Quanta Services Inc (PWR) 2007 Q3 法說會逐字稿

Thank you for standing by and welcome to the Quanta third quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode and following the presentation the conference will be open for questions. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today, Thursday, November 8, 2007. I'd now like to turn the conference over to Mr. Ken Dennard, DRG&E. Mr. Dennard, please go ahead.

Thank you, [Gentry], and welcome everyone to Quanta Services conference call to review 2007 third quarter results.

Before I turn the call over to management, I have the normal housekeeping details to run through. If you would like to be on the e-mail or fax distribution list to receive future press 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 at DRG&E, 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 to the investors center presentation section of the website. In addition, there is a telephonic recorded instant replay that will be available for the next seven days, 24 hours a day. The access is in the press release, but it is 303-590-3000, using the passcode 11094322.

Also today, please remember that information reported on this call speaks only as of today, November 8, 2007, and, therefore, you are advised that any 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 under the Safe Harbor from 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. Also growth in particular markets, Quanta's strategies and plans, anticipated future projects, expected benefits, from the merger with InfraSource Services and other statements reflecting Quanta's expectations, intentions, assumptions or beliefs about future events or performance, or that do not solely relate to historical or current facts.

Actual results may differ materially from those expected or implied as forward-looking statements, and management cautions that you should not place undue reliance on these forward-looking statements. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict or beyond Quanta's control.

For additional information concerning some of the risks, uncertainties and assumptions that could affect these forward-looking statements, please refer to the Company's annual report on Form 10-K for the year ended December 31, 2006, its quarterly reports on Form 10-Q for the quarters ended March 31, 2007 and June 30, 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.

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

Good morning, everyone. To start the call this morning, I will provide a general overview of the period, 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, and then James Haddox, our Chief Financial Officer, will review the quarter's financial results. John Wilson, the President of Electric Power and Gas, is present for questions. After our prepared remarks we will open the call for questions.

One of the major events of the quarter was the closing of the InfraSource acquisition. The response to this acquisition has been very positive and we believe that the addition of the InfraSource resources strengthens our position as a leading provider of infrastructure services. The acquisition provides Quanta with expanded tools and resources to build the infrastructure required to meet the growing demand for electric power, gas and telecommunications services.

Integration of the InfraSource operation is progressing nicely and on the anticipated schedule. The synergies we expected are there and are being captured. In particular, we are integrating corporate functions ranging from bidding, marketing and contract performance, information technology, HR, business development, accounting and legal functions.

As we integrate the financial reporting of the two companies, it is logical to change how we discuss certain measures of our performance, specifically, our revenue breakout and backlog. We believe this provides additional transparency into our operations in more detail regarding the strength of our services to certain industries. From this point forward, I will evaluate all revenues based on the type of work performed. Previously, I have dissected revenues by type of customer. James will discuss the backlog changes during his remarks.

To give you some color on our third quarter 2007, pro forma revenues were approximately $818 million. We have classified them by type of work. Approximately 55% of pro forma revenues were from Electric Power Services. This includes revenues from energized and emergency restoration services. Approximately 16% of our pro forma revenues were from Natural Gas Services, including pipeline integrity.

Approximately 19% of pro forma revenues from Telecommunications and Cable Services, including traditional wire line maintenance and fiber to the home installation, as well as dark fiber leasing. Approximately 10% from ancillary services such as horizontal directional drilling and commercial and industrial wiring.

Our largest customer for the quarter made up approximately 4.5% of our pro forma revenues. Our top 10 customers for the quarter equaled approximately 30% of our total pro forma revenues, and our top 20 customers made up approximately 43% of pro forma revenues.

At the end of the third quarter 2007, our employee count was 15,672, 4,246 of these employees were from the InfraSource acquisition.

Now looking at our electric power and gas operations, excluding revenues from emergency restoration work from all periods, revenues from Quanta's legacy electric power operations increased 20% compared to the third quarter of 2006. Several recent developments are spurring higher demand for our services and contribute to the continued strength of our electric power operations.

First, our customers are continuing to spend on their core T&D assets. Second, power consumption continues to increase and demand is not expected to subside. According to a report last month by the National Electric Reliability Council, demand for electricity in the United States is forecasted to increase by almost 18% over the next 10 years. The same report states electricity usage in the United States is projected to grow more than twice as fast as committed resources over the next 10 years.

Third, as part of its responsibility assigned by the Energy Policy Act, the Department of Energy designated two additional corridors of national interest last month. The two areas are the Mid-Atlantic area of national interest electric transmission corridor and the Southwest area of national interest electric transmission corridor.

These include two of the nation's most populated regions with major congestion issues, the West and the Northeast. The corridors are in effect for 12 years to give regional transmission owners, utilities time to evaluate, plan and build additional transmission infrastructure.

Fourth, the environment is a top priority. The environment remains a critical consideration as we to work to improve reliability and ensure power delivery. Based upon government reports electric power accounts for 22% of greenhouse gases, surpassed only by transportation at 41%, and followed closely by the industrial segment at 21%.

More than 20 states have renewable energy mandates. The House recently passed legislation that requires investor-owned utilities to generate at least 15% of power from renewable energy sources. These new plans will require new transmission lines and substations, as well as expansion of the grid.

Quanta upholds its customers commitments to the environment and strategically works to minimize the impact of construction on habitat. In fact, we have recently introduced experimental hybrid trucks into our fleet. These trucks use up to 40% less fuel than traditional trucks, and, of course, reduce tailpipe emissions.

Fifth. We are approaching an election year. I'm often asked what impact political changes may potentially have on the existing Energy Policy Act and the buildout of the transmission grid.

While there may be policy changes with a new administration, we do not believe that it will slow down the buildout and expansion of the nation's transmission grid. Reliability of the grid must be addressed. Also, more renewable energy means more transmission lines and substations.

These are just a few of the items influencing our business and the industries we serve. When these recent developments are combined with other long-term situations like an aging work force and deteriorating transmission grid, utilities are moving quickly to make sure that they have access to the resources required to meet reliability standards, keep cheap, reliable power flowing to their customers.

One example of this is the memorandum of understanding we announced with Northeast Utilities earlier this week. The MOU establishes the general framework for a contract under which Quanta will provide transmission infrastructure services related to end use transmission buildout. The contract intended by the MOU, which is expected to be negotiated and finalized by the end of the year, will be valued at approximately $750 million starting in 2008 and will run through 2013.

This arrangement builds on the ongoing success of our Middletown-Norwalk project where we are providing transmission construction services across 45 miles in Connecticut for Northeast Utilities. The work contemplated under the MOU is not yet in backlog numbers that James will discuss, and has not been included as one of the five key transmission projects that we have provided updates on in our previous calls.

I would like to provide an update on those projects now. As we stated in our last conference call, we have secured a contract to install the transmission infrastructure for Allegheny Energy's 210-mile, 500,000-volt trans-Allegheny interstate line, also known as the Trail Project. Construction is projected to begin late fall of 2008.

As announced in our first quarter call, the ATC project in the 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. We have also begun construction on the 75-mile long, 500,000-volt Tehachapi wind power project that was moved ahead of the 250-mile, 500,000-volt project for Southern California Edison called Palo Verde to [Devers] line. This project continues to be delayed due to permits for the State of Arizona.

The 190-mile, 500,000-volt AltaLink project in Canada has been postponed for a number of reasons, one of which is the consideration of rerouting the line which would entail new permitting which could take up to one or two years.

The other major projects mentioned in the last conference call are, as far as we know, still on schedule to bid over the next several quarters. Gulf Coast residents were relieved that the 2007 hurricane season was mild and minimal damage occurred. For the second year in a row, we had little or no hurricane work. Our gas operations have been minimally impacted by the decline in new home construction. However, our challenges to improve the margins in this division and reducing the number of low margin contracts is part of that process.

In conclusion, we are very pleased with our results for the third quarter. The integration of InfraSource is going as planned. Demand for our services continues to increase and customers in all of the industries we serve are seeking us as a strategic service provider. We believe we are well poised to build the infrastructure that will deliver the next generation of power delivery, communications and entertainment.

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. The performance of our telecommunications and broadband cable operations in the third quarter continue the pattern of revenue growth and margin improvement driven primarily by our outside plan operations, further strengthened by our focus on cost controls and margin optimization. We have seen this trend of revenue growth and margin expansion each quarter since 2004, if we exclude emergency restoration services from all the periods.

All the industry segments that are telecom and cable operations serve continue to be financially stable with strong programs that will enhance their networks. Our customers providing telephone, Internet, wireless, cable and convergent services are focused on expansion of infrastructure and service offerings to meet increased demand and respond to competitive pressures.

For the third quarter of 2007, revenues from our telecom cable operations increased almost 22% compared to the third quarter of 2006. This does not include the addition of revenues from our newly acquired dark fiber operations or other operations acquired from the merger with InfraSource.

Our growth in backlog continues to be robust and reflects both the health of the markets we serve and the ability of our operating units to capture our share of these opportunities while continuing to meet our margin expectations. The 12-month backlog for the legacy Quanta telecom and cable operations increased almost 18% compared to backlog at the end of the second quarter.

Before I update you on the various areas of our telecom operations, I would like to speak briefly about our new dark fiber services. As you are probably aware, as part of the InfraSource acquisition we acquired Sunesys, headquartered in the Philadelphia area, and engaged in the business of leasing dark fiber assets to primarily enterprise and governmental entities.

This business is also experiencing vertical market growth, particularly in the education and healthcare markets where secure, high speed networks are important. We are excited to add this dimension to our telecom service offerings and are committed to make the investments in management focus and capital to grow and expand this opportunity to enhance shareholder value. We intend to extend the reach of networks in the markets we currently serve, as well as continue to explore and evaluate new market opportunities.

In the third quarter, our outside plant operations experienced growth primarily through fiber installation and traditional wireline service agreements. To date, more than 2% of North American households have direct connections to high speed fiber networks. We do not see an end in sight to this growth. According to the Fiber To the Home Council the annual rate of growth in fiber to the home connections continues to increase and now exceeds 100%.

Verizon is leading the market with two-thirds of total installations and is seeing its FTTP investment start to pay off. Just last week Verizon announced it secured 202,000 new files TV subscribers in the third quarter taking the total to 717,000. It also added 229,000 files Internet subscribers. We continue to support Verizon's buildout of the FiOS network across the country with an emphasis in the Southeast, Northeast, Western and Northwestern U.S.

In all, Verizon offers FiOS TV in 12 states. In the third quarter it expanded FiOS service delivery in all 12 of those states.

Our work in support of AT&T's Project Lightspeed and U-verse services expanded beyond the initial markets this quarter to include Texas and Missouri. Our revenues from AT&T in the Western U.S. more than doubled in the third quarter, compared to the second quarter of 2007, as our support of AT&T's Fiber To the Node initiative continues to ramp up.

AT&T continues to accelerate its spending to support its estimate of passing 17 million homes with U-verse services by the end of 2008. Last month, the company announced it plans to invest nearly $1.25 billion in its Texas network. The investment will support wireless network enhancements, expansion of U-verse TV and Internet services and the maintenance upgrade and installation of fiber optic lines, central offices and other network facilities.

AT&T is also investing more than $1.1 billion in networks in Ohio, Louisiana, New York, Connecticut, Maine, North Carolina, Florida and Minnesota. And just yesterday, AT&T announced that it is increasing its projected 2008 spending for its U-verse network by $500 million to total between $4.5 billion and $5 billion through the end of 2008.

The growing role of municipalities is evident in that fact that while Verizon holds two-thirds of the total installations, 369 other service providers make up the remaining third of the market. This according to the Fiber To the Home Council. We continue to be actively engaged in the bidding and proposal process with municipalities throughout the nation. Also we continue construction of the fiber to the home system in North Carolina as part of the municipal contract that we announced earlier this year.

In his opening remarks, John discussed the decline in housing starts, which in September was largely a decline in new construction of multi-dwelling units or MDUs. I wanted to point out this does not have an impact on our installation of FTTH infrastructure in MDUs since the vast majority of our revenues in this area are from installation in these areas into existing MDUs.

We expect this to continue to be a strong area of growth as telecom companies focus on increasing subscriber numbers. MDUs are an increasingly competitive area for telecoms and cable operators. Last week the FCC adopted an order that bans cable operators from enforcing or entering into exclusive contracts with the owners of MDUs. This new order expands competition to give apartment dwellers more choice.

Our cable operations continue to work under relatively new contracts with Time Warner, Comcast and other service providers in the Mid-Atlantic, Southeastern U.S., and Southern California. Our revenues from this market are increasing as we support our customers' efforts to meet the challenges to their market share being mounted by the FTTX initiatives of the telecoms and municipalities.

Cable companies' efforts to remain competitive are being further bolstered by new legislation. Last week the Federal Communications Commission adopted an order to extend many of the same video franchising rules to incumbent cable operators that it granted last year to new video providers such as AT&T and Verizon. The new rules essentially establish a 90-day time frame for local franchise authorities to approve franchise applications by providers with existing access to rights of way, and it gives a six-month time frame for new entrants.

We are experiencing stronger spending from our wireless customers as they focus on expanding their networks and enhancing their systems to support that new next generation technologies. After a weak period of infrastructure deployment by the carriers, we began in the third quarter to see signs of recovery and spending in this segment, and we are projecting a return to historical levels in the fourth quarter.

In 2008, we will combine our operating units that primarily serve the wireless market into one operating unit, which will be named and branded Quanta Wireless Solutions. We expect this to streamline, integrate and improve our service delivery capabilities to better serve our wireless customers. Our plan remains to restructure this area of our operations to better collaborate and maximize efficiencies.

We are proud of our initiatives and the results of our efforts to strengthen our telecom operations. From our unit management to our installation crews, Quanta's reputation in the industry is strong. We continue to be known for our hard work, our commitment to our customers, and the ability to get the job done safely and efficiently. Now I'll turn the call over to James Haddox for a review of our financial results.

Thanks, Ken. Good morning, everyone. Our reported results this quarter include the effects of several unusual items. As a result of these items, our operating results for the quarter are going to be somewhat cumbersome to discuss. The unusual items include, first of all, one month's operations for InfraSource services, a company we acquired on August 30, 2007.

Second, approximately $1.4 million pre-tax and out of pocket integration costs incurred during the quarter. Third, based on our preliminary allocation of the purchase price for InfraSource, we have allocated approximately $165 million to amortizable intangibles, the majority of which is allocated to customer relationships and backlog. Our amortization of intangible assets of InfraSource totaled approximately $4.2 million pre-tax dollars for the month of September.

Fourth, the sale of a small operating unit that specialized in vegetation management, primarily for our electric power customers. This sale was accounted for as a discontinued operation this quarter and resulted in a gain, net of tax, of $2.3 million during the third quarter. As a result of this unit being accounted for as a discontinued operation for all prior periods, its results of operations for all prior periods have been reclassed from each individual line in our historical income statements down to the discontinued operation line.

Therefore, the discussions related to comparative operating results for all periods will exclude the results of the discontinued operation. And finally, fifth, we recorded the reversal of approximately $17.9 million in tax contingency reserves due to the expiration of the statutes of limitations related to certain federal and state tax returns during the quarter.

Having said all that, today we announced revenues of $655.9 million for the third quarter, compared to $523.6 million in the prior year's third quarter. Former InfraSource operating units earned approximately $90.8 million of this quarter's as reported revenues. Due to another very quiet hurricane season, this year's quarter included only $13 million in emergency restoration revenues compared to $17 million in last year's third quarter. Excluding emergency restoration revenues from both periods, and InfraSource's revenues for September, our revenues would have grown approximately 9% in 3Q '07 versus 3Q '06.

Our revenues of $565 million for 3Q '07, excluding InfraSource, were slightly lower than our guidance due to lower than expected emergency restoration work, lower productivity in our operations due to adverse weather conditions in the south central U.S. in July and August, lower wireless telecom revenues due to delayed project starts, and no revenues being derived from our discontinued operation.

Before I discuss revenues during the quarter by industry served, I want to point out that we have changed our methodology for compiling revenue by industry. In the past, we have discussed revenues by type of customer. However, we will discuss revenue by type of work performed.

For example, in the past we may have performed certain telecom work for an electric utility or performed electric work for an ancillary customer. In the past, the work was classified by type of customer. Now it will be classified by type of work performed.

Since InfraSource was a part of Quanta for only one month during the third quarter, we believe our discussion of growth by type of service performed should focus on Quanta's legacy companies for the third quarter. Therefore, the following revenue discussion relates only to Quanta operating units for the full quarter.

Revenues from electric and gas utilities services increased by approximately $37 million, or 11%. Telecom and cable service revenues increased by approximately $16 million, or 17%, and ancillary service revenues decreased by approximately $12 million, or 14%. As I mentioned in the past, these allocations of revenues are not precise because in many cases we are performing several types of service on one job.

Our gross margins were 17.5% for this quarter compared to 15.8% during last year's third quarter. While InfraSource's margins for September were slightly diluted to margins for the quarter, the effect was immaterial to our overall margins. Our margins, excluding the results of InfraSource, improved in each of our service types, electric and gas, telecom and ancillary.

While we continue to experience the adverse effects on productivity in our South Central markets due to excessive rain during July and August, these effects were more than offset by the positive impact of good weather and productivity in the Northeast. Our G&A expenses were $59.8 million in the third quarter of 2007 compared to $44.8 million in the third quarter of 2006, and $47.3 million in the second quarter of 2007.

The increase was due primarily to the inclusion of approximately $7.4 million of G&A expenses associated with InfraSource's operations for the month of September, $1.4 million in integration costs, and the incurrence of higher than usual legal fees during the quarter. G&A expenses included $2.5 million in non-cash compensation expenses for the third quarter of 2007 and approximately $900,000 in losses from equipment sales. G&A expenses in 3Q '07 increased to 9.1% of revenues versus 8.5% in 3Q '06.

EBITDA, which is defined as operating income plus amortization, increased approximately $17.3 million or 45%. EBITDA margins were 8.4% and were up 117 basis points quarter-over-quarter. The calculation of EBITDA is set forth in the financial news section of our website at www. quantaservices.com.

We believe that EBITDA will become a more important metric in the future as amortization expenses associated with the InfraSource acquisition is expected to become a more material component of our income statement.

Interest expense decreased from $5.7 million to $5.2 million primarily due to the repayment of the remaining $33.3 million balance of our 4.0% converts on July 2, 2007, and lower commitment fees on our credit facility. Interest income increased to $5.4 million in the third quarter of '07 from $4.3 million in the third quarter of '06 as a result of higher cash balances and higher interest rates. Our effective tax rate during the quarter was 5.9%. This was lower than we expected due to the previously discussed reversal of tax contingency reserves that were no longer required. Our effective tax rate on a normalized basis would have been 41.7%.

Our net income from continuing operations for the quarter was $49.3 million, resulting in earnings per diluted share from continuing operations of $0.30 compared to net income of $22.4 million, or $0.17 per share in the third quarter of 2006. The reversal of the tax contingency reserves of $17.9 million contributed $0.11 to our diluted EPS, while amortization attributable to InfraSource adversely affected our results by $4.2 million pre-tax or approximately $2.6 million after tax, or approximately $0.02.

And integration costs adversely affected our results by approximately $1.4 million pre-tax or $850,000 after tax, or approximately $0.01 per share.

Cash flow from operations totaled approximately $38 million for the quarter. Cash flow from operations less capital expenditures of $8.5 million net of proceeds resulted in approximately $29.5 million in free cash flow for the quarter. EBITDA was $68.3 million for the third quarter of 2007, representing an increase of 36% over EBITDA in 2006's third quarter. For the first nine months of 2007, EBITDA was $159.9 million, compared to $125.9 million for the first nine months of 2006. A calculation of this non-GAAP measure can be found in the financial news section of our website at the address I just quoted a second ago.

We have also posted to our website a calculation of adjusted EBITDA which adds back to EBITDA merger related costs and non-cash compensation expense. Adjusted EBITDA was $71.8 million and $167.4 million for the three and nine months ended September 30, 2007.

Turning to backlog, this quarter we will begin expanding our disclosure related to backlog by adding a discussion of total backlog to our normal discussion of 12-month backlog. Since this is the first time we have discussed total backlog, I will take a moment to provide you with the definition of total backlog. Total backlog includes the amount of revenues we expect to derive in the future from signed contracts for project work and master service agreements.

Backlog for project work includes the remaining revenues to be earned under lump sum projects and our estimate of the remaining revenues to be earned under T&E unit price contracts. Backlog for master service agreements includes our estimate of future billings based on our knowledge of our customers' spending patterns under T&E and unit price arrangements through the end of the initial contract periods and through the end of any renewal periods provided by the contract for which we reasonably expect the contract to continue.

Our total backlog of work is approximately $3.792 billion. Unfortunately, we can't provide you with any comparative total backlog data since this is the first quarter Quanta has calculated total backlog.

This quarter's backlog includes anticipated revenues from the recently announced Allegheny and Tehachapi transmission contracts, but does not include any backlog related to the recently announced MOU with Northeast Utilities valued at approximately $750 million. This will be include in backlog once the final contract is signed.

Our 12-month backlog currently stands at $2.217 billion. Once again, we can't give you comparative 12-month backlog as of September 30, 2006 or June 30, 2007, because InfraSource hasn't traditionally tracked 12-month backlog. However, 12-month backlog for the historical Quanta operating units increased from $1.505 billion at June 30, 2007 to $1.613 billion at September 30, 2007, an increased $108 million or approximately 7%, with $62 million of the increase being attributed to Quanta's electric and gas units, and $49 million being attributed to Quanta's telecom units, primarily for FTTX work.

Our day sales outstanding, which we calculate by using the sum of current accounts receivable plus costs and earnings in excess of billings plus billings in excess of costs divided by average pro forma revenues per day during the quarter, were 83 days at September 30, 2007 versus 84 days at September 30, 2006.

In the third quarter, we amended our credit facility and expanded our senior secured revolving credit facility to $475 million from $300 million. The amendment also extended the maturity date by more than one year to September 19, 2012. This amendment provides increased flexibility for the Company going forward. The amended facility provides opportunities for lower pricing, more flexible share and dividend repurchase options, and increased investment capabilities.

At quarter end, we had $371 million in cash on our balance sheet. We had approximately $172 million in letters of credit outstanding, primarily to secure our insurance program. We had no borrowings under our $475 million revolving credit facility, other than for the letters of credits just mentioned leaving us with approximately $303 million in available borrowing capacity.

Concerning our outlook for the future, our estimate of revenues for the fourth quarter of 2007 is from $810 million to $840 million. Our revenue forecast for 4Q '07 includes about $10 million of storm restoration work. Revenues for the fourth quarter of '06 included approximately $62 million in storm restoration revenues. Our estimate for 4Q '07 EPS based on revenues of between $810 million and $840 million is from $0.11 to $0.12 per diluted share on a GAAP basis.

Our GAAP EPS forecast includes an estimate of $15.5 million for amortization and non-cash compensation expenses. Excluding these expenses, our cash EPS for the quarter is expected to be $0.16 to $0.17. For additional guidance, we are currently projecting our tax rate for the fourth quarter to be approximately 38%. We expect our diluted share count to be about 201 million shares during the fourth quarter, which includes the shares underlying our convertible subordinated notes and the shares issued in the InfraSource acquisition. The net income add back associated with the converted shares is approximately $3.2 million per quarter.

We expect CapEx for all of '07 to be approximately $110 million. A higher CapEx level than previously discussed is primarily related to InfraSource operations, particularly related to their fiber leasing operation.

As John said, we continue to be excited about the opportunities for revenue and margin growth in the industries we serve, especially with our enhanced geographical and service portfolio as a result of the InfraSource merger. That concludes our formal presentation and now we'll open the line for Q & A.

[Gentry]?

Yes, very good. Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. (OPERATOR INSTRUCTIONS) Our first question will come from the line of Jamie Cook of Credit Suisse. Please go ahead.

Hi, good morning, and congratulations.

Thank you.

I guess my first question on the guidance in the fourth quarter, the $0.16 and $0.17 in cash EPS. James, can you just sort of talk me through, one, are there any integration charges included in that number? And if so, what?

I guess just a follow-up on that question. If I just sort of back into what the implied margins are for this for Q4, it's a high 6%, 7% margin, which is comparable to sort of where you were last year.

So I'm just sort of wondering why we aren't seeing any, why there isn't any implied margin improvement year-over-year? Is it storm work, is it utilization of employees? If you could just sort of help me with that?

Yes. Sure, Jamie. The fourth quarter guidance we have given includes some integration costs, but not a significant difference between what we had in the third quarter. I would expect it is about the same as the integration costs we experienced in the third quarter. Margins are lower than we experienced in the third quarter, but that's normal because of traditional seasonal weather patterns.

I mean we are getting ready to go into the winter weather season. Last year's fourth quarter included $62 million of storm work, which came in December primarily. That's difficult to predict because if the weather's bad, that's bad for us. But if it's really bad it creates emergency restoration situations for us that carry higher margins than our other work traditionally carries.

We are not predicting a recurrence of last year's emergency restoration work so, therefore, you're going to see if that doesn't happen, you will see a margin differential between fourth quarter last year and fourth quarter of this year.

What about is there any margin deterioration as you integrate the acquisition, just ramping up the employees in terms of utilization? Anything like that that is impacting Q4?

Not material.

Not material?

No, I mean the integration costs that we've got are, like I said, about the same as the third quarter. InfraSource's margins are slightly diluted to our margins, as I said. They were slightly diluted for the quarter, but not materially.

So the primary difference is just storm work and then we just have some small integration charges?

Right.

Then, secondly, when you originally talked about this transaction, you talked about sort of $20 million in cost synergies, which to me seemed conservative based on, I don't know just as you walked us through that. As you look today or a couple of months into the acquisition how do you look at the $20 million in cost synergies? Do you think there is any potential upside as we move ahead here?

Jamie, as we said earlier, the $20 million was what we considered to be low hanging fruit and was a fairly easy number to calculate. Right now we are on a path, based on the things that we included in that calculation, we are on the same path to make the $18 million to $20 million in integration savings in '08.

I didn't see any difficulty with that number at all. The other synergies are a little more difficult to calculate. They come from equipment sharing, they come from increased penetration from customers, better bidding processes. So they are much more difficult to quantify, but we still feel that they are there.

Is there a possibility we could exceed the $18 million to $20 million based on what you are seeing today?

Yes. Yes. It is just difficult to give a number for it.

Okay, but it could be up, it's just we're too early on. And then lastly, historically, I mean, I'm assuming you are still assuming the next 12 months or so that sort of on a combined basis at least that 9% to 12% operating margin is still attainable for 2008? Without giving guidance based on what you are seeing today that is still an achievable goal?

Well, the 9% to 12% we have said is kind of an 18 to 24-month goal. Whether we could get to that level in '08 or not, we are not giving guidance for '08.

We think our margins will continue to improve as time goes on, especially when we start to capture some of the synergies and the demand from our customers for transmission services increases. It is just difficult to be precise as to what the actual margin expectation is for '08 at this point in time.

All right, I'll let somebody else ask a question. Thanks a lot.

Thank you. Our next question from the line of Sanjay Shrestha of Lazard Capital Markets. Please go ahead.

Good morning, guys. It's actually Graham in for Sanjay. How are you?

Fine, thanks.

Quick question, looking at bidding activity levels in the electric segment, can you just comment on the level of bidding activity versus this year versus last year?

I think the bidding activity is maybe up a little, but very similar to what it was at this time last year. There might have been a little slow down in the third quarter in bidding activity, but it is picking up again in the fourth quarter. So it's either the same or a little better than last year.

Okay, and then have you already seemed some of the synergies in terms, I know with the bidding, but in terms of the asset utilization now that you have had the InfraSource for two months now?

Yes, we have. We have, I think, over 200 pieces of equipment that we have identified to share among the various operating units. And several other things, as well.

So we are beginning to see some of those synergies. I know we have bid several projects utilizing the assets of InfraSource's operating units combined with our historic operating units.

Okay. Great. I'll jump back in queue. Thank you.

Thank you. Our next question from the line of Jeff Beach of Stifel Nicolaus.

Excuse me. Good morning, John and James.

Good morning.

I have two questions regarding spending trends with the electric utilities. The first one is just reflecting back on this large MOU, you just I guess reached agreement on, the motivation behind this, I'm guessing a little bit is concern about the capability ahead over the next several years by the private sector to do this work, and there is a move being contemplated here by utilities to package, bundle large amounts of transmission work over multiple years and hand out an award.

Is this something you see happening, and that we might see a lot more of this over the next 2008/2009 time period?

Yes, we are seeing a lot of utilities planning further ahead than they ever have. I guess there are two reasons for that. One, to lock in limited work force. There is going to be a shortage of skilled labor, we think, in late '08, '09, '10.

But also it can reduce their costs by enabling us with these longer term contracts and contracts awarded now to build a local work force and to train that work force, therefore, reducing some of the costs going forward. It is twofold, one, locking in short labor supply, but also enabling us to train a work force locally, which can reduce their costs.

All right. And second thing I get the most calls on is concerns that this weak housing is going to, I think, meaningfully lower the growth rate of spending by the electric utilities ahead.

Are you seeing that impact your amount of business available today? And what do you see and hear from the utilities that you are serving looking out to the 2008 CapEx budgets?

The trend we are talking about reduced housing started really back in 2005, and we have seen some reduction in the amount of work related to building new subdivisions and new houses, primarily related to joint trench activity. That joint trench activity is probably -- well, I know is less than 2% of our overall business, but it is affected somewhat by locality. Houston, thus far, has held up fairly well, where San Antonio and Austin have been down.

Denver was the first place that we noticed a downturn in the housing market back in 2005. So yes, there is a reduction in spending related to a new subdivision development and new housing. However, there is also increases in petroleum pipelines and so forth, gathering lines for specific petroleum fields that is increasing.

So we have pretty much been able to replace that revenue as time has gone on. And so far we haven't, we have just seen minimal impact. Also there is some trends going from construction to increased maintenance by the utilities on their distribution systems, which is a trend we think will continue.

All right. Thanks.

You are welcome.

Your next question comes from the line of Alex Rygiel of FBR Capital Markets.

Thank you. Good morning, gentlemen.

Good morning.

James, I don't believe you disclosed this. I'm not sure if you can. Do you have revenue mix by type of work in 2006 for the third quarter pro forma? The two entities?

Revenue mix for the third quarter by type for '06?

Right, just like you disclosed it this morning.

I don't think we have that, James.

No, I really don't have a good shot at that right now as far as specific numbers. Alex, because of the fact we changed it we are going back and trying to redo all of our previous years' numbers.

Great.

And I expect that we'll have more numbers that we can talk about once we scrub them down. But it is quite a process to go through to shift it from type of customer to type of work, especially for prior periods.

Sure. Do you have the pro forma '06 revenue excluding the divested operation?

I think I can give you an estimate, but, hold on just a second. Pro forma '06 revenues.

Do you have any other questions while he is looking that up?

I sure do. About what is your current annual run rate in revenue from Northeast Utilities today?

It's pretty significant because we have a major transmission project ongoing at the present time. So it's pretty significant and this contract will only enhance that.

So this contract, if we were to take the 750 and divide it by six years, that equals, obviously, about $125 million a year. Currently, you are running on an annual rate below that?

Year-to-date, we are approximately $85 million, $85 million to $90 million year-to-date for that entity.

Okay. And your 2008 CapEx guidance of $110 million? How much of that is targeted toward dark fiber?

Alex, did you say 2007 or 2008?

Sorry. 2008. Right. That is your guidance for --

The $110 million was the updated total CapEx forecast for '07.

Okay, and how much of that is going to be targeted towards dark fiber?

About $28 million.

How do you see that as you look out into '08? Increasing, decreasing or about the same?

I think it's going to be higher in '08 than it is '07 because of the new markets that they have moved in. I mean the $28 million number that I gave you is a number for only the four months. It's September through December for InfraSource for their dark fiber operations. So it's going to be a higher number. I would expect the dark fiber -- we are currently in our budgeting process, but I would expect dark fiber expenditures in '08 will be $50 million to $75 million. Is that right, Ken?

Yes, I would say $40 million to $75 million.

About how much in annual revenue are you doing with Verizon today, and a range is fine with me?

Alex, I don't have that at my fingertips. I would say $80 million to $100 million.

When you calculate your total backlog, what is the methodology you are using for future revenue from Verizon?

Typically, what we'll do if we are looking at total backlog we'll just go out a maximum of a year on those contracts after we have established through experience what the revenues in a particular market should bring us.

So if we are going into a new market we'll probably be extremely conservative in the backlog, maybe even down to zero, until we have done work there and see what it is going to bring us and then we'll go out no further than a year.

Okay, very good --

Alex, I think the answer to your question, and I'm hesitating a little bit, but I think the answer to your question is pro forma revenues for '06, excluding the discontinued operations and including InfraSource, is about $3,120,000,000 or so.

And the discontinued operation is not a big number. It's probably somewhere around $20 million a year.

Okay, very good. (OPERATOR INSTRUCTIONS) Our next question comes from the line of Steve Gambuzza with Longbow Capital.

Good morning. On the tax rate, 38% for Q4, is that the rate we should be using going forward?

No. I -- for going forward, we haven't given '08 guidance yet. But I mean we have been between 41% and 42%, around the 42% number.

The guidance for the fourth quarter is lower than it traditionally has been because we also will have a reversal of tax contingencies in the fourth quarter of this year for tax returns, particularly, mainly state tax returns where the statutes expired in October rather than in the third quarter.

Okay, and so that's essentially what accounts for the difference between the 38% and better than guidance and your kind of normal run rate of 40% to 42%. All right, great. Thanks a lot.

Thank you. Our next question comes from the line of Tahira Afzal of Keybanc Capital Markets.

Good morning, gentlemen.

Morning.

Just a couple of questions regarding your Northeast Utilities contract. Would you say those are the type of contracts that you would generally be seeing going forward? So not just one large contract, but something which is more regionally encompassed?

Yes, I think that is the trend. Utilities are more inclined to negotiate their larger contracts, again, locking in labor supply and, of course, reducing their costs by enabling us to project utilization of equipment and to develop and train a work force for that local area.

All right. If you look at the Northeast Utilities business you have been doing for (inaudible) this particular contract, what is the upside that you are seeing, implied margins for this contract versus the business you are doing right now?

We don't disclose margins on individual jobs. But having said that, the margins will be, in our opinion, similar to margins on other contracts. And those types in other areas.

But I mean, would you say that versus -- because you have essentially locked in your capacity in a tight market for six years. Would it be fair to say that the margins you are seeing for that locked in capacity would be higher than what you have been seeing from Northeast so far?

Again, I'm not going to comment on margins on an individual customer basis. But it enables us to reduce costs, both for the utility and, of course, for us, as well.

The $750 million is a minimum amount. There is other work there for that utility that we have the capability of doing, as well. That certainly does not lock in all of our capacity in that area at all.

But I mean, in terms of, let's say, your work force and I'm sure as you get such large contracts you are kind of rationalizing your work force. How much of your work force do you think you will be approximately using for just this contract?

Less than, oh, probably less than 10%. Probably 5%. 5% to 10%, probably.

I guess I can maybe try to ask this margin question another way. When you look at your 2008, 2009, so your 18 to 24-month operating goal of 9% to 12%, would you say that the contract you have just gotten would sort of meet up with that margin goal in mind? Or do you think you know it would be sort of what it is right now?

Again, I'm not going to talk about margins on individual projects or for individual customers. John WIlson has whispered in my ear it is more like 2% to 3% of the work force, rather than the 5% to 10% that I talked about earlier.

Okay, so how many of these do you think you can handle and manage at the same time?

I guess under those conditions about 50.

Okay. So I guess I'm not getting much on the margins from you guys, then. (laughter)

No, I don't think that's appropriate to discuss margins on individual contracts for individual customers. It's giving our competition way too much advantage.

You don't have any competition left now, I thought? (laughter)

Oh, yes, we still have competition out there.

Okay. So I'll just move on from the margin question then.

If I look at your fourth quarter, right, you had around, you are being conservative, is probably the right thing to do around your (inaudible) work that is around $50 million.

Is there anything else? I mean if I look back seasonality wise, even if I take out, let's say, $50 million from the fourth quarter of '06 I still end up with revenues which are kind of in line with the third quarter. Is there anything else in seasonality maybe perhaps with the addition of InfraSource that is impacting you?

No. It is just the seasonality. Like I said our margins are lower, as we mentioned earlier.

Our margins and revenues are lower typically when we are in a situation where it was raining, which is that we experienced in the South Central U.S. in July and August. So that impacted our margins and would continue to impact our margins nationwide as the winter weather moves in.

When you start getting into late November and December it is difficult to predict whether it is going to be rain, ice, snow or just whatever, and those kind of conditions cause our productivity to go down and our margins to go down.

The other thing is the holidays that impact the fourth quarter. If you look back in our history, the industry has been so robust that you haven't seen the normal seasonality that occurs in our business because we have had a very robust fourth quarter. Because just of the growth in the industries. In the past.

All right. Thank you, gentlemen. If you would please continue with your closing remarks.

Thank you all very much. We appreciate your interest in Quanta Services. And we continue to look forward to hearing you on the next call. Thank you very much.

Ladies and gentlemen, this does conclude our Quanta third quarter earnings conference call. Thank you for your participation. You may now disconnect.