Quanta Services Inc (PWR) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Quanta Services third quarter earnings conference call. During today's presentation all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions.

(Operator Instructions)

This conference is being recorded today, Wednesday, November 2 of 2011. I would now like to turn the conference over to our host for today, Mr. Kip Rupp, Vice President of Investor Relations. Please go ahead, sir.

Great. Thank you, Patricia, and welcome everyone to the Quanta Services conference call to review third quarter of 2011 results. Before I turn the call over to management, I have the normal housekeeping details to run through. If you would like to have Quanta news releases and other information emailed to you when they occur, please sign up for email information alerts by going to the Investors and Media section of Quanta Services' website at quantaservices.com. A replay of today's call will be available on Quanta's website at quantaservices.com. In addition, a telephonic recorded instant replay will be available for the next 7 days, 24 hours a day, that can be accessed as set forth in the press release. Please remember that information reported on this call speaks only as of today, November 2, 2011, 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.

This conference call will include forward-looking statements intended to qualify under the Safe Harbor for liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements include all 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.

Management cautions you that should you not replace 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. For additional information concerning some of the risks, uncertainties, and assumptions that could affect Quanta's forward-looking statements, please refer to the Company's annual report on Form 10-K for the year ended December 31, 2010, and its quarterly reports on Form 10-Q, and its other documents filed with the Securities and Exchange Commission, which may be obtained on Quanta's website or through the SEC's website at sec.gov. With that, I would now like to turn the call over to Mr. Jim O'Neil, Quanta's President and CEO. Jim.

Thanks, Kip. Good morning, everyone, and welcome to the Quanta Services third quarter 2011 earnings conference call. I will start the call with an operational overview before turning the call over to James Haddox, Quanta's CFO, to provide a detailed review of our third quarter financial results. Following James' comments, we welcome your questions. In the third quarter, we experienced momentum in each of our operating segments for the first time since 2008. Specifically, our electric transmission business in the quarter to continued to ramp up as a number of projects moved into full construction. We were also awarded nearly $250 million of pipeline projects in the third quarter, which are beginning to mobilize into construction in the fourth quarter. As a result, this increased act -- of this increased activity, our workforce increased by approximately 2500 employees, or 17%, at the end of the third quarter as compared to June 30 of 2011.

Both our 12-month and total backlog at the end of the third quarter were at record levels. Our 12-month backlog at the end of the third quarter increased about 39%, and total backlog increased approximately 25% compared to backlog at the end of the third quarter of 2010. During the quarter, our electric power segment grew revenues by approximately 55% compared to the same period of last year. Our electric power segment 12-month backlog as of the end of the third quarter increased nearly 49%, and total backlog increased nearly 17% as compared to the third quarter 2010. We believe we are in the early stages of a major multi-year transmission build out in the United States and Canada and expect backlog to continue to remain strong throughout 2012.

The large electric transmission projects that we are progressing are progressing in a manner that is consistent with the expectations we set on our second quarter conference call without any meaningful delays during the quarter. During the third quarter, the joint venture including Quanta operating unit, Valard Construction, finalized the contract with BC Hydro for the engineering procurement and construction of the Northwest Transmission Line. Under on our scope of the contract, we will construct the 344-kilometer, 287-kilovolt transmission line, which is designated to provide a secure interconnection point for clean energy generation projects and supply electricity to support future industrial developments in Northern British Columbia. We have commenced reconstruction activities, which do not expect to move toward full construction until the spring of 2012 with completion expected in the fourth quarter of 2013. While large transmission projects are grabbing the headlines, we are also experiencing an increase in activity for projects less than $100 million in value that we typically don't announce.

For example, AEP awarded Quanta work in two states to rebuild a number of transmission lines totaling more than 300 miles. Oklahoma Gas & Electric recently awarded Quanta the Seminole to Muskogee transmission project, which is 125-mile, 345-kilovolt line. Construction on this project is expected to start in the middle of 2012, with completion expected in late 2013. The aggregate of these projects is approximately $170 million. We continue to see a recovery in demand for our electric distribution services. Since the beginning of the year, our utility customers have continued to add our crews for maintenance work. And, we estimate that our electric distribution revenues have increased approximately 11% for the first nine months of this year, compared to the same period last year.

During the third quarter, Hurricane Irene severely damaged the electric infrastructure along the Eastern coast of the United States and knocked out power to more than 7 million electric customers. Quanta deployed approximately 2000 employees to provide electric restoration services to assist utilities throughout the impacted areas. The $63 million in revenue generated in the quarter from emergency restoration services was offset by impacts to operations along the Eastern seaboard and in the Northeast US where our productivity was hindered as a result of Hurricane Irene. Our operating income, however, did benefit somewhat from the emergency restoration work we performed.

In our renewable operations, we generated revenues of $150 million for the first nine months of this year, compared to $182 million in the same period last year. We currently anticipate generating approximately $220 million of renewable revenue in 2011. This compares to $313 million for the full year of 2010. Reasons for the year over year decline include delays on solar projects moving forward while developers wait for solar panel prices to settle at lower price levels. The wind market also was significantly impacted this year because of low natural gas prices and challenges in obtaining financing for projects. However, we believe the solar industry in the United States will provide growth opportunities for Quanta in 2012 and 2013.

We recently announced that Quanta was selected by Samsung C&T America to provide comprehensive EPC services for a 20-megawatt utility-scale solar installation near the city of Alpaugh in Tulare County, California. Construction on this project is just beginning and should be completed in August of 2012. This project is not in backlog at the end of the third quarter. We have also been awarded work from Johnson Controls and Strata Solar on two 10-megawatt solar projects where our scope of work is focused on construction services only, which includes the installation of conduit, wiring and some racking and panel installation.

Our natural gas and pipeline segment has been challenged for the third quarter and for the first nine months of this year, principally related to our large diameter transmission business, but these challenges -- these challenging conditions are beginning to change. We're seeing an increased level of project awards for large diameter transmission work. This was reflected in the increased backlog for this segment at the end of the third quarter. Our natural gas and pipeline segment 12-month and total backlog increased nearly 10%, and approximately 62% respectively as compared to the third quarter of last year. In the quarter, we were awarded and are currently working on building more than 190 miles of large diameter pipeline for enterprise products partners in the Eagle Ford Shale.

We were also awarded and are now working on shorter mileage large diameter pipeline projects in the Bakken and Marcellus Shales, as well as in Canada. The aggregate value of these projects added approximately $250 million to backlog during the third quarter. These projects are expected to be completed no later than the end of the first quarter of next year. As you may have seen this morning we announced that TransCanada has selected Quanta to be part of a joint venture consisting of three pipelines construction contractors to build 1179 miles of pipeline and related infrastructure from Hardisty, Alberta to Steele City, Nebraska as part of the TransCanada Keystone XL Pipeline project. The scope of services to be provided by each joint venture member is still being defined in the finalization of the terms of the joint venture and the contract with TransCanada are in process. We anticipate that Quanta will play a significant role in the construction of the pipeline infrastructure for the Keystone XL project.

The final review of the Keystone XL Pipeline by the regulatory authorities is underway, and assuming no further delays, TransCanada expects a decision some time in December of this year. If this occurs, construction of the pipeline is estimated to begin in early 2012, with completion expected by the middle of 2013. According to information publicly disclosed by TransCanada upon regulatory approval, the Keystone XL project is estimated to create approximately 20,000 US jobs including 13,000 construction jobs and 7000 manufacturing jobs. This project will create at least 2000 construction jobs for Quanta. The $7 billion project is expected to create 118,000 spinoff jobs in the local areas while the pipeline is being built, as well as $20 billion of economic benefits to the United States during the construction process.

TransCanada is a long-time customer of Quanta and we appreciate our relationship with them and the confidence they have demonstrated by choosing Quanta to be a meaningful partner in building a significant portion of this project. Through our 100 years of experience in the pipeline construction industry combined with TransCanada's innovative solutions to meet the high level of environmental requirements on the Keystone XL projects, we are committed to build the safest pipeline system in the United States. While the challenging environmental and permeating conditions that our customer face remain, we are optimistic the momentum we are experiencing in our pipeline business will continue through the rest of this year and into 2012. However, it is very early in the 2012 pipeline bidding season and our visibility on forecasting 2012 pipeline activity is limited at this time.

Gathering system work within the shale formations is robust. We have established a local presence in key shale plays to take advantage of opportunities in these areas. We are making inroads and currently working on several lateral and gathering system projects in the Marcellus, Eagle Ford and Bakken Shales. We also believe that pipeline inspection, integrity testing and rehabilitation will be an area of significant opportunity and growth for Quanta in the coming years as heightened federal and state standards and regulatory requirements for more frequent and invasive testing of pipelines begin to be implemented. We have experienced increased levels of inquiries relating to this part of our business by pipeline owners and utilities. We believe this is due to our customers proactively moving forward with voluntary programs ahead of new regulatory requirements being put into place.

We are pleased with the continued improvement in our telecommunication industry segment as revenues increased 50% over the same period last year and margins increased 260 basis points. 12-month and total backlog for the segment increased about 73% and approximately 68% respectively in the third quarter as compared to last year's third quarter. The increase in revenues, margins and backlog for this segment was driven by increases in engineering and start-up of broadband stimulus projects, fiber to cell site projects and wireless-related work. We anticipate this segment's revenues will continue to gain momentum during the fourth quarter and we expect strong growth for this segment in 2012.

The KINBER project where we are building a statewide 1600 mile fiber optic network in Pennsylvania continues to move forward. We have received required project permits, have completed the engineering work and are performing construction activities. We believe this project is on track for completion by the end of 2012. We continue to see opportunities from wireless and fiber to cell site initiatives driven by strong wireless data growth, efforts to improve 3G wireless networks and from 4G and LTE wireless network upgrades and performance. The fiber optic licensing segment increased 12-month and total backlog of about 6% and nearly 4% respectively in the third quarters compared to last year's third quarter. More than half of our customers in this segment are educational facilities, including K-12 schools. We saw a deceleration in spending from these customers through the recession, but have experienced an increase in sales activity this year and we believe this will continue into 2012.

In summary, we continue to see positive trends across all of our operating segments as we move into the fourth quarter, which is reflected by the nearly 39% increase in our 12 month backlog at the end of the third quarter. The Keystone XL project is not in these backlog figures. As we look towards 2012, we believe the momentum we already have in our business provides a nice runway for strong revenue and profits, profit growth next year. With that, I would like to turn the call over to James.

Thanks, Jim, and good morning, everyone. Today we announced revenues of $1.25 billion for the third quarter of 2011, compared to $1.21 billion in the prior-year's third quarter, reflecting growth of approximately 3.7% quarter over quarter. Net income attributable to common stock for the quarter was $52 million, or $0.25 per diluted share. The growth in consolidated revenues in 3Q '11 was driven primarily by an increase in revenues from our electric power infrastructure services segment of 55% quarter over quarter. A portion of this growth resulted from an acquisition during the fourth quarter of 2010, and to a lesser extent four smaller acquisitions completed during the third quarter of 2011. Four acquisitions completed in the third quarter of 2011 contributed about $12 million in revenues to the quarter.

Excluding these five acquisitions completed since 3Q 2010, the electric power segment revenues would have grown 42% quarter over quarter. Also contributing to growth and overall revenues were increased quarter over quarter revenues from telecom infrastructure services of $47.1 million, or 53% -- 50.3%, I'm sorry. These revenues increases were offset by a 53% decrease in revenues from our natural gas and pipeline infrastructure services segment. Our consolidated gross margin declined slightly from 15.8% in 3Q of '10 to 15.6% in 3Q of '11. The decrease was primarily due to the impact of lower overall revenues from natural gas transmission projects on this segment's ability to cover fixed costs. Partially offsetting these decreases were higher margins from our electric power and telecommunications infrastructure services segment, which were positively impacted by higher overall revenues reported by these segments.

Selling, general and administrative expenses increased $10.4 million to $92.4 million as compared to last year's third quarter. Administrative costs associated with acquired companies resulted in an increase in G&A expenses of approximately $4 million quarter over quarter. Selling, general and administrative expenses also increased as a result of $8.7 million in higher salaries, benefits, and incentive compensation costs associated with additional personnel and salary increases. Offsetting the current quarter increases were lower losses on sales and equipment quarter over quarter of approximately $3 million. As a percentage of revenues, selling, general and admin expenses increased from 6.8% in the third quarter of 2010 to 7.4% in the third quarter of 2011, primarily due to the lower overall revenues reported by our natural gas and pipeline segment and the impact of these decreases on Quanta's ability to cover these costs.

Our consolidated operating margin before amortization expense decreased from 9% in 3Q of '10 to 8.2% in 3Q of '11, as a result of the effects I just discussed on gross margins and G&A expenses. Amortization of intangible assets decreased from $13.4 million in 3Q '10 to $8.3 million in 3Q '11 due to the runoff of amortization related to backlog and other intangible assets recorded from our prior acquisitions, partially offset by an increase in amortization-related intangibles associated with the acquisitions completed in 3Q '11 and 4Q '10. Amortization expense increased from $6.9 million in 2Q '11 to $8.3 million in 3Q '11 as a result of the acquisitions completed in the third quarter of '11. Moving further down into the details of our results by segment.

Electric power segment revenues were up about $290 million quarter over quarter, or about 55%. Revenues were positively impacted by increased revenues from electric power transmission projects, primarily due to increased spending by our customers during the third quarter of 2011. Revenues from emergency restoration services increased $52.4 million to $62.7 million in the third quarter of 2011, primarily due to Hurricane Irene impacting the East Coast region of the United States. Also revenues were favorably impacted during the third quarter from the contribution of approximately $63 million of revenues from acquisitions which occurred subsequent to the third quarter of 2010. The operating margin in the electric power segment was 12.4% in the third quarter, compared to 11.3% in last year's third quarter, primarily due to higher overall revenues, which resulted from an increase in the volume of revenues from higher-margin transmission projects, as well as from increases and higher margins of emergency restoration services.

Our natural gas and pipeline segment revenues decreased quarter over quarter approximately 53% to about $259 million in 3Q '11, due to a decrease in the number and size of projects as a result of delays and spending by our customers, specifically in connection with natural gas transmission projects. Operating as a percentage of revenues decreased to a negative 1.5% for 3Q '11 from a positive 9.6% for 3Q '10. The decrease was primarily due to the low overall revenues described above to the lower overall revenues described above, which negatively impacted this segment's ability to cover operating, overhead costs and admin costs. Additionally, we wrote down certain underutilized assets by about $3 million, negatively impacting pipeline margins in the third quarter 2011.

Revenues from our telecommunications segment increased approximately $47 million, or 50.3%, to approximately $140.7 million in 3Q '11, primarily due to an increase in the volume of work associated with stimulus funded projects that ramped up substantially during 3Q '11, and an increase in revenues from FTTx build-out initiatives as a result of increased capital spending by our customers during 3Q '11, as compared to 3Q '10. Operating margin in the telecommunications segment was 11.3% in 3Q '11, compared to 6% in 3Q '10. This increase in margin is primarily due to increased demand for our services, allowing for margin expansion as well as the impact of revenue increases on this segment's ability to cover fixed costs. Also contributing to this increase were lower overall selling, general and administration expenses that resulted from the restructuring of certain operating units, which reduced the overall amount of fixed costs associated with the segment for 3Q '11, as compared to 3Q 10.

Fiber optic licensing segment revenues were approximately $28.4 million for the third quarter of 2011, reflecting an increase of about 1.2% from 3Q '10. And operating margin was 50% in 3Q '11, compared to operating margin of 47.2% in 3Q of '10. When discussing operating margins by segment, we do not allocate certain selling, general and admin expenses and amortization expense to our segments. Therefore, the previous discussion about operating margins by segment includes the effect of such expenses. Corporate and unallocated costs decreased $3.8 million in the third quarter of 2011, as compared to 3Q of 2010, primarily due to $5.1 million decrease in amortization of intangible assets, partially offset by $1.1 million increase in salaries and benefits expenses.

Net income attributable to common stock for the quarter was $52 million, or $0.25 per diluted share. Net income attributable to common stock in 3Q '10 was $62.8 million, or $0.30 per diluted share, which included $9.4 million of income, or a benefit of $0.04 per diluted share due to the release of income tax contingencies from the expiration of various statutes of limitations related to federal and state tax returns. Adjusted diluted earnings per share as calculated in today's press release was $0.29 for the third quarter of 2011 as compared to adjusted diluted earnings per share of $0.32 for 3Q of '10. Cash flow from operations of $40.8 million less net capital expenditures of about $38.3 million, resulted in approximately $2.5 million in free cash flow for the quarter. This compares to prior-year's third quarter, which had a negative free cash flow of $79.2 million. The increase in free cash flow for the third quarter of 2011 is compared to the prior-year quarter's, primarily due to more favorable billing positions on 2011 projects as well as significantly higher working capital requirement on pipeline projects that were in process during the third quarter of the prior year.

EBITA for the third quarter 2011 was $102.3 million, or 8.2% of revenues, compared to about $108 million, or 9% of revenues, for the third quarter of 2010. Adjusted EBITDA was about $133 million for the third quarter of 2011, compared to $141.4 million for the third quarter of 2010. Our day sales outstanding, or DSOs, were relatively flat at 75 days at September 30, 2011, June 30, 2011, and September 30, 2010. The calculation of EBITA and EBITDA and adjusted EBITDA, all non-GAAP measures, and the definitions of these and DSOs can be found in the Investors and Media section at our website at quantaservices.com.

As previously announced, we entered into an amended senior secured revolving credit agreement with a syndicate of vendors led by Bank of America N.A. and Wells Fargo N.A. during the third quarter. The amendment expanded our senior secured revolving facility from $475 million to $700 million and extends the maturity date to August 2, 2016. Under this new facility, at September 30, 2011 we had $190 million in letters of credit outstanding primarily to secure our insurance program and had no other outstanding borrowings. In addition, at the end of the quarter we had about $257.8 million in cash. Considering our cash and availability under our new credit facility, we have nearly $768 million in total liquidity as of September 30.

During the second quarter of 2011, our Board of Directors authorized us to purchase up to a total of $150 million of our outstanding common stock. In the third quarter, we repurchased 3.2 million shares in the open market for a total cost of $55.1 million. Including the shares repurchased in the second quarter, we have repurchased a total of approximately 8.1 million shares for a total cost of approximately $149.5 million. All repurchases were paid for with cash on hand.

As I previously mentioned, we closed four acquisitions during the third quarter. The aggregate purchase price was were approximate $81.6 million, comprised of $58.9 million in cash and $22.7 million in shares of Quanta stock. The acquisitions expanded our international presence in both electric power and natural gas pipeline services.

Concerning our outlook for the future. Our estimate for 4Q '11 EPS based on revenues of between $1.35 billion and $1.45 billion is $0.32 to $0.36 per diluted share on a GAAP basis. This estimate compares to $0.16 in GAAP EPS in the fourth quarter of 2010. Our GAAP EPS forecast for 4Q '11 includes an estimate of $5.8 million for non-cash compensation expenses and $7.8 million for amortization expenses. Excluding these expenses are non-GAAP adjusted diluted earnings per share for the quarter expected to be $0.36 to $0.40. This non-GAAP measure calculated on the same basis as the historical adjusted diluted earnings per share presented in this release.

We are currently forecasting net income attributable to non controlling interest to be approximately $3.7 million in the fourth quarter of 2011. And, for additional guidance, we are currently projecting our GAAP tax rate to be approximately 39.5% to 40% for 4Q 2011. We expect our diluted share count to be about 209 million shares for the fourth quarter of 2011. We expect CapEx for all of 2011 to be approximately $180 million to $190 million, which includes CapEx for our fiber licensing segment of about $25 million. This $180 million to $190 million for 2011 compares to CapEx for all of 2010 of about $150 million. This concludes our former presentation and will now open the line for Q&A. Patricia, we are ready to go to Q&A now.

(Operator Instructions)

Jamie Cook, Credit Suisse.

Congratulations. Just a couple of questions. One, as I look at your fourth quarter guidance. James, we are making some improvement on the natural gas and pipeline profits if you exclude the write down you took in the third quarter. I'm just trying to think about how we think about run rate margins in the fourth quarter for the natural gas pipeline business given some of the orders that you've gotten would be my first question and how you think about sort of margins longer term, sort of with and without Keystone? Then my second question would be, Keystone, I understand you are still in negotiations, but can you just talk about the potential size for Quanta? The project going forward and what that does to sort of capacity in the market in 2012 and the pricing environment?

Jamie, this is Jim. In regards to pipeline margins in the fourth quarter. They should continue to get better obviously. We needed work, and we are starting to see work. We've been awarded $250 million worth of projects. Most of that work is going to be done in the fourth quarter, in the first quarter. So because we have that revenue coming in, we are able to leverage fixed cost in that pipeline segment, which is going to certainly help revenues for the fourth quarter.

But, do we get back? Because if you just look at your guidance for the fourth quarter, it implies margins sequentially have to be up. Have to be approaching the 9.5% range versus 7.5% for this quarter. So I'm just trying -- is all of that improvement in natural gas in terms of the operating profit line? I'm just trying to get a sense for our margins exiting the year sort of in the mid-high single digit range on the natural gas pipeline because that has implications for earnings next year.

Yes, margins in the transmission business should be north of 7%. The segment should be approximately 8% for the segment. We've got the weather that impacts us in the fourth quarter when doing pipeline work, so we have to hedge there a little bit. But, certainly having that additional revenue is the key and we should have better, significantly better margins than we have had the first nine months of this year, doing about 7% operating income in the transmission pipeline business, and 8% for the segment. In regards to TransCanada, we are really excited about it. This is the biggest infrastructure opportunity that we certainly have on our horizon. It is hard to give or to quantify what that total opportunity is right now.

We haven't even gotten the maps for the layout of the pipeline project or detailed maps where we can price it. We have been given indicative pricing on a unit basis to the customer. But we haven't certainly divided the scope of work or looked at what the total dollar opportunity is for the JV. We should do at least 1/3 of the work. There are three of us and we certainly expected to do our fair share of that work. And we do think it is a significant opportunity. As soon as we can quantify that we will communicate that to you guys.

But, what's the contractors addressable scope on the -- you know what I mean, because you're not going to -- the materials or whatever. That's not going to get -- that won't be through you. I'm trying to get a sense of -- why you don't want to tell me your share, what is the addressable scope for the three contractors?

Well that's what we can't quantify right now. The total project is $7 billion. That includes engineering material and construction.

So if we back out material, is it 50% about, and then we can sort of split?

It's really hard to tell because there has been a lot of money spent on this project up front. I would say on a typical pipeline project, you are looking at 30% construction scope, but they spent so much money on this project and that $7 billion, I just can't even estimate that right now. I can tell you it's a huge opportunity for us. It is the biggest infrastructure project that we have on the horizon that we will be doing going forward. I just can't quantify right now. I wish I could, but we can't.

Okay. And then just --.

There is other supporting infrastructure too.

Yes. There is other supporting infrastructure in addition to the pipeline as well.

That's included in the $7 billion. There is substations and pressure stations, those kinds of things that have not been bid out yet. So it is really hard for us to tell you how much of the $7 billion applies just to the pipeline.

Tahira Afzal, KeyBanc.

Congratulations on another very good quarter gentlemen. I have two questions. Just a follow-up on the Keystone Pipeline project. For my understanding, you have the Keystone Cushing extension, which is already built. The Gulf Coast segment was given out to Michels last year. So, I guess my assumption is with this particular contract essentially the whole pipeline has been bid out. I would like to get some comments on that.

Then if you could comment on whether this is fixed price or cost plus for you. And given that the Steele City portion make especially means that at least one, I would say around 15% to 20% of this pipeline project is running all across Nebraska in terms of your partnership's portion. How do you look at the fact Nebraska has probably been the most contentious state? Do you see if TransCanada telling you that they will ahead and start constructing and leave Nebraska for later? And Nebraska should not really influence the construction timeline too much. That is unfortunately a very long first question.

And a follow-up is, I just wanted to ask about your accounts receivable. Have seen them sort of go up a bit? I assume that has to do with the ramp up of all your transmission projects. But, any additional color would be helpful. Thank you.

The portion of the project is the one that goes from and I quoted it in my script, going from Canada to Nebraska. That is the portion of the project. So yes, this doesn't include the Southern section, which has already been awarded. The work is going to be done lump sum. We haven't got to that price yet with a customer. We've given, the JV has given indicative pricing on a unit basis, but it will eventually be a lump sum project by the JV to TransCanada.

As far as the regulatory issues and permeating issues. I can't comment on that. We haven't talked about how we are going to approach the work and whether we are going to avoid sections initially. We just haven't gotten into that detail with the customer. Those would be the questions for TransCanada at this time.

And here on the receivables questions, that is just purely related to the ramp up in revenues. We had a $240 million ramp-up in revenues between the second quarter and the third quarter. And every quarter this year has been, revenues have been significantly higher than they were from the prior years. That is requiring quite a bit of work in capital as these ramp up. But, our DSOs have remained flat throughout all the periods that are comparable.

We are still, we are at about 75 days and that is the way it was at the end of the second quarter, and at the end of the third quarter of last year. So there's not really any significant issue in receivables. It's just requiring a lot of working capital to ramp the accounts up.

Thank you very much and congratulations again.

William Bremer, Maxim Group.

Good morning, gentlemen. Jim, can you give us a little color on -- I know you specified that in the pipeline segment you have been working on more on the smaller, sort of branches of pipeline, and not so much on the larger more profitable. What type of capacity is that segment? What type of capacity has that segment been running at say the first nine months here? And then my second question is, you called out inspection and heightened federal as well as state regulatory issues on the inspection of pipelines. Does Quanta have all the technology there that they need, or is there some type of technology out there they may need to be acquired?

Well, I don't think it is a technology issue. I think it is just getting the permitting and inciting approval, the regulatory approval are what the big issues are. It's not about the application of how we build pipelines. I can tell you that the TransCanada line is going to have requirements in place that far exceed what is standard in the industry today and there is going to be technology applied to the new type of material for the casing or pipeline that can't be punctured. It's going to be concrete in case. So I think that those technologies certainly will be provided to us to construct or to put into place. Our integrity business is certainly an area where we differentiate from a technology standpoint. And, we do have some technology there to provide integrity service and rehabilitation services to our customers.

As far as the question on the shale work, I wouldn't say that it's not as profitable. I would say it is just as profitable as the other work. It's just smaller sections of large diameter pipe. We have seen that business ramp up in the last 90 days or so. It's really starting to move along at a really nice clip.

And we've established ourselves in these shales. We have a local presence to where we can capitalize on these opportunities in a timely basis. So we are excited about that part of our business, especially in the liquid rich plays; the Bakken, and the Marcellus and the Eagle Ford. We see significant opportunity going forward.

Okay. Thank you.

Zach Larkin, Stephens Inc.

Good morning, gentlemen. Congrats on the quarter. First off, wanted to see if you guys could talk a little bit about the electric distribution business, your commentary on how that's been doing quite well. In light of last quarter, you noted that margins and pricing due to increased competition was something you had been facing. Is that situation improved, or what is that market look like currently?

I don't think we really have a competitive environment in our distribution market. We have MSAs in place throughout the country. It is just a matter that utilities are bringing more crews on from Quanta, where we have MSAs to perform maintenance work, which means they are increasing their maintenance. That surprisingly continues to ramp up in this economy, which is good news. I think after the first six months of the year, we had 7% increase year over year. And now after nine months we are close to 11% increase for the nine months ending in this year versus the same period last year. We're certainly seeing improvement, which is encouraging.

Great. And then on the renewable side, are you guys anticipating any type of a year-end rush or pickup as the 1603 cash grants end at the end of the year. Have you seen anything on that, on that line?

Yes. That's a good question. I think that's one of the catalysts on why Samsung went forward when it did. And we are working on at least two other utility scale programs that are being competitively bid where I think there should be some announcements before the end of the year. So there is a rush of developers trying to take advantage of the 1603 tax grant before it expires at the end of the year.

Okay. Thanks and congrats again on the quarter.

Alex Rygiel, FBR.

Thank you. Good morning gentlemen. Nice quarter. First, as it relates to the acquisitions. Can you quantify the anticipated annual contribution in revenue and the contribution in backlog in the current quarter?

Yes. We are expecting about $100 million in revenues from those acquisitions for next year. And the other question was what, Alex, on backlog?

What do they contribute to backlog in the third quarter?

About $52 million.

And your --?

On backlog for acquisitions that were acquired in the third quarter is about $52 million.

And as it relates to your fourth-quarter guidance, can you comment on the recent storm activity in the Northeast with regards to the snow and whether or not that is included in your guidance or not?

We've got $37 million I think in storm revenue in our forecast for the fourth quarter. It's too early to tell, Alex how this -- we have responded. I think we've got over 1000 people that we sent to the area to respond to the recent event, to respond to the outages particularly in the Northeast. But, we don't know how that's going to offset against our loss of productivity on some major projects we have in that area. So it's too early to tell how that shakes out, if that will shake out. We think it will be net positive, but we are right in the middle of that right now.

I apologize if I missed this. But your fourth-quarter EPS guidance down a little bit from previous guidance. Is that due to a short-term delay in some of the gas awards that have now been awarded and are mobilizing, or is there something else there?

Actually, it is because we had pipeline work which we expected to start in the third quarter move into the fourth quarter. And now most of the pipeline work we are going to do is going to be in the fourth quarter and first quarter. And that can be an inclement weather period.

It is only a timing difference.

Exactly. It's timing. We expect to do significantly more in the third quarter than what -- because of regulatory and permitting delays, it pushed into the fourth. And we're just starting upon many of those projects.

Very helpful. Thank you very much.

Will Gabrielski, Lazard.

Thanks. Good morning, guys. In terms of Keystone and the potential for there to be a wide range of start up dates for construction, how do you go about managing the schedule and your equipment and your spreads in terms of how you look and forecast for 2012? Is there any way to mitigate the potential timing risk there, or maybe another point on that to comment on how much of that capacity will be the leased equipment versus equipment you own that you are planning to allocate to Keystone?

We have got the capability to do nine spreads of big pipe. We are doing one spread of big pipe right now with Enterprise. So, we've got plenty of capacity. So from a timing standpoint in how we plan these resources I don't think we are -- we are able to capture other opportunities in addition to Keystone right now. All construction companies have a rental model to where they own a certain amount of the specialized equipment and they will lease equipment, like light duty vehicles and other equipment that is common across industries. Certainly, if we ramp up to where we have a significant amount of work going on, we won't be leasing equipment, but that's not a big deal. That's just the way they have done business in the past and that is the model the industry uses.

Okay. Then on the transmission business. Obviously, there was some news during the quarter with the President and Congress working to try to expedite the process of permitting yet again. They went through, I think, several projects. That combined with the other projects out for bid right now, how would you characterize 2012 bookings opportunities for electric transmission coming off a very good year in 2011?

We have pretty much -- we pretty much made it through our customers, made it through the regulatory hurdles that we were facing in '11. Now that's not to say we won't encounter anymore in '12. I don't anticipate any, but we've got 10 major projects that are moving into construction. And we've got some nice tail wind there and we expect further awards in the fourth quarter and into next year.

And we think that backlog will be strong even with the run rate in electric transmission next year as far as the burn that we will have. We are excited about the opportunities. Again, we think we are in the early stages of a major build out in the electric transmission market. And we will see more awards and significant increase in revenues next year in transmission as compared to what we experienced this year.

Okay. Great. Thank you.

Andrew Wittmann, Robert W. Baird & Company.

Jim, just on some of the recent acquisitions. The transmission one seemed pretty middle of the fairway. But, directional drilling in Australia, a little bit far-flung geographically, and doesn't seem directly like what you have done historically. Combine this with the acquisition in the Eagle Ford where you are doing some things that are a little bit different. The question is, is there a bit of a change in strategy here and how much of these kinds of acquisitions should we expect going forward?

We have been saying for the last year or so that we've been opportunistically looking for opportunities international. And you look at this being a directional drilling company in Australia. It's really an opportunity to establish a base to not only pursue gas pipeline opportunities and directional drilling opportunities, because Alaska is going to be the number one exporter of LNG in the world because of their natural resources going into next year as they export LNG into Asia. But, we are going to use this as a base as well to expand our electric transmission and distribution segment as well, which is a huge opportunity in Australia to upgrade infrastructure very similar to what is occurring here in the US and Canada.

So it's a very friendly state, country very much like the US. And it's an opportunity that we have been looking out for a long time. So, I don't think it is a departure from what our core business is or our philosophy. It's just an area of opportunity in Australia that we can capitalize, not only in the pipeline market, but in the electric power infrastructure market as well.

So do you think you will -- just to continue on that, do you think you will add in around that with more investments in Australia, then?

Well, maybe more investments in Australia, maybe we will just grow organically that small company, because now we have a platform for growth and bring in resources. So, it could be a combination of both.

Okay. Great. And then just (multiple speakers) --

No. Australia is just a huge opportunity group for growth in all of the industries that we participate in today. And this is the first step in trying to establish a platform to grow that opportunity.

Great. And just under the electric transmission margins. Was there any contribution from any positive close outs in the quarter that may have moved the margins a little bit higher? It seems like the storm benefit was kind of offset with negatives and some of the other work that you were doing. So it seems like storm was not necessarily the contributor, but I was wondering if there was close outs. And maybe now that utilization levels are moving higher, are the margins in the third quarter indicative of some of the trends that you hoped to see in the busier 2012 season?

This is James. I will take the first question. No. There weren't any close-outs of any major projects. We closed those out towards the end of 2010. And, now we are ramping up on a lot of projects. In fact, we are being somewhat conservative as we usually are in the beginning of these major contracts as far as revenue recognition is concerned. We should see some improvement in margins as these projects move on through if we execute properly.

And in the consistency of work on as many projects as we are on, we are able to fully utilize or at least improve significantly the utilization of equipment. And our key people are superintendents and foremen. So, yes, margins should go up. And yes I think the third quarter, electric margins is reflective of that occurring. We just have to be cognizant that the fourth quarter does have some -- and the first quarter can bring some unpredictable weather. But we expect margins to continue to improve in the fourth and first quarter as we move into next year.

All right. Thank you.

Jeff Beach, Stifel Nicolaus.

Good morning, Jim and James. Typically you give you an update on a lot of your projects. You didn't this time, but could you focus on the two or three projects that earlier in the year were delayed because of environmental permitting and issues like that, such as Tehachapi, and if they are progressing at this point? And if there is any that are still being held up by permitting?

No, there is -- Jeff, all the projects are moving forward. I'm not going to say there is not a little issue here or there on projects, but nothing material like we had in the beginning of the year. I can tell you that the momentum in the third quarter was primarily from Sunrise getting the green light. The grid reliability project getting the green light. And then Sharyland began to ramp up, excuse me, Lone Star. So those were the three transmission projects that really gained momentum in the third quarter. But again, everything is moving forward. We don't see any regulatory issues that -- anywhere near what we saw at the beginning of the year. And things are moving forward nicely.

All right. On the gas revenue. Could you give us either the dollar amount or kind of a rough percentage of how much this quarter was in the large diameter pipeline versus everything else?

We had very little. That Enterprise job was supposed to start at the beginning of September when we forecasted originally, and that pushed into October. So, we had very little large diameter pipeline. It was a long-distance pipeline. Most of the revenues that we generated in the third quarter were from the shale projects. When I say the shale projects, the shorter distance, larger diameter pipelines projects.

All right. And I assume this surge in the margin in fourth quarter then is coming from some utilization of your large diameter equipment.

That is correct.

All right. Thanks.

And to put more color on that, I think we will have about $90 million of that to $250 million in the first quarter of next year. So that is how things have shifted from the third quarter now. All of those jobs were expected to complete for the most part by the end of the year and now would have $90 million of revenue moving into the first quarter of that $250 million.

Scott Levine, JPMorgan.

Good morning, guys. So with regard to -- you mentioned weather and its impact on the fourth quarter. When you talk about how you factor that into your guidance here, is that based on what you have already seen relative to the month of October? Or are you just factoring in more conservatism than is seasonally typical, or maybe a little bit more color with regard to the weather considerations you had in setting or resetting your Q4 guidance there?

We just set normal weather patterns in the fourth quarter compared to what we would see in the third. In the fourth quarter, you typically are going to get less productivity than you do in the third. And we have databases of information in certain geographical areas that we refer back to to try to get a good feel on what those margins should be.

So in reality, your gas work is sliding a little bit back further and a little bit into rougher weather conditions, so we consider that to be a little bit more of an issue with respect to margins. You are likely to earn on that, or is that not really a factor there?

No. I think you're right. The revenues have been pushed back due to permitting and regulatory issues. You had revenues move that were anticipated in the third quarter into the fourth and first. And historically, the production that we get during the fourth and first quarter is not anywhere near what we would get in the third.

Got it.

Not anywhere near, it's just more challenging than what we would get in the third.

Got it. And one follow-up really quickly maybe on the SG&A. You know, obviously, you are growing your book of business here dramatically, what are your expectations or what thoughts should we have in terms of how that line is likely to behave into 2012 without asking for explicit guidance per se?

I think you will probably see it come down as a percentage of revenues. It will probably move up on an absolute dollar basis. But considering the growth that we are expecting it should come down on a percentage basis. You might see it be below. Typically an 8% number is a good number. You might see below that number in 2012. But we are not really giving any specific guidance yet on 2012. So, that is just kind of general. I think it will, like I said, go up on an absolute dollar basis and it should be lower on a percentage basis.

Dan Mannes, Avondale.

Good morning, guys. A couple follow-up questions. First, on Keystone. Given the size, the project number, the spreads you have to potentially commit to it. How do you through your bidding strategy as it relates to other work for 2012 given you may have to tie up a lot of resource on that project?

Yes. Dan. I think I tried to answer that before. We've got the capacity to do nine spreads at a time and even expand that up to maybe 11 or 12 spreads. Keystone is not going to take but 1/3 to maybe 50% of our capacity. So we have plenty of capacity to do all the work and to pursue other projects. It is a good problem or a good situation to be in.

Well, or the other side is that's indicative of your current utilization. Looking beyond Keystone as we look to 2012 and I know it's early, what do you think of the current outlook for pipeline work, especially large diameter excluding Keystone, and are you seeing more and more opportunities starting to come down the pike?

We do. We're trying to be little more cautious, because last year at this time we said we saw $1 billion more activity going into '11 that we had in '10 and we didn't do very well this year to date. So, we are optimistic about the bidding environment. We're looking into about $600 million in projects right now to bid for this year. And we've got other projects in that $1.8 billion that we hope will go that we talked about before. So we are optimistic about '12. I think '12 is going to be better than '11 for sure. So, but we'll certainly have more color for you on our fourth quarter call and give you more detail on where we are at that time, because we are only in the bidding season right now.

Adam Thalhimer, BB&T Capital Markets.

Good morning, guys. Who are your JV partners on Keystone?

It is two private companies. One of them is Michels and the other one is Sheehan.

Okay. Thanks for that. Then last quarter, Jim, I think you talked about some on the telecom side some fiber shortages and some delays in stimulus projects. You didn't mention that this time. I am just wondering if those issues have been cleared up since last quarter.

Yes. That is still an issue, but we tend to -- we're working through that. And, it hasn't really slow down our growth or productivity to date. It's still an issue that is out there, but it hasn't affected us to date.

Craig Irwin, Wedbush Securities.

Good morning, gentlemen. Thank you for taking my question. As we look over the course of the next year, there has been a lot of speculation about economic weakness. Some companies reporting that they are seeing it. Others are saying that there is no indication either from their customers or from the overall end market environment. What is your take on the economic outlook and how this can potentially impact your business over the course of the next year?

I'm not going to comment specifically on what I think is going to happen with the economy, but I can tell you that we are fairly confident that our electric segment and our telecommunication segments are going to have very strong growth next year compared to this year. Pipeline, we anticipate to do better but that's the wild card, certainly. We will have to see how that plays out as we go through the bidding season. But overall, we expect to have a significantly better year in 2012 than we did in '11 driven by electric power and telecommunication growth in both revenues and margins.

Excellent. And then as my follow-up question. From your answers to other people's questions on this call about pricing and the pricing outlook, it sounds like you are being fairly conservative. It sounds like you are not anticipating a significant change in profitability of the work given the utilization levels are most likely going to go up dramatically on the gas side and have already gone up fairly significantly on the electric T&D side. What is there that would have you be more constructive on potential for more positive pricing over the course of the next few quarters?

Well, I think we are -- the resource constraints in the electric industry are there. I think the supply of qualified labor to move forward on additional projects in the industry are scarce and that we are well-positioned to take advantage of opportunities. So, certainly there are some opportunities to move pricing up in electric power going forward. Telecommunication, the margins are strong. We expect margins to increase several hundred basis points over the course of the next year.

Gas is the big wild card. We have got to be able to leverage that fixed cost overhead with some meaningful work. We are not going to pursue low cost work. We are going to maintain our bidding philosophy that we've had all along in our transmission pipeline business. And certainly if that business takes off, we should have some very nice margins next year. But we are still anticipating and 9% to 12% operating income throughout 2012, and we should be at the higher end of that if our gas business performs as we expect it to in 2012.

You might mention that when you say throughout 2012 that might not hold for the first quarter.

That's right.

Because the first quarter is subject to seasonality. That is the winter quarter. You won't see -- I don't think you are going to see the first quarter fall off of -- compared to the fourth quarter as much as it traditionally has, because of the momentum. But, we will still have some effects of weather on the first quarter. And with respect to margins and revenues will be lower in the first quarter than they are in the fourth quarter.

John Rogers, D.A. Davidson & Co.

Good morning. Just wanted to follow up a little bit on the cash situation. In terms of Keystone, is this project so suited -- are you required -- do you expect to have to hold a lot of cash, working capital purposes and sort of how do you weigh future buybacks relative to that decision or award?

John, I don't think things have changed a lot as far as the way we view our cash position. We've been saying for the last couple of years that we were building up cash in anticipation of the need of working capital that we are seeing right now. TransCanada, we are going to need normal working capital as revenues increase in 2012. I don't think it will be extraordinary. We haven't really signed the contract yet, but we will take the normal approach with TransCanada that we take on all of our big projects, which is to try as much as we can to minimize the working capital that we have to put out. But that being said, we've got the availability to do, to carry the working capital.

So, we -- like I started to say, we've held cash primarily to be able to fund these types of projects, followed up by capital expenditures and acquisitions. And then coming behind that is stock repurchases. And acquisitions and stock repurchases are opportunistic. It's a little hard for me to give you guidance on any more specifics than that.

Okay. Fair enough. James, in terms of capital spending though next, and I don't know whether you can talk about this. Given -- you mentioned -- you talked about capacity availability earlier in for a lot of this work. Should it have to change significantly next year?

Capital spending?

Yes.

No. I don't think so. It might be a little bit higher, but I don't think so. I think it will be about the same as it is this year.

Okay. Great. Thank you and congratulations.

Andrew Byington, Millennium Partners.

Hi Jim. It is actually Mark Caruso for Drew. Just following up on the Dan Mannes' question earlier. It sounds like you were mentioning that you're -- you have extra capacity to go pursue other work. I want to see what your thoughts are on Wrangler, if that is a project that you are targeting? If you think there is implications of that on Keystone?

Yes, we are pursuing that opportunity as well. I wanted to say, in the annual cyclicality of the pipeline business, there is a lot of contractors with capacity right now. We are early in the bidding season and people typically don't start building pipeline in the fourth quarter or the first quarter. We are seeing an anomaly this year because of regulatory delays that have moved projects into the fourth quarter. So, it is not unusual to have excess capacity this time of the year.

It is just the nature of the business. As we are early in the bidding season. If we have this type of capacity in the second and third quarter, then that's more of an issue than it is in the fourth quarter. So I'm not concerned about having the excess capacity right now. It is not a bad problem to have as we are in the beginning of our bidding season. But we are pursuing Wrangler as well.

Is there a scenario where you could be part of both projects?

Yes, absolutely. There is no conflict there at all. So we could certainly, we have the capacity to pursue both projects.

Thanks.

Tahira Afzal, KeyBanc.

Thank you very much for taking my follow-up question. If you look at Enterprise and Chesapeake, they've come out with very bullish shale ventures going forward on the gas gathering side. There are particular talks now increasingly so on the Utica Shale play. Jim, you guys were off to a late start in some of the other shale plays, can you talk about Utica and then of course Enterprise has had a good record win, but also talk maybe perhaps about Chesapeake as a client?

Yes. Those are certainly customers that we work for and they are good customers and we have a presence in the Utica Shale as well. So I don't see us as being behind. There are opportunities there and we've got customers that we have worked with in the past on big pipe that are certainly happy that we've got a presence in these area and want us to participate in their gathering programs.

Thanks a lot, Jim.

William Bremer, Maxim Group.

Yes, gentlemen. Just a quick one. Can you give a update on Valard and what their contribution was for the quarter, and is that still on track for fiscal '11 in terms of what you were expecting?

We don't typically drill down into the results of our operating units on the quarter. I have given you. You can actually just back into it, because the differential in electric power growth was instead of 55% was 42% and $12 million came from the new acquisition. So you can probably back into it. But Valard is doing well. Valard is performing up to our expectations for 2011 and about what we expect them to do for 2012.

Right. Valard's not one of the four. That was acquired back in October of '10. That's correct?

That is correct.

Okay. Thank you.

October of '10. That's right.

Thank you. And Management, there are no further questions in the queue at this time. Please continue.

I'd like to thank you all for participating in our third quarter conference call. We appreciate your questions and your ongoing interest in Quanta Services. Thank you and this concludes our call today.

Thank you ladies and gentlemen. Again, this concludes the Quanta Services third quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030, or the toll-free number of 1-800-406-7325, and enter the access code of 4483974. We would like to thank you for your participation and you may now disconnect.