Pike Electric Corporation F4Q09 (Qtr End 06/30/09) Earnings Call Transcript

| About: Pike Corporation (PIKE)

Pike Electric Corporation (NYSE:PIKE)

F4Q09 Earnings Call

September 1, 2009 5:00 pm ET

Executives

Frank Milano – Investor Relations, ICR

J. Eric Pike – Chairman and Chief Executive Officer

Anthony K. Slater – Executive Vice President and Chief Financial Officer

Analysts

[Rich Waslowski] – Sidoti and Company

Tahira Afzal - Keybanc Capital Markets

Andrea Wirth - Robert W. Baird & Co., Inc.

Adam Thalhimer - BB&T Capital Markets

Scott Levine - J.P. Morgan

[Jonathan Barrett] – Luminous

Operator

Good day everyone and welcome to the Pike Electric Corporation fourth quarter 2009 earnings conference call. As a reminder, today’s call is being recorded.

Now for opening remarks and introductions I’d like to turn the call over to Frank Milano, Pike Electric’s IR contact with ICR. Please go ahead.

Frank Milano

Thank you. Good afternoon. Welcome to Pike Electric’s conference call to review our fiscal 2009 fourth quarter results.

Joining us this afternoon are Eric Pike, our Chairman and Chief Executive Officer and Anthony Slater, our Executive Vice President and 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 operation, 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 discussion and analysis sections of our annual reports on Form 10-K and other SEC filings describe the factors that may affect 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 these factors. We undertake no obligation to revise these forward-looking statements to reflect events or circumstances after today’s call.

A replay of today’s call will be available this evening in the Investor section of our website at www.pike.com. Investor Relations questions can be directed to us at 336-719-4622 and financial news alerts are available via email.

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

J. Eric Pike

Thanks, Frank. Good afternoon everyone. To start the call today I’m going to provide a general overview of our fiscal 2009 and fourth quarter results, our perspective on the national economy, the trends within our industry and an update on Pike’s business strategy. Afterwards Anthony will then review our financial results in detail, and as always when we finish we will welcome your questions following our remarks.

Revenues for our fourth quarter were $128.5 million compared to $137.8 million for the fourth quarter of fiscal 2008. Revenues were negatively impacted by the ongoing softness in the distribution markets as our customers continued to defer necessary maintenance spending. We continue to see growth, however, in our engineering, transmission and substation work. Our transmission revenues were up 71% year-over-year in the fourth quarter and 24% sequentially. Engineering, which is a new service this year, was up 14% sequentially in the fourth quarter from the third quarter. And substation revenues increased 18% sequentially. Combined, these services still represent a minority of our business today, but we are confident they will continue to grow at an accelerated rate.

Net income was $2.5 million or $0.07 per diluted share, which was in line with our expectations for the quarter. For the full fiscal year 2009, we delivered double-digit revenue and earnings growth as revenues increased to $613.5 million from $552 million, and we increased earnings per diluted share by 56% to $0.94 of EPS. This growth would be considerable in any environment, but it is certainly an accomplishment in light of the ongoing economic challenges.

Fiscal 2009 was our second highest storm restoration year. In September we responded to Hurricane Gustav and right on its heels we responded to Hurricane Ike. Then, in February, Kentucky and Missouri experienced the biggest ice storms in their recorded history. Based on our efforts, and as our reputation spread, we picked up four new accounts immediately following our storm restoration efforts in Missouri. Although our storm restoration revenues might be considered non-recurring, this portion of our business does actually generate recurring revenue for us year-in and year-out. The annual contribution to revenue is not predictable, but we are able to consistently maximize the opportunity with our flexible business model and efficient response.

The diversity of our customer base and the strength of our customer relationships is the key to our ability to withstand the current economic environment. We have emerged as an even stronger company. For fiscal 2009, our largest customer made up 20% revenues and our top ten customers were 55% of total revenues. Most of our customer relationships are long-standing, with over 90% of our services provided under master service agreements. As a result, we are positioned to benefit as the broader economy recovers.

We will also benefit as utilities catch up on necessary distribution maintenance spending that has been deferred for several years. We have also focused on aligning the company’s cost structure to the realities of the market. We have reduced crew levels where appropriate, and our flexible staffing model allows us to retain our most experienced linemen. This model provides us the ability to rebuild our crews as the economy rebounds.

Senior management has also participated in these cost containment efforts. The top members of our management team voluntarily forfeited cash bonuses in fiscal 2009 to which they would have been entitled. We all felt this was the appropriate response at the time, based on the current economic challenges.

For the year, Pike generated strong cash flow from operations of $77 million, as we also executed on our business plan and delivered solid profitability. We improved our gross margin by more than 130 basis points from last year.

Most importantly, Pike is in a strong financial position. In fiscal 2009, we self-funded and completed two acquisitions totaling $25 million. I will discuss these in further detail shortly. We also increased our cash balance by $32 million year-over-year to a total of $44 million of cash on hand as of June 30.

After the close of the fourth quarter, we also successfully amended our credit facility, thereby providing Pike with greater financial flexibility to operate and capitalize on opportunities. We also more than doubled our surety bond program, expanding the surety facility to a capacity of $300 million.

During the year, we made significant progress on our diversification strategy. In the first quarter, we completed the acquisition of EDS, which transformed Pike into an energy solutions company. We are now able to provide customers with an array of services across the entire supply chain including engineering, EPC, transmission, substation and distribution construction. This also includes renewables such as wind farms and solar arrays.

In our fourth quarter we purchased Facilities Planning and Siting, which expanded our energy solutions platform. This added planning, siting, routing and right-of-way acquisition capabilities for our utility and cooperative and municipality customers, and it uses cutting-edge technology as well as a proprietary siting procedure. This means we can now provide services and add value to our customers at the conceptual stage of their projects.

In terms of employees, as of June 30, 2009 our employee count was 4,500 employees compared to 5,400 employees a year ago. Our acquisitions and related subsequent internal business line growth achieved headcount increases in the engineering, substation and transmission lines. However, we did experience year-over-year headcount declines in our distribution business. However, it is important to note that we added sequential headcount in our overhead distribution business, which is our largest revenue producer, in the fiscal fourth quarter and the rate of decline has significantly slowed in our underground distribution business. We believe this is a positive indicator, which contributes to our optimism.

Like others in our industry, Pike’s fiscal fourth quarter was impacted by the prolonged challenges of a very difficult economy. Despite this disruption, we remain optimistic regarding our long-term prospects. Storm restoration revenues more than offset the ongoing softness early in the year, but in the fourth quarter the reduced spending by customers throughout the industry was more visible. However, there are emerging signs of stabilization. As I mentioned earlier, the pace of underground distribution decline has certainly slowed. We experienced headcount growth in our overhead distribution crews near the end of the quarter, and we certainly believe this is the positive indicator we have been looking for that the market is beginning to turn towards a recovery.

The reduced maintenance spend in the quarter was compounded as utilities anticipate a number of government initiatives and are awaiting the outcomes. For example, the American Clean Energy and Security Act of ’09 passed the House of Representatives in June. This bill would establish national standards for energy efficiency and renewable energy. Additional spending from the American Recovery Reinvestment Stimulus Act has been also fairly slow to materialize, but there has been progress recently. In July, the Department of Energy announced a loan guarantee program of approximately $30 billion for renewable energy and transmission grid projects. Additionally, the Treasury Department began accepting applications on July 31 for a new cash grant program for renewable energy projects, to which they anticipate providing at least $3 billion.

Customers are still delaying projects as they await the details around these programs, but the developments are positive indicators that should result in renewed activity as our fiscal 2010 progresses. To that end, Pike is presently working with a customer to design and engineer transmission lines and a substation, and we will be assisting them in completing a proposal to submit this work for stimulus funding.

There are a number of dynamics in the market that we believe will drive growth in our industry in the second half of fiscal 2010. These include infrastructure upgrades that have continued to be deferred and initiatives around smart grid implementations. Furthermore, there is increasing demand for renewable solutions and the associated transmission and substation needs, which will drive additional growth.

As we discuss our expanded service offerings with our customers, their reception to our energy solutions platform remains very encouraging. Customers are starting to discuss their plans for strengthening their power infrastructure, and I am confident this will translate into new business for Pike.

As an example, we have several utilities in the Midwest and the Carolinas that have longstanding MSA relationships with Pike, and now we are expanding our service relationships with these customers. We are now providing substation and transmission design, as well as engineering, relay and control services. Some of these are project-based and some have been transitioned into longer term maintenance relationships, but they are all indicative of the opportunity to find additional synergies within our present customer base.

While still a very small portion of our business at this point, customers are expressing interest in renewables. The timing of the span and the investment in renewables and grid upgrades is taking longer than most anyone anticipated. Momentum slowed as financing for these projects became scarcer. These challenges were heightened with credit requirements, and a limited supply of tax equity financing and uncertainty of what is coming out of federal legislation. Despite the delays, we remain enthusiastic regarding these prospects.

While the requests for proposals and bids are increasing in the wind and solar arena for Pike, we don’t expect to see a large construction pick up until later in 2010. However, we do believe we are entering the early stage of a significant infrastructure investment cycle, and Pike is now even better positioned with our full service capabilities.

For all renewable energy alternatives, Pike can provide a total energy solution. This includes preliminary studies, planning, siting and permitting, engineering and design, construction, procurement and grid interconnection. Based on a recent EIA report, renewable energy now supplies less than 10% of the country’s power. This should lead to a meaningful opportunity to build the capabilities and develop the infrastructure.

What is great about our business is we don’t need to decide which renewable source is going to be more prominent. Our services will be compatible with any source that needs connectivity to the grid.

Additionally, our footprint in the South and the West puts us in an ideal location to meet the demands of solar projects. There is no doubt that over the next several years, our renewable revenues will increase meaningly from today’s levels. Our unique value proposition to customers allows us to support the engineering and design, procurement and construction needs for all energy projects, no matter how the power is generated.

In summary, there is no question that fiscal 2009 was a challenging year for Pike and for the broader industry, but I am pleased with what we have accomplished. We have a full service energy solutions platform and EPC capability, a strong financial position and longstanding customer relationships. Looking ahead, we’re confident that the need for our energy solutions will continue to grow.

Now I’m going to turn the call over to Anthony to provide the details financials. Anthony?

Anthony K. Slater

Thanks, Eric. I’m going to walk through the income statement and provide selected information related to our balance sheet and cash flows for our fiscal 2009 fourth quarter, and give a recap of the full year for fiscal 2009.

Total revenues for the fiscal fourth quarter of fiscal 2009 were $128.5 million, a 6.8% decrease from $137.8 million in the comparable period last year. Core revenues which include all revenues except our storm restoration services decreased by 4.4% to $118.4 million. Engineering and substation construction revenues totaled $19.5 million for the fourth quarter of fiscal 2009, the highest level since we began offering these services after our acquisition of EDS in September, 2008. Transmission revenues were up $7.2 million or 71% year-over-year to $17.4 million. Sequentially, transmission revenues increased 24% from the third quarter.

In total, revenue generated in the quarter related to the EDS acquisition was approximately $26 million. These revenues include engineering, substation, transmission, as well as specific distribution projects related to the acquisition. We are pleased with our execution and the integration of the EDS acquisition. Its contribution in fiscal 2009 was better than our original breakeven expectation.

In terms of business mix, approximately 29% of our total revenues were generated by engineering, transmission and substation construction services in the fourth quarter. Going forward we expect that these services will increasingly account for a greater portion of our revenues.

Distribution revenues were $81.4 million for the fourth quarter, and continue to be negatively impacted by ongoing reduced maintenance spending across Pike’s operating territory and the sluggish housing market.

Storm restoration revenues were $10.1 million in the fourth quarter of 2009, compared to $13.9 million for the fourth quarter of prior year.

Gross profit for the fourth quarter of fiscal 2009 was $18.7 million compared to $23.2 million in the fourth quarter of fiscal 2008. Gross profit was 14.6% of revenues compared to 16.8% in the prior year. The benefits provided by our cost control efforts and moderating fuel costs were offset by a loss of operating leverage on lower volumes of core and storm revenues, including a decrease in equipment utilization due to a continued softness in our distribution services.

General and administrative expenses increased $3.2 million year-over-year to $13.6 million for the fourth quarter of fiscal 2009, due primarily to increased wages and benefits of approximately $1.8 million, which includes the administrative positions related to our engineering and substation services and other strategic additions to the Pike team. We also incurred a $600,000 increase in professional fees and a $400,000 increase of fees related to information system initiatives during the quarter. G&A expenses were 10.6% of total revenues for the fourth quarter of fiscal 2009, up from 7.6% in the same period of the prior year, due in part to the loss of leverage on lower revenues this quarter.

Interest expense for the fiscal fourth quarter of 2009 decreased to 17% to $2 million as compared to the fourth quarter of last year, due primarily to lower interest rates.

Our effective tax rate was 33.8% in the quarter. The lower effective rate is primarily due to a larger domestic production activities deduction and lower state income taxes.

Net income for the fiscal fourth quarter of 2009 was $2.5 million or $0.07 per diluted share compared to $5.6 million or $0.17 per diluted share last year.

EBITDA was $14.5 million for the fourth quarter of fiscal 2009 compared to $20.5 million for the same period last year.

Depreciation and amortization for the fourth quarter totaled $8.7 million versus $8.6 million last year. A reconciliation of net income to EBITDA is posted on our website in the Investor Center.

Turning to our cash flow and balance sheet, net cash provided by operations totaled $25.3 million for the quarter. Our cash position was $43.8 million as of June 30, 2009, up from $11.4 million a year ago.

Total long term debt remained at $140.5 million and we had no borrowings under our revolver. After giving effect to the outstanding letters of credit totaling $23.6 million at June 30, we had $66.4 million available under the revolving portion of the credit facility. After the close of the fourth quarter, we successfully amended our credit facility, thereby providing Pike with greater flexibility to operate and capitalize on opportunities. The material amendments to the credit facility include extending the maturity of the revolver to July 1, 2012 from July 1, 2010; increasing availability under the revolver to $115 million from $90 million; increasing aggregate dollar limits on the company’s ability to invest in joint ventures; transfer assets to foreign subsidiaries; make earn-out payments; use unsecured debt; lease equipment; repurchase debt; pay dividends and repurchase equity. We also increased the letter of credit limit within the revolver to $90 million from $50 million.

The current interest rate on the revolving portion of the amended facility will increase to LIBOR plus 350 basis points from LIBOR plus 150 basis points. The current interest rate on the company’s term loan remains unchanged at LIBOR plus 150 basis points. All financial covenants remain unchanged.

Based on the trailing 12 month EBITDA, our long-term debt to EBITDA ratio is down to approximately 1.5 times as we have meaningfully reduced our debt over the past several years. Of our total term debt outstanding, nothing is due until July 1, 2012.

Turning to our full year results, Pike delivered strong revenue and earnings growth and generated solid cash flow for fiscal 2009, despite a challenging economy and sluggish spending by many of the electric utilities on maintenance and upgrades. For the year ended June 30, 2009 total revenues increased 11.1%. Core revenues were $460.6 million for the 2009 fiscal year, an 8.4% reduction from the prior year period.

It should be noted that during fiscal 2009 significant storm restoration activities diverted significant man hours from core work. Storm restoration revenues totaled $152.9 million for the 12 month period, up significantly from last year’s $49.4 million. As Eric mentioned, fiscal 2009 was Pike’s second largest storm restoration year.

Fiscal 2009 EBITDA was $96 million, up from $83.2 million in fiscal 2008. Net income for fiscal 2009 totaled $31.6 million or $0.94 per diluted share compared to $20.2 million or $0.60 per diluted share last year.

Cash flow from operations for fiscal 2009 totaled $77.3 million, a 38.7% increase over fiscal 2008. Since our IPO in August of 2005, we have paid down $279 million in debt. We are comfortable with our current debt level, which represents 35% of our total capital. And our priority use of cash flow has shifted. In fiscal 2009 we completed two cash-based acquisitions totaling $25.1 million and we increased our cash balance by $32.5 million. We also continue to invest in the business including transmission and substation equipment, engineering facilities and technology infrastructure. We are confident that we are making the right moves by investing in our business growth.

In fiscal 2009 our capital expenditures totaled $27.3 million as compared to $8.6 million in the prior year. In 2010 we would anticipate capital expenditures to range from $20 to $30 million.

In terms of outlook going forward, we are introducing our fiscal 2010 guidance. We expect total revenues for fiscal 2010 to range from $575 to $625 million. We expect earnings per diluted share for fiscal 2010 to be in the range of $0.60 to $0.75. Details on our guidance include the following. First, our guidance range assumes storm restoration revenues of $50 to $75 million. Over the past five years we have averaged $118 million of storm restoration revenues per year. Storm restoration revenues vary greatly and are certainly unpredictable, and are dependent in a large part on hurricane activities and winter storms.

Second, based on our revenue range we anticipate our general and administrative expenses as a percent of revenues to be approximately 9% in fiscal 2010. This is an increase from the 7 to 8% of revenue range that we’ve provided in past years. Our fiscal 2009 general and administrative expenses as a percent of revenue were favorably impacted by strong storm restoration revenues and the forfeiture of incentive payments due our senior management team. Our increased guidance on general and administrative expenses includes the following. G&A related depreciation expenses related to new systems, including HR, payroll, billing and job costing will increase approximately $1 million in fiscal 2010 compared to 2009. General and administrative expenses related to our new service offerings acquired in September of 2008 will have 12 months of impact in fiscal 2010 versus 10 months in fiscal 2009. Senior management will participate in our incentive program during fiscal 2010 and should performance targets be met, they would be paid under this program. We have also made strategic additions to our team including safety, human resources and casualty insurance teams.

Third, as a reminder we have two interest rate swaps that fix our interest rate on $100 million of our term debt at 5.9% until December of 2009.

Lastly, while we do not provide quarterly guidance we would offer you the following seasonal considerations. We concur with many in the industry that while we are starting to see signs of improvement, the remainder of calendar 2009 will remain challenging. Our guidance assumes stronger results as we move into the second half of our fiscal 2010. As to storm results, while there is potential hurricane activity in the Atlantic, we are two months into the first fiscal quarter of 2010 and our storm restoration activities have been minimal to date.

With that I’ll turn the call back over to Eric for closing remarks.

J. Eric Pike

Thanks, Anthony. Pike has had a challenging and exciting year during fiscal 2009. We have once again responded to our customers needs with both storm restoration assistance as well as crew flexibility to meet their budgets. We’ve reduced our costs and management has led by example. We have broadened our service lines with two acquisitions that are performing better than expected. We have improved our cash position and our credit facility. All in all, a very productive year. However, we’re not content to stop with our improvements or our growth. We’ll continue to grow our business lines during 2010. Our siting, engineering, transmission and substation groups are already growing at a faster pace than expected and we’re seeing improvement in the overhead distribution group as well. Our underground distribution will likely remain impacted until housing returns, but we are optimistic that the latter quarters of 2010 will bring additional opportunities across our entire energy solutions platform of services.

In addition, we will continue to look for acquisition opportunities to enhance our services to our customers and to broaden our geographic coverage. Finally, we believe all of these services will be complemented by the increased spending in renewables, which will positively affect every service line Pike offers.

While there will certainly still be challenges in the near term, we’re excited about the opportunities that 2010 will offer Pike to continue our expansion as a company and as an energy solutions provider to our customers.

With that, we’ll now open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from [Rich Waslowski] – Sidoti and Company.

[Rich Waslowski] – Sidoti and Company

You had mentioned that you increased your overhead distribution headcount toward the end of the quarter, but to be clear was that higher in June than it was in March? And then where is it today relative to the end of the year?

J. Eric Pike

We have not seen an increase over March. It was an increase during the quarter and headcount since year end has continued to increase slightly.

[Rich Waslowski] – Sidoti and Company

Now that you’ve presumably completed some of this stand alone engineering work in substations transmission, do you find that it does indeed give you a leg up in bidding on the construction portion or are you thrown back into the general fray of the contractors once the engineering work is done?

J. Eric Pike

You know it depends on the circumstance and the location, Rich. I mean a lot of the jobs that you have a lot better knowledge on that are bid jobs, in terms of how that engineering applies back to the MSA agreements, they typically are more just an augment to the MSA and which we’re now able to provide a broader range of services under the MSA. But on bid type jobs you certainly have a much better knowledge of the job and where its going.

[Rich Waslowski] – Sidoti and Company

That goes along with the last question I have with FPS, apparently the purposeful view is to get the first look at the type of projects you’re aiming for with the EDS deal that you did, so how is FPS business doing?

J. Eric Pike

It’s doing well. It’s actually picked up several contracts since we completed the acquisition and it has also served as a real pivotal piece as we look. We have a utility customer that we are assisting right now to do some transmission and substation rerouting and pricing for. Hopefully they’re going to receive a stimulus proposal, but oddly enough right after we closed that we were able to utilize the FPS group to go out and help them do a condemnation study on some areas where they might have to reroute the line. So it’s working out extremely well.

Operator

Your next question comes from Tahira Afzal - Keybanc Capital Markets.

Tahira Afzal - Keybanc Capital Markets

Just wanted to go over a couple of things. Number one, I know there’s been some rude paving work and you’d mentioned in the past that would potentially be beneficial for you. Did we see any benefits of those in the fiscal fourth quarter?

J. Eric Pike

We’ve started to see some more bids come out. We were successful. These are smaller projects. We wouldn’t define out what they are, but they’re smaller DOT projects. We’ve been successful on several of them in Tennessee as well as Alabama. But the volume flow right now is still somewhat slower than we expected, but they are driven by the stimulus program.

Tahira Afzal - Keybanc Capital Markets

So would one say they’re more or less than $5 million or so of revenues in total for your quarter?

J. Eric Pike

Yes. Definitely less than that for the quarter.

Tahira Afzal - Keybanc Capital Markets

And then you know if you look at these projects do they fall under your usual contractual terms, or would the pricing for these particular projects be any different from your MSAs?

J. Eric Pike

They’d be a little different. They’re competitively bid as lump-sum projects.

Tahira Afzal - Keybanc Capital Markets

But it seems like the margins were fairly decent.

J. Eric Pike

Yes, they are. It depends somewhat on the area of where you’re bidding. I mean I don’t think we’re seeing anything that maybe our industry peers aren’t seeing that there is certainly some competitiveness in the pricing, and I think that it’s imperative on us to you know continue to be diligent on our pricing. We want to be competitive but at the same time we don’t want to take long term work at bad pricing levels. So there are certainly some jobs out there that while we would like to participate in them we’re not going to sacrifice all the profitability there.

Tahira Afzal - Keybanc Capital Markets

And do you know if I was to take storm work out of the quarter, it seems like your underlying margins were you know sequentially higher in a sense versus even the last two quarters. Is that kind of the math that you’re seeing as well? And if it is, is that because we’re seeing more of a mixture towards transmission or you know is it EDS? Are you seeing an improvement in margins there perhaps? Or is it just more cost cuts related?

J. Eric Pike

Well I think you’ve got a bit of a combination as you look over the last quarter in that there was a lot of storm activity throughout the entire year which helped offset some of the G&A expenses that Anthony discussed. That will impact margins as you go forward a bit. The margins in our engineering, our transmission, our substation, siting and planning, those margins are typically higher than distribution margins. So they’ve definitely helped to offset that, but I wouldn’t say that I would necessarily see margins expanding right now.

Tahira Afzal - Keybanc Capital Markets

I have several questions more, Eric, but I’ll jump in the queue and get back in line.

Operator

Your next question comes from Andrea Wirth - Robert W. Baird & Co., Inc.

Andrea Wirth - Robert W. Baird & Co., Inc.

I wonder if you would just talk a little bit about what the utilities are saying about their budgets for maintenance spending. Has it really changed much from last quarter because last quarter we were talking more about expectations for maybe two to two-and-a-half times what they were in 2009 in terms of what they’re looking for for 2010. Just wondering if that’s changed at all from last quarter or has that maybe you know gotten pushed out a little bit. Just trying to get a little bit of color in terms of what you’re hearing from your customers on their budgets and how they’ve changed.

J. Eric Pike

We haven’t really heard anything, Andrea that would change that. I mean those are certainly for our customer base calendar 2010 budgets. But I think probably the more encouraging thing to us has been the addition of overhead crews really scattered throughout our service territory towards the end of Q4 and then obviously in some of the early part of Q1. A lot of these crew adds that we have made have been for maintenance type work, so we’re already starting to see some of the turn there of necessary maintenance having to be done. So I think that kind of correlates into where they’re trying to migrate to in calendar ’10.

Andrea Wirth - Robert W. Baird & Co., Inc.

And it actually does look like the DOE did issue kind of the first round of cash grants today, about $500 million it looks for about 12 different projects. Just wondering if you’ve had a chance to look at those at all and if you have any relationships with any of those utilities that are expected to get some of that work?

J. Eric Pike

We did not address them specifically for the call today. We know several of the utilities on there, we have longstanding relationships with. And some of them that, you know, their projects that are in the news today, we typically don’t highlight customers individually but our engineering group is providing the basically the owner engineering services for several of the large renewable projects that are kind of out in the paper right now in the last week or so. So we’re definitely able to participate in that, certainly right now through our engineering group.

Andrea Wirth - Robert W. Baird & Co., Inc.

Just curious on your hedging program for diesel. Just wondering where that stands these days and is it helping you, hurting you? And how do we think about that going forward?

J. Eric Pike

The average gallon price on our hedges is above the current pump retail price and so I guess from an immediate cash flow perspective it has a slight negative impact. But I think if we look at the value of those hedge positions, actually I think we’re in pretty good shape. We have some high hedge pricing that will actually fall off this quarter, positions that we took about a year ago which were around the $4 per gallon mark. As those fall off I think we’re going to actually be in a pretty good position for the rest of this year.

Andrea Wirth - Robert W. Baird & Co., Inc.

What’s the tax rate expectation for 2010?

J. Eric Pike

We would anticipate somewhere around a 38% range.

Operator

Your next question comes from Adam Thalhimer - BB&T Capital Markets.

Adam Thalhimer - BB&T Capital Markets

On the acquisition front you know what kind of opportunities are you guys looking at right now? And how big would you go?

J. Eric Pike

Adam, I don’t know that we would probably address the latter half of the question but in terms of what we’re looking at now is that we’ve been we think very strategic. We want to be very cost competitive as we do that as well. But as we have seen the integration of EDS as well as FPS and what that does to our total business mix as well as what we now can bring to the customer, in terms of not only construction resources but intellectual capital as well to help them, we think that there’s some other very interesting strategic opportunities that are out on the market that we’re looking at, as well as we would certainly if we continue to see credit markets improve we would not shy away from something that was a scaleable transaction as well. But nothing really to report on this quarter.

Adam Thalhimer - BB&T Capital Markets

What are you seeing in terms of pricing expectations for potential acquisitions?

J. Eric Pike

You know I think that in general you’re starting to see maybe some reality set in. As we looked at different opportunities earlier in the year, I think potential sellers were at multiples that were more reminiscent of pre-financial collapse. Now there’s a little more rationality in the market. Plus the credit markets themselves are improving, which helps. But I think still we would be pretty diligent in making sure that it was an accretive deal for the company if we moved forward on anything.

Adam Thalhimer - BB&T Capital Markets

Maybe just one question for Eric. I mean in your experience in this industry, where do you kind of see us right now relative to the turn? I mean it seems like you guys, headcounts picked up a little bit. You guys and private competitors are saying the turn is maybe as soon as a quarter away. I think in the past you’ve talked about their being you know nice snap-back in demand when it comes back. How does this progress relate to prior downturns?

J. Eric Pike

Adam, this has definitely been the most significant downturn we’ve experienced certainly during my tenure with the company. I have seen other downturns that were typically more regionally based. I’m not sure that I would concur that we expect to see something snap back in the next quarter or two. I think had more of the stimulus spending been able to reach the marketplace during the higher construction months of the summer, I might agree with that. I think you know we’re going into the cyclical part of the business in which you typically have more maintenance, less new construction through the winter.

So you know I think we’re going to see the greater recovery in the spring, but you know maintenance issues were highlighted tremendously last year with the ice storms throughout the Midwest and the hurricanes, and the very fact that we’re adding headcount now is indicative that there is certain work that simply just can’t be postponed any longer. So we could see and we expect to see some gradual improvement through the first and second quarter in terms of headcount, but we really don’t anticipate sort of the snap you’re talking about until the latter half of the year.

Operator

Your next question comes from Scott Levine - J.P. Morgan.

Scott Levine - J.P. Morgan

Following the question regarding the turn and change in spending. I mean where there any other noteworthy changes that gave you confidence with regard to a back half improvement? And are you seeing a lot of difference in spending behavior amongst the individual utility customers you have? Or are they generally uniform with regards to the behavior more or less?

J. Eric Pike

Scott, I would say that this sounds like I’m answering your question maybe both ways and I don’t intend to. I’ll try to give you as fair assessment as I can. Once they begin to reach the point they have to start doing some maintenance work, they’re fairly consistent in their spend approach. However, different customers are in different cycles. We’re starting to see different ones reach that pivot point to where they’re needing to do that work. Even doing it, they’re doing it at a reduced rate and trying to bring folks on you know periodically to where they know they have the staffing levels. I think if we see any general economic improvement, that’s when you’re going to see that trend really accelerate. And you know arguably we could probably be talking about labor issues and manpower issues at some point in the next year, year-and-a-half, but probably not in the next couple quarters.

Scott Levine - J.P. Morgan

And then with regard to the margin you indicated that engineering, substation, transmission higher than your core distribution business. Could you give us a sense on how transmission stacks up versus the engineering and substation piece from a margin standpoint? Are they comparable or is one notably higher than the other?

J. Eric Pike

They’re comparable. The transmission would be a little lower than the engineering and substation. But they’re very close.

Scott Levine - J.P. Morgan

On the sale the Energy Solutions Package and cross-selling initiatives, do you guys have targets with regard to how much of the business you’re looking to do with the existing customer base? I know there are some differences I think in the footprint between the two pieces maybe but do you have targets there that you’d be willing to share with us in terms of how much you’re looking to cross-sell your core customers onto the expanded service platform?

J. Eric Pike

Yes. We certainly have internal targets. Those are not something that we would typically disclose at this point. But when we completed the transaction with EDS, Scott, we basically after doing the diligence we felt like we only had about 5% of our customers that overlapped in sort of the full service group. So that’s left a lot of opportunity for us and we are targeting right now not only our utility customers but more importantly I think our cooperative customers that we’ve never brought a blended service program to. And they seem to be very excited about it. They are customers that typically like to deal with one or two entities, not a lot of different groups. And so being able to do this is really opening some doors there.

But you know I mentioned in our previous remarks, I think the thing that we’re most excited about with our utilities we have a lot of utility customers that have been long MSA customers, and now we’re being able to bring in transmission line design, siting assistance, substation design, relaying control protection. These are services that they seem to really value and we’ve seen quite an uptick in growth. So while we do have targets we wouldn’t disclose them, but it’s certainly working well to bring these new services to existing customers.

Operator

Your next question comes from Tahira Afzal - Keybanc Capital Markets.

Tahira Afzal - Keybanc Capital Markets

I just had a couple of follow on questions. In your experience, how much maintenance work does the utility do on a housing community that is empty and unoccupied versus one where you know which is occupied? So even if it is deciding maintenance, is there a difference between what it needs to do for something that’s occupied versus that which is not?

J. Eric Pike

You know Tahira I’m not sure that I can give you a fair answer on that, but I’ll try to put some color around it to maybe help. You know I think when you think about a distribution system and the maintenance that is required, the way that system operates you can’t really decide to leave an unoccupied neighborhood and say I’m not going to do anything there because that’s not really how the system flows. The power flows by it. I mean you may not do any work on the house service going to an unoccupied house, but if the three phase distribution line that feeds that neighborhood also happens to feed a hospital down the road, it’s going to require maintenance.

And so their cycles are not as hinged upon whether there’s occupancy or un-occupancy. They’re more hinged on age and load and whether they have kept active maintenance cycles or if they have deferred them. And so I don’t know if that helps but the fact that we’ve deferred as much as we have for as long as we’ve been talking about this on the various calls has pent up quite a bit of demand, even though there hasn’t necessarily been new customer load growth.

Tahira Afzal - Keybanc Capital Markets

Second question, you know I think we’ve talked about this before but you said you had some utilities who might be interested in looking at your distribution truck facility and perhaps seeing if you could provide those trucks, sort of re-vamps for the transmission side. Is there any update in terms of that business?

J. Eric Pike

Not really, Tahira. I mean that’s a piece of the business that we are, it’s an unusual piece of Pike’s platform of services. It’s something that we do hope to roll out more as a customer oriented piece but today we are a third party manufacturer. We do all the final assembly on our distribution fleet of trucks as well as our relay and control equipment and specialty units. We believe that we may be able to help our customers in terms of either fleet maintenance or fleet usage around that. But at the present time that’s still pretty much just an internal function.

Operator

Your next question comes from [Jonathan Barrett] – Luminous.

[Jonathan Barrett] – Luminous

I’ve got a couple of questions on sort of helping us on the model and then a couple of strategic questions. On the modeling side, you mentioned that you have 5.9% interest rates in term debt. Is that calendar year? And then should we use like a 2% for the second half of your fiscal year?

Anthony K. Slater

We have just over $140 million of total term debt. We have interest rate swaps in place on $100 million of the $140 total. That fix our interest rate at 5.49% through the middle of December of 2009. So just first it would be Q1 and Q2 fiscal year impact. After that, our term loan will go to LIBOR plus 150.

[Jonathan Barrett] – Luminous

And so there will be interest savings in the second half of your fiscal year?

Anthony K. Slater

Correct. Yes, depending on what LIBOR does but yes based on the current estimates that’s right.

[Jonathan Barrett] – Luminous

As far as visibility and looking at your backlog booked, etc. when you compare going into fiscal year 2010 with the visibility that you’ve had in other years, how would you stack it up?

J. Eric Pike

I’m sorry, Jonathan. I apologize. Could you repeat that again? I didn’t quite follow what you said there.

[Jonathan Barrett] – Luminous

How would you compare the visibility that you have on revenues going into calendar year 2010, I mean into fiscal year 2010 that you had in some prior years?

J. Eric Pike

Okay. Okay. Yes. I would have to say that you know distribution revenues, it’s still very gray. You know we’re going into it optimistic. We’re seeing some improvement. We’ve certainly had dialog with customers that would lead us to believe that improvement’s there. But there’s still you know a strong two quarters to go through here that we could still see some pretty big fluctuation if things happen in the market.

I would say on the other business lines, we probably have more visibility than we have ever had before, simply because with our siting and planning group we now know of projects that are literally a year or two out. And with our engineering group we know about transmission projects. Now whether or not we’ll be successful on all of them, obviously that remains to be seen. But we’re getting much more visibility into the renewable space, around solar opportunities and wind opportunities as well as the substation space. So you know I think we have probably better visibility in those lines than we do around some of the MSA work right now.

[Jonathan Barrett] – Luminous

The type of money that your customers are spending now, is that the type of expense that has to run through their income statement as an O&M expense versus capitalizing it? And is that sort of a different composition than you would have seen a couple of years ago?

J. Eric Pike

I think some of them are certainly taking advantage of if they have budgets that are not capped, moving them over into capital budgets to make some of these improvements. But we don’t typically get a lot of visibility into how they’re going to account for it.

[Jonathan Barrett] – Luminous

And then the last question is as far as competition, I mean obviously renewables and government projects will place a lot of people who wouldn’t otherwise have the ability to look for opportunities. Are you starting to see that? And you’ve got some competitive advantage but are you starting to see competition and pricing pressure, etc.?

J. Eric Pike

You are seeing it in some areas. You know some of the projects, you may have heard part of the answer I gave earlier on some of the highway jobs there are some locations, not all locations, but some locations where jobs like that are being extremely competitively bid because there are a lot of private contractors out there that have gone through a very, very tough year. They’ve had no storm work to help tide them over in terms of cash flow and you know a lot of them at this point are taking work at or below cost to remain viable. And while we certainly don’t want to give up work, we want to be real disciplined in how we bid these projects. And so sometimes you have to wait and let a couple go by, and people get them, and then you can get one at the right profitability metrics. I would definitely say that there’s pressure in the market now, but it’s not a pressure that I think is going to deviate us off of where we want to be.

Operator

Thank you and that does conclude the Q&A session. At this time I’d like to turn the program back over to Mr. Pike for any additional or closing comments.

J. Eric Pike

All right. Thank you. We’d just like to thank everyone that joined the call today. We appreciate your questions, your interest in the company. Also like to thank all of the employees of the company for the diligent work they did on both the storms and also their regular work during the past year. It’s been definitely a challenging and exciting year. We welcome our new team mates with EDS and FPS and look forward to a great 2010. We look forward to talking to you next quarter. Thanks.

Operator

That does conclude today’s conference. Thank you for your participation.

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