeline job.

Okay, okay. And then just lastly, the small LNG project, I assume those are the storage facilities. How big are those?

These are actually a -- this is a LNG -- we make the gas liquid -- liquefaction plant. And I can't off the top of my head remember the size of this one, but the broad, the one we put in at the Borax plant for Boone a couple years ago was 120,000 gallons a day. And that revenue to us, about $80 million.

They had in excess -- they had way too much storage, because they use it as a distribution facility also. But this will be -- this'll be quite -- this will be almost as large, I believe, but it doesn't have nearly had the storage that we put in for Boone out there.

Shell is going to convert 1,200 stations to LNG. BP is looking at following suit. We think there is going to be a lot of these little mini plants built and they are going to be pretty much strung all over the country.

Okay, great. Thank you.

Richard Diamond, Strait Lane Capital.

I know you talk about enviro Nazis, but you do solar work for California, which is as a Texan makes no economic sense. Is it fair to say no matter who becomes President you don't let politics get in the way of making money?

My greed transcends all politics! (multiple speakers). Yes, we are not a fan of the market, and that is the great thing about our Company. Our welders don't care whether they are welding on an environmentally managed project or Cowboys -- a Cowboys and Indian project in South Texas.

We are going to find a way to make money. And quite honestly, I would much prefer a guy that is pro growth, but at the same time there's a lot to be said about - a lot of positives towards us about the current administration and the kind of stuff they're doing with the renewables and the tighter operating specs for the operating companies.

Yes. And is it fair to say on the large pipeline -- this is from a conceptual viewpoint. I just think since you own a third of the company and everyone is going to bother you if you miss, that you would rather be conservative in your guidance and underpromise and overdeliver, and that there really isn't any fundamental difference in viewpoint on large-diameter pipeline between Quanta, MasTec and Primoris.

I think we got better guys. So I think that's the only difference. We will deliver it anyway they want to.

Now from our - Quanta brags about having 30% of the capacity; they just don't have that much. The MasTec guys are very competitive. They are young guys, Danny and Steve and the precision guys, and they've got a company called Pumpco -- very competitive, good guys. They're good competition, both of them. They understand mark-up, they're not stupid. When they bid a job they expect pretty much the same kind of terms and conditions we expect. So we -- I am happy to have them on the bid list. And I think in the same market we hold our own against them. We punch our weight.

Well, I think you have consistently delivered profitability and growth and being shareholders is good for everybody. So I just want to thank you. And I will look forward to seeing you November 14 and 15 at investor conference in Dallas. Thank you.

Rich Wesolowski, Sidoti & Company.

One quick one, if I may. You spoke about the fourth quarter for the PG&E pipeline integrity not being as large, and a turnover of the alliance contracts. Is this potentially in 2012 the best that your California pipeline integrity revenue gets or are you still confident that 2013 and 2014 will be growth years?

I think there is a ways to go growth-wise. You have got -- you have got the seven utilities entering into the next phase, which is the phase where they really start running the smart tools and they begin their -- they begin their mitigation process.

We have been getting them set up. We are in the last year of the set-up stage. And they're getting ready to award the process of -- what these utilities want to do is they want to -- they want somebody else to develop the process of how they are going to monitor the integrity of these pipes and then hand it over to them. At least that is what Sempra's goal is - so they don't have to gear up and invent a new wheel. And so we are involved in that process.

So we're entering the phase of getting the pipes ready to take the small tools and doing the house-on-fire kind of fixes to the more long-term, longevity and kind of long -- you know, the marathon part of it. So we think that business will grow significantly.

PG&E is just starting. They committed originally -- they are three or four years behind the other utilities, because they chose a different method. If you go back I've talked about it on some of the previous calls, way back. They are just now after the [San Berno] incident, they have had to get into the mode of the rest of the pipeline owners out there. So they're just starting into this.

As you can see, they have committed $2.2 billion over this year and last year and next year. And this year they have only worked off so far this year less than $0.5 billion. So they are not even up to their current commitment and that was to jumpstart their program. That got about -- that got the nasty pipes or the pipes that were the oldest in most of the exposed areas -- got those tested. But that didn't begin to do the massive replacement they need to do to bring this system up into a current safe environment. So I'd think look for that business to grow substantially.

Some of these programs don't put a lot of money in our pocket. They are not programs that we sell to. We don't run the tools. We don't do the engineering. We don't do that other stuff. What you have seen in the first part of this PG&E spend has been a lot of that money that doesn't go to us, it goes to engineers and program management people.

We look for more and more of the spend to be richer towards us and for it to continue to grow. And then we look for this to grow nationally. We're in acquisition, when we spoke of a little earlier. It kind of opens up some new geographies and stuff for us. And that allows us to sell these services more nationally and we are really excited about those prospects. So we are going to take this show on the road, and we think the revenues -- the growth has really no conceivable cap at this point.

Excellent. Again, I appreciate it. Thank you.

There are no further questions at this time. I would like to turn the floor back to management for closing comments.

Okay, I would like to thank everybody for your interest and calling in today. I want to offer special thanks to all the team at the Primoris companies. Our people are truly exceptional. Our current numbers are a direct result for your hard work, as is our long-endured reputation for excellence and professionalism. Thank you and goodbye.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.