ITEM 1. DESCRIPTION OF BUSINESS
In this report, we use the terms Pernix Group, Pernix, the Company, we, us and our to refer to Pernix Group, Inc. and its consolidated subsidiaries. Unless otherwise noted, references to years are for calendar years. We refer to the calendar year ended December 31, 2015 as 2015 and the calendar year ended December 31, 2014, as 2014.
Overview
Pernix Group is a global company operating across multiple industry sectors providing a wide variety of services, employing approx. 475 employees across various international and US domestic locations. The Company is over 96.0% owned by Ernil Continental, S.A., BVI, Halbarad Group, Ltd., BVI, and Affiliates. The Company conducts its operations through the parent and its subsidiaries. The Companys two primary operating business segments are construction and power services. In addition to these two operating segments, the corporate operations are a separately reported segment that provides administrative support to the operating segments.
Pernix has full-scale construction and management capabilities, with some of our subsidiaries located in the United States, Guam, Fiji, Vanuatu, South Korea, Africa, and Germany. We provide our services in a broad range of end markets, including construction, construction management, and power operations and maintenance (O&M) services.
Construction services include pre-construction (pre-con) consulting services, construction management, design build and general contracting delivered either in lump-sum, guaranteed maximum cost or cost-plus contract models. Markets include both U.S. Department of State (DOS) and other government clients and private sector commercial clients, the latter typically in either technically based or commercial facilities.
Power services focus includes operating and maintenance of power production facilities typically with longer term contracts.
We have provided construction and power services since 1995 and have established a strong reputation within our markets by delivering complex projects and providing innovative facility O&M solutions to clients world-wide with an unwavering commitment to safety, quality, social responsibility and total customer satisfaction. We have established domestic & international experience, high-performance management teams with a proven track record of successfully completing complex projects around the globe and in some of the most remote locations. We have over twenty years of experience providing our services in domestic and international locations. We believe that these attributes are the foundation of Pernixs success.
We believe that the unique collection of resources, experience, operational and financial attributes that Pernix possess properly position the Company for future growth, diversification and financial success. The recent acquisitions of BE&K Building Group (BE&K BG) and certain assets of dck Pacific Guam, LLC and dck-ecc Pacific Guam, LLC Joint Venture Interest (collectively, PPG) has significantly increased diversification of end markets, services and geographic footprint increased critical mass, and expanded the subcontractor/vendor base as well as the project partner network globally.
Business Segments
Construction Segment
Our construction segment includes both general contracting and construction management services with significant pre-con consulting. We have responsibility from contract award through the successful completion of each project.
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General Contracting
Our general contracting services are focused on our domestic and international projects where we have developed a global network of suppliers and subcontractors. Together with these strategic partners, we utilize niche capabilities and experience that address customer design, budget and schedule requirements. This not only assists Pernix Group in winning larger projects, but also mitigates cost, design and other risks, provides experience managing larger projects, expands relations with more subcontractors and vendors, and enhances the number and type of contract opportunities that Pernix can qualify for, bid on and win.
Additionally, all of our construction team members have worked on complex domestic and international projects. We have the expertise required to successfully conduct full scale construction projects anywhere in the world. We have demonstrated that we can execute the most technically and geographically challenging projects within time and budget parameters while meeting the exacting quality and safety requirements of the contract, thereby exceeding our clients expectations. Pernix Group has the ability to self-perform multiple trades when doing so brings efficiencies and value to a project and our customers.
Construction Management
We have significant experience in providing at-risk and agency construction management services on complex facility projects typically in the private sector across specific market centers-of-excellence including Advanced Manufacturing, Food/Beverage, Biotech/Pharma, Healthcare, Higher Education and other General Commercial Mixed use sectors.
Our experience has proven that early involvement in a project and its design is one of the keys to its success. Our proven approach works in line with our customers needs and expectations to develop a plan and an execution schedule that saves time and money and ensures timely completion of our projects. Our state-of-the-art construction management services provide a systematic project review, including a comprehensive construction and start-up schedule. By establishing a singular point of responsibility, we provide continuous updates on project milestones and ensure the safest working environment while we deliver projects on time and on budget.
Design Build
Pernix embraces the design/build model to ensure design excellence and successful completion of construction projects from analysis, architecture and permitting, through engineering, construction, completion and customer acceptance. By establishing a singular point of responsibility, we deliver on our promise to fulfill all project requirements and specifications on-time and on-budget.
We are committed to understanding the unique requirements and specifications of each project to provide a comprehensive single source solution. This value-added partnership leverages our ability to align and manage the best resources for all aspects of the project.
Recent Acquisitions
On June 15, 2015, Pernix Guam LLC (PPG) a wholly-owned subsidiary of the Company, acquired certain assets of dck Pacific Guam LLC, including Guam-based experienced operations and sales personnel, and a 55% membership interest in dck-ecc Pacific Guam LLC joint venture (collectively PPG). PPG provides general construction, as well as design-build and construction management-at-risk services. PPG has construction expertise in the military, retail, industrial, commercial and healthcare end markets. The PPG acquisition establishes a sizable and reputable platform in the region with the ability to pursue opportunities across the Pacific Rim. As part of the acquisition, PPG obtained rights to a $53.6 million P-109 project with the Naval Facilities Engineering Command for the design and construction of an aircraft maintenance hangar on the island of Guam. Pernix assumed a 96% economic interest in the rights and obligations of the JV with respect to the aircraft maintenance hangar project, while the other members of the JV retain the rights to all other projects of the JV. The P-109 project is
approximately 37% complete as
of December 31, 2015.
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On June 30, 2015, Pernix Group acquired KBR Building Group, LLC, now known as BE&K Building Group (BEK BG), a diversified domestic construction services company serving Advanced Manufacturing, Food/Beverage, Biotech/Pharma, Healthcare, Higher Education, Commercial/Mixed-use and institutional clients nationally. BEK BG offers a variety of construction services and project delivery methods including: pre-con, at-risk and agency construction management, and design/build. As a result of this acquisition, Pernix added locations in Greenville, South Carolina, (BEK BG headquarters) as well as additional regional operations in Chicago, Illinois; Houston, Texas; Washington, D.C.; Research Triangle Park, North Carolina; and Charleston, South Carolina. BEK BG is well-positioned to operate in other parts of the country to accommodate its clients building programs. In the last decade alone, BEK BG has executed an impressive list of building programs for major corporations including American Honda Motor Company, BASF, Boeing, Duke Medicine, DuPont, General Mills, Ferguson Enterprises, Gulfstream Aerospace, Novartis Vaccines & Diagnostics, Purdue Pharma, Sysco Foods and Triumph Aerostructures. The vast majority of its projects are for repeat clients, and most of its projects are won on the basis of the qualifications, experience and client-driven values of its people.
Recent Projects
BEK BG is providing construction services for an 186,000 sf
production/research
facility for Mayne Pharma in Greenville, North Carolina. Site construction began October 2015 with completion scheduled for fall of 2017.
BEK BG is providing construction and design-assist services for a new 290,000 sf aircraft modernization laboratory facility in Oklahoma City for The Boeing Company. The building will eventually house approximately 800 employees working in engineering, research and development laboratories, and support areas. Construction began May 2015 with completion scheduled for July 2016.
BEK BG is providing construction services for an autoclave expansion for The Boeing Company in South Carolina. This project is part of a comprehensive building program. BEK BG has provided ongoing construction management services for this client at this location for nearly 10 years. The project size is approximately 30,000 sf, construction began in October 2014 and was substantially completed in February 2016.
BEK BG is providing construction services for Gulfstream Aerospace Corporations Georgia headquarters which involves a significant expansion to an existing facility, also constructed by BEK BG. The expansion adds 110,000 sf of high-bay manufacturing space to the original facility. Construction began in March 2015 and was completed in January 2016.
BEK BG is providing construction services for a 120,000 sf judicial center with court and court related facilities for Florence County, in Florence, South Carolina. Construction began February 2016 with completion scheduled for December 2017.
In addition to our construction projects associated with our recent acquisitions, many of the Companys construction projects are for the DOS as well as select foreign governments. In most instances the bidding process requires an initial pre-qualification of selected contractors, followed by a proposal submission stage for qualified contractors. Pernix Group focuses its efforts in areas and on projects where we have a competitive advantage that is within our core competency. We minimize risk and develop winning strategies by thoroughly studying local markets, aligning ourselves with capable local or regional large prime-subcontractors, and establishing purchasing and logistics support locally, or regionally, whenever possible. Our performance history and record of client retention demonstrate the successful formula Pernix and its partners have developed allowing us to grow our business and achieve customer satisfaction, which is evidenced by the awarded contracts from The Bureau of Overseas Buildings Operations (OBO) to Pernix and our joint ventures.
On September 18, 2015, the U.S. DOS awarded the Company a contract totaling $81.6 million for the U.S. Embassy Berlin Clay Allee Campus. The contract includes major renovations to and the historical preservation of the Berlin Brigade Headquarters constructed by the German Luftwaffe prior to World War II. The contract also includes an upgrade to campus security and a Marine Security Guard Quarters fit-out project.
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Since 2011, OBO has awarded five projects to Pernix or PSJV, a highly effective venture with Serka Insaat ve Ticaret, A.S. (Serka) that is 52% owned by Pernix and 48% by Serka. PSJV has an office in Vienna, Virginia, in close proximity to U.S. Government agencies in order to closely manage its customer relationships (including OBO) and to provide effective contract execution and oversight for its customers on its mission critical, fast-track work efforts in Iraq, Africa and elsewhere.
Additionally, PSJV participates in a multi-billion dollar Indefinite Delivery Indefinite Quantity (IDIQ) contract with OBO. The IDIQ provides PSJV with the opportunity to bid on task orders for Containerized Housing Units (CHU) and Modular Office Units to be built internationally. The size of each task order is dependent upon the scope of work and there is no guarantee that PSJV will win any particular task order, but the overall IDIQ program is for five years and totals $12.0 billion. The amount of the awards to any one contractor cannot exceed $500 million in one year and $2.0 billion over the life of the contract should all four option years be exercised. PSJV has actively responded to several Task Order Proposal Requests to bid under this IDIQ contract and has been awarded three contracts with revenue totaling over $230 million under this program since April 2011.
In December 2015, OBO extended the period of performance by a period of six months under our base CHU IDIQ contract extending the period within which additional Task Orders can be awarded to PSJV to July 2016.
Our experiences with the OBO have strategically strengthened our technical and management expertise and developed relationships that enable us to provide our clients with a broad spectrum of services that leverage the expertise and the construction résumés of our staff and our partners to the mutual benefit of all involved. In addition to PSJV, Pernix has also formed several additional strategic alliances with companies who possess niche capabilities in restoration work as well as critical mass that enables Pernix to be part of a consortium of contractors with the intention of bidding and working together on large scale projects which Pernix may not be able to access on a stand-alone basis.
On January 22, 2015, the Department of the Armys U.S. Army Corps of Engineers awarded Pernix-Kaseman JV (a newly formed Limited Liability Company in which the Company owns 51%) a contract totaling $11.6 million to construct a Communications Center Special Area at Camp Humphrey in South Korea. The project is approximately 37% complete as of December 31, 2015.
In early 2014, Pernix Fiji Limited (PFL) was awarded a $27.4 million project to build a 36MW expansion to the Kinoya diesel plant in Fiji. The project scope includes design expansion, procurement and installation. PFL also received a $3.4 million award in February 2015 for construction of the sub-station to support the newly expanded diesel power station previously awarded to PFL. This project is substantially complete as of December 31, 2015.
We believe our experience and track record in Fiji and ongoing experience in Niger, Freetown and Baku demonstrate our ability to bid on, obtain and successfully complete additional embassy and/or U.S. Government projects as the DOS intends to build, rehabilitate or upgrade more than 33 embassy and consulate facilities in the 2016 2018 timeframe.
Construction Segment Outlook
According to Global Construction 2030, construction is currently in excess of an $8 trillion market globally with the expectation to grow 85%, or almost 4% annually, to $15.5 trillion by 2030. Forecasts show China, the United States and India driving this growth, accounting for 57% of all global growth anticipated for 2015-2030. Overall, developing markets will continue to emerge as some of the fastest growing construction markets, in particular in the ASEAN and Sub-Saharan African nations, as rising populations, rapid urbanization, infrastructure development and strong economic growth prospects serve as catalysts for the construction industry. Positive near-term outlook is also anticipated from developed markets, with higher growth in the United States and United Kingdom offsetting headwinds in Europe and Japan. Challenges across the developed world include poor demographic trends, large public deficits, Eurozone exit fears and limited economic growth prospects.
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As a result of the aforementioned demographic and economic trends, emerging markets represent a significant growth opportunity in the near and long term. In light of its experience, Pernix is uniquely qualified to perform in emerging markets which can be more remote and logistically challenging environments. Furthermore, Pernix is currently operating in Africa, East Asia, Europe and the Pacific Rim, demonstrating an ability to navigate market shifts across the developing and developed world.
The U.S. is expected to experience one of the highest developed nation growth rates in 2016 by registering an upturn in both residential and non-residential building construction. Dodge Data & Analytics 2016 Dodge Construction Outlook anticipates residential building up 16% with construction start dollars increasing 20% for Single Family Housing and 7% for Multifamily Housing. Additionally, Dodge anticipates total non-residential building growth of 9% that is headlined by Commercial Building growth of 11%, Institutional Building Growth of 9% and a slight decline in Manufacturing Building starts of 1%. Pernix, through its subsidiary BE&K BG, is well positioned to capitalize on these trends with experience in Multifamily, Commercial, Institutional and Manufacturing construction for both global Fortune 100 and regional clients across the United States.
Power Services Segment
Although virtually everyone in the world relies on it, the needs and resources required to generate power can vary widely from location to location. From the types of fuels and technologies employed to the plethora of regulations governing the development, construction and operation of power generation plants, Pernix Group understands the unique needs and requirements of different projects in diverse geographic locations.
Our Power Services business segment includes plant Engineering, Procurement, and Construction (EPC), O&M services, and Build, Own, Operate, Transfer (BOOT) capabilities. Pernix focuses its service offerings on small to mid-size power plants as well as transmission and distribution grids and underground cable installation.
Operations and Maintenance (O&M)
Pernix Groups Power O&M services provide an integrated scope of services covering all aspects of power operations. Specifically, our O&M services include maintenance & operations, engineering, on-going reliability studies, construction management, recovery/rebuild, specialty services and rehabilitation. Prior to assuming operating responsibility for customer operations, we perform plant audits and provide a comprehensive plan, including timelines for assuming responsibility of the operation, as well as initial and long-term maintenance requirements. Our intense focus on machine performance and OEM maintenance requirements ensures efficient and long term operation of equipment. We also partner closely with public and private entities to improve plant processes, performance, reliability and customer service while reducing operating costs as circumstances allow.
Pernix focuses on operating efficiency and reliability while maintaining safety, security and environmental stewardship. The Pernix Group power segment prides itself in being a steward of the environment and the assets entrusted to us by the communities in which we work. Accordingly, Pernix Group goes to great lengths to ensure that power segment employees are not transient operators, but ones who live and work in the community and depend upon the same power being provided to our customers. This is part of our commitment to bring jobs and add value to the communities we serve.
Engineering, Procurement, and Construction (EPC)
Pernix Group relies on its construction capability and strong affiliation with world-class design firms and subcontractors to provide comprehensive global power EPC solutions. We have the resources to properly fit technology with our customers special requirements, budget and environmental considerations and constraints. Power plants are a significant investment and become a crucial part of a communitys survival, hence we take great care to understand what our customer requires, and ensure that the end product exceeds their expectations for today and contemplates their needs for the future. We accomplish this by partnering with our customers throughout all project phases to understand and recognize the unique requirements of each customer and each project phase, and leverage our ability to align and manage the best resources for all aspects of each particular project.
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Pernix Group differentiates itself in its ability to efficiently scale its services to various size projects, ranging from small to mid-sized projects on a stand-alone project basis to large projects in association with our strategic partners. The variation in the scale of projects on which we work reflects the well thought out design, agility and efficiency in our operations. Pernix also has a wealth of experience upgrading existing facilities including the addition of new capacity or the refurbishment or replacement of outdated equipment at customer sites. These upgrade projects typically produce significant cost savings and performance improvements for our customers and can often be carried out while the power plant continues to operate, resulting in even greater cost savings.
As noted in the construction segment discussion, our state-of-the-art construction management services provide a systematic project review, including a comprehensive construction and start-up schedule. Our power plant construction methodology is not limited to building a facility; we also provide start up and commissioning services to ensure that the equipment is fully integrated with all other operating systems as well the transmission/distribution system and power grid. Furthermore, we provide the appropriate training for startup as well as future operations and maintenance. In many cases, Pernix manages and operates many of the plants that we build. Due to our years of experience and diverse geographic footprint, we have developed strong regional and in-country relationships with engine and turbine manufacturers, suppliers of parts for power plants and distribution/ transmission systems, software developers and suppliers for control systems, Customer Information Systems (CIS), and Geographic Information Systems (GIS). For this reason, Pernix is able to provide world-class power plant O&M services which are broad in scope and competitively priced.
Build, Own, Operate, Transfer (BOOT)
In addition to our O&M services and EPC, Pernix Group has the ability to implement projects via a BOOT model to help our customers finance and manage their current and potential infrastructure projects. Up-front costs are eliminated and the customer ultimately attains ownership of the final product. This is very similar in concept to a toll road. BOOT makes it easy for the customer to execute critically needed projects now despite budget constraints which would otherwise require deferring such projects well into the future.
Organizations such as the World Bank, U.S. EX-IM Bank and other international finance institutions (IFIs) have a history of lending money to aid customers in improving and privatizing their infrastructure. The BOOT model is another financial tool available to cash or budget constrained customers to achieve their infrastructure improvement goals. BOOT is one of several financing options that the Pernix Group may be able to offer our clients.
Current Power Operations & Maintenance Services
Our power projects to date have been primarily international with specific focus in the North and South Pacific. Our power services segment currently operates power plants in the Republic of the Fiji Islands (Fiji) and the Republic of Vanuatu (Vanuatu) and it contributed
$6.0 million
, or 3.0% of our 2015 revenue. Although the revenue from our power operations represents
just 3.0% and 7.7% of
consolidated revenue during 2015 and 2014, respectively, it historically accounts for a significant portion of the Companys pretax income from continuing operations in 2014.
Pernix Fiji Limited (f.k.a. Telesource Fiji, Limited)
PFL is a subsidiary of Pernix that conducts power service activities in Fiji. PFL has long-term contract with the Fiji Electricity Authority (FEA) to operate and maintain two separate diesel fired power generation plants. The O&M contract for these plants expires in May 2028 and includes management of a total of 110 MW of diesel power generation installed capacity in Fiji. In November 2014, Fijian Holdings Limited (FHL), an unrelated third party, acquired a 25% interest or 249,999 common shares of PFL for $2.3 million. Prior to this transaction, PFL was a wholly-owned subsidiary of Pernix.
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The Company operates two power plants in Fiji. The Kinoya Power Plant, which consist of three phased-in plants situated near Suva, the capital of Fiji, is part of the FEA grid and is the largest diesel fueled power plant in Fiji with an installed capacity of 86.1 MW. The Vuda Power Plant, situated between Nadi and Lautoka is the second largest diesel fueled power plant in Fiji with an installed capacity of 24.2 MW for a total combined installed capacity of 110 MW. The Kinoya and Vuda Power Plants are fully compliant with the applicable laws of Fiji relative to power plant operations such as the Labor Industrial Act and the Environmental Act, and complies with manufacturers guidelines by applying prudent engineering practice in the operation and maintenance of the power plant in both locations.
In late 2015, the Companys existing O&M service agreement was amended to reflect the award of the 36 MW expansion project at Kinoya (as Pernix had been the EPC contractor). The Companys total operated capacity of 110 MW is inclusive of the 36 MW expansion.
Demonstrative of PFLs outstanding O&M performance record, FEA has rated the PFL-managed Vuda and Kinoya power stations first and second out of five power stations in Fiji, and the FEA report stated ...it is no coincidence that the two Telesource (Pernix) stations are ranked first and second. They have a dedicated technically based health, safety and environmental officer who is actively involved in carrying out frequent and regular in house risk management checks. FEA is a utility wholly-owned by the Government of Fiji and is responsible for the generation, transmission, distribution and retail sale of electricity on the islands of Viti Levu, Vanua Levu and Ovalau. FEA serves approximately 90% of the countrys population. PFL is therefore very proud of the positive recognition given to it by FEA.
Vanuatu Utilities and Infrastructure Limited (VUI)
In late 2010, VUI was selected by the Government of the Republic of Vanuatu to provide O&M services for the Luganville power plant in Vanuatu. VUI earns a monthly fee based on man hours necessary to operate and maintain the facilities. The costs associated with earning the management fee are included in salaries and employee benefits and also in general and administrative expenses in the consolidated statement of operations.
The Utilities Regulatory Authority monitors and reports on the performance of electric utilities in Vanuatu. These reports bring transparency to the performance of the power providers, having recently described how well VUI provided services to its customers since VUI began to manage the power structure on Vanuatu on January 1, 2011. This report found VUI to have performed well in all areas including network performance, safety performance, customer service, reliability and quality of supply, and legislative and regulatory compliance.
Power Segment Outlook
According to ExxonMobils Outlook for Energy, from 2016 to 2040 the worlds population is projected to grow from 7.2 billion to 9 billion, and the global economy will more than double. As economies and populations grow, and as living standards improve for billions of people, the need for electricity is expected to continue to rise. Even with significant efficiency gains, global electricity demand is projected to rise by about 65% percent from 2014 to 2040.
In the countries belonging to the Organization for Economic Cooperation and Development (OECD) - including countries in North America and Europe energy saving practices and technologies are expected to keep power usage relatively flat, even as these countries achieve economic growth and even higher living standards. In contrast, 85% of new electricity demand through 2040 is expected to come from Non-OECD countries as billions of people working to advance their living standards will require more power. By 2040 only 550 million people in the world are projected to remain without access to electricity, the majority of them located in sub-Saharan Africa.
Additionally, renewable energy sources will continue to overtake coal and other fossil fuels driving over half of all growth in electricity demand to 2040. By the early 2030s, the IEA expects renewables to become the largest source of electricity around the world and by 2040 account for 50% of generation in the European Union, 30% of generation in China and Japan and 25% of generation in the United States and India.
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Pernix is well-positioned to meet that global demand for power. As mentioned above, Pernix is among few within the power industry that have constructed and operated power plants in some of the most remote locations in the world and we can readily scale to various size projects ranging from small to mid-sized, on a stand-alone project basis and to large projects in association with our partners. This flexibility in the scale of projects on which we serve reflects the well thought out design, agility and efficiency in our operations.
The Company also has the capability to provide services for renewable power, including development, design, construction and facility O&M services for hydroelectric, solar, biomass and other renewable energy sources. Pernix continues to actively pursue those opportunities in Guam, Fiji, Papua New Guinea, Vanuatu, Samoa, the Solomon Islands and other locations across the Pacific Rim. Given its presence and strong reputation, Pernix anticipates that it will continue to be successful in that region.
While the Companys outlook for new
projects is highly positive, its relationships in Fiji and Vanuatu provide a recurring revenue stream for the next several years.
Corporate Segment
The Corporate segment covers the indirect activities supporting the Companys construction and power activities. The Corporate segment earnings consist of rental revenue generated from the Companys headquarters in Lombard, Illinois.
Our Business Strategy
Our business strategy as a diversified contractor focuses on expanding our public (government funded or sponsored) as well as extending our private sector construction management services and power services construction market segments. Key elements of our strategy include:
Expand and foster positive relationships with governments, public agencies and private entities worldwide
We will continue to focus on maintaining and expanding our existing relationships with governments, public agencies and private sector clients worldwide and diversifying our customer base within these sectors both domestically and internationally. We intend to penetrate these markets through strategic relationships, co-investment opportunities and acquisitions. We believe that to develop new contacts and opportunities we must continue to consistently exceed existing customer expectations, something we strive to do with every opportunity to serve. We will find new opportunities through promoting our Companys résumé and our reputation in the marketplace to targeted customers. These efforts will be supplemented by market intelligence gathering and providing customized solutions based upon an understanding of the specific needs of each governmental agency and each private customer.
Capitalize on opportunities in challenging geographic locations
Pernix has built its reputation in the public sector on completing difficult projects in the most remote areas of the globe. For example, the Companys résumé includes constructing a broadcasting station on the remote island of Tinian; managing the global logistics necessary to construct or modify the U.S. Embassies in Suva, Fiji, Baku, Azerbaijan, Freetown, Sierra Leone and Niamey, Niger; managing logistics and construction of the containerized housing projects in Iraq, and finding and training a local workforce to bring electricity to regions in Vanuatu that had never had electric service before. Pernix possesses the ability to help our clients understand, define and complete extraordinary projects of varying scale. Pernix Group understands what is required to execute and complete the most challenging projects regardless of whether the challenge is geographical, political, mechanical, or any combination of` these factors. While many of our competitors are not equipped nor experienced to manage technically challenging projects in remote geographic locations, Pernix Group specializes in and thrives on such challenges.
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We intend to leverage our leading positions in the general construction, power construction and facilities O&M capabilities to continue to expand our services and revenue. We believe that the need for infrastructure upgrades, governmental facilities as well as diesel-fired, hydroelectric, biomass, natural gas fueled combined cycle and solar power will result in continued opportunities in our core markets. All of our business segments have unique integration opportunities particularly in the construction and O&M markets. With our ability to manage projects internationally, our successful track record and our global resources, we believe we are well-positioned to compete for projects in these global markets.
Continue to drive Center-of- Excellence Capabilities
Pernix is well recognized in the private sector across many specific end markets for expertise on all consulting and implementation levels. We will continue to develop our expertise in these specific project types as well as drive operational centers of excellence, including advanced upstream pre-con services and technology/systems enhanced downstream construction management capabilities, across our specific current and several new end markets.
Utilize our long-standing relationships with industry specialists
We have long-standing relationships with a number of industry specialists worldwide. These relationships have been established to enhance our ability to satisfy our clients and deliver comprehensive solutions for customer needs. By collaboratively consolidating knowledge bases, skill sets, resources and contacts, we believe we have the ability to efficiently export our leading edge technical skills to any region in the world in which our clients may need them. We also continually develop new relationships that provide us with the necessary agility and expertise to meet design, construction and operating needs of new and existing customers as their needs evolve.
Continue to pursue our acquisition strategy
We intend to consider acquisitions and co-investment opportunities to grow our general construction, power construction, and facilities O&M businesses. The Pernix Group management team has defined what it considers to be desired potential target characteristics including: companies of a scale and scope that will provide manageable growth that can be readily integrated, will be accretive to earnings, and will facilitate new client relationships. Ideal targets will also expand Pernix Groups domestic presence and diversify and balance the Companys profile, credit risk and provide more consistency to Pernix Groups revenue and earnings streams. We will search for other successful companies whose growth can be enhanced through a synergistic combination of respective resources. This approach will expand, strengthen and diversify our market leadership positions geographically and technically across end markets. We believe that the trend towards consolidation in the industries in which we operate will produce candidates that align with our acquisition strategy.
Strengthen and support human capital
Our customers benefit from the extensive experience of the Pernix team members; we have engineers at Pernix with project experience in a multitude of different countries. The management team in the Finance and Administration areas has significant prior public accounting and Fortune 100 finance experience. With the recent acquisitions of BEK BG and PPG (which are disclosed in Note 4), the Company significantly enhanced its business development and operations managers in the construction segment. A large percentage of our employees have technical and professional backgrounds, as well as undergraduate and advanced degrees.
We will continue to focus on providing our personnel with training and other personal and professional growth opportunities, performance-based incentives, opportunities for stock ownership and other competitive benefits in order to strengthen and support our human capital base. The Company has three equity incentive plans and the Company has broadened participation in the equity plans based on performance.
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The Company also invests in key leadership positions at the highest levels in the organization, including the Board of Directors. This experience and leadership expertise ensures alignment of business strategy objectives and corporate governance within the organization
. Specifically, Mr. Don J. Gunther assumed the role of Chairman of the Board of Directors effective December 31, 2013 through October 6, 2015. He continues to serve on the Companys Board of Directors as Vice Chairman and on the Compensation Committee since December 2012 and brings a wealth of construction and energy knowledge to the Board. Mr. Gunther was President, Vice Chairman and Director of the Bechtel Group, where he had responsibility for all of the global industry units and all corporate functions, including project management, engineering, procurement, construction, information services, information technology and contracts.
Our Business Segments
The following table sets forth the revenue attributable to our business segments for the periods indicated (1):
|
Year End December 31,
|
|
|
2015
|
|
|
2014
|
Construction
|
$
|
189,415,888
|
|
$
|
78,573,035
|
Power Services
|
|
5,987,511
|
|
|
6,583,394
|
Corporate
|
|
87,925
|
|
|
144,310
|
Total Revenue
|
$
|
195,491,324
|
|
$
|
85,300,739
|
|
|
|
|
|
|
(1)
For additional financial information including net income by segment, see Note 19 to our consolidated financial statements.
Our Clients by Segment
In 2015 the construction segment has one major customer, who represents 26% of the consolidated total revenues of $195.5 million. The loss or reduction of business from this customer could materially and negatively impact the Companys net income, cash flows and financial condition.
As of December 31, 2015, the power services segment has two primary customers: the FEA and the Government of Vanuatu. In 2015, neither of these customers individually account for more than 10% of the consolidated total revenues. However, the Government of Vanuatu accounts for $1.1 million of the Companys 2015 pre-tax income. The loss of either of these customers could materially and negatively impact the Companys net income, cash flows and financial condition.
The Corporate revenue consists of rental income received from third parties for space leased in the corporate office headquarters in Lombard, Illinois. The Corporate segment does not have any major customers in 2015.
Joint Ventures and Other Arrangements
Some of our larger contracts may operate under joint ventures or other arrangements under which we team with other reputable companies, typically companies with which we have worked for many years. This is often done where the scale of the project dictates such an arrangement or when the parties want to strengthen either its combined market position or technical skills. Several such joint ventures and strategic alliances have been established in the past several years and we continue to develop more strategic relationships.
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Competition
The professional, technical and management support service markets we serve are highly fragmented and we compete with a large number of regional, national and international companies. Certain of these competitors have greater financial and other resources than we do. Others are smaller, more specialized, and concentrate their resources in particular areas of expertise. The extent of our competition varies according to the particular markets and geographic area. The degree and type of competition we face is also influenced by the type and scope of a particular project. Our clients make competitive determinations based upon qualifications, experience, performance, reputation, technology, customer relationships and ability to provide the relevant services in a timely, safe and cost-efficient manner. Pernix Group utilizes partnerships and other key strategic relationships to obtain an advantage with regard to niche specialization, to obtain flexibility with regard to scale and scope of projects it may be involved with, thereby enhancing the combined résumés of Pernix and its partners. Pernix Group will continue to focus on providing the best in class procurement and contract execution processes as well as world class customer service in an agile fashion.
Insurance and Risk Management
We maintain insurance covering professional liability and claims involving bodily injury and property damage. We consider our present limits of coverage, deductibles, and reserves to be adequate. Wherever possible, we endeavor to eliminate or reduce the risk of loss on a project through the use of quality assurance/control, risk management, workplace safety and similar methods. Risk management is an integral part of our project management approach and our project execution process.
Regulation
We are subject to various government laws, regulations and/or applicable laws pertaining to the protection of the environment, primarily in the areas of water and air pollution (e.g. Council on Environmental Quality, the Environmental Protection Agency and FEA). These laws and regulations in many cases require a lengthy and complex process of obtaining and maintaining licenses, permits and approvals from local agencies. As regulations
are enacted or adopted in any of these jurisdictions, we cannot predict the effect of compliance therewith on our business. Our failure to comply with any applicable requirements could result in delays in proceeding with any projects under development or require modifications to operating facilities. During periods of non-compliance, our operating facilities also may be forced to shut down until the instances of non-compliance are corrected and/or be subject to fines or penalties. We are responsible for ensuring compliance of facilities with applicable requirements and, accordingly, we attempt to minimize these risks by dealing with reputable contractors and using appropriate technology to measure compliance with the applicable standards.
We are regulated in a number of fields in which we operate. In the United States, we deal with the DOS to bid and execute on the construction of U.S. embassies and other projects. When working with this agency, we must comply with laws and regulations relating to the formation, administration and performance of contracts. These laws and regulations, among other things:
require certification and disclosure of all cost or pricing data in connection with various contract negotiations;
impose procurement regulations that define allowable and unallowable costs and otherwise govern our right to reimbursement under various cost-based U.S. government contracts; and
restrict the use and dissemination of information classified for national security purposes and the exportation of certain products and technical data.
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Presently, neither the Customer Choice Act nor other similar proposed legislation dealing with U.S. power policies directly impact us because the legislation and restructuring plan pertain to the retail market or new contracts in wholesale markets. However, we could be impacted in the future by, among other things, increases in competition as a result of deregulation. Compliance with federal, state, local and foreign laws enacted for the protection of the environment have had no significant effect on our capital expenditures, earnings, or competitive position to date. We are actively monitoring these developments in power proceedings in order to evaluate the impact on existing projects, and also to evaluate new business opportunities created by the restructuring of the electric utility industry and technological developments therein.
Contract Backlog
Backlog represents the amount of revenue the Company expects to realize from work to be performed on uncompleted construction contracts in progress at December 31, 2015, and from construction contractual agreements on which work has not yet begun and awarded not booked backlog where a contract agreement has not been signed but there is a high degree of certainty where we expect to recognize revenue in the future. The following summarizes changes in backlog on construction contracts during the fiscal year ended December 31, 2015:
Balance at December 31, 2014
|
$
|
21,501,972
|
New construction contracts / amendments to contracts in 2015
|
|
547,346,411
|
Less: construction revenue earned as of December 31, 2015
|
|
(189,415,888)
|
Balance at December 31, 2015
|
$
|
379,432,495
|
Management anticipates that a significant portion of the backlog will be recognized as revenue during 2016. The
table does not include $169.2 million of revenue associated with our recent OBO award to construct the new U.S. Embassy Compound in Maputo, Mozambique (disclosed as a subsequent event in Note 21), nor does it include our long term contracts or memo of understanding (MOU) for power O&M services or construction segment stipend income. The stipend income is related to contracts that were not ultimately awarded to the Company as they are not directly related to core construction work.