Quanta Services Inc (PWR) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Quanta Services third-quarter earnings conference call. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded today, Thursday, November 2, 2006. I would now like to turn the conference over to Ken Dennard with DRG&E. Please go ahead sir.

Thank you, and we welcome everyone to Quanta Services conference call to review 2006 third-quarter results. Before I turn the call over to management, I have the typical normal housekeeping details to run through. If you'd like to be on the e-mail or fax distribution list to receive future releases for Quanta, or if you had any technical difficulties this morning and did not receive your e-mail or fax, please call our offices, DRG&E, and that's 713-529-6600. Also, if you'd like to listen to a replay of today's call, it will be available via Webcast by going to QuantaServices.com and the investor center events section of the Website. In addition there's a telephonic recorded instant replay that will be available for the next seven days, 24 hours a day, and that's 303-590-3000, using the passcode 11074617.

Also today, please remember that information reported on this call speaks only as of today, November 2, 2006, and therefore, you're advised that any -- that time-sensitive information may no longer be accurate as of the time of any replay listing.

Also, this conference call will include 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, 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 and all of Quanta's forward-looking statements may turn out to be wrong. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict. Please refer to the Company's annual report on Form 10-K for the year ended December 31, 2005, its Form 10-Qs for the first and second quarters of 2006, and its other reports filed with the Securities and Exchange Commission, for additional information concerning some of the risks, uncertainties and assumptions that could affect the outcome or the results of operations for Quanta generally. Actual results may differ materially from those expressed or implied as forward-looking statements. All such forward-looking statements, whether written or oral, are expressly qualified by these cautionary statements and any other cautionary statements that may accompany such forward-looking statements. In addition, Quanta does not undertake any obligation to update any forward-looking statement to reflect events or circumstances after this call.

With that behind us now, I'd like to turn the call over to Mr. John Colson, Quanta's Chairman and CEO. John?

Good morning. Welcome, everyone, to Quanta Services' third 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 electric power and natural gas operations. Our remarks will be followed by a review of our telecommunications and cable operations by Ken Trawick, the President of that group. Then James Haddox, our Chief Financial Officer, will review the quarter's financial results. John Wilson, President of our Electric Power and Gas operations, is also present to answer questions. After our prepared remarks we will open the call for questions.

The third quarter is typically influenced by the hurricane season and other inclement whether. We all recall the major hurricanes in 2005, Hurricanes Dennis, Emily, Katrina, Rita and Wilma. Thankfully we did not see that level of destruction this year.

This resulted in approximately $58 million less emergency restoration revenue for us than in the third quarter of 2005. Quanta's ability to deliver strong results in a non-typical third quarter illustrates the strength of our core markets and our ability to respond to our customer's needs.

For the third quarter of 2006, revenues were approximately $528.5 million. This compares to $523.3 million in the third quarter of 2005. With emergency restoration revenues removed from both quarters, Electric Power and Gas revenues grew 11% in the third quarter of 2006 over the third quarter of 2005. And Telecommunications and Cable revenues grew 26.6% in the third quarter of 2006 over the third quarter of 2005.

Even with emergency restoration revenue and related profit included in the comparison, we achieved internal growth of over $5 million and grew net income 74%. EPS increased by $0.06 to $0.17 for the third quarter of 2006, to meet the high-end of our projections and analyst consensus. We are on track to meet our goal of double-digit internal growth for the year in our core businesses. In addition, gross margins increased to 15.7%, from 15.3% in the third quarter of 2005. And remember, 2005 had the higher margins from storm revenues.

When divided by type of customer, our 2006 third-quarter revenues were 63% from electric and gas utilities, compared to 69% in the third quarter of last year, 17% from the telecommunications and broadband cable customers, compared to 13% in the same quarter last year, and 20% of ancillary services, compared to 18% in the third quarter of '05.

Our largest customer made up approximately 6% of our revenues in the third quarter of '06, our top 10 customers for the quarter accounted for approximately 33% of our total revenues, and our top 20 customers made up approximately 43% of revenues for the quarter.

At the end of the third quarter of 2006, our employee count was 11,625, up from 11,572 at the end of the third quarter of 2005.

Now looking at the performance in the Electric Power and Gas operations (technical difficulty) business, our crews are busy and remain focused on performing core operations for utility customers who are committed to enhancing their transmission and distribution infrastructure. Throughout the nation our employees are working to enhance existing infrastructure and build new systems to meet the increasing demand for reliable power delivery. As segments of the Energy Policy Act of 2005 come into effect, utilities will be in better position to finance and implement system enhancements.

New England is one area of the nation that is being directly and positively impacted by certain elements of the Energy Policy Act of 2005. On October 31, FERC, the Federal Energy Regulatory Commission, through a majority decision, authorized a return on equity for the owners of the ISO New England transmission grid. This includes an incentive rate to encourage badly-needed transmission expansion and ensure reliability in the New England region. The Commission found that the incentive was appropriate because it will assist ISO New England in bringing needed transmission projects online in a timely fashion.

Northeast Utilities is one of several utilities in the New England area committed to addressing the need for expanded transmission capacity. This morning we announced a new contract with Northeast Utilities, or NU. This contract signifies the momentum behind infrastructure upgrades and the focus of our customers to improve service to their customers. The contract is the largest electric utility transmission contract in the history of our company. It is part of NU's $1.3 billion project to extend the utility's transmission system in the Southwest region of Connecticut. This is a large focus for NU considering that 50% of Connecticut's power is consumed in the Southwest quarter of the state.

A portion of the work that we will perform is focused on the overhead transmission system and spans a 30-month period. We will add new 345,000-volt overhead circuits to existing rights of way and rebuild various 115,000-volt overhead circuits on new structures. The majority of our work will take place between Middletown and Milford, Connecticut.

Also, we are working with NU to apply Quanta's proprietary energize services to implement specific maintenance work on NU's transmission infrastructure without de-energizing the lines.

We are proud to be working on such a significant project, and this agreement is another example of our ability to partner with our customers to meet their immediate and future infrastructure needs. Similar discussions and plans are taking place throughout the nation, as demand for our services continues to grow.

In previous calls we have discussed the significant amount of work being performed in Texas for the Lower Colorado River Authority, or LCRA. The majority of this work is complete and the project and partnership with LCRA was very successful. We hope to continue to work closely with LCRA to meet their infrastructure maintenance and enhancement requirements.

In other industry and national developments, utilities throughout the country have announced plans to install new lines, upgrade existing systems, and conduct studies to measure demand against capacity.

Looking forward, Quanta's 12-month backlog is in at a record level. In the period between June and September, we booked an increase of $131 million. As James will discuss, this reflects the new partnership with NU, as well as several other key contracts recently finalized. We anticipate demand for our services to continue in the future.

In the third quarter we experienced solid growth (technical difficulty) to our gas pipeline services as well. We are in the final stages of one segment of work under a recently-secured contract for a major gas customer. We've completed the installation of more than 30 miles of pipeline in Central Texas. This project incorporated complicated [boring] elements where we utilized our drilling expertise to tunnel under highways and rivers. We continue to work in Central Texas to install an additional 20 miles, which will also cross a large highway system.

The third project includes installation of over 70 miles of new pipeline in Northern Louisiana. In addition to being a key project for our gas operations, this project is important to the U.S. economy, as it is related to the drilling efforts in the Barnett shale, which according to some experts may be the largest onshore natural gas field in the United States. The field is reported to have proven reserves of 2.1 trillion cubic feet of natural gas and is estimated to contain as much as 30 trillion cubic feet of natural gas resources. The new pipeline will help distribute those resources.

I should also discuss the fourth-quarter revenue and EPS guidance. In the fourth quarter of 2005, we performed approximately $70 million of hurricane-related emergency work. The fourth-quarter guidance for this year does not include any hurricane work.

A similar situation existed in the third quarter of 2006. However, we were able to overcome the shortage of storm revenues because of the strength in our end markets and strong performance. Because of the holidays and the onset of winter weather in the last few weeks of the fourth quarter, we are not projecting that we can grow revenues and profit above last year's fourth quarter that, again, included $70 million of storm revenues.

When performing restoration work in the fourth quarter of '05, we were able to work during winter weather and through the holidays because it was an emergency restoration work, and because of the cost-plus nature of the contracts.

While we certainly have the backlog and the margins in our backlog to outperform last year's fourth quarter, we do not expect to be able to because of winter weather and the holidays. We remind our investors to take emergency restoration work out of any evaluated periods, and to look at the underlying growth, margins and strength in our core businesses.

We have also strengthened our corporate executive team with the addition of [Joe Avala] as Executive Vice President. Joe brings more than 30 years experience in the utility industry to his new role. He spent much of his career as a partner at McKinsey & Co., where he created one of the firm's most distinctive client service records, with a focus on the energy, industrial and telecommunications industries. In his new position here, he will guide many of our strategic initiatives and work to strengthen various areas of our business.

Another service to our industry is our annual Utility Perspectives Symposium. This year the Symposium drew a record number of attendees to discuss issues ranging from the new financial landscape, to operating post-Energy Policy Act, to new technologies. This event continues to draw attention from the industry press and industry thought leaders. Our fifth annual Symposium will be held next fall in New York City.

Our performance this quarter reflects Quanta's dedicated employee base and the increasing demand for our services. We have ongoing programs to help us work safer, smarter, and deliver a higher-quality service to our customers. This commitment to quality and delivering value to our stakeholders is evident in the industry. 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 condition of their infrastructure.

Now I will turn the call over to Ken Trawick, who will discuss the recent developments in our Telecommunications and Cable operations.

Thank you, John, and good morning, everyone. We continue to achieve revenue growth and stronger margins in our Telecommunications and Cable operations. Each segment of this industry appears to be recovering, some more quickly than others. Spending dedicated to the buildout or maintenance of networks to support fiber-to-the-home, traditional wireline and wireless services is increasing, and we expect this momentum to continue into 2007.

We continue to be recognized as a leading provider of outside-plant infrastructure services, including fiber-to-the-home and traditional wireline. Our existing customers depend on Quanta to help meet aggressive timeliness to deploy new convergent technologies and help them remain competitive. New customer categories such as municipalities continue to emerge and turn to Quanta to support their service delivery goals.

Throughout the nation our crews are working to build a fiber network to support next-generation voice, video and data services, such as Verizon's FiOS and AT&T's U-verse. Currently we have crews spread throughout California, Florida, Oregon, Pennsylvania, Texas and Washington working on these projects.

Since the launch of its U-verse service in May, AT&T has unveiled an agreement to build a fiber-to-the-home network to deliver U-verse to a 20,000-home master plan community near Houston. This service is expected to go live in November. Commercial launch of the U-verse services occurred in San Antonio in June.

AT&T also announced planned fiber network upgrades in Kansas following the passage of the Kansas Video Competition Act. Similarly, the Company outlined an investment plan to build a network in Connecticut, following a positive IP video ruling by the Connecticut Department of Public Utility Control.

These recent developments lead us to believe that the momentum and funding behind AT&T's fiber deployment will continue through 2007 and beyond. In fact, the Company stated last week during its earnings announcement that it expects to launch U-verse services to approximately 15 markets by the end of '06.

Similarly, Verizon continues to boast FiOS as a large growth opportunity with the potential to pass 33 million households and 3.6 million businesses in the $50 billion voice, video and data market. To date, the company has passed 4.4 million premises in 16 states. It continues to target 6 million premises by the end of the year. By 2010, over 50% of households and 18 million total premises are expected to be passed by the FiOS service.

And it's becoming easier in many states to bring competition to market, as more states as franchise legislation. Most recently, New Jersey, Florida, California, and North Carolina have passed franchise legislation that enables service providers to obtain only one franchise license for the entire state. Similar legislation continues to progress in Tennessee, Louisiana, Iowa, New York and Pennsylvania.

California went a step further to help the implementation of high-speed networks. Just last week Governor Schwarzenegger signed an executive order to streamline the approval process for building new networks in California. He also created a task force that will "work to make sure the State of California is at the forefront of broadband infrastructure deployment."

As I mentioned earlier, California is an area of focus for us relative to our broadband installation services. Verizon, one of our largest telecom customers, has been very vocal regarding their support of the Governor's executive order.

Municipalities are emerging as a key opportunity to apply our network buildout expertise, as more and more communities demand advanced high-speed voice, video and data services. We are focused on pursuing work in this area and are in the midst of several negotiations and RFP processes.

Quanta has a competitive advantage in this market niche due to our ability to work in both overhead power and communications installation zones, provide underground installation services, integrate resources, and function as a one-stop shop for engineering, project management, construction, [make-ready], splicing, electronics installation, and system commissioning for municipalities.

In the traditional wireline side of our business, we continue to work under several major Master Service Agreements with leading service providers. Several of these agreements are coming up on the expiration dates at the end of this year. We have long-standing solid relationships with these customers and have every indication that these will be renewed at similar higher levels than our previous agreements. Our 12-month telecom backlog has increased 4% relative to the second quarter; however, the fact that these contracts are expiring at year's end is having a temporary impact on our telecom backlog numbers.

Our inside-plant operations continue to have a strong year as we build on a long relationship with Verizon. As Verizon's fiber-to-the-home deployment spreads, they turn to Quanta to address their needs related to central office installations.

We have also increased the diversity of our customer base in this area. We are now working more with original equipment manufacturers, as well as carriers, on central office initiatives. This has helped stabilize our revenue and strengthen margins.

The cable market is at a turning point as it works to compete with the new convergent voice, video and data services being offered by the telcos. MSOs are beginning to reallocate CapEx to enhance their networks. We anticipate continued growth in this area as Comcast and Time Warner enhance the capabilities of the old Adelphia systems. In fact, we recently started construction under a contract which we secured in the third quarter to enhance network capabilities on one of the former Adelphia properties.

As carriers continue to roll out the latest generation of wireless data technologies, they continue to require expansion of their existing infrastructures or deployment of new systems. This is an industry in which advances in technology are emerging and carriers continuously work to reposition themselves to align with the latest focus.

This occasionally impacts our revenues. This quarter, revenues from wireless customers were down compared to the third quarter of '05. We consider this a temporary situation and not a trend. Even with the revenue decrease, our margins have remained strong and steady, and this continues to be a strong area of our business overall from a margin perspective.

In summary, our efforts to strengthen our telecom business are coming to fruition, as is evident in our performance. Revenues increased 25% in the third quarter of '06 compared to the third quarter of 2005, with margins improving as well.

Before I hand the call over to James, I want to mention that we continue to strengthen our management team with the addition of key personnel. Specifically, during the quarter we have added personnel to strengthen our business development group, to support our operating units, and taking full advantage of emerging opportunities. We are proud of the strengthen in our operations, and I want to thank our management and operations teams for all their hard work negotiating contracts, building customer relationships, and getting the jobs done.

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

Thanks, Ken, and good morning. Today we announced revenues of 528.5 million for the third quarter, which included gross emergency restoration revenues of approximately $16 million, compared to 523.5 million in the prior year's third quarter, which included approximately 74 million in storm restoration revenues.

Excluding emergency restoration revenues from both periods, our revenues would have grown 14.1% in the third quarter of '06 versus the third quarter of '05. Excluding emergency storm restoration work, revenues from electric and gas utility customers increased by $31.7 million, or 11.1%. Telecom and cable customer revenues increased $17.8 million, or 25%, and ancillary customer revenues increased $13 million, or 14%.

Our year-to-date internal revenue growth on an as-reported basis amounts to 15%, and excluding third-quarter storm work from both nine-month periods, amounts to 21%.

Our gross margins were 15.7% for this quarter, compared to 15.3% during last year's third quarter, even though last year's third-quarter revenues included a significantly larger portion of storm restoration revenues. Excluding the estimated effects of storm restoration revenues, gross margins improved in all the primary industries we serve.

Our G&A expenses were 45.1 million in the third quarter of 2006, compared to 49.4 million in the third quarter of 2005. The decrease was due primarily to lower professional fees, as we incurred costs in last year's third quarter for our margin enhancement program and for specific bidding activity and litigation that were not incurred in this year's third quarter. G&A expenses in 3Q '06 declined to 8.5% of revenues, versus 9.4% in 3Q '05.

Considering all the items just discussed, our as-reported operating margins improved by 130 basis points in 3Q '06 compared to 3Q '05, and operating income was up $7.3 million quarter-over-quarter.

Interest expense decreased from 6.0 million to 5.7 million, primarily due to a lower interest rate associated with our recently issued 3.75% convertible subordinated notes. Interest income increased approximately 2.4 million in the third quarter of '06 versus the third quarter of '05, as a result of higher average cash balances in this year's third quarter, as well as higher overall interest rates.

Our effective tax rate during the quarter was 38.8%. This was lower than we previously expected due to our investment of a significant portion of our available cash in tax-exempt investments, which we did not have in the prior year, and the reversal of certain state tax contingency reserves which were no longer needed.

Net income for the quarter was 22.4 million, resulting in earnings per diluted share of $0.17, compared to net income of $12.9 million, or $0.11 per share in the third quarter of 2005. We should also note that we achieved the top of our EPS guidance range, even though our storm restoration revenues were $20 million less than we forecasted.

Cash flow from operations totaled approximately $46.8 million for the quarter. Cash flow from operations, less capital expenditures of $7.0 million, resulted in approximately 39.8 million in free cash flow for the quarter.

EBITDA was 51.9 million for the third quarter of 2006, representing an increase of 12.3% over EBITDA in 2005's third quarter. The amounts making up the EBITDA of 51.9 million were net income of $22.4 million, plus income taxes of $14.2 million, plus depreciation and amortization expense of $12.2 million, plus non-cash compensation of $1.6 million, and net interest expense of $1.5 million.

For the first nine months of 2006, EBITDA was $131.7 million. The amounts making up this number were net income of $47.9 million, plus income taxes of 31.9 million, plus depreciation and amortization expense of 37.8 million, plus non-cash compensation of 4.6 million, and net interest expense of $11.1 million. That's a gain on early extinguishment of debt of $1.6 million.

Our current backlog of work to be completed during the next 12 months continues to be at record levels, and is approximately $1.466 billion, which compares to $1.335 billion in backlog as of the end of the second quarter, for an increase of approximately $131 million, or 9.8%. Backlog has increased primarily due to new contracts and an increase in demand for our services.

This quarter's backlog includes $80 million in revenues we expect to perform during the next 12 months under the newly-announced 30-month Northeast Utilities contract.

Total backlog increased 15.3%, or $195 million, compared to last year at this time. Also, it should be noted that backlog at the end of the third quarter of last year included approximately $30 million related to storm restoration revenues, while this quarter's backlog includes a negligible amount of emergency restoration revenues.

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 expected to be performed during the next 12 months under long-term maintenance contracts and new contractual agreements on which work has not yet begun.

Our days sales outstanding -- which we calculate by using the sum of current accounts receivable, plus costs in earnings in excess of billings, less billings in excess of costs, divided by average revenues per day during the quarter -- were 85 days at September 30, 2006, versus 86 days at September 30, 2005 and 83 days at June 30, 2006.

At quarter end we had 351 million -- 351.7 million in cash and short-term investments on our balance sheet. We had 125.4 million in letters of credit outstanding, primarily to secure our insurance program. We had no borrowings under our $300 million revolving credit facility other than LOCs, leaving us with approximately $175 million in available borrowing capacity.

Concerning our outlook for the future, our estimate of revenues for the fourth quarter of '06 is from 500 to 525 million. Our forecast represents approximately 13% internal revenue growth for the fourth quarter of 2006 over 4Q '05, excluding approximately $70 million of storm restoration revenues in 4Q '05. Our revenue forecast includes a minimal amount of emergency storm work in the fourth quarter of '06.

Our estimate of 4Q '06 EPS, based on revenues of between 500 and 525 million, is between $0.11 and $0.14 per diluted share. This 4Q '06 forecast compares to total revenues of 523.5 million and diluted earnings per share of $0.15 during the fourth quarter of '05. We're forecasting approximately the same revenues and lower margins and EPS in the fourth quarter of '06 than we experienced in the fourth quarter of 2005, due to the expectation of lower storm restoration revenues relative to last year and the unpredictability of weather conditions as winter begins.

This challenging fourth-quarter comparison does not reflect our overall attitude toward our business environment, as we see increasing backlog and improving margins, excluding the effects of storm restoration revenues.

[For additional] guidance, we're currently projecting our tax rate for the fourth quarter to be approximately 42%. We expect our diluted share count to be about 142 million shares during the fourth quarter, which includes the shares underlying our 4.5% convertible subordinated notes. The net income addback associated with these convert shares is approximately $2.2 million per quarter. And we expect CapEx for all of '06 to continue to be less than $60 million.

This concludes our formal presentation. Now we will open up the line for Q&A.

(OPERATOR INSTRUCTIONS). Alex Rygiel, Friedman Billings Ramsey.

Congratulations on a very nice quarter, actually. It would appear that backlog is accelerating in its strength, and I'm pretty excited about that. Can you talk more about backlog outside of the Northeast contract as it relates to the electric utilities space? How many other large or medium-sized project awards did you receive in the quarter? What's the outlook for the next six to 12 months for new bidding opportunities?

We're seeing about as robust business opportunities as we've ever seen in our 35 years of business, and it extends across the United States. We've received several contract awards from West Coast, Central United States, Southern United States, and of course the big contract up in the Northeast. Remember, too, that our backlog numbers are down because, as Kenny explained a little bit, we had some fairly major long-term maintenance agreements that are expiring around the first of the year. And we expect those to be renewed on the telecom side; however, they're certainly not in backlog at this time. And if they renew, backlog really would be stronger than it appears at this time.

James, on the backlog can you break that out between your three segments?

Backlog for utility and gas is 1.092 billion, for telecom and cable it's 232 million, and for ancillary it's 142.4.

I'm sorry; what was the backlog for electric utility again?

1.092 billion, which is an increase over the end of last quarter of 102 million.

That's up 26% year-over-year?

20% year-over-year.

Great. With regards to G&A, G&A in the fourth quarter historically has stepped up a little bit. Do you anticipate that trend to occur again this year?

Just a little bit. It may be $1 million or so higher than it was in the third quarter, but not much.

It sounds like your fourth quarter guidance has really taken a big step back and saying let's be conservative, let's take out all the storm work, let's take out any kind of risk associated with difficult weather conditions, and put up a number out there that is sort of that baseline that's very conservative. Is that true?

First of all, we haven't given fourth-quarter guidance before. (multiple speakers) first time we've actually given fourth-quarter guidance. So we haven't backed off of our guidance. But we are taking an approach as to where we see things today, and also taking into consideration the fact that the weather can be bad in the fourth quarter. And there have been significant amounts of rain so far.

Your margins have been improving very nicely over the last 12 months. Your backlog in margins within your backlog today, do you continue to feel confident that your backlog margins are better today than they were 12 months ago?

Yes. Absolutely. Margins continue to improve in backlog. We continue to expect margin improvement over the next several quarters.

Curt Woodworth, J.P. Morgan.

Historically about 30% of the utility and gas business has gone to the transmission market. I'm just wondering if that's about where it is today, and how you see that mix shifting over the next one to two years. And what type of margin implications that could have for the Company.

Actually, we kind of see those percentages pretty much staying the same. Transmission is having a huge increase, but we're also seeing a lot of work on the distribution side that's occurring. So, as far as kind of a ratio, I don't see much change; it's just the overall spending is increasing at such magnificent amounts is what's got us all excited.

Great. Last quarter you commented that a lot of the margin improvement you were seeing was a function of much better pricing on the utility side, and maybe a little bit on the telecom side. I'm wondering where do you think we are in the price cycle. Do you feel that you still have a fair amount of the service agreements that you need to improve price on, or do you kind of feel like you already need to be there?

As I indicated earlier, we anticipate margins to continue to increase. They're not anywhere near historic levels. This is, I guess, my 35th year in business. And the first 30 years of business, traditionally utility revenues, 17 to 20% gross profit. So, we've got a ways to go to get back to historic levels. And some periods during that period of time when there was increased spending on the utility side, or growth in spending on the utility side, margins can exceed that. We wouldn't project that, but we think long-term our utility margins should be in the 17 to 20% gross profit range.

And where are they currently?

They're south of that now. James, do we give that information?

We haven't really talked about where we are. But year-to-date we're in the 15 to 16% range year-to-date on the utility margins.

You also commented that the margin profile on the telecom side has been improving. Would the telecom gross margin be about that level, maybe slightly lower?

Telecom margins have been going back and forth with utility margins. In some quarters telecom is ahead of utility, and other quarters they're behind; they're running kind of neck in neck today. Telecom margins have traditionally, though, been higher than utility margins. (multiple speakers) quarter they've been going back and forth, kind of in a race in improving margins.

Last question, James. Can you give us any guidance on the tax rate assumption for 2007?

We haven't given any guidance on '07 at all, but I would -- I hesitate, because it depends on how much we've got as far as tax-exempt investments versus taxable investments. I think it's probably going to be around the 43% range.

Sanjay Shrestha, First Albany.

A couple of quick questions. First of all, congratulations here on this win with the Northeast Utilities. I was just wondering, did you guys mention what is the total scope of that project for you guys? It's a 30-month job, but did you say how much that is as a portion of your business?

No we didn't really. We are not able to announce the total amount of that contract because it's against the Utility's policy (multiple speakers) the lump sum amount of the contract. We do try to give some emphasis to the size of it by saying that it's the largest electric utility transmission project the Company has ever had.

Precisely. In terms of the structure of the contract and that project, I take it, given the environment we're in, we've got some sort of a negotiated fixed-price contract and the terms are certainly pretty favorable, contributing to some nice earnings as we continue to execute on this project. Is that a fair way to think about it?

The margins in the contract we anticipate to be our normal fixed-price electric utility margins.

That's great. One of the key things here, you mentioned that -- I mean, utility spending is picking up here finally. We're starting to see the ASPs go up, and margin's still got some room to move up. What sort of week is a continuation of sort of same as usual, and tracking along, and more projects getting released? Or do we still have yet to see some meaningful benefit on the passage of the Energy Policy Act of 2005, which is sort of what gets us to that 17 to 20% type of gross margin on the electric side of the work?

I'm not sure that any of these new projects that we're bidding right now really have had much impact from the Energy Policy Act. We say that we're probably a year to 18 months away from seeing those projects hit the market. What we're seeing now is utilities spending money on their core T&D infrastructure, and we haven't seen a lot of impact. We're seeing it. The ruling that I talked about that was passed October 31st; that's a pretty good sign. But if they started thinking about investing right now, it would take a year, 18 months, or sometimes more than that to get a project to fruition. So I think we're going to see it. But right now what we're seeing is just the utilities increasing spending on their T&D infrastructure.

So when we see the benefit of that, or the effect of that, and net net with the continued spending, potentially gets us to that sort of a trajectory. Great. One last question, then. You guys obviously -- the end market is picking up here. You're executing well. Backlog is growing. I mean, given the amount of the magnitude of the work that can come your way here on the electric telecom and the natural gas side, what is your total capacity? How much revenue can you guys support at this point in time to kind of capitalize on the benefit in this growth opportunity that is ahead of you?

Our labor force is a variable labor force, and we continue to grow our resources in order to accommodate our customers' increased spending. For instance, last year we increased our nationwide and [friendship] training program 53%. And so, I don't (indiscernible) we have a constraint on capacity. As far as how much work can we do, if you increase margins and if we continue to be able to grow our work force, there's really not a limit. Obviously there is some place up the road, but I don't know what that amount is.

So at this point in time we've still got both the topline and the margin benefit that we should continue to see at least for the next several years.

That's correct.

Got it. That is terrific. Once again, congratulations, guys.

Jamie Cook, Credit Suisse.

Congratulations. My first question -- on the third quarter, you mentioned your margin improvement was pretty impressive year-over-year. And you said -- you mentioned that that was even without the hurricane work. So I guess, can you -- hurricane work -- I guess I'm just trying to understand, hurricane work is typically more profitable. Can you sort of help us last year how much -- can you sort of help us how much the hurricane work helped your profitability last year, so we can get a feel for what your true margin improvement was?

We don't talk about margins on hurricane restoration work. First of all, it varies on a regional basis, and also varies depending on allocations of certain unallocated equipment costs and things like that. But I can tell you, to give you a little bit of guidance, we're -- our numbers are showing that our margins have improved somewhere between 100 and 200 basis points year-over-year without storm work, if you pull storm work out of both of them. (multiple speakers) 100 to 200 basis point range.

That gets me to the fourth quarter and sort of why I'm confused. Because if you look at your implied margins for your fourth quarter, if we take the midpoint or so, that would imply that your margins year-over-year are down. So why wouldn't we get the same improvement, given all the positive pricing, the operational execution, all those things, in the fourth quarter like we got in the third? Was there anything unusual in the third quarter, a performance award or anything like that? Or is it just conservatism?

The fourth quarter has holidays, seasons in it --

But you had that last year.

That's right. And we worked right through those on that emergency storm restoration work. We worked Thanksgiving and the day after Thanksgiving at double-time and overtime and -- time and a half and double-time rates. And we worked Saturdays and Sundays, where we wouldn't work those kinds of holidays, and Sundays particularly we don't work in our normal routine work. We do that because it's emergency work. People are without lights, so we have to work those kinds of hours. We work 16 hours a day. We have high utilization of equipment, obviously, when you're working 16 hours a day.

And then, of course, you have inclement weather. And in an emergency situation, when people are without lights, our guys work in the rain, in the mud, in the inclement weather conditions, whereas in normal routine work, winter weather has an impact on our workforce. And we don't work during those periods of time. And if -- because it's cost-plus work as well. If you're working fixed-price work or unit-price work, in the mud or in winter weather, you can expect margins to be lower than when you're working cost-plus on emergency restoration work. I hope I get that explained properly, because it's important for the investors to understand that. If you have any other questions about it, be sure and ask them.

No. That makes sense, although I still think you're being a little conservative, but that's okay. My next question -- can you just talk a little bit about what your thoughts are on acquisitions here, weather there's anything in the pipeline and whether you have the capacity to do acquisitions, given the strength of just the business, the organic business?

Yes. With the increased cash flow from the third quarter, we have increased the cash balance. We have a lot more cash than we really need on our balance sheet. We are looking at acquisitions. We don't have any announcements to make or anything like that, but we are continuously looking, and acquisitions are in our future.

John Rogers, D.A. Davidson.

A couple of just quick things in terms of bidding activity. You talked about some of your telecom contracts running off or awaiting renewal. When will you hear on those?

This is very typical of our business. We have Master Service Agreements. Some of them are year term, most of them are two or three-year term. We have just come up here at the end of '06, and we have, I would say, more than a third of them -- sort of a little bit of a high number that are coming up the renewal. They typically expire at year's end. And we are in negotiations now to renew those for additional two or three-year periods, depending on the client, the location.

Sometimes, I will tell you that those negotiations or agreements are not finalized prior to year-end, and it's not unusual to get a three-month extension to complete that process. So I would -- by the end of the first quarter we'll be through that whole process on all those contracts. I can't really say for sure that we'll be through by the end of the year. Even though they expire at the end of the year, sometimes those negotiations drag out into the first quarter.

Is the amount of work that's out there potentially up for renewal -- is that increasing?

We'll be looking at renewing all the Master Service Agreements that we currently have, and also analyzing opportunities to increase our -- because these are coming up for renewals, some are being bid and some are being negotiated. It's a combination. It's a mix of those, of both. And so some of those that are being bid in areas that we currently do not have Master Service Agreements for these same customers, we'll be looking possibly to extend our market share.

Okay. And then on the Power side, are you seeing more large transmission-type projects like you announced in Connecticut, or is it the same sort of mixes that you've seen in the past? You mentioned the Northeast. Is that the most active market right now? If you could give us a little more flavor there.

I think that it's across the United States. There's been announcements recently in Nebraska, for instance; NPPD has announced some projects. California is a very active market. Texas is an active market. The Northeast certainly is active. So, it's all across the country. Even the Southeast United States, been several recent announcements there. There are more -- there's more activity in the transmission market than we have seen in quite some time, (indiscernible) my career.

Do you expect those contracts to be awarded in early '07, or could we see more of it in the fourth quarter?

I think probably we won't see any -- John, help me here if I'm wrong -- but I don't think we've got any projects besides this one coming out in the fourth quarter. But they will be scattered out over the next 12 to 18 months as either negotiations or bidding processes take place.

John, I think you're absolutely right. Right now we're kind of -- we're right in the middle, kind of, of the traditional deal. We have lots of projects coming out that we're securing everyday that range anywhere from 3 to 5 million, maybe some 7, 8, $10 million contracts. But the ones that's approaching $100 million size, they'll start coming out, we're hoping, as John said, scattered in '07.

Just a last question. Before the Connecticut job, what was the value of your largest project?

Are you referring to on the electric utilities side?

Yes.

Upwards of -- John, correct if I'm incorrect -- upwards of around 60 million.

Right.

[Eric Keener], ThinkEquity.

Congratulations again. I wonder if you could talk a little bit about the competitive environment. Maybe it's even silly to ask the question, but it sounds like there's not a huge amount of competition out there. I wonder if you could comment on that.

There's always competition out there, depending on what markets you're talking about -- the telecommunications market, the electric utility market. In local markets we have a lot of smaller contractors and regional contractors. When you get into the $50 million contracts and higher, then there are very few players that can compete in that environment. But there's plenty of competition in the smaller projects, both on the telecom and electric power side.

But we bring a lot of things to the table that our smaller competitors and regional competitors don't bring. For instance, the response we can give them in an emergency situation; our energized services. A lot of things. The equipment, the manpower, tooling, expertise. A lot of things that we bring to the table that the smaller competitors and regional competitors don't bring.

Clearly. Next question is, I wonder if you could give us some color on the RFP activity, specifically in some of the larger telecom and cable customers. Specifically, as far as what kind of work are you doing? When we talk about broadband, are you actually going into customer's homes and hooking them up? You mentioned that you were doing some CO work for the telcos. I assume you're doing a bunch of what is sometimes called path construction, dragging the fiber through the outside plant. Could you talk about some of those kinds of things that you're doing?

Using Verizon as an example, we do path creation, what Verizon calls path creation. That's the installation of the conduit down the street. We also do the fiber installation, which is installing the fiber cable in the conduit. We do the splicing as well.

In addition, the central office equipment that's required to be installed inside the central office to support the fiber-to-the-home architecture, we do that installation is well. We do -- on the cable side, we do some installations, in-home installations; that's not a major part of our business. It's -- we do some of that, but that's not core to what we do. Typically you can -- what we do is outside the home, between the home and the central office.

On the wireless side, we also have a substantial wireless operation in our communications group. And we do tower installations, site surveys, equipment installation in the sell site, just complete side acquisition engineering services. So we self-perform a broad range of services that our customers require on the communications side of the house. Does that give you a color for -- an answer to your question?

That's outstanding. It sounds like one of the things you're not doing, at least on the telecom side, is in-home installations. You're really only doing that on the cable TV side. Am I hearing that correctly?

No. You did hear it correctly, and that's not a big part of our business. But I can tell you that we are beginning to see RFPs -- typically, historically, on the telecom side of our business, that particular function has been performed in-house by the carriers. We are beginning to see RFPs for outsourcing that piece of business to contractors. So, we have seen those RFPs. Again, we do a little bit of that, but it's not a big part of our business.

Jeff Beach, Stifel Nicolaus.

Two questions. First, on this large contract with Northeast Utilities you just won, can you comment whether that was a negotiated contract, or whether you beat out competitors on a fixed-bid price? And along with that, is the profitability you're hoping for off of this project equal to or above your profitability of your average work in the electrical sector?

The process is a bid and negotiating process. As you can imagine, there's a limited number of contractors that can perform that type of work. And so, it was a bid process with a negotiation process afterwards. And as I think I said earlier -- maybe I didn't -- that the margins are typical of our lump sum fixed-price electric transmission projects.

Okay. And second, on all these telecom MSAs that are coming up, can you just generally describe the length of the relationships for most of these companies that you have had, and what the historical experience has been on turnover, losing contracts versus maintaining?

I'm sitting here trying to think through all of these contracts, and I think it would be safe to say that we have held these Master Service Agreements, all of which are coming up for renewal, in excess of five years. And the opportunity to expand -- the incumbent, in the cases where we're the incumbent in this Master Service Agreement, has a distinct advantage. Because he is well aware of the costs, and we have tremendous relationships with these folks. And so we'll leverage those to our benefit as well, during in the negotiations.

Some of those relationships go back decades, right, Ken?

In some cases, one or two I'm thinking about that are up, we've been there in excess of 10 years. But certainly they're long-term relationships.

I think we have time for maybe one more question.

Alex Rygiel.

With regards to the Northeast Utility contract, will you also be participating in the construction of the substations?

Right now we don't have any substation contracts.

There are no further audio questions.

Thank you very much for attending our conference call today. We appreciate your continued interest in Quanta. We'll talk to you on our next conference call. Thank you very much.

Ladies and gentlemen, this does conclude the Quanta Services third-quarter earnings conference. You may now disconnect.