Quanta Services Inc (PWR) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Quanta Services second quarter earnings conference call. [OPERATOR INSTRUCTIONS] I would now like the turn the conference over to Mr. Ken Dennard of DRG&E. Please go ahead sir.

Thank you, Michael and good morning, everyone. We welcome you to Quanta Services' conference call to review 2006 second 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 the on e-mail or fax distribution lists or to receive future news releases on Quanta or if you experienced any technical difficulties this morning or did not receive your fax or e-mail please call our offices at DRG&E and that's 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 going to the Investor Center, Event Section of the Website. Also, there is a telephonic recorded instant replay that will available for the next seven days 24 hours a day and the dial-in information and passcode are in this morning's press release. Please remember that information reported on this call speaks only as of today, August 2, 2006. And therefore, you are advised that time sensitive information may no longer be accurate at the time of any replay listening.

Also, this call will contain forward-looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. Forward-looking statements include but are not limited to statements related to projected revenues and earnings per share, projected tax rates and other financial and operating results and information, capital expenditures, benefits of the Energy Policy Act of 2005 or other legislation, growth in particular markets, strategies, expectations, intentions, plans, future events, performance, underlying assumptions and other statements that do not relate to historical or current fact.

These forward-looking statements are not guarantees of future performance, and management cautions that any or all of Quanta's forward-looking statements may turn out to be incorrect. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict.

Please refer to Quanta's annual report on Form 10-K for the year ended December 31, 2005, the Company's Form 10-Q for the three months ended March 31, 2006, and other reports filed with the SEC; for additional information concerning some of the risks, uncertainties and consumptions that could affect the outcome of the results or the results of operations or Quanta generally. Actual results may even differ materially from those expressed or implied as forward-looking statements. And all forward-looking statements, whether written or orally, are expressly qualified by these cautionary statements and other cautionary statements that may accompany such forward-looking statements.

In addition, Quanta does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after the date of this call. Now, I would like the turn the call over to Mr. John Colson, Quanta's Chairman and CEO. John.

Good morning, everyone, and welcome to Quanta Services' second quarter 2006 conference call. To start the call this morning, I will provide a general overview of the quarter and a detailed discussion of our telecommunications and cable operations. My remarks will be followed by review of our electric power and gas operations by John Wilson, the President of that Group; and James Haddox our Chief Financial Officer, will review the quarter's financial results. Ken Trawick, the President of telecommunications and cable operations is also present to answer questions. After our prepared remarks, we will open the call for questions.

Quanta's ongoing ability to lead the market, deliver critical value to our customers and maintain our competitive advantage is evident in our second quarter results. For the second quarter of 2006, revenues were approximately $514 million. This compares to $439.3 million in the second quarter of 2005. Electric power and gas revenues grew 22% in the second quarter of 2006 over the second quarter of 2005. Telecommunications and cable revenues grew 17.5% in the second quarter of 2006 over the second quarter of '05.

For the Company, internal revenue growth was 17% for the quarter over the same period in 2005. This is well in line with our objective of achieving double digit internal growth for the year in our core business, excluding storm revenues for both periods. In addition, gross margins increased 330 basis points to 15.3% over the second quarter of 2005. These financial results are attributable partly to additional opportunities due to the improved financial condition of our customers and an increase in negotiated work versus traditional bid work.

As more utilities and telecom service providers seek to form partnerships and continue to outsource more work, we expect this trend toward negotiated work to continue. When divided by type of customer, our 2006 second quarter revenues were 66% from electric and gas utilities, compared to 63% in the second quarter of last year. 17% from telecommunications and broadband cable customers, compared to 17% in the same quarter last year. And 17% from ancillary services, compared to 20% in the second quarter of '05.

Our largest customer made up approximately 6% of our revenues in the second quarter of '06. Our top 10 customers for the quarter accounted for approximately 34% of our total revenues. And our top 20 customers made up approximately 50% of revenues for the quarter. At the end of the second quarter of 2006, our employee count was 11,664, up from 11,240 at the end of the first quarter of 2006 and up from 11,161 at the end of the second quarter of '05.

As we've discussed in previous calls, we continue to see a shift in our customers' operating and financial environment. In the early part of this decade, many utilities experienced a liquidity crisis and shifted focus to internal factors such as paying down debt and strengthening their balance sheet, resulting in the divesture of non-core assets. This is in contrast to the late 90's when utilities were focused externally to secure acquisitions required for growth.

Looking forward, we believe new capital is starting to enter the market. New regulations are influencing this change, as is an overall improved economic environment. One element of the Energy Policy act of 2005 is the repeal of PUHCA, which is the Public Utility Holding Company Act. This repeal is already spurring new investment in the industry from outside parties. For example, private equity investors, as well as hedge funds, are using their financial resources to pursue new opportunities and they see the utility industry as an appealing investment that can deliver consistent returns.

Evidence of this transition is the recent acquisition of Duquesne Light Holdings led by Macquarie Infrastructure Partners, Warren Buffett's acquisition of PacifCorp, and Carl Icahn's joint venture with Panda Energy international. These new entrants are acquiring utilities at a faster rate and tend to have a preference for strong counter parties, which plays to our strength. What did this mean for Quanta? The question of need has never been an issue. Power reliability and infrastructure enhancement must occur. The issue has been how will it be funded.

With an influx of new financing into the utility industry, utilities are better positioned to invest in their infrastructure through the construction and maintenance of transmission lines and enhancement of existing distribution delivery systems, ultimately increasing reliability for their customers. In another regulatory development, just last week the Federal Energy Regulatory Commission finalized rules intended to increase investment in the grid, while promoting electric reliability and decreasing consumer costs. The final rule identifies specific initiatives that the Commission would allow on a case by case basis including; full recovery of prudently incurred construction work in progress, pre-operations costs and costs of abandoned facilities. And in a separate action last week [Bertrand] and Transmission investment incentive rate request to AEP and Allegheny Energy. The request by these Quanta customers were related to proposed transmission projects in the mid-Atlantic region.

John Wilson will talk more about how we're responding to these industry shifts on an operational level. We strongly believe that Quanta's leading market position establishes us as the premier infrastructure service provider to meet the increasing demand for strengthening transmission and distribution assets.

Now, looking at the performance of our telecommunications and broadband cable operations. Revenues from customers in the telecommunications and broadband cable industries increased 17.5% in the second quarter of 2006 as compared to the second quarter of 2005. As I mentioned earlier, various elements are influencing growth in this area of our business. Many industry experts are referring to the new Telecommunications Bill as the most important piece of legislation the Congress will take up this session. This legislation went before the Senate Commerce Committee in June and is a rewrite of the oldest existing telecom law, the Telecommunications act of 1934.

The franchising element is one piece of the bill, but what is currently getting the most attention, is a net neutrality element of the bill. Under the net neutrality aspect of the bill, telecom companies would be able to split Internet access into premium lanes and segregate access to customers based on content, origin and purpose of the data. Net neutral was rejected in a Senate vote in June but there is potential for it to be reincorporated before the bill becomes law. Even without the net neutrality element of the bill, telecom companies are rapidly encroaching on the cable market and speeding up their deployment of video services.

Many states continue to follow in Texas' footsteps by passing new franchise laws that enable phone companies such as AT&T and Verizon to offer cable television service without obtaining local government approvals. Both South Carolina and Arizona recently passed franchise legislation. Meanwhile California's bill passed the House, as did the bills in Michigan and Louisiana. Franchise bills in New Jersey, Iowa, Missouri, North Carolina, and Tennessee are in various stages of the legislative process.

The growth in our outside plant operation continues to be spurred by aggressive fiber deployments by Verizon, AT&T which of course was previously SBC, rural telcos, as well as new market entries by various municipalities. Yesterday, Verizon reported that it added more than 111,000 new FiOS customers in the second quarter, a 47% increase compared to the second quarter of 2005. In all of the FiOS fiber-to-the-premise broadband service has been deployed in 16 states, passing a total of 4.5 million homes. The company remains on target to pass 6 million homes by the end of the year. Most of our work for Verizon continues to be in California, Florida, Oregon, Pennsylvania, Texas, and Washington.

AT&T has attributed its revenue growth partially to solid execution of its wireline services, which includes its project light speed deployment and integrations of new technologies. Last quarter AT&T had launched a new U-verse service, which integrates digit tall TV, high speed Internet and voice services. We've seen expansion of our work for AT&T, particularly in the western states, as this deployment begins to ramp up. BPL, or broadband-over-power lines, continues to gain momentum through deployments in Texas, California and Ohio. We believe Quanta remains well positioned to deploy this new technology as utilities begin to leverage what's being referred to as the third broadband pipe into the home.

We believe Quanta has an edge in the delivery of installation services to the BPL market by leveraging our project management skills and our ability to provide a skilled workforce to operate in both the energized zone and the communications zone on joint use poles in all environments. Our inside plant and wireless telecom operations continue to remain stable. We continue to strengthen customer relationships and pursue strategic alliances to assist them in deploying new technologies to meet the ever increasing demand.

We expect to see increased demand for these services in the second half of 2006. With the resolution of the Adelphia bankruptcy, we're in discussions with Comcast and Time Warner concerning specific projects they intend to deploy beginning in the fourth quarter of this year. These network enhancement projects will further strengthen the ability for the MSO's to deploy voice-over-IP services as well as more robust bandwidth capabilities for Internet access and video services.

Our performance this quarter reflects Quanta's strengths and the increased demand for our services. We have ongoing programs to help us work safer and smarter and deliver a higher quality service to our customers. This commitment to quality and delivering value to our stakeholders is evident. I believe we will continue to see improvements in the industries we serve as our customers look for strategic opportunities and work to improve the state of their infrastructure.

Now, I will turn the call over to John Wilson who will discuss the recent developments in our electric power and gas operations.

Thanks, John, and good morning, everyone. We continue to experience increased demand related to the services we provide to the electric power and gas utilities. We also remain focused on maximizing the strength of our operations and continue to operate in a dynamic and ever changing environment. Therefore, quality, safety and efficiency remain our priorities in delivering superior services to our customer.

With these elements driving our mission, we are flexible enough to respond to market demands while remaining well established in the markets we serve. As the Energy Policy Act approaches its one-year anniversary, it also nears several key deadlines that impact the future of power delivery. One initiative recently accomplished is the preliminary draft map of potential energy corridors on federal lands in western states by the Federal Department of Energy, Interior, Agriculture and Defense. The corridors may contain oil, gas, and hydrogen pipelines, as well as electric transmission facilities.

A preliminary map of the corridors was released in June and is expected to be finalized by August 2007. This development marks important progress toward the goal of establishing reliable energy delivery across the nation. We believe that one advantage of the energy corridors will be to streamline planning and signing of new transmission lines while fully accommodating environmental concerns.

As John mentioned just last week, the final rule promoting transmission investment was adopted. The recent proposal by AEP was related to its planned new 765,000 volt, 550-mile transmission line that would extend from West Virginia to New Jersey. The Allegheny Energy request, also approved last week by FERC, included four incentives related to the construction of a 500,000 volt transmission line extending from southwestern Pennsylvania to Virginia. In addition, last week FERC accepted a proposal that will provide up to 600 megawatts of transmission capacity between Alberta, Canada, and Great Falls, Montana.

These milestones signify the beginning of the new era focused on increasing the reliability of power delivery on the nation's transmission infrastructure. This legislation continues to spur general optimism and investment in infrastructure within the power industry. The Energy Information Administration, or EIA, continues to project that even with more efficient equipment and technology the demand for electricity in the U.S. will increase between 11% and 17% between 2006 and 2014.

Meanwhile, the EIA and North American Electric Reliability Council together estimate that more than 50,000 megawatts of new generation will be required by 2014 to meet the increasing demand. This isn't surprising when you consider that many of the new technologies that the system powers did not exist a decade ago; from 176 million personal computers to 208 million cellphones. But the reality is that 70% of the nation's transmission lines are 25 years old or older. In all, the combined transmission and distribution power delivery system is a $360 billion asset, a large and aging asset.

This is a lot of work to do to get the system up to par. We continue to build strong long-term relationships with utilities to ensure that their needs are met and to implement initiatives that help them meet the increasing demand for power in their service territory. For example, in the West we continue to deploy full service programs for engineering, to system maintenance and construction and on call restoration work. While the 2006 hurricane season has spared the country from significant damage thus far, the recent heat wave stretching across the U.S. continues to put a strain on the nation's power grid.

The concern about potential blackouts is increasing. More than 3 million Americans found themselves without electricity between July 16 and July 29. Some were without power for hours. Others days. During this time both La Guardia Airports and the New York Subway lost power, leaving many travelers and commuters stranded. And last week in Queens, as many as 100,000 people were affected by a nine day outage caused by primary and secondary feeder lines that burned up.

On the other side of the country, California has called for a stage 1 power emergency, which prepares for the possibility of rolling blackouts. California utilities were also focused on restoring power after lines were damaged by various widespread fires. In addition to fire restoration, we've been working around the clock to replace failed equipment damaged by the intense heat.

We continue to work with our customers in utilities throughout the U.S. to ensure preparedness for any outage whether heat, storm or disaster related. Recently, several thunderstroms in the central and northeastern U.S. caused damage to lines and resulted in electrical outages. We deployed our crews to St. Louis to help restore power to the thousands of households whose service was interrupted by these storms. This was the largest outage in the history of that utility.

Also, we sent crews to Pennsylvania last month to repair infrastructure damaged by thunderstroms with hurricane force winds. Crews worked diligently, sometimes 16 to 20 hours per day, to get the service restored. As you know, tropical storm Chris is currently in the Caribbean and has the potential to impact Florida and the Gulf Coast. As this storm progresses, our crews are prepared to respond to our customers' need to restore power quickly, safely and efficiently.

Our energized services continues to be a key competitive advantage for Quanta. Utilities often come to us to design a custom solution to a unique challenge with a power infrastructure. Either it is too costly to take an outage or the system is to critical in nature to take it out of service. Our Quanta energized services team is focused on working with utilities and outlining a relationship that will allow the required work to be done to the system while minimizing outages. We continue to see an increase in interest in energized services as utilities gain the knowledge and understanding of our innovative, energized solutions both here and abroad.

Turning now to our gas operations. The second quarter saw the completion of a significant pipeline for Crosstex Energy in north Texas. The line encompasses 140 miles and is 24 in diameter and will transport gas out of the Barnett Shale, one of the largest natural gas fields in the continental United States. Barnett Shale accounts for 2% of the gas consumed in the U.S. making this pipeline an important investment.

As port of our core strategy, Quanta is very attuned to the current and projected market and industry develops that have potential to impact our business. As various commodity prices increase, we evaluate and renegotiate our contracts to ensure elements like fuel adjustment clauses are applied. This helps to minimize the impact of rising fuel costs on our profitability.

We also believe there continues to be an industry shift away from work that is bid to more negotiated contracts. We remain focused on and committed to operating in the most efficient way to deliver a superior quality service to our customers, while ensuring the safety of our employees and the communities we serve.

Now, I would like the turn the call over to James Haddox, Quanta's Chief Financial Officer. James.

Thanks, John, and good morning, everyone. Today we announced revenues of $514 million for the second quarter, compared to 439.3 million in the prior year second quarter resulting in an increase of $75 million. Revenues from electric and gas utility customers increased by $62 million or 22%. Telecom and cable customer revenues increased $13 million or 18%. And ancillary customer revenues were constant, resulting in overall internal revenue growth of 17% for the quarter.

Our quarter over quarter revenue growth resulted primarily from improved business conditions in the industries we serve. Our gross margins of 15.6% for this quarter, compared to 12.3% during last year's second quarter. We experienced higher margins in the electric power, natural gas, and telecommunications industries as these markets continued to recover. Margins related to or ancillary services decreased quarter over quarter.

G&A expenses in Q2, '06 declined to 9.1% of revenues versus 10% in Q2 '05. Interest expense increased by 3.9 million primarily due to the write-off of deferred financing costs associated with the refinancing completed during the quarter. Interest income increased approximately 1.3 million in the second quarter of '06 versus the second quarter of '05, as a result of our higher average cash balances and increased interest rates.

Our effective tax rate during the quarter was 38.5%. This was lower than we expected and lower than we project for the remainder of the year due to the favorable settlement of a multi-year tax refund claim with the State of California of $1.6 million. Excluding this settlement, our tax rate would have been 44.1%. Net income for the quarter was $17.7 million, resulting in earnings per diluted share of $0.14, compared to net income of $3.3 million or $0.03 per share in the second quarter of 2005.

Nonrecurring items, which included the write-off of deferred financing costs of $3.3 million, a gain of $1.6 million on the early extinguishment of debt, and the tax refund mentioned above; had no effect on EPS for Q2 '06, as they offset each other. Cash flow from operations totaled approximately $41.9 million for the quarter. Cash flow from operations less capital expenditures of $15.7 million resulted in approximately $26.2 million in free cash flow for the quarter.

EBITDA was $48.3 million for the second quarter of 2006, resulting in an increase of 94% over EBITDA in 2005's second quarter. EBITDA is defined as earnings before interest, taxes, depreciation, amortization, and non-cash compensation expenses. The amounts making up EBITDA of $48.3 million were; net income of 17.7 million, plus income taxes of $11.1 million, plus depreciation and amortization expenses of $12.9 million, plus non-cash compensation of 1.5 million, and net interest expense of 6.7 million, less a gain on early extinguishment of debt of $1.6 million.

For the first half of 2006, EBITDA was $79.8 million. The amounts making up EBITDA of 79.8 million were; net income of 25.5 million, plus income taxes of 17.6 million, plus depreciation and amortization expense of 25.6 million, plus non-cash compensation of 3 million, and net interest expense of 9.7 million, less a gain on early extinguishment of debt of $1.6 million.

Our current backlog of work to be completed, and this is backlog for the next twelve months, continues to be at record levels. And is approximately $1.335 billion, which compares to $1.295 billion in the backlog as of year end 2005, for an increase of approximately $40 million or 3%. Backlog has increased since year end in the electric and gas utility and telecom portions of our business, partially offset by slight decreases in backlog and ancillary services. Total backlog increased 11% or $136 million compared to last year at this time. Backlog increased $14 million since March 31, 2006, primarily due to increases in backlog from telecom customers. Backlog represents the amount of revenue that we expect to realize from work to be performed over the next twelve months on contracts including; estimates of work under long-term maintenance contracts and new contractual agreements on which work has not yet begun.

Our day sales outstanding and accounts receivable, which we calculate by using the sum of current accounts receivable plus costs and earnings in excess of billings, less billings in excess of cost, divided by the average revenues per day during the second quarter; were 83 days at June 30, 2006 versus 85 days at June 30, 2005 and 86 days at March 31, 2006. At quarter end, we had 309.5 million in cash on our balance sheet. We had $124.3 million in letters of credit outstanding, primarily to secure our insurance program. This represents a $20 million decrease in letters of credit outstanding since March 31, 2006.

During the second quarter we closed an offering for an aggregate principle amount of $143.75 million of 3.75% of convertible subordinated notes. We used the proceeds of this offering to repurchase through a tender offer approximately 139.3 million out of $172.5 million of convertible subordinated notes, which were going to become a current liability on July 1, 2006. We also amended our existing credit facility to lower our interest rate and cost of letters of credit, increased our borrowing capacity to $300 million, and gained flexibility under our covenants. Other than the letters of credit mentioned above, we had no borrowings under the credit facility. Leaving us with approximately $176 million of available borrowing capacity.

Concerning our outlook for the future. Our third quarter results can vary significantly due to the effect of storm -- that storm restoration work may have on the quarter. Last year's storm restoration work resulted in gross revenues of $74 million in the third quarter. Storm restoration revenues in the third quarter of 2004 were $71 million. Our estimate of revenues for the third quarter of '06 is from $520 to $550 million.

This estimate includes approximately $25 million from hurricane restoration work. And $10 million for emergency restoration work related to extreme heat, fires and thunderstroms in the Midwest and West Coast. If you subtract $35 million of gross storm restoration revenues from the mid-point of our range for 3Q, '06, and $74 million of storm work from 3Q '05's revenues; our forecast represents 11% internal revenue growth for the third quarter of 2006, excluding storm restoration revenues. Therefore, our estimate for Q3 '06 EPS, based on revenues of between $520 and $550 million, is between $0.15 and $0.17 per diluted share. This compares to revenues of 523 million and diluted earnings per share of $0.11 during the third quarter of '05.

For additional guidance, we are currently projecting our tax rate for the third quarter to be approximately 44.5%. We expect our diluted share count to be about 142 million shares during each remaining quarter of this year, which includes shares underlying our 4.5% convertible subordinated notes. The net income add back associated with these convert shares is approximately $2.2 million per quarter. We expect CapEx for all of '06 to be less than $60 million.

Our performance in the first half of this year has been very strong. With the refinancing completed during the second quarter Quanta is in an excellent position to capitalize on the growing opportunities in the electric power and telecom industries. Also, we have the ability to pursue strategic acquisition opportunities to strengthen our leading market position. This concludes our formal presentation and we'll now open the line for Q&A.

[OPERATOR INSTRUCTIONS] And Curt Woodworth, please state your company name followed by your question.

J.P. Morgan. Good morning. I was wondering if you could break out a more detailed break out on the revenue growth on the electric utility side? The 22% growth, is that coming more from the transmission side of the equation, more from distribution? And can you comment on the mix of the work you're doing? Just given that your head count was up roughly 4.5% year-on-year but your sales growth is much higher than that. I am just wondering the dynamics around that? Thank you.

Well, I think the dynamics around that are related to margin improvement year-over-year. The answer to your question, I think transmission and distribution are growing at fairly equal rates. Transmission of course gets most of the headlines but distribution growth is pretty strong as well. So, I think growth-wise, transmission distribution are about the same. We do about 60% of our electric work is distribution and 40% is transmission, which includes substation work as well.

Okay. Thank you. And then last question, on the acquisition front, can you talk about how active are you being in pursuing acquisitions? What types of companies are you looking at? And just give us a sense for how far along you are there.

We're looking at companies that participate in the electric power business and the telecommunications business. And we are probably more active now than we were last year. Although, we've been pursuing acquisitions for quite some time and we continue to be very active in the acquisition business.

And what are the criteria you use when evaluating suitable acquisitions?

Well, they need to fit our business obviously. We like for companies to be -- have some history in the industry. We like for them to -- our sweet spot is approximately 50 million in revenues with 20 or more years in business. That gives -- and typically those companies have the systems and procedures in place that make them fairly easy to integrate. We like for them to be profitable. We like for them to be immediately accretive if possible. We like for them to fill in a geographic or service line that we're not participating in.

Great. Thank you very much.

Thank you, sir. Sanjay Shrestha, please go ahead and state your company name followed by your question.

Thank you. First Albany. Good morning, guys. First of all, good quarter. A couple quick questions. Number one, you guys are talking about the outlook improving for the end market, it finally seems like it is starting to happen here. Can you sort of talk about the internal growth rate here? How much of that, if you can break down, was related to the increase in pricing versus the volume of work?

We've been fairly selective in the work that we take. There is more work out there than -- you can have as much as work as you want if you're willing to take prices down.

Exactly.

So, we've been fairly selective and more concentrating on increasing margins than we are increasing revenues. But there is plenty of work out there and we think that revenues should continue to increase at double digit levels. And we also anticipate further margin increase.

Got it. So then the growth in this particular quarter was a mixture of both. Where the ASP went up and you were selective and hence, that's why 17% internal growth is the way it is, correct?

That's right.

Okay. A quick follow-up. Obviously, a lot of the bigger projects are now finally start to go get approval, it looks like or they're start to move forward now. You guys being one of the largest companies in the industry, is that going to change sort of the transmission and distribution mix for you guys? Or how do you think that's going to impact the labor dynamics or do you see new competitors coming in? How do you think -- obviously, it is going to improve the margins and takes it to that 10%, 12% level. How do you see that dynamics playing out for you guys over the course of another few years?

As I said earlier, the transmission work gets all the headlines and all of these big jobs get the headlines. But the distribution business is growing just as rapidly. So, I don't think we'll see a huge change in our mix between distribution and transmission.

Okay.

I think you might see some quarterly variations as maybe a couple of three huge jobs start at one time or something. But by and large, I expect growth out of both sides of the industry.

Okay. And you don't see new competitors kind of coming into the market given that there is some of these larger projects showing up?

No, not really. It is pretty hard to come into this business unless you've had a history. Now sometimes the name changes. Some of the private competitors are now joined together in various companies and you see some private equity investments out there buying companies and putting them under one name. But really, the competition remains fairly steady. It is the same people, sometimes just under a different name.

Just a follow-up on that, then, and hop back into queue. Is it fair to say then guys, given the magnitude of the work, both transmission and distribution and maybe some on the fiber-to-the-premise side and the number of the players that are in the industry and the amount of the work that you guys can do and you being selective; Is essentially going to one) help margin grow consistently. And two) extend the opportunity that is there within this industry longer than maybe what would have been the case if there were let's say two or three real big large sized players, five or ten and doesn't seem like the dynamic is going to change. Is that a fair way to characterize it?

I think that's true. It looks to us like we're in for a long-term growth cycle. Obviously, margins will peak at some time. We don't see that happening in the near future. We believe that margins will continue to grow and revenues will continue to grow over a fairly long period of time and new entrants to the market and margins get significantly better. You just can't come into the market, particularly on the electric power side, and start up an operation and be successful. But after margins reach certainly levels, 30% gross profit and those kinds of things, then you will see people come in because those kinds of margins nearly anyone can survive.

Got it. That's great. Thanks a lot, guys.

Thank you. Alex Rygiel please state your company name followed by your question.

Thank you. Friedman, Billings and Ramsey. First, James, could you give us the mix of backlog by the three business segments?

Yes. Utility and gas is 989.6 million. Telecom is 223.4 million. And specialty services or ancillary is 121.9 million.

And as I look at your guidance, I think my wild card for your third quarter guidance is attempting to forecast the ancillary services line item, and I think I might have been a little too aggressive on that based upon the sort of first quarter strong performance. Can you comment on how we should be thinking about that business long-term? What type of growth rate to sort of develop in our models?

I am not sure I can give you any guidance on that, Alex. Because that ancillary line is made up of several different industries. It is inside electrical, it is transportation, it is underground or horizontal boring, it is rock trenching. There is several different businesses in there that have different growth rates. But it is difficult for me to give you any kind of long-term growth rate for the ancillary business. But having said that, a lot of the ancillary business also follows telecom or utilities. So in the past, we've seen ancillary grow at the same rates as telecom and utility. It is just this quarter we didn't see that kind of growth because of major projects that had finished or other things that were affecting the various businesses that we're in that line.

I think you commented and it actually shows in your backlog that you picked up some new business in the telecom segment. Is that business with AT&T?

That is primarily coming from the wireless sector and also from our fiber-to-the-home stuff, and different customers on the fiber -- FTTP side.

Great. Thank you very much.

Jamie Cook. Please state your company name followed by your question.

Credit Suisse. Good morning. My first question, when I look at your your top line guidance for the third quarter backing out the hurricane stuff, the implied revenue growth 11%, to me that seems a little bit low. Third quarter seasonally is generally a pretty good quarter. So, if you could just provide a little color on that given the robustness of the markets, I am surprised we're only getting 11% growth.

I think the market is fairly robust but the third quarter obviously also is dominated by hurricanes this time of year. I think that perhaps that there is some reluctance to take on new projects and start new projects, particularly in the southeastern United States when you're looking at hurricanes baring down on you. I think double digit internal growth is what you can expect. And it may be 11 or it might be more but hurricanes are the dominant thing that in these days during the third quarter.

Okay. But there is nothing -- don't read into it to suggest there is anything else going on here, anything negative?

Absolutely not.

Okay. And then one of the other comments you mentioned in your prepared remarks was more negotiated contracts versus contracts going out for bid. Could you just expand a little bit on that and what markets and how that -- whether that will have any impact on the profitability of the Company going forward? And does your old target of the 10 to -- because of that the target of the 10% to 12% operating margin now seem conservative?

Jamie, what we've seen here in the past three years is double-digit growth on more negotiated contracts. That's a reasonable expectation I think going forward. And more utilities are developing longer term relationships with contractors. And therefore, we continue to see negotiated contracts being a bigger part for our business going forward. And that growth rate that I threw out there to you on the negotiated contracts is on the electric power side of the business.

That was John Wilson, and to finish the rest of your question, I think that 10% to 12% operating income is reasonable to expect. The thing about the negotiated work, of course, is that it takes risk out of the business but it also -- you don't have those up's and downs, peaks and valleys. And so, in some cases you don't have -- the margins are not as great as they are on bid work. But it does take risk out of the business.

Okay. Thanks. I will get back in queue.

Thank you. John Rogers, please state your company name followed by your question.

Hi. D.A. Davidson. Good morning. You mentioned, in terms of backlog, that this was what you could see over the next twelve months. I am wondering with the build up in transmission work, which I know is a little bit longer term in nature than the distribution side and with the fiber work; do you have much backlog that extends beyond twelve months at this point?

Yes we do. We don't measure because it is it gets out there over two or three years, why it becomes less easy to measure with any certainty. But it probably is double what our one-year backlog is or maybe triple because we have a lot of -- 23% or 25% of our revenues are from strategic alliances. Those are three to five year contracts. Another 25%, approximately, related to long-term maintenance agreements. And those are typically three year contracts. So, there is a lot of work out there that in year two and year three that is not in backlog.

And how does that compare in aggregate to a year ago or the last couple of quarters, is it growing?

That's what we were saying is that the distribution business is growing as fast as the transmission business and that both of those businesses are robust. And the transmission lines get the headlines but the distribution systems were built, a lot of them after World War II, and they're aging and need repair as well.

So, and that's more an ongoing long-term service arrangement?

This is John Wilson. All of the outages recently that you have seen in the country, whether it is heat related damage to equipment, cables failing, all of those things that you're getting headlines on, all of that is distribution side of the business.

Right. Okay. Thank you very much.

Thank you, sir. [OPERATOR INSTRUCTIONS] We have a follow-up from Curt Woodworth. Please go ahead.

Hi. A question on the margins. Can you give us a sense for how much of the improvement has been driven and the overall pricing of the projects improving versus maybe just productivity among your asset base?

We've been working very hard to improve productivity and to cut costs in the field. However, probably most of the -- majority, I will say that, majority of the margin increase is due to increased pricing.

So, would it be safe to say that pricing has been up maybe 4% to 5% across your mix year-on-year?

Well, it is hard to define. I think regionally it varies. And of course, it varies by customer whether it is price increases or whether it is productivity increases, so it is hard to measure. But I think a majority of the price increase, and I am saying maybe 60%, is based on increased pricing and the rest is based on new methods we've developed to improve productivity.

Okay. And then excluding hurricanes from a seasonality perspective, is it right to assume that usually the fourth quarter just because of weather would be a little bit weaker in terms of the revenue trends for the Company relative to Q3?

That's correct.

How much weaker generally would it be, like 2% or --?

It varies. Typically, you can think of the first quarter as our worst quarter revenue-wise. Second and fourth are neck and neck usually and the third quarter is our best quarter.

Okay. And last question, just on trying to get an apples-for-apples look at your margins, you talked about the 74 million in storm sales last year. What is the applicable margin to use on that revenue base?

We don't disclose the margins that we make on storm work for a variety of reasons but it is typically higher than the margins. It is typically significantly higher that the margins we get on routine day-to-day work.

Would it be more than double.

No.

Thank you very much.

[Allan Metroni] please state your company name.

[Silvenlake] Asset Management. Thank you. You talked about Adelphia and Time Warner. Can you just give us further update in terms of timing that you think Warner and Comcast will start spending some money to upgrade the Adelphia assets?

This is Kenneth Trawick. We expect that to occur later this year. We're having ongoing discussions with them across the country as they prepared their budgets in anticipation of the settlement of the bankruptcy. So, I would use the term "imminent" that these contracts will be awarded in the next 30 to 60 to 90 days, which will probably mean we won't see the real effect of starting the work and recognizing revenue until the fourth quarter.

And do you have any sense of how many miles they're looking to upgrade?

Not really. It is just -- we're just beginning to hear about the specific plans. Over the last six or eight months, we've heard in general that they're going to be upgrades here and there. And so we only know the specifics of two or three projects right now. But we continue to hear other areas they've identified that require enhancement. And so I don't want to stick a mild number on it yet.

Okay. Thank you.

Thank you.

Thank you, sir. We have a follow-up from Alex Rygiel. Please go ahead.

Thank you. James, can you help us to understand; my assumption long-term has always been that electric power margins are greater than ancillary services. Is that correct?

That's right.

And it would appear that this quarter at least as it relates to your backlog, electric power backlog was up 19% year-over-year. That's an accelerating trend from the first quarter, and ancillary services backlog was down 28% in the quarter, such that your mix is shifting towards your higher margin business. Is that correct?

Yes, it is.

And as it relates to --?

I don't know that your numbers are right on the ancillary, though.

When you say down, what period are you talking about?

Year-over-year, just ancillary backlog.

I understand. And then as it relates to your guidance, if one were to assume that ancillary revenues were down in the second half of the year, your embedded internal growth assumptions for electric power are well into sort of the mid-teens organic growth range, is that correct?

I would say yes.

Perfect. Thank you.

Thank you, sir. And our final question will be coming from Robert Pickels. Please state your company name followed by your question.

[Manning and Peer Advisors.] Can you just talk a little bit bit about how your past history with making acquisitions is impacting your current plans going forward?

We've had a lot of experience making acquisitions. I don't know that it has a huge impact. We've always had pretty much the same philosophy about acquisitions. And we've been relatively successful, I think, in doing acquisitions. And we've learned lessons but it is kind of the hot stove principle, the cat on the hot stove. You don't want to make the same mistake twice but on the other hand, you have to think ahead and be progressive in your thinking. So, I don't think our attitude has changed much over the past several years. We've been very successful at acquisitions and very conservative in our pricing typically.

Okay. Thank you.

We have no further questions. If not, I would like to thank you again for your participation in our second quarter conference call. We appreciate your questions and ongoing interest in Quanta. And this closes our second quarter 2006 conference call.

Thank you, sir. Ladies and gentlemen, this does conclude the Quanta Services second quarter earnings conference call. If you would like to listen to to a replay of today's conference, you may do so by dialing 303-590-3000, entering access code 11066692. Again, the dail-in number to listen to a replay of this conference in its entirety is the 303-590-3000 using the access 11066692. You may disconnect. Thank you for using ACC teleconferencing. Have a very pleasant day.