Quanta Services Inc (PWR) 2002 Q2 法說會逐字稿

Good morning, ladies and gentlemen and welcome to the Quanta second quarter earnings conference call. At this time all participants are in a listen-only mode. Following today's presentation, instructions will be given for the question-and-answer session. If anyone needs assistance at any time during the conference, please press the star followed by the zero. As a reminder this conference is being recorded on Tuesday, August 13, 2002. I would now like to turn the call over to Mr. Ken Dennard, Managing Partner of Investor Relations. Please go ahead. sir.

Thank you, Daphne. Good morning, everybody. We appreciate you joining us for Quanta Services conference call to review quarterly results. We also welcome our Internet participants listening to the call as it is being simulcast live over the Web. Before I turn the call over to management, I have the normal housekeeping details to run through. You could have received a fax or an email of the earnings release this morning but occasionally there are technical difficulties experienced during these broadcasts. So if you didn't get your release or would like to be put on the distribution list to receive these releases, please call our offices at Easterly Investor Relations, 713-529-6600. Additionally, there will be a replay of today's call available via webcast by going to quantaservices.com and click on the webcast section that will be archived there for about 30 days. There's also a telephonic replay available a couple of hours after the call. To access that feature, please dial 303-590-3000. And enter the pass code 491655. This information is also in the press release.

As you know, this conference call today contains various forward-looking statements and information including management's expectations regarding revenues, operating margins, EBITDA earnings per share and other results for the quarter ended September 30 -- for the quarter ending September 30, 2002, and the year ending December 31, 2002. These statements are based upon management's beliefs as well as assumptions made by and information currently available to management. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, they can give no assurance that such expectations will prove to have been correct. Such statements are subject to certain risks, uncertainties and assumptions including, among other matters, future growth in the electrical utility and telecommunications outsourcing industry, the ability of Quanta to compete -- excuse me, complete acquisitions and effectively integrate operations of acquired companies, access to sufficient funding to finance Quanta's' desired growth, dependence on fixed price contracts, cancellations provisions and contracts, and departure of key personnel as well as general risks related to the industries in which Quanta operates.

Should one or more of these risks materialize or should underlying assumptions prove incorrect, actual results may vary materially from those expected. For detailed discussions on these risks, investors are urged to refer to the Company's reports filed under the Securities and Exchange Act of 1934. And now I'd like to turn the call over to John Colson, Quanta's Chief Executive Officer. John?

Thanks, Ken. I would also like to welcome you to our second quarter 2002 conference call. After my initial overview of the quarter, our Chief Operating Officer, Peter Dameris, will outline the operational highlights, including our cost savings initiatives. Then James Haddox our Chief Financial Officer will present the financial details. After the presentation, we will be available for questions.

While we continue to operate in a difficult telecom market, we remain optimistic about our opportunities and maintain our focus on ensuring the stability of our core business and positioning the Company for future growth. This morning we announced earnings for the second quarter of 2002. Today we also announced an amendment of our existing credit facility and also we have adopted SFAS 142 which resulted in a non-cash charge relating to the change in accounting. James, of course, will address both of these items in more detail. While the second quarter saw another wave of market deterioration and customers filing for bankruptcy, delaying and canceling projects, and reducing their CAPEX spending, we continue to focus on the elements of our business we can control. Such as reducing costs, collecting receivables, ensuring quality service, and downsizing our business to match the markets that we now serve. Our overall business strategy, especially our focus on diversification and exceptional quality standards remains the primary driver of Quanta's overall performance even in today's market. And with the resolution of the proxy contest with Aquila in the second quarter, we should no longer have proxy costs encumbering our P&L. Peter will talk about specific market conditions and our cost control and right-sizing initiatives.

To illustrate our commitment to downsizing our business to produce profits in a declining market, SG&A excluding expenses associated with professional fees, related primarily to collections, was reduced in the second quarter, compared to the first quarter of 2002. And we experienced a total employee reduction of over 1200 since the end of the first quarter. What I'd like to focus on now is providing you with some insight on the developments that contributed to the condition of the markets we serve and why our current business model is one of stability that ensures future success. Even a brief evaluation of our top 20 customer listings for 2000 and where those customers are today clearly illustrates the completely different operating and competitive environment that we are currently in. For the year 2000, more than half of our top 20 customers were telecom companies. Today the emerging telecom industry no longer exists and telecom CAPEX budgets are $150 billion less than originally planned for in the period of '02 to 2005.

To compound the situation, our electric power customers are now faced with cash flow problems such as trying to maintain credit agency ratings because of financial shortfalls related to deregulated investments. This has resulted in layoffs, downsizing and selling of assets by the utilities. As a result, half of the companies that were on our list of top 20 customers in 2000 are either no longer in business or have filed for bankruptcy. These customers include PF Net which is now called Philosedent, Williams Communications, Level 3, Saren, Next Link, PQ, Adelphia, Enron, and RCN. The effect of this market shift is evidenced in our second quarter results. Specific factors impacting our second quarter results include, our largest overall customer in the first quarter, Adelphia, filing for bankruptcy and halting its cable buildout. Velocita also filed for bankruptcy in the second quarter. Velocita has been a major customer since 1999 when we entered into a three-year $140 million contract with them to build a fiber network from California to Florida. In addition, temporarily frozen budgets at customers including AT&T have not yet been released. We believe the unexpected deterioration of the electric power side of our business last quarter, is temporary. And because of our deep expertise, we are solidly positioned as that deterioration subsides.

Nonetheless, our customer make-up is very different today with income from emerging telecom companies removed from our revenue base, the revenue by customer breakout consists primarily of financially stable companies such as Puget Sound Energy, Entergy and others with whom we have a long solid working relationship. For the second quarter, our pro forma revenues by customer industry is as follows. 51% of our revenues were derived from electric power customers followed by telecommunications customers at 18%. Compared to 2001, when Tocos made up 32% of our revenues and electric power companies customers made up 39% of our revenues. For the second quarter of 2000, 12% of our revenues were derived from broadband cable TV customers. And the remaining 19% of revenues were derived from other customers including government agencies.

The breakout of revenues by type of work is as follows for the second quarter of 2002. 53% of our revenues were related to outside electrical and gas work. 13% of our revenues were generated from local and area loop telecommunications work. 1% of our revenues were from long haul telecom work and fiber cable being installed on electric transmission lines. 1% of our revenues were also from wireless telecom. 12% of our revenues were generated from the cable television work. 6% of our revenues were from commercial and industrial inside work, which includes inside wiring, data cabling, and VDV, that's voice data and video. 5% of our revenues were from traffic signal, street lights and intelligent highway systems and other transportation-related areas. The remaining 9% were classified as "other." Our top 10 customers for the quarter equal only 32% of our total revenues. And our top 20 customers made up approximately 47% of revenues.

We continue to be aggressive and pro-active in seeking ways to grow our business. For example, we partner with many of our customers and other industry leaders to leverage complementary strengths and coordinate marketing efforts. In fact, 37% of our revenues in the second quarter came from strategic alliances. And more than 45% of our contracts are cost-plus, or negotiated, where quality, timely completion and safety are primary considerations rather than low price. We believe that our customer base going forward is more stable now than at any time over the past two years. This is because of who these customers are and their financial strengths.

This past quarter, 15 of our top 20 customers based on revenue fall in the power industry. Companies such as Entergy, who just reported an increase in profits, Puget Sound Energy, whose second quarter results exceeded expectations, Intermountain Rural Electric, Georgia Power, Florida Power and Light, Alabama Power Company, Kansas City Power and Light, El Paso Energy, San Diego Gas and Electric, Reliant Energy, Southern California Edison, Aquila, PG&E, Xcel Energy and Nevada Power. No common cable customers in the top 20 include Erickson, Charter, AT&T, and Century Telephone and, of course, Adelphia. This is quite a shift when compared to the customer breakout for 2000 that I referred to earlier.

Considering delicate economic climate, we continue to focus on controlling the elements that we can. Such as our SG&A costs and CAPEX spending, the service we provide our customers, the margins we accept on projects, and collecting accounts receivable. Equal focus is applied to quickly responding to things we cannot control. Customer bankruptcies, slow pay, cancelled projects, and market deterioration. We founded Quanta with a vision to become the leading provider of specialty contract services to the electric power and telecom industries, and are certain that Quanta will continue to be a market leader for the future.

Before I turn the call over to Peter, I'd like to convey on behalf of Quanta's executive team our confidence in this Company and its employees. We've worked very hard to get where we are. We have always been committed to high standards of ethical business practices, corporate governance, and financial transparency. We are pleased to comply with new legal requirements and hope this will help reassure investors and contribute to a positive investment atmosphere. Now I'd like to turn the call over to Peter Dameris, our Chief Operating Officer for a brief overview of our operations.

Thank you, John and good morning everyone. As John outlined Quanta's operating environment has changed dramatically over the past two years and the telecom and utility markets have experienced substantial change in just the past six months. During the quarter, demand for our services decreased in each of the industries we served, whether caused by the collapse of the telecom industry, increased scrutiny of cable, gas pipeline and energy merchants, or the mild winter and summer weather affecting our regulated utility customers. As announced last month, many of those changes had a negative financial impact on Quanta in the second quarter of 2002. Our ability to produce positive cash flow in the quarter was influenced by several factors, including Adelphia's bankruptcy filing and several customers holding payment until after the quarter end. Although we did not produce positive cash flow during the quarter, we continue to have a good handle on our cash generation initiatives.

Amounts outstanding under our bank lines increased by $49.9 million during the quarter, which was primarily due to a $12 million repurchase of common stock, $5.9 million in proxy costs, a $7 million acquisition, and the acquisition of $16.6 million in equipment. Capital outlays that should not occur in the remaining half of the year. Notwithstanding those capital outlays, in the first six months of 2002l, we generated $52.8 million in cash flow from operations and $19.3 million in free cash flow. We are committed to generating significant cash and strengthening our balance sheet just as we did in the fourth quarter of 2001 and the first quarter of 2002. To address the continued weak market conditions during the second quarter, we focused heavily on modifying our cost and operational structure to address the market opportunities that are available today and that we expect to be available in the future. However, in many instances, revenue opportunities fell faster than our ability to cut costs.

Before I address some of the specific costs saving initiatives we put into place, I'd like to spend a few minutes summarizing our thoughts regarding the industries we serve and our outlook on future demand for services in these industries. As we have previously stated, we have been taking steps to reduce our exposure to the emerging telecom market over the past 18 months. While this is something that cannot occur overnight because of long-term contractual commitments, we believe we are close to completely eliminating revenues derived from emerging telecom customers. Since August 2001, unless we were contractually committed to perform work under existing contracts, we have dramatically reduced performance of any new work for emerging telecom companies. Despite this elimination of work, costs associated with increases in reserves for bad debts, collection of receivables, excess equipment, personnel and facility costs associated with telecom work, continued to impact our earnings through the second quarter of 2002.

With the additional reserves we took in the second quarter, and the termination of work for our remaining emerging telecom customers, we believe that our profits will be impacted less in the future as compared to the last few quarters. To date, there's been no increase in new work in the telecom industry. However, we continue to perform routine maintenance and construction work for regional Bell operating companies, RUSs, universities and municipalities. We see no substantial change in projected growth in the telecom market for the foreseeable future and are continuing to focus on obtaining and maintaining telecom customers that will survive the economic downturn. The cable industry also reduced spending in the quarter with Quanta's largest customer and our largest overall customer in the first quarter, Adelphia, filing for bankruptcy and halting its cable buildout. We have filed liens against Adelphia's cable systems and are actively monitoring the status of the receivables. We believe we will recover substantially all of what is owed and we will consider opportunities to work with Adelphia post-petition.

Separately, franchise issues and some of our cable customers are pushing them to spend capital going forward. We believe that dollars must be allocated for maintenance to keep franchises in good standing and expect to see some of the spending to be released in the next two quarters. While we are committed to supporting this industry, we will not carry excess capacity in support of a possible early rebound. Pending market stabilization, we foresee a stable cable market in 2003.

The past quarter saw gas pipeline companies delay their capital expenditure spending in order to satisfy credit agency concerns and to work through the recent fluctuations in the stock market. Williams and El Paso, two of Quanta's largest gas pipeline customers, delayed and/or reduced the capital expenditures with Quanta in the quarter. We expect normal spending trends to return within the next six to eight months. The most surprising event in the second quarter was the sharp, although temporary, interruption in demand for our services in the electric power market. In addition to mild winter and summer weather, many of our power customers such as Dynegy, Sierra Pacific, PG&E, Duke, Georgia Power, Wisconsin Public Service, Aquila, and Xcel were forced to focus internally to address credit agency ratings and FERC investigations. In response to these outside pressures, these companies have temporarily frozen spending, are laying off employees and closing or downsizing trading operations to address their financial issues.

We are, however, beginning to see new projects and maintenance work being released in some areas. And the unexpected interruption in work is being resolved. In addition to the industry factors previously discussed, there were several factors that affected our SG&A for the quarter. Specifically, we experienced higher legal fees related to our pursuing collection of accounts receivable, collection against bad debt, filing liens and defending against customer counterclaims. We recorded an $8.4 million expense reserve in the second quarter of 2002 and in certain cases negotiated receivables at less than 100 cents on the dollar in order to resolve AR issues prior to a customer filing for bankruptcy. And many of our telecom operators had difficulty downsizing their business as rapidly as their markets declined. However, this effort was beginning to prove successful starting in July and we believe we now have the right level of personnel and fixed costs to correspond with available opportunities.

In response to these difficult industry and economic events, we have been realining our business to better serve our electric and gas utilities customers and incumbent phone and cable companies. Specific cost saving initiatives we put in place include: One, we have realigned the cost structure of our labor force to address the decline in work in the industries we serve. This includes reducing pay rates and the number of full-time non-billable employees, reducing the number of employees performing repairs and maintenance on equipment that is not fully utilized, and strictly monitoring or eliminating overtime hours. Two, we have taken significant steps to right-size our telecom practice to be aligned with current market conditions. To date, we have eliminated eight regional telecom divisions. During the closing of these divisions, customers were effectively transitioned to other Quanta companies and any necessary personnel and equipment were also transferred. As a result, we have been able to maximize utilization of our strongest managers with records of successful bidding and managing jobs with minimal disruption for our customers.

Three, in addition to the steps taken to right-size our telecom practice, we continue to evaluate opportunities to reduce the number of field offices and increase efficiencies through similar actions in all industries across the Quanta organization. Four, we continue to evaluate excess equipment and share this equipment across other Quanta companies to maximize utilization and to reduce the amount of equipment acquired on a short-term rental basis. This along with stringent review of capital expenditure requests and cooperation from our operating units and scaling back purchases has allowed to us contain our capital expenditures. For the second quarter, our capital expenditures were $16.6 million, compared to the budgeted amount of $25.2 million. For the remaining six months of 2002, we are reducing our capital expenditure budget by 40% and will continue to strictly monitor all capital expenditure requests. With these reductions, we are now projecting to spend $55 million for the full year versus a budget of $70 million at the beginning of 2002.

Five, we are reviewing all of our assets to determine the core assets necessary to effectively operate our business. Noncore assets are being evaluated for potential sale including real estate, conduit, turbines and equipment. Six, when possible, we are renegotiating facility leases to ensure we are receiving the most favorable rates. Seven, we have and are continuing to combine facilities and yards where duplicate facilities exist in the same geographic region. Eight, we continue to communicate to our operators that our number one operating objective is implementing cost containment initiatives; i.e., reducing our cost of goods sold, so that will have an immediate impact on Quanta's bottom line. These initiatives include right-sizing the workforce to be aligned with current revenue base, reducing per diems, reducing and/or eliminating cell phones and restricting travel.

Lastly, we are continuing to focus our operators on cash generation, margin expansion, and good customer relations while de-emphasizing growth in this difficult environment. Our goal is to be cash flow and earnings positive for the second half of the year and return our focus to revenue growth when the market and the economy recovers. Notwithstanding the actions previously mentioned, we continue to invest in areas that will permit to us grow and lead the industry once our markets and the economy stabilize. While our current operating conditions are difficult, the trends and conditions in the utility industry that Quanta was built upon continue to emerge.

While the conditions of our nation's power grid continue to decline, rate challenges and cost reductions are causing our gas and electric utility customers to reassess how they will perform work to meet the increasing economic pressures against them. Opportunities surrounding outsourcing continue to gain momentum as our customers search for methods of reducing cost while maintaining and often increasing quality of service. And as such we continue to prepare ourselves to emerge as a market leader. To fully leverage these opportunities we have hired Vin Bosco as our Vice President of Outsourcing. Vin has worked in the utility industry for over 20 years and has significant experience in utility outsourcing. Vin will collaborate efforts through our organization to leverage the extensive service offerings of Quanta.

As discussed last quarter, we are in advanced negotiations for a major multi-year outsourcing arrangement and in fact, have been awarded in excess of $20 million in work from that client to date and continue to negotiate towards the final definitive documentation related to the larger outsourcing function. In addition, we have made numerous presentations to utilities on outsourcing and see positive acceptance of our ideas and strategies by them. While we are not satisfied with the results of the second quarter, we believe we are positioning Quanta for substantial growth in the future and believe we are surviving better than most companies faced with the issues that exist in the markets we serve. We have positioned Quanta to be capable of producing much higher profits once normalized spending returns and believe Quanta has the business model, customers, assets and cash flow to be the leading specialty contractor in the years to come. I would now like to turn the call over to James Haddox.

Thanks, Peter, and good morning, everybody. As John and Peter discussed, we remain very focused on managing our costs relative to our revenues in this challenging environment. Before I begin the discussion of our results, I'd like to address some of the charges that we took during the quarter. We have adopted SFAS 142 which established new accounting and reporting requirements for goodwill. Under 142, we are required to evaluate the carrying value of each of our operating units based upon projection of those units upon adoption of January 1, 2002. After completing this evaluation, we determined that we should record a transitional impairment of $4.45 million net of a tax benefit of $43 million. This charge was recorded on our income statement as a cumulative effect of a change in accounting principle for the six months ended June 30, 2002. Then based on the continued deterioration in our markets and our estimates, we determined that we once again needed to review the value of our operating units in accordance with SFAS 142 as of the end of June 2002. This evaluation resulted in an interim impairment charge of $167 million, and as required by SFAS 142, was recorded above the operating income line during the second quarter of 2002. The tax benefit of this impairment was $14.5 million, and is recorded through the tax provision line in the second quarter.

The next charge to discuss is related to a contract we have had ongoing with Velocita for the past three years. Velocita filed Chapter 11 during the quarter. They were building a coast-to-coast long-haul fiber network. Based on our assessment of Velocita's prospects for obtaining adequate financing to complete the network, and our assessment of the credit quality of certain other customers, we determined that we would take a charge during the quarter of $17 million. A portion of which was the write-off through revenue reduction of costs in excess of billings, with the remainder of the write-off of $8.4 million flowing through bad debt expense. Finally, proxy costs during the quarter totaled $5.9 million.

Turning to our results for the quarter, today we announced revenues of $432 million for the second quarter and net income before charges was $2.2 million, with diluted EPS of 3 cents, which was in line with our preannouncement on July 2. Our gross margins of 11% for the quarter reflected a decrease from both the second quarter of 2001 and the first quarter of 2002. The decline in margins from 16.8% in the first quarter was due to a number of issues. Utility and gas gross margins were down to 15.2% due to poor market conditions, no high margin IPP work during the quarter, a larger percentage of our utility revenues being derived from cost-plus jobs which carry a lower margin, and costs associated with demob'ing crews from various utility jobs. Telecom gross margins were a negative 4.5% primarily related to client bankruptcies, write-off of unrealizable costs in excess of billings related to the Velocitor project and costs associated with reducing our fixed costs related to our telecom relations. Without the Velocitor charge, telecom margins would have been 4.3%.

Cable margins were down to 18.5% and were negatively impacted in the second quarter similar to our telecom operation, by client bankruptcies and costs associated with demobilization of personnel and equipment on certain projects particularly Adelphia. Ancillary service margins were up slightly over the first quarter primarily related to better asset utilization in that sector. G&A expenses were down about $600,000 from the first quarter after excluding proxy costs and bad debt expense from both quarters. EBITDA before charges for the three months was $27.2 million which equates to EBITDA of 35 cents per diluted share compared to $81.9 million and $1.04 per diluted share in the second quarter of 2001.

Cash flow from operations was approximately a negative $15.6 million for the quarter, compared to $30.8 million for the second quarter last year. Cash flow from operations year to date totaled $52.8 million, compared to $91.4 million last year. Our current backlog of work stands at about $920 million and is made up of 60% utility and gas work. This amount represents work to be completed during the next 12 months and includes work under lump sum contracts and our estimation of work under long-term unit price or cost-plus contracts.

Our day sales outstanding in accounts receivable were 93 days at the end of the second quarter of 2002. After taking into consideration all components of the balance sheet which are related to deriving revenues -- in other words, accounts receivable net of reserve, costs in excess and billings in excess. Related to capital availability, we have recently amended both our bank credit facility and our senior secured notes. The amendment to the $210 million senior secured notes was required primarily as a result of our adoption of SFAS 142. And the amendment of our bank credit facility provides with us more flexibility in our financial covenants. We now have a $275 million credit facility with a total of $194 million outstanding against the facility. The outstanding balance includes $132 million in borrowings and $62 million in letters of credit. The new amendment leaves with us a remaining borrowing capacity today of about $81 million.

Based on our current forecast, the new facility should provide -- or the new amended facility should provide us with adequate capital to take care of our operating needs. Our average borrowing rate under these debt instruments is now 8.2%. The maturity date of our senior notes is unchanged with the first scheduled principal maturity in March of 2005. And the maturity date of our bank credit agreement remains unchanged at June 2004. At June 30 of 2002, the Company had a debt-to-total cap ratio of 46.7%, considering the SFAS 142 impairment charges being taken against equity. We expect revenue for the third quarter to be approximately $400 million, and we're forecasting our operating margin for the third quarter to be approximately 5%. For those of you who have running forecast models we are projecting an effective tax rate for the third and fourth quarter of zero percent. And we are using approximately 78 million diluted shares for our calculation. These forecasts result in EPS for the third quarter of between 9 and 12 cents. Now I'll turn the call over to the Operator who will open the call up for questions. Operator?

Thank you, sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. If you have a question, please press the star followed by the one on your push button phone. If you would like to decline from the polling process, press the star followed by the two. You will hear a three-tone prompt acknowledging your selection. If you are using speaker equipment, you will need to lift the handset before pressing the numbers. We ask that you please ask one question and one follow-up. If you have additional questions, please requeue by press the star followed by the one. One moment, please, for the first question. Our first question comes from Marc Hughes with SunTrust. Please go ahead with your question.

Thank you very much. Good morning, John and James, Peter.

Good morning.

You talked about more activity in the utilities segment. You're seeing new projects released. Could you give a little more detail on that? Is that just kind of the ebb and flow of business or do you think it's, you know, something more than that?

I think a part of it is that we have had some hot weather this summer in some parts of the United States, so the revenue for our customers has increased somewhat. And, therefore, they have the cash flow that they need to do maintenance and we're actually seeing some increased maintenance over the past few weeks as we add numbers of crews to our customer base.

All right. Gotcha. And then in the cable segment, looks like maybe you're down about 10 or 11% sequentially. Is that right, and is that kind of in line with the overall market and what do you see going into the third quarter? Thanks.

When you say 10 or 11%, you are talking about revenues being down 10 or 11%?

Yes, that's right.

Uhm...

Maybe a little more than that, as I recall. But most of that's related to Adelphia shutting down.

Yeah. Right.

Do you have a number there handy, James?

If you would take out Adelphia, how do you think it looks going into the third quarter?

I think, uhm, well, we -- we still had Adelphia in the second quarter for about half of it. So revenues should be down -- I'd say revenues in the third quarter from cable will be down about 20%, 15 to 20%. Something like that. Over the second quarter.

Right. Okay. Thank you very much.

Okay.

Our next question comes from Alex Reigel with Friedman Billings and Ramsey. Please go ahead, sir.

Couple questions, can you be more specific on who your top five customers were and what percentage of revenues that came?

Yes. I can give that to you, I believe. For the second quarter, Charter Communications was number one. Puget Sound was number two, Erickson was number three, Adelphia Communications was number four, Souther California Edison was number five.

And can you expand upon the reduction in head count on a sequential base, understanding you cut about 1300 heads, can you identify the head count reduction that would be associated -- or non-revenue-producing head count or head count that appears in your SG&A line?

Yeah. It was approximately proportionate. You tend to have SG&A-type head count a little longer than you do the field head count in that the field people are productive people. They're hourly and as soon as the work's over, you can lay them off but you have to have the SG&A people in order to close up the job, inventory, materials, so they tend to lag. But it's approximately in proportion to our hourly workforce.

Can you also comment on your share repurchase program where you stand on that today? And whether or not you have any restrictions to buy back shares relative to your bank agreement?

Yes. Alex, we bought 964,000 shares at the beginning of the second quarter. I guess that would be -- it was actually closer to the beginning of June when we bought those shares. And under our amended credit facility, share repurchases are prohibited.

And one further question. Has Aquila requested to convert any of its convertible preferred stock yet?

Not that I know of.

Know that I'm aware of, no.

Thank you.

Our next question comes from Chris Gutek with Morgan Stanley. Please go ahead with your question.

Thanks. Good morning, guys.

Good morning, Chris.

On the call in early July you guys talked in a little more detail about the specific money losing projects. Maybe without getting into specific details could you talk generally about the percent of projects on which you are currently losing money? How long you see those projects taking before you complete them, and in that context how you are viewing the quality of the backlog in terms of the likely margins of the backlog, as well?

Chris, this is Pete. We pretty much eliminated the loss associated with transitioning a workforce from European telecom equipment manufacturer into our workforce. So those shouldn't be running through our P&L as they did in the past. As we have told you we had a couple of bores that didn't go well in the Northeast that did not get completed by the end of the quarter so we recognized the expense but not any revenue. Those have been completed. Successfully now. And we don't have any additional costs associated with those bores. The Velocitor contract is pretty much at an end and because of problems that they had internally with getting permits and clearance from the Bureau of Land Services, it really delayed production and our effectiveness. So I would tell you that -- that the vast majority of the jobs that were really causing us problems in the first two quarters of this year, we think are behind us, not to say that there couldn't be a problem going forward. But I think some of the larger issues we were dealing with have been run through the P&L.

And with the backlog, how thoroughly have you scrubbed down the backlog? In other words, how much confidence do you have that there are no large potentially money-losing projects in the backlog?

Well, let me take first out of that, I don't think that, you know, we feel like anything in the backlog was improperly bid. And that now, it's a money-losing project. Boring work at time, if you -- if you lose the hole or things like that can cost you more. You have to pull out and try again. We have looked at it. We have a policy of reviewing large bids and we think that the appropriate margin has been placed on the contracts to cover contingencies and things that are beyond our control. We have actually been guiding our telecom guys to the extent that they have sufficient work to remain profitable for the remaining portion of the year to try to move the margins up and not be as competitive maybe on the pricing. To alleviate the potential of risk.

Chris, if we are on fixed price jobs and we think that we are going to have a loss on that job through duration, say it's going to go on for another six months and we are going to lose money at the end of it we're required to record that entire loss now.

Okay.

So for the jobs that we know of that were -- that we're losing jobs, we have accrued for those as of June 30th.

Okay. Great.

One more thing along the lines of lost jobs. A lot of these losses are associated with customers that are in financial problems and it's completely different environment than -- than, uhm, when the project was bid or just a few months ago. As our customer's financial condition deteriorates, it becomes much more onerous, hard to deal with, both in legitimate contract extras as well as in the terms of the contract.

I understand. Okay. One follow-up if I could. James, could you give us the actual covenant terms for the new credit facility in terms of the EBITDA and interest coverage? Yeah. It's actually -- the minimum interest coverage ratio has been revised so that it now changes from quarter to quarter. It's been loose.

We used to have under the old agreement we had a 3.0:1 requirement. Now we have a 2.4:1 at the end of September moving down to a 1.7:1 through the quarters -- the quarter ended March 31st and then it goes back up again for the quarters after that. That kind of gives you the range of where it is. The funded debt to EBITDA ratio also floats from quarter to quarter. Right now, total funded debt to EBITDA in the old agreement was 3.5:1. That also ratchets up and leaves us more flexibility going out through the first quarter of March 31 of -- first quarter of '03. It goes from 3 1/2 to 4 1/2 during those quarters and then it starts to come back down during the period after that until the loan -- until, say, December 31, 2003 and then it stays the say -- same from there until the loan matures in June of '04.

And presumably based on your current forecast going out in the first quarter of '03 that you're comfortable you'll stay within those terms?

I hope so, yes. That's the way we forecasted it in -- and negotiated the amendment.

Great. Thanks, guys.

Our next question comes from Ram Kasergard with Morgan Keegan. Please go ahead with your question.

John, have two questions for you. The first one would be what is it going to take to -- in your mind at least to see these RBOCs and these cable companies start spending money again? And then, secondly, with your existing credit facility, what kind of growth can you support going forward, what do you have to do to have the capital to fund growth when it picks up?

Well, first, or last question first. We think we have plenty of sufficient funds in our bank lines to fund our growth. We were very inquisitive the past several years and we primarily use our credit line to fund our acquisition growth so we have plenty of facility to fund our internal growth. What will it take to get the RBOCs and telecoms to spending money? First of all, I think they have to, to have some. They have to have the ability to raise capital, to fund their maintenance and their new projects. Part of that is certainly market sentiment. But part of it, too I think will eventually be driven by the FCC or Public Service Commissions as they start looking at the franchises of the various telecoms and cable companies and cities and in states where they are not providing adequate or timely service to their customers.

So would this be a situation where in the cable industry and the telecom industry customer complaints with the FCC start to go up and then the regulators start to get back to these, uhm, operators to force them to spend money?

That's correct. I don't have statistics to quote, but the fines that are being applied to the telco group is probably higher now than it's been in many years or maybe in history as they are electing to pay fines rather than spend the money to build new facilities or adequate facilities for their customers.

Thank you.

Our next question comes from Neil Doshie with Credit Suisse First Boston. Please go ahead with your question.

First thing, can you just let me know what the depreciation expense was for the quarter? And then with respect to the EBITDA, you reported in the press release, if there is any charges in the cost of sales line for the SG&A line that you are excluding? And second question on a different matter, you mentioned potential non-core asset sales to raise cash. Any color on timing or estimated proceeds from these asset sales?

Let me take that, the asset sales one first. It's not necessarily to raise cash as it is to just streamline the business. We own some [INAUDIBLE] in downtown San Francisco because of the failure of a customer when we foreclosed on it. We own some turbines that were purchased in contemplation of doing a couple of independent power production facilities. We own some real estate that comes along with some acquisitions that we concluded. So those things are not critical for us to execute against our business model. And we have the time to clean up the balance sheet so that's what we are looking at doing. With regard to the -- your EBITDA question, I'll toss it to James.

Yeah. Depreciation expense for the quarter was $15.3 million. And the $27.2 million of EBITDA that I talked about excludes the SFAS 142 charges, the proxy charges and the bad debt. Those are actually considered non-cash during the quarter. Was that your question?

Uhm, yeah. Thank you very much.

Okay.

Our next question comes from Alan Metroni with Copper Beach Capital. Please go ahead with your question.

Can you outline the competitive environment right now? What are you seeing out of your competitors? Are you seeing fewer bidders on projects and maybe talk about the different sectors that you hit as relates to the competitive environment? Thank you.

Certainly we've seen some of our weaker competitors pull out of the market or fold because of financial reasons. But you're seeing additional pressure on margins from the smaller operators that are trying, you know, either to make their equipment payment or if their equipment is paid, all they are worrying about is making payroll and surviving through this difficult period. So there's certainly pressure on margins from some of the smaller groups, although there is certainly a number of our competitors that are not going to make it through this period.

Which end markets are you seeing the most competition in?

Oh, certainly in the telecom markets. And then you see these telecom players also trying to perform other work moving in trying to move into the cable markets and even into the transportation market trying to install intelligent highway systems and that sort of stuff.

Okay. Thank you.

Sure.

Our next question comes from Rusty Johnson with HLM & Company. Please go ahead with your question.

The question regards the outsourcing propensity. I assume a number of the big utilities still have a huge amount of fixed costs and labor so that -- and as their work goes down, they probably are going to do it in house rather than go to you. To what degree can you really offer a superior service or do you have to wait for years before they actually downsize their in-house maintenance repair and service operations? And how much are you at risk of them effectively spending more but spending maybe less with you?

Yeah. It's pretty much the opposite of the presumption that you just stated. We can pretty much guarantee them a minimum of a 30% savings if they outsource the work versus self-perform it. Their collective bargaining agreements are structured in such a way that they pay their people regardless if they work or don't work. The people that work for us are -- they traditionally get paid as much, if not more, but they get paid to work and they don't get paid if they're not working. And because of the environment that exists out there for the utilities where they have made unprofitable unregulated industry investments, their status quo is no longer acceptable. They are either going to have to reduce head count internally or they are going to have to find a more efficient way to do it. So there's a fair amount of air cover for executives in regulated industries to consider outsourcing more work. It's cheaper on the capital expenditure side. You go into these arrangements and you see the amount of facilities and equipment that have been built up over a term of years because they have been able to pass it on to the ratepayers. And that's just not the model going forward.

I would add one thing to that. Traditionally when you see a utility that's having financial problems, they announce in big headlines the number of head count that they are reducing to reduce their costs internally, and I think that's pretty consistent across all of the utilities that have had cash flow problems. Of course, they reduce our crews, as well. But when they reduce that internal head count, when the maintenance problems begin to build up and they have to go back to work they not going to hire people back. They are going to put outsourcers like Quanta to work in their place.

Okay. Thank you. The other one if I could tag on would regard to the balance of your telco customers which still seems relatively material. Could you give us any indication of how many of those are actually sort of financially solvent, comfortable and capable of paying as they still stand in your order book? Sort of an open-ended there in terms of whether we are going to have a similar discussion a year from now that we had on this customer base. I'm just hoping for comfort about those that are still standing can truly stand.

I'll just give you the names of the top 20 telco and cable customers and I'll let you make your own decision about whether he'll -- they'll be here.

That's fair.

Charter Communications, Erickson, AT&T, Century Telephone, and the only other one that was in there was Adelphia and, of course, they're gone for now. Any work we do for them will be post-petition work. So those are the five out of the top 20.

Okay. Thank you very much.

Thank you.

Our next question comes from Pernal Perique with Q Investments.

Thank you. Just a quick follow-up on the covenants. Are you going to file an 8-K soon on the new facility?

Yeah.

Okay.

We will be filing it with the documents.

With the 10-Q you mean?

No. We'll be filing an 8-K with the amended credit facilities.

Right. Will it come out soon?

Uhm, yes. I expect that it will.

Okay. And your SG&A run rate? What's going forward run rate at this time?

For the quarter -- for the quarter ended June 30th, the normalized number was $45.2 million. But we've made some reductions. We've merged some facilities, we've closed some facilities. I think we should -- I think that number should get down, you know, another million and a half or so. From where we are per quarter. And that's barring any further, you know, collection costs or bad debt expenses or unusual costs but just the run rate from normal operations should be somewhere around, say, the $44 million, $43.5 million.

43.5. So because it was about $53.6 million for June and that included $17 million in allowances, charges --

No. That included $8.4 million in allowances. The other $8.6 million was a revenue reversal. And it was a revenue reversal because of Velocita, we had that much money tied up in cost in excess of billings and we determined that we would not reach the billing milestones with them necessary to be able to realize those revenues. So we reversed that through the revenue line so the $17 million includes that plus $8.4 million of bad debt expense.

Okay. Any -- what about the AR and the reserves against the AR? How comfortable are you? Did you go back and look at all your -- (overlapping speakers). What's the allowance at this point?

We do that every quarter. The total allowance right now is about $41.5 million. We look at that allowance, and it -- uhm, it changes from quarter to quarter based upon an evaluation of each of our major customers. Some of them in the past, we have provided reserves for and we have actually ended up collecting it. But it always seems to be filled by another customer for the last few quarters.

Right. Do you see any more allowance going up or are you comfortable with where you are now?

We're comfortable with where we are now but it is subject to, you know, going through legal proceedings and trying to collect money from these people and foreclosing on liens, so there is some judgment in there but we look at it fairly closely each quarter and discuss it with our attorneys and determine what our lien rights are and what we feel about the value of those lien rights and adjust it. So we feel like it's proper right now.

Our next question comes from Marc Hughes with SunTrust. Please go ahead with your question.

Yeah. Thank you very much. In terms of competition for master service agreements and longer-term telco agreements, could you talk about the pricing and then what kind of opportunity? Are there many of those coming available on the markets?

They come available from time to time. Those are typically longer-term contracts. We've had some successes in those areas. Those are similar to our cost-plus strategic alliance type work. Those margins are typically lower than your hard dollar bid job work. But the reason for that is because they're lower risk and perhaps steadier revenues. So that's the reason that they bring typically lower margins but, yes, there's competitive -- it's a competitive environment out there. You know in every area of the telecom market.

I would add that that and the master service agreements we have with Verizon and SBC, they have been awarded -- we prepare budgets about work to be released and they just haven't been executed against in this environment. These guys have really, just screwed down the spending. Part of it is the battles they are doing with the FCC trying to get 271 overturned. Part of it has to do with the PUCs. But you know, the production under those MSAs aren't -- they're hard to determine these days.

Was the growth anywhere if you look at the intelligent traffic or transportation or the commercial industrial inside work any bright spots?

Well, the -- the traffic signal intelligent highway work has held up. That's primarily government funding. Either from municipal governments or federal governments as they're subsidizing the federal highway system. So that has been fairly strong. I wouldn't say there's been a significant increase in the amount of that work that we've obtained, primarily again we're seeing some competition as the some of the telecom contractors are trying to get into that area and bidding hard for that type work. Mostly that work is hard dollar bid job work. With the municipals and federal government. So that work's holding up but there is not much hope of increasing our percentage or our share of that work without reducing margins further.

How about the commercial and industrial environment?

That work has, as well, been holding up but again, the margins in that area are not very attractive to us. We try to specialize in that area of work so that we are doing more of the very specialized work so we can try to get some higher margins in those areas. That work has held up fairly decently.

Yeah. Gotcha. Thank you.

Thanks, Mark. And we're up against the hour now, Daphne. So what we'll do is turn it over to John for some final comments.

Thank you, again, Ken. I'd like to thank all of you for participating in our conference call this morning. We appreciate your questions and ongoing interest in Quanta. And as we continue to grow our business and diversify our service offerings, we'll keep you updated. Thank you very much and good-bye for now.

Ladies and gentlemen, this concludes the Quanta second quarter earnings conference call. If you would like to listen to a replay of today's conference, you may do so by dialing 303-590-3000 an use an access code of 491655. Again, the replay number is 303-590-3000. The access code is 491655. Thank you for your participation. You may now disconnect.