Quanta Services Inc (PWR) 2002 Q3 法說會逐字稿

Good morning ladies and gentlemen. And welcome to the Quanta Third 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 today, Monday, November 11 of 2002. I would like to turn the conference over to Mr. Ken Dennard, Managing Partner of DRG&E. Please go ahead, sir.

Thank you. And good morning we appreciate you joining us for Quanta Services, Inc. Conference Call to review quarterly results. We also would like to welcome our Internet participants listening globally to the call as it is being simulcast over the web.

Before I turn the call over to management, I have the normal housekeeping details. You could have received a fax and/or e-mail this morning of the earnings release, but occasionally there are technical difficulties experienced to your during these broadcasts. If you didn't get a release, or you would like to be on a distribution list, please call or offices at DRG&E, (713)529-6600. Additionally, there will also be a replay of today's call available via web cast and so you go to www.quantaservices.com and click on the web section. There will be a telephonic replay available just a few hours after the call is over. The -- that dial-in number and pass code information is in today's press release.

As you know, this conference call contains various forward-looking statements and information including management expectations regarding revenues, earnings per share and other results for the quarter 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 reflect in such forward-looking statements are reasonable, they can give no assurance that such expectations will have proven to be correct.

Such statements are subject to certain risks, uncertainties and assumptions, including, among other matters, future growth in the electric utility and telecommunications outsourcing industries, the ability of Quanta to complete acquisitions and effectively integrate operations of acquired companies, access to sufficient funding to finance Quanta's desired growth, dependence on fixed price contracts, cancellation provisions in contracts, 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 differ materially from those expected. For more detail, investors are urged to refer to the company's filings with the SEC.

Now, I'd like to turn the call over to Mr. John Colson, Quanta's Chairman and Chief Executive Officer.

Thanks, Ken, I would also like to welcome you to our third quarter 2002 conference call. After my initial review of the quarter and operational highlights, James Haddox, our Chief Financial Officer, will present the financial details. As always, we will be available for questions after the initial comments.

This morning, we announced earnings for the third quarter of 2002. For the quarter, revenues were $436 million net income totaled 6.4 million, or 9 cents per diluted share before charges. We are optimistic that the markets we serve are beginning to stabilize. And our revenue base increasingly consists of more solid viable blue chip companies. These two things increase our confidence that we will be able to maintain and build on the current revenue level.

To give you an idea of the breakout of our revenue by customer for the quarter and overall industry-specific outlook, pro forma revenues from our telecom customers were approximately $75 million, or 17 percent of our third quarter revenues. While we are not seeing an increase in the amount of new work or an overall upward trend in the telecom market, we believe that we are starting to see a stabilization of the telecom market. This, and the fact that none of our major telecom customers have filed for bankruptcy in the past few months are positive signs.

This is further supportive by a recent study that found that announced job cuts from telecom companies declined 52 percent in September, compared with the second quarter, and 58 percent fewer cuts were made compared to the third quarter of last year. In fact, September 2002 saw the fewest telecom job cuts eliminated within one month since November of 2000.

Also we continue to vigorously pursue accounts receivable and are encouraged by renewed conversations related to previously cancelled contracts that we thought would never resume. We see no substantial change in projected growth in telecom for this foreseeable future, and we are continuing to focus on obtaining and maintaining telecom customers that will survive the economic downturn.

Revenues from broadband cable customers were approximately $52 million or 12 percent of our revenues. There appears to be some movement in the broadband cable industry. With the AT&T Comcast deal getting closer to resolution, there's potential for work from Comcast in the near future. This work has the potential of offsetting reduced revenues from Adelphia and others.

96 million or 22 percent of pro forma revenues were derived from other customers, including commercial and industrial, inside electrical, transportation, and government agencies.

Moving now to our electric power and gas customers for the third quarter, pro forma revenues from electric power and gas customers were approximately 215 million, or 49 percent of our revenues. Some of our customers are still facing cash flow challenges and outside pressures caused by credit agency ratings and FERC and SEC investigations. As a result, many of our electric power customers had delayed spending on capital expenditures and maintenance.

However, these challenges, we believe, still should be short-lived. As these issues are resolved, Quanta remains well positioned to increase market share by expanding current relationships and capturing new work from those competitors unable though withstand the current challenging environment. We are continuously evaluating and pursuing the long-term strategic growth opportunities presented by projects related to the aging of our national transmission infrastructure and total outsourcing. Our roots remain strong in the power industry and our exposure to key utility customers is ever increasing through strategic marketing efforts.

Fueled by the current market conditions, outsourcing continues to present a significant opportunity. Today, utilities are contracting more and focusing on their core business segments segments. And, in fact, Reuter's just reported more than 20,000 jobs have been eliminated in the U.S. power market and this number is expected to grow. Yet in today's competitive market, utilities are struggling to maintain service to the power consumer with fewer people. Outsourcing is often the solution to this quandary, and utilities are beginning to understand its value.

Quanta is the recognized leader in outsourcing. We are regularly requested to speak at industry events and we are receiving more and more inquiries from companies evaluating the benefits of outsourcing, and our existing customers are standing current outsourcing programs.

For example, last quarter we talked about a potential contract with a utility. That utility is now taking an incremental approach to outsourcing. Already the scope of work on that contract has increased. The total value of the contract is currently 20 to $30 million annually. Also, we have had conversations with several utilities in the past few weeks that are interested in taking similar steps to improve their operations.

We feel the outsourcing is the future for utilities and that Quanta is the natural outsourcing leader with the skill, resources, experience and strategic know how to make it work.

There are also outsourcing opportunities not telecommunications area. But obviously, market conditions need to improve to capitalize on these opportunities.

Backlog is up this quarter and a large majority of the increase is in the electric power side of our business. This further supports or belief that the challenges our power customers are facing are temporary. In fact, our electric utility backlog is at a near record high. We have the second highest electric and gas backlog ever in our history. That, of course, is the good news.

The bad news is that the utility backlog is up due to increased service and maintenance contract, which have lower margins because service and maintenance work is typically cost-plus, lower risk business than fixed price bid work. Still, maintenance work generally is more predicable and recurring.

The breakout of pro forma revenues by type of work is as follows for the third quarter of 2002: 51 percent of our revenues were related to outside electrical and gas work. 14 percent of our revenues were generated from local and area loop telecommunications work. 10 percent of our revenues were generated from cable television work. 6 percent of our revenues were from commercial and industrial inside work, which, again, includes data cabling, VDV, and inside wiring. 5 percent of our revenues were from traffic signals, street lights, or other transportation-related areas. 2 percent of our revenues were from long haul telecom work and fiber cable being installed on electric transmission lines. 1 percent of our revenues were from wireless telecom and the remaining 11 percent were classified as others.

Our top 10 customers for the quarter equalled 32 percent of our total revenues, and our top 20 customers made up approximately 44 percent of revenues. We remain optimistic about our ability to sustain our current customer base in the near term, and leverage opportunities to build on this revenue base for the future.

Our focus on ensuring the stability of our core business and position of the company for future growth remains strong. And we believe our aggressiveness and proactive initiatives to align our business and scale our operations to accurately reflect the current demands of our customers, should ensure this growth and ongoing success. Our cost savings, rightside sizing and consolidation efforts are beginning to show results. The full effect of these results -- full effect of these efforts will be more evident in the future.

Specific initiatives this quarter include the following: We continue to merge certain operating units into other entities where there were regional customer or service offering synergies. One that was underperforming and didn't fit in the strategic direction of the company was sold. We closed two companies and merged their profitable operations into our operating units. Head count reduction continued where there were redundancies or poor performance. The number of salaried employees was reduced by 101 during the quarter.

SG&A on a precharge basis was approximately $3 million less in the third quarter than in the second quarter. Also, we continued the implementation of a thorough, unit-by-unit audit of costs designed to assess all expenses paid by the company, including capital expenditures and equipment utilization and travel and entertainment. This review will help identify inefficiencies and opportunities for future cost reductions.

Before I close, I'd like to outline the vision behind Quanta's new vertical alignment, another effort to become more efficient and reduce costs. Gone are the days when over half of the utilities had a telecom division. As I mentioned previously, today our customers are realigning to focus on core competencies and strategic business initiatives.

The fact is, most of our customers are disaggregating rather than consolidating. This disaggregating drives our customers to seek further offerings just as focussed as their strategies.

More customers are seeking deeper, expanded services from one of our offerings, such as a power company. They no longer require multiple services from two or more of our offerings, such as power and telecom. By aligning our business to better address this evolving need, we secure in advance our leading market position for the future. This new structure will increase efficiencies and fully utilize the core knowledge base of our senior leadership team.

Beginning January 1, 2003, our operations will consist of two primary groups: The electric power and gas group and the telecommunications and broadband cable group. Each operating unit will be assigned to a group based on the source of the majority of its revenues. Our operating units will continue to operate under their current brand with cobranding of a Quanta Services, Inc. company. Each operating unit will report to the president of the appropriate group.

I expect to announce the president of electric and gas group and the president of the telecom broadband group in the next few weeks. Both individuals will report directly to me. The two positions will take on the traditional role of a Chief Operating Officer. We don't anticipate this realignment to increase cost, except for possible severance and closure costs. But actually, to reduce costs moving forward.

To close, I'd like to re-emphasize our commitment to reducing costs. We are already seeing the effect of our aggressive initiatives and we expect benefits to continue into the future. This lean and mean position, combined with our leadership position in the industries we serve and our more efficient alignment in a changing market, should result in higher profits once normalized spending returns. Our team, from the senior management to the workers in the field, and our strategic business plan, solid customer base, and assets secure our position as the leader in our space.

Now, I'd like to turn the call over to James Haddox, our Chief Financial Officer.

Thanks, John. And good morning everyone.

Today we announced revenues of 436.2 million for the third quarter. Excluding special charges taken during the quarter, diluted EPS would have been 9 cents, which is in line with our previous guidance. Before I begin the discussion of our results, though, I would like to address some of the special charges taken during the quarter.

This quarter we booked charges totally $31 million reflecting the changing environment related to the independent power plants we built over the past two years, and our changed outline for realization of our related receivables and inventory. More specifically, during the quarter, the customer for which we constructed and financed a number of IPPs during the last two years began to experience unanticipated cash flow difficulties. These difficulties have caused us to reevaluate the likelihood that the plants will be refinanced and the collectability of the short and long-term note receivable has become doubtful.

We also reevaluated the carrying value of inventory held for future co-gen projects projects. Accordingly we booked a reserve of approximately 31 million during the quarter. Also during the quarter, we disposed of a subsidiary that had been losing money and recorded a loss of 670,000 on the disposition. And finally, as we discussed during our last conference call, we amended our credit facility and senior notes during the quarter. These amendments results in 1.2 million in charges to the P & L during the quarter.

After deduction of these charges, we reported a net loss for the quarter of $8.6 million, with diluted EPS of negative 11 cents. The following discussion of our results excludes the charges that I just described.

Our gross margins were 13.5 percent for the quarter, compared to 12 point 9 percent precharge gross margins for the second quarter of '02. The increase in margins was attributable primarily to telecom margins improving from a precharge second quarter level of 4.3 percent, to 11.4 percent in the third quarter, primarily due to our ability to improve profits on a major outsourcing contract on which we encouraged significant transition costs in the first and second quarter of '02. And due to losses incurred on a couple of jobs that did not recur in the third quarter.

Utility and gas margins were 13.3 percent, compared to 15.2 percent in the 2nd quarter of 2002. This decline was a result of higher than anticipated costs being incurred on a job in Nevada, fewer high margin overtime hours being worked on maintenance projects, and a higher proportion of cost-plus work which typically carries lower margins. We also encountered unfavorable weather conditions in certain areas during the month of August.

Cable margins declined from 18.5 percent last quarter to 15.6 percent this quarter, as a result of the reduction in revenues from Adelphia that started midway through the second quarter. The reduction in Adelphia work in our West Coast market has created increased competition for other work and has resulted in lower margins for cable overall.

Gross margins from our ancillary and other work improved slightly due to improved asset utilization in that area.

Our GNA expenses declined 2.9 million or 6.4 percent, to 42.3 million on a precharge basis for the quarter, compared to 45.2 million on a precharge basis for the second quarter. This decrease was due to head count reduction and facilities closures, related to our telecom contractors. Our GNA expenses for the quarter included approximately $400,000 in severance pay and lease termination costs.

Our precharge operating margins were 3.8 percent for the quarter, compared to precharge operating margins of 3 percent, 3.0 percent in 2Q '02. The increased margins were a result higher gross margins and lower GNA expenses on our telecom contractors.

EBITDA for the three months was 32.2 million, which equates to 41 cents per diluted share, compared to 78.7 million and a dollar one in the third quarter of 2001. Appreciation expense was 15.2 million and amortization was 92,000, totaling 15.3 million for the quarter and year to date precharge EBITDA totals 103.2 million and DNA totals 45.3 million.

Regarding our provision for taxes during the quarter, due to the charges being booked during the quarter and lower current expectations for the remainder of the year, we now anticipate a 9.3 percent tax benefit for the year. The cumulative effect of this benefit was booked during the quarter and amounted to a tax benefit of 17.6 million flowing through our as-reported results for the quarter. In the calculation of precharge earnings for the quarter, we used a 3.1 effective tax rate, that would have been the estimated tax rate for 2002 had we not booked the charges in the third quarter.

Cash flow from operations total $9 million for the quarter. Cash flow from operations year to date total $62 million, and free cash flow year to date total $22 million.

Capital expenditures total approximately 6.4 million for the quarter, and 39.8 million year to date. We now expect to spend approximately 50 million for Capex this year, which will be 30 percent less than budgeted for the year and as John outlined, we continue to focus on controlling cost, scrutinizing capital expenditures, and sharing equipment between our operating units.

Our current backlog of work stands at 933 million. This amount represents work to be completed during the next 12 months and includes work under lump sum contracts and our estimation under long-term unit price or cost-contemporaneous contracts. This represents an increase in backlog during the quarter of $13 million. And the increases in backlog from our utility customers more than offset decreases in backlog from our telecom and cable customers.

Our day of sales outstanding in cost of receivable and cost of earnings in excess of billings are now at 92 days, compared with 93 days at the end of the second quarter of 2002.

Related to availability of capital at September 30, we had $131 million borrowed, plus letters of credit totaling about 62 million, under our $265 million credit facility, leaving us with 82 million in available borrowing capacity. At September 30, the company had a debt to total cap ratio of 47 percent, and pro forma TTM EBITDA of about 156 million.

The company is currently in compliance with all loan covenants and we expect to continue to be in compliance based on our forecast for the foreseeable future. However, the new capital we anticipate receiving from first reserve should give us the ability to negotiate more flexibility into our financial covenants.

We expect revenues for the fourth quarter to total between 390 million and 410 million, and operating margins for the fourth quarter to be between three and a half and 3.8 percent.

For those running forecast models, we project our effective tax rate for to be 9.3 percent and we're using approximately 88.5 million diluted shares for our calculation which includes the first of the first reserve investment. Using the above, this would result in EPS for the fourth quarter of between 4 and 6 cents.

I'll now turn the call over to the operator who will open the call up for questions.

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 1 on your push button phone. If you would like to decline from the polling process, press the star followed by a 2. You will hear a three-tone prompt acknowledging your selection. Your questions will be polled -- I'm sorry, if you're using a speakerphone, you will need to lift the hand set before pressing the numbers. One moment, please, for the first question. The first question's from Mr. Chris Gutek, please state your company name followed by your question.

Thanks, good morning, Chris Gutek, Morgan Stanley. A couple of questions. John, some of the things you're doing from a cost reduction perspective and decline in GNA, I'm curious if you, based on the specific plans you have in place, if you put together targets or forecasts for additional cost savings and what the time line would be to achieve the cost savings?

Yeah, Chris, we've got a target of SG&A quarterly SG&A being approximately 39 million, that's our target. And depending on where our revenues go, depends on when we get to that, but I would anticipate first or second quarter of next year, if our revenue base doesn't increase, our SG&A should be at that level.

Okay. And expected restructuring charges to be taken for [INAUDIBLE] or frankly any other cost savings for any other factors you're currently aware of?

We'll certainly have continued severance charges. James, do you want to address that?

And we will probably have some charges in the fourth quarter related to credit facility.

And the estimated magnitude of that charge?

Ah, Chris, I couldn't really tell you right now because we haven't actually negotiated amendment fees or anything with the bank group. It will be total charges associated with it will be somewhere north of a million dollars, though.

Okay. And then if I could follow up on the situation with Comcast, AT&T broadband, I'm curious what your field level operating guys are hearing in terms of expected increases in spending comes out of the merged entity and in particular, what the timing would be for the dollars to actually hit the Pacific construction project, would affect the revenue line.

Chris, it varies across the country, but last time that I was involved closely with it, it was anticipated spending to start after the first of the year, and depending on, again, what area of the country, how much spending it was, and of course, all of that spending won't go to Quanta. In fact, Comcast has not been a large customer of ours, but we're hopeful that we'll pick up enough of the Comcast spending to offset some of the decreases we've seen from other customers going forward.

So it sounds like so far there's no concrete plans or numbers being talked about in terms of incremental spending or a time frame, an expectation of an increase but nothing for -- more specific than that?

We have some small contracts, a few hundred miles here and there, but nothing of any magnitude at this time to talk about.

Great, thanks.

The next question is from Jason Voss, please state your company name.

This is Jason Voss, Davis Mutual Funds. I have a couple of repeat questions. If you could go through the revenue breakdown again, specifically right around commercial and long haul telecom, you said one part of your business had garnered 5 percent of the revenues. Then if you could do operating cash and change in working capital again, that would be great. Thanks.

Okay. I'll take the pro forma revenues, and I think you're talking about by type of work; is that correct?

That's correct.

Outside electrical and gas was 51 percent. Local and area loop telecom was 14 percent. Long haul telecom was 2 percent. Wireless telecom, one. Cable TV 10 percent. Inside electric and VDV, voice data video, 6 percent. Transportation, that's things like traffic signals, streetlights and other transportation-related work is 5 percent. And other is 11 percent. I'll turn over to you, James, for cash flow.

Yeah, John, if you could hold on for just one second. Cash flow from operations for the quarter was about $9 million, and hold on for just one second. We had negative working capital during the quarter of about 29.8 million.

Thank you so much, you guys.

Okay.

Thank you. The next question is from Alex Rygiel, please state your company name followed by your question.

Friedman, Billings, Ramsey. In the very beginning, you talked about a previously cancelled contracts within your telecom group. Can you expand upon that a little bit and give us any guidance as to whether or not you think that those telecom contracts could potentially lead to telecom revenues increasing on a sequential basis over the next couple of quarters?

Yeah. First of all, I don't anticipate telecom revenues increasing. But we are seeing some movement from some of the contracts that we were working on that got cancelled when our customers filed bankruptcy, those networks have now been acquired or are being acquired by other companies that are still viable, and they're inquiring about what needs to be done to finish the networks and would we be finished in finishing the networks and what would it cost. Some inquiries that are serious and, in fact, we thought those projects would forever be gone.

And with expanding upon that, with regards to those customers that have been or customer that has been acquired, did you have any risk on your balance sheet associated with that customer that now may get resolved?

I think most all that has been reserved for.

It's already been reserved for, there would just be upside from here.

Thank you, the next question is from Mark Hughes, please state your company name, followed by your question.

SunTrust Robinson-Humphrey. The charges in the quarter, where do they hit specifically on the P & L? You gave us an SG&A number. Where else do the other charges factor in?

About 5 million of it flowed through gross profit. And about 26 million of it flowed through G & A.

Thanks. And then the debt amendments, was that in "other"?

Yes.

And then the loss, was that also in "other" as well?

Yes.

How about, I know the "other" category is a mixture of different things but you didn't give an outlook there. Any general thoughts on those categories?

Mark, I think that business is stable. We don't anticipate large growth in that area, but we don't expect any decline. We expect it to remain fairly stable. We're holding our own in the transportation market, inside electric, the VDV business. It's at low levels -- and the margins aren't great but I don't anticipate that revenues are going to fall off much.

In telecom, you said you didn't anticipate increases in coming quarters, other than seasonality. Do you anticipate declines, further declines?

It kind of depends on some of the contractors we were talking about. But our forecasts show telecom revenues declining. Slightly from these levels.

One final question: The split in terms of the two segments, is that going to be a pretty clean split, facilities, management, the whole kit and caboodle?

Right. As you know, can we have several operating units that work for cable, telecoms and utilities. Those will be a little bit messy to divide out. And of course the other category will need to be divided as well. But primarily, we're trying to integrate in a manner that will help us market more efficiently and have better efficiency of management.

Okay. Thank you.

Thank you. The next question's from Pernal Pareek.

Thank you. [Cue] Investments, hi guys. Can you run over the top 10 customer list, if you don't mind and can you talk about what other remaining cash costs if any, cash charges that fall through, and if you can talk about what's the revenue decline from the third to the fourth quarter, where is that coming from, what sector is that coming from? And lastly, if you can tell us about if you already got the cash, 26 million, from first reserve and so your pro forma cash is something like 40 million.

Okay, I'll start out with the customer list for the third quarter. Our top customer was Charter Communications, followed by Pugeot Sound Energy next was the Southern Companies -- no, I'm sorry, Southern California Edison. The next was Ericsson. Our fifth customer was San Diego Gas & electric. Our sixth customer was Pacific Gas & Electric. Our 7th customer fair to say Entergy Services, Number 8 was AT&T Media One, Number 9 was Reliant Energy, and Number 10 was Intermountain Rural Electric. James, do you want to address --

I didn't understand what the second question was. Pernal, could you repeat the second question?

Yeah, sure, related to all your restructuring actions reducing costs, I was just wondering what kind of cash impact would you have in terms of cash going out the door, in terms of severance, et cetera, going forward. Not the new charges, but any old accrual you might have.

I think the question is how much cash charges we're going to have because of severance going forward, closure?

Yeah.

And that depends on how deep we make our cuts. But I would anticipate those being a million dollars or more than -- between a million and a million and a half in the next quarter but I'm uncertain whether some of that is in this quarter or the next quarter.

Okay. Can you just talk about what the revenue decline is and what sector, going from 436, to 490, to 410.

I hope we're being conservative in the fourth quarter. We usually exceed our revenue forecasts, but the decline is primarily in the cable and telecom side of the business. We're estimating a slight increase from utility work in the fourth quarter, and declines in telecom and cable.

Okay. And in terms of the -- you already closed the first part of the transaction from First Reserve.

That's right.

You already had $26 million, the pro forma cash is more like 40 million.

Right.

Okay, thank you.

Thank you, the next question is from Ron Giesen. Please state your company name.

David Jay Green and Company. How are you doing, guys?

Great, how are you?

Good. Which EBITDA number is the bank using in the covenant, in the measurement of covenants?

The bank would be using the precharge numbers.

Okay.

To a great extent. We've provided for the write-off of receivables on the IPP plans we took, those were already provided for in our covenant amendments.

Okay. And then if we look at the receivable portfolio, what's the likelihood of some additional charges going forward? I guess more reliant on some of the teleco exposures?

Obviously, you know, we would be required to take those charges if we didn't think that what we had left were collectible. James, do you want to add some color to that?

No, I mean, that's the right answer. We currently -- we review our receivables every quarter based on the current circumstances and things we know about our customers. We think we're adequately reserved right now.

Okay.

We did -- I would -- I will point out that we have transferred, if you know, we put a new classification on our balance sheet this quarter, which is long-term receivables, and we did reclassify the balance that we're carrying due from Adelphia, long-term.

Okay.

Because we just -- we couldn't see whether -- we couldn't we assured that we're going to collect the money from Adelphia within the next year based on their bankruptcy proceedings. We feel comfortable with the number based on the fact that we have liens on their assets, and there's some, what we understand are fairly valuable assets, being the West Coast system. We couldn't see visibility of the timing of collection, so we reclassed it down to long-term.

Okay. Let's see. What -- give us a sense for the bank negotiation. What are the things that are hanging out there? Why are we still not -- have we not closed it? I'm just sort of wondering at what point if it becomes a done deal and is not floating around.

Well, we're anticipating that it's going to close prior to December7th. That's our target date.

Okay.

And we wanted to get our new forecast. We wanted to close our quarter, get new forecast together, it's a fairly tedious process, numerous vendors and numerous parties having -- First Reserve will be involved in it, too. So we wanted to be sure we have updated numbers after closing and reviewing the quarter and forecasts with all of our operating units.

Right. Okay. And what about any future impairments to stockholders' equity, you know, any charges to the goodwill, what's the likelihood of something like that taking place?

I'm not aware of any right now. We took a very conservative approach on our telecom units, those were the ones -- we wrote off most of the goodwill on telecom back in the second quarter. So I'm not aware of any FAS 142 issues right now.

Thank you. The next question is from Ram Kasergard.

Morgan Keegan. John, I have two questions for you. One is can you review the management changes and the operating structure changes that are taking place? And what you see as the potential impact going forward. And secondly, can you discuss what you're capacity utilization is today and is there a planned Capex budget for '03?

Basically what we're doing is changing from a regional management structure to industry line management structure. And what we expect that to do is to provide a leaner and better communication line to our customer, better marketing, more efficient management where we're not -- as you know, like 50 percent of the electric utilities had telecommunication subsidiaries. Many of them were entering the cable overbuild market.

That pretty much has gone away now, where the utilities are all saying the same thing, that they're going to focus on their core business, their T& D action. That's what we need to do is to be able to talk to those people and focus our marketing efforts on their T&D business. We'll take our telecom people and focus on the telecom business and cable business.

By doing that, we don't expect a tremendous amount of reductions in supervisory personnel, but what we do expect is more efficient management with fewer people in the chain of command. Answering your question about Capex for next year, James?

Should be somewhere around 50 million. And that's dependent upon new outsourcing contracts from utilities that -- might require us to get the assets of the utility, but 50 million should be okay without any significant contracts like that.

That will be roughly flat with this year and capacity utilization, you know, however you measure it, where does it stand right now?

I would say, Ram, that we still have some unutilized capacity, although we've been trimming that capacity through our efforts, I'd still say that there's room for continued improvement there. As I said, we're trying to get our SG&A to the $38 million level, providing we don't have some increases in revenues, but I'd say we still have some overcapacity.

Thank you.

Thank you. The next question is from Alex Rygiel, please go ahead with your question.

One quick follow-up question. The noncurrent accounts an receivable line item of 53 million, is that including the Adelphia receivable about 32 million or so and the loss of 22 million, is that what that accounts for?

No, it's made up of the receivable from Adelphia of about 22 million.

Okay.

And it's made up of a balance of about 21 million, which is remaining from the customer that we sold the plants to, the IPP plants.

Great, thank you.

Thank you. Ladies and gentlemen, if there are any additional questions, please press the star followed by the 1 at this time. As a reminder, if you're using speaker equipment, you'll need to lift the hand set before pressing the numbers. One moment, please, for the next question. The next question is from Chris Gutek. Please go ahead with your question.

Thanks, a quick follow-up, on the last question regarding any exposure to the project, above and beyond the 21 million on the balance sheet. What do you guys have in the backlog for that type of work? And notice on the last two, you had some hedging contracts. Do you have still an exposure there as well?

There's about $7 million left in inventory related to IPP projects. Currently working on a couple of projects that we think we'll be able to utilize that inventory on.

And the gas hedging?

The gas hedging contract we totaled that contract in the fourth quarter. We don't have exposure to that contract.

Okay. And anything in the backlog for these type of projects?

For IPP projects?

That's correct, yes.

No.

Okay. And unrelated, James, can you give us an update on the potential second investment by First Reserve, what criteria has to be met and what the time frame for that would be?

The time frame for the investment is to close before December7th and the criteria has not really been outlined yet. It's subject to favorable negotiations or acceptable negotiations on our credit. More flexibility on the EBITDA interest coverage ratio, getting more flexibility on the ability to do acquisitions and more flexibility on capital expenditures. Those are the primary things we're talking about, along with a few other things that are cleanup from the last agreement.

Okay.

Basically, they're trying to -- trying to give more flexibility for future growth of the company. The outsourcing contracts that require us to purchase capital expenditures to fulfill the needs of those contracts, often we buy the equipment. We have no use for that equipment as they give us their manpower, that equipment is excess to them. They obviously need that equipment in order to -- just more flexibility for growth in several areas.

Okay. Great, thanks, guys.

Thank you. Gentlemen, please continue with any closing statements.

I'd like to thank all of you for participating in our conference call this morning. We appreciate your questions and your ongoing interest in Quanta. As we've outlined in our discussion today, we are starting to see signs of stabilization in the industries we serve. They remain vast long-term opportunities for growth and Quanta is positioned to lead the recovery. We will continue to communicate with you as we drive the outsourcing trend, continue our cost cutting initiatives and implement our new industry aligned structure. Thank you all very much for attending and good-bye for now.

Thank you, sir. Ladies and gentlemen, this concludes the Quanta Third Quarter Earnings Conference Call. If you would like to listen to the replay, please dial (303)590-3000 with access number 506366. Once again, if you would like to listen to a replay of today's conference call, please dial (303)590-3000 with access number 506366. You may now disconnect.