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Executives

Hilton H. Howell - Vice Chairman, Chief Executive Officer and Member of Executive Committee

Robert S. Prather - President, Chief Operating Officer, Director and Member of Executive Committee

James C. Ryan - Chief Financial Officer and Senior Vice President

Analysts

Bishop Cheen - Wells Fargo Securities, LLC, Research Division

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Aaron Watts - Deutsche Bank AG, Research Division

Barry L. Lucas - Gabelli & Company, Inc.

Lawrence Schnurmacher

Michael McCaffrey

Todd Morgan

Richard Crawford

Gray Television (GTN) Q1 2012 Earnings Call May 2, 2012 11:30 AM ET

Operator

Good day, everyone, and welcome to the Gray Television's First Quarter 2012 Earnings Release Conference Call. Today's call is being recorded. For opening remarks and introductions, I'd like to turn the call over to Mr. Hilton Howell. Please go ahead,.

Hilton H. Howell

Thank you, operator, and good morning, everyone. Welcome to the first quarter 2012 earnings call for Gray Television. As the operator mentioned, I am Hilton Howell, Vice Chairman and CEO of the company. I will make a few brief comments, followed by Bob Prather, our President and Chief Operating Officer; and then Jim Ryan, our Senior Vice President and Chief Financial Officer. They will all add their own color this quarter's outstanding results. Questions will be answered at the conclusions of our comments.

Candidly, it was a fantastic quarter. Total revenues soared by 16% to $80.6 million from $69.7 million last year, a $10.9 million increase. Record-setting political advertising and retransmission consent revenue, coupled with strong growth and local advertising and Internet advertising, were behind this quarter's record-setting results. And what we see as a sign of things to come, Gray received $5 million in political advertising this quarter, a new record for first quarter political ad spends. To compare in 2011, for the first quarter, Gray received $1.4 million in political advertising, in 2010, we received $2.8 million and in 2009, we received $3.1 million.

And what we can only see as a sign of an improving economy in our core advertising categories, our 5 largest local and national advertising categories all increased. Automotive increased by 8%, restaurants increased also by 8%, medical increased by 15%, communications increased by 17% and furniture and appliances increased by 5%. These excellent results led to net income of $2.2 million or $0.04 per share for the quarter compared to a loss of $4.9 million or $0.09 per share last year.

In our last conference call, we said that we expected robust and likely record revenue growth and earnings for the year, and our results today have, we believed, confirmed our confidence. The Super Bowl on NBC produced about $600,000 in increase for Gray compared to last year's Super Bowl broadcast on the FOX network. Further, we believe that the NBC broadcast of the Summer Olympics from London will be a certain ratings winner for the network and for Gray's 10 NBC stations this summer. And obviously, we expect continued record-setting political advertising in this presidential election year.

We're also proud to note that on April 4, Standard & Poor's raised its corporate credit rating on Gray from B- to single B with a stable outlook, and this past Monday, Moody's followed suit and raised its outlook on Gray to positive.

With regard to our balance sheet this quarter, we have continued to reduce our debt and have prepaid approximately $10 million and expect much more substantial debt reduction to the balance of the year. Clearly, we are very pleased with our results this quarter and expect great things for the rest of 2012.

With that, I will turn it over to Bob Prather. Bob?

Robert S. Prather

Thanks, Hilton. I appreciate it. I think Hilton summed it up pretty good. It was a good quarter. We're very happy with it. I think the rest of the year is looking strong right now. The economy, at least for the broadcast industry, seems to be coming back pretty strong. Local has been very, very good. Automotive is leading the charge as you would expect. I've talked to a lot of our managers and a lot of car dealers around and they're all saying that they're getting a huge amount of activity in showrooms, and the key thing is, that financing is available, interest rates at all-time lows, leasing is back in a big way. And so I think the car dealers are going to continue to have a very, very strong year the rest of this year. There's a lot of pent-up demand from 2009 and '10 when the volume of cars that sold in this country has dropped close to almost 40% during that time period. So I think there's a lot of people out there sitting with the 5-, 6-, 7-year-old cars that are looking to get a new car. So I think this is going to continue.

We're continuing our local HD conversion. We'll be through with virtually all our stations, except for a few of our smaller markets by the end of this year. I think it's gone extremely well. I think it's extremely important. I think all of you that have an HD television. I'm pretty sure everybody on this line's probably got one. You can't even watch standard definition anymore once you watch HD. And that includes local news. And I think people walk with their feet. If you don't have local news on in the market, somebody else does. We have been very fortunate to be first in most of our markets with local news and where we weren't first, we were right behind whoever went on first. So I want us to continue this, and this is extremely important for us to maintain our news presence and also to maintain our strong #1 ratings and reinforce our markets. So this is something we want to continue.

As Hilton mentioned, political is coming in strong. Wisconsin has been extremely strong. Not only you've got a lot of factors up there with this governor recall race and the union situation up there. So that's a little bit of anomaly, but we take the money where we could get it, and we've got 3 very strong stations in Wisconsin. I think we'll continue to benefit from the political spending up there. I don't think you can extrapolate that to the rest of the stations' markets, but I do think it's going to be a great political year all the way around. And as you all see, they are all raising regular amounts of money, and I promise you, they'll spend it. That's the good news. We're trying to do a lot of things in the area of continuing to improve our operating efficiencies, looking for more ways. We've introduced these backpack units called TVEUs [ph]. They're doing fantastic. Our stations really love them. They allow photographer/reporter to go out virtually by themselves and send back live over the Internet through cell phone circuits. The picture quality is very good and we actually retired 11 live trucks there this year, but getting more TV units in the hands of our reporters. So I think this trend is going to continue. I think this is something that is great for our business. This unit it seems like every time they come out, with a new generation they seem to get better. So I think you're going to see this as something, a way for us to be much more efficient and continue to give the excellent news coverage we do in our markets.

One of the things I want to mention that Hilton mentioned briefly, I think it's very important we continue to pay down our debt. Our goal is to pay down at least $50 million of our debt this year, which I think we're well on track to doing. And next year obviously won't be political, but we'll continue to pay down debt. We'd love to get our balance sheet where we're consistently in the low fives, even under 5x our debt to cash flow ratio, and I think this is important to all the management and our Board, and we will continue marching down that road.

At this point, I'll turn it over to Jim Ryan, our CFO, and then we will take some questions. Jim?

James C. Ryan

Thanks, Bob. Good morning, everybody. I'll keep my comments brief and focus basically on the balance sheet. At the end of the quarter, we had our senior term loan with its $461.8 million. Of course we have the second lien notes of $365 million. So our total debt was $826.8 million. We had nothing drawn on our revolver and we had $50 million of cash.

Our first lien leverage ratio under our senior credit agreement, which is a trailing 8 quarter calculation, we were at 3.71 against a 6.5 covenant. Our free cash flow ratio under the senior agreement, again, a trailing 8 quarter calculation, was at 1.32 against the 1:1 covenant.

Our Series D preferred outstanding including the accumulated dividend with a $40.7 million at the end of the quarter.

Our CapEx for the quarter was approximately $6.8 million. And as we've said last time on our call, we're expecting about $20 million for the year.

Cash taxes for the quarter were a de minimis $5,000 for the year. We're expecting somewhere between $500,000 and $1 million, and that's due in certain states. Again, we have a very, very large Federal NOL.

Our program payments for the quarter were $2.8 million, and that was essentially the same as the amortization number as well.

With that, Bob, I'll just turn it back to you.

Robert S. Prather

Thanks, Jim. Operator, at this time, we'd like to open up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] We'll move to our first question. It comes from Bishop Cheen with Wells Fargo.

Bishop Cheen - Wells Fargo Securities, LLC, Research Division

The update was very useful. So let me focus on 2 things: one on the operations, one on the balance sheet. On operations, can you give us a primer [ph] we can understand on retrans for the timing differences. I believe the protocol now is the retrans revenue is all sort of baked in to your broadcast revenue. But the reverse compensation or retrans expense is just sort of tucked in to your call it operating, broadcast operating expense line. But is there a timing difference this year between your commitments to reverse retrans and your escalators in your retrans agreements with your broadband carriers? And is it making your EBITDA and your expenses choppy this year?

Robert S. Prather

Good question, Bishop. The good news is it's definitely the timing difference, we've been very fortunate in that --- we just had negotiations on about 40 plus percent of our cable and satellite operators in December and got some nice increases for the next 3 years. We're only paying a very small amount on our 4 small Fox stations right now. We're not paying anything in the other big 3 networks. NBC, we've got 9 or 10, I think it's 9 stations that would end this year. They were originally supposed to start talking until the end of the year. They asked for a 3-month extension. We gave it to them. They've asked for another 3-month extension for June 1, I think it is. And we have not heard a word from them. I know they're out in the marketplace talking to other groups right now, but we have not heard anything and we assume at some point they will call us and want to start negotiating.

Our ABC stations are up until December of '13 and then our CBS, which is by far our biggest group, is December 14. So we're very fortunate to have some timing difference on the income coming in from the retrans and what we'll have to pay out the networks. And that works for being pretty aggressive, I can tell you that. I know NBC that they're being aggressive. CBS has made some deals last year that were -- they were pretty firm on what they wanted, and they didn't budge virtually any on the amount of -- and they're not calling it reverse comp. Some of them are calling it just programming payments. They're not tying it to your retrans revenue. As a matter of fact, CBS wanted it for all households in the market, whether you own cable or satellite or over the air. So I think the homecoming had a little bit different, but they all want the same thing. They want money, and they're going to get it. Let's just hope that we -- I believe we can stay ahead of them on the cable side of things, and actually, increase from our baseline, which we kind of consider our baseline $20 million at the end of '11. It will be about $35 million this year, and it will be escalated over the next couple of years. So right now, it's real good for us.

Bishop Cheen - Wells Fargo Securities, LLC, Research Division

All right. And the baseline is the -- you're talking expenses or the revenue?

Robert S. Prather

No, no. The baseline is what we were taking coming in from the cable guys and basically putting out nothing to the networks. So I got to consider that's -- our money we want to keep going forward. We want to add to that. Ideally, giving a better deal for the cable operators and were paying out to the networks. And I think that's going to be our goal, and I think we'll be able to achieve it for good many years ahead of times in the future.

Bishop Cheen - Wells Fargo Securities, LLC, Research Division

Okay. Fair Enough. And then to the balance sheet quick, I just ask a broad question every time we talk and you give the color. Why not go ahead, and I know it's expensive, and recap the whole thing, attic to basement.

Robert S. Prather

Bishop, we talk about that every single day. Hilton and I we're just talking about it this morning. Jim and I are talking by over the weekend. I guess, right now, we watch the market every day, we're in constant contact with our bankers, both the banks we deal with regularly and other banks calling us. What it boils down to is right now, I guess, that we want to pay $4 million plus a year for an insurance policy that would get us out 7 years or plus on refinancing. And, I guess that so far, we haven't been able to pull the trigger on that. I'm not saying we won't. I think we're going to watch it very close. I can say that clearly, daily we want the market and talk to the bankers, and if we think it's the right thing to go ahead and pull the trigger, we'll do it sooner than later.

Operator

Next we'll move to Marci Ryvicker with Wells Fargo.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

I have a couple of questions. Trying to understand what's going on in national. It was down in Q1, it was up in Q2. We've heard it from Sinclair that it's actually gaining some steam. So what's happening in national?

Robert S. Prather

Marci, that's a great question. If I could answer that, I think I'd retire tomorrow and just become a guru for all the stations. National is a fickle animal. It jumps all over the board. I always kiddingly say there's some 25-year-old computer genius up there in Madison Avenue that is sticking pens in a map and just decides to, let's try national here, see what happens. There's seems to be no rhyme or reason to it and like I said, in our size market it jumps around a good bid. I think large markets is more stable.

The good news for us is obviously a lot of lower percentage for us than most of the large markets. So while we love good national business and we want to keep going, I always say, my goal is to get more local and a bigger percentage of local every day. I'll go with our local even faster. The good news is in a political year, you can be very selective on what national you take. We'll be very careful because we want to make sure we're keeping our rates up and making sure that we got plenty of inventory for the political that is going to continue to come in. So it's just a very fickle animal. And it literally from market to market, I mean, we can have a situation that we've had it where Madison and Wisconsin is having a great national year and Wausau 2 hours away is having a terrible national year, and nobody can explain it. So it's -- like I said, my goal would be to be 80% local, 20% national in a couple of years. And when we grown in our local enough to all said any changes at national good or bad.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Okay. I just have some clarification on guidance. Maybe this for Jim. So for retrans revenue, you're guiding $0.4 million less in Q2 than you did in Q1. So what's the delta there?

James C. Ryan

There was a little bit of choppiness, Marci, a small percentage of our overall retrans involves airtime buys and that's not necessarily completely linear. So that's part of it. And those airtime buys, they're embedded into a handful those contracts is maybe 6% of the total number. So while it's not big, it can create some lumpiness quarter-to-quarter.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Okay. And then for expense growth, what's driving the expense growth in the second quarter? You have lower revenue growth versus Q1, but higher expense growth than Q1.

James C. Ryan

It's in part just some comp increases we're seeing and also there's some increase in, at least, forecasted increase in the broader program expenses going forward in Q2 and the rest of the year.

Marci Ryvicker - Wells Fargo Securities, LLC, Research Division

Okay. And then my last question, I know you haven't talked to NBC. We heard that they may be pulling the [indiscernible] altogether. Have you heard that at all?

Robert S. Prather

Yes, they are, but supposedly, that's off the table now. I think they've given up on it. One of our managers is on the Affiliate Board and they're leading down in Las Vegas, [indiscernible] and he said that's pretty much off the board right now. That's -- and they are out negotiating with individual stations and groups right now.

James C. Ryan

Marci, another real quick aside on the national. I think part of it is being driven by the auto. And as of last Friday for Q2, our auto business was pacing in the mid-teens compared to business on books a year ago. Not that I'm saying it's not some organized end in the mid-teens, but certainly, a very strong pace as were basically hitting April 30. And that showed up in the national numbers as well. So that's probably part of the national difference between Q1 and Q2.

Operator

Next, we'll move to Aaron Watts at Deutsche Bank.

Aaron Watts - Deutsche Bank AG, Research Division

So you've touched on this a little bit, but I guess, I'm just curious if you set aside kind of the pop you're going to get in auto because of last year's comps. How do you describe the environment right now across the other categories versus your expectations may be in January, or how this year was going to unfold kind of in the first half?

Robert S. Prather

Jim, I feel real good. I'll let Jim, he can give you a little more color on the detail, but I think most of our categories we're very pleased with what's going on.

James C. Ryan

I agree with Bob's general comment. Certainly we saw strength in our category Q1, if anything. It generally feels a little bit better from Q2. In Q1, the only thing we're seeing is dragging little bit with home improvement and discount department stores, each down 1% or 2%. Now supermarkets were also down, but it's a relatively small part of the business and they were down the last quarter or 2. If you look ahead into Q2 a little bit, again, we're seeing strength pretty much across the board, in the pacing, and again the only thing that's looking a little sluggish in Q1 is the department -- discount department stores and home improvement and supermarkets. So our Q2 feels a little bit relatively better than Q1, but kind of a broad-based among multiple categories. It's just not auto. And certainly, auto is pacing the highest right now, but everything else looks is pretty healthy.

Aaron Watts - Deutsche Bank AG, Research Division

That's good to hear. My second question, Bob, maybe for you, it's kind of big picture. I'm just curious what you think about it. So you hearing a lot about migration of especially younger viewers from traditional television watching to watching online on mobile devices. And I know you don't have CW or MyNetwork in your traditional stations, but maybe with some of your digital exposure, you have some dots on this. Just what you're seeing at those stations and what you think the threat is to the broadcast on an operating station business model, with that shift going on? And then, I guess, on the second part of it, if you were looking at potential assets to buy, does it make you not necessarily want to look at those assets as closely if they affiliations with maybe, especially CW or MyNetworkTV?

Robert S. Prather

That's a good question. I think the jury's out. I think that's the big question for our whole business going forward is what the young viewer, let's just 30 and under to make it easier, 30 and under viewer, what their viewing habits really are, we're trying to do a lot of news research in that area. The researchers are good at what they do, and they're probably not near as good at doing stuff like that. One of the things I've asked them to, for example, is to pole people that have cell phone only because there's a big percentage, especially of younger people that don't have a landline anymore and we're not talking any of those people, and we don't know exactly what they're watching. I would say, there was a big article in New York Times just a couple of weeks ago about the very thing a primetime viewing dropping off a lot worse than anybody thought it would. I think it's the big question mark for us as an industry. I think that's one reason we've got to be really, really on the forefront of being on mobile devices, both iPad, iPhone, Android, all this stuff because clearly, the younger generation is very comfortable watching television on any of those devices. One of the other things we're trying to do is we feel we're good at promoting all our digital products, but we basically promote them between with our own air products, and if you're not watching us on air, you're not seeing any of those promotions. So we're trying to come up of ways to do a better job through Facebook and Twitter and Pandora, and even go on to some of these college newspapers in all of this major university pals and trying to get out, hey, if you want to get our app for iPhone or Android or your iPad, where you can click on and immediately find out what's going on local, weather, news, sports, whatever it is locally, I think a lot of those people would want to have that and it's something they're very familiar with using. I think we're going to do a better job, but I think it's more of that. You got to be -- you got to have your program unavailable when, where and how people want it.

Now I think if you're not doing that, you're going to be in serious trouble in the future. I think it's an incumbent upon us as a company and us as an industry if we want to maintain the kind of presence we got in the world today, we basically give people the news and information we're good at, however, whenever they want it.

Operator

Next we'll move to Barry Lucas with Gabelli & Company.

Barry L. Lucas - Gabelli & Company, Inc.

Just a couple of items. On the retrans, I think the comments you made is that you renewed about 40% of the sub base effective 11?

Robert S. Prather

Yes. That's correct.

Barry L. Lucas - Gabelli & Company, Inc.

So what would the -- what would 12/31/12 look like or how much comes up this year and next year?

Robert S. Prather

We've got very little, I think. Next year, we've got -- I think at the end of '13, we've got Comcast which is our biggest single supplier, and I think is it Dish or Direct is coming up in '13.

Hilton H. Howell

It's one or the other and then [indiscernible]...

Robert S. Prather

So we will get a few other systems, plus Comcast, plus either Dish or Direct in '13, and then we'll have Dish or Direct, whichever one we didn't get in '14. So and then we'll all of this 40% again in December 14, because we've made all 3-year deals. So we ought to have a pretty nice increases over the next 3 years. And one of the things we're emphasizing, Barry, just so you'll know, and I think we did a good job of selling it this year, we really pushed on, and in fact, hey guys, we got the #1 station in most of these markets. We've got a tremendous history of leadership and excellence in news, and we're worth a lot more to you than these other guys are. Here's our ratings, here's our history. I always like the brag. We've got 16 stations, that's been #1 50 straight years or more. I mean, that's a pretty good record, and these communities are providing the news and the programming that people want to see. And we want to continue that tradition. And ideally make it stronger in years ahead. But I really think we got make sure that we're getting that message across to these cable operators that our stations are worth more than most of these other stations in the market. And like I say, we did a good job with and we're going to keep doing that.

Barry L. Lucas - Gabelli & Company, Inc.

Right. not to drill down too much into the arcane here, Bob, but there seems to be a little bit of a disconnect if it was really glad to see furniture and appliances up, but home improvement as a category was down. Any regional variances or anything or other color you can provide that would sort of explain the divergence?

Robert S. Prather

I don't have a good answer to that. Jim, do you got any color on that?.

James C. Ryan

Barry, noted, the home improvement was only down about 1%, and I'm looking for you real quick. I mean that 1% was $25,000, so call it flat. So really not all that bad. We need to go back and look and see how the furniture and appliances had done the last couple of quarters. That may have been a case that it lagged a little and then catching itself up a little bit.

Barry L. Lucas - Gabelli & Company, Inc.

Okay. Just to come back to Aaron's question and the way you articulated the need to move into mobile devices, Bob. Where are we in terms of launching and having commercial products out there for smart phones and tablets?

Robert S. Prather

Barry, right now, we're testing a lot of mobile in 2 markets in Omaha and in Lincoln. The industry still has not quite got their act together. There's some stations in this Pearl Group doing some NBC live mobile right now. But frankly, the networks are asking us to sign some agreements to be able to put live programming on a regular commercial basis. But we're not ready to sign both CBS and NBC. So I think it's something we're going to be really focusing on over the next few months and trying to figure out a way. One thing we are doing though, we're looking, we probably going to start streaming all of our newscast on our website. Pretty much all the time, which is something we're doing in a good many stations now. But actually going, we'd have all our stations streaming all their newscast over, which will be available on PC or on mobile devices. And we're looking at some technologies out there that will allow you to do some things with mobile that we can't do right now. But the live mobile itself is a great technological advance. There's no question. It's just the question surrounding how do we get it on air, how do we get a standard, everybody can agree on for the devices. How do we get the manufacturers to put those chips in the devices. All those things are still in the future and still pretty much up in the air.

Operator

Next, we'll move to Larry Schnurmacher with Morgan Stanley Smith Barney.

Lawrence Schnurmacher

Just a couple of questions. How does your recent revenue performance compare to peers? If there's a way you can show us that. And political, based on growth in '08 and 2010, what is '12 look like if you can do like a growth rate comparison?

Robert S. Prather

Jim, you want to take that? And I will say I think regarding relationship our peers have, I think we are right at the top of the industry right now. We're all in -- Jim, you want to answer as far as it's going back from '08 on?

James C. Ryan

Well, as far as the political for total year, given a recap starting in '06, it was $43 million, '08 was $48 million, '10, we set the record at $58 million. Certainly, we expect a strong '12 and just exactly how big '12 is, we'll be able to answer to that question in early November. But it will be certainly be a very strong year for us no matter what the final number comes out to be. But there has been significant growth period-over-period, whether it's been presidential years or non-presidential years.

Operator

[Operator Instructions] In the meantime, we'll move Michael McCaffrey with Shenkman Capital.

Michael McCaffrey

Just to confirm, did you guys say that you did make prepayments on the, I guess, it was in the revolver you guys paid down?

Robert S. Prather

We paid down -- we had $9 million drawn on the revolver at the end of the year. That was all paid back and all. And then we had the standard $1.2 million of required amortization during the quarter. So net, I mean all in, we reduced total senior debt $10 million from where we were at the end of last quarter.

Michael McCaffrey

Got you. And as you sit now, as you're looking out to the next couple of quarters since you can't do anything to address the preferred, given the 7x RP you've got related to the second lien notes? Are you more inclined to use the excess cash flow to chip away at the term loan or kind of hold on to the cash until Q3, when you're likely to be under that threshold and you can potentially pay down the preferred?

James C. Ryan

I think it's probably more likely -- I mean, there might be some opportunities to pay down, technically pay down in late Q2. I think it's more likely a Q3 event, with that will be coming up and there may be a possibility of being able to do something on the preferred at that point in time as well, but certainly by early Q4. So as we -- just as we did in '10, most of the voluntary prepayments we did that year were really more back weighted. I'd say, September forward is the real heavy political money rolled in. And we could gauge exactly how much we wanted to prepay once we had the cash in the door rather than trying to kind of guess that a little bit and take it on the comment, take it too early in the year.

Michael McCaffrey

Okay. And then just, you guys have mentioned before that, and times pass when there were big moves in gas prices, you saw a noticeable shift in your business. Can you just comment on during the month of March when gas prices were on the news on a daily basis? Did that impact any cancellations or just the general pace of business?

Robert S. Prather

We didn't see it this time, and I think what's happened is people are getting a little more immune to -- when it jumps up to a $4 plus for premium in a lot of places, I think people -- it wasn't like when we it jumped to $4 back in '08 and it really spooked people because it never had been that high before. I think this time around, it's probably going to take $5 to spook people this time, but I think if it did, it seems to be coming back down right now, but if it popped back up, and was jumping up in the $5-plus range, I think we would clearly see some effect on local business, especially.

Operator

Next, we'll move to Todd Morgan with OpCo.

Todd Morgan

I just want -- I recognize this small number, but the consulting revenue being 100,000 or so in the quarter was below or, excuse me, above the $600,000 so you talked about as a base rate. The question is, I mean, obviously that's not a big difference, but does that mean you're getting any of the incentive payments or can you -- or is there any way you could kind of clarify the guidance you provided without...

James C. Ryan

Yes, the difference was a small amount of incentive payment that actually -- goes back to '11. As we talked about on our last call, at that of the year, we still didn't know exactly what we might be entitled to and so the number that rolled through in the guidance. The number that you seeing now reflects that little bit of additional incentive that we picked up from '11.

Todd Morgan

And just for budgeting purposes, you said $600,000 a quarter. Does that just mean that you just aren't calculating any budget, any incentive that you may receive or that...

James C. Ryan

That's correct. We really don't -- that's right, we're just talking about the base fee going forward. But we do have our eligible turn of potential incentive for the 2012 year. But right now, it's way too early to have any way of accurately estimating it. So we're just not trying to get to something we don't know yet.

Todd Morgan

That's fair. Just then secondly, it looks to me like you're going to be comfortably below the 7x leverage test in the bond indenture by the third quarter. Is the trigger in order to be able to make a restricted payment for the preferred, so I'm assuming that's what you'd -- would try and do around that time. Is it filing the 10-Q financial statements or what is the actual trigger to be able to make that payment?

James C. Ryan

I believe the indenture has language to the effect of when statements are "available." I don't recall off the top of my head that it says specifically having filed. So I believe there's a little bit of -- for us the gray area, exactly when we could pull the trigger. But as we get close and are comfortable that we have the capacity and comply with the indenture, we'll obviously consult with counsel and figure it out, and it probably wouldn't surprise anybody if we try to -- if we end up pulling that trigger as soon as we reasonably can.

Operator

[Operator Instructions] Next, we'll we move to Rich Crawford with Wellington Management.

Richard Crawford

Just the following on the preferred question. So can you just update us on what availability you have there? Is there anything in the bank line restricting you? Is it just in the bonds? And I hear what you're saying, it's a focus at the third quarter on meeting that.

James C. Ryan

The senior credit facility allows us $20 million of restricted payment in any calendar year. So that is the absolute hard stop number we have to work with in 2012 as in the refinancing transaction. And then as you said, the second gating issue is when under the indenture we really have the ability, with the leverage test under the indenture to actually pull the trigger on making that redemption -- repurchase, I should say.

Operator

Thank you. And at this time, we have no further questions.

Hilton H. Howell

Okay. Thank you, everybody. I want to let you know I appreciate everybody's support. As I tell you every time, we answer on phone, we will answer any questions you got if you want to follow up, and we look forward to talking to you at the end of the second quarter call. Thanks, everybody. Goodbye.

Operator

Thank you. This does conclude today's program. You may disconnect at any time, and have a great day.

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