Quanta Services Inc (PWR) 2003 Q3 法說會逐字稿

Welcome to the Quanta third quarter earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Thursday, November 13, 2003. I would now like to turn the conference over to Mr. Ken Dennard, managing partner of DRG&E.

Good morning everyone. We appreciate you joining us for Quanta Services' conference call to review third quarter results. Before I turn the call over to management, I have the normal housekeeping details to run through. If you would like to be on the e-mail distribution or fax list to receive future news releases for Quanta, or if you experienced a technical problem and didn't receive your fax or e-mail this morning, please call our offices at DRG&E and relay that information to us. Our number is 713-529-6600. Also, if you would like to listen to a replay of today's call, it will be available via webcast by going to www.QuantaServices.com, and click on the webcast section there; or there's a telephonic recorded instant replay that will be available for seven days, 24 hours a day. To use that dial-in replay feature, dial 303-590-3000 and use the passcode 558947. That information is also in today's release.

Information reported on this call speaks only as of today, November 13, 2003, and therefore, you are advised that time sensitive information may no longer be accurate as of the time of any replay. As you know also, this conference call today contains various forward-looking statements and information, including management's expectations regarding revenues, earnings per share and other results for the fourth quarter and full year of 2003. These statements are based on management's beliefs, as well as assumptions made by and information currently available to management. Although the Company believes that expectations reflected 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 factors -- future growth of the electric utility and telecommunications outsourcing industry; the ability for Quanta to effectively integrate the operations of its companies; access to sufficient funding; compliance with financial covenants; dependence on fixed-price contracts; cancellation 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 to be incorrect, actual results may differ materially from those expected. For more detailed information and a discussion of these risks, investors are urged to refer to the Company's filings with the SEC.

Now I would like to turn the call over to Mr. John Colson, Quanta's Chairman and CEO. John?

Good morning everyone, and welcome to Quanta Services' third quarter 2003 conference call. Joining me today is James Haddox, our Chief Financial Officer, and Luke Spalj, President of Quanta's Telecommunications and Cable Television division. John Wilson, President of Quanta's Electric Power and Gas division, is traveling today and will not be available. After my initial discussion, Luke Spalj will present an update on our telecommunications and cable operations, including industry developments. Then James will outline our financial performance before we open the call for questions.

Today we announced the results for the third quarter of 2003. Revenues for the third quarter of 2003 were approximately 436 million, a $28 million increase from second quarter. The results for the third quarter were in line with our expectations announced in our last quarterly call. To update you on the nine large projects we talked about in recent conference calls, three of the nine projects were awarded to other companies; two of the projects were canceled; two of the projects have been delayed until 2004, probably in late 2004; and we have been awarded two of these projects, which were announced in a separate press release that we issued today. These two projects will represent approximately $100 million in revenues over the next 18 months.

The contract with American Electric Power will address the transmission constraints in Virginia and West Virginia with the construction of a 90 mile 765 kV transmission line. Energy demand in Western Virginia and southern West Virginia has increased more than 135 percent since the last transmission line to serve this region was completed more than 30 years ago. This will be the first 6 bundle transmission line in the nation. Compared to a 4 bundled conductor, the 6 bundled will reduce noise emitted from the transmission lines by half. To further reduced the disturbance caused by the project and reduce the magnitude of construction roads, we will utilize heavy lift helicopters to erect more than 75 percent of the steel transmission towers that will stretch across the 90 miles. The new transmission line crosses parts of the Appalachian mountain range and segments of national forest. For the other contract with the Tennessee Valley Authority, our crews will provide installation and maintenance services for TVA's transmission system and substations over the next five years. This contract also has a five-year extension clause.

Some other key highlights of the third quarter. We completed an offering of $270 million of convertible subordinated debentures, due 2023, through a private placement. As James will discuss, we used the net proceeds of the offering to repay senior secured notes and associated make hold prepayment premiums. Also, we had a $200 million committed credit facility that should close sometime during the fourth quarter. These refinancing initiatives mean a reduced -- a reduction in the interest rates paid on our debt, and when closed, no principal payments due on our debt until 2007. This provides the liquidity we need to ensure our ability to fund our growth for the next decade.

Just a week after our last earnings release call, the northeast was impacted by a massive power outage. The underlying issues related to this blackout should have a positive direct impact on our business. The August blackout brought the state of our nation's aging transmission grid to the public's attention. The nation quickly became aware of how much we rely on power and how much we take its delivery for granted, and the fact that a lot of work needs to take place quickly to avoid another similar circumstance. While spending on generation surged over the past several years, investment in the transmission system has dived to all-time lows. What our nation is now learning is that maintaining and upgrading the transmission system is not as simple as ordering the work to be done. We must first determine who will be responsible for the work and who will pay for it.

The energy bill which originally addressed the transmission grid has been in and out of political debates for the past 18 months. I'm sure many of you have read that, as of now, the control and responsibility for the expansion of our nation's transmission grid lies with the individual utilities and state and regional transmission organizations. Whether controlled by regional or national organizations, the expansion and upgrade of our transmission grid must happen. Quanta's long history in transmission infrastructure services, and close relationships with key utilities and regional transmission organizations, ensure that we will be a key player in the rebuild of the system. As you can imagine, there were certain efficiencies when approaching the upgrade from a national level; therefore, by placing responsibility on the state and regional level, there most likely will be a larger amount of work performed, but the financing and timing are more uncertain.

In addition to the publicity Quanta received following the blackout, the industry continues to talk about the unique methods our energized crews use to meet the demanding challenge of upgrading 23 miles 345 kV transmission line in five months. This was done without interrupting service to the customers of Kansas City Power and Light and other Southwest power (indiscernible) utilities. As RTOs take a more strategic role in alleviating key constraints, such as this one in Kansas, they will look to energize methods to reduce the cost, time and inconvenience to power consumers, as they upgrade their transmission lines. Quanta and this energized reconductoring project are featured on the cover of the September issue of Transmission and Distribution World, a well-known industry publication.

During the quarter, we provided significant support to our customer's efforts to restore power after the devastation of Hurricane Isabel on the East Coast and the unprecedented fires on the West Coast. Our operating units provided more than 1500 people in response to Hurricane Isabel. Over the span of three weeks, our crews worked for six different utilities affected by the storm. In California, we worked over 350 people for two weeks, helping three different major utilities recover from the massive fires. These efforts illustrate Quanta's unique ability to provide nationwide services to our customers.

We continue to be strategic in our marketing and sales efforts. In addition to the increased publicity on our unique proprietary methods, we continue our direct customer outreach efforts to provide strategic value to their businesses and partner with them on a high level. As many of you know, Quanta facilitated the gathering of select industry executives in (indiscernible) in September in Chicago. The utility (indiscernible) drew participants from utilities across the nation, as well as the FERC, (indiscernible) and various public utility commissions. The symposium is designed to be a small, selective gathering of thought leaders representing various points of view. The agenda incorporated panel discussion and presentations on regulatory and financial issues, new technologies and partnering strategies.

Now I'll review the breakout of our revenues by type of customers for the quarter. 59 percent of our revenues for the quarter was from electric and gas utilities compared to 51 percent in the third quarter last year. 16 percent was from telecom companies compared to 17 percent in the same quarter of 2002. Cable customers accounted for 8 percent compared to 12 percent. 9 percent was commercial and industrial, no change from the 9 percent in the third quarter of 2002. 4 percent was transmission -- or excuse me, transportation revenue, compared to 6 percent a year ago. And 4 percent of our third quarter revenue were other, which totaled 5 percent for the third quarter of 2002. Our largest customer for the quarter made up only 5 percent of our revenues. Our top 10 customers for the quarter equaled 29 percent of our total revenues, and our top 20 customers made up approximately 41 percent of revenues.

At the end of our second quarter, our employee count was 11,629, an increase of 143 employees, compared to the second quarter. From a G&A standpoint, we have continued to make operational changes where they have had the highest impact. And we continue to manage costs and leverage synergies by consolidating operating units. The number of salaried employees decreased for the third quarter in a row. 12 month backlog increased slightly over second quarter of 2003, and increased $50 million over last year.

In closing, I would like to reiterate our outlook for the future of Quanta. The opportunities that lie ahead are unprecedented, and no other infrastructure service provider is as strongly positioned to leverage these opportunities as Quanta. We continue to be proud of our work force and the quality work they do, and our ability to strengthen our customer relationships, our balance sheet and our competitive position. While recovery is slow in the industry's we serve, we are encouraged by the improvements in our customer's financial position.

Now I would like to turn the call over to Luke Spalj, President of our Telecommunications and Broadband Cable division, who will give us an overview of his operations and the industry overall.

Thank John, and good morning everyone. The telecom, cable and specialty business environments that we operate in are experiencing increased stability, and there are specific pockets of growth that will ultimately, long-term, benefit our business. We think we have a clear picture of this environment going forward. Most of our telephony customers appear to be maintaining their current, albeit depressed, level of capital expenditures. They do not show any indication of significant upward trending until there is further regulatory relief or they commit to full-blown fiber-to-the-home expansion. They are seeing increased pressure from CLECs on a UNI-P platform, pricing pressures in their long distance markets, increased pressure from cable operators on their broadband products, and the threat of voiceover Internet protocol technology, which cable operators are trying to roll out. We believe all of these threats will leave telephony CAPEX at current levels until the regulatory landscape changes.

Our cable customers, with the exception of Comcast and Adelphia, also appear to be maintaining current spending levels. Comcast is still the most active in finishing their upgrades and Adelphia is indicating that they may increase spending as they try to emerge from bankruptcy. With the general operating environment mentioned previously, the ongoing focus of our telecom and cable operations is best summarized in three points -- number one maintain or reduce our current cost structure, which reflects the current business environment; number two, remain active in the marketplace and strongly position Quanta in areas that present the largest margin growth and stability opportunities; number three, monitor regulatory developments and their effect on our customers and our business, while keeping an eye on future capital spending trends.

As you know, we offer various services across our subsidiaries. Therefore, I will allow for a few additional comment on each of our business lines.

Wireline and outside plant. As stated previously, while we are seeing stabilized capital expenditure levels from telecom service providers, there are pockets of potential growth. The single largest opportunity for this area of our business is the fiber-to-the-premise or home deployments. According to market research firm Render, Vanderslice and Associates, FTTP growth has been accelerating in the latter part of 2003, and there appears to be an increasing number of projects in feasibility and engineering stages, especially with municipalities looking at open access networks. Quanta has responded to numerous smaller RFPs in this area that have yet to be awarded. We are well-positioned to benefit from FTT deployments as they progress. Also, the have RBOCs have discussed, but not committed to, FTT deployment as an answer to the cable operators' multiservice threat that I mentioned earlier. But again, we do not expect significant revenues from these projects for 12 to 18 months.

In previous calls, we talked about the government (indiscernible) project. It appears that the Department of Defense -- or DOD -- has substantially scaled back the RFP to about 25 percent of the original dollar value, due to budgeting issues. This amount was awarded to an undisclosed carrier; however, the language in the DOD release seemed to indicate that they will reissue the remaining portions of the RFPs in the next budget cycle. We now anticipate work from this project to take place over the next three years, rather than the next two.

DOE (ph) and inside plant. Revenues for an inside plant and central office operations remain flat; however, we have made significant progress in reducing G&A and increasing operating income. This group is also benefiting from the efficiencies of consolidation. We have merged operations with service synergies, which has already resulted in higher-impact business development efforts, clearer messaging in the marketplace and overall cost savings. Most of our work and future prospects are in the EF&I -- or engineered furnishing install -- services for central office facilities. As telecom equipment manufacturers remain focused on their core competencies, they are increasingly looking at outsourcing the full EF&I function instead of selective portions, in an effort to reduce their fixed overhead costs. We think this is our greatest opportunity and we are in discussions with various telecom equipment manufacturers about this approach.

Cable. We believe revenues from our cable TV business will remain stable for the remainder of the year and into 2004. We do have Comcast work in certain markets where we have significant strength. We believe our strong Adelphia relationships will result in an increased workload as they emerge from bankruptcy. It should be noted that a number of cable operators are exploring reducing the number of small service providers they utilize, and are looking at large national firms like Quanta to perform their work. This enables them to scale back their internal work force.

Wireless. Wireless continued to be a strong area of opportunity for Quanta. As new technologies are deployed and adoption increases, the major wireless providers are faced with increased capacity demand and expansion of their networks. Because of our realignment, our full-service, total solution wireless offering has been extremely successful this year. Also, this division has been asked to submit a number of end-to-end program management proposals to various carriers. For example, in the past month alone, we have submitted well over 100 million in total solution proposals for projects that will be developed and implemented in 2004. For the second year in a row, we were also recognized in September by E&R Magazine as (indiscernible) in the nation in tower and antenna erection. In addition to our outsourcing relationship with Ericsson, we have been selected as their strategic partner to perform sole source site development and construction on upcoming contracts. Also, Bechtel (ph) Communications awarded us an 18 month sole source strategic partnering contract to provide wireless construction services for a major market build in New Jersey for 18 key wireless services. Although our customers' CAPEX appears to be flat in 2004, we believe our new wireless business model has positioned us to increase our wireless market share through consolidated efforts.

C&I. Our commercial and industrial operations are experiencing increased activity in structured cabling, hospitals, educational facilities and intelligent highway systems. However, there is less activity in office complexes, industrial facilities, power plants, hotels and casinos. Many of our existing and potential customers are looking to the future and planning work. This has resulted in increased bid opportunities; however, in most cases, these bids are price-driven, and margins remain low. We've had a number of management issues in this area over the past few quarters, and have recently made significant management changes. These problems have and will and continue to affect Quanta's earnings for the short term, but we believe the steps we have taken will strengthen the performance of this group.

Specialty. Growth in our consolidated specialty group is being driven by new federal regulations related to pipeline integrity. The new requirements call for all pipeline operators to assess the condition of their pipelines and rehabilitate the problems found. Quanta has specific operations that specialize in this technical process, and have the equipment and expertise required to effectively assess pipeline integrity for our customers.

In summary, we believe the vast majority of our customers' capital expenditures going forward will be flat, with pockets of increased activity. Our focus on the three key operating points previously mentioned will enable us to achieve our financial goals while maintaining our market leading reputation, and should leave us positioned to capitalize as the economic environment turns upward. We would also like to note that even though our customers' CAPEX levels are flat, they are still historically low, and any uptick in new spending in any of our business areas will bring incremental margin growth. But again, I would like to stress we are focused on operating in the current environment, with our eye on future changes in the economy.

Now I will turn the call over to James Haddox for the review of our financial results.

Thanks Luke. Today we announced revenues of 436.1 million for the third quarter, compared to 436.2 million in the prior year's third quarter. Net income attributable to common stock for the quarter was 5.4 million, or five cents per diluted share, compared to a net loss of 8.5 million, or 14 cents per diluted share in the third quarter of 2002. Last year's third quarter included a $31 million pre-tax charge for an allowance for doubtful accounts and write-down of inventory related to our independent power plant business.

Our gross margins of 12.6 percent for the third quarter of 2003 compared to 12.4 percent during the third quarter of 2002. While margins earned from our electric and gas utility and telecom services increased slightly compared to 2002, the increase was partially offset by a decrease in margins from our services to inside electrical and transportation customers. We continue to make progress in reducing our G&A expenses. Our G&A expenses were 38.9 million in the third quarter of 2003. G&A expenses of 68.7 million in the third quarter of 2002 included a bad debt write-off of approximately 26 million. Excluding the $26 million charge, our G&A expenses for the third quarter of 2002 would have been about 43 million; therefore, our G&A expenses have been reduced by 4.1 million for the third quarter -- from the third quarter of 2002. Our G&A expenses continue to include costs related to facility abandonment, severance charges and costs associated with the collection of receivables. Our pre-charge reduction in G&A reflects our continuing efforts to align our fixed cost structure to our current operating environment.

For the third quarter of 2003, EBITDA was 31.7 million, or 27 cents per diluted share. The EBITDA calculation begins with net income of 5.4 million, plus net interest expense of 7.7 million, depreciation and amortization of 15.0 million and stock-based compensation expense of 839,000 -- plus the tax provision of 2.8 million. Cash flow from operations totaled approximately 3.6 million for the quarter. Year-to-date cash flow from operations through September 30 totaled 76.7 million. Subtracting year-to-date CAPEX of 23.9 million yields 52.8 million of free cash flow for the first nine months of 2003. We continue to maintain our previous capital expenditure projection of about 30 million for all of 2003.

Our current backlog of work to be completed during the next 12 months is approximately 983 million, for an increase of $50 million from the $933 million in backlog at this time last year. The increase in backlog is attributable to our utility and gas work, partially offset by reductions in backlog for cable work. Backlog represents the amount of revenue that we expect to realize from work to be performed over the next 12 months on contracts, including estimates of work under long-term maintenance contracts and new contractual agreements on which work has not yet begun.

Our days sales outstanding, which we calculate including current accounts receivable plus costs and earnings in excess of billings, less billings in excess of costs, were 89 days at September 30 versus 87 days at June 30 of '03. The increase in DSOs for the quarter was related to a disproportionate portion of revenues for the quarter being performed during the last month of the quarter, and even the latter part of that month, as we were performing storm restoration work related to Hurricane Isabel.

At quarter end, we had $78 million in cash and we had $91 million in letters of credit outstanding under our credit facility, primarily to secure our insurance program. As John mentioned, subsequent to the end of the third quarter, we undertook a refinancing strategy which included the following -- one, the issuance of 270 million of subordinated convertible notes which carry an interest rate of 4.5 percent; and two, we also amended our bank credit facility to obtain 60 million in funded borrowings and a $120 million letter of credit facility from a bank. The proceeds of these financings, combined with cash on hand, we used to pay off our $210 million in senior notes and an associated make hold premium of $31 million, and with the remaining cash being used to collateralize our letter of credit facility. As a result as a result of these refinancings, we've reduced our interest rate -- our average interest rate on debt from 7.3 percent to 4.4 percent, which should generate a savings of approximately $8 million per year. We've also extended the maturities of our debt and obtained significantly relaxed financial covenants. We plan to close a new credit facility of up to $200 million with a group of lenders prior to the end of 2003. This facility will replace our existing credit facility. As of today, we have $63 million in cash and $96 million of cash pledged to secure letters of credit.

Concerning our outlook for the future, we project the revenues in the fourth quarter of 2003 will be in the range of 380 to 410 million, and that EPS will be in the range of a negative 16 cents to 19 cents, after giving consideration to a pre-tax charge of approximately $35 million associated with the make hold premium on the senior note repayment and the write-off of deferred financing costs associated with previous financings. The estimated EPS effect of the charge is approximately a negative 21 cents. Therefore, before giving consideration to these charges, we expect EPS for the fourth quarter to range between 2 and 5 cents. We also expect interest expense, excluding the make hold charges, to total about 7.2 million in the fourth quarter of '03.

Looking forward, we will continue to focus on the implementation of our proven business strategy, measurement of progress, recognition of areas for improvement, the application of our primary profitable capabilities and the foresight to market Quanta in growth areas. These continued efforts will insure Quanta's position as the markets we serve recover.

This concludes our formal presentation, and now we will open the line for Q&A.

(OPERATOR INSTRUCTIONS). Sanjay Shrestha, First Albany.

A couple of quick questions here. Can you give us a little more color on what exactly was the impact of Hurricane Isabel, as well as the fire in California during the quarter?

I think the revenues from storm work, the total revenues during the third quarter from storm work were approximately $25 million. But we also -- but that's not the incremental revenue, because those crews that we used on storm work were mobilized from other jobs that they were on. So we estimated that the incremental revenues earned from storm work during the quarter were about 11.4 million. The fire, I don't think we had much revenues from the fire in the third quarter. Most of that will be in the fourth quarter, and it's too early at this point in time to anticipate what the revenues from that might be.

Do you see any further revenue opportunity from the Hurricane Isabel into the fourth quarter, as well, or you think most of that is behind you now?

I think we've got a few days of Isabel in the fourth quarter, but it wouldn't be more than about a week.

Obviously, you guys have actually landed a couple of nice jobs here on the T&D side. But again, I know it's become a big political event here, but can you give us at least something that we can sort of monitor or look for? Obviously, there is a lot of talk out there, even (indiscernible) talks about a big opportunity. But help us understand what we should be monitoring, or what is your take on that whole opportunity right now going into 2004?

(indiscernible) some interesting information. One of our executives attended a symposium (indiscernible) where there were a FERC commissioner, 6 representatives of ISOs and several different executives of transmission utilities. And they were addressing in this symposium the article in the Wall Street Journal, where they were talking about the energy bill and the rebuild of the transmission grid, and all that was left out of the energy bill. Let me quote a few things from his letter to me, summarizing what was said at that conference. Most of the above parties were continuing to move toward the concepts outlined by FERC, and indicated the delay was no big deal in their areas. In fact -- and I will just say one of ISO members -- indicated there would be little effect in the northeast, and this approach may be better because had it been made mandatory, we really would have had a food fight. The FERC commissioner indicated that they would do what Congress decided, but given where the country is, all but the Northwest and the Southeast are moving in the direction there outlined anyway. She was traveling to California and included them in the category of moving ahead. The bottom line opinion from the participants in this conference about future transmission expenditures is, transmission expenditures are going to increase across the country in the next few years because the signals from FERC are starting to be understood and accepted, and more transmission owning entities are developing. Most all agree that there are two reasons to build transmission -- one for reliability; and two, for a more efficient market. They will find a way to get the projects done for reliability immediately, but building for a more efficient market will take a little longer. I think that pretty much summarizes what the utility industry is thinking right now. Many of our utility customers are just now budgeting for the year 2004, and some of them are hesitant to spend money in this short-term period over the next quarter, waiting to see what exactly is going to change in the regulatory environment. So I think, things you can monitor, obviously, the energy bill; any new FERC rulings, any regulatory changes or any tax benefits that Congress gives to the utilities to incent them to build more transmission facilities.

Just a little more clarification on one thing. You just mentioned here that the reliability portion of that could be immediate, right? When we say immediate, are we talking about early '04 or are we talking about latter '04?

I think we're talking about '04 and '05. When a utility says immediate, I think they're probably talking 6 months, 18 months out.

Fair enough. In terms of the fourth quarter earnings guidance of 2 to 5 cents, which was slightly below the previous expectation, is that also because of the utility being in the process of budgeting for 2004, and kind of impacting the spending levels here in the fourth quarter?

That's correct. There is also some emerging winter weather anticipated in that. And as Luke mentioned, there are some issues on our C&I side that we don't expect to show significant profitability in the fourth quarter, either.

Fair enough. One last question, if I may. Obviously, (indiscernible) done this refinancing and the convertible debt, which is going to save about $8 million of interest expense in 2004. That's obviously great strength on your balance sheet and things like that. But at this point, I understand you guys are probably in your budgeting process, but the numbers are out there on the street from a consensus standpoint. Can you talk to that, at least from a 10,000 foot view? What is your take right now? I guess we are going to wait for the fourth quarter call to really get the formal guidance for 2004. But can you speak to that a little bit, as much as you can at this point?

We expect 2004 to be a better year than 2003, and that's primarily due to the customers that we serve having a better balance sheet, that they are beginning to recover. That expectation doesn't include such things as a major transmission buildout and doesn't include such thing as fiber-to-the-home initiatives. Just because our customers are getting more healthy, we expect maintenance spending to return to more near normal levels; not probably normal yet, but at least get near more normal levels.

Alex Rygiel, Friedman, Billings, Ramsey.

It looks like a pretty good quarter. Revenues for the first time in two years were flattish on a year over year basis. Margins, gross margins improved modestly year-over-year. Looking out into 2004, it sounds like your body language would suggest flat to modestly up revenues. Is that correct? Is that assumption correct?

We expect -- as I said, I don't want to get too much involved in 2004 without having the official guidance out there on the street, but we expect it to be better than 2003. Revenues, depending on what individual projects we might get, could be up or down. But we expect margins to improve, so we expect 2003 to be a better year, even without significant buildout -- if we get significant buildout in 2004. Even if we don't get significant buildout from the transmission grid, which we expect some, and even if we don't get significant fiber-to-the-home projects or some other major initiative, we expect 2004 to be better than 2003.

Excluding fiber-to-the-home, do you expect telecom and cable to be up next year? It sounds like that's your body language, as you see your customers spending at stable levels, but there is pockets of growth and there's market share gain opportunities from vendor consolidation. Is it a fair assumption to assume that telecom and cable will be up next year?

Luke, do you want to address that? I don't think that we are expecting huge increases in revenues. Luke is working on margins definitely all the time, with further consolidations and some integration of slower performing units. Luke, do you have that?

I don't think they are going to be up. But again, (indiscernible) we are focusing on margins and operating income and cash flow, so we could do better that way. But to say revenues are up, I think CAPEX is flat year-over-year most segments. So yes, there are pockets of growth. And if we get some of those pockets we could be up, but I am not suggesting that.

James, could you give us an update as to what your expectation is for shares outstanding in the fourth quarter?

Yes. Shares in the fourth quarter should be right around 116.6 million.

Tranal Trarigue (ph), (indiscernible).

I missed the cash flow from operations number. Can you update me on that, James?

Cash flow from operations was 3.6 million in the quarter.

My understanding of the way this refinancing that you've done until now, is 60 million of term loan and 120 of your LC facility -- does that replace the existing facility, or you just amended it such that the 225 now becomes 180?

It's an amendment to the new facility. It's an amendment to the existing facility -- it's confusing. We amended the existing facility. It's no longer a $225 million facility, it's been converted to a $60 million term loan, which we have actually funded and used the proceeds of that to repay the senior notes. And the $120 million letter of credit facility, of which we have about, I think, it's about 91 million outstanding right now, and have cash collateralized up to 96 million. Because we expect to issue another $5 million shortly under that facility.

Okay. Because you got 270 million from the subnotes, and then you used the 60 million of term loan, which was not drawn earlier -- the credit facility was not drawn. You used those to pay off 240 million of the senior secured notes, and then --?

And then (indiscernible) 95, 96 --

(multiple speakers)

Right. 80 million from the proceeds and maybe 15 million from cash on hand (indiscernible). Is that right?

That's right. We used about 15 million from cash on hand.

So when you redo the new facility, will this cash become unrestricted and go on your balance sheet?

I expect it to, but I hate to talk to much about the new facility right now because of the fact that we haven't got the facility completed and closed. But I expect you are right; the cash that is now restricted will come back to us.

Jason Voss, Davis Mutual Funds.

My first question, and I've got one sort of follow-up on that, is, what is your estimate of capacity utilization, recognizing of course that that is kind of a tough number to gauge?

Can you clarify that a little bit? Capacity utilization as far as equipment and people, or --?

I guess the way I am approaching it is that operating income back in the first quarter was about flat. And since that time, you guys have added about 69 million in revenues. And now operating income is about 16 million, which would imply an incremental margin of about 25 percent. So what I am trying to figure out is how sustainable is that before you guys would have to add more people, more equipment, etc.? I guess the reason I'm asking capacity utilization is to get some sort of estimate of how sustainable that incremental margin is?

Most of our workforce is variable, most of our employees, except salaried employees, work by the hour. And so it's (inaudible) variable. So they're nearly always 100 percent utilized. Of course, our SG&A is where there is -- SG&A always lags your revenue, going up or going down. Our equipment, we always keep a significant percentage of our equipment on the rental side. So that if revenues go down, we turn the rental equipment back in, and as revenues go up, we don't have to buy the first time we pick up a contract. We just go out and rent that first bit of equipment. We like to work it that way to take care of any peaks and valleys. The issue you are talking about in regard to revenue, it's not perhaps like a manufacturing plant. We're more dependent upon margins. If our revenues, for instance, were to stay at a $375 million level, we could increase our profitability by being able to better utilize the SG&A that we have in the equipment that we have to generate better profits. In the case of (inaudible) $375 million forever, why we would be reducing. If it was $450 million forever, then we might have some increase, but once it's at that level and remains stationary at that level, our profitability should increase as we match our capabilities to the market that we have.

How reflective of your restructuring efforts is that 25 percent incremental margin? I ask because looking back over your previous quarters, about 16 percent was your peak back in third quarter of '00. Another 16 percent was the peak -- full operating margin, not incremental margin. So how reflective of your restructuring efforts is that 25 percent you just put on?

I don't follow that question, do you James? Do you understand? Try me again.

That's alright, I apologize. Your peak operating margin occurred in third quarter '00, which was about 16 percent. But that's not an incremental margin, that is your total margin. And at that time, business was growing, so I am guessing you were adding people piecemeal and equipment piecemeal. But you have just delivered a 25 percent (indiscernible) margin over your first quarter. So my question is, you guys have been restructuring, is that 25 percent incremental margin reflective of -- say, once you get back to sort of a sustainable more normalized revenue stream and operating environment, is that 25 percent margin a good assumption many years out? Or is that just happenstance because of the contracts you bid recently?

I think that there should be continued improvement on the margin side as time goes on and as the markets stabilize, but also, there is seasonality involved between the first quarter -- which was a very severe weather quarter for us. Severe weather across the United States, which is very unusual. The third quarter seasonally is a better quarter for us, because (indiscernible) much better working environment.

Paul Krieger (ph), Stratus Investment Management.

I realize you're not giving guidance for 2004, but for your internal (indiscernible), are you expecting more contracts to be closed? Or are the 2 that you just signed enough to get you to your internal (indiscernible) for next year?

We expect to continue to sign contracts. The reason that we announced these contracts were two reasons -- one, they were part of the nine large jobs that we talked about in the first quarter of this year, and -- because they were extremely large contracts, and that's the reason we announced these particular two. We get contracts every day that we don't announce, and we expect to continue to get contracts.

I understand that. I know you expect to get more contracts in 2004. My specific question is -- is what you have signed already enough to get you to your targets for 2004?

Do you want to talk about backlog, James? I think that's probably the statistic he is looking for there.

You haven't -- you've said you are not going to talk about guidance for '04, but you have internally your own planning discussions, 2004 is going to be a better year. Is the contract backlog you have in place enough to get you to a better year for next year?

Yes. (multiple speakers)

David Maserly (ph), (indiscernible) associates.

Can you guys run through the cash flows again from the subnotes, and then the new revolvers? I'm sorry I missed that. It seems like sort of just a shuffling around, in terms of total indebtedness. But then also, can you review the purpose or the thought behind the new credit facility, the 200 million? With the cash you have on hand, it seems like an additional borrowing capacity. It seems like you have sufficient liquidity.

The primary need for the new borrowing facility is that our original credit facility, our existing facility was going to expire in June of '04. We amended that facility to increase -- to extend the maturities until June '05. We still have the need for a long-term credit facility, and that's what we're working on right now. With a group of lenders, we are working to extend it so that the new credit facility would be out to -- actually would out 4.5 half years from now, once we get that completed. And that will give us additional liquidity to handle things such as any increase in work that we see as a result of any changes in attitudes of the utilities toward building out the grid or upgrading the grid. And also, help us with any new outsourcing contracts that we may get from utilities, which in many cases, require quite a bit of working capital and some capital expenditures. That's the thinking behind the new facility. And just to make it into a longer-term facility, with primarily a new group of lenders.

We also don't expect interest rates to get any lower than they are today.

That's right. And as far as the funding that came in, we received $270 million -- that's before transaction costs on the convert, plus $60 million on the new -- the amended facility, the term loan-type facility that's due in January of '05. So those were the incoming flows; the outgoing were $240 million associated with the repayment of the senior notes and the make hold premiums. Some associated costs with that which totaled -- total cost for all the transactions is probably somewhere around $12 million. And then we used $15 million of our cash on hand. (multiple speakers). The remainder of that, say $96 million, went to cash collateralized letters of credit that we currently have outstanding.

We've got time for one more question.

Alex Rygiel.

In 2004, James, what do you expect your tax rate to be? And I appreciate you updating us on those nine large projects. Are there a number of large projects out there right now that you are looking at? I know there's several larger transmission projects in the upper northeast that are being discussed. Can you comment on any other large opportunities that you see on the horizon?

The large opportunities we typically don't get into detail about, unless we have a group as large as we had those nine that were bidding all -- or were supposed to bid within like a 30 day period. Yes, there are some other large projects out there that we are looking at. We are still working on the two projects that were postponed until 2004. But I don't want to get into a scenario where we are talking about projects we are getting, and then if we don't get them or if we do get them, we have to explain how we did or why we didn't. There are projects every day that we are looking at. Some of them right now are rather large, and hence, some of the reason that we think we need to have a significant amount of cash available and on hand to fund some of these larger projects in the beginning working capital needs can be quite heavy. James, do you want to address the tax issue?

We haven't actually given our guidance or completed what we need to do for guidance, but I anticipate that the tax rate for '04 should be a more normalized rate of around 38 percent -- 37, 38, somewhere in there.

So John, we will wrap up with that.

I would like to thank you all for your participation in our third quarter conference call. We appreciate your questions and ongoing interest in Quanta. Thank you very much, and goodbye.

Ladies and gentlemen, this concludes today's Quanta third quarter earnings conference. If you would like to listen to a replay of today's conference, please dial 303-590-3000, followed by access number 558947.