Quanta Services Inc (PWR) 2004 Q4 法說會逐字稿

Welcome to the InfraSource 2004 results conference call. Today’s call will be hosted by David Helwig, Chief Executive Officer, and Terence Montgomery, Chief Financial Officer.

As a reminder, this call is being recorded. Statements made on this conference call may contain forward-looking statements based on InfraSource’s current expectations about future events. These statements generally relate to InfraSource’s plans, objectives and expectations for future operations and are based upon management’s current estimates and projections of future results or trends.

These statements are subject to a number of risks and uncertainties and other factors that could cause actual results to differ materially from those described in the forward-looking statements. Listeners are cautioned not to put undue reliance on these forward-looking statements, which are not a guarantee of InfraSource’s future performance. For a detailed discussion of these and other cautionary statements, please refer to InfraSource’s filings with the Securities and Exchange Commission.

At this time, I would like to turn the call over to David Helwig. Please go ahead, sir.

Thank you, Adele and good morning. Welcome to our fourth quarter 2004 earnings conference call. As Adele mentioned, joining me today is Terry Montgomery, our chief financial officer.

Today we will discuss our 2004 results and answer your questions about the fourth quarter. As you’ll hear, our final results for the quarter exceeded our expectations and are consistent with the preliminary results that we discussed with you last month.

For the fourth quarter 2004, our revenues increased 41% over the prior year and 18% over the third quarter of 2004.

EBITDA, as adjusted, increased by 5% over the over prior year, to $18.7 million and our earnings per share was 14 cents per share on a diluted basis, slightly better than our preliminary estimate of 13 cents as discussed in last month’s press release and conference call.

Our revenue mix for the quarter was substantially the same as the prior year despite the contribution from our recent natural gas acquisitions that closed during the third quarter of ’04, indicating continued strength and growth in each of our other end markets.

For the full year 2004, our revenues were $651 million, EBITDA, as adjusted, was 68.4 million and our earnings per share was 27 cents on a diluted basis. Overall, we are very pleased with the performance of the business, reflective of strong operating results, even with a shift of certain project settlements into 2005, as mentioned on our last conference call.

Our backlog remained quite substantial, providing us with support for future performance. Our total backlog of $935 million at the end of the year was up 18% or $144 million over the fourth quarter of 2003 and down only 6% or $57 million over the third quarter, despite the normal seasonal downturn at this time of year.

Approximately $500-520 million of that total backlog is expected to be realized during 2005. Since our last call, we have continued to receive awards of small to medium size regional electric transmission projects, which are in our plan for the year. We’re tracking the development of a number of large electric transmission project opportunities, some of which are built into our expectations for the year. However, none of them has yet reached the stage for award.

Our strategic focus continues to be to capitalize on the favorable trends in the utility infrastructure market. Our substantial backlog reflects the benefit of that focus, despite the uncertainty of timing for a number of large transmission projects and despite the obvious challenge that we face in replacing a project that’s large and as successful as Path 15.

Now, I’d like turn the call over to Terry Montgomery, our CFO, who will discuss our financial results for the quarter in more detail.

As Dave mentioned, today we announced that revenues for the fourth quarter of 2004 increased $56.8 million to $194.4 million compared to $137.6 million for the fourth quarter of 2003. This increase in revenues for the quarter was primarily due to additional natural gas work including a full quarter of operations from the acquisitions of EnStructure and Utili-Trax, additional aerial electric transmission work from the acquisition of Maslonka & Associates from January of 2004 and additional telecommunications work, including the Department of Transportation fiber project.

EBITDA from continuing operations for the fourth quarter of 2004 increased $5.5 million to $19.6 million compared to $14.1 for the fourth quarter of 2003. However, EBITDA from continuing operations for the fourth quarter included $1.1 million of interest forgiveness related to the extinguishment of a subordinated note and several other lesser adjustments as outlined in the tables attached to this morning’s press release.

EBITDA from continuing operations for the fourth quarter of 2003 included a $3.8 million charge relating to a litigation judgment entered against the company in connection with a proposed 1999 acquisition.

Excluding the aforementioned items, EBITDA from continuing operations as adjusted, was $18.7 million for the fourth quarter of 2004 versus $17.9 million for the fourth quarter a year ago.

SG&A expenses of $17.5 million for the quarter included approximately $1.8 million of SG&A, attributable to the EnStructure and Utili-Trax acquisitions, which is recurring in nature.

We have reported GAAP net income for the fourth quarter of $5.5 million or 14 cents per share versus $1.3 million or 12 cents per share for the fourth quarter last year. Please note that our prior year earnings per share is based on our predecessor entity results and share count and is therefore not directly comparable.

Results for the fourth quarter of 2004, included on an after tax basis, between $0.8 million of amortization of intangible assets results from purchase accounting under FAS 141 and $0.7 million of interest forgiveness relating to the early extinguishment of a subordinated note as well as several other lesser adjustments.

For the fourth quarter of 2003, they included, on an after tax basis, a $2.2 million charge related to a litigation judgment entered against the company in connection with a proposed 1999 acquisition and several other lesser adjustments. Exclusive of the effect of these items, income is adjusted with $5.7 million for the fourth quarter of 2004 versus $3.5 million for the fourth quarter of 2003.

The reconciliation of GAAP net income to EBITDA from continuing operations and to EBITDA from continuing operations as adjusted as well as GAAP net income to income as adjusted is included in the tables contained in this morning’s press release and in our 8-K filed in connection with our press release. We are providing the previously mentioned reconciliations of unusual items effecting EBITDA and net income in order to demonstrate how we as management evaluate the results of our operations, exclusive of the effects of unusual non-operational items.

At the end of the fourth quarter, we had $26.8 million of cash on our balance sheet, including $5 million restricted cash, and approximately $56.9 million of availability under our revolving credit facility.

Net cash flow provided by operating activities from continuing operations was a source of $22.2 million in the fourth quarter. As we expected, net cash flow provided by operating activities was positive due to the seasonal pattern of working capital for our business and also the completion of certain projects that allowed for the collection of some of our project retentions.

Capital expenditures were $8.8 million for the quarter compared to $4.0 million for the fourth quarter of 2003. We had $28.1 million on letters of credit outstanding, primarily to secure our insurance and bonding programs and had no drawings under our revolving credit facility at the end of the quarter. We are currently in compliance with the covenants under our credit agreement.

I will now turn the call back to Dave for some closing comments.

Thanks, Terry. On our last call, several questions were raised, related to the impact of acquisitions and also of our large electric transmission projects on our results of operations and also our expectations for 2005.

On our third quarter call, we stated that our expectations for EPS contribution for the acquisitions of EnStructure and Utili-Trax was between 6 and 8 cents per share on an annualized basis. We have integrated those businesses completed into our underground operations and do not track their results separately. However, a review of the acquired contracts confirms that we expect to at least meet those expectations for 2005.

Secondly, we mentioned during the last call that the Arrowhead to Weston transmission line construction project, which we know colloquially as the Power-Up Wisconsin project, has been slowed somewhat due to right of way and permitting issues. These are customer issues, however our current expectations are that we will realize between $10-20 million of revenue on this contract during 2005, depending on the timing of the resolution of those right of way issues. In the interim, we continue to be awarded small to medium sized transmission projects in that region, which are utilizing our available resources.

Lastly, we have highlighted that Path 15 was indeed a very successful project for us during 2004, contributing a significant amount of revenues and earnings, especially during the first half of the year. We have not yet replaced that contract in our backlog of transmission line work, which is the primarily reason for our decline in margin expectations for the first quarter and for the balance of the year.

We’re very pleased with our fourth quarter results, the magnitude of our backlog and the continuing level of activity in our end markets. We remain on track with our previous guidance for the first quarter. The level of activity in our end markets indicates favorable prospects for continued long-term growth.

However, as we have indicated before, the level and quarterly profile of those earnings will continue to be dependent on the timing and scope of large electric transmission projects and the overall mix of electric transmission versus other distribution-related service work.

This now concludes our formal presentation. We’ll open the lines for questions.

Thank you, sir.

(Operator Instructions)

Our first question comes from Sanjay Shrestha from First Albany. Please go ahead.

Great. Thank you. Good morning, guys.

Good morning, Sanjay.

Good morning, Dave. On Path 15, could you give us an update regarding the status of when some of that collection might come in or where does that stand? Can you give us a little update on that?

Sure. Unfortunately, the federal review and settlement process is not exactly under our control. However, we have an agreed upon timeline for the completion of reviews and discussions that would have it conclude somewhere around the end of the quarter, I’d say most likely into the earlier part of the second quarter of this year. We are actively in those discussions.

In fact, I was just reading the notes of a conference call and preliminary setup for a follow-up meeting that’s occurring perhaps this week or early next week. It’s progressing, but not as timely as we all might like.

Yes. Okay. Great. And just a quick question, again, staying with some of the large size transmission project. Obviously, we all saw the Cal ISO approval of $680 million transmission project from Arizona to California and it sounds like it’s going to be a part of the rate base.

Have you heard anything incremental on that front and your solid execution on the Path 15 – how do you sort of see that maybe even benefiting you guys. Could you care to comment a little bit more on that? What are you hearing? What are you seeing?

Sanjay, it’s such an active market. That’s a very good example of a project that’s moved forward to some additional, substantial state of progress or milestone of progress towards actually getting off the ground and proceeding. But quite frankly, that’s one of many in that same sort of category.

We’ve seen, throughout this last quarter or even the last several weeks, similar projects in quite a few regions, including – I’ve kind of lost track, but if I’m not mistaken, the fifth or sixth Western state has now formed a transmission group specifically for the purpose of developing and financing through bond issuances and making public, private deals and stuff like that and agency of some sort to foster project development.

So, there’s a lot of activity. I can’t speak – it would be inappropriate for me to speak to our assessment of any one project. But suffice it to say that our folks following the large projects are quite activity engaged in discussions on many fronts.

Great. And just a quick follow-up on that, Dave, if I could. Given that it’s going to be a part of the rate base, would you say that that’s really kind of maybe a big sentiment change around the utilities part and maybe a signal that some of these large projects will do, in fact, go forward even before the regulatory release? Is that a fair characterization of that?

I believe that, for that project, in California specifically, the thesis that you’ve outlined is a good read of the situation. As we’ve discussed, things develop differently in each jurisdiction.

Absolutely.

So, we see look what Cal ISO is doing and the progress being made there. That’s different than the ERCOT situation. It’s different than – et cetera.

Okay. And one last question …

We also, Sanjay, if we may, we also, just within the last 2 weeks here heard the announcement with major steps forward on at least 2 merchant lines, one in the California and San Francisco Bay Area and the other in the Alberta, Canada to Northwest U.S. – Alberta to Montana. They’ve both been publicly announced as forward as well.

Yes. Great. And one last question. If you could sort of comment on some of the opportunities that you’re seeing on the fiber to the premise side here and how do you sort of see that having an impact on your numbers here in ’05 and ’06?

Excellent question and we have pursued fiber to the premise work. We are performing modest amounts of it. I would characterize it as modest amounts. That might be in the $10-20 million sort of range currently.

And we are being very selective about doing that work only in the areas where we have a substantial infrastructure in presence currently and on contractual firms that meet our internal margin expectations.

That is a type of work that has been under considerable margin pressure, as you know, from talking with others and, quite frankly, we have chosen not to chase that, but to concentrate in niches where we can obtain the work, perform it exceptionally at price levels that meet our standards.

Okay. That’s great. Thanks a lot, guys.

Thank you. Our next question comes from Tom Ford from Lehman Brothers.

Good morning.

Good morning, Mr. Ford.

How are you?

Good.

Just one quick question on the numbers because it’s kind of a non-event, but I just wanted to make sure. It’s – like the gross margin was a bit better than what you guys thought. Was that the reason for the little bit better performance?

Are you comparing the 13 cents to the 14 cents, Tom?

Yes.

Yes, it was.

Okay.

It wasn’t a large difference. In fact, it was pretty much rounding that got the difference between 13 and 14 cents.

Okay.

But we didn’t want to say 14 and then have it be 13 when you round off finish.

This is okay. You’re learning, Dave.

Thank you. Thank you.

You mentioned San Francisco and the merchant there. I think in one of the last calls, you guys had mentioned a small little project in San Fran. I think it was part of underground. Is that – is that connected in any way?

No. Different development all together. The project that we are currently working on, which is an underground transmission line is called Jefferson-Martin. It’s from down toward San Jose along 280. Actually, I just visited that project either last week or this week, I can’t remember. And it heads north from the San Jose, sort of area, up along 280 and goes into south San Francisco. It’s a three segment project. We are the contractor for 2 of those 3 segments. And that work is, in fact, under way.

The merchant project – so, that was a PG&E development. The merchant project I referred to is across in North Bay and has been a link that’s been studied in alternative pursued by PG&E and various developers for quite some time. And what came forward this week was a, specifically, a merchant proposal for an underwater line across from Richmond, across to North Bay.

And we’ll see how that actually develops, but nevertheless, I think it’s indicative of the kind of pent-up opportunities for merchant development. And in fact, they, if I remember correctly, the press on that, specifically referred to the Path 15 development as a model for what they were trying to do there.

And I guess your check is in the mail to the press or whoever the reporter was, right? One thing, just curious here, is that you always talk about the rewards and the fact that there certainly seemed to be some level of activity that’s building. Just wondering if you guys track this internally in terms of number of projects or dollar value. Something that can give us an indication. Because even from your comments here, it seems like there’s things that are popping up in even just the past couple of weeks.

Yes, well, Tom, we certainly do. And we track project opportunities, both in terms of number, we had them stratified by size and certainly potential value and, in fact, the timing of their potential revenues by quarter, as best we can estimate them. We do a formal review of that at least monthly and these days we end up more like biweekly doing an update as different things come up and advance, such as the Southern California line you talked about. When that took another step forward, of course, we went back and said, okay, now let’s look where all the ancillary opportunities that go with that and where we had them marked in terms of probability to go forward and let’s assess our – reassess our competitive position for them.

So, it is very dynamic. I would say – I guess, in some previous call I gave some indication of the stratification – how many project opportunities there were that were greater than $25 million in a year and so on and so on. I – the complexion of that has not changed all that much. Projects come and go on it. I think the absolute number of projects has not diminished. In fact, I’m looking at a chart here. It increased a bit, actually, in absolute count and I’d say the profile remains about the same, a select number of very large projects and I’ll classify those as greater than $25 million – a pretty healthy amount in the $5-25 range and a very large amount in the $1-5 range.

So, I don’t exactly remember the timeline since our last call, but, for example, the level of activity, we have gotten, just since our last call a month ago, at least 3 project awards in 3 different states or jurisdictions with 3 different customers in the 1-5 range. And that’s just – that’s kind of the routine of bid or negotiating a reward that’s the slow work, so to speak, of transmission as opposed to the very large project work.

Okay. I mean, does it strike you that the activity in the 1-5 range is working – that’s fairly consistent? And then, I guess, on the large side then is where you still see the large projects that are out there, but it’s just the timing hasn’t clarified it all?

That’s a – that’s a decent characterization. Yes. And I’d say not even just the small, but the medium sized projects. So, we also, perhaps, in the last month, were awarded about an $8 million project in the Midwest. I mentioned the slowdown on Arrowhead to Weston or Power-Up Wisconsin.

So, it is those small and medium size project awards that, despite the slowdown on Power-Up, are enabling us to fill in for the year and fully utilize the resource that we had there. But there’s (inaudible) of activity at that lower range and, just as you said, the game changer and the ones that had the most lumpiness and uncertainty, relative to their actual timing and award are those larger projects. The other, the rest of it is more or less continuous levels of activity.

Right. Okay. Well, just one other question I just wanted to go back to was Terry’s comment, he had mentioned – because I missed part of it – but he had talked about telecom. I think it was dark fiber work for one of the government agencies.

No, it wasn’t …

I was wondering if you could talk a little bit more about that?

Yes, it wasn’t – it was fiber work for a private fiber network, however, it was a contract performed for the Colorado Department of Transportation up Interstate 80. It goes up from the city, up towards Vale and Eisenhower Tunnel, the big pass, the big road up there. It’s like a 53-mile development of private dark fiber that we contracted for and are in the process of completing. Nice project. It’s worked out very, very well. A very impressive project and it’s going quite well.

And just lastly, I mean, one of the things I was trying to circle on was we had conversations in the past you guys had talked about dark fiber and building that out into new markets. I just wondered if you could give us an update.

We are indeed actively engaged in the development of several new markets. We have, in at least 2 of those markets, begun to get contract awards. I wouldn’t say that either of them is at the point of critical mass yet and as we’ve talked about, there is a sales and development cycle that probably approaches 2 years – 1.5-2 years – that we would expect to actually reach critical mass, setting the stage for accelerated earnings. So, we’re actively pursuing the development of those markets, pleased with the results thus far in at least 2 of those additional markets where we, in fact, are beginning to get contracts.

And just real quick, then, if you’re on a 2-year cycle, when did the process begin or what would be the estimated timeframe to critical mass?

Each one of them’s a little bit different, but we’ve started one of those a year ago now and the other one probably 6 – between 6 and 9 months ago.

Okay. Great. Thanks very much.

Hey, Tom, one point of clarification on the build for the Colorado Department of Transportation – that’s fiber that they own. It’s not our ads that they were leasing.

Okay. Thanks, Terry.

From Merrill Lynch, we now move to Lorraine Maikis.

Hi, this is Gina calling in for Lorraine. A couple of questions. Firstly, you said that margins would be 13-14% in the – Q1. This is what you provided on the last call and that they would improve through the year at or slightly below the ’04 margin. What would be the driver of this margin expansion? Would it be these large projects that you’re expecting?

It’s a couple things, Gina. It’s the combination of the seasonality of the business. We expect a more typical profile in 2005 than we had in 2004 and also some of the larger fixed price work that would occur in the latter part of the year.

Okay, and then, I guess, on – earlier in the call, you’d mentioned that you track large projects and you had built some of them into your expectations in ’05, although they have not been won yet?

That’s correct.

Okay, so how much is – are you assuming, over these large projects in your ’05 expectations?

A bit. Not a huge amount, but we do have – we do fully anticipate some large project awards to contribute to our – meeting our objectives for the year and we have the ongoing activity to support that belief or we wouldn’t be approaching it that way.

Okay. How much of the delay in the Power-Up Wisconsin is really impacting margins in ’05 – just because I know that Path 15 was such a lucrative project for you guys.

It has not impacted it. If the project were to be able to go on a more accelerated basis than we have it in the plan for now, that could contribute positively. We believe we have it marked conservatively in our plan, at this point.

Okay. So, the margins related to Power-Up are significantly below that of Path 15, so you wouldn’t expect …

It’s a substantially different project. For example, it’s about twice as long. It’s a 210-mile project, where Path 15 was like 85 miles. And our scope on Power-Up is limited to construction, whereas Path 15, if you recall, we had the complete turnkey responsibility for environmental, management, engineering, materials procurement, construction and testing. So, it’s a more limited scope. In terms of contract value per mile, it’s probably between 40-50%. Of what Path 15 represented, typically the splits on a transmission line will be about 40% of the total cost being construction. And as much as 50% being materials, for example.

Okay. Thanks. And then, my final question would be amortization of intangible assets. What is – what are you putting into you assumptions for ’05 and how would that trend – how is that going to trend throughout the year?

Gina, I’ll look that up in a second and get back to you on it.

Okay. Thank you.

Thank you. Our next question comes from Rich Wesolowski from Sidoti Company.

Good morning.

Good morning.

Dave, it’s been a while since you guys or anybody has won one of the transmission elephants. Could you give us an idea of whether you expect the competitive landscape on these jobs to change how that could affect A) your success rate and B) the profitability on these jobs?

That’s a difficult question to answer. We believe, in terms of competitive position, that we have rather uniquely demonstrated our ability to do complete scope turnkey work on accelerated timetables very successfully. I believe we have earned a distinct reputation in that regard, principally as the result of the performance of our Maslonka unit, and would expect that that would contribute to our ability to get those awards.

Do you think that other contractors or other notable contractors have gained ground in that regard? Have also proven themselves to be …

… not.

I’m sorry?

No.

Okay.

We believe that our position would be that our demonstrated performance, in that regard, is, in fact, unique.

Okay. And just secondly, could you comment on the bidding season for the natural gas work and maybe compare it to what your expectations were and what you guys had last year?

Our backlogs – yes, in general way, our backlogs, in the natural gas arena, are quite substantial compared to where they were in the prior year. And we have continued to enjoy successes in the bidding season there. Just yesterday, for example, Paul Daily, president of our underground business, was advised of the award of some nice contracts for another customer. So, we’re right in the midst of the bidding season and quite pleased with the results thus far.

Again, we are not chasing just revenue side growth there. We’re being very selective in that business and pursuing work with strategic customers in areas where we have a presence and at pricing levels that we believe will enable us to meet our expectations and the customers’.

Okay. Thanks a lot.

This is Terry. Back to Gina’s question on amortization of intangibles. For ’05, we’re expecting approximately $4.8 million, the largest part in the first quarter, then ramping down throughout the year.

Thank you.

That’s tailing off, in other words.

Our next question comes from Jeff Beach from Stifel Nicolaus.

Yes, good morning, Dave and Terry.

Good morning, Jeff.

Two questions. One, when you acquired EnStructure, you were entering a new large market in the Southeast for natural gas. Have you identified any significant MSA contract opportunities that might come up during the course of this year?

Actually, Jeff, the awards that I was just advised of yesterday, at least one of those was, in fact, in the Southeast. So, yes, we are pursuing opportunities there. There’s quite a bit of activity. We’re quite busy pursuing opportunities in the Southeast – South and Southeast. Kind of South Central and Southeast would be more descriptive.

Is a lot of the work there in natural gas already tied up in longer-term contracts that are regularly expiring every year or is there a lot of work where there hasn’t been a big player and it’s more parceled out during the course of the year?

It’s kind of both. I think, as we look at it, certainly we know each and every MSA and when it’s routinely up for bid. There’s always some kind of underlying churn, if you will, with customer dissatisfaction or a supply initiative with a rebidding out of cycle. Even their MSA or blanket-type work.

But besides that, in the South and Southeast, there are quite a few pipeline companies with compressor stations and things like that and the need to do inspections and repairs on their facilities, where there have not been – where there as not been a level of activity that, heretofore, warranted a blanket order MSA-type arrangement.

So, there’s a fair amount of project-type work in that regard as well, that’s separately bid. It’s – I have a hard time – there’s probably as much MSA work as we’re pursuing in the South and Southeast as there is project work. I can’t tell you that one dominates the other.

Okay. The other question I wanted to ask is you were anticipating back 1 or 2 quarters ago, substation work being awarded in Power-Up Wisconsin, potentially in the first half of ’05. Has that been pushed out, too?

Sure, that’s going to follow on, of course.

Is that ’06 work, at this point? Is that your best guess?

We would hope that contract bidding and award would be, for those associated projects, would be later in ’05 and into ’06. However, I ought to say, just like with the transmission side work, there is, for lack of a better term, what I’ll call fill-in substation-type work that we’re also engaged in. Just off the top of my head, for example, if I picture the backlog report, there’s probably 4 substation projects in Wisconsin that we have under contract, are actively engaged in. Don’t hold me to 3 or 4 – you know 3-5 range.

Okay. Thanks.

You’re welcome.

Thank you. From D. A. Davidson, we now move to John Rogers.

Good morning.

Good morning, John.

And I got on the call a couple of minutes late, so I apologize. And if you said this, I can get it later. But Terry, did you give us the backlog in revenue numbers by sector?

It has not changed from the last call. We can actually give them to you again.

Okay.

If you hang on just a second, I’ll flip through it.

Okay.

Our backlog at the end of the year – $360 million electric, of which $161, roughly, is transmission, $387 million of gas – $387 of gas, $170 of telecom and $19 of other, for a total of $935.

Okay. And the revenue?

On the revenue splits for the quarter was 51% electric, 37% gas, 8% telecommunications and 4% other.

Okay. Great. And secondly, Dave, you’ve talked a fair amount about some of the bigger projects. What about on the local distribution side – or electrical power. What are you seeing in that market? Some of the outsourcing – or is that gaining momentum? The utilities have talked about selling some their operations and just kind of what are you seeing there and …

That’s a great question, John. Actually, as we’ve talked before, the distribution work is work that we really only concentrate on pursuing where there is a strategic customer relationship. It’s not something that we define ourselves as. But rather, we pursue it to round out the basket of services, if you will, that we’re providing in a strategic customer relationship. Nevertheless, there are – there are probably 8-10 engagements of significance where we provide decent, significant amounts of distribution support to customers.

We have recently taken on a new customer engagement in that regard. We do see a trend where, across the country, coast to coast, a general trend, where utilities, for various reasons, depending their local circumstance, are facing up to the situation where there’s more work to be done than they currently have the resources internally to do.

Yes.

So, we’ve been invited to any number of discussions to see what we can do to help out in that regard. We try to be judicious in how many of those discussions we entertain. Because the other thing that’s developed with a number of utilities facing that kind of increase in demand for contracted services, the availability of contract lineman, which is a fairly transient population, is more limited than the demand, currently. Did I say that right? There’s fewer people than the demand.

Okay.

So, for example, for one of our large – our largest distribution customers, as a matter of fact …

Is that …

Yes. We have been unable to completely fill their demand for distribution linemen, have turned to other contractors to help us out in that regard and still been unable to meet their full demand. So, we did kind of study across the country of what was going on and found that, as a general rule of thumb, it looked to us like there was a situation where the shortage of available contract linemen was perhaps 20% compared to demand – the current demand.

Demand in ’04?

Pardon me?

The current demand, not …

Current demand.

… next year. Okay.

Current demand. So – and of course, that’s a pretty broad generalization when the situation is very local, on a regional basis, and local utilities, situational basis. But better, as a general flavor, increased demand for those services and a shortage of resources.

And, I think, in the past it’s been said that 70% of that work is still performed in-house. Is that still a good estimate or do you think that’s changing?

I’ll bet you, if you can find somebody who had actually done some statistically significant work in that regard, that it’s changed. And that’s what we predicted over the last couple of years, in terms of trends, as you look at the utilities, reducing their workforce minimally by attrition.

And then, you add to that the effect of increasing amounts of work, but not atypical these days for utility to be facing a 20, 30, even 40% increase in their capital expenditures. If we put those 2 factors together and I would say that, just intuitively, the percent, being self performed, has to be dropping.

Yes. And in pursuit of that work, are you trying – are you looking to get long-term strategic relationships similar to some of your natural gas work and work with Exelon, where you have a long-term – I don’t know if it’s a contract, but agreement, service agreement?

Two facets of it. One is yes. We’re looking for long-term agreements and when I talk about a strategic customer relationship, that’s kind of our secret code for a broad range of services, be that electric, gas, transmission, substation, distribution, et cetera, instead of just one contract for one type of work.

So, our breadth of services enables us to – available services from all the different parts of InfraSource – enables us to pursue that and actually be pretty darn well uniquely positioned in that regard. So, that’s what we define as a strategic customer relationship.

Okay. Thank you.

Thank you. Min Cho from Friedman, Billings, Ramsey has our next question.

Good morning. This is Min Cho for Alex Rygiel. I know that fiber to the premise is not a big portion of your business, but I just wanted to get a little more detail, if I could, on the work that you’re doing there. First of all, the $10-20 million in revenue from fiber to the premise, is that all for Verizon or are you some work for smaller municipalities?

The vast majority of that’s for Verizon.

Okay. And can you tell us which markets – and if not which, at least the number of markets you are currently working in?

On fiber to premise?

Yes.

It would be limited to the Northeast in any statistically significant way. We have considered it and do pursue it elsewhere. The places where it’s kind of met our expectations and has worked out to date, happens to be in the Northeast.

Okay. And how much fiber to the premise do you currently have in your backlog – 12-month backlog?

I don’t think – that’s not visible to me at the moment.

Okay. And also, if you could mention if you were working as the main contractor or a subcontractor.

The main contractor.

As the main. All right. And then, a couple housekeeping items. The $1.1 million in interest forgiveness that’s mentioned in the press release, was that included in your preliminary 13 cent number?

Yes, it was.

Okay. And then, lastly, I’m not sure if I’m just not adding correctly. It seems like your year-end number for revenue and costs are – the quarterly numbers are not adding up to the year-end number and it’s off by about $4 million. I mean, it’s not significant, but I wondering if there was any type of small restatement or anything that was taken out that we should be aware of.

That’s likely the discontinued operations that we had in June, so the first 2 quarters would have included those in the original issued statements.

Got you. Okay. Great. Thank you.

Thank you.

(Operator Instructions)

We have a follow-up question from Tom Ford from Lehman Brothers.

Thanks very much. Dave, just going back to the fiber to the premises work, how much would you need to see a change in the big economics for you to be more interested? Do you have an idea?

Well, sure, we have an idea.

I mean, is it something material? I’m just trying to get a sense. Is it getting better? Is it still poor from when you talked about it, say, a year ago?

The situation from a year ago looks about the same to us.

Okay.

That it is the exception where we are positioned and the work is available at such a level that it’s attractive to us.

Right. Okay.

And, as you know, we do not pursue distribution commodity type work except under those circumstances where it meets our expectations in goals. That’s not our business model.

Right. Okay. Going back to John Rogers’ questions on distribution, you had mentioned 8-10 engagements and one was new recently. Let’s go back 12 months ago. How many of those 8-10 would be new?

Two or 3.

Okay. So, there is sort of a process there. And how comfortable do you feel that those 2 are – because I imagine it’s sort of scratching one’s back with a promise of additional work, but how comfortable are you that when these 2 or 3 come through with transmission-related work, that’s, the attractive element to you, how comfortable are you that that’s going to come your way?

It’s worked quite well for us thus far, Tom.

Okay. Okay.

The – yes. I mean, we believe that, given the chance to perform for somebody and have them observe what we do, that that’s how they come to know us and appreciate the value that we bring.

Okay.

And that very approach has led to a growth of our business relationship with the customers that we’ve started to do distribution work with now regularly. So, we’re quite selective in where we do that.

Okay. And just one last question, which is you had, in the press release and then you also in your prepared comments had made the same comment that one a sequential basis, you were 6% down in terms of the backlog. And kind of implying that that was actually pretty good for normal seasonality. So, I’m just kind of wondering what would be – what would have been the downtrend? Because last year tends to get, I think, impacted by Maslonka.

Sure.

So, I’m just wondering what would be something that would be normal?

Well, we have doodled with how to best quantify that now about every way you can do it. And ended up just characterizing it, rather than statistically, with a kind of relative characterization that says, well, given the relative normal seasonality of the business, that sure isn’t down very much. I’d tell you just intuitively and I would not be able to back this up with any kind of quantitative study.

But it would not be surprising at all to me if backlogs, if you could sort out the numbers, if they’d be down, historically, 15 or 20% as opposed to 6. I mean, quite frankly, I was quite surprised it was only down 6% year over year – or over the quarter. I would have expected it to be more on the order of between 15-20%. Now, tying that out analytically, that’s difficult.

Right. Okay.

Judgment of the business, that would be more a feel for the seasonality of things. Large project impacts aside.

Right. Okay. All right. Great. Thanks very much.

Thank you. It appears there are no further questions at this time. Mr. Helwig, I’d like to turn the call back over to you for any additional or closing remarks.

Great. Thank you very much, ladies and gentlemen, for participating today. As you’ve heard, we are very pleased with our final results for the fourth quarter and we believe that we are well positioned for future growth. We look forward to speaking with you all on our next call.

Ladies and gentlemen, that concludes today’s conference call.

Thank you for your participation.

You may now disconnect.