Quanta Services Inc (PWR) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Quanta Services second quarter earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded, today, August 2, 2007. I would now like to turn the conference over to Mr. Kip Rupp with DRG&E, please go ahead, sir.

Thank you. Welcome everyone to Quanta Services conference call to review 2007 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 on e-mail or fax distribution list to receive future press releases from Quanta or if you had any technical difficulties this morning and did not receive e-mail or fax, please call DRG&E's offices at (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 quantaservices.com and then the investor center presentation 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 accessed by dialing (303)590-3000, and using the pass code 11094322.

Also today, please remember the information reported on this call speaks only as of today, August 2nd, 2007 and, therefore, you are advised that any time sensitive information may no longer be accurate as of the time of any replay of this call. Also, this conference call will include forward-looking statements intended to qualify under the Safe Harbor for Liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include but are not limited to projected revenues, earnings per share, tax rates, capital expenditures and other projections of financial and operating results and information. The benefits of the Energy Policy Act of 2005, growth in particular markets, Quanta's strategies and plans whether and when the pending merger with InfraSource Services will be consummated and the potential benefits of the merger, and any other statements reflecting Quanta's expectations, intentions, assumption or beliefs about future events or performance that do not solely relate to historical or current facts.

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 incorrect. Forward-looking statements involve certain risks and uncertainties and assumptions that are difficult to predict or are beyond Quanta's control. For additional information concerning some of the risks, uncertainties and assumptions that could affect the outcome of results of operations of Quanta generally, please refer to the Company's annual report on Form 10-K for the year-ended December 31, 2006, its quarterly report on Form 10-Q for the quarter ended March 31, 2007, and its other documents filed with the Securities and Exchange Commission, which may be obtained through the SEC's website at www.SEC.gov. Actual results may differ materially from those expressed or implied in these 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 statements to reflect events or circumstances after this call.

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

Morning, everyone. Welcome to Quanta Services second quarter 2007 conference call. To start the call this morning, I will provide a general overview of the period and a detailed discussion of our telecom and cable operations. My remarks will be followed by a review of our electric power and natural gas operations by John Wilson. Then James Haddox, our Chief Financial Officer, will review the quarter financial results. After our prepared remarks, we will open the call for questions.

Quanta's performance continued to be strong in the second quarter, with revenue growth of 8.5% resulting from total revenues of $557.6 million. This compares to $514 million in the second quarter of 2006. For the six months ended June 30th, 2007, revenue growth was 12.1%, and revenues were $1.3 billion compared to $1.01 billion, in the first six months of 2006.

Before I delve into the specifics behind our results, however, I would like to update you on the progress of our acquisition of InfraSource Services. We have completed substantially all the customary regulatory processes, including receipt of early termination of the Hart Scott Rodino waiting period and approval from the applicable state public utility commissions. Our registration statement containing the joint proxy prospectus relating to the stockholder meetings for Quanta and InfraSource and the issuance of Quanta common stock in the merge was declared effective by the Securities Exchange Commission on July 26th, 2007 and we commenced mailing of the proxy materials to stockholders this week. We and InfraSource will hold our respective special stockholders' meetings on August 30th. The details of the meeting can be found in the joint proxy prospectus, posted on our Website at www.quantaservices.com in the investor section. With all of these items complete and assuming approval by the stockholders of Quanta and InfraSource and the satisfaction of the remaining customary closing conditions, we expect to complete the acquisition in the third quarter, as originally anticipated.

Over the past several months, our integration teams, in conjunction with our integration task force have been working diligently to map out the merger of the operational and corporate functions of both companies to identify synergies and leverage best practices. These efforts will streamline the integration process and ensure a smooth transition for customers, employees, and strategic partners alike. As we move forward, the benefits remain clear. The combined company will have the ability to offer an even more comprehensive portfolio of services to a larger customer base. From design and engineering to installation and maintenance, to energized services and emergency restoration, we continue to expect a business combination to create significant value over the long term, including synergy realization. I also believe employees realize the opportunities involved with being a part of a larger, more dynamic organization while customers will gain assess to new services and expanded personnel and equipment resources.

Reviewing Quanta's stand-alone results for the second quarter of 2007, revenues by type of customers were: 69% from electric and gas utilities compared to 66% in the second quarter of last year. 15% from telecommunications and broadband cable customers, compared to 17% in the same quarter last year, and 16% from ancillary services compared to 17% in the second quarter of '06. Our largest customer for the quarter made up only 5.5% of our revenues. Our top 10 customers for the quarter equaled 32.6% of our total revenues. And our top 20 customers made up approximately 46.9% of revenues. At the end of the second quarter 2007, our employee count was 11,713, down slightly from 11,804 at the end of the first quarter of this year, and up from 11,644 at the end of the second quarter of 2006.

Now, looking to our telecommunications and cable operations, for the second quarter of 2007, revenues from telecom and cable customers decreased 4.2%, compared to the second quarter of 2006. The majority of these revenues continue to be from customers on our outside plant and fiber expertise. Our wireless division experienced a revenue decline of approximately 35% in the quarter, and accounted for the vast majority of the decline in telecom revenues. However, backlog from our telecom and cable operations increased 22.6%, when compared to backlog as of June 30 of 2006.

Initiatives by telecom service providers to drive fiber closer to the home continue to have a positive impact on the performance of our telecom and cable operations. Although impacted by heavy rains in Texas and the Midwest, other areas such as California, Pennsylvania, Florida, Oregon, Washington and New York, showed increased activity. As of June 20, Verizon has secured more than 1 million FiOS Internet customers, and half a million FiOS TV subscribers, our work with Verizon spans not only path creation and fiber optic cable installation, but also residential installation for single and multifamily dwellings. AT&T remains on track to reach nearly 18 million households by the end of 2008 as part of its initial deployment of additional fiber, totaling 40,000 miles. By the end of 2007, AT&T expects to pass approximately 8 million living units. We have increased our support of the AT&T and New Verse initiative particularly in California and Texas.

New state franchise legislation continues to assist these FTTH initiatives. In the second quarter, Ohio, Nevada, Iowa, and Florida passed new franchise legislation that enables service providers to obtain a single license for the state. In all, 15 states have passed such legislation, equating to over half of the population of the country. The opportunities for our outside plant and services continue to expand. Municipalities continue to be more aggressive when seeking methods to employ fiber to their opportunities. For example, one of our operating units was awarded work in Tennessee for the installation of 120 miles of fiber. The work will begin this month and under the three-year contract, additional services, including the engineering, make-ready, cable splicing and service drop installation will be performed.

In the second quarter, we initiated work under a previously announced contract with the city of Wilson, North Carolina. We are in the initial phases of this contract to build a private fiber network for the municipality. We also continue to work under the recently renewed master service contracts with CenturyTel and Wind stream, among others. Our cable TV operations are being positively impacted by the cable operators' focus on delivering competitive services. In the second quarter, we initiated work under recently secured contracts with Time Warner, Comcast, and other service providers. This work is primarily in the southeastern United States and southern California.

Our wireless operations, although down approximately 35% in revenue for the second quarter, have begun to see clear indications of increased activity and strength in spending. To support our goals, we established a new operational division, Quanta Wireless Solutions, in the second quarter. This will consolidate all of the wireless operations for Quanta Services under one umbrella and enhances our brand initiatives.

In the second quarter, we renewed our master service agreement with Ericsson, the contract, which encompasses installation of new wireless equipment to support Ericsson's delivery of convergent technologies has been extended for five years. In addition, we were awarded a three-year master service agreement with Nokia Siemens networks. The contract establishes Quanta as Nokia's prime contractor in the central region of the United States. Following the award of these contracts, Quanta has secured two projects for nearly 2,000 T-Mobile third generation sites, located in both the central and northeastern region of the United States, and 400 Sprint fourth generation sites in the Northeast region.

In closing, as we move to the second half of 2007, we continue to be well-positioned to benefit from market developments and increased spending in the primary industries we serve. We are proud of the strength of our operations and I want to thank our management and operations teams for their hard work negotiating contracts, building customer relationships, and getting the jobs done. Now I'm going to turn the call over to John Wilson, who will discuss the recent developments in our electric power and natural gas operations.

Thank you, John. And good morning everyone. Our electric power operations continue to grow as utilities throughout the nation seek strategic partners to repair and maintain existing power delivery infrastructure and build new transmission and distribution lines to support growing demand. For the second quarter 2007, revenues from electric power and natural gas customers increased 13% when compared to the second quarter of 2006.

Today, we're going to spend most of our time talking about large transmission projects. Keep in mind, if we were to be awarded all five of the projects I will talk about later, the expected annual revenue from these projects would account for less than 10% of our current revenue. Our second quarter results were negatively impacted by heavy rains throughout Texas, Oklahoma, Missouri and Kansas. In May and June, many of the south central states stretching from Texas to Missouri received between 2,000 -- 200 and 300% of normal precipitation levels. Rains were mostly steady, with minimal damage to infrastructure. Keep in mind that we are entering the part of hurricane season when historically more than 90% of Atlantic hurricanes develop, August 15th and October 15th. We're ready to support our utility customers as needs arise.

While we continue to see growing opportunities and increase spending in virtually all areas of our power and gas operations, there remains a large focus on transmission infrastructure. Starting June 18th, there are more than 1,400 entities which are responsible for power plants, transmission lines and substations that must comply with 83 reliability standards as part of the 2005 Energy Policy Act. The standards relate to the planning and operation of the bulk power system and cover areas such as balancing customer demand with generation supplies, emergency operations, cyber security, vegetation management and disturbance reporting. The standards are an important part of assuring the reliability of the nation's bulk power system.

With mandatory reliability standards in place and imminent work force shortage and pricing pressures, utilities are taking action now to ensure access to expert reliable resources to make their power delivery strategies a reality. There is evidence in the transmission product development in the second quarter of our recent contract awards. In past conference calls, we have provided updates on five key transmission projects. Since our last call, all five contracts we discussed have gone to bid and three have been awarded either to Quanta or InfraSource.

One of the five projects is for Allegheny Energy. As we stated in this morning's press release, we have secured a contract through Kenny Construction to install the transmission the transmission infrastructure for this 210-mile, 500,000 volt trans-Allegheny line, the Trail Project. The new line this spans from southwestern Pennsylvania from west Virginia to northern Virginia will strengthen the reliability of the power grids serving the Mid-Atlantic region. Although the project is currently in the planning and signing stages, we already have employees on site. Construction is projected to begin the summer of 2008.

As announced in our last call, the ATC project in northern United States that encompasses a 102-mile, 345,000 volt line was awarded to us as a general service contract through Kenny Construction and is progressing on schedule. Seventy-five-mile long 500,000 volt Tehachapi wind strong that was moved ahead of 250-mile project for Southern California Edison has been awarded to InfraSource and construction is scheduled to again fall of 2007. On the Canadian project, preliminary proposals have been received by Alta Link for the 190 miles, 500,000 volt line, and the project is expected to be awarded in the near future.

Proposals have been submitted to Southern California Edison for the installation of a 250-mile, 500,000 volt project in southwest United States. The award has been delayed because the Arizona Public Service Commission rejected a requested permit on one-third of that project. We are expecting construction to begin early 2008 on the other two sections, not impacted by the Arizona permit. These projects reflect the focus on the two regions of the United States where reliability is of the utmost concern. The west, from Arizona to Southern California, and the Northeast. We continue to see significant bidding activity related to the power infrastructure in these key regions.

Now I will update you on contracts recently secured and projects initiated in the second quarter. We continue to help Northeast Utilities upgrade its transmission infrastructure by construction of the Middletown to Norwalk project. This project is on schedule and proceeding nicely. The two segments of the project awarded to Quanta included the addition of new 345,000 volt overhead circuits to existing rights-of-way and rebuilding various 115,000 volt overhead circuits on new structure. Also in the second quarter, we initiated a transmission project for Duke Power near Robbinsville, North Carolina. Under the contract, we will build 19 miles of double circuit 230KV line through the rugged mounts of the Nantahala, the first phase of the project is expected to be completed in September. Phase two begins March 2008.

In July, we initiated foundation installation and started receiving structures on a job for Salt River Project. It is a 52-mile 500,000 volt transmission line stretching from Paloverde [Pomoll] west. On the West Coast, we will start work as part of the new project with the Los Angeles Department of Water and Power. The project spans approximately one year for the construction of a 230,000 volt transmission line. The line will support power delivery originating at the Pine Tree Wind Power facility.

At the end of our first quarter conference call, I responded to a question concerning pending transmission projects that we monitor. Beyond the five that I discussed already, many of these projects are in the early planning stages and timing is not certain. Some of these projects may not occur, and while we are well-positioned to perform the work, there is no certainty as to the number of projects we will be awarded. However, over the past several months, we have received numerous enquiries about these projects. So I thought it would help to recap these projects and give you our current sense of timing for the potential opportunities.

Projects projected to bid between now and the end of 2008 include Sherry Land power in northern Texas, 6 to 800 miles of 345 KV, AEP and Mid America Energy, 1,000 miles which has a $7 billion budget. Nebraska Power, 100 miles of 345KV, Excel Energy in Minnesota, 150 miles of 345KV, Montana Alberta line by SMC Nibelung , 135 miles of 230KV, Valley Electric out of Arizona, 60 miles, 230KV, Eastern Plains Project, Tri-state Generation and Western Area Power Administration, 1,035 miles of 500, 345, and 230KV, Gateway for Tucson Electric, 60 miles, 345KV, Northern Lights, between 100 and 2,000 miles which is 5 HVDC lines. Sunrise Power for San Diego Gas and Electric, 150 miles of 500 and 230KV.

Now, projects targeted to bid between 2008 and 2010 include Sierra Pacific, 310 miles of 500KV, HTP Wyoming, 130 miles of 230 KV, AEP, Allegheny, 550 miles of 765KV. In fact, this project achieves significant progress this quarter as PJM Interconnection approved the proposal by AEP and Allegheny to build 250 miles of 765,000-volt and 40 miles at 500,000-volt transmission line from West Virginia to Maryland as part of this project.

Finally, of the projects I mentioned on the last call, two are slotted to be bid after 2010. Transwest Express,1000 to 1,800 miles of 500 and 765, CapEx 2020, 605 miles, 345 and 230 KV. Keep in mind that currently there are more than 700 transmission projects totaling over 23,700 miles being planned. Of those 700 projects, more than 400 projects are critical to reliability and, therefore, are being tracked by the North American Electric Reliability Council. So these 17 projects are just a small sampling to show the magnitude of the escalating activity surrounding the nation's transmission grid.

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

Thanks, John, and good morning. Today we announced revenues of $557.6 million for the second quarter. Compared to $514.0 million in the prior year's second quarter. Resulting in an increase of $43.6 million. Revenues from electric and gas utility customers increased by $44.6 million or 13.1%. Telecom and cable customer revenues decreased $3.6 million, or 4.2%, and ancillary customer revenues increased by $2.6 million or 3.0%, resulting in overall internal revenue growth of 8.5% for the quarter.

Our quarter-over-quarter revenue growth resulted primarily from the trend in increased spending by our electric and gas utility customers, partially offset by lower demand from our wireless telecom customers. Our gross margins of 15.4% for this quarter compared to 15.6% during last year's second quarter. We experienced slightly lower margins in the electric power and natural gas utility industry, primarily due to adverse weather conditions across the south central U.S., causing reduced productivity on many jobs. Our telecom and ancillary margins were up slightly quarter-over-quarter.

Our G&A expenses were relatively constant at $47.3 million in the second quarter of 2007, compared to $46.6 million in the second quarter of 2006. G&A expenses in 2Q '07 declined to 8.5% of revenues versus 9.1% in 2Q '06. Our income from operations increased approximately $4 million or 11.7%. EBIT-A, which is defined as operating income plus amortization, increased approximately $4.6 million, or 13.5%. EBIT-A margins were up 30 basis points quarter-over-quarter. The calculation of EBIT-A is set forth in the financial news section of our Website at www.quantaservices.com. We believe that EBIT-A will become a more important metric in the future as amortization expenses associated with the InfraSource transaction is expected to become a more material component of our income statement.

Interest expense decreased by $4.3 million as compared to the second quarter 2006, primarily due to the expensing of unamortized debt issuance costs of $3.3 million associated with amending our credit facility and the repurchase of a portion of 4% convertible notes during last year's second quarter. Interest income increased approximately $2.6 million in the second quarter of '07, versus the second quarter of '06, as a result of a higher average cash balance quarter-over-quarter, coupled with higher interest rates. Our effective tax rate during the quarter was 42.2%. Net income for the quarter was $21.9 million, resulting in earnings per diluted share of $0.17, compared to net income of $17.7 million or $0.14 per diluted share in the second quarter of 2006.

2Q '06 included nonrecurring items, such as the writeoff of deferred financing costs, the gain on the early extinguishment of debt and a tax refund. However, the net impact of the nonrecurring items in 2Q '06 had no material effect on the quarter-over-quarter EPS comparison. Cash flow from operations totaled approximately $8.4 million for the quarter. Cash flow from operations less $13.2 million of capital expenditures net of proceeds from sales resulted in approximately $4.8 million in negative free cash flow for the quarter. Cash flow was negatively impacted by increased working capital requirements associated with the large Northeast Utilities job as well as two estimated tax payments made during the quarter.

Adjusted EBITDA was $52.7 million for the second quarter of 2007, representing an increase of 9.1% over EBITDA in 2006's second quarter. The amounts making up adjusted EBITDA are detailed on a separate analysis in the financial news section of our Website at www.quantaservices.com. For the first half of 2007, EBITDA was $96.1 million, or 20.5% higher than EBITDA in the first half of 2006. Cash flow from operations for the first half of 2007 totaled $72.5 million. Subtracting net CapEx of $37.8 million yields $34.7 million in free cash flow year-to-date.

Our current backlog of work to be completed during the next 12 months is approximately $1.505 billion which compares to $1.496 billion in backlog as of the first quarter of 2007. For an increase of approximately $9 million. Subsequent to the end of the quarter, we were awarded two contracts totaling approximately $240 million in value, including the Allegheny job. These contracts are not in the 1.5 billion of backlog, and since one of the contracts is a multi-year contract starting in mid-2008, we will include the revenues for these contracts for only the next 12 months, beginning with our September 30 backlog announcement.

Total 12-month backlog increased 12.7%, or $170 million compared to last year at this time. Backlog represents the amount of revenue that we expect to realize from work to be performed over the next 12 months on contracts, including estimates of work under long-term maintenance contracts and new contractual agreements on which work has not yet begun. Our days sales outstanding, which we calculate by using the sum of current accounts receivable, plus costs and earnings in excess of billings, less billings in excess of costs, divided by average revenues per day during the second quarter, I'm sorry, were 82 days at June 30, 2007, versus 83 days at June 30, 2006.

At quarter end, we had $405.8 million in cash on our balance sheet. We expect our cash balance to decrease during the third quarter, as we repaid the remaining $33 million due under our 4% convert, that matured on July 1st. In addition, when the InfraSource transaction closes, we will repay their outstanding debt and costs associated with the merger. We had approximately $140 million in letters of credit outstanding, primarily to secure our insurance program. Leaving us with approximately $160 million in available borrowing capacity under our credit facility. Concerning our outlook for the future, our third quarter results can vary significantly due to the effect that emergency restoration work may have on the quarter.

Our estimate of revenues for the third quarter of '07 is from 595 to $615 million. This estimate includes approximately $25 million of revenues from emergency restoration services. Our forecast represents approximately 13% Internal Revenue growth for the third quarter of '07, excluding emergency restoration revenues from both third quarter periods. Our estimate of -- for 3Q '07 EPS, based on revenues of between 595 and $615 million is between $0.20 and $0.21 per diluted share. This compares to revenues of $528 million and diluted earnings per share of $0.17 during the third quarter of '06.

For additional guidance, we're currently projecting our tax rate for the third quarter to be approximately 42%. We expect our diluted share count to be about 150 million shares. We expect CapEx for all of '07 to be approximately $70 million. Our third quarter estimate does not take into consideration any of the effects of the pending acquisition of InfraSource. We currently expect to close the acquisition on or about August 31st, 2007. If the transaction closes on that date, our third quarter, as reported results, will include one month of InfraSource's operating results, and will also include amortization of estimated intangibles, such as backlog and customer relationships. Our third quarter, as reported results, will also include other deal-related items such as integration costs and employee retention costs. Once again, our third quarter guidance does not include these items as the timing and amounts are difficult to predict at this time.

In summary, 2007 is off to a good start. We look forward to our merger with InfraSource and to meeting our customers' growing needs for infrastructure services. This concludes our formal presentation and now we'll open the line for Q&A.

Thank you, sir. (OPERATOR INSTRUCTIONS). Our first question comes from the line of Sanjay Shrestha, at Lazard Capital Management. Please go ahead.

Good morning, guys, once again, thank you so much for the update on the transmission project. One thing, if I can ask on that, obviously seems like projects are moving forward, you guys highlighted 17 and you talked about more than 700 and 400 of them that needs to move forward. How should we think about the total opportunity of that, and apart from opportunity extending for a longer period of time due to, let's say the shortage of the linemen or something like that, what could derail these 400 jobs from moving forward? Why wouldn't they move forward?

The total of the 700 jobs obviously a lot of those will have delays. Many of these projects have already been delayed.

Sure.

For a decade. And the longer they are delayed, of course, the more they're needed, the more necessary they are to give the country reliable electric power. I think that the attitudes of the Public Service Commissions, the public, and the politicians are such these days that they're not going to tolerate additional blackouts across the country. To avoid these blackouts, many of these lines have to be built and FERC is saying those 400 are necessary for electric reliability in the country.

So there's a lot of things that can delay these lines and many of them will be delayed, no doubt. They have been in the past, they will be in the future. Some of the things that affect those are protests from environmentalists that don't want transmission lines built. That's a huge, often has a huge impact. But there can be things like archaeological studies, government regulations, funding for the lines, a number of different things can cause delays. But what we're trying to show there is that the magnitude and the number of those projects are sufficient for strong growth for Quanta for years and years to come.

Precisely. So that was kind of what I was trying to get at. And it seems like obviously all these projects are clearly not going to move forward, but even with some of the ones that are moving forward here even out of the five, three are moving forward, and what I was trying to get at guys, is if all these 400 projects were to move forward, call it maybe 50% moves forward, who were to think along those lines, what is the actual total absolute dollar opportunity for that? And two, if all of those were to go forward, what could your electric portion of the business's operating margin get to?

This is hard to really put a number on the price per mile of those lines. We don't even -- we know there's 400 projects being tracked, but the average length of those lines are in flux at this time. And of course the cost per mile is in flux as well. Certainly there are projections out there of billions and billions of dollars to be spent over the next several years. And we think that as these projects come online and as more and more capacity is eaten up in the market, that margins will continue to increase on the electric power side. And we think that -- we've said that our goal is to have Quanta's revenues growing at double-digit levels for the foreseeable future and maybe for as much as a decade, but also to have our gross profits in the 17 to 20% level yielding operating income of 9 to 12%. And in if time, we beat that in the past, but that's what we should be able to do in fairly decent times in our business.

That's great. One real quick clarification, guys, then I'll back in the queue. The project out in the West Coast, the one that was sort of opposed by the Arizona public utility commission, despite that situation, a certain portion of that project has already or is actually on track to move forward; correct?

That's right. That project wasn't -- none of those projects were scheduled to start until 2008, and the other two projects, there's a powerhouse that is being built out there, a power plant, and so I think the other two lines will be built sooner. And we really think that the Public Service Commission of Arizona will eventually give their approval. There's a lot of politics involved in that. But it's part of an overall project for the reliability of power in Arizona and California, and I think that once the political situation is clarified, they'll probably give that approval. But who knows the timing on that, but you're right, two-thirds of the project is going ahead.

That's terrific, thanks a lot, guys.

Thank you, sir. Our next question comes from the line of Curt Woodworth with JPMorgan. Please go ahead.

Good morning. I guess, could you comment a little further on the gross margin progression you see at the company? I know the numbers were hurt a little bit this quarter from the weather and the guidance for next quarter looks like it implies to about a 16% gross margin, which would be up about 30 basis points year-on-year, yet some of these transmission projects that are starting to hit, included in the top line guidance of roughly 15% is very strong, so it seems like you're already operating in a pretty favorable market climate today. So getting to the, say, 18 to 19% gross margin level, is that going to be simply a matter of getting more operating leverage on the asset base or is it going to be more of a mix issue that, as transmission becomes a bigger part of the pie that carries higher gross margins? I'm just trying to figure out how you get there.

Part of it is the runoff of contracts that were some of our longer term maintenance contracts and strategic alliances that are three or four-year contracts, three to 5 year contracts. The runoff of those and as we renew those, margins will be enhanced there. The overall margins of Quanta of course, are affected by lower margin business such as C & I business, our gas business as well. So we have to do some things with those margins to reach our goal. But the utility margins, and, in fact, telecom, although telecom had some issues with revenues this quarter, their margins are looking pretty strong, too. So the margins on the two major portions of our business are fairly strong now and I think as demand continues to grow and part of the demand is from these large projects, but part of it is going to be because of reliability standards being imposed on the utilities, and the utilities folks see more on their forward C and D competencies. As spending increases margins should continue to increase.

In terms of the maintenance contract rollover, what's the timing of that, what percent of those contracts should roll over, say, in the next year or two when you start to be able to renew these at a higher margin rate?

I don't have an exact statistic on that, but probably half of the projects will renew over the next two years.

Then in terms of the business mix today, I assume nothing has changed dramatically in terms of the there's versus sort of distribution mix. Is it still about two-thirds distribution one-third transmission or has the T part shifted up a bit given the growth?

The T part is growing, in our business, the T part, transmission, is growing more rapidly than the distribution. Distribution business is a robust business and it's our day-to-day business with lots of maintenance agreements and lots of strategic alliances with our customers. But the distribution business is a good business for us, but transmission looks like it's going to outgrow distribution and will probably be 50% of our business fairly shortly.

50% by '08?

The end of '08, perhaps as much as 50% of our electric power and gas business, yes.

And right now it would be about high 30s?

No, we think it's probably in the near 40 range at this time, of our electric power and gas business.

Okay. And then by the end of '08, you think it could be about half?

That's right.

Okay. Just one final question, if I may, in terms of the backlog that you quote for electric utility, how much of that would be comprised of your base revenue that you know you're going to get annually under your MSA's for things like these transmission projects that you've outlined?

Probably 50/some percent of our work is routine maintenance-type work that we have long term maintenance agreements with.

About half and half?

Yes.

Okay. Great, thank you very much.

Thank you, sir. Our next question comes from the line of [Pierre Apsol] with KeyBanc Capital Markets. Please go ahead.

Hi guys, just had a couple of questions in regards to your transmission projects, of the five projects that you alluded to that can be close to 10% of your total revenues for the year, how much of that is the EMC portion versus the procurement portion?

Most all of it is in the construction of the project, the engineering and construction of the project. I think, I'll ask Wilson to confirm this, I think all of those projects the customer furnishes the material. The only material that we might furnish on those projects is the concrete for the foundations.

That's correct, John.

Then if you look at the margins that are related to the ENC portion there, would you say they're about what you're realizing for let's say your average transmission and distribution business?

Yes, I think the margins on those contracts, because -- particularly the ones that are fixed price, a fixed price contracts carry a higher margin potentially because they're higher risk contracts.

Right.

Some of these contracts,, are negotiated contracts and they're not fixed price contracts.

Okay. Great. That's all I had, I'll skip back and get back into the queue. Thank you.

Thank you.

Thank you, ma'am. Our next question comes from the line of Jamie Cook with Credit Suisse. Please go ahead.

Good morning, guys. I guess my first question, is there any way you guys can help us quantify how much the bad weather impacted your margins on the electric power side this quarter just so we can get a feel for how margins are trending outside of, one-time issues, I guess, or weather issues?

Jamie, we looked at that and that's really -- it's tough to quantify the weather because if you just look at the South central U.S. or central Midwest area, there was a big slice of area where there were record rainfall levels through that geographic area. It was kind of difficult to do that. What we did was we just took the operating unit that was the most impacted by the weather, which was the one here in Texas, and if you subtract out that unit out of both periods --

Okay.

-- our margins would have actually have increased slightly rather than decreasing slightly. So it had a pretty material impact. And that's about as much detail as we can get into when we're trying to analyze the effects of the weather because it has such a different effect on so many jobs across the central U.S.

Okay. And just as a follow-up question, there's been, I guess, more recently, some controversy on what's going on in terms of transmission spend. You guys, obviously, this conference call seems much more optimistic but then you had another company, General Cable that reported some unfavorable results, and at the same time , hey suggested that they're seeing a pushout in transmission projects from the second half of 2007 to, I think they said 2008. I'm just trying to reconcile the two. I mean, outside of the one in Southern California, which I think you guys have been pretty vocal on, is there any -- have you gone back and checked with the field guys to see if there's anything else out there? What are the things that -- should we be concerned that this is an indicator of major

Well first of all, we know that there are going to be project delays, it's just the nature of the industry. So it wouldn't surprise us if there are project delays. But yes, we had a number of calls from investors yesterday inquiring to what projects were being delayed, and we did some homework and the only project that we can find that has been delayed is the Southern California Edison project because of the Arizona Public Service Commission rejecting their permit, and we, as of yesterday, they're going ahead with the other two-thirds of that project, and we wouldn't find any other project that we're tracking that has been delayed. All those projects that we're talking about are 2008 starts, not 2007 starts. And here's the issue, though, too. They could be tracking different projects than we're tracking. They might even be talking about projects that are under sea projects. They do a lot of cable I know for underwater projects. We typically aren't involved in those kind of projects, we wouldn't know if those have been delayed or not. John, do you have anything to add to that?

Jamie, one of the other things, as we were doing our homework, we were talking to some of our customers and one customer in particular, where we have a large transmission project going on, they're actually talking about accelerating their transmission span. So right now, we're only seeing positive effects, not any negatives.

All right. Fantastic. Just one follow-up, James, not to push you too much on the margin front but, these are, I would consider these good times, at some point we can surpass your 9 to 12% profit margin, how far away are we in terms of getting to the nine to 12% operating margin range. If you could give us any color on that, that would be helpful.

I think that the electric utility group is probably in that range now, telecom is in that range and we have to -- before we get into that range. Of course we could get there increasing the electric utility margins or increasing the utility margin above those ranges which has happen in the past. So we're thinking that '08-'09 will probably be some very good times for us and we should be in those ranges at that time.

All right. Thank you. I'll get back in queue.

Thank you, ma'am. Our next question comes from the line of Mark Hughes with SunTrust. Please go ahead.

Thank you very much. Any effect from the volatility in housing construction, extending networks into new subdivisions, that activity slowed, did that affect you at all?

Yes, it affects us some. We do quite a bit of that work. That effect has been ongoing for the last couple of years really, 18 months to two years. Denver's been particularly hard hit. Houston has been affected by it as well as California has been affected by it. But that's kind of -- it's been an effect for quite some time for us. Our total, back when we were doing a lot of that work probably didn't amount to more than maybe 3% of our revenues.

Right.

And probably we're doing half of that now, maybe 1.5% of our revenues are related to new housing. And most of that is here in Texas, but some of it's in Colorado as well. Okay. So separate already from that, it's kind of built in. Most of those have reverted back to maintenance on the distribution system. We really didn't lose too many crews because of that. But certainly housing starts has slowed a lot, and but it's been an effect for quite some time for us.

Right, got you. Then G&A was pretty lean this quarter, I don't know if you commented on this, but should we expect that to carry over into subsequent quarters or should that maybe tick back up a little bit?

I expect that it may tick up a little bit. But not a whole lot. I mean, we're not forecasting any major increases in it. I just expect that it will gradually climb. I don't think it's going to climb as a percentage of revenues, though.

Got you. Then one final question, the backlog in telco and cable up 23%, that's pretty good stuff. Do you sense any kind of broader changes? Is this -- was this just a very good quarter for you or do you sense a little more momentum developing there?

I think that first of all, the big impact is the wireless group is back on track. They've been delayed since the third quarter of last year, spending has been down because mergers in that industry as well as some changes to fourth generation technologies. We renewed the Ericsson contract on that side, we got the new Nokia contract so wireless spending overall as an industry I think's going to pick up and our share because of the new contracts is going to increase as well. That's the big thing. But AT&T contracts continue to flow and they're not yet, I don't think, up to speed on their builds. So I would expect some initial momentum from AT&T, Verizon' probably at a run rate revenue base now, they probably won't -- their revenues probably won't increase that much for us over the next year or so.

Okay. Thank you.

Thank you, sir. Our next question comes from the line of Jeffrey Beach with Stifel Nicolaus. Please go ahead.

Good morning, good quarter. I don't believe yet unless I missed it you've given us a rough breakdown of the backlog. Can you do that?

Sure. Backlog on the electric and gas utility side is $1.132 billion , on the telecom and cable side, $274 million, on the ancillary side, it's about $99

All right. Thanks. And just to help us gauge again a little better the second quarter results, trying to assess the impact of this bad weather on the company, you had cited the results would have been different without this Texas unit. Can you give us just a general sense as to the -- what happened with the revenues in your Texas unit and an idea of the operating income?

Boy, I don't have those right at my fingertips, but we don't typically talk about individual operating unit results or give out margins or revenues or anything on individual operating units.

Well, were the revenues and operating income off significantly?

Yes, they were. The rain does two things, one it affects revenues in that you're not working typically in the rain unless it's an emergency situation. But you're also impacted after the rain because you're then working in mud and environments that are not as productive as otherwise. The Texas operating unit's a great unit for us, one of our most consistent producers. James just threw that out to try to show that Texas was the most impacted by the rain, and that we would have had increased profitability if we hadn't had all of that rain and mud. For the second quarter.

And just as -- associated with that, can you just give a ballpark guess as to your revenues in Texas and I think Oklahoma may have been as bad or worse as Texas, can you give just a guess as to how much revenues you do in those two states total company?

Well, in Texas probably 60 to $75 million in range. Oklahoma, probably another 15 million. John, would you confirm those?

Probably so. And then we have other operating units that had portions of their operations that was affected, that's more difficult to try to pinpoint. So you're really talking about multiple units. But one unit is in total where the others are part.

All right. Thank you very much.

You're welcome.

Thank you, sir. Our next question comes from the line of Brent Thielman with D.A. Davidson.

Good morning, guys. QUick question: on the 17 projects you mentioned there, I'm just sort of curious. To what extent do those projects rely on the construction of new power generation, versus just grid capacity constraints.

Wow, you know. I've never looked at it in that regard. I might have to do a little homework on that. If I was going to guess, I'd probably say 50/50 right now.

Some of that related to new wind farm projects that are being built at this time. I would have guessed you're probably right, maybe half of them.

there's so many of them that are involved with the reliability standards going in because of the weakness of the grid and the southwestern part of the United States and the northeast, John. , so having a lot of detail, I would say probably

Okay. That's great. Thanks, guys.

I think also you're going to see your momentum pick up on reliability side as well as the RTOs are really looking at operations. Reliability is really becoming a huge issue in our country.

Sure. Thank you.

Thank you, sir. Our next question is a follow-up from the line of Curt Woodworth.

Two quick questions. One on the issue of reliability. It's been four years since the blackout, and some of the standards were somewhat telecast before the energy policy act went into place, so, I mean, is your sense from talking to the utility that they still have a lot to do here to get reliability up to the standards in place, you know, or do you think, you know, kind of what stage do you think we're in, in terms of this reliability upgrade that's obviously been mandated?

Well, utilities are somewhat concerned about these reliability standards. Most will say, well, they're in compliance, but I think where we're going to see an increase in revenue directed from these new rules is in maintenance work. I think it will encourage the utilities to continue to improve and spend more money on their maintenance programs than they have in the past, even after the -- this building of transmission lines has passed, they're going to have to do more maintenance going forward. This is probably just the beginning of that phase of it, but most utilities, I think, are somewhat comfortable that they're in compliance at this time, but they're nervous that they won't be in compliance going forward.

Got you. Then on these five projects that sort of near term you're targeting and you've won three -- you commented that the revenue potential would be less than 10% of the revenue base of the company, so you know, call it $240 million potential, should we assume, then that if you were to win all five that the backlog impact would then statistically be a little bit below that number in terms of the 12-month revenue opportunity for you?

The backlog would probably match the percentage of revenues very closely. Those projects are spread out over time, and some would be starting in early '08, some will start in late '08, so it will vary somewhat, but, yes, they'll make up 8 to 10% of our backlog. We measure backlog for a 12-month period at this time.

Right. So would -- does it go into the backlog when you win the contract or when you actually start the work?

Goes into backlog when we sign the contract.

When you sign it. Okay.

But we only include it for the 12-month period. Not starting until the mid to later summer of '08. There's nothing in backlog for Allegheny right now.

Right.

When we get into the third quarter, there will only really be one quarter of Allegheny in backlog.

It will be the start-up phase of that project as well.

Right.

Could you quantify the revenue opportunity there?

We just said that there were two contracts. I mean, we don't typically disclose contract values, but we said two contracts awarded, that total 4240 million.

After closing.

After the close of the quarter.

Okay. Great. Thanks.

I think we have time for maybe one more question.

yes, thank you, sir. Our final question comes from the line of [Tejira Asphalt]. Please go ahead, ma'am.

Just following up on the -- regulatory environment, seems like -- I was on the -- the other day. Seems like everyone is ramping up their wind power plans, and it seems like when I talked to Edison electric and FERC that they're more positive that these projects will go ahead at a faster pace. I would like to know what your leverage would be versus some of your competitors in terms of these projects versus some of the other large projects.

Certainly. Every time they build a wind farm, they need our part of the work typically, although we have built entire wind farms, including the erecting of the wind generators, but typically the parts of the project that we get are the gathering of the electricity from the individual generators, the substation that supplies the power into the transmission line, and the transmission line that goes from the wind farm to the load, to the city or wherever the load might be. So we have capability of doing anything in any wind farm anywhere in the United States or North America. And we have the capacity to do these lines in a very short period of time. Very often what happens, these are private investors, investing in these wind farms, and they have -- they want their transmission lines built just in time, and, of course, we have the resources to build that line in a very short period of time. It gives aus tremendous advantage over our competitors.

Just one last small follow-up to that. When you usually bid on these projects, let's say the larger wind farm projects, how many competitors are you typically seeing bidding on these projects as well?

It it varies. It varies all over the country, depending on how many local contractors there are that have capabilities, and it depends on what part of the project you're bidding on. If you're bidding on the erection of the generators and the powers, you might have five or six bidders. If you're bidding on the gathering what we call the gathering lines or the distribution lines from the windmills to the substation, you might also see five or six bidders. If you're bidding on the transmission line, most times you're seeing maybe three, maybe four bidders. We're also seeing some of the larger developers now are starting to talk to us about taking over their operation. So I think we're going to start seeing lot more negotiated project on the wind side.

okay. , so I mean, your pricing power versus wind power project you might have done in the past seals like it could be fairly

We believe so.

Thank you.

You're welcome.

And, Mr. Colson, there are no further questions. You may continue.

I'd just like to thank you all again for your participation in our second quarter conference call. We appreciate your questions and ongoing interest in Quanta. Good-bye for now.

Ladies and gentlemen, this concludes the Quanta Services second quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3000 and enter passcode 11094322. Once again, if you would like to listen to a replay of today's conference please dial 303-590-3000, and enter passcode 11094322. Thank you for using AT&T teleconferencing. You may now disconnect.