URS Corp. Q4 2007 Earnings Call Transcript

URS Corporation (URS)

Q4 FY07 Earnings Call

February 27, 2008, 11.00 AM

Executives

H. Thomas Hicks - VP and CFO

Martin M. Koffel - Chairman and CEO

Thomas H. Zarges - President, Washington Division

Analysts

Andrew Obin - Merrill Lynch

Richard Paget - Morgan Joseph

John Roger - DA Davidson

Jamie Cook - Credit Suisse.

Scott Levine - JP Morgan

Alex Rygiel - FBR Capital Markets

Avram Fisher - BMO Capital Markets

Presentation

Operator

Good morning and welcome to the URS Corporation Earnings Conference Call of the Fiscal 2007 for the Fourth Quarter. To begin, I will turn the call over Mr. Thomas Hicks, Chief Financial Officer. Mr. Hicks?

H. Thomas Hicks - Vice President and Chief Financial Officer

Thank you operator. First let me apologize for the slight delay, we had some technical difficulties getting started. I thank you for joining us this morning. Before we get started, let me remind you that today's call will contain forward-looking statements, including statements about our future revenues and business prospects. Our future earnings and financial results, our future tax rates, the benefits of our Washington Group International acquisition, our future debt payments, our future outstanding shares, future economic and industry conditions, and all other statements that may be made on this call that are not historic facts.

These statements represent our predictions and expectations as to future events, which we believe are reasonable and are based on reasonable assumptions. However, numerous risks and uncertainties could cause actual results to differ materially from those expressed or implied in the forward-looking statements. Information about some of these risks and uncertainties can be found in our earnings release issued yesterday and our Form 10-K filed for the year ended December 28, 2007 as well as in our other SEC filings. We assume no obligation to revise or update any forward-looking statements.

A webcast of this call also is available on the Investor Relations portion of our website and will be archived in audio form on the website for a limited period. And with that, I'll turn the call over to Martin Koffel, our Chairman and Chief Executive Officer.

Martin M. Koffel - Chairman and Chief Executive Officer

Good morning and thank you for joining us, I should like to extend a special welcome to you, to those of you who are new investors in URS. And with me this morning in our San Francisco headquarters are Tom Hicks, who just spoke, Gary Jandegian, President of the URS Division, Randy Wotring, President of the EG&G Division, Martin Tanzer, Executive Vice President of Marketing, Reed Brimhall, our Corporate Controller and Chief Accounting Officer, and Sam Ramraj, Vice President of Investor Relations.

I should like to specially to welcome Tom Zarges, President of the Washington Division, who is participating on our earnings call for the first time. And later in the call Tom will comment on the power market which many of you know is a large, rapidly growing and very dynamic part of our business now. Today's call will be slightly longer than usual as we have more to cover, especially this first time out.

I'll summarize our 2007 fiscal year results and then discuss how we are organizing and reporting on the combined company. And then Tom Hicks will review our financials in greater detail. As usual I shall discuss the key trends we see in our core market sectors and give you our outlook for each of these markets for the coming year. And before I cover the 2007 result, I should like to say how pleased we are with the progress we have made in bringing URS and our new Washington Division together.

Clearly URS is the much larger company today than it was just a few months ago. And we now have 56,000 employees, pro forma revenues for the combined company in 2007 were $9 billion. And we start 2008 with a $30 billion book of business. Through the acquisition of Washington Group, we have significantly expanded our capabilities in the engineering and construction market. We now provide the full range of integrated engineering, construction and technical services to clients in several important markets such as power, infrastructure, oil and gas and defense.

As you know, we are attracted to Washington Group because of its complimentary markets. Technical capabilities and share business values including shared focus on clients. The cultural fit between our organizations was an equally important factor, particularly given the great importance of professional challenge in our business. Many of our clients also have expressed enthusiasm for the combination and the enhanced value that we can now provide to them. And I am appreciated hearing many positive comments from our stockholders. We are committed here to making the most of this larger more diversified business in the years ahead.

And now to our 2007 results. As you would have seen from our press release last evening, it was an exceptional year. Consolidated 2007 revenues were $5.4 billion, which is a record for the company and an increase of 27% from 2006. Our revenues were driven by strong growth in all sectors. The consolidated revenues include $448 million from six weeks of Washington Division operations.

Net income for the year was $132 million, a 17% increase from 2006. Earnings per share were $2.35 which was 7% higher than 2006. And our cash flow exceeded expectations and we generated $312 million in cash from operations during '07 and this reflects both the strength of our business and our focus on cash management and you heard us mentioned that in every call.

Operating cash flow in the fourth quarter was exceptionally strong. We have a track record for using cash flow to aggressively repay debt following strategic acquisitions. Within 43 days of closing the Washington Group transaction, we repaid $125 million of the debt that we used to finance the acquisition. And this represents 100% of our mandatory debt repayments through the third quarter of fiscal 2009. And this has reduced the outstanding debt on our credit facility to approximately $1.275 billion, down from $1.4 billion on November 15, the date we closed the acquisition. And we ended the year with a total book of business of $30 billion, which reflects the success of both URS and Washington Group in winning new business. Now, Tom Hicks will discuss the book of business in more detail later in the call.

I shall now briefly review our 2007 results in the major market sectors for which, we have historically reported performance. The private sector, state and local government and the Federal government sectors and later in the call I shall describe how we have realigned on market sectors to reflect the company's new composition. As I mentioned these results include six weeks of the Washington Division's performance.

I shall begin with our domestic private sector business, which performed extremely well in 2007. Our revenue were $1.5 billion, a 52% increase over 2006 and this increase includes $201 million from the Washington Division, which represents 21% of that increase. Now these strong results reflect the continued value of our MASTER SERVICE agreements with multi national corporations.

Revenues from our clients in the oil and gas and power sectors were particularly strong. Of course our private sector business and especially the power sector will expand significantly through the Washington Group acquisition. And I shall talk amore about the opportunities in the power sector later on the call.

And now to discuss the state and local government sector, this business also performed very will throughout last year. State and local government revenues for 2007 were $1.1 billion, a 24% increase from 2006. Our performance reflected several positive trends that occurred throughout last year, including a renewed focus on infrastructure investment by state and local governments and favorable funding condition.

A general fund spending by the states grew by 8.6% last year. The states and municipalities sold a record $411 billion in new bonds in 2007 and SAFETEA-LU at the federal highway and transit funding bill provided $48 billion in new transportation projects, that's a 9.5% increase over 2006. Of course our current economic conditions are expected to have an impact on this market. And we are closely monitoring the budget shortfalls and deficits and facing many stage in local governments as for 2008 and 2009. And in particular, we are focused on whether the rapid downturn in tax receipts in several key states could have an impact on funding for infrastructure work in the second half of 2008.

While the immediate impact today is quite minimal, we know from the experience how quickly this funding picture can change. And I'll discuss this in more detail later in the call.

Turning now to the federal sector. Our federal business generated revenues of $2.2 billion in 2007, up 14% over 2006. And these revenues were generated by both our EG&G and our URS divisions. And our results also include $154 million in revenues from the Washington Division. The EG&G division recorded federal revenues of $1.5 billion for the year that was an increase of 6% over 2006. And that growth reflected increased revenues from our O&M contracts with the DoD in the second half of the year. We also had increased revenues from our systems engineering, technical assistance, and logistics management work for the federal government.

Revenues for the URS divisions, federal business in fiscal 2007 were $531 million, an increase of 7% over 2006. This growth reflected the success of our strategy in pursuing large bundle contracts with the Department of Defense, that support long-term initiatives such as the military transformation program and that includes Brac.

Now turning to the 2008 fiscal year, although we are presenting a single URS brand to our clients that was the whole rationale behind the acquisition. We report financial results for three operating segments, the URS Division, the EG&G Division and the Washington Division. And for those who have previously followed either URS or the Washington Group should note that we've shifted discreet portions of our operations between divisions to align similar work and common customers that's done for strategic and marketing reasons.

And the EG&G Division results will now include work performed by the Washington Divisions former defense business unit and the Washington Division's results will include the Advatech joint venture which provides emission control services for coal fired power plants which aligns all our power work under one leadership team. In addition to providing results for our three operating segments, we continue to discuss key market sectors on our quarterly calls, and I know you all have valued that in the past.

We believe these discussions which include market trends and the outlook for major funding sources provide important insights into our business. And following the acquisition, we've redefined our market sectors as follows, the federal government sector, the infrastructure sector, the industrial and commercial sector and the power sector.

And I shall now discuss each of these sectors, explain the services we provide and the key market trends and the revenue outlook for fiscal 2008. So from here on, in the call we are forward-looking. First the federal government sector, which is our largest, this includes our work for a number of U.S. government agencies including the Departments of Defense, Homeland Security and Energy, NASA, the Department of State and certain classified agencies. We expect that the federal government sector will generate approximately 35% of the company's total revenues in 2008.

Our largest federal customer remains the Department of Defense. We built a defense business that's aligned with the strategy, the gross trends and the budgetary priorities of the DoD and we bought EG&G in 2002 for just that purpose. So we have been slowly building the scale and the direction to match the way our customers headed. Recently there have been several fundamental changes in this market. The first was the DoD shift in focus in the post cold war era and rather than protecting Europe and Japan as the priorities and the priorities become addressing the new security risks in the Middle-East and other parts of the world.

The resulting realignment of military basis and the redeployment of troops around the world have increased the demand for these facilities design, engineering and construction services that we provide to the DoD.

And the second change has been the rapid growth of operations and maintenance work for the DoD. The war in Iraq and Afghanistan has put high levels of stress on military equipment leading to increased demand for the O&M services we provide.

The third shift has been the DoD increase use of large bundled contracts to support major initiatives such as the global war on terror. And the military transformation initiatives and that includes the Brac program, URS's ability to provide a diverse array of services now considerably enhanced by the Washington Division has enabled us to win several large bundled DoD contracts. And another significant trend has been the DoD's increased use of outsourcing for non combat functions. And this has increased demand for the logistics and technical assistance services we provide including the training of military pilots.

URS is the largest private trainer of under graduate military pilots in the country. Looking forward, we expect continued growth in the DoD business. A major realignment of the army is underway and by 2011 about one-third of the army's troops will be relocated to different basis around the world. The army has expected to increase by 65,000 troops and plans to expand the number of combat brigades from 33 to 48 that brings the total number of active duty soldiers to 547,000.

The Marine Corp is planning to add 5000 marines by the end of 2009 and it's in the process of moving approximately 8000 marines from Japan to Guam. New air fields maintenance facilities, housing complexes and birthing facilities all of which could utilize URS's services will be needed to accommodate this relocation. In addition, we are continuing to see favorable trends in our O&M business. As part of its military transformation program, the DoD has been moving equipment modification and refurbishment work from U.S. sites to bases located close to the theaters of operation, you may recall, that last year we were awarded a contract to refurbish military vehicles in Kuwait.

The DoD budget picture is also favorable. The Congress is considering $102.5 billion in supplemental funding for the global war on terror for the remainder of fiscal 2008 which ends on September the 30th. This in an addition to nearly $87 billion in supplemental funding already approved which included 21 billion for O&M activities related to military operations in the Middle East. And earlier this month, the administration submitted its proposed federal budget for 2009.

The request includes two separate funding measures for the DoD. The first is a $515 billion baseline DoD budget for fiscal 2009 a record, a 7.5% increase from the 2008 budget. And the second is $70 billion supplemental budget request to support the global war on terror through the middle of 2009.

The DoD's fiscal 2009 budget contains strong funding for O&M programs to support the sustained high level of military activity in the Middle East. This O&M work which includes the repair and maintenance of various army aircraft and ground vehicles should support continued growth in our EG&G division.

The DoD fiscal 2009 budget also proposes $9.5 billion in Brac funding, a 26% increase from the amount appropriated in fiscal 2008. And URS provides the planned and engineering and construction services required to implement Brac projects at bases around the world.

In addition, the DoD 2009 budget should continue to support the program management and systems engineering work, we provide to several military contract including the Virginia Class Nuclear submarine, as the mine resistant ambush protection of MRAP vehicles that you have been reading about. And the militaries Joint Unmanned Aerial Vehicles program.

And finally the proposed budget includes $1.6 billion for the chemical demilitarization program, including $819 million for the chemical stock pile disposal initiative a 5% increase over 2008. URS has provided services at all seven of the primary U.S. chemical weapons demilitarization facilities. We're one of the few companies in the world to safely design, build, operate and close the high hazard facilities used to destroy these weapons.

I shall now discuss the new portion of our federal business, and it come with the acquisition of Washington Group and that's our work for the Department of Energy. Our relationship with the DOE and its predecessor agencies, dates back to the Manhattan project in the 1940s. And today URS has one of the largest teams of Nuclear Scientist and engineers in the industry.

We're leading provider of environmental and management services to the DOE. In fact since 2001, we have won nine out of the past 11 major DOE project awards for which we had competed. Our work for the DOE includes managing the stabilization and disposal of nuclear waste. We're the only contractor to vitrify high level nuclear waste in the United States, and this is process of turning liquid nuclear waste into a solid and stable material suitable for storage and isolation calculation.

We also decontaminate and decommission nuclear facilities and hazardous waste sights. Our work includes safely decontaminating, demolishing and cleaning up nuclear facilities and ground, dating back to the Manhattan project. For example, we're managing the decontamination and decommissioning of facilities of the DOE's hamford site in the state of Washington. We provide environmental remediation enclosure services at Federal facilities.

And we jointly managed the environmental remediation program at the Idaho, National Laboratory site which was contaminated with waste generated from World War II era conventional weapons. And URS is part of the teams that operate and manage the Los Alamos and Lawrence Livermore National Laboratories. These facilities are responsible for ensuring the safety, the security and reliability of the nation nuclear weapons stock pile. In fact, URS. serves on the management teams four of the largest national research laboratories in the United States.

We are encouraged by the long-term fundamentals that we see in the DOE market. The administrations proposed 2009 budget includes $25 billion for the DOE, a 4% increase over 2008 and the proposed budget provide sustained funding for several agencies that are important to URS, including funding for the National Nuclear Security Administration, the Office of Environmental Management and the office of Science.

In addition, we believe that we can use our nuclear capabilities and our experience with the DOE to capture a portion of the nuclear remediation market in the United Kingdom, The U.K. is in the early stages of cleaning up and decommissioning its government and commercial nuclear complexes. The Nuclear Decommissioning Authority or NDA, as its called will oversee the government's Decommissioning strategy which is modeled after the U.S. DOE's program.

Experts estimate that the U.K. will need to spend approximately 30 billion pounds over the next 10 years for nuclear decommissioning, a waste reprocessing remediation and facility management. The U.S. has extensive experience in all of these areas.

So, in summary, we see the positive trends in the federal government sector. For 2008, we expect the total federal government sector revenues will be between $3.3 billion and $3.5 billion. Our next key sector is the infrastructure, and this sector comprises work conducted by our URS and Washington Divisions, and primarily on public infrastructure projects throughout the United States.

In fiscal 2008, we expect that the infrastructure sector will generate about 19% of the Company's total revenue. As you know, we have strong position in the infrastructure market, with leading positions in the transportation, in water, wastewater and public facilities markets. Our network of more than 300 offices in the United States provides close relationships with key state and municipal agencies, and it's a competitive advantage for us.

The addition of the Washington Division's construction capabilities has given us the ability to service the entire lifecycle of an infrastructure project, and we can now provide the full range of project development, planning, engineering design, construction and construction management, and operations and maintenance services.

As I noted earlier, we've been monitoring the outlook for the infrastructure market closely. I should like to take moment to update you on what we are seeing. One of the issues facing the infrastructure market is higher raw-material costs, and we have commented that on that in our last three calls. These inflated costs are leading to higher construction bids, and depleting funds more quickly than states and municipalities had anticipated. As a result, some projects have been delayed due to the rationing of funds.

The second concern is the decrease in state tax revenues and due to the economic slowdown, and this has already had an impact on state budgets. In fiscal 2008, which ends in June for most states, a general fund spending is expected to grow by 4.7%. Now that's down from 8.6% last year. Now, for the 12 states that are most important to our business, general fund spending is projected to grow by only 3.4% in 2008, compared to 10.2% for those 12 states last year.

In addition, many states are facing budget deficits to fiscal 2008. The National Governors Association has predicted that 18 states will face budget shortfalls, totaling more than $14 billion in fiscal 2008. In these states we expected to have a total deficit of $32 billion in fiscal 2009. New York, California and Florida, three of our most significant states are facing deficits for fiscal 2009. For example, New York projects a $4.4 billion budget shortfall due to slower growth in revenues from personal income taxes. And California is projecting a budget deficit in excess of $3 billion in fiscal 2008, and the potential budget gap of $16 billion over the next three years, primarily due to the decline in revenues from personal income, sales, and corporate taxes. Of the 2009, California's Governor is proposing to reduce general fund expenditures by 2.3% over the 2008 levels, and has directed state agencies to reduce spending by 10% across the board.

In Florida, state leaders are working to close an unexpected revenue gap of $2 billion resulting from the decline in the housing market and the reduction in tax revenues.

The transportation funding is effected by the depressed housing market, because 8% of Florida's contributions to the state transportation trust fund comes from taxes on real-estate transaction. And the Governor's fiscal 2009 budget proposes $8.4 billion for the Department of Transportation which is essentially flat with 2008.

Federal funding for infrastructure is also under pressure. The administration's proposed fiscal 2009 budget includes $40.1 billion for SAFETEA-LU, that's the federal highway matching fund. That's a 5% decrease from fiscal 2008, although, I think that number is subject to further political pressure to be realistic. On the positive side, funding for infrastructure work is much more diverse than it was during the 2002 downturn in this market.

The deficit numbers that I was giving you a moment ago, if you think back to the... those of you who were involved in this market, back in 2002 and 2003. The combined deficit of all of the states was something like $80 billion in those years. And if these deficits that I have been discussing, in fact, hold out and don't get worse, that saying the recession is materially in recession this sectors is materially softer than the earlier one.

So, it's too early to say. It's only February. But, we've got a lot experience in this, and we've got lot of experience in tracking the numbers, and we are correlating what we're seeing with our prior experience. As I noted earlier, there was a record $411 billion in bond sales to fund infrastructure projects in 2007. This included $67 billion in California alone, $32 billion in New York, and $28 billion in Florida. The bond will provide a $106 billion in funding for education projects, a $49 billion for healthcare, and $42 billion for transportation, all of which significant are areas of expertise for URS. And this funding should help mitigate the impact of state budget cuts, and decreases in federal support.

So far, the extent of the project deferrals and cancellations has been limited. But, we're continuing to monitor the infrastructure sector very closely. And based on our discussions with state budget officials and our own analysis of market conditions, we believe it's only a prudent to anticipate some further softening in the market. And not withstanding our strong competitive position, we may see some projects canceled or deferred in the second half of the year. And we expect to have more clarity as the states develop budgets for fiscal 2009, and we'll obviously report to you on that as the year goes by.

Taking all of these factors into account, we expect that revenues from the infrastructure sector will be between $1.7 billion and $1.9 billion in 2008. And our view of the infrastructure market is the principal factor, underlying our cautious outlook for the Company's fiscal 2008 results.

Our next sector is the industrial and commercial market, and this sector comprises all of the private sector work performed by the URS in Washington Divisions, including work for the oil and gas, mining, chemical and manufacturing industries. And work for power companies is included separately as I noted. We expect that this sector will generate approximately 26% of the Company's total revenues in 2008.

In the interest of time, I should focus on one of our largest markets, oil and gas. URS' clients include essentially all of the major multinationals in the oil and gas industry. We provide a full range of front-end planning, environmental, engineering, procurement, construction, and operations and maintenance services, on upstream and downstream facilities and on pipelines.

The oil and gas market has grown rapidly in recent years and we expect that oil and gas companies will continue to use profits from the sustained high level of energy prices to finance capital investments. In 2008, a global spending on exploration and production is expected to be approximately $370 billion, that's an increase of more than 11% over last year.

Now with our expanded capabilities following the acquisition, URS is very well positioned to capture additional assignments from our clients in this sector. We're currently supporting several clients, Syncrude on major oil sands projects in Alberta, Canada. It's estimated that Canada's oil sands or recoverable petroleum reserves have a 175 billion barrels, and that's which hold second only to Saudi Arabia.

Work concludes feasibility studies and front-end engineering and design or feed services, as well as detailed engineering and construction. We're also seeing new opportunities in downstream projects as companies upgrade and modify refineries to produce premium fuels and to handle new types of crude oil, including oil from Canada's oil sands. So in summary, we are optimistic about the future performance of this sector. We expect that revenues from the industry and commercial sector will be between $2.4 billion and $2.6 billion in 2008.

And turning now to the power sector, as you know, work for our power business primarily has performed by our Washington Division. We expect the power sector will generate approximately 20% of the Company's total revenues in 2008. Now, I shall firstly summarize our capabilities and outlook in the power sector, and then Tom Zarges will provide additional detail.

It's hard to overstate the strength of opposition in the power market. Over our history, we have engineered or constructed roughly 250,000 megawatts of electrical generating capacity in the United States, and that's about 25% of the country's total installed capacity. URS provides a full range of services and their experience includes virtually every form of power generating facility, as well as transmission and distribution projects.

In the fossil fuel industry, we designed to build more than 200 coal-fired facilities and more than 300 combustion turbine units around the globe. In the nuclear power industry, we have engineered or constructed 49 units around the world. In addition, we've serviced over 100 operating units, extending the life and efficiency of those facilities.

As a leader in electric power delivery systems, we worked on over 30,000 miles of transmission lines and more than 1,000 sub-stations. And as many of you know, URS is also a leader in providing emissions control services. Over the past several years, our URS Division, primarily through its Advatech joint venture that's helped utilities comply with stringent emission and control regulations by retrofitting coal-fired power plants with Flue gas desulfurization or FGD scrubbers.

URS' capabilities in this market were significantly expanded with the addition of Washington Group. Washington had a substantial business providing air quality control programs to the power sector, including FGD scrubbers and selective catalytic reduction or SCR systems. Our outlook for the power sector reflects a continued high level of energy demand, recognition of the aging infrastructure, and strains on existing power generation capacity.

We're well positioned as a company to capture the work from capacity increases in fossil fuel plants. And between 2008 and 2010, we expect coal-fired power projects will add approximately 20,000 megawatts in the United States. And we're seeing increased investment in gas-fired power plants, including combined cycle facilities, which are more efficient and cleaner than coal-fired units.

Overall, approximately 15,000 megawatts from combined cycle facilities are expected to be added between 2008 and 2010. And beyond 2010, the demand for combined cycle facilities could increase significantly, if environmental concerns actually limit the development of new coal-fired power plants.

The tougher emission control regulations and a desire to reduce our dependence on fossil fuels are driving a resurgence in nuclear power, which does not of course produce greenhouse gases. And by the end of this year, the Nuclear Regulatory Commission expects that up to 19 applications may be filed to build new nuclear power plants. Now, no one knows how many plants will be approved, although those that are would be the first new nuclear power facilities to be ordered in the United States for more than 30 years.

In the meantime, we expect continued opportunities to assist clients in the replacement, and the retrofit of major nuclear power components, such as steam generators to extend the life of the existing nuclear facilities. Based on the strong market fundamentals, the enhanced services we can provide to our power sector plants, we are enthusiastic about the growth potential in this sector. We expect that our 2008 power sector revenues will be between $2 billion and $2.2 billion.

Now, I'd like to introduce Tom Zarges, who would talk more about our power sector. Tom is a talented and a proven leader, and we're delighted to have him as President of our new Washington Division. In this new position, his joined Randy Wotring and Gary Jandegian as one of URS' top three operating executives. Tom has more then 30 years experience with the Washington Group, including as serving as President of Washington Group's Power Business in an earlier assignment. In 2002, he was named Senior Executive Vice President of Operations that was Washington's Chief Operating post. He remained in that capacity until he was named President of our Washington Division last month.

So, welcome Tom.

Thomas H. Zarges - President, Washington Division

Well, thank you Martin. As you have indicated, this is quite an exciting time to be leading the Washington Division. We have a tremendous team of professionals in very enviable positions, in a number of high growth markets. In fact, we're already working with our colleagues in the URS and EG&G Divisions to unlock some additional opportunities for this large combined company.

I'm going to focus my comments on our power business, which is expected to be a key growth driver for URS. In fact, in my 30 years, in this industry, including my time as President of the Washington Group's power business, I have never seen a stronger market.

URS is one of the few companies that provides the full lifecycle of services, for fossil and nuclear fueled facilities. On the front end, we provide planning, citing, licensing and environmental work. And once a new facility has received the necessary approvals, we provide engineering, construction and startup services. For existing facilities, we offer expansion, retrofit modification, as well as operations and maintenance services. And finally, we provide decontamination and decommissioning services on nuclear plants that are closing.

Although Martin touched on the opportunities in the nuclear market, I'll provide more detail given the significant amount of recent press on the expected renaissance in this market. In fact, our business can regrouped into three areas; engineering and modifications at operating plants, enrichment and advanced technology related to the nuclear fuel cycle, and new commercial nuclear power.

Apart from our work for the DOE, most of our nuclear power revenues currently come from engineering and modification support on existing facilities. This market includes the modification and the replacement of major components, such as steam generators, pressurizers, and reactor vessel components. We typically provide the consulting, licensing, engineering, installation and project management services. Our clients in this market have included Detroit Edison, Pacific Gas and Electric, Entergy [ph] and Exelon among others.

A second area of our nuclear business is related to the nuclear fuel cycle, and it involves enrichment and services related to the development of technologies and support a fuel processes, and next-generation reactors. For example URS is providing construction management services for the Louisiana Energy Services natural enrichment facility, which enriches uranium to fuel nuclear power facilities. This is the first new nuclear commercial construction project in 25 years. And the fist new nuclear facility in the United States licensed under the NRC's new one-step licensing process.

Finally, we're already well positioned in the emerging market for new commercial nuclear facility facilities. URS is providing engineering and licensing services to help General Electric to play its Economic Simplified Boiling Water Reactor, a new evolutionary technology that is likely to be used in commercial facilities. We're also working with Mitsubishi Heavy Industries under deployment of another reactor type, the US advanced Pressurized Water Reactor. Working on both types of these nuclear systems give us a real competitive advantage when work on these new facilities begins. Again there are tremendous opportunities in the power market, in both nuclear and fossil fuel assignments. And I look forward to working with this team to build on our successes.

And now, I'll turn the call over to Tom Hicks, and Tom will take you through URS' financial results for 2007.

H. Thomas Hicks - Vice President and Chief Financial Officer

Thanks Tom. I'll focus on the full year 2007 results. Fourth quarter results were available on the press release we issued yesterday. To summarize our 2007 results, revenues were $5.38

billion, that's up 27% from 2006. Net income was a $132.2 million, and earnings per share were $2.35.

Our results include six weeks of performance from the Washington Division. And if we exclude the Washington Division's results as well as URS Corporation's transaction-related costs and the shares issued as part of the transaction, our results for 2007 would have been revenues up $4.93 billion, which is an increase of 17% from 2006, net income of $135.9 million, and EPS of $2.58 per share, which exceeded our guidance of $2.50 to $2.55. A reconciliation of revenues, net income and EPS excluding the Washington Division results and cost associated with the acquisition to GAAP results is available on the Investor Relations page of our web site at www.urscorp.com.

Our interest expense for 2007 was $27.7 million, compared to $19.7 million in 2006, and the tax rate for the year was 41.4% that compares to 42.6% tax rate in 2006, and our fully diluted weighted shares outstanding for 2007 were $56.3 million. We generated $312 million in operating cash flow during 2007, and this cash flow allowed us to continue to strengthen our balance sheet. Prior to the Washington Group acquisition November, we repaid nearly all of our outstanding bank debt. And as you might remember, our bank debt reached a high of $954 million in 2002, following the acquisition of EG&G.

Additionally, we have already repaid approximately a $125 million on the credit facility, we used to finance the Washington Group acquisition. This is a 100% of our mandatory debt payments through the third quarter of fiscal 2009. This repayment decreased the outstanding amount on the facility from $1.4 billion on November 15th, right after the acquisition, to approximately $1.275 billion.

Now, turning to our book of business, as you know, we track four separate categories; backlog, which consist of signed contracts and task orders; designations, consist a projects for which we've been selected, but have not yet finalized the contract with the client; and option years, which represents the value of option years on signed multi-year contracts; and finally, Indefinite Delivery Contracts or IDCs, and these are long-term contracts under which individual task orders must be issued before we can begin work.

We ended the year with a total book a business of $30 billion. That's more than doubled the $12.4 billion book of business we had at the end of 2006. Approximately $14.5 billion of this increase was purchased as part of the Washington Group acquisition. To give you more detail from the book a business, backlog was $18.7 billion versus $4.6 billion at December 29, 2006, and 2007 backlog includes $12.6 million in backlog purchased from the Washington Group acquisition. And of the $12.6 billion, $6.6 billion represents adjustments to present Washington Group's backlog under URS reporting conventions.

Designations were $3.1 billion, including $1.1 billion for the Washington Group acquisition, compared to $1.6 billion at the end of 2006. And the value of option years was $2.5 billion, including $354 million from the Washington Group acquisition, and this compares to $1 billion on December 29, 2006. IDCs were $5.78 billion, including $404 million for the Washington Group acquisition, and this compares to $5.2 billion at the December 29, 2006. And finally, with regard to Washington Group acquisition, we remain on target to achieve our $50 million to $55 million in annual cost savings, and much of this will be captured in 2008.

And with that, I'll turn the call back to Martin.

Martin M. Koffel - Chairman and Chief Executive Officer

Well, I am going to discuss the fiscal guidance for 2008. To reiterate our outlook for the key markets that I went through earlier, we expect that revenues from the federal government sector will be $3.3 billion and $3.5 billion. And revenues from the infrastructure sector will be between $1.7 billion and 1.9 billion. The revenues from the industrial and commercial sector will be between $2.4 billion and $2.6 billion, and the revenues from the past sector will be between $2 billion and $2.2 billion. Based on these assumptions, we expect that consolidated revenues for 2008 will be approximately $9.8 billion.

And before we discuss net income, I should point out that as the result of the acquisition, URS will be recording an annual non cash charge related to the amortization of purchased intangibles from the Washington Group and this non cash charge will total approximately $54 million before taxes and $31 million on an after tax basis in fiscal 2008.

On a GAAP basis, we expect net income for 2008 will be between $187 million and $197 million or between $2.24 and $2.36 per share on a fully diluted basis. Excluding the non cash charge related to the amortization of purchased intangibles, we expect the net income will be between $218 million and $228 million or between $2.61 and $2.73 per share on a fully diluted basis.

A table reconciling non-GAAP net income and earnings per share to GAAP net income and EPS guidance excluding the charge for amortization of purchased intangibles is available on the investor relation section of our website at www.urscorp.com.

And finally, we expect that net interest for 2008 will be approximately $88 million. We expect that our effective income tax rate for the year will be approximately 41.5% and to the number of weighted average shares outstanding used to calculate our EPS for 2008 will be approximately 83.5 million shares.

Now, before we open the call for your questions, I should like to reiterate how pleased we are with the Washington Group acquisition. Companies have come together extremely well, happy with progress so far. The Washington Division has further diversified our business mix and enhanced our resiliency to potential softness in any one of our markets in the years ahead. This has been a consistent goal in all of our major acquisitions. With the Washington Division, we are now much stronger in power, in nuclear and the oil and gas sector all of which are expected to be robust into the foreseeable future.

Of course, as the leader in the public infrastructure market, we cannot ignore the current economic slowdown and its impact on tax receipts and funding capability at the state or local level. And we think it's only sensible to anticipate weakness or delays in infrastructure spending. And accordingly, we tampered our outlook for this sector. As you would expect, with dedicated significant resources to monitoring the underlying economic conditions and we will continue to update you on future calls.

We believe that long term this will be strong markets for URS. As a comment on infrastructure, we are talking about relatively lower gross rates. We are not talking here about declines. I actually remember sitting here in this conference room in the same call, the same month in 2003, when everything has fallen apart, after the November 2002 elections, lack of transparency in state budgets and we and everyone else, were talking about the decline of 20% in the state and local government market. Not talking anything like that whatsoever.

We are talking about coming off a very high year which at once stage we thought we may have been able to extrapolate into '03 and into excuse me, into '08 and we are now saying that growth rate has come down because of the of the tax sourcing that's going on.

So I want to make that quite clear. As a combined company where stronger than ever and with a host of new technical project delivery and operational capabilities. And with a pool of talent that we think is unmatched in the engineering and construction industry. It's gratifying for me to see how more than 56,000 people are responding to the many opportunities that we see in the marketplace. It gives me great confidence that we can continue to deliver superior results for our stockholders and our clients for many years to come. And with that I will turn the call back to the operator and we'll open the line up for your questions. Operator?

Question And Answer

Operator

At this time, the floor is open for questions. [Operator Instructions] Our first question comes from Andrew Obin with Merrill Lynch. Please go ahead.

Andrew Obin - Merrill Lynch

Yeah. Good morning.

Unidentified Company Representative

Good morning Andrew.

Andrew Obin - Merrill Lynch

Hi, if I read from your November press release you stated that URS expect the transaction to be slightly dilutive to GAAP earnings per share and if I...'07, '08 numbers and if I look at your net income outlook for URS that you have been consistently providing in your financials. It's 157 which on share count translate somewhere close to $3 and I just have a hard time understanding. How 2.24 to 2.36 squares up, it was being slightly dilutive. And I do want to point out, that your revenue guidance, that you have been providing all so long was $5.2 billion of revenue for URS and $4.645 billion for Washington Group which comes out to $9.8 billion which is actually where we are guiding right now. So how come revenue guidance did not change but net income guidance plummeted.

Martin M. Koffel - Chairman and Chief Executive Officer

Andrew first comment on the revenue guidance. The revenue guidance is as you know the way we do our planning and the way we build our plans as we do it from the bottom up. And the numbers that we were guiding to last year ended up with the bottoms up planning we did for '08 came out to be pretty close to the same number you point out. The mix of that business has changed from what we expected it to be and that has an impact on the margins.

Secondly if you look at the difference between what the proxy based information was our best estimate at that time, for net income for 2008 and you compare that to what the 228 number which is the upper end of our range, there is about 10% difference in that number on a cash earnings basis, i.e., earnings basis without the amortization of the purchased intangibles and some of that is due to this mix change, we have got business flowing through at lower margins than we anticipated and some of it, is due to just the conditions in the market right now. So that is the difference between the margins you saw last fall and some of which were done in August, September timeframe and there is more construction in our book of business today and our anticipated sales for '08 and that comes thorough with subcontracts and lower margins on it than we expected.

Andrew Obin - Merrill Lynch

But which part of the equation changed. So you gave net income guidance for URS of 157 and I guess if I apply after tax to Washington Group rough, flat lets call it $100 million of Washington Group net income. So which one of them went down and what is that business mix changed because I wouldn't have thought state and local business was some of the most profitable.

Thomas H. Zarges - President, Washington Division

The state and local business is very profitable for us. A lot of it is traditional design work which has some of the highest margins that we have in our book of business and is that has some...as Martin pointed out earlier, we got a terrific year, last year in that area and as we rolled the plans up. There's obviously some caution about what the growth rates going to be there, you looked back what we put together back last year, We expected growth rates to slow but not as much as we think they might slow now. So that, it was really across the board, if you look at, you're trying to get to the question of how that net income change in our assumptions. Its equally spread between the acquired company and the original parent company in the sense that about the same kind of margin erosion which is minor by the way, its about 5% difference from what was in the...

Andrew Obin - Merrill Lynch

How much the margin differential between Washington Group and URS was so big in the fourth quarter. URS posted some of the weakest margin and Washington Group margin was actually really good, it seems that Washington can raise the numbers all along. And it seems to me you guys have an operating issue inside of URS and you're trying to mask it with your a revenue shortfall story.

Thomas H. Zarges - President, Washington Division

Okay. Let me tell you what happened in the fourth quarter. We as you know, every quarter, we assess and go through our valuation exercise on all the assets that we're carrying and the liabilities were recognized in the balance sheet. We have a long dormant issue that's been disclosed in our K's and Qs over the years relating to an acquisition we did 8 years ago, that is in process and its various litigation underway and each quarter we sit out and assess the recoverability of the assets or the recognition of liabilities associated with that and other projects and we associated a, and we in our assessment in the fourth quarter we recognized a change in the asset position, the point I want to make to you is the operating characteristics of U.S. division, EG&G and the former U.S. company as constituted, continue just as typical for the rest of the year and the margin erosion seen in the fourth quarter represented a one time charge related to a dormant issue that we got new information on and made a reassessment on.

Andrew Obin - Merrill Lynch

So, what do we have more now and what do have less of URS versus the initial expectations that wax the margin at URS?

Thomas H. Zarges - President, Washington Division

Well, we have our business is generating on a core basis. As we go forward we think the margins on the business, the EBIT margins on the URS. business are off slightly from what we expected, when we put the plants together back or we put the pro formas together back in the summer and fall of '07 and on the Washington Group side, it's a same thing. They are just, they are off a little bit as primarily mix issues, its primarily mixes issues, it's not dramatic. There is no... as I said its about 5% different from what we expected; if you look at what our current plan and expectations are for '08 versus what was in the PS4 that was filed in November.

Andrew Obin - Merrill Lynch

Okay. Thank you very much.

Unidentified Company Representative

You're welcome.

Operator

Thank you. Our next question is coming from Richard Paget with Morgan Joseph. Please go ahead.

Richard Paget - Morgan Joseph

Good afternoon everyone.

Unidentified Company Representative

Hi, Richard.

Richard Paget - Morgan Joseph

I wonder if you could give us give us a better sense of what organic backlog growth was, I know you backed up some of the Washington Group so you could calculate for URS. But I just want to get a sense of, you've had some pretty good year-over-year growth for last couple of quarters and I want to see how much of that has been sustained?

Unidentified Company Representative

Yes. Obviously we've been doing a lot of work on this Richard and we bring home [ph] controllers is right here and has some information for you?

Unidentified Company Representative

Hi Richard. URS and EG&G combined backlog from 2006 grew by $893 million. The total book of business is up $2.2 million. So the organic growth in the business is pretty consistent with where we've been in the past couple of years.

Richard Paget - Morgan Joseph

Okay.And how does that break down for Washington Group?

Unidentified Company Representative

Well Washington Group as Tom mentioned, when we acquired them we moved them over to our process for evaluating book of business and backlog. Historically they haven't described designations optionaries or IDC. In addition to that they had a policy that limited backlog on federal government contracts for two years and on mining contracts for five years.

Now when you adopt our policy, that increase their backlog amounts by $6.6 billion to pick up those out year pieces and their book of business totaled 15.3 billion at the end of 2007. The backlog pieces of that is $13.1 million and again the policy adjustments $6.6 billion dollar increase.

Unidentified Company Representative

Did that answer your question Richard?

Richard Paget - Morgan Joseph

Yes, I can do the math later. And then with the amortization schedule I think in the K you are talking about doing it straight line? So you are going to front-end, any of this and pre-tax it will be around 53 million a year.

Unidentified Company Representative

That's correct, its pretty straight line. As you get to the tail end of IT, 10 plus years, it starts to have a little bit different period, because some of the elements in that have different amortization periods. But right out of the gates every...it's going to be straight line for the next few years. The same number you saw today.

Richard Paget - Morgan Joseph

Okay.And then just finally I just want to be clear on the infrastructure market, I mean you guys are expecting it to slow due to some of the macro issues. But you have...have you actually seen that slowing down.

Unidentified Company Representative

We have seen a few delays and few cancellations in some states most of our caution is based on the underlying fundamentals and we think if it occurs, it will be in the second half of the year, which is why we are taking a cautious approach. But we are booking business as we speak. And it's quite a good clip actually, did you know...I know you are involved with us in the last time, the cycle on this market. We have that paradox as we are booking business, it was been slowed at the same time.

Now our infrastructure backlog is terrific and our new sales are terrific. If we took a very short-term view we took a six month look at our numbers, you say what's the problem. But, we do know this market. And we do know from personal experience that if the legislature get nervous, they start cutting things back. What they do as they bring work house. In California, in Traltrans, which is the state DOT here its highly unionized and there is a lot of pressure always from the engineers union internally. Same in Texas, when economic conditions change, well lets not give it to these consultants and engineers.

Lets do it in-house. So the first thing that happens as they pull work back in-house. The second thing that happens, they actual work in projects to climb

Unidentified Company Representative

So the medium terms affect isn't too bad. It's actually up, I mean as I said earlier and I want make this point. We expect infrastructure to grow in '08 this is not the conditions we saw a five, six years ago. It's a question of it growing at a substantially lower rate and the very high growth rates that we enjoyed last year. I mean last year was double-digits and we think that the growth rate this year in infrastructure could be high single-digits. But that's still has quite an effect on our outlook and the guidance we gave.

Unidentified Analyst

Okay. Thanks I'll get back in line.

Unidentified Company Representative

Thanks Richard.

Operator

Thank you. Our next question is coming from John Roger with DA Davidson. Please go ahead.

John Roger - DA Davidson

Hi. Good morning.

Unidentified Company Representative

Yes, John.

John Roger - DA Davidson

Couple of things. First of all in the past Washington Group pretty conservative with some reserves for claims and other things that were outstanding. Can you give us a sense what those like, what you are assuming over the next couple of years in terms of recoveries?

H. Thomas Hicks - Vice President and Chief Financial Officer

John, hi its Tom.

John Roger - DA Davidson

Hi Tom. How are you? We as you would expect took a fresh look at all the positions Washington Group had established on various projects, claims that they had outstanding and there...we made no significant or material adjustments to those positions. We adjusted a lot of them but nothing that would be significantly out of line with the information you received in the past from Washington Group. As to what their outlook was. We of course reassess those every quarter, every week, every month depending on at new data that becomes available. But I think we continue to be, our position continues to be very summered to what Washington Group was on most of outstanding situations.

John Roger - DA Davidson

Okay. But in terms of amount that are out there the California highway projects. Some of the other things that were moving towards resolution, no change?

Unidentified Company Representative

Yes. There is no change in our estimation of or the numbers that are out there. The project continues to be, the project is open. The SR125, I think you are referring to?

John Roger - DA Davidson

Right.

Unidentified Company Representative

It's opened and cars are using it. There is some final clean up and work to be done. But there has been no change in the condition there nor in our position that the client there, we believe we have some very valid claims against the client for work that was done, that they haven't paid for or recognized.

Unidentified Company Representative

We also have a consistent view of the project itself. All the people have worked on this work and all the accountants and controllers. Obviously are still with us, they are thriving part of URS. So, as a complete consistency of the way these things are measured to get back to your first question and the way we look at claims, same people are making the evaluation.

Unidentified Company Representative

Hey John, one other point that I think is important for your analysis is we have not assumed that for SR125 in particular, that we will receive any upside from that situation during '08. So anything that might happen there in a positive sense would be additive but we don't think there is some, well...we feel pretty good that there is no additional downside either at this point based on the schedule where we are and getting it completed. So, it's neutral to our '08 performance at this point.

John Roger - DA Davidson

Okay. And Martin, you talked about the high single digit growth in the infrastructure market. Could you give us a same sort of analysis for the federal, industrial and power?

Martin M. Koffel - Chairman and Chief Executive Officer

No I broke infrastructure, we don't customarily do that and I broke infrastructure because we had something different say and the keen interest that obviously result from our press release last night. And we don't typically break it out for the other sectors. There is so much cross over between divisions and so it's pretty hard to measure it and we worked hard there to get an infrastructure number because we're giving different guidance.

Unidentified Company Representative

John, I think we're looking at little bit over 9% kind of top line if you did, some kind of pro forma for '07, 9% or 10%. And you could I mean infrastructure we gave you some inside into which is a little less than that. And therefore the rest of the businesses are going to grow little more than that to offset that. So I think that's a reasonable kind of starting point as you look at it. And we'll give you more information as we go through the year, as to how the markets are developing, how the sector's look as far as our original expectation versus where we are each quarter.

John Roger - DA Davidson

Okay, that helps. Tom, the charge on the...include in the URS operating income, how much was that?

H. Thomas Hicks - Vice President and Chief Financial Officer

Which charge John?

John Roger - DA Davidson

The one for you said adjustment for a prior acquisition.

H. Thomas Hicks - Vice President and Chief Financial Officer

It was about $12 million pretax.

John Roger - DA Davidson

Thank you...

H. Thomas Hicks - Vice President and Chief Financial Officer

That all had in one quarter, the fourth quarter obviously.

Unidentified Company Representative

Right, you can obviously get somewhere with your margin calculation if you factor that in.

John Roger - DA Davidson

Yes.

H. Thomas Hicks - Vice President and Chief Financial Officer

Thanks John.

John Roger - DA Davidson

Thank you.

Operator

Thank you. Our next question is coming from Jamie Cook with Credit Suisse. Please go ahead.

Jamie Cook - Credit Suisse.

Hi, good morning.

Unidentified Company Representative

Morning Jaime.

Jamie Cook - Credit Suisse.

I guess my first question. On the guidance margin and we are sitting here last year and you guided to 240 to 245 and you came out at 256. So and we had probably a similar reaction to your stock as we are sitting here last year, maybe not as bad but still not great. So as I look at your approach to guidance today, I mean has the approach changed, are there one any charges in '08 versus '07 we don't know about in terms of integration charges. And would it be fair, and then the second is would it be fair to assume that because you are dealing with sort of forecasting with the Washington Group this is our first time as a company together trying to come up with a forecast that you probably be...your assumption would be somewhat conservative?

Unidentified Company Representative

Jamie I have been leading this company since 1990 and in that time we missed one quarter in terms of guidance and you and everyone else killed us first. We like to try and be measured in a fewer things and execute to that plan and deliver. There are no unexpected charges to answer your first question.

Jamie Cook - Credit Suisse.

So there is no integration charges nothing in..

Unidentified Company Representative

No, there aren't Jamie we...as you would expect, we have set aside integration expenses in the opening balance sheet here that we expect and therefore the operating... the numbers you are seeing for '08 represent operating performance as oppose to any recognition of integration, I would say that as I said we had estimated $50 to $55 million of savings, and not all of that starts on day one. So the speed in which we captured that, we expect it to capture all of it plus we will have some impact on how our performance is for '08.

Unidentified Company Representative

Let me explain on that little bit. If you recall back to last year this...our proposal to acquire Washington Group at the price we have suggested was largely contested if you recall and delay things, there was a strike suite against, there is all kinds of things and closing that we thought that might take place in the autumn didn't take place until November the 15th. So as Tom said we're highly confident that we are going to capture the savings, but we don't quite get the full... we don't get the years worth this year. Although on a run rate basis we'll certainly get it. So there could be some variability into which we capture those saving this year.

In terms of your other question, we acquired the company in November and we've been working hard on closing and planning and everything else, and there are 25,000 new people for us to become accustomed to and then become accustomed to us and the re-arranging of divisions a bit, and I suppose it would be only natural to be cautious particularly as we've got some businesses that are new to us I mean we're comfortable with the DOE and so that's a whole new area for us.

We're pursuing a... let me address something else though. Jamie, you've followed us through quite a number of acquisitions and just like this one, we've being very strict about saying there are cost synergies that we've never addressed revenue synergies. We've never based our acquisition model and in particular our financing on the prospect of revenue synergies.

On the other hand, the success with every acquisition was made and here this is the fifth one that's doubled it. In fact the success has occurred because of the strategic and revenue synergies and the common branding. So we know, although it was never in our model, we're now starting to address that. And as we speak across the divisions, we are pursuing $1 billion in revenue. Revenue pursuits on a combined company basis comprising project with neither company could have pursued or won in its own right.

Jamie Cook - Credit Suisse.

That's fair. But, let me I mean maybe we're being too short-term focused in terms of thinking about 2008. So let's and it's the first year and those savings you have to generate and you probably don't get a lot of revenue synergies the first year, but less look long-term. And if you look at URS historically always traded at discount to the group for number of reasons when you had leveraged that went away and then you still traded at a discount. Because you weren't... while you had higher margins and probably didn't have the execution issue the other companies had, you didn't have the growth prospects the other companies had. So now with Washington Group you have a significant opportunity on the power side whether to new generation clean up, but your end-market mix I think it's much more favorable then it had and should afford more growth opportunities. So longer-term how should I think about your earnings growth potential relative to the peer. Do you think that gap will narrow, do you think it'll be in line, if you get it?

Thomas H. Zarges - President, Washington Division

Sorry, Jamie its Tom. You make a very good point and as in the past we have been really labor base driven is what drives our growth and you have made the point before on calls and we have talked about it before. Entering a project based business which is what Washington Group is gives us an opportunity to see rapid changes in growth that are not necessarily labor driven; they are driven by project size and by how the execution pace. So, the answer to your question, yes, we now have a significant portion of our business. 30% or 40% that's exposed to potential of a higher growth rate and more volatility as we have said before. But as you point out, I think it's early. This is a long-term strategic move we made. We are getting to know each other, we are getting to know their business. They are getting to know how we operate and the integration process is really ten weeks older seller, I mean its early and we are very hopeful that we'll able to demonstrate a substantially different growth rates as we go forward.

Unidentified Company Representative

Jamie, the discounts that we have traded at historically I think it's been due to debt to... the fact we weren't aligned with power and oil and gas to the extent that we are now. And always to that concern that it is going to be stable or might they do another acquisition? And when we entered into periods we didn't do another acquisition. We will be accused by the street often of losing our nerve if you recall.

Jamie Cook - Credit Suisse.

That wasn't me.

Unidentified Company Representative

It's wasn't you Jamie. I do recall. And so now we've got debt. But the debt relative to all, the debt to capitalization ratio really to all prior acquisitions is much more modest. I mean the debt just shouldn't really a factor.

Jamie Cook - Credit Suisse.

Yeah, but that gets back to the earnings growth and when I'm looking at the other companies within my coverage universe that I have the exposure in power and oil and gas. I'm thinking of an earnings growth rate of at least 20%.

Unidentified Company Representative

Let me get there Jamie. So we've got I think the debt is the discount issue, it really shouldn't be an issue. And we really do another acquisition well, not right now, we have done it. And thirdly I think the real issue was although we are aligned with very attractive market, we weren't aligned with the high growth markets. I think we did a lot with this acquisition to shift the mix, and if you think back URS was entirely a government contractor, but either federal or state and local. And now they shift towards power and industrial processes and so on. It's almost half the company. So I think as we look beyond 08, which definitely I think you have said that the consolidation year for us in a choppy economy I mean our whole point in making this acquisition, it was an anticipation that we would enjoy the growth rate some of our peers as we better aligned the business with the opportunities.

Jamie Cook - Credit Suisse.

Okay. I hold you to it. Thanks guys.

Unidentified Company Representative

Thanks, Jenny. Jenny, in 07 our power business was, and in 02, I am just going back, in 02 our power business is 25 million. In 08, our power business will be 2 billion.

Jamie Cook - Credit Suisse.

Okay. All right, thanks guys.

Unidentified Company Representative

Thanks, Jamie.

Operator

Thank you. Our next question is coming from Scott Levine with J.P. Morgan. Please go ahead.

Scott Levine - JP Morgan

Good morning, guys.

Unidentified Company Representative

Hi, Scott.

Scott Levine - JP Morgan

With regard to the infrastructure situation, you flagged the last couple of quarters, the rising construction cost environment, it sounds like the state local budget issue is one that kind of intensifying more recently, but could you talk anecdotally with regard to whether the construction costs rising and rationalization of projects, it intensifying, as well as that kind of the same pace within the last couple of quarters?

Unidentified Company Representative

No, I would say, it's not... that is not intensified. The intensification is being on the young potential budget shortfall.

Scott Levine - JP Morgan

Got it. And its, is it primarily New York, California and Florida are for the other nine states, I guess, I think your group at 12, is it one modest but some missing direction or it's really keep that state?

Unidentified Company Representative

Let me just pull the few numbers out. We track 12 states, the best sort of general proxy for the way the infrastructure funding goes, is the general fund expenditure, just to pull a few out, Arizona's growth rate in general fund expenditure in 07 was 16%, the 08 budget is 3.9%, and California was 11%, the latest estimate is 0.6%. Florida was you know 07 12.9% we are talking minus 0.2%, and Ohio was learned as had a heavy cut, and Virginia was 17.7% growth in the general fund expenditures in 07 it's down to almost minus 2% in 08.

Scott Levine - JP Morgan

Okay. So reasonably broad based perhaps not as critical to your overall business?

Martin M. Koffel - Chairman and Chief Executive Officer

No. And then as I said earlier, and I think we have covered in earlier calls, you've got the bond sales, total bond sales, I am not talking about a bonds approved by the voters, but bonds actually take into cash in the states and territories with $411 billion. That's up 8% year-on-year and the top 10 states issuing bonds accounted for 60% of all bonds funded. The California leads it we have $66 billion or so bonds in the 07 and that's a 37% growth over the year prior and Texas would be the next largest and--

Scott Levine - JP Morgan

I am so sorry, just go ahead Martin.

Martin M. Koffel - Chairman and Chief Executive Officer

No that's I am just trying to give you a little flavor of it you know.

Scott Levine - JP Morgan

I appreciate it. And lastly any thought s regarding you know the fact that's an election year here and what the implications are if any there?

Martin M. Koffel - Chairman and Chief Executive Officer

Well,I made comment in my prepared remarks about the apparent reduction in the SAFETEA-LU matching funds it's hard to imagine that's surviving in election year. I can't imagine the White House, which was obvious one of the parties allowing that to happen. So I think that's a little bit of a political flag, and then you know in the states that have serious elections this year gubernatorial elections. I think you could see some attempts to reflate the spinning there still have some arcannians alive out there in the state houses and no long roads and bridges. There's one stand I think I heard just this morning, Minnesota which has got a fiscally conservative Governor really wanted to make a major reduction I think of the legislature came out and just added $6.6 billion through a $0.05 gas tax increase right on top of it, right in the face of the Governor. So I say someone's up for reelection.

Scott Levine - JP Morgan

And one last one then on the nuclear. Can you just remind us what your thoughts are in commercial obviously your capabilities are quite strong there? Thoughts on timing of announcements there, understanding if their applications have been filed, some more are going to be filed this year or next, any thoughts on the likelihood of timing of nuclear EPC announcements from you guys?

Martin M. Koffel - Chairman and Chief Executive Officer

Tom will speak to that.

Thomas H. Zarges - President, Washington Division

Yes there's quite a way but as you know of combined operating license applications right now. There are about 13 units that are in line today with the NRC and they expect that to double through 08 and 09. So the preliminary moves by utilities, who have sites and would like to build on them, are coming through very clearly. The timing on these colors is still a bit uncertain, it's a brand new process, most people expect it to take about three years to complete, but in the interim period, there are also front-end activities in environmental licensing, in conceptual designs and then finalizing some of the designs with many of the original equipment manufacturers that is the reactor vendors. So there's about a three year staging process that I think we should anticipate, and then announcements could begin anywhere as those three years begin to mature.

Scott Levine - JP Morgan

Got it. Thank you very much.

Martin M. Koffel - Chairman and Chief Executive Officer

Thank you, Scott.

Operator

Thank you. We have time for one more question, and that's coming from Alex Rygiel with FBR Capital Markets. Please go ahead.

Alex Rygiel - FBR Capital Markets

Thank you, and good morning, gentlemen.

Unidentified Company Representative

Hi, Alex.

Unidentified Company Representative

Good morning.

Alex Rygiel - FBR Capital Markets

Few question. First, what assumptions have you made about the Silvano River project in your guidance?

Unidentified Company Representative

Well I love to get into it, but as you may be aware that it's been appealed, and it's going through a federal appeal process down the decision on that. And it's probably best that you allow me not to answer that for the time being that I believe I will be in a position to speak to it in the first quarter call.

Alex Rygiel - FBR Capital Markets

That's fair enough. Any chance that you could comment on backlog by segments like you provided your revenue guidance by segments and whether or not in your backlog there is any material shifts from the revenue guidance mix that you've provided?

Unidentified Company Representative

Yes, we were... at this point the answer is no, we can tell you that the backlog growth in each of those segments certainly supports the projections we have really without question. And overall on a relative basis we have about little over 70% of our projected revenue for 2008 is already in backlog. And so we feel pretty good about that, but obviously there is quite a bit of business it has to be booked and build during the year in order to make our revenue projection. Going forward we are hopeful that will be able to provide you more information about backlog by market sector, but we are not prepared to do it today.

Alex Rygiel - FBR Capital Markets

Within the power segment, which segment within power do you think is going to show the most meaningful growth in 2008?

Unidentified Company Representative

Well I would say that the air quality issues continue to run at a very feverish pace, there is several deadlines there for compliance, only about half of programs have been committed, and will be operating this year. And so there is still tremendous legs left in the air quality market and that should continue to be fastest paced segment in the power industry. We see that closely followed by new generation. There is a tremendous demand coming apace now, and we see applications for both new coal plants and also for combined cycle natural gas fuel plants beginning to come alive. So I think there is a growth in the short-term continues to be in air quality, it will be sustained in the longer term by demand for new generation.

Alex Rygiel - FBR Capital Markets

And Tom one last question, can you give us a little bit assistance on guidance for depreciation in 2008, as well as your CapEx plans for 2008?

Unidentified Company Representative

Yes, I can give you depreciation and amortization in total is approximately $130 million for the combined company. And capital expenditures between the two companies vary a bit because of the project basis that we have. But, our numbers in the $40 million to $50 million range each year I think the Washington Group number is in that same ballpark, so less than a $100 million are going forward.

Alex Rygiel - FBR Capital Markets

Thanks. Excellent, thank you very much.

Unidentified Company Representative

You're welcome Ryg.

Unidentified Company Representative

Just a couple of comments in closing.

Unidentified Company Representative

Operator, do we have any more questions?

Operator

Yes sir. Our next question is a follow-up from Andrew Obin.

Unidentified Company Representative

Okay Andrew, hi.

Andrew Obin - Merrill Lynch

The way I think about it maybe this could be way simplistic. You cut your operating guidance ex-amortization, by roughly 10%. There is maybe 25, $0.20 to $0.30 missing from operating numbers versus expectation and you were sighting a shift away from high margin. It's been a local business to lower margin other stuff. I've just realized data local business is only 17% of your revenue, so how come a shortfall in the business that's only 17% of your revenue causes a 10% short fall in operating earnings?

Unidentified Company Representative

There are two things going in Andrew. One is that issue. The second one is I mentioned to you is with a higher percentage even our core business that URS is moving towards more construction and pass through business overtime, and we're seeing that grow... that portion of our backlog growing faster than our labor base portion. And that is driving our margin to some degree.

When we looked at the projections last summer, when we put them together, we made some guesses as to what the composition of the revenue would be in 08 and obviously now that we're in to 08, we understand where things are and understand our backlog better. When you rollup the projects, this isn't a top down exercise. This is going project-by-project and identifying what the margins are on those projects.

The numbers are added up to a little less than we expected. As I said on the net income basis about 5% and you right on the operating basis about 10%. Now I would tell you as you know from and Jamie pointed out earlier, we're not in the business for projecting heroic assumptions. We are very careful about what we put out and we make sure that we can deliver as we demonstrate over the last few years.

So we're going in to a year that's got some big question marks, and that combined with the fact that our detailed rollup budget came out to these numbers. This is how we arrived at what we thought was most prudent guidance to give you.

Andrew Obin - Merrill Lynch

Thank you very much.

Unidentified Company Representative

You're welcome.

Unidentified Company Representative

I think there is one more question. Operator?

Operator

That question is from Avi Fisher with BMO Capital Markets.

Avram Fisher - BMO Capital Markets

Hi. Thanks for squeezing me in and...

Unidentified Company Representative

Sure.

Avram Fisher - BMO Capital Markets

I appreciate it. I don't mean to go out with kind of theoretical question, but what's is in and Tom Zarges can't answer this though, what's been the biggest obstacle for you guys in terms of either thinking or acting or estimating like a contractor versus like an engineer which you have historically done?

Thomas H. Zarges - President, Washington Division

Well I don't think we think any differently about the way that we approach estimate or contract for our business. As you may know if you have followed us we have a pretty rigorous risk management model and there is a great degree of seal activity now in the engineering construction business. It is a good market for us, and so we continued to look at a very conservative risk model. We look for reimbursable target kinds of projects. We avoid mass competitions for a lump sum prices and the acceptance of high risk. So the market is very good. The model remains intact and I think there is a complete agreement on the posture that we take and our approach to the business as we go forward, so no change.

Avram Fisher - BMO Capital Markets

Got you. Well I said Tom couldn't answer, but I'll give you a pass this time. Thanks.

Thomas H. Zarges - President, Washington Division

That question actually leads me into a couple of closing remarks. First of all we should all understand. We are very happy with the acquisition, and we thought it was a great company, but thee is nothing like actually getting involved with it and getting all the transaction and everything behind you because last year was a very transactional year, very much like this business. We think the people are terrific and our evaluation at the cultures were very similar and thee will be no difficulties in forging one large ENC firm already just two months into it a 10 weeks into it is proving to be the case. And we will have some real revenue synergy about it in future years as we go out under a single brand. So I feel very good about that, and I think to pickup on the response we gave to Jamie. I mean obviously behind this was a desire to align ourselves with what we think of the growth markets in the years that lie ahead. And I think URS in this acquisition apart from giving itself scale and more technical capabilities to work across the project lifecycle. I think we've made a directional alignment away from some markets that grew nicely, but never had the excitement of our oil and gas and power, and got ourselves properly positioned there.

So we look forward to reporting to you in the future. Thank you for your patience with the length of this call. But, we saw as a foundation call for what essentially using the new URS. We are actually having an Investor Day in New York scheduled in April, and we have to see many of you there, and then of course updating on our first quarter results in May. Thank you and have a good day.

Operator

Thank you this does conclude today's URS Corporation conference call you may all disconnect, and have a great day.

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