Tutor Perini Corp (TPC) 2018 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tutor Perini Corporation Fourth Quarter and Full Year 2018 Earnings Conference Call. My name is Sherry, and I will be your coordinator for today. (Operator Instructions) As a reminder, this conference call is being recorded for replay purposes. (Operator Instructions) I will now turn the conference over to your host for today, Mr. Jorge Casado, Vice President of Investor Relations. Please proceed.

Hello, everyone, and thank you for joining us today. With us on the call are Ronald Tutor, Chairman and CEO; and Gary Smalley, Executive Vice President and CFO.

Before we discuss our results, I will remind everyone that during today's call, we will be making forward-looking statements which reflect management's current assessment of existing trends and information. There is an inherent risk that our actual results could differ materially. You can find our disclosures about risk factors that can potentially contribute to such differences in our 10-K, which we are filing today. The company assumes no obligation to update forward-looking statements whether as a result of new information, future events or otherwise other than as required by law.

With that said, I will turn the call over to Ronald Tutor.

Thanks, Jorge. Good afternoon, and thank you for joining us. We delivered excellent fourth quarter results highlighted by strong operating margins across all segments, particularly improved performance in the Specialty Contractors segment and a very large volume of new awards that enabled us to grow our backlog by 28% year-over-year, setting a new record of $9.3 billion.

Further, we added $2 billion of new awards in the fourth quarter and a total of $6.5 billion of new awards for the entire year, resulting in a book-to-burn ratio of 1.45. Our strong backlog growth in the fourth quarter was broad-based across all 3 segments and was driven, in particular, by the $800 million Minneapolis Southwest Light Rail project, $245 million of funding for a technology project in California, $244 million of various electrical and mechanical projects in New York City and a $100 million military facility for the Air Force in Saudi Arabia.

In addition, we generated solid operating cash of $56 million in the fourth quarter. The outlook for continued backlog growth in 2019 is excellent, as we expect to, and in fact are booking, over $2.5 billion of identified awards during the first quarter of 2019. The largest of these is the $1.4 billion Purple Line Section 3 Stations project which connects to the already awarded Purple Line 3 Tunnels project which we received last year, and that goes to the board for final approval tomorrow, which will be routinely processed. In addition, we see a sustained high level of demand in the pipeline of large civil works projects. Our growing backlog provides the foundation upon which I expect to deliver revenue growth and increased earnings over the next 3 to 5 years.

We continue to be selective and disciplined in our bidding approach. As I've said previously, there are significantly more major civil works projects hitting the bid pipeline, and we have the physical ability [demand. The competition] is limited at best. So we are selectively choosing those projects that give us the best opportunity to succeed. As I've said previously, quite frankly, there are so few companies with the resources and experience to successfully undertake these projects that it's an interesting phenomenon facing the civil works industry today, and we have both the track record and the reputation of successfully executing these projects.

We will be bidding in the next 60 days the $400 million 8th Avenue train control project, similar to the Culver Line we were awarded at $250 million earlier this year. Both projects are part of the major works that New York City Transit continues to undertake to modify their antiquated signal systems throughout the entire transit system. If that were not enough, in New York, we were recently appraised of the Mayor of New York City committing to a $52 billion infrastructure refurbishment program that will take place over the next 4 years.

Further, other large upcoming civil bids that we are committed to bid within our organization are: the $3.5 billion bus depot for the Port Authority of New York and New Jersey in downtown Manhattan; the $2 billion Brooklyn-Queens Expressway in New York City; the $1.4 billion Portal swing bridge replacement in New Jersey; and $1.5 billion -- what are those ones for LaGuardia -- there are 2 feeder lines, 1 each at LaGuardia and at Newark. They're called people movers. They are $1.5 billion each, and those will also hit the street, I believe, by the end of [2019] (corrected by company after the call). Since the civil opportunities far outweigh our capacity, we will have to be selective in those we pursue.

The Building segment's larger opportunities include: 2 convention center projects, 1 in Los Angeles, another in Las Vegas, collectively valued at $1.2 billion; a $700 million airport cargo facility called the Airglades Perishable Air Cargo Complex; and a $300 million project in Miami. There is a $300 million Los Angeles Civic Center P3 and a $250 million health care project in California. More importantly, the Building segment has already $1 billion of pending awards that we expect to enter into backlog in 2019, including the Choctaw Resort & Casino expansion, and 2 other hospitality and gaming projects. The Specialty Contractors segment is in the process of bidding over $500 million of mechanical and electrical projects in the next 2 to 3 months, and the bidding pipeline is robust to a point of, again, testing our capacities in that arena.

Next, I will provide some details on the more significant projects that contributed to our fourth quarter results, beginning with the Civil segment. On the West Coast, we continue to ramp up our work on Purple Line Section 2 in Los Angeles with the construction of the tunnel launch pit commencing in [Century City]. After it's completed, we will begin the tunnel boring machine, assemblies, followed by the start of tunneling in January.

In Beverly Hills, we are beginning the relocation of utilities in advance of commencing with the Wilshire station in Beverly Hills later this year. In British Columbia, Frontier-Kemper is progressing work on the Kemano second tunnel project. We also remain busy with work on California High-Speed Rail and are still anticipating volume of work increasing substantially by this summer. Work also continues to progress on the San Francisco Central Subway Project with a targeted completion in the first half of 2019.

In the Midwest, Lunda Construction has been active with its work on the I-74 bridge project between Iowa and Illinois as well as many other projects contributing to their significant backlog and is starting work on the Minneapolis Light Rail.

In the Northeast, which is essentially New York, our most active projects include CM007 and CQ33 for New York Transit and of course, the $1,400,000,000 Newark Airport Terminal 1, which is advancing well. In Seattle, we completed the SR99 tunnel last year, and it has been turned over and traffic is using a completed tunnel.

The Building projects largest contributors in the fourth quarter included the technology campus that we don't refer to the owner of, the Rosewood Miramar beach hotel for Caruso Enterprises, the Newark Airport Terminal 1 in New Jersey for the Port Authority of New York and the Precision Cancer Medical Building at the University of California San Francisco Medical Center.

The Specialty Contractors segment has a substantial volume of newer, higher-margin work being performed over the next period of years. Recall that on the Newark Airport Terminal 1 project, Five Star Electric and WDF Mechanical hold contracts exceeding $360 million or the electrical and mechanical pieces of that $1,400,000,000 project. In addition, they have added $244 million of new electrical and mechanical projects in the fourth quarter, positioning our segment for double-digit revenue growth in 2019.

Now let me provide you with a brief update on our unbilled receivables and claims. We continue in negotiations on 3 major claims, have received significant offers on 2 of them, although not adequate. We continue to talk. We hope to bring those to conclusion over the next 90 days, but we have not been able to conclude any as yet. We believe that with the continued progress in these negotiations, we have the potential to settle in the next half a year.

Overall, we anticipate strong double-digit revenue growth and higher operating margins across all segments, with noteworthy margin improvement expected in the Specialty Contractors segment and margin improvements in the Civil and Building segments. Based on our current backlog and forecast, we are establishing our earnings per share guidance for 2019 in the range of $2.00 to $2.30. As in 2018, we expect that our earnings in '19 will be significantly weighted towards the second half of the year, particularly due to the extreme weather we have suffered across the country in the first quarter.

With that, I will turn the call over to Gary Smalley to present the financial results.

Thank you, Ron. Good afternoon, everyone. I will start by discussing our results for the year, after which I'll review the fourth quarter. I'll then provide some comments on our balance sheet, cash flow and our 2019 guidance assumptions.

Revenue for 2018 was $4.5 billion, down slightly compared to last year mainly because revenue from new projects that started up in 2018 do not fully replace revenue from projects that completed or were nearing completion solely due to timing. Civil segment revenue was $1.6 billion, Building segment revenue was $1.9 billion and Specialty Contractors revenue was $1.0 billion, all down compared to the prior year, again, due to the timing of revenue burn for new work.

Gross margin for 2018 was 10.2%, the highest annual gross margin percentage since 2014. G&A for the year was $263 million, down modestly compared to last year mainly due to lower compensation-related expenses. Our income from construction operations was $192 million, up 7% compared to 2017 despite the volume reduction, due to improved margins in our specialty and building groups and the lower G&A that I mentioned.

Civil segment income from construction operations was $168 million, down 12% compared to 2017 principally due to a $17.8 million pretax charge in the first quarter of 2018 for the unexpected adverse outcome of an arbitration decision on a project that was completed several years ago. The segment's operating margin was 10.6% for the year compared to 12% for the prior year with the decrease primarily due to the 2018 first quarter charge.

Building segment income from construction operations was $44 million, up 28% despite a modest revenue reduction mainly due to contributions from the Newark Airport Terminal 1 project and the favorable closeout adjustment on a courthouse project in California. The Building segment's operating margin was 2.4% for 2018, up from 1.8% in 2017.

Specialty Contractors income from construction operations was $43 million, more than double last year's result mainly due to the overall improvement in the performance of various mechanical projects. As a result of these factors, the segment's operating margin was 4.3% for 2018, a significant improvement compared to 1.6% in 2017. Recall that we target an operating margin range of 5% to 7% for the segment, which we expect to achieve in 2019.

Other income in 2018 was $4 million compared to $44 million in 2017. The significantly larger amount last year was primarily due to a $37 million gain associated with a legal settlement. Interest expense in 2018 was $64 million compared to $69 million in the prior year. The reduction was primarily because of noncash extinguishment costs recognized in 2017 related to our debt restructuring transactions. Our effective tax rate for 2018 was 26.3%, positively impacted by the lower federal statutory rate with the enactment of the Tax Cuts and Jobs Act.

Net income attributable to Tutor Perini in 2018 was $83 million or $1.66 per diluted share, exceeding the upper end of the revised guidance for the year. Net income in 2017 was $148 million or $2.92 per diluted share and was favorably impacted by a tax benefit of $53 million or $1.05 per diluted share associated with the one-time revaluation of our deferred tax assets and liabilities in connection with the Tax Act. The prior year also benefited from the pretax gain of $37 million or $0.43 per share for the legal settlement that I just mentioned.

Now for the fourth quarter results. Revenue for the quarter was $1.2 billion, level compared to the fourth quarter of last year. Segment revenues were $489 million for Civil, $469 million for Building and $225 million for specialty. Civil segment revenue was up 14% compared to the fourth quarter of last year primarily as a result of progress on the Newark Airport Terminal 1 project which started in 2018 and increased activities on the Kemano tunnel project in British Columbia.

Building segment revenue was up modestly compared to the fourth quarter of last year as progress on newer projects more than offset volume reductions from projects that completed or are winding down. Specialty Contractors revenue was down 26% compared to the fourth quarter of 2017, mainly due to reduced activities on certain electrical projects in California, Washington and New York.

Gross profit for the fourth quarter of 2018 was $158 million, up 21% compared to the fourth quarter of last year with the corresponding gross margin of 13.3%, our highest quarterly gross margin ever, and this compares to 10.9% for the comparable quarter of 2017.

G&A for the fourth quarter was $67 million, down 6% compared to the fourth quarter of 2017. The decrease was principally due to reduced compensation-related expenses. Income from construction operations for the fourth quarter was $91 million, up $53 million -- excuse me, up 53% compared to $59 million for the fourth quarter of last year due to strong margin improvement across all segments.

Civil segment income from construction operations was $75 million in the fourth quarter, up 17% compared to the same quarter of last year due to the higher volume in the quarter and improving operating margin, 15.3% versus 14.9%. The stronger operating margin was due to favorable progress in productivity experienced in the quarter on a broad range of projects. And as discussed previously, we have been anticipating operating margins to gradually increase with the new work that we have been awarded over last year, and this is beginning to be reflected in our results. However, I would note that while we're pleased with the strong fourth quarter Civil margin, we don't expect a 15% margin to be the norm, at least not yet. On an annual basis, we now expect Civil operating margins to be at the upper end of the 10% to 12% margin range that we have historically seen in Civil group, if not slightly higher.

Building segment income from construction operations was $16 million, up 76% compared to $9 million in the fourth quarter of last year. The increase was largely due to contributions from the Newark Airport Terminal 1 project and the technology project in California as well as favorable adjustments associated with the closeout of a courthouse project in California and progress toward completion on a health care project also in California. These factors resulted in somewhat elevated operating margin of 3.4% for the quarter compared to 2% for the fourth quarter of 2017.

Specialty Contractors segment income from construction operations was $17 million, more than quadrupled the $4 million reported in the fourth quarter of last year, reflecting overall improved performance in various mechanical projects as well as favorable adjustments associated with progress toward completion on certain electrical and mechanical projects. The segment's fourth quarter operating margin was strong at 7.6% compared to 1.2% for the same quarter last year and exceeded the 5% to 7% range we target for the segment. Contributions from higher-margin projects added to backlog over the past year are now beginning to have a positive impact on the specialty segment's operating results.

Interest expense for the fourth quarter of 2018 was $16 million, about level with the prior year's fourth quarter. Tax expense for the fourth quarter was $20 million. The effective tax rate for the quarter was 26.3%, the same effective tax rate as for the full year of 2018. Net income attributable to Tutor Perini for the fourth quarter was $49 million or $0.98 per diluted share compared to $81 million or $1.60 per diluted share for the fourth quarter of last year which, again, included the $53 million or $1.05 per share tax benefit.

Shifting gears, let's discuss our balance sheet and operating cash. Our project working capital grew slightly in the fourth quarter principally because of an increase in unbilled costs and the decrease in billings in excess of costs. We continue our focus on reducing our unbilled costs and expect more progress to be made in 2019, as Ron noted earlier.

We generated $56 million of operating cash in the fourth quarter and $21 million for the full year of 2018. While our fourth quarter operating cash was strong as a result of strong collections, the amount generated in the quarter was insufficient to overcome the cumulative shortfall for the year that resulted from the growth in unbilled costs. However, we believe that our operating cash generation in 2019 will be substantially improved, and we are again targeting operating cash for the year to be in excess of net income as it was in both 2016 and 2017. Our total debt as of December 31, 2018, was $762 million compared to $736 million at the end of 2017, reflecting a modest increase in our revolver from its zero balance at the end of 2017.

Now let me review our assumptions related to the 2019 guidance. While we do not provide specific revenue guidance, as Ron mentioned, we are expecting strong double-digit revenue growth in 2019. Also, as I noted earlier, we anticipate that the Civil segment's operating margin for 2019 will be at the upper end of our historical range of 10% to 12%. The Building segment's operating margin for 2019 should exceed 2%, which has been our normal benchmark. For the Specialty Contractors segment, we believe that the operating margin should be in the 5% to 7% range in 2019.

We anticipate an effective tax rate for 2019 of approximately 27% to 28%. We also expect that there will be approximately 51 million diluted shares outstanding for the year. Interest expense for 2019 is estimated to be around $63 million and of this amount, [$13 million] will be noncash. We anticipate approximately $20 million of general and maintenance capital expenditures for 2019. In addition, keep in mind that for certain of our large civil projects, we purchase equipment that is entirely owner funded. For 2019, we estimate that this amount will be approximately $70 million.

Depreciation and amortization expense for 2019 is estimated at $62 million. We expect that our G&A dollars will be modestly higher in 2019 compared to last year. But given our strong anticipated revenue growth, our G&A margin for 2019 should be quite a bit lower than in 2018. We also anticipate that noncontrolling interest in 2019 will be approximately $30 million to $35 million.

Lastly, I'd like to comment as to the expected pace of earnings generation in 2019. We expect that our first quarter EPS will be rather light and far lower than the other quarters in 2019 due to the significantly worse weather, more rain and snow than usual to date in California, British Columbia, the Midwest and New York and also due to the timing of when new projects will begin to burn revenue of any significance. More specifically, our forecast calls for first quarter EPS to be only slightly better than last year's first quarter EPS after adjusting for the $0.25 charge we took last year. Earnings momentum in 2019, however, is expected to increase substantially each quarter as the year progresses.

With that, Ron, I'll turn the call back over to you.

Thanks, Gary. Obviously, I'm very pleased with our strong fourth quarter performance, particularly with respect to the record backlog that continued through the first quarter of 2019 with the additional awards. In addition, the continuing pipeline of major work I discussed previously continues to grow with owners and locations where we have great strength with very little competition, to put it bluntly. There is no reason our backlog should not continue to grow in 2019, and the only thing that stops the momentum will be our own analysis of our intellectual and physical capacity.

As I've said before, evidenced every day by the minimum competition in the $1 billion-plus projects, there are very few companies in the United States that can successfully build billion-dollar-plus infrastructure projects and as such, there are very few bidders as we go forward. We continue to recruit and focus on adding to our organization and training engineers in our training programs, but I would be definite to once again state that is the one governing factor that will limit our growth to what we feel comfortable with.

As a reminder, the projected margins on our new awards from last year in the backlog on average are considerably higher than the existing margins that we have earned over the past years. And we expect that margin to increase as, frankly, we raise our margins given the lack of competition. So over time, as the older work with lesser margin burns off and is replaced by higher-margin new work at an accelerated pace, we feel there is an opportunity for significant increases in both operating income and earnings per share. We look forward to delivering improved results in 2019, some resolves of the course of our unbilled receivables and continued earnings growth as well as operating cash.

With that, I will turn the call over to the operator for questions. Thank you.

(Operator Instructions) Our first question is from Tahira Afzal with KeyBanc Capital Markets.

This is Alex Dwyer on for Tahira. So I guess my first question is based on your range of guidance and the things you've mentioned, what areas do you guys see as having the most visibility or concerns on what may help you reach the upper end of guidance? Are there any issues in segments or any specific projects you would like to highlight in 2019?

No, I don't think there's -- it's Ron Tutor. I don't think there's any question we have an opportunity to reach the higher levels of our guidance, but it will depend, to a great extent, we were in the midst of negotiations on 3 of our major claims where significant offers have been made. We have not accepted those because it does not meet our expectations. And one of the concerns and probably the only real concern I have is if we reach a point to where it's close to what we want and there's a few million dollars separating their final offer with our final demand, there is no question that we're going to have to start settling and collecting that cash, which could generate some write-downs in operating margins. I think we have taken those into consideration within the range of these expectations. But we have a very substantial, as I've said before, number of claims teed up in negotiations and we feel the potential to be concluded in 2019. And the real issue will be, very candidly, whether I'm willing to take a reduction in what we believe we're entitled to, to close them out and collect what is obviously a very substantial amount of cash. So if I have one concern, that's about it. We continue to, frankly, get one major civil award after another in our key markets between New York, which is exploding, and California, which is equally so. If I really put down on paper the opportunities that are tailor-made for our civil group between our 2 strengths in New York and California, I don't even know how we could possibly even handle it. There are so many major projects teeing up for the next 12 to 18 months in an industry where nobody's left. I keep saying it, but the truth is in the pudding. We have now got 3 straight large projects for the MTA: $1.3 billion, $400 million tunnel and $1.4 billion stations, 3 straight contracts to total $3 billion for the LA MTA; $1,400,000,000 job in Newark where we're the only bidder. And as I advise our owners, if you don't make these contracts far more contractor-friendly, you're not going to get bids even including us. And the fact of the matter is an owner today is fortunate if he gets 2 bids and really extraordinary if he gets 3. That's the market we're in. Having said that, we still have our limits, physically and intellectually, about how much more we can take even regardless of the margins entailed within them.

And Alex, if I could just add, I think you understand this, but our accounting positions were recorded at the probable amount of recovery. But like Ron is saying, if we get close to what we're looking for rather than prolong the dispute in -- with litigation or something like that where we could get the amount that's recorded and take another 2 or 3 years to get it, that's the -- that's what we're talking about in this case.

Okay. That was helpful. Also, so we continue to monitor the possibility of a large infrastructure bill this year in Washington. Are you hearing anything new on this? And if a bill like this gets passed, where do you see the spending going? And what areas of your business would most likely have the opportunity to benefit from this?

I think there's no question that they're going to have to constitute an infrastructure bill in Washington because the Democrats and Republicans, it seems to be the only thing they agree on. However, setting aside Washington, the truth of the matter is New York State, which is 1 of our 2 major geographical places of operation, just announced $52 billion in New York City of funded work. All of our New York City operations are working at 120% of capacity: electrical, mechanical, building and civil. And with the reduction in size of Skanska, our largest competitor in New York, and the failures of some of our New York peers, we find ourselves increasing and increasing that New York backlog to a point I've had all of our subsidiaries have to get my approval before they bid any more work because our backlogs in New York are at records, both electrically, mechanically and civilly. So the real -- when you talk about government and government funding, frankly, the only thing we're interested in is civil work. The Building business continues to be a low margin, relatively low risk and a business that, in my opinion, increased government spending doesn't affect us because we're simply not going to pursue significant growth in a business that at best generates 2% pretax margins when in fact our Civil business, we're anticipating 10% to 12% and potentially increases in that because of the lack of competition. New York City has this enormous backlog. Governor Cuomo has stated for everyone to hear that he expects to generate even more in infrastructure construction in the state and New York City. And California's booming. We meet regularly with the principals of Los Angeles MTA. And with that sales tax proposition that passed, they're talking about $10 billion in civil work going out into the marketplace over the next 12 to 15 months, and there isn't 2 or 3 companies that even have the potential to bid it. So it is really quite an interesting time of enormous growth in opportunities in a depleted industry.

Our next question is from Brent Thielman with D.A. Davidson.

Ron, on the outlook for '19, can you just remind us or walk us through which are going to be the most kind of critical projects ramping up in the second half to kind of get you to that guidance range?

I think the Newark terminal is ramping up significantly. We're erecting structural steel as we speak. I would expect the steel to be fully erected by sometime in the third quarter and then finish trades and significantly more costs associated with that terminal. And remember, it's a 39-month job, and we're there now approximately 10 months. So you've got over $1,200,000,000 of spend going on over the next, essentially, 24 months. Not only that, Purple Line 2 is ramping up dramatically. We will start the Wilshire/Rodeo Station this year. We are finishing the launch pit this year. We expect to put the tunnel machines in the hole. So that will be a significant ramp-up. Purple Line 3 will be awarded tomorrow. We probably won't get a notice to proceed until April or May. But initially, this year, there's still a $100 million of high-margin cost associated with Purple Line 3. In addition, the Lunda job at the light rail has started. That should generate revenue. And essentially, Five Star, Fisk and WDF have the largest backlogs they've ever had. As an example, in Purple Line 3, we were awarded the contract at approximately $1,371,000,000 and of that, we subcontracted over $250 million to Fisk Electric, Becho drilling and Desert Mechanical with their appropriate margins. So these jobs have a profound impact on our operation as long as we can get them from the design phase into the construction phase and generate the cost that make for the profits. So we're just very optimistic about what the future commencing really now has in store. The only thing that I -- that concerns me at all is reaching a point where it is in our interest to take settlements and write-downs on claim settlements generating significant levels of cash, however taking reductions in settlements. Heretofore in the past, we have never done it and have a record of always achieving our booked amounts. But then again, we've never had $1 billion in unbilled receivables. So that's really the only pressure on us. We continue to operate strongly in spite of the unbilled receivables. We think Purple Line 3 will, as Purple Line 2 did, generate significant cash flow. Newark continues to generate substantial cash flow. And High-Speed Rail, with all its problems and delays, continues to promise to be a very successful project.

Okay. And I want to touch on that, Ron. Can you kind of update us where High-Speed Rail is at, at this point? Is that you're beyond the right-of-way issues here? And is that kind of free and clear once you get some weather in your favor?

Well, High-Speed Rail is a constant dilemma and I'm in touch literally on a weekly basis with the principals, the agency in Sacramento as well as the job site. We continue to have delays in right-of-way and third-party agreements that they have taken responsibility for, and their commitments to turn us loose in March now look like more like June or July. However, I'm also in the midst of negotiations on over $400 million of extra work that they would like us to perform. So obviously, those are very positive. I have said and they have concurred that we will not start any extra work without an agreed entitled change order and an agreed price. So there are very positive aspects of High-Speed Rail. The negative is we are stymied in many areas, continue to be, and I expect to have a meeting in the next 2 weeks and try to, in some manner, determine when we can gear back up because although they are a state agency, they continue to struggle to do their job. And their job, as defined by our contract, is to get their right-of-ways out of the way, get their third-party agreements out of the way and get out of our way the way the contract states they would. So it's just a struggle. But in fairness, they deal with us with integrity. They pay us when they owe us. They step up. So it's just a continuing travail that we think in the long run will turn out well. But in the short run, it's very difficult because we can't earn money on costs we don't spend.

Okay. Appreciate that color. Maybe just...

And I will say -- one thing I'd add on High-Speed Rail, there's a lot of talk about are they going to go on, is it going to continue, will they ever finish it. The reality is you got to remember, it's a State of California agency. And no matter what the federal government does, it pulls back, it doesn't pull back, first, there's never been an instance in my 50 years of consequence that the federal government ever clawed back or was able to claw back committed funds. So my sense is -- this is rhetoric from our President and against the political direction of our state, and it will be determined whether or not that realistically can be done irrespective of it can be done or not. This is the State of California, which is like a country onto its own. The state will step up and fund any gaps and fight with the federal government later. They have made it very clear that they are not going to go any further than connecting our job to Merced, and there's a short reach connecting to downtown Bakersfield on the other end. Their goal is to finish this work by 2025, which is particularly emphasized on the contracts behind us. But that means they've got to conclude all our extra work, our delays, everything associated with making us in agreement whole and probably portray a completion of our job in 2021 or '22 because remember, to complete in 2025 requires them to buy railroad cars, put in track signals, electrification, et cetera. So they have a plan. They've shared it to me. That's logical. And then what they would hope is that sometime during that time frame, to put it bluntly, create more credibility for the agency's operation, go back to Sacramento somewhere around 2025 and hopefully generate a way forward to move on to the next reach. But they really are in no position to abandon 100 miles of elevated structures and embankments in the middle of the state and walk away. That's about the only thing everybody seems to agree on.

(Operator Instructions) Our next question is from Steven Fisher with UBS.

Just curious what kind of flexibility do you have within your covenants to take any of those compromise write-downs you were talking about on the claims resolutions.

I don't think we have any restrictions, but better to let Gary answer that specifically.

Yes. First of all, Steve, we're not anticipating large amounts, if any, and then we have plenty of headroom in the -- within the calculations already where we don't think it's an issue. But also, we built in, let's say, a contingency plan where we have -- for judgments that go against us and that are noncash in nature where the cash had already been spent, then those are excluded from the covenant calculation. And we're currently talking about settlements and including those in the same type of consideration in an amendment that's not yet final. But the bottom line is we don't think it's going to impact us even without the amendment based on where -- the headroom that we currently have and the outcomes that we anticipate. But worst-case scenario, it still shouldn't impact us.

Okay. That's helpful. And then can you maybe just give us your confidence that the unbilleds won't go up from here now in 2019?

Let's put it this way. It shouldn't. We're being very harsh on our subsidiaries on the use of unbilled receivables to a point where I'm telling them, "If you can't get my personal approval, you won't be able to utilize it". I do allow them to bill their legal and support costs for ongoing unbilleds against it. But I don't know what more we can do other than absolutely restrict access to the unbilleds, and that's where we are and it's a battle every quarter. But the biggest single element is we need to make a very substantial reduction. And a very significant amount of our unbilled total, as I've said previously and as we reviewed in-house, comes due, to put it bluntly or I don't know how else to define it, in the next 12 months. So we simply have to get those to resolve to a reasonable settlement figure that's acceptable and close them and dramatically reduce the unbilled. It can't continue to go up. I couldn't agree more.

And can you just frame maybe the amounts of what's under discussion for the next 90 days, maybe kind of a range of possible outcomes?

There is approximately -- let me take a... There's approximately $280 million in various exchanges of offers ongoing right now.

[Maybe can you just give a quick]...

Yes, Steve, I was just going to say [that's on account]. Of course, things after the 90 days also, there are other things that are staged later in the year that...

[It's that] much again before the end of the year. [That's how -- that the number we get].

Right. So [that was going to get a -- I assume] SR99 is later this year?

No. SR99 isn't one of those because with all the goddamned crooked lawyers appealing and delaying and delaying and appealing so they can generate more legal fees, that's been put off to 2020.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back over to management for closing remarks.

Thank you, everybody. We're very pleased, obviously, with our continued backlog growth and the future of the company. The only hitch remains us getting through these unbilleds and bringing the money back to the company. We will continue to work day and night to make that happen and keep you apprised as it takes place. Thank you.

This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.