Pike Electric Corporation F3Q09 (Qtr End 3/31/09) Earnings Call Transcript

Pike Electric Corporation (PEC)

F3Q09 (Qtr End 3/31/09) Earnings Call

May 11, 2009 5:00 pm ET

Executives

Anthony Slater - Chief Financial Officer

Eric Pike - Chairman and Chief Executive Officer

Analysts

Rich Wesolowski - Sidoti & Company

Tahira Afzal - KeyBanc

Andrea Wirth - Robert Baird

Alex Rygiel – FBR Captial Markets

Scott Levine – J.P. Morgan

Paul Carter – Evergreen

Presentation

Operator

Good day everyone and welcome to the Pike Electric Corporation third quarter 2009 earnings conference call. As a reminder today's call is being recorded. Now for opening remarks and introductions, I would like to turn the call over to Lara Travers.

Lara Travers

Welcome to Pike Electric’s conference call to review our 2009 third quarter results. Joining us this afternoon are Eric Pike, our Chairman and Chief Executive Officer, and Anthony Slater, our Chief Financial Officer.

Before I turn the call over to Eric and Anthony, I will review the necessary disclosure. During this call, we will make forward-looking statements. These are statements that are either not historical facts or statements regarding our attempts, beliefs or expectations, with respect to trends affecting the company's operations, financial, general economic and market conditions and growth and operating strategies. Financial expectations and estimates, for example, are forward-looking statements.

We filed our earnings release on Form 8-K earlier today. The risk factors and management's discussion and analysis sections of our 2008 annual report on Form 10-K and other SEC filings describe the factors that may affect the future results of our operations. Any forward-looking statements made today, contained in Pike’s public statements or made by our management should be considered in light of those factors. A replay of today's call will be available in the Investor Relations section of our website at www.pike.com this evening. Investor relations questions can also be directed to 336-719-4492 and financial news alerts are available by email.

I will now turn the call over to Eric Pike, Chairman and Chief Executive Officer, who will begin the call with a business update.

Eric Pike

Good afternoon everyone, and thank you for joining Pike Electric’s fiscal 2009 third quarter earnings call. On today’s call we’ll address several topics. First our financial results, which will be covered in more detail at the end by Anthony following my remarks, our views regarding the present economic climate and its impact on the industry, and finally the progress we’re making with our service expansion as one of the nation’s largest energy solutions company. As always, we welcome your questions following our comments.

Third quarter revenues increased 17.9% to $155 million from $131 million in the prior year’s first quarter. Despite reduced revenue in our core business and a challenging economic environment, we had a strong quarter in storm restoration work, positive momentum in our expanded transmission services, and continued growth in our engineering services as more and more customers began utilizing our expanded platform of energy solutions.

During this quarter, we once again demonstrated our strength and responsiveness in storm restoration work. In the aftermath of the ice storms that hit the Midwest earlier this year, we responded with a force of nearly 200 Pike linemen to widespread power outages across Kentucky, Missouri, Indiana, and Ohio. Pike is widely recognized for our ability to mobilize thousands of employees and their equipment within 24 hours. Our flexible master service agreement model for distribution resources ensures solid storm reaction time.

As a result, storm revenues were up significantly to $54 million compared to $11 million in the third quarter of fiscal ’08. These ice storms combined with the hurricane restoration work we performed in fiscal first quarter have resulted in Pike’s third highest year for storm restoration revenues. Only 2005 and 2006 were higher, each with massive hurricanes throughout Florida and the Gulf states. At that time, Pike’s headcount was much larger in the distribution arena which makes these results even more impressive. My thanks go out to our dedicated workforce that performed so well in extremely rough winter conditions.

We do want to emphasize that the weather is not something we can control, and there is a lot of variability in storm response revenues from quarter to quarter and year to year, but there is another plus to our storm restoration efforts, and that’s our ability to further establish our reputation and expand our opportunities for new business. The winter storms provided Pike the opportunity to add four new cooperative accounts for continued long-term business. These long-term customer gains are truly the best result for Pike from our storm work, and we look forward to helping our new customers with their regular work needs.

Turning to core business, we’re seeing positive momentum in transmission construction and engineering services, but a decrease in overall revenues due to a deferral of core as a result of the storm work, the ongoing challenging economic environment, and a softened electric distribution market. This resulted in lower core business revenues of $101 million compared to $120 million in the quarter last year. More importantly, we spent this quarter very aggressively positioning ourselves for an upturn in the economy, and our diversification of Pike as one of the nation’s largest energy solutions providers continues to be well received by our customers.

Let me take just a moment to talk about the energy solutions platform. For more than 60 years, Pike has been known for our transmission and distribution construction services. Today, we certainly still offer overhead and underground T&D construction, but we have expanded our scope to offer national engineering service, full EPC contracting, project and program management solutions, substation design and construction, relay testing and control applications, as well as rigging and hauling. More importantly, these energy solutions also apply to renewable energy, interconnect designs to the transmission grid, and smart grid implementations.

That’s a lot of opportunity for growth, and we’ve been on the road a lot the past few quarters informing our customers about our new services and building on existing long-term relationships. We continue to strengthen our safety initiatives, our leadership, and our capabilities, so that when utilities, co-ops and municipalities are ready to start spending again, the choice will be clear. I believe we are well positioned beginning with the way we’ve refocused the business.

We see engineering as an important driver of the business, and we’ve increased our engineering staff by 50% and added a new office in Pittsburgh since our purchase of EDS. We now have nearly 200 engineers at Pike. These engineers are expanding our presence across the nation, spearheading our ability to become involved with T&D and renewable projects at their inception with turnkey design, balance of plant work, engineering procurement and construction, and project management of everything from hundreds of miles of transmission lines to substations for massive wind farms.

We’re able to get in the process earlier, not just in engineering the project, but also in gaining insight into how our customers will be spending capital, getting a heads-up about upcoming projects, which enables us to determine whether a project is also something we want to bid for construction. Plus, many of our engineers used to work for utilities, and they know that business well. They also have background in renewables and substation. This experience gives our customers a level of comfort and confidence and it gives Pike’s energy solutions platform tremendous credibility.

Our energy solutions are also the reason we’re optimistic about the government’s stimulus packages. While we do know if spending will be in a large way until 2010 or 2011, each of our energy solutions services has an opportunity to capture potential stimulus dollars which it is spent. While we don’t have anymore specific details than those publicly available about individual packages or individual recipients, we are in close contact with our customers as well as government officials regarding potential initiatives, and we believe we’re well positioned to benefit no matter which project gained traction.

For example, in the renewable energy—wind, solar, biomass, or geothermal—there continues to be significant momentum from political and regulatory forces to move forward. More than $25 billion in the form of loan guarantees, tax credits, and grants have been earmarked by the federal government for a large expansion of renewable generation. Here opportunities for Pike include balance of plant construction, engineering and constructing collector substation systems, interconnecting to the grid, and load balancing.

In transmission, the government’s build out proposal calls for the addition of over 600,000 miles of transmission. Presently, the entire country only has 150,000 miles. Our newly expanded KV capabilities increase our value in this market as well as our talented substation workforce that is already constructing 500 KV switchyards as well as performing MSA maintenance work.

In smart grid and broadband, about $12 billion is earmarked for spending. Here the opportunity for Pike is the interconnection within the energized zone, within the substations and the energized secondary work, and finally but perhaps most importantly, in the infrastructure expansion, the proposal calls for nearly $30 billion to spent on road expansion. We’re one of the first businesses that will grow when this happens because we’re the ones who do a lot of the relocation of distribution facilities when secondary roads get widened.

In addition to the anticipate stimulus initiatives, there is also still a meaningful backlog of maintenance and upgrade that many of our customers have deferred due to economic and credit concerns. While we don’t know when the spending will begin, we know it will come, and we’ll be ready. We have maintained our fleet during the slower period, and while the decreased equipment utilization has been a drag on our margins, we’re confident that we have the right long-term strategy. We’ve also made adjustments to our staffing levels, making sure to hold on to most experienced and skillful linemen.

Most of our business is done through master service agreements, with customers who have trusted Pike to do their projects for more than 30 years. Over this past quarter, we have extended a lot of these master service agreements, so when the utilities are ready to spend, we’ll already be there. In addition, we have continued to demonstrate good financial discipline. Despite ongoing economic challenges, we continue to generate positive cash flow. Over the last 24 months, we have reduced our debt by over $74 million, completed a $22.6 million business acquisition, applied $32 million to capital expenditures, and increased Pike’s cash balance to $24.9 million.

Looking forward, I can’t tell you when the economy will bounce back, but I can say I am optimistic about Pike’s role as we begin to see some recovery. We have the financial discipline, long-term customer relationships, and energy solutions services that will continue to serve us through the remainder of this downturn, and while we expect the near term to remain difficult especially in the distribution sector due to the continued sluggish housing starts and credit challenges, we have the right processes in place.

As the country focuses on rebuilding the grid, building out infrastructure and installing new facilities for renewable energy, Pike is one of the companies that will be a major participant in these works.

One final comment before I turn the call over to Anthony. I am also very pleased to tell you that our stock ticker on the New York Exchange has now changed from PEC to PIKE as of last Friday.

With that, I’ll turn the call over to Anthony for a financial review.

Anthony Slater

I'm going to walk you through the income statement for our fiscal 2009 third quarter, balance sheet, and cash flows and provide our outlook for the remainder of fiscal 2009.

Total revenues for the fiscal third quarter ended March 31, 2009, increased 17.9%, to $154.9 million from $131.4 million in the comparable period last year. This growth was due to the large amount of storm restoration work we performed during the quarter, the addition of engineering and substation construction services added this year, and continued growth in transmission projects.

Storm restoration revenues were $54.2 million in the third quarter of 2009, compared to $11.1 million in the third quarter of 2008. Our transmission service revenues increased by $5.6 million, or 67% over the prior year quarter. Revenue generated in the quarter related to the EDS acquisition totaled approximately $24 million. These revenues included engineering, substation, transmission, and distribution projects.

Our storm efforts this quarter diverted a significant number of our crews from core work and our distribution services underground and overhead remain impacted by the housing market and lower utility distribution maintenance spending during the current economic environment. As a result, core revenues decreased by 16.3% to $100.7 million.

Gross profit for the third quarter of fiscal 2009 was $28.1 million, compared to $20.8 million in the third quarter of fiscal 2008. Gross profit was 18.2% of revenues compared to 15.8% in the prior year. The year over year increase was due to a significant increase in higher margin storm restoration revenues in the quarter which accounted for 35% of this quarter’s revenues, compared to 8% in the prior year.

Additionally fuel expenses have moderated since the record highs that were reached in the spring and summer of 2008. Fuel costs for the quarter were 3.7% of revenues compared to 6.4% in the prior year. Offsetting these benefits were a couple of factors that negatively impacted the results for the quarter. First, a decrease in equipment utilization due to a continued softness in our distribution work. We own much of our equipment, which we believe is a competitive advantage. It puts us in the best position for when distribution spending starts to return. However, in the interim, the reduced demand for underground and overhead construction services has resulted in higher equipment cost as a percentage of core revenues. Additionally, in this fiscal year we added material procurement to our service offerings. These offerings are part of our full energy solutions service offering, but have generally lower gross margin compared to other core services.

General and administrative expenses increased $1.7 million year-over-year to $12.1 million in the third quarter of fiscal 2009 due primarily to administrative costs related to the recently acquired EDS business. G&A expenses were 7.8% of total revenues for the third quarter of fiscal 2009, slightly down from 7.9% in the same period of the prior year.

Interest expense for the fiscal third quarter of 2009 decreased 35% to $2.2 million compared to the third quarter last year due to the debt reduction and lower interest rates. Our effective tax rate was 36.2% in the quarter. We expect our effective tax rate to be approximately 37.5% to 38% over the next several quarters.

Net income for the fiscal third quarter of 2009 was $8.3 million or $0.25 per diluted share, compared to $4.3 million or $0.13 per diluted share last year. EBITDA increased 26.9% to $21.4 million for the third quarter of fiscal 2009 from $19 million for the same period last year. Depreciation and amortization for the third quarter totaled $9 million versus $8.7 million last year. A reconciliation of net income to EBITDA is posted on our website under the Investor Center section.

Now turning to the cash flows and balance sheet. Net cash provided by operations totaled $28.9 million for the quarter. Our cash position was $25.6 million at the end of the quarter. Total long-term debt remained at $140.5 million, and we had $66.4 million available under our $90 million revolving line of credit after giving effect to outstanding letters of credit.

We did purchase transmission equipment and continued IT system implementations during the quarter. We purchased approximately $7.6 million of former EDS transmission equipment, previously under lease or short term rental arrangements. In addition, we completed the implementation of our HR and payroll system and continued to work on a new job cost and billing system which will be in place during our first quarter of fiscal 2010. IT capital expenditures totaled $2.9 million in the quarter. Based on a trailing 12-month EBITDA, our long-term debt to EBITDA ratio is down to approximately 1.4 times as we have meaningfully reduced our debt over the past several years. Of our total term debt outstanding, none is due until 2012.

Now switching to year to date results, our year to date total revenues for the nine months ended March 31, 2009, were $485 million, compared to $414.2 million for the same period last year. Core revenues were $342.2 million for the 9 months ended March 31, 2009, a 9.6% reduction from the prior year. Storm restoration revenues totaled $142.8 million for the 9-month period, up from last year’s $35.5 million. Net income for the first 9 months of fiscal 2009 totaled $29.1 million or $0.86 per diluted share, compared to net income of $14.6 million or $0.44 per diluted share the same period last year.

Now let me update you on the outlook for the remainder of fiscal 2009. We are pleased with the revenue contribution from our storm restoration work so far this year. While we still expect to realize benefits from our more diversified energy solutions platform and the positive momentum that we’re experiencing from expanded transmission and engineering capabilities, offsetting this is an ongoing difficult economic environment, tight credit, and weak housing markets that continue to impact our customers’ spending. Taken together, we continue to expect total revenues to range from $600 million to $620 million for fiscal 2009. We are, however, narrowing our range for expected diluted earnings per share to $0.90 to $0.95 compared to our prior range of $0.85 to $0.95. We expect to continue to generate positive cash flows and proactively manage the areas of business that we can, controlling costs and positioning Pike as a full service energy solutions provider.

That concludes my remarks. Operator, if you could please open the call to questions.

Question-and-Answer Session

Operator

(Operator Instructions). We'll take our first question from Rich Wesolowski - Sidoti & Company.

Rich Wesolowski - Sidoti & Company

How much of the organic core sales job was due to the deferral in storm activity?

Eric Pike

As we’ve discussed before on the call, there is no one mathematical calculation that really converts nicely from storm to diversion of core, so we’re hesitant to give that exact detail. Clearly the core was impacted negatively because of the storm efforts, but as we noted in the script, we certainly have seen some other softness in the distribution market, so the drop in core was certainly impacted by both the storm work diversion as well as that continued softness.

Rich Wesolowski - Sidoti & Company

If I take at EDS the core organic rate was down 36%, if I look at the prior two quarters, you were down between 11% and 26%. Would it be safe to say that the March rate was somewhere in between those two?

Eric Pike

You said the March rate. I’m sorry, I didn’t understand the question.

Rich Wesolowski - Sidoti & Company

I’m just trying to get somewhat of a ballpark figure for organic core sales decline, absent the storm, but I know there’s no exact way, just handicapping it, would you say somewhere down between 10% and 20%?

Eric Pike

If you try to add in and we also had the acquisition that plays into this a little bit, looking at the prior year, but one of the things we do is try to look a little bit at head count and if you try to assume that EDS, the employees that were over at September 1^st, if you assume they were in the mix last year, we’re looking at a headcount drop of around 15% to 17%, as I remember bit, so if you want to use that measure that may help you a little bit.

Rich Wesolowski - Sidoti & Company

Can you relay some of the discussions you’re having with utilities and how your outlook for the timing of a rebound in core activity may have changed, if at all, since the last call?

Anthony Slater

I don’t think, Rick, it has really changed that much from the last. We still expect the majority of the rebound to take place starting early calendar 2010, though we do feel like there’s some opportunity especially as some of the highway stimulus dollars, we believe, may make it down to the work project level probably in late calendar Q3 or early calendar Q4 on some of the road widening.

Rich Wesolowski - Sidoti & Company

Do you think Pike can have their core sales back up in that mid $500 million range just on a rebound in maintenance and perhaps stimulus activity or do you think that requires a pickup in housing starts?

Eric Pike

I think you can get back to certainly the north of the $500 range on core with an uptick in maintenance and so forth without the housing. I think to get to the upper end of that, you’re going to have to have some improvement in housing.

Operator

Your next question comes from the line of Tahira Afzal – KeyBanc.

Tahira Afzal - KeyBanc

When I look out to fiscal year 2010, it sounds like the first half of fiscal year 2010 might be challenging, but really as you start looking at these declines you’re seeing on the core power lines side and to the extent you can talk about just the effect of that assuming normalized storm activity, do you think the rate of decline is going to start settling down because you’ve now seen two years of consistent declines, let’s say between 100 to 120 sort of doable amount?

Eric Pike

One thing I can say, Tahira, to your question is we certainly have seen the rate of decline slowing. We’re not ready to say we’re at the bottom, but we’re seeing that rate of decline slow, and so I think that that’s a positive if you want to latch onto one in this environment.

Tahira Afzal - KeyBanc

If you’re looking at the month that’s gone by so far in this quarter, for example, or rather the last two months, would you say the rate of decline you’re seeing in those two months is perhaps less than less than what you’ve seen in the prior quarter?

Eric Pike

Yes.

Tahira Afzal - KeyBanc

And this assuming normalized levels of storm work. Would that be correct?

Eric Pike

Correct.

Tahira Afzal - KeyBanc

If you look at the pricing then, would that also be stabilizing?

Eric Pike

There’s certainly some pricing pressure in the market, but still based on all the statistics we review for the business, our pricing has actually held its own. We haven’t seen a material weakness on pricing to date.

Tahira Afzal - KeyBanc

If I look at your fiscal fourth quarter guidance, the implied guidance is, let’s say, $0.11 to $0.12 or something like that, and that’s assuming that you start seeing a lower amount of decline on your core power line business. Should we be taking that $0.11 to $0.12 and prorating that for fiscal year 2010? Do you expect that amount to improve going forward, and this is ex any material benefit from storm work?

Eric Pike

First of all, Tahira, I want to make sure that the EPS guidance that we provided was $0.90 to $0.95, and we were at $0.86 year to date March, so I want to speak to $0.11 to $0.12 Q4 which is the ranges you provided.

Tahira Afzal - KeyBanc

So would you say the guidance is even lower?

Eric Pike

Our guidance is to reach $0.90 to $0.95 for the year.

Tahira Afzal - KeyBanc

And you’re at $0.86 already.

Eric Pike

Correct.

Tahira Afzal - KeyBanc

How should we be interpreting that in terms of, and I know you don’t want to give fiscal year ’10 guidance right now, but how should we be interpreting something that is like $0.04 to $0.09 for fourth quarter versus what you could potentially see in fiscal year 2010, should we assume that’s a conservative number right now?

Eric Pike

I think it’s a number based on all the factors that we’ve just talked about. We have a great business model that allows us the flexibility to maximize earnings in inclement weather, and yet that same core business is still continuing to be impacted by weak distribution spend in our present markets. It’s also having to carry a little bit of excess equipment as well as in our profit model now with the procurement side of our business, that is a lower margin piece of the work, so what we are trying to set up with is more realistic expectations of while most of the industry would love to hear people come on the line and say the recovery is going to happen in the next month, we’re not going to tell you that it’s going to happen in the next month. We do believe it’s going to happen in possibly our fiscal 2010 year. We may begin to see some stuff in Q1 and Q2. Obviously there’s a chance that we can do a better than that, but we feel like based on the economic conditions and the customer constraints we’re presently seeing that those are the realistic guidance estimates, and we’ll certainly, Tahira, in our next call discuss 2010 guidance information as we approach or as we get to our next quarter call.

Tahira Afzal – Keybanc Capital Markets

That’s about fair, I guess. The closest quarter I can look at as a comparison, let’s take fiscal year second quarter, where you still had around $24 million of EDS revenue flowing through. You had more normalized levels of storm work, around $10 million flowing through, and yet you did $0.08. If I were to take the fiscal second quarter and really compare it to the fiscal fourth quarter, what has changed between those two?

Eric Pike

The fiscal second quarter, that was really the quarter where we started seeing more of the slowdown, but some of that slow down started happening toward the end of the quarter, so certainly as we talked about in the script one of the major impacts is the equipment utilization and that drain on margins, and that piece is really the major difference between Q2 and what we are estimating for Q4.

Tahira Afzal – Keybanc Capital Markets

If I look at your headcount as in current and I know you gave it earlier on in terms of percentage decline, but would it be possible to get a number in terms of your headcount as of this quarter versus last year?

Eric Pike

We’re just under 5000. We’re approximately 5000 people as of the end of March.

Operator

The next question comes from the line of Andrea Wirth with Robert W. Baird.

Andrea Wirth – Robert W. Baird

Just first in the guidance, what are you assuming for storm roughly for the fourth quarter, still a $10 million number or what should we be thinking there?

Eric Pike

We have assumed $3 to 5 million.

Andrea Wirth – Robert W. Baird

And you mentioned that one of the big differences when you look at Q2 versus Q4 as equipment utilization rates. Can you give us a rough idea as to how that has changed in percentage terms or some kind of metrics so we have an idea of how much that has moved?

Eric Pike

I don’t have the Q2 numbers specifically available right now, but historically we’ve always had about, I’m going to say, roughly 5% of our equipment is idle, and that’s because we have equipment in transit. We have some equipment down for repair. We have some equipment in the normal maintenance schedules. Today, we’re approximately 20% available or idle.

Andrea Wirth – Robert W. Baird

And it’s probably fair to say in Q2 it was probably somewhere in between that range, probably more like 10%.

Eric Pike

It started moving up mid to late quarter in Q2 if I remember correctly.

Andrea Wirth – Robert W. Baird

Just in terms of what you are actually seeing out in the system because now we’ve seen nine quarters of core power line being down year over year, are you starting see that there are stresses out in the system and do you think there can be may be even potentially a spike seasonally in activity, if we happen to get fairly warm summer or something like that? Just trying to get an idea of how stressed the system is right now after all these years of not spending.

Eric Pike

Yes. I think the biggest indication we’re getting, we’re seeing Andrea some bid packages that will go out into 2010 and beyond, and we’re seeing estimated work volumes in those packages that are some times two or more times what’ve performed in ’09.

Andrea Wirth – Robert W. Baird

About your headcount right now, how are you thinking about the levels that you have? Do you think that just given that there’s still a decent amount of uncertainty as to really when stimulus comes through, etc., do you think that you need to still need pare that headcount back or are you hesitant to do that at this point just given how quickly the work could come back?

Eric Pike

Basically Andrea the way our crews work is we’re not carrying excess people. They’re either employed productively or they’re not, so the only reason we’d continue to reduce headcount is if we saw work slow beyond the point that we’re performing it today, and right now as Anthony said earlier, we’ve seen that rate of decline drop pretty substantially.

Anthony Slater

We really keep our core distribution transmission employees in the field at a very high utilization rate, and we haven’t seen that decline.

Andrea Wirth – Robert W. Baird

How about profitability levels at EDS? Just may be some idea of the progress there and getting that business up to more PIKE average levels.

Eric Pike

It’s actually been a success story. I think that the transmission business continues to do well as we mentioned in the script. Out of all the business lines in EDS distribution was the lowest, and our crews and our supervision and the guys coming over from EDS have done a good job in turning that business around, and we’re seeing as we mentioned on the other calls, the engineering business certainly has the potential to generate higher margins than our historical core construction rate, so overall, we’re pleased where we are at with the acquisition.

Operator

(Operator Instructions) The next question comes from the line of Alex Rygiel with FBR Capital Markets.

Alex Rygiel – FBR Capital Markets

What percent of your fuel is hedged these days?

Anthony Slater

We are about 35% today Alex.

Alex Rygiel – FBR Capital Markets

You spent about $21 million in Capex here to date. Can you break that down between equipment and IT?

Anthony Slater

For the year to date, Alex, I don’t have that number specifically here available to me, but the IT components I would guess are in the probably $5 to $6 million range year to date and the significant majority of the remaining balance would be fleet Capex. The only other component that we do have this year that’s not typical for us is we did, and I think we talked about this a couple calls ago, we did move all of the EDS employees that were acquired in the transaction to new offices, and we had to up fit those offices with IT equipment and furniture and fixtures and leasehold improvements, and so really IT, the EDS offices, and fleet are really the major components this year.

Alex Rygiel – FBR Capital Markets

The $15 million, is it safe to assume that none of that was spent on your core business?

Anthony Slater

Very little would have been spent on distribution. There was certainly Capex spent on transmission, and then really with engineering, it’s primarily office space Capex. Substation does have some equipment demands.

Alex Rygiel – FBR Capital Markets

To ask it a different way, should we think about that $15 million in Capex to be cost to acquire EDS?

Anthony Slater

You’re taking the 21 less the 7 to get to 14?

Alex Rygiel – FBR Capital Markets

Is that something that we should consider where effectively add that to your purchase price of $24-25 million from a year ago?

Anthony Slater

No. There was certainly regular maintenance Capex that we have going on, and we had transmission business before we acquired them. We have ramped up some of that transmission equipment, and then there were expenditures related to those office build-outs, and that number I would say for the EDS offices, we probably spent $3 to $4 million, somewhere in that range for those offices.

Alex Rygiel – FBR Capital Markets

What was the transmission revenue in the quarter?

Anthony Slater

The transmission revenues, we’ve not disclosed the total, but we had a 67% increase over prior year. You could probably really do the math, but it was $5.6 million increase which would take it to about $14 million.

Alex Rygiel – FBR Capital Markets

Eric, can you comment on opportunities in the solar sector clearly too because recently talked a little bit about spending about $50 million in rooftop solar panels. Do you view that as an opportunity going forward?

Eric Pike

No Alex. Really the rooftop installation, at least as we see it today is really going to be a smaller units that are, I won’t say residential, but more small business type pieces. The part that we are looking at doing, and we feel like will be a meaningful piece to our business really delve more into the solar fields when you get up to a true utility generation level, the 25-30 MW and higher solar fields. Those are the projects that our engineers are working on right now, and we hope to expand it into the construction side as well.

Operator

The next question comes from the line of Scott Levine with J.P. Morgan.

Scott Levine – J.P. Morgan

Applying the numbers you just gave, following up on the question on transmission, so it would look like transmission is about just under 15% maybe or so of your core service revenue for the quarter. Do you have a rough idea that you want to communicate regarding having a piece in the mix, do you see that growing to assuming a normalized growth trajectory in your core distribution services portfolio?

Eric Pike

I think we’ve talked a fair bit Scott. We’re not exactly sure when we are going to see that core distribution piece uptick. I can tell you that we’ve as Anthony mentioned from a Capex standpoint as well as an acquisitional standpoint and management attention standpoint we’re very focused on growing those transmission revenues. We do feel like it can be certainly a much more meaningful part. Whether that equates to 15 moving to 25% of our revenues, I not sure I’m going to make any kind of projections on that, but that’s where we’re focusing a lot of our efforts and really look to use the synergies of the engineering on that as well because we’re pursuing a lot of engineering projects for transmission work.

Scott Levine – J.P. Morgan

So would it be just philosophically more accurate to maybe think of the engineering substation coupled in with transmission and could you then help us think about maybe what growth rate for maybe that piece of business might look like, and is it more accurate to think of it that way? It sounds like it is.

Eric Pike

The idea is that we want to create an ability to layer that over entire projects, but they’re not all specific to one project. We’re certainly doing standalone EPC for substation now. It has nothing to do with any T line work. Likewise, we are doing owner engineering work for transmission that has no construction component to it, so they can be blended, which we obviously hope to do. We think that maximizes the value to customers, but as we look out at the piece on the growth side of that, we think that’s obviously going to be a large growth engine for us. Again, I’m not going to give any kind of projections as to what percent of revenue that’s going to be until we develop it more, and also really decide on how we’re going to segment report by the end of Q4.

Scott Levine – J.P. Morgan

On the stimulus, it sounds like it’s still too early to think about some hard numbers, but could you talk maybe about as the details are rolling in are you maybe more or less encouraged than maybe you were at the bill’s outset and which areas may be upside or downside surprises maybe versus your initial expectations?

Eric Pike

I would say that we’re probably more encouraged right now. We’ve got a group that’s working with us in DC and we’re staying much closer to it as pieces are rolling out that affect both the infrastructure as well as directly to the energy space, and I think as we’re starting to see a little bit more definition around where the projects are, how they’re capped, and getting a sense of how they may play out to our customer base, we’re becoming more optimistic of the areas that we’re going to play a critical role in. One for instance is the smart grid piece. As we see the levels those incentive dollars may be capped, whole those caps are not necessarily advantageous to some of our utility customers because they’re probably too small, for a lot of our workforce the is on cooperative and municipal accounts, those provide great incentive components that we’re working with customers on how that’s going to fit their business model now.

Scott Levine – J.P. Morgan

On core margins, I know that the storm work makes is kind of difficult to back into the core margins, but if you could talk a little bit about core margin trends in the business and definitionally or roughly speaking how they’re trending? Is the equipment utilization expected to remain on drag on margins for the total business ex storm?

Eric Pike

Our current position is that we’re going to hold this excess equipment because we believe it’s only excess equipment for the short term. We strongly believe that the distribution spend will come back. It’s matter of when, not if in our view, and we want to make sure we have got that equipment available. We have sold some equipment where we thought that it made sense based on the age of the equipment, but we want to be in a good position when this demand comes back. We’ve got a plan on how to handle our manpower, and we want to have those hard assets available, so it’ll remain a drag on margins until the overhead and underground distribution business returns.

Operator

Your next question comes from the line of Paul Carter with Evergreen.

Paul Carter – Evergreen

What did you say your average headcount was for the quarter?

Eric Pike

We didn’t say the average, but we were just under 5000 at the end of the quarter.

Paul Carter – Evergreen

How many of those were EDS?

Eric Pike

The EDS folks are totally integrated back into the business from a transmission and distribution perspective, and so we don’t look at it broken out anymore.

Paul Carter – Evergreen

Now, did you say you added substantially to that group this quarter?

Eric Pike

We added substantially to the engineering sub component, which was acquired?

Paul Carter – Evergreen

And how many people sequentially quarter to quarter were added?

Eric Pike

I don’t know if we have it broken out, Paul, quarter to quarter, but when we acquired them in September, there were roughly 130 people in the engineering group, and there are just 200 today.

Paul Carter – Evergreen

Going back to the storm work, the number of days that you guys spent? Typically you guys disclose that in your Q’s and K’s, right?

Eric Pike

I don’t know if we’ve disclosed on days before, and to be honest, I am not sure I can tell you off the top of my head. It was the better part of the entire month of February.

Paul Carter – Evergreen

So that’s quite a bit then, and you said 2100 employees, right?

Eric Pike

It was right at 2200. Now, you’ve got to be careful, Paul, because it typically ramps up. It hits a maximum, and then it ramps back down, so it’s not that we had 2200 people working for X number of days. You’ve got a bit of a bell curve component as you ramp up to a maximum and then come back off. There are a lot of variables on the storm. That’s why we’re very cautious about it. We try to be cautious on what information we give because it’s a very hard thing to model, and we don’t want to give anybody the wrong modeling information, to be totally honest.

Paul Carter – Evergreen

On the excess equipment, most of those are trucks, right?

Eric Pike

That’s right.

Paul Carter – Evergreen

Just out of curiosity, how many trucks are you guys running right now?

Eric Pike

We have probably 9000 pieces of total equipment. I’m going to say probably 5000 licensed pieces.

Paul Carter – Evergreen

Do you know ballpark and I can get this offline if necessary, but you know what that was at year end?

Eric Pike

If I remember right, the high point since I’ve been here which is three year, we were just over 10,000 total pieces, and now we’re down to about 9000.

Operator

We’ll take a followup from Tahira Afzal – KeyBanc.

Tahira Afzal - KeyBanc

One of your peers has said that it started to see some smart grid activity flow through. Could you comment on any opportunities you might see even if it’s not this year, maybe early into 2010?

Eric Pike

Yes, we’re seeing some smart grid activity. We’re actually performing some work for two of our utility customers installing some smart grid equipment within the substation that would monitor their circuits. We’re beginning to see some of it pick up, Tahira, but at this stage, it’s rolling out a bit piecemeal due to some of the security concerns. I think you’ve probably seen them in the Wall Street Journal under the cyber terror pieces that have to be addressed in the architecture, but there is some infrastructure that’s being put in place now.

Tahira Afzal - KeyBanc

The underground lines, that initiative, that might be taken in Charlotte, anymore updates on that?

Eric Pike

Certainly if the underground component in Charlotte gains traction beyond what they normally do in Charlotte, we’ll certainly be a big participant in that. I think that’s still pretty much in the discussion stage.

Operator

There are no further questions at this time. I will turn the conference back over to our speakers for any additional or closing remarks.

Eric Pike

Thank you all for joining us on the call. We look forward to talking to you again next quarter.

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