Quanta Services Inc (PWR) 2009 Q1 法說會逐字稿

Welcome to the Quanta Services first quarter earnings conference call on May 6, 2009. After the presentation, there will be an opportunity to ask questions. (Operator Instructions) I will hand the conference over to Mr. Kip Rupp from DRG&E. Please go ahead, sir.

Thank you, Stacey. And welcome everyone to Quanta Services conference call to review 2009 first quarter results. Before I turn the call over to management, I have the normal housekeeping details to run through. If you'd like to be on the e-mail or fax distribution list to receive future press releases for Quanta or if you had any technical difficulty this morning and did not receive your e-mail for fax, please call our offices at DRG&E 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 Quanta's Website at quantaservices.com. In addition, there's a telephonic recorded instant replay that will available for the next seven days, 24 hours a day, that can be accessed, as forth in the press release by dialing 303-590-3030 and using the pass code 4064181#. Please remember that information reported on this call speaks only as of today, May 6, 2009 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 from liability established by the Private Securities Reform Act of 1995. These forward-looking statements include any 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. Forward-looking statements involve certain risks, uncertainties and assumptions that are difficult to predict or are beyond Quanta's control and actual results may differ materially from those expected or implied as forward-looking statements.

For additional information concerning some of the risks, uncertainties and assumptions that could affect our forward-looking statements, please refer to the Company's annual report on Form 10-K for the year ended December 31, 2008 and its other documents filed with the Securities and Exchange Commission, which may be obtained through the SEC's Website at SEC.gov. Management cautions that you should not place undue reliance on Quanta's forward-looking statements and Quanta does not undertake any obligation to update any forward-looking statements to reflect events or circumstances after this call. With that, I'd now like to turn the call to Mr. John Colson, Quanta's Chairman and CEO. John?

Thank you. Good morning, everyone. Welcome to Quanta Services first quarter conference call. To start the call this morning, I will provide a general overview of the quarter, insight on the impact of the current economic conditions, developments in the industries we serve and perspectives on emerging opportunities. My comments will be followed by an operational review by Jim O'Neil, President and Chief Operating Officer and a review of financial results by James Haddox, Chief Financial Officer. John Wilson, President of Electric Power and Natural Gas Operations; and Ken Trawick, President of Telecommunications and Cable Operations are also present and will be available for questions. As always, we welcome your questions following our remarks.

Revenues for the first quarter were $738.5 million, compared to $844.4 million in the prior year's first quarter. Despite reduced revenue and a challenging economic environment, we achieved EPS of $0.11 and increased operating margins by 20 basis points compared to the first quarter of 2008. In today's economy, we're pleased with this performance. Quanta's diverse customer base continued to lend strength to our financial performance. For the first quarter of 2009, our largest customer made up only 4.7% of our revenues. Our top 10 customers represented 25.5% of our total revenues. And our top 20 customers made up approximately 37.5% of revenues.

The breakout of revenues also highlights the diversity of our business. When divided by type of work, our 2009 first quarter revenues were approximately 68% revenues from electric power services. 12% from natural gas services. 10% from telecommunications and cable services. 7% from ancillary services, such as horizontal directional drilling and commercial and industrial wiring. And 3% from dark fiber licensing -- leasing. Our employee count was 13,807 at March 31, 2009. This compares to 14,751 at 12/31/08 and 15,909 at March 31, 2008. The reduction in employee count is primarily due to softening of electric distribution spending; Reduced spending by FTTX by telecommunication companies; And spending cuts related to gas pipeline facilities. The variable work force is one of the core strengths of our business model.

The decrease in total revenues was attributable to numerous circumstances and developments in the first quarter. As we anticipated, the electric power distribution market continued to experience softening in the first quarter but this was offset by strength in the transmission market. This strength is evident in our recently announced contracts with the National Grid, LCRA and Northeast Utilities. All indications are that utilities remain committed to the expansion and strengthening of their transmission infrastructure. We have not experienced delays or cancellations on our large transmission projects so far in 2009 and we are not aware of any planned delays or cancellations. And to date, utilities appear to be able to raise the capital needed to continue to build out proposed transmission projects.

Even with these positive developments, particularly in transmission work, the weakness in the power distribution market did not allow our revenues from electric power to overcome the decline in revenues from telecommunications and natural gas work. Winter weather extending into March slowed the start of our gas distribution work in the north and north central United States. Also, a several week delay on a major project caused our gas revenues to decline 33% over the first quarter of 2008. We expect gas revenues to recover in the second quarter. Contributing to this, is our work under our recent pipeline contract for the mid-continent express pipeline, a joint venture between Kinder Morgan Energy Partners and Energy Transfer Partners, which got underway early in the second quarter.

Telecom continues to be the area of our business most impacted by the decline in the economy. As we discussed in our last call, telecom spending, particularly from AT&T and Verizon, is expected to be minimal in the first half of the year. However, AT&T and Verizon continue to have confident outlooks for the future. In announcements last week, both reinforced their capital spending allocations for 2009. Only a fraction of their projected budget was spent in the first quarter, indicating significant increased spending the second half of the year. Both companies have publicly affirmed long-term commitments to the delivery of triple-play services and the fiber buildouts required to meet growing demand for bandwidth. During this period of decreased spending, we have had significant success leveraging our diverse set of services and strong relationships with telecom service providers to support subscriber acquisition goals.

We have also continued to redeploy the expertise of these crews to areas of growth, such as renewable energy. However, revenues from these initiatives are not yet on a level to offset the overall decline in telecom spending. There continues to be significant momentum, both political and regulatory, behind renewable energy, particularly, utility scale solar installations. Throughout the quarter, we continued to work closely with our customers to apply Quanta's infrastructure expertise to achieve their renewable energy goals. Optimism related to certain areas addressed by the American Reinvestment and Recovery Act, or the ARRA, remains. However, major spending from this stimulus plan is not expected to occur until possibly late 2009 and more likely 2010.

We believe strong opportunities will develop to apply our expertise and diverse service offerings through renewable energy, the strengthening of the transmission grid, smart grid implementations and deployment of broadband telecommunications to rural and other unserved communities. Also, the proposal of a new energy bill called the American Clean Energy and Security act of 2009 has the potential to positively impact our business. As proposed, this Act addresses the need for federal renewable energy standards and facilitates the deployment of a smart grid. It also directs the Federal Energy Regulatory Commission to reform the regional planning process to modernize the electric grid and provide for new transmission lines to carry electricity generated from renewable sources. This new energy policy. scheduled to be completed by Memorial Day. has the potential to alleviate the sighting, right-of-way and jurisdiction challenges our customers are experiencing today. All of these efforts fall squarely within Quanta's sweet spot. However, the time frame in which these initiatives will solidify and positively impact Quanta is uncertain.

Looking forward, we are optimistic that the second quarter will represent the low point of the economy's negative impact on our business. We expect to see increased spending, particularly in the telecom industries. In the second half of the year, however -- spending in the second half of the year may still not be at the level to counterbalance the softness of the first half of the year. Therefore, we do not believe that the double digit growth is a realistic expectation for 2009. We still maintain that Quanta should grow at double digit levels in more normal economic times. Our financial position remains strong, as does the financial health of most of our customers. And the demand for our diverse service offerings continues to be strong in many industries with potential for long-term growth.

Looking forward, our focus is on maintaining margins throughout all of the industries we serve as we navigate this challenging environment. No one can predict the future of our economy or the timing of a recovery. However, the rebuilding of the grid, installation of new infrastructure for renewable energy, building of networks to meet demand for bandwidth and opening new gas fields is going to happen. Quanta is positioned to be a major beneficiary of this spending when it does happen. Right now, we think the second half of the year will be the beginning of a recovery in these industries. Be assured that we have the balance sheet, the customer relations and the team to profitably power through this downturn. And when the market turns, be a major force in all of these areas. Now, I'll turn the call over to Jim, who will talk in more detail about key operational accomplishments in the quarter.

Thank you, John. And good morning, everyone. Today, I will discuss the overall performance of our electric power, natural gas and telecommunications operations. Each is experiencing unique dynamics, legislative developments and emerging trends. In the first quarter of 2009, revenues from our electric power operations were approximately $501 million. This compared to approximately $488 million in the first quarter of 2008. Emergency restoration work accounted for $46 million of our first quarter revenues. Our crews worked diligently throughout the country to restore power and communications to the communities impacted by ice storms and winter weather.

We achieved several key accomplishments in our electric power operations during the first quarter of this year. The National Grid contract was finalized and executed at the end of the first quarter. We are currently performing preconstruction services and expect full construction to begin in the third quarter of this year. Under the five year contract, transmission and substation infrastructure services will be performed by New Energy Alliance, a joint venture between Quanta Services, MJ Electric Operating Unit and Balfour Beatty Infrastructure Incorporated. We will utilize our energized services and proprietary methods during the initial phase of this project, which will allow National Grid to minimize power deliver disruptions to their customers.

Building on the success of the services we are performing under our existing $194 million contract with the Lower Colorado River Authority or LCRA, today, we announced the LCRA Board approved a contract addendum, estimated at $256 million, to construct the utilities transmission infrastructure as part of the Texas Competitive Renewable Energy Zone for CREZ. This now brings our total transmission contract with LCRA to $450 million through October of 2013. The $256 million addendum is not in our backlog numbers as of 3/31/09. Work was recently initiated under a contract with CenterPoint Energy and Itron to install 2.4 million smart electric meters and related communication devices throughout electric utility's 5,000 square mile Houston area, over a five year period. We believe that the implementation of smart grid technologies is a key growth area for our Company and we look forward to furthering our relationships with CenterPoint to forge new ground in intelligent grid systems and ultimately apply this success to support other initiatives.

We also announced this morning, that we will provide services to improve power reliability in South Africa. Under the project, our crews will provide energized services, utilizing our proprietary technology and work methods, to replace aging transmission infrastructure, increase power delivery capacity and improve system reliability to the greater Johannesburg area. This project is also not in backlog as of 3/31/09.

I would now like to give you a status update on certain transmission projects. Our work for Oklahoma Gas and Electric continues to progress as scheduled. This project symbolizes Quanta's power-of-one and spotlights our diverse service offerings. Four Quanta operating units are working simultaneously on the 120 miles of 345,000-volt transmission line, providing various services from foundation installation to wire stringing. Our work for Southern California Edison to build the transmission infrastructure that will deliver renewable power from the Tehachapi wind energy facility throughout California is proceeding nicely. This project is scheduled for completion in the first quarter of 2010.

As we announced on our last conference call, we received a $200 million extension of our existing contract with Northeast Utilities or NU, for the buildout of their transmission infrastructure in the New England region. The total contract with NU is now valued at $950 million and extends through 2015. We are in the very early stages of work under this contract. Many of you have been following our updates and the progress of the Trail Project as Allegheny worked through the required PUC approvals. We are pleased to announce that the construction, which started last month, is well underway on this 150 mile, 500,000-volt transmission project. This project also includes constructing multiple substations and related facilities.

We remain confident that renewable energy opportunities, both wind and solar, are significant growth areas for our Company in 2009 and beyond, despite the challenging economy. Recent developments reinforce our belief that renewable energy opportunities will increase in the latter part of the year and into 2010. For example, last week, the Department of Energy announced plans to provide $93 million from the American Recovery and Reinvestment Act, or ARRA, to support further development of wind energy in the United States. Many of the projects spurred by the ARRA are currently in the engineering and design phase. We should see construction on some of these projects starting later this year.

Some analysts expect the solar market to triple in the next four years as ongoing government incentives and accelerated cost reductions make solar electricity a more cost effective energy source. The solar industry has realized a significant reduction in solar technology prices over the past six months. Solar panels account for approximately 50% of the total cost of a typical utility scale or large commercial solar installation. The remaining costs are associated with the engineering, design, construction and materials required to install the solar panels. Over the past year, Quanta has streamlined the cost of engineering, design, procurement, project management and construction solutions; for utility scale and large commercial solar generation facilities to our customers. The remaining cost must come down in order for solar to be competitive.

We have demonstrated our ability to provide cost effective and seamless EPC solutions to the solar industry. We believe our strong balance sheet, geographical reach and streamlined service offering make us the partner of choice to provide cost effective solutions in this area. We continue to believe that renewable energy revenues will be 20% to 30% of Quanta's overall revenues in three to five years. We have also stated that we will double renewable revenues from $150 million in 2008, to $300 million in 2009. We believe our 2009 goal is achievable but it may be more difficult due to slower than expected customer spending and project delays in the first quarter.

Now, let's turn our attention to our natural gas operations. In the first quarter of 2009, revenues from natural gas operations were approximately $91 million. This compared to approximately $137 million in the first quarter of 2008. Revenue decreases in our gas operations are attributable to extreme frigid temperatures in the upper midwest and northeast that extended into March and adversely affected our underground gas distribution services. Also the mid-continent express pipeline project, originally expected to start in early March, started construction in early April. The mid-continent express pipeline is a joint venture between Kinder Morgan Energy Partners and Energy Transfer Partners. Under this contract, we are providing installation services for more than 70 miles of 36-inch natural gas pipeline in central Mississippi. We have experienced an active bidding season so far this year but are still concerned about how depressed natural gas prices will affect our customers' spending in the second half of this year.

Now, turning to our telecom operations. In the first quarter, the biggest impact to our business was from our telecom operations. In the first quarter of 2009, revenues from telecommunications and broadband cable operations were approximately $74 million. This compares to approximately $144 million in the first quarter of 2008. While this area of our business has no doubt been impacted by reductions in spending due to the economic downturn, we are encouraged by the recent indicators that the second quarter may be the bottom of the decline. This is supported by recent announcements by AT&T and Verizon that reiterate a strong commitment to their U-verse and FiOS capital programs in 2009.

Verizon reported near record results for FiOS service in the first quarter, with the addition of 299,000 subscribers. And AT&T reported 284,000 net adds for U-verse TV. We are encouraged by these reports and the public statements by large telcos reinforcing their commitment to bring fiber closer to the home and deliver triple-play services to consumers across the nation. AT&T reiterated that it would spend $18 billion in CapEx in 2009. Only a fraction of this was expended in the first quarter of this year. Although, our revenues may not reach 2008 levels, we anticipate a significant increase in activity for both Verizon and AT&T in the second half of this year.

We continue to build on our existing relationship with major telecom service operators by providing additional services required to support their strategic objectives in the current economy. We have expectations that the value we have delivered during this downturn will enable us to provide additional services to our customers when spending returns to normal levels. These initiatives have helped mitigate the impact of the decline in spending related to fiber-to-the-home, although it does not completely offset the decline. We continue to believe the municipality and rural telecom markets remain robust. Especially with the application of $7 billion in stimulus funding to rural areas that lack sufficient bandwidth to adequately support economic development. These initiatives will most likely be spearheaded by municipalities, states and rural telephone companies, areas where Quanta enjoys a long history of success.

To close, I am pleased with our first quarter financial performance and the efforts of our management and employees who contributed to these results. We believe, we can successfully navigate through the current economic challenges by leveraging our balance sheet, operating leadership and Company diversity to take advantage of opportunities during this downturn. Now, I will turn the call over to James Haddox, our CFO.

Thanks, Jim and good morning, everyone. Today, we announced the first quarter revenues of $738.5 million, compared to $844.4 million in the prior year's first quarter, reflecting a decrease of approximately 12.5% quarter over quarter. This year's first quarter revenues included emergency restoration revenues of approximately $46 million, compared to approximately. $22 million being earned in 1Q '08. Excluding all emergency restoration revenues from both periods, revenue decreased by approximately 15.8% in the first quarter.

Revenues from electric power work during the first quarter of '09 increased by approximately $13 million or about 3% over the first quarter of 2008. Excluding all emergency restoration revenues from both periods, electric power revenues would have decreased about 2%. Gas work decrease approximately $46 million or 33% quarter over quarter. Our gas work declined quarter over quarter due to adverse weather in the northeast and upper midwest, coupled with the delayed start up of several -- of certain major projects from 1Q '09 to the beginning of 2Q '09. Revenues from telecom and cable work decreased from about $144 million in 1Q '08 to about $74 million in 1Q '09, or about 49%. As you may recall, the FTTX initiative was in full swing during the first quarter of 2008.

Revenues from ancillary work decreased approximately $8 million or about 13% quarter over quarter, from about $62 million in 1Q '08 to about $54 million in 1Q '09. Dark fiber revenues contributed approximately $19 million to the first quarter, compared to $13 million in it the last year's first quarter, for about 43% growth. We generated gross margins of 15.9% for the first quarter of 2009, compared to gross margins of 14.7% during the first quarter of 2008, for an increase of 120 basis points. This growth in margins came from increased margins from electric power and ancillary work, partially offset by lower margins in telecom and gas work. Our G&A expenses increased from $70.7 million in 1Q '08, to $73.6 million in the first quarter of '09. primarily due to higher non-cash stock compensation, costs associated with the implementation of an information technology solution and higher legal fees.

D&A expenses are up from 8.4% of revenues in 1Q '08 to 10% in 1Q '09 due to lower revenues quarter over quarter. D&A expenses were down sequentially from $82 million in 4Q '08. EBITA for the first quarter of 2009 was about $44 million or 5.9% of revenues, compared to about $53 million or 6.3% for the first quarter of 2008. The calculation of EBITA is set forth in the financial news section of our Website at quantaservices.com. Amortization of intangible assets decreased from $10.6 million in 1Q '08, to $4.9 million in 1Q '09 due primarily to the runoff of amortization of the intangible asset associated with InfraSource's backlog.

Interest expense decreased from $9.6 million in 1Q '08, to $2.8 million in 1Q '09. Interest expense in 1Q '08 included about $4.5 million of non-cash interest expense associated with the adoption of FSP APB 14-1. Interest expense in 1Q '09 includes about $1.1 million of non-cash interest expense associated with the adoption of 14-1. During 4Q '08, our $270 million convertible security was converted into equity. The decrease in interest expense is primarily due to the conversion of these 4.5% convertible notes in the fourth quarter of 2008. Interest income decreased from $4.0 million in the first quarter of '08, to $1.1 million in the first quarter of '09, primarily due to lower interest rates during the period.

Net income attributable to common stock for the quarter was $21.4 million or $0.11 per diluted share, compared to $21.5 million or $0.13 per diluted share in 1Q, '08. Adding back non-cash amortization of intangibles, non-cash interest expense and non-cash compensation expenses, net of taxes, would have resulted in adjusted net income of $27.9 million or cash EPS per diluted share $0.14 for the first quarter of '09, compared to adjusted net income of $33.2 million or $0.18 per diluted share in the first quarter of 2008. And a reconciliation of GAAP to cash EPS is provided in the tables attached to our press release issued today. Our diluted share count in 1Q '08 was about $172 million versus about $198 million for 1Q '09. The increase in share count was primarily due to the shares issued in 4Q '08 as a result of the conversion of our $270 million of convertible notes. In 1Q '08, these notes were anti-dilutive and therefore, not included in the dilutive share count.

Cash flow from operations totaled approximately $111 million for the quarter. Cash flow from operations, less net capital expenditures of about $39 million, resulted in approximately $72 million in free cash flow for the quarter. EBITDA was $63 million for the first quarter of 2009, representing a decrease of approximately 12.6% over the first quarter of 2008. The calculation of this non-GAAP measure can be found in the financial news section of our Website at quantaservices.com. We've also posted to our Website a calculation of adjusted EBITDA. Our day sales outstanding, or DSO's, were 83 days at March 31 versus 80 days at December 31, 2008 and 83 days at March 31, 2008. The definition of day sales outstanding can be found in the financial news section of our Company Website.

Now, I'll turn to a discussion of backlog. 12 month backlog is defined as the amount of work expected to be completed over the next 12 months under signed contracts. Total backlog includes the amount of revenues we expect to derive in the future from signed contracts for project work and master service agreements. A more detailed definition of backlog can be found in the financial news section of our Company Website. Our total backlog of work at March 31 of '09 was approximately $5.801 billion, which is $633 million or about 12.2% higher than total backlog at March 31 of '08. Total backlog has increased $609 million or 11.7% since December 31 of '08. Our 12 month backlog currently stands at $2.524 billion. This compares to 12 month backlog of $2.385 billion at March 31 of '08 and represents an increase of $139 million or about 6%.

12 month backlog attributed to electric work increased about $95 million. Gas work increased about $56 million, while telecom 12 month backlog decreased about $39 million. Ancillary 12 month backlog increased about $8 million. While dark fiber backlog increased about $19 million. Our 3/31/09 backlog of $2.524 billion also compares to 12 month backlog of $2.577 billion as of 12/31/08, a decrease of about $54 million or approximately 2.1%. A normal seasonal decline, with about $41 million of the decrease being attributed to electric work, $24 million attributed to gas work, And $29 million attributed to ancillary work. Partially offset by an increase of $30 million attributable to telecom work and an increase of $10 million attributed to dark fiber work.

At the end of the quarter, we had about $509 million in cash and $317 million in available borrowing capacity under our $475 million credit facility. We had about $158 million in letters of credit outstanding, primarily to secure our insurance programs. The combination of our cash balance and availability under our credit facility, gives us about $825 million in total liquidity.

Concerning our outlook for the the future, our estimate of revenues for the second quarter of '09 is from $850 million to $890 million. Our estimate for 2Q '09 EPS, based upon revenues of between $850 million and $890 million, is from $0.14 to $0.15 per diluted share on a GAAP basis. Our GAAP EPS forecast includes an estimate of $11.2 million for amortization, non-cash compensation expenses and non-cash interest expense. Excluding these expenses, our cash earnings per diluted share for the quarter are expected to be $0.17 to $0.18. For additional guidance, we are currently projecting our tax rate for the second quarter to be approximately 41.2%. We expect our diluted share count to be about 198 million shares during the second quarter. We expect CapEx for all of '09 to be approximately $175 million. This compares to CapEx for all of '08 of $186 million.

In summary, considering the economic environment we're faced with, we're very pleased with our first quarter. We increased our revenues from electric power work. Increased our gross margins by 120 basis points. Increased our total backlog by $633 million. And generated $111 million in cash flow from operations and $72 million of free cash flow. We continued to improve our financial strength and are well positioned to capitalize on opportunities we see in the future. This concludes our formal presentation and we will now open the line for Q&A. Stacey?

Thank you, sir. (Operator Instructions) Our first question comes from Jamie Cook. Please state your company name followed by your question.

Good morning. Hi, good morning. It's actually Chase Becker in for Jamie. How are you?

Great. Thank you.

Quick question with respect to your comments on the specific project you had in gas. It was delayed. Is there anyway to quantify the impact in the quarter or was that fairly de minimus? And then also, is there anyway to quantify the impact of the mid-continent express being pushed out a month?

This is Jim O'Neil. We believe that there were really two events that accounted for the majority of the $45 million shortfall, quarter over quarter. That would be the pipeline project being delayed. And the frigid weather in the northeast and upper midwest that extended into late March. These conditions made it virtually impossible to perform underground distribution gas services. So, those two events made up the majority of that shortfall.

Okay. And then, just looking at your gross margins, even though your top line was down 12.5%, the margins were better than what we thought. How much is that is coming from some of the storm work that you have? It looks like roughly $25 million higher year-over-year. Is that the primary driver of that, was just generally increase in transmission mix?

No. It did have an effect on us. We do earn higher margins on storm work and storm work was higher than we expected it to be for the quarter. So, that drove some of it but we continued to see improved pricing quarter over quarter. And we also saw improved margins in the ancillary work in our business, which was due to the completion of some low margin contracts in '08 that did not recur in '09.

Okay. And then, one last question and I'll give somebody else a chance. I'm wondering if you can just quantify the project that you were talking about in South Africa? Is that a material amount? And then also, how do we think about -- are there some other international opportunities that you're exploring at this point? Thank you.

This is John Wilson. The project that we have in South Africa, some of you might have read that South Africa is experiencing a lot of problems on their transmission grid. And this is kind of the first step here for us. It's going to equate to somewhere between $11 million and $12 million contract for us at Quanta and we'll be reconductoring their transmission grid.

Does that answer your question? Hello?

Thank you. The next question comes from Will Gabrielski. Please state your company name, followed by your question.

Sure. Broadpoint Amtech, thank you. So, a couple of questions here. You kind of addressed this already but obviously, the total backlog was up very nicely. 12 month backlog down quarter to quarter. Can you just comment on why there is the seasonality in 12 month backlog versus total backlog and give a little more color around that?

Yes, typically, you have some seasonality in backlog. Over recent years, because backlog has been increasing every single quarter, we haven't noticed it. But it's a little bit traditional in our business that backlog is down because we have more bidding activity in the second and third quarter than we do in the first quarter of the year. Usually the companies are preparing their bids and so forth in the first quarter and then they come out for a bid in the second quarter and sometimes as late as third quarter.

Okay. That's helpful. On the smart meter project, can you talk about what that requires from you guys from a deployment standpoint and how much of that work is out there? And how aggressively are you going to go after it? And where do the margins fall out on work like that versus maybe your other businesses?

Well, we can't really talk about the margins right now. And of course, the revenue generated from this project, it isn't an announceable project, from that standpoint for us, which our threshold is typically around $100 million. So that kind of tells you that it's less than that. The scope of work is, this is a radio frequency program. We'll be installing the transmitters, as well as the smart meters throughout CenterPoint's network here in Houston.

Okay. Two more if you'll allow me. The first one on CREZ, obviously, I think the LCRA work was a little bit ahead of what some of us may have been expecting, myself personally. Engagement with other utilities and transmission owners on the project, can you comment on that? Beyond LCRA, what type of exposure you guys are looking at?

Well, we have a relationship with everyone that has any piece of the CREZ work to build. And we, of course, are doing our best to make sure that they understand that we are the premier and the best provider of services for them. Some of them, I'm sure, will go out to bid. Some of it will be negotiated and we'll get some of it and some of it we will not get. But we're happy that we -- really, as far as I know, this is the first piece that's been officially awarded and we're happy to have that piece of work.

Okay. And last one for me. Just to confirm, all of the delayed gas projects from weather are now underway and there's no additional issues there that are going to creep up on us this quarter, right?

Yes. As far as we know, gas in the second quarter should be more normal than it was in the first quarter. And we don't expect strong growth out of gas or anything like that but it should be a more normal quarter in the second quarter.

Okay. Great. Thanks, guys.

The next question comes from Andrea Wirth. Please state your company name, followed by your question.

Robert Baird. Good morning, guys.

Good morning.

Wondering if you could first talk a little bit about the distribution business. Is it probably fair to say that that business was down double digits this quarter?

It's hard to segregate distribution and transmission work because we construct distribution circuits on transmission lines and vice versa. Therefore, the numbers are not precise based on our estimates. And also, storm work confuses the issue as well. But excluding the storm work, we think that distribution declined approximately 15% to 20%, while transmission rose 5% to 10%, again without storm work in the periods. If you add storm work back in, distribution probably was -- did not decline.

Got it. That's very helpful. And then, what about your outlook for the distribution business? Do you expect it to remain fairly weak for the majority of the year or do you see some indications that that might start to improve?

We see that it's certainly going to be weak in the second quarter, we think. It varies utility to utility. But we have some optimism that there may be some strength in the third and fourth quarter in our distribution business, as utilities come back and start spending some money on their distribution networks.

Okay. And then, when you think about your full year revenue outlook, obviously, double digits will be difficult to achieve now this year. But do you think you can still actually show growth in 2009, just given the fact that distribution may still be weak? Telecom may not be up year-over-year. Natural gas won't be too strong a growth. So, just trying to understand how we should look at the second half of the year in terms of; can that help you pull out growth for the actual full year of 2009?

Sure, growth obviously depends on a number of factors. How much does Telecom recover. We have some fairly easy comparisons in the third and fourth quarter for telecom. And if it recovers significantly, we'll have a significant amount of growth in Telecom. Also what affects gas prices -- will gas prices have on new shale infrastructure? It's awfully hard for us to anticipate what the price in natural gas is going to do for the development of those shale formations. We are -- our thoughts are that whatever CapEx is spent, will be spent on these new shale formations. And therefore, that bodes well for gas to continue to be a growth area for us. But that's certainly uncertain. Distribution spending is also a difficult to time within a quarter or two. But as it stands now and trying to answer your question, we expect revenue growth in 2009 but likely not at the double digit level, as we said before.

Okay. That's very helpful. And then, just on the margin front and maybe specifically operating margins, when we start looking out into 2010, really assuming that spending levels do return to normal, what type of margin expansion should you expect to see in 2010?

Well, we're doing our best to hold margins during this difficult time. We could probably do better on the revenue side if we weren't trying to hold our margins because it's so difficult once margins goes down to bring those margins back up. But we think that once the economy and spending returns to normal levels, we should be back in the 9% to 12% range that we have talked about for so many months.

And then, just to follow up on that, the 12% range isn't really a number you've seen yet. What makes the difference between kind of seeing a 9% level versus a 12% level? Is it just contract pricing? And do you actually have contracts that get you to that level? Or is it something that maybe we don't see 12% until we get out into later years?

Well, yes, it's spending by our customers and certainly, we have contracts that exceed that level. And we'll have to have that because we have some areas of our Company that don't meet that 9% criteria. Typically, gas is lower than 9%, for instance. And the ancillary group is usually lower than 9% as well. So, we have to have telecom and electric power well above 9% in order to average that in the Company. But one thing that -- customer spending will get us to the 12% line. And also, labor shortages often will boost margins. You have to manage to maintain growth during those periods. But certainly, a shortage of skilled labor, as we expect to see, particularly in the transmission market, then you'll likely see higher margins as well.

(Operator Instructions) Thank you. Our next question comes from Sanjay Shrestha. Please state your company name, followed by your question.

Lazard Capital Markets. Hi, this is Sarah in for Sanjay. You say that smart grid will be a key growth area for the Company. Have you seen more bidding activity for smart grid works similar to that at CenterPoint, given the current policy emphasis in this area?

Right now, there's a lot of talk and a lot of enthusiasm about smart grid. I think most are waiting to see what the government financing or subsidies are going to amount to. So, we haven't seen a lot of bidding activity. CenterPoint is a bit in front of the pack as far as this goes. But we do see a lot of utilities looking at it and anticipating doing something along those line. But bidding activity, as yet, I wouldn't say of any significant amount.

And can you talk a little bit about the levels of profitability in backlog now versus what you saw 12 months ago?

Sure. Our margins and backlog are generally flat compared to what they were at year end. The margin breakout by industry is kind of mixed, as you might expect. Electric power margins are flat to up slightly. Telecom is down about 40 basis points. Gas is up by the same amount that Telecom is down. And ancillary is down about 30 basis points. But since our last conference call, they've pretty well held flat.

Thanks.

Thank you. The next question comes from Alex Rygiel Please state your company name, followed by your question.

Good morning, gentlemen.

Good morning.

James, I wanted some clarification on backlog. The National Grid award, was that included or excluded in the backlog?

National Grid is included.

And the value of National Grid is approximately what?

Do you have guys have that off the top of your head? $500 million or so, $550 million, something like that. We are not -- it's not really clear right now because it's not a fixed priced contract.

Okay. And CenterPoint, was that in or out?

CenterPoint was in.

And the value of that again, was about what?

$40 million to $50 million.

Perfect. And then, could I also get total backlog by end market?

Total backlog, yes, electric is $4.047 billion. Gas is $707 million. Telecom is $460 million. Ancillary is $184 million. And dark fiber is $402 million.

And one last question. As it relates to your strategy within solar, do you have any plans to use some the cash on your balance sheet to be an owner/operator, sort of like in your dark fiber business?

We can do that but that's not the preferred route that we would want to take. We want to be the EPC contractor but if asked by one of our customers to take a position, we certainly have a limited appetite.

Great. Thank you.

Thank you. The next question comes from Tahira Afzal. Please state your company name, followed by your question.

Hi, this is Tahira from Keybanc. Good morning, gentlemen. Are you hearing anything along the lines of electric cars infrastructure and any idea, if you are, on the potential size of that market?

I'm sorry, Tahira, you cut out. Say that again, please.

Just wanted to see you're hearing anything from your sponsors about the electric car infrastructure? And if you are, if you could try to size up the market there for us?

Yes, electric cars, we're not hearing much about that. I think that last fall, we heard from Chairman of FERC, I believe, is the one that gave this quote. That if we were going to have 25% electric cars by the year 2012 or 2015, that we were already behind in building the infrastructure for that. That the infrastructure for electric cars would require not only more transmission, more substation and more distribution; it would just almost be unheard of, as far as the amount of work that would have to be done. We are doing, on that note, a study with our technology group for a utility to look at what they would have to do to anticipate electric cars. That's the only activity that I'm aware of though at this point in time. Certainly, it would be a boon to our business but it's probably a ways out there.

Got it, thanks. And just turning back to CREZ for a second. It seems the other key utility that seems to have gotten a portion of the priority lines is Encore. Encore seems to have already awarded the steel structures associated with that to Falcon Steel. Where do you stand there? I know one of your private players is well pretty positioned to get a portion of the Encore CREZ priority lines. But given their portion is essentially close to double that of lower Colorado's, could you give us color on your positioning over there?

I think that -- well, we have a good relationship with Encore. We work there for them. Certainly, we have some competition in that particular utility. We would probably be looked at as the second choice in that utility. But that's a lot of work and they may need additional help rather than one contractor. They may need more than one contractor to get that work done. And so, we haven't given up hope that we'll get some of that work but certainly, we're not the favored son for that particular utility.

Got it. And then, could you give me an idea of the competitive landscape for the large projects, as you see it right now? There are a couple of larger general contractors that are making some noise about being more active in the space. Are you seeing a change over there or is it around the same?

No, it's about the same. We've seen [TWiT] team with some electrical contractors on one project in the west. But again, typically, these large civil contractors or E&C contractors don't have the employees in-house to perform the work. And so, what they do is project manage the job and the work is still performed by the traditional electrical contractors.

Thank you, the next question comes from Jeff Beach. Please state your company name , followed by your

Stifel Nicolaus. Good morning, John and James. Can you discuss, kind of walking through the businesses the bidding opportunities that are emerging in the market right now. Walking through electric utility and kind of balancing out the transmission against the distribution work that the utilities are looking at. And I'd love their comment about how long you think utilities can cut back significantly on distribution, maybe looking back at the last recession? And then, moving on to how is the renewable market developing now? I know it came to a halt and is coming back? And then, moving on into gas, I'd like to know if it's nonexistent right now or whether there's still a lot of projects out there in the offing?

Yes, the transmission bidding, as I think most everyone knows, particularly the large projects, are moving forward pretty much on schedule, as we thought. Distribution has slowed. As you probably know, distribution started slowing in general last fall. And it didn't really impact us significantly until first quarter and second quarter. Usually this distribution spending is slowed, in the past, we've seen it as much as a year. Anything over a year starts to stress the utility. But too, we probably need a little help from housing starts to boost that distribution spending forward.

Anecdotally, some utilities are saying they're going to cut their spending in June and start again in September. Others are saying they are not going to start their distribution spending until 2010. And when they do it, they're going to double what they had when they -- in 2008. So, it varies across the board from good to bad news. But generally, it's fairly short termed as far as how long they can keep from spending on distribution. The Public Service Commissions get excited when they start slowing their distribution spend. As we all know, the distribution networks are in fairly poor shape and every time we have a storm, people are without lights. And when the newspapers or the public and the Public Service Commissions hear that the utilities have slowed spending on distribution maintenance, they get pretty excited when their light goes out. So, it typically doesn't last for too long.

But we could use help again from housing starts and also if credit was a little easier to acquire and cheaper, I think utilities would have a different outlook as well. So, need some help on a couple of fronts there. On gas and renewables, I'll let O'Neill address those two.

On our renewals we think stimulus funds will begin flowing into the marketplace. The current administration is trying to get shovel ready projects moving forward. And we just think there's a tremendous opportunity in the second half of the year and going into '10. We also currently working a pipeline of viable projects that we, unfortunately, can't discuss right now, that lead us to believe that we will have an active year, the second half of the year. On gas, bidding activities are at normal levels right now. Lead us to believe that our customers are going to move forward with their programs. We are still in the bidding season. We should be moving into construction. We think the second quarter will be equal to what we did last year at this time and certainly, we have a positive outlook on gas for the rest of the year. But you've got to remember that gas is an area that there's a lot of short duration projects. So, our sight on gas is probably now three to six months in this type of environment. So, we need to be very cautious but right now, we're optimistic that we're going to have a good second half of the year.

Thank you. The next question comes from John Rogers. Please state your company name, followed by your question.

D.A. Davidson. Good morning. Just a little bit of follow-up in terms of the margins. You had better margins this quarter. It sounds like they're going to be a little lower year-over-year next -- or the current quarter, second quarter. And you talked about margins within backlog being relatively stable. And I'm just trying to get a sense of what you are seeing in terms of the pricing environment. Do we expect margins to stay at these levels or are we going to see some improvement with the telecom business further out?

Margins and backlog, as James stated, are fairly stable. It's the fill-in work, obviously, we don't have 100% of our backlog for the next quarter or the quarter after that. So, it's that fill-in work that goes at lower margins. And that depends on the margins you harvest from the quarter is that fill-in work. And pricing is difficult, as you can imagine in the telecom business. It is also difficult in the gas business. And gas and electric distribution is probably going to be difficult, as well, going forward. At least for a few quarters.

So it is that pricing and that just in time or --? That's right.

The telecom spending pick up that we anticipate in the latter part of the year will certainly help our margins because our telecom margins are usually very strong when spending is at normal levels. So, we should see some margin pick up from increased telecom spending.

Thank you. The last question comes from Will Gabrielski. Please go ahead, sir.

Sure, thank you. One question. You guys made a comment about fixed pricing cost plus work. Is there a general shift right now from these bigger and longer term agreements and especially as we move forward and on some of the bigger projects, to move away from some of the fixed price work? And how do you see that impacting business and margin levels?

We see trend in some of these utilities, particularly where they have large contracts and they want to get us on board well before the projects are ready to be bid. In other words, they want our expertise and constructability in the project related to right-of-way. Constructability related to design of the line and the structures in the line. Those kinds of things. They often, then, will bring us in and of course, that would be on a cost plus or some kind of negotiated basis. And that's something that certainly takes a lot of the risk out of those large projects. And so, we often give our customers a more reasonable rate than we would if it we had to take all of that risk. That's normally true with all of the cost plus work that we do. Our customers usually get a little better rate for that than they do for a fixed price job because they're taking part of the risk away from us. How does that effect margins going forward? That's built into our margin expectations and we think that margins will continue to be strong once we get back to normal spending levels.

Okay. And then last one and conclude the call. But I just was curious, internationally, is there a general strategy there? Would you guys look to be inquisitive? Or are you -- obviously, there's some announcements internationally from you guys this quarter. And I'm just curious what the strategy there? And then Iraq and reconstruction and some of those opportunities probably would be out there in the next year or two. So, any thoughts on that?

Sure. We are just opportunistic when it comes to international work. We've been working on this South African project for many, many months. It's an area where we can -- we have a specialty, a niche, that we can bring to a foreign market that enables us to be competitive and to reap the margins that we need to, frankly, take care of the risks that are involved in international projects. So, we've worked literally all over the world but it's on a project to project basis and opportunistically. And that's the way we look at going forward. If we're ever going to really have a strong international presence permanently, we have to develop a work force outside of the US because not only is the US work force a little bit scarce for skilled labor right now but also, it's very high priced when you get into the foreign markets. So we need to develop a work force, frankly, from probably a third world work force that can be competitive in the international markets.

Thank you. That was the last question. I'd like to hand the call back to Mr. John Colson for any closing comments.

Okay, thank you. We'd like to thank you very much for participating in our call today. We appreciate your questions and your ongoing interest in Quanta Services. Thank you very much. Goodbye.

Thank you ladies and gentlemen. This concludes Quanta Services first quarter earnings conference call. Thank you for participating. You may now disconnect.