Nov 19, 2008
Executives
Deb Wensel – CFO, SVP and Treasurer Doug Mackie – President and CEO
Analysts
Glosho [ph] – Barclays Capital Richard Paget – Morgan Joseph John Parker – Jefferies Dennis Scannell – Rutabaga Capital Mark Brostowski – Regiment Capital
Operator
Good morning and welcome to the Great Lakes Dredge & Dock Corporation third quarter 2008 earnings call. Today's call is being recorded.
At this time, I would like to turn the call over to Ms. Deb Wensel, Chief Financial Officer of Great Lakes.
Please go ahead.
Deb Wensel
Thank you. This is Deb Wensel and I welcome you to our quarterly conference call.
I will begin our discussions by presenting the financial highlights for the three months and nine months ended September 30, 2008. Then Doug Mackie, Chief Executive Officer of Great Lakes, will share his market overview, which will provide a useful context within which to view my more detailed discussion of operating results.
Following our comments there will be an opportunity for questions. Before I begin, however, I need to remind you that certain matters discussed may be considered forward-looking statements and participants in this call are cautioned not to place undue reliance on such forward-looking statements.
Furthermore, any forward-looking statements speak only as of the date hereof and Great Lakes assumes no obligation to provide any future updates. I hope that all of you had a chance to review our press release issued this morning, which includes financial highlights for the quarter and nine months ended September 30, 2008.
As you know, we had a strong revenue performance for the quarter, with dredging revenue growing nearly 32% to $123.8 million. Foreign operations up by more than 21% to $50.8 million and the domestic maintenance market, which more than tripled to $28.6 million, led the way.
Gross profit increased by 32% to $17.6 million for the quarter, boosting the gross margin to 12.3% versus 11.5% a year ago, driven by increased dredge utilization. This performance occurred despite major mechanical and weather related downtime, which negatively impacted three domestic projects and the Company's operations in the Middle East.
Operating income in the third quarter was $6.5 million, up 74% from $3.7 million. Pretax earnings nearly doubled from last year to $2.2 million despite downward pressure from two factors.
Interest expense of $4.3 million increased $1 million from a year ago due to a $0.8 million reduction in the unrealized gain on the Company's interest rate swap, and earnings from the Company's 50% owned joint venture, Amboy Aggregates, decreased by $0.7 million from last year. Amboy's operations have been negatively impacted by the slowdown in housing and road construction.
EBITDA of $14.6 million for the quarter was up 24% from $11.7 million in the previous year. Revenue for the nine-month period ended September 30, 2008 of $423.9 million was up by 18% from $358.8 million for the comparable 2007 period, which produced 13% growth in gross profit to $51.2 million from $45.2 million.
However, gross profit margin of 12.1% decreased from 12.6% a year earlier, as operations in the first half of the year were unfavorably impacted by the temporary loss of the dredge New York, mobilizations to the Middle East and the reduced level of beach work. Operating income increased to $18.5 million from $18.2 million for the nine months ended September 30 2008, as higher gross profits more than offset the growth in general and administrative expenses.
Pretax earnings increased slightly to $5.7 million, as interest expense savings for the nine month period of $1.4 million were entirely offset by a $1.4 million reduction in earnings from the Amboy's joint venture. Net income for the nine months ended September 30, 2008 was $3.2 million, relatively unchanged from $3.3 million, a year earlier.
Earnings per diluted share for the first nine months of 2008 were $0.05 versus $0.07 the previous year. The diluted weighted average number of shares outstanding for the nine months ended September 30, 2008 increased to 58.5 million from 50.1 million last year as a result of the Company's issuance of 18.4 million shares of stock upon exercise of warrant in 2007.
Year-to-date 2008 EBITDA was $39.8 million, which is comparable to the same period of 2007. Now at this point I'd like to turn the call over to Doug Mackie, our CEO, who will give you an overview of what's going on in the dredging market.
Doug Mackie
Thank you, Deb. With another active domestic bid market in the third quarter, generating $195 million of work, two thirds of which was maintenance work along the East and Gulf Coast.
The Company has already won more maintenance work through the first three quarters than we won in all of 2007. Through the first three quarters of 2008 maintenance projects represented 51% of the total domestic bid market of $593 million.
Year-to-date the overall market is only $10 million less than the total 2007 bid market, which is very encouraging for the industry. While the Company's 37% share of the 2008 year-to-date market is down from 44% in the same period 2007 period, it represents more work to-date than was taken on during the first nine months of 2007.
The Company was also low bidder in the third quarter on four projects worth over $50 million. Two of these projects were awarded subsequent to the quarter-end and the other two are expected to be awarded before year-end.
The year-to-date 2008 domestic bid market has been sizeable; however the beach market is still weaker than expected. The Company sees more than $100 million of beach work scheduled to be bid during the next 12 months, as many beaches along the East and Gulf Coast are at critical stages, which could result in property damage.
We are optimistic that we will be able to fully utilize our beach vessels to the current open environmental window that will run through the April-May period of 2009. Since a 2009 budget was not approved prior to the beginning of the government's fiscal year, October 1st, a continuing resolution was passed at that time.
It allows the government to keep running for six months without an approved budget, which is longer than the typical six-week continuing resolutions that we have seen over the past several years. The resolution kept spending at the 2008 budget levels, which was positive for the dredging industry, as the 2008 budget had an increase in funding for dredging from the prior year.
In addition, Congress and the current administration are negotiating a $150 billion stimulus plan. One of the elements of which is expected to be infrastructure spending.
It is our understanding that this stimulus package will include more than $1 billion to be spent over a two-year period as requested by the Army Corps of Engineers for maintenance dredging and coastal restoration. There has been increased discussion on Capitol Hill regarding the need for maintenance dredging in our country's 269 commercial ports.
This has likely been the result of the efforts of the maritime industry coalition Realize America's Maritime Promise or RAMP that we have discussed in the last few quarters. Maintenance dredging in our nation's port has been underfunded for several years, leaving many of them a considerably less than their prescribed depths.
This has had a negative impact on U.S. commerce by virtue of increasing costs on imports and exports.
Maintaining our ports will lead to more efficient movement of shipping traffic, thereby reducing costs and promoting economic growth. So while specific projects under this stimulus plan are still to be determined, it's a positive sign that work will most likely be forthcoming earlier this year or in early 2009.
While stimulus package will be helpful to get our nation's ports back in shape in the near-term the problem will reoccur in subsequent years if a reliable source of funding is not provided to maintain them. Therefore, the success of RAMP's initiative is critical.
Having 100% of the harbor maintenance trust funds go to their intended purpose will ensure our harbors are continually maintained at their stated depths. For additional information concerning this effort you can go to www.ramphmtf.org.
As deeper draft cargo ships are being built in the Panama Canal expansion moves forward the need to deepen our ports, not just maintain them, will become more important over the next several years. Near-term domestic capital projects include another section of the New York Harbor; a port expansion project in Jacksonville Harbor, Florida; a project for new container terminal facilities in Norfolk, Virginia, two coastal restoration projects in the Mississippi River sediment delivery system project, which in the aggregate will provide more than $200 million of opportunities over the next 12 months.
There is nothing new to report regarding potential of O&G terminals. No significant O&G starts have come this year and none are expected for some time, as various potential projects continue to work through permitting and sourcing issues.
In March, a $5.25 billion expansion plan for Panama Canal got underway and is expected to be completed over the next six years. In recent weeks, the Panama Canal Authority announced that it planned to finance about $2.3 billion of work through debt, and it had secured debt financing.
The remainder will be financed through cash flow generated by operation of the canal. We anticipate there will be several more projects that will come out in the next couple of years, which will provide good opportunities for employing our equipment.
But more importantly, the completion of the Panama Canal expansion will make maintaining and deepening our ports even more critical. If this is to be done – if this is not done deeper draft vessels that are too large to navigate in our ports would choose to go to deeper ports outside the U.S.
and goods will have be to imported into the country via a more expensive method. So while the domestic dredging market, with the exception of the beach market, has been fairly robust to-date, the overall funding constraints are still evident.
We do anticipate an increase in work coming out to bid once the stimulus package gets finalized and funds are allocated to specific projects. And with the change in the administration, there is a reason to anticipate that the appropriation process will get back on track and money will start to be spent on the country's infrastructure needs.
In addition, with the growth in foreign commerce, which is expected to accelerate with the expansion of the Panama Canal, there is real pressure to improve our ports to remain competitive. Finally, there is hope that the harbor maintenance trust funds will be directed to their intended purpose of funding maintenance dredging needs.
For these reasons, we continue to feel positive about the domestic dredging market over the longer term horizon. On the international side of the business we had a big win in the quarter, signing the second phase of the Diyaar land reclamation project in Bahrain.
This added $158 million to backlog at quarter-end. As we have said in previous call, 2008 is turning out to be another strong year on the foreign side of the business.
In October, we were awarded a channel deepening project in Bahrain, and the Company has several projects pending for a substantial amount of work that is expected to commence operations throughout 2009. As mentioned in earlier quarters this year, the Company deployed four of its vessels to the Middle East.
The mobilization has been completed, and during the quarter, progress was made in equipping and upgrading the Reem Island, the Noon Island and the Ohio. The hydraulic cutter head dredge Texas was fully operational during the third quarter.
The Reem began working in the fourth quarter and the Ohio and Noon are expected to be fully operational in 2009 Now let me ask Deb to walk you through a more detailed analysis of our second quarter performance.
Deb Wensel
Okay. I will start with a general overview of contracts contributing to the quarter's performance within the context of the dredging markets we serve in our demolition segment.
Revenue during the third quarter of 2008 included $37 million of domestic capital, $51 million of foreign capital, $7 million of beach, $29 million of maintenance, and $19 million of demolition work, for a total of third quarter revenue of $143 million. This compares to the second quarter of 2008, where we had $45 million of domestic capital, $35 million of foreign capital, $9 million of beach, $21 million of maintenance, and $35 million of demolition for a total quarter revenue of $145 million.
And finally, the numbers for the third quarter of 2007, we had $39 million of domestic capital, $42 million foreign capital, $3 million beach, $9 million of maintenance, $23 million of demolition for a total Company quarter revenue of $116 million. The majority of our $90 million of capital revenues were generated by our dredge New York and clamshell dredges, continuing work on our deepening projects in Newark Bay, Port Jersey and Boston, continuing work on our Columbia River deepening project on the West Coast with our hopper dredge Liberty Island, work on a Louisiana coastal restoration project with our hydraulic dredge Alaska, and finally three projects in Bahrain; Diyar, Dirare [ph] and Diratmarina [ph].
We employed three hopper dredges and three hydraulic dredges, including the recently mobilized dredge Texas to work for the entire quarter. Beach revenue was $7 million in the third quarter compared with $3 million a year ago.
2008 beach revenue has been down overall as a result of delays in getting work out to bid. And is typical, the third quarter in both areas was impacted by environmental window restrictions that protect bird and turtle nesting.
A project in South Carolina and two projects in New Jersey accounted for most of the third quarter of 2008 beach revenue. Maintenance revenue in the third quarter was $29 million, up from only $9 million a year ago.
As previously mentioned, the maintenance market has continued to be strong throughout this year, reaching $302 million year-to-date, more than the total 2007 market of $188 million. A number of maintenance projects contributed to this quarter's revenue, including dredging in Florida, the Mississippi River, and along the West Coast.
With the award of the second phase of Diyar and winning 37% of the domestic bid market this year, dredging backlog at September 30, 2008, totaled $453 million compared with $291 million at September 30, 2007. Additionally, the September 30, 2008 dredging backlog does not reflect approximately $132 million of domestic, low bid pending award on additional phases pending on projects currently in backlog.
Additional opportunities in Bahrain include a channel deepening that was awarded in October, as well as several land reclamation projects that we expect to begin in 2009. NASDI revenue of $19 million has begun to moderate from the highs we have seen over the last four quarters.
As we've noted in earlier calls, NASDI took on several large contract for work that had substantial subcontracting requirements, resulting in record revenue for the segment over the last year. Due to the subcontracting components in the work the margin on these projects were lower than for NASDI's typical demolition projects.
During the first nine months of this year NASDI substantially completed these projects. They anticipate that their successful completion will lead to future demolition opportunities for NASDI.
The demolition services backlog at September 30, 2008 was $19 million compared with $37 million at the end of the third quarter of 2007. Due to the completion of the several large projects just mentioned, backlog has begun to moderate to levels existing prior to the 2007 second quarter.
Our backlog by judging work type and segment at September 30, 2008 was $186 million of domestic capital; $212 million of foreign capital; $24 million of beach; $31 million of maintenance, for a total dredging backlog of $453 million. Adding $19 million for the demolition business gives us a total company backlog of $472 million.
The comparable numbers for the end of the second quarter of 2008 were $218 million of domestic capital, $91 million of foreign capital, $21 million of beach, $26 million of maintenance, for a total dredging backlog of $356 million. NASDI had $22 million of backlog for a total Company backlog then of $378 million.
And the numbers for the end of the third quarter of 2007 were $103 million of domestic capital, $128 million of foreign capital, $44 million beach, $16 million of maintenance, for a total dredging backlog of $291 million. Demolition backlog had $37 million for a total Company backlog of $328 million.
Capital expenditures for the third quarter totaled $11.6 million. This included spending of $4.1 million on the dredges Ohio, Reem Island and Noon Island related to upgrades in placing these vessels into service.
$3.6 million was spent this quarter on continuing construction on the power barge that will enhance the utilization and operating efficiency of our dredge Florida. Work on this vessel was completed in October and the vessel was then sold in a sale leaseback transaction.
The remaining $3.9 million included work on a variety of dredges as well as the purchase of smaller ancillary equipment for dredging operations. Third quarter 2008 maintenance spending, which is equipment-related costs that are expensed in the year incurred, was $9.2 million, which is down from the last two quarters and the prior year.
Maintenance costs are down compared with the same quarter last year, primarily because there were several dry – vessels in dry dock in 2007, which was not the case this year. As of September 30, 2008, senior and subordinated debt, net of $11.6 million in cash and cash equivalents was $213.2 million, including $49.7 million of borrowings under the revolving credit facility.
At the end of the third quarter of 2008 outstanding performance letters of credit totaled $42.7 million. At quarter-end our total leverage was 3.62 times and interest coverage was 3.89 times.
Subsequent to quarter-end the work on the power barge that supports the dredge Florida was completed and the barge was sold in a sale leaseback transaction, bringing in over $16 million of cash. The Company entered into a new revolving credit facility in 2007, which matures in June 2012.
The facility allows for $155 million in borrowings and includes an $85 million sublimit for the issuance of letters of credit. At September 30, 2008, the Company had $79 million of borrowings available under the revolver.
Leading positions in our credit are held by Bank of America and GE Capital Corporation. Fortunately, we have seen minimal impact from the recent financial and credit crisis.
At the end of September, Lehman Commercial Paper Incorporated, a 6.5% participant in our credit facility, stopped funding its share of our revolver borrowings. However, since we have significant capacity on the revolver, this has not impacted our ability to fund working capital needs.
We are currently working with a new lender to take on that share of the revolver. In addition, AIG holds our workers' compensation and our primary on our general liability and certain pollution coverage, none of which are the maintain drivers of our insurance program.
Workers' compensation insurance covers a small portion of our workforce, primarily in our demolition business. All of these policies are held by a subsidiary of AIG that has not been directly affected by the parent company's credit issues, and at this point we do not expect any impact in the future.
In addition, we believe we would be able to replace this coverage in a short period of time, if necessary. During 2008, we experienced an increasing working capital, as pipe inventory increased in both our international and domestic operations.
In addition, as our foreign operations continue to grow we have increased our spare parts inventory, receivables and retainage that we expect to maintain in the course of level of work overseas. The Company began 2008 with a solid domestic backlog complementing the continuing momentum in the international market.
In the first nine months, the domestic market provided some good longer-term opportunities, specifically in the New York and New Jersey harbors. And with the recent signing of the second phase of Diyar and letters of intent on several projects in the Middle East, we have substantial opportunities for the equipment committed there.
Our current backlog should provide solid utilization in the fourth quarter. However, the issues that negatively impacted the third quarter, including major weather and mechanical downtime, both domestically and abroad will affect full year results.
Therefore, the Company is adjusting guidance for the total year of 2008 EBITDA to the range of $54 million to $57 million from the previously discussed $58 million to $63 million range. We do anticipate our capital expenditures for the year will be less than expected.
The funds to upgrade the Reem Island, Noon Island and power barge should all be spent this year, but a portion of the Ohio spend will be deferred to next year. Total spending on the projects being completed this year is expected to be $24 million.
In addition, to power barge was sold in a sale leaseback transaction that brought in over $16 million of cash. We also anticipate a decrease in base capital spending from approximately $23 million to $22 million for the year.
In total then we expect capital spending for our 2008 on the specific vessels mentioned and base capital spending to be approximately $46 million, down $4 million from previous estimates. This concludes our prepared remarks, but I would also note that we will provide a summary of the operating and backlog information provided herein as well as a reconciliation of our EBITDA, which is a non-GAAP measure, to net income, a GAAP measure, in the financial section of our Company's Web site at gldd.com.
I would now like to open up the call for questions that you might have.
Operator
Thank you. (Operator instructions) We'll go first to Andrew Kaplowitz, Barclays Capital.
Glosho – Barclays Capital
Hi, good morning. This is actually Glosho [ph] in place of Andy.
Deb Wensel
Hi.
Glosho – Barclays Capital
Hi. Can you talk a little bit about the potential $1 billion in dredging projects and the $150 billion stimulus plan mentioned in the press release?
How real do you think in terms of the prospects are and the timing of awards for Great Lakes?
Doug Mackie
Well, we think it's got a very good chance of being passed. Congress is negotiating with the current administration and the administration is favorable to it.
There is – I believe at one point, they thought they could do it prior to the election, but I think they're on track to do it prior to the inauguration of the next President. It is – most of the work will be maintenance work and some in shore protection work around populated areas.
Glosho – Barclays Capital
Okay. I'm sorry if I missed it, but can you talk a little bit more about the weather and mechanical issues you had in the quarter in the U.S.
and the Middle East that caused the gross profit margins shortfall? Are the issues isolated in the third quarter or do you see continuation in the fourth and beyond?
Doug Mackie
Well, right now, the biggest the domestic was the hurricane season, which affected three of our contracts, one which was in Florida and the other two in the Gulf. And we lost large percentages of time on the job and hurt us badly.
We've had – the New York and one other dredge had – the New York as we put it to work it was not terribly efficient at the beginning, so we lost some ground there until we got all the systems up and running, and we had a hopper dredge on the West Coast that had a major breakdown for about a month. In the Middle East, we had very unusual weather for the Middle East.
We've been working there a long time and never seen a summer – a third quarter season with weather like we had in the Middle East. We lost more time than we've ever experienced in our ten years over there during the third quarter.
Also, we had a difficult time. We were projecting that we get two of our hopper dredges back up and working in the third quarter, but we had major issues with suppliers and major components coming in either faulty or late, so we lost for two of our hopper dredges a significant amount of time during the third quarter.
Glosho – Barclays Capital
The mechanical issues, that's all at this point?
Doug Mackie
Yes.
Glosho – Barclays Capital
Okay.
Doug Mackie
They're up and running.
Glosho – Barclays Capital
Well, do you have any contingencies built into the project contracts on these mechanical downtime, weather-related delays in terms of like insure indemnification?
Doug Mackie
Well, we do – we have – we built in – based on our historical average, we break – we build in a certain amount of percent every day that the dredge will be down, then we also put in major mechanical delays on projects into our estimate. But these are averages, so when you hit really hard – hit really hard you go well over the averages.
So we're – and for weather, also. We put – again, weather mostly will affect the beach work and/or – and channel work, but the – but in this case, when you get hurricanes, again, we put in an ample amount of time, we believe, on averages for that time of year.
But we had some extended – as you know, in the Gulf we had three hurricanes come in one after another, and we had – in Florida and North Carolina we had an extended period where couple of hurricanes just sat over the East Coast for three weeks and that is well beyond what we would on average expect.
Glosho – Barclays Capital
Okay, the final question. Can you talk a little bit about the disaster related work following the hurricanes in the Gulf?
Do we – we saw some pickup in maintenance revenues in the quarter, but are there any other specific projects that you're hoping to get in the next quarter or two?
Doug Mackie
Yes, I think this will continue. As a matter of fact, part of the stimulus plans is the reason why they're – I think the dredging number will be so large.
I think they're looking at many, many ports in the Gulf and the Southeast that need additional dredging beyond what they planned. So we think that part of the stimulus plan will be to get all the Gulf ports and the east – southeast ports up and to their stated depth.
Glosho – Barclays Capital
Okay. Thank you very much.
Operator
And we'll go next to Richard Paget with Morgan Joseph.
Richard Paget – Morgan Joseph
Good morning, Deb and Doug.
Deb Wensel
Good morning.
Doug Mackie
Good morning.
Richard Paget – Morgan Joseph
It sounds like with potential $1 billion stimulus package, and maybe the Army Corps of Engineers gets a little bit more freed up to concentrate on domestic issues, it sounds overall the bid market for dredging might be a little bit better than at least your outlook was maybe six months ago or even into last year. What kind of maybe capacity constraints do you think there might be in letting out this work?
And then at what point or what kind of bid levels do we need to achieve so that you guys can get some pricing power we can see some increases in margins?
Doug Mackie
Well, certainly, this is a better market. We're up to $600 million and I think this is going to be a pretty active fourth quarter of bidding.
So I think to the answer to the last question I think that lot of our competitors and some of our dredges are – were virtually fully occupied with some exceptions, so that – so the – there won't be – I think there will be increases in margins and – for all the competitors to the end of this year and the beginning of the next year. As far as capacity, the only reason we have any capacity strength is because the Corps of Engineers and the cities and towns that are putting out beach work and other work are putting them out so late.
We're bidding beach jobs through January when they should have been bid back in August and September, which created a lot of idle equipment throughout the industry during that period when we could've started a lot of that work, both beach and maintenance, anywhere from the first of September through October, but it had nothing – if there's a capacity issue it was – it would be generated by the owners who are putting out the work.
Richard Paget – Morgan Joseph
Okay. And then any new developments with any of the water related Louisiana work?
Doug Mackie
Well, there has been a lot of discussions about again and some of that where to work on Louisiana coast being in the stimulus plan. They talked about shore protection.
It didn't focus just on Louisiana, but I think that, that will probably be in there, some of that. But nothing specific have we seen out of the stimulus.
However, there is, again, talk with a new administration of having a new order bill coming out next year, as I think the administration, whichever administration it is, will want to stimulate the economy and certainly the infrastructure work will be part of it.
Richard Paget – Morgan Joseph
Okay. And then for the construction market, the Middle East has obviously been going at a pretty healthy clip, but there has been some stories out there that the credit crunch is finally hitting them and some of the large real estate projects with the land reclamation have slowed down a bit.
Have you guys been seeing any of that or is your backlog still pretty big enough to take you through the next several quarters?
Doug Mackie
Well, first of all, the biggest – the big news is the one – the Palm tree on Dubai, which they came out and said they might have to slow it down and that job was being built by VanOrd, a Dutch competitor. The next week, the Dubai authority said that they're full steam ahead.
We're concerned, obviously, with oil prices down and the slowdown in world economy, we're concerned. We – again, we see the signs, we're not naive, but any delays that we see in taking on work, as far as we can tell, is the fact it's just the long terms and negotiations we go through, and the long and difficult process of getting the work permitted in the Middle East.
As far as we can see, we have not had any of our projects that we have letter of intents on or awards that have been delayed or are going to be stopped at all. We haven't seen any of that yet, but we're concerned.
Richard Paget – Morgan Joseph
Okay. I'll get back in queue.
Operator
And we'll go next to John Parker, Jefferies.
John Parker – Jefferies
Hi, just a couple of housekeeping issues. I apologize; I missed some of your comments.
On the capital X, what was your full-year guidance for capital X? Capital expenditure?
Deb Wensel
Yes, full year for this year about $46 million.
John Parker – Jefferies
And what did you do in the third quarter?
Deb Wensel
Our total spend was $11.6 million.
John Parker – Jefferies
Okay. And then the – was there any – in the interest expense line, was there any noncash swap component there for the third quarter?
Deb Wensel
Yes, there wasn't much this year, it's a bigger number in the prior year, so that's (inaudible).
John Parker – Jefferies
Okay. And then maybe October sale leaseback amount if you could give me that again?
Deb Wensel
Just over $16 million.
John Parker – Jefferies
$16 million, okay, good. Now looks like in the third quarter you didn't get as much market share as you have prior quarters and it looks like a lot of it was maintenance, but can you comment on which competitors have been winning that work and were able to win that work in the third quarter?
Doug Mackie
Well, it was – again, it was a lot of maintenance work and lot of our tools, which might be doing beach work has done some maintenance work, but obviously it doesn't bring the same revenues and margins, but I guess the – again, I would think year-to-date 2008, Weeks was a big winner. They are – they do focus on – most of their focus is in the Gulf of Mexico, with a little – with very little on the East Coast, except for a couple of hopper dredges, so they've taken a lot of that work.
Manson, again, is basically a Gulf operator that has gotten a bigger percentage because of all of the maintenance work. Those are the two that really stepped up.
Norfolk is up higher than they were in the last year. And so that's – again, they're a maintenance type business.
So with 300 – with more than 50% of the market being maintenance, they are extremely happy with the situation. However, that will – the good news is they will be occupied.
John Parker – Jefferies
Yes. Now, I notice that the capital US dropped off, I think you already explained it.
It sounds like it is a function of some mechanical issues with New York and also perhaps a hurricane issue impacted your Florida capital US project. Is there anything else?
From the prior quarter your drop off is pretty much explained by what you went through already, is that correct? Your capital US is off from the second quarter of this year.
Doug Mackie
That's correct. We – the only capital work we had – well, we had the work on the West Coast where we had to dredge down for about a month, and we had starter problems with the New York.
So, yes, that was pretty much. We also – what it doesn't show in capital work we have pending – in capital work we have pending probably just about $80 million still pending options that will be awarded over the next year.
So we – when we put in with our competitors bids, we just put them in there regardless of what their options are because we don't know what they have, but we're – we often have the most options because we get most of the capital work. So if we were just looking at straight bids, we – you could add another $100 million into our side, and we would be up at the 50%.
John Parker – Jefferies
Sure. Sure.
I picked up a story recently about there is a reduction in dredging in the Great Lakes region, and I know that that isn't an area that you typically cover, but it talked about funding issues at the Army Corps of Engineers and a reduction in dredging work in the Great Lakes region, and it sounds little bit different from what I'm hearing from you I guess with the stimulus package. Are you seeing any budget cutbacks or talk at that right now?
It doesn't sound like what you've been talking about in the first part of this call.
Doug Mackie
We're really not in the Great Lakes region – the Great Lakes and it's been – there's not that much work to do in the Great Lakes and there hasn't been much demand. As far as the river systems like the Mississippi – up the Mississippi by St.
Louis and then Memphis, those jobs are going strong and probably will overrun.
John Parker – Jefferies
Okay. It sounds like the – you have three dredges in the Middle East that were still not productive in the third quarter, just want to confirm that the Noon Island and the Reem Island and the Ohio.
Were those at all productive in the third quarter? And I guess what I'm trying to get to is, I think you said you're going to get to full capacity – or everything will be available in 2009 for the Middle East, and what type of revenue or run rates can you run at full capacity, and how much higher is it than what you did in the third quarter?
Deb Wensel
Again, just to confirm, that's correct again, we had three more vessels that need to come on line. The Reem Island is back, is in service now in the fourth quarter up in the Middle East.
The Noon will come sooner in '09 and the Ohio probably by mid '09 or so. Again, they're different vessels and they produce a different amount, but clearly, we still see that we can continue to increase the amount of foreign revenue that we can produce by bringing those three vessels on line.
Doug Mackie
And the one other vessel, which was actually a vessel that's been in the Middle East for six years or seven years called the Victoria Island, that was actually one of the dredges that was down for the third quarter, which was not anticipated. So it was not – we didn't really anticipate the Noon or the Ohio producing really until 2009 at any effective rate.
So it was actually the – so I think it was mostly the two vessels that were down, the Victoria and the Reem, which we expected to work, and then we had very difficult weather for our cutter heads off the Diyar project. Okay.
John Parker – Jefferies
Okay. But if you took the – what capacity was running in the third quarter in the Middle East, and then you said, alright, would you say you have another 20% capacity that could be working by the end of 2009 or is it 25% more capacity?
Deb Wensel
Again, we always have such a difficult time saying what capacity is, because it really depends upon the vessel, and then it depends what type of work that vessels going on to. So, yes, there is a – what we would consider a significant amount of capacity that will come on.
It just depends whether it will be working at the continuation of Diyar or whether we will able to start some of these other projects, which we've been talking about, which I think are better projects for vessels, like the Ohio and actually our other cutter head vessels. So it's really dependent and it's a fairly large range as to what they could do next year.
John Parker – Jefferies
Okay. And then is there any reason to think with the declining fortunes of the container shipping lines, they're well publicized, is there any reason to think there'd be less interest in the ongoing port deepening operations that you guys have been involved with or do you think those are just full speed ahead regardless of what's going on in the container trades?
Doug Mackie
Well, I know that the West Coast, especially Long Beach and L.A. has had a turn down in their container traffic, obviously, I guess, from what's going on in Southeast Asia.
However, they have deports. I still think they have not been able to take the large container vessels around to the Gulf and the East Coast, which they will be able to do once the Panama Canal is deepened.
And hopefully in six years, we'll be out of this recession, sometime before that, and we'll have a better economy.
John Parker – Jefferies
Okay. That's all for me.
Thank you very much for your help.
Operator
Our next question is from Dennis Scannell, Rutabaga Capital.
Dennis Scannell – Rutabaga Capital
Yes, good morning. Couple of quick things.
You've sometimes given the figure of I guess pending but not in backlog yet for the Middle East. I think it was $307 million at the end of the second quarter.
I'm just wondering – and it sounds like you did book some of that in the third quarter, but do you have that figure now as of the end of the third quarter?
Deb Wensel
Yes, we have over the last, I think, couple of quarters developed and given a number, but as we – as it turned out these are very significant projects, and as we spend time in the negotiations process, as Doug said, it just takes a lot of time to get these contracts in place, and then the permitting, and even during permitting they change the scope. So what we've seen is just significant swings in what those the scope of the projects are, so that's why this quarter we stepped back and weren't giving out the numbers.
We still have those projects, we're still negotiating them, we really think we'll start working on them next year, but the size of them both get bigger and smaller. I think they're still in the range which we were talking about before, but we just didn't have a real comfort level because those ranges are just getting so big, because they're big contracts.
So, no, we don't have a specific number, that's why we didn't give it, but we do still have those projects and we still feel very confident that we'll see some of that work starting next year.
Dennis Scannell – Rutabaga Capital
Okay. I think you already said this, but just to confirm that, would you're not seeing any push out either due to the collapsing oil prices or the credit crunch – credit issues that are going on in the market in general?
You're not seeing push outs yet of projects that you were expecting as you were shipping more capacity over into the Middle East?
Deb Wensel
No, as Doug was saying, of course, we watch that all the time and we talk with our customers and we've had certainly no issues on getting payment on current contracts. And we are – they continue to negotiate and talk on these further projects.
So, no, we don't see any specific sign at this point in time. They continue to move forward.
And as Doug said, it's just something that, obviously, we all need to watch and see, if, in fact, it did get to a point where it does start impacting.
Dennis Scannell – Rutabaga Capital
Okay, thanks, a couple other quick things. On the beach nourishment business, could any of – is any of that tied to local tax revenues, property taxes, state income taxes?
I'm just wondering, the market was depressed in – coming out of calendar year '07 into early '08, you said that there was some permitting issues, some environmental issues that didn't get resolved, but I'm wondering, as we look into the '08, '09 periods, whether local tax revenues might also put a crimp on that business?
Doug Mackie
Well, we've seen in – I think, just once in a couple of years ago, did we see a city fail to do a beach job that was funded because there was a referendum, but we see more issues with the Corps not being able to come up with their share than the locals. If anything, the locals are generally more reliable than the Corps of Engineers is about getting their funds together.
However, it is getting critical. There actually are properties that will be damaged if they don't do something quickly, and we think there's – there should be – it should be a strong market for – throughout the '08, '09 season for beach work.
Dennis Scannell – Rutabaga Capital
So the payments for beach nourishment come from both the Corps as well as local funding?
Doug Mackie
Some locals do it all 100% themselves so they'll do it all we have. But generally they are anywhere from 40% federal to 60% or 70% federal dollars and the rest being state, local or city.
Dennis Scannell – Rutabaga Capital
Okay. And you're not – we're not at the point or could we be at a point where there might actually be a secular change in the way that some places look at beach nourishment?
Obviously, some environmental, I would say let those buildings go, who cares, you're destroying other beaches by continuing to rebuild this. Is that kind of movement getting any increased currency in the marketplace where you'd say, geez, it's probably going to be a shrinking market going forward?
Doug Mackie
We haven't seen it. We certainly have heard all of that and we've heard, at one time, they – Hilton Head decided that area – or South Carolina, actually, put out a referendum that if you – if the beach – if your house gets damaged, you can't rebuild, but that was quickly overturned in another referendum.
There are – they try, there's a lot of things they can do to slow down the erosion, which they're doing, but I can't believe they're going to let billions – hundreds of billions of dollars of real estate be damaged and the cost of beach nourishment is tiny compared to the tax revenues from resorts and even just real estate taxes it tales. When they do cost benefit ratios it's on the moon.
It's better than any other work the Corps of Engineer does.
Dennis Scannell – Rutabaga Capital
Right. Okay.
Thanks. And then one last thing.
It seems like there's more discussion this quarter about some mechanical issues at the dredge level that than I recall in other recent quarterly conference calls. Are there any issues that you're looking at in terms of – as a management team, about the maintenance that you have been doing and capital spending?
Have we been under spending? Is there something systemic in the – in your fleet that you may have to address or are these kinds of all just one-offs and surprises, but hey, surprises happen in life?
Doug Mackie
Well, two of them were ones we bought from Brazil and they're beautiful vessels, but their mechanics weren't up to our – up to snuff, and we have troubles with those, but I don't think this is unusual, it happens, some of it is just – some of it is an event, could be human error or not or it – often we have certain lives for every major piece in our dredge and often you think you have – 2,000 hours on it, and for whatever reason, whether it's a defect in the machinery, you might all of a sudden get a breakdown at 8,000 hours. Some of – there is some of that.
We do find that parts we're getting – major parts we're getting do not last as long as their warranty says they do – would. So it's a combination.
We – I'm sure our bard would say we spend plenty of money on maintenance and capital.
Dennis Scannell – Rutabaga Capital
Yes. Okay, thank you.
Operator
(Operator instructions) We'll go to Mark Brostowski, Regiment Capital.
Mark Brostowski – Regiment Capital
Yes, two questions. First, the Harbor Maintenance Trust Fund.
Can you just go into a little more detail? I know I can go to their Web site, but how much is there, how long you expect to be – it would take to get it released, and over what time period?
And then secondly, the next round of bidding for the Panama Canal, when that would be and the amounts you would think would come out of that? Thanks.
Doug Mackie
Okay. The Harbor Maintenance Trust Fund, over the last couple of years it's averaged $1.4 billion in taxes collected.
It might have gone down a little. I'm not sure, because some of the imports have slowed down, but I think that's a year away.
So it's about $1.4 billion. We are actually – when Congress comes back we have some sponsors who will put in a bill to have the – whatever funds come out of that tax, the Harbor Maintenance Funds, be 100% put into the dredging.
We're hopeful that we'll get it, since it is an infrastructure play, and we have not heard any negative vibes coming out of Congress at all, but we'll have to watch that. As far as the Panama Canal, they've only let one job.
There's – of this $5 billion of work, probably only about $1.8 billion is dredging. We have not seen them advertise another job yet, but I'm sure over the next six years we'll see two or three a year coming out.
Mark Brostowski – Regiment Capital
Great. Thank you.
Operator
And it appears there are no further questions at this time, so I'll turn the call back over to management for closing remarks.
Deb Wensel
Okay. Well, thank you for joining our third quarter update, and we look forward to talking with you after the end of the 2008 year.
Thank you.
Operator
Ladies and gentlemen, that does conclude today's conference. Thank you for your participation.
You may disconnect at this time.