Quanta Services Inc (PWR) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, thank you for standing by. Welcome to the Quanta Services' second-quarter 2012 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, August 2, 2012.

I would now like to turn the conference over to Kip Rupp, VP of Investor Relations. Please go ahead, sir.

Great, thank you, Erin, and welcome, everyone, to the Quanta Services' conference call to review second-quarter 2012 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 e-mailed to you when they occur, please sign up for e-mail information alerts by going to the investors and media section of the 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 seven days, 24 hours a day that can be accessed as set forth in the press release. Please remember that the information reported on this call speaks only as of today August 2, 2012, 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 from 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 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 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.

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, 2011, 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 Quanta Services' second quarter 2012 earnings conference call. I will start the call with an operational overview before turning it over to Derrick Jensen, Quanta's Chief Financial Officer, who will provide a detail review of our second-quarter financial results. Following Derrick's comments, we will welcome your questions.

Our second-quarter results demonstrate continued solid execution by our operations and reflect strong demand for our services. Our revenues in the second quarter grew 50% compared to the second quarter of 2011. And revenues for the first six months of this year have increased 58% compared to the same period last year. Our GAAP diluted earnings per share of $0.31 in the second quarter increased 107% compared to the second quarter of last year. Our second-quarter results were driven by strong performance in our Electric Power segment, due to the significant volume of electric transmission projects underway and our ability to safely execute on those projects. Quarter over quarter and sequentially, improved performance from our Natural Gas and Pipeline segment also contributed to the strong results.

Our employee count at the end of this year's second quarter was approximately 19,300, up 30% compared to the second quarter of last year and up 10% since the end of 2011. Our Electric Power segment revenues increased approximately 52% in this year's second quarter compared to the same period last year. At the end of the second quarter, 12-month backlog for the Electric Power segment increased 27.4% and total backlog for this segment increased 4.1% compared to the second quarter of 2011.

In the second quarter, Quanta completed the installation of San Diego Gas and Electric Sunrise Powerlink transmission line, which was energized on June 17. This was an extremely challenging project due to the environmental sensitivities, difficult geology and geography and an accelerated construction time line. For environmental reasons nearly 75% of the project's towers were set by helicopters resulting in more than 28,000 flight hours being logged to complete the aerial construction. The timely completion of Sunrise Powerlink transmission line was critical due to the recent shutdown of the San Onofre nuclear plant. Because this plant supplied a significant amount of electricity to San Diego, energizing the Sunrise Powerlink line on the accelerated schedule was critical. This project in almost every aspect is an excellent example of Quanta's industry leading transmission capabilities and our ability to meet our customers expectations under challenging circumstances.

Also during the second quarter we completed construction of Hydro ONE's Bruce to Milton transmission line. This 79-mile double circuit 500,000-volt transmission line is the largest expansion of Ontario's electric transmission system in more than two decades, and should bring enough nuclear and renewal energy to provide more than 10% of the Provinces' electricity needs. It is worth noting that this project was accomplished with zero loss time injuries to Hydro ONE employees or contractors working on this job, demonstrating the safety commitment of everyone involved. While Quanta was successfully completing these two projects in the second quarter, we also were ramping up on construction-- construction activities on three projects, the Dever-Palo Verde 2 project for Southern California Edison, Texas Competitive Renewable Energy Zone, or CREZ projects, for Sharyland and ETT, and the Northwest transmission line project for BC Hydro.

We believe the industry is in a multi-year transmission investment trend, it has been more than 40 years since significant transmission investment occurred in the North American and various industry sources indicate approximately two-thirds of North American's transmission infrastructure is in poor condition. Four quarters of meaningful transmission construction does not solve this challenge. The replacement or repair of aging electrical infrastructure, the installation of new transmission networks to improve reliability and the need for transmission interconnects for renewable power sources are only a few of the drivers of transmission investment. We believe certain near and medium term dynamics are not currently reflected in various third-party transmission spending forecast, which will require additional transmission infrastructure spending. These dynamics include the implementation of mandatory compliance with NERC reliability standards, the implementation of FERC order 1,000, which we believe will spur merchant transmission investment, and the impact of new transmission or upgraded transmission lines resulting from the retirement and conversion of older coal-fired generation plants to cleaner burning generation sources such as natural gas-fired plants due to Federal environmental regulations.

For example, ICF International recently estimated that more than 50 gigawatts of coal-fired generation will be retired over the next four years. Earlier this week, Quanta announced that ADCO Electric had selected Valard Construction, a Quanta Services company to install transmission infrastructure for their Hanna Region Transmission Development project. Under the terms of the contract, Valard will install approximately 149 miles of 240-kilovolt transmission infrastructure in the Hanna region of Southeast Alberta, Canada. Resources have mobilized to begin this project, which is expected to be completed in 2013. This project is included in our backlog figure at June 30. We believe this award is indicative of the level of transmission opportunities that exist in the market. As we have highlighted in our past few earnings conference calls, we expect the timing of large transmission projects awards to be lumpy going forward. Therefore, we recommend that investors focus on new award activity over a longer term rather than on a quarterly basis.

Turning to our Natural Gas and Pipeline segment, revenues increased approximately 62% in the second quarter of 2012 compared to the same quarter last year. Importantly, operating income in the quarter improved from a loss of $1.2 million in last year's second quarter to $15.3 million of operating income in this year's second quarter. With the strategic moves we have made to date, we believe this segment will be profitable for the remainder of the year. At the end of the second quarter of 2012, 12 month and total backlog for this segment increased about 59% and 20% respectively compared to the end of the second quarter of 2011. The significant increase in quarter over quarter backlog reflects the strategic shift Quanta made last year to pursue shale gathering work and also the master service agreement we signed with Puget Sound Energy last year for natural gas infrastructure maintenance. Despite declines in crude oil and NGL prices, we have seen increased demand for our pipeline construction services. Aggregate horizontal directional rig counts and liquid rich shales remain at high levels and companies continue to maintain or increase exploration in production activities for liquids in wet shale formations such as the Bakken, Eagle Ford and Marcellus shales. In addition, there is minimal existing infrastructure in these shales, and hundreds of wells are shut in because they do not have the pipeline gathering infrastructure to transport the product from the wells to processing facilities. Therefore, strategic investment in gathering infrastructure is required to transport product to market in the near and long term.

We continue to see signs that a significant volume of long haul large diameter projects could be awarded and move into construction in 2013. Should most of these project move forward, the industry could experience the most active pipeline construction market it has seen in the past several years. We will continue to gain more clarity on these projects as we approach year end. This dynamic coupled with expectations for continued shale gathering pipeline infrastructure development will require significant pipeline construction resources and could result in tightening of industry capacity.

Our Telecommunications segment experienced solid growth in the quarter. Revenues increased almost 26% in this year's second quarter compared to the same period last year driven by increases in the pace of construction on broadband stimulus projects and fiber to the cell site projects. Compared to the end of the last year's second quarter, 12 month and total backlog for this segment decreased 2.4% and about 10% respectively. The decrease in segment backlog was due it backlog burn associated with a significant increases in projects and construction during this year's second quarter, as well as the exploration of several multi-year master service agreements at the end of this year. However, we are actively working with these customers and are optimistic about renewing these master service agreements before year end.

In our Fiber Optic Licensing segment, revenues for the quarter increased approximately 3.5% compared to the second quarter of last year. We continue to balance the build out of our newer markets to increase network penetration while investing in our more mature markets that generate higher margins and returns in the near term. This balanced approach should enable us to grow revenues while maintaining high margins and acceptable rates of return on investment. As a result of our strong first and second quarter results, the expectation of continued strength in our Electric Power segment and ongoing opportunities and better visibility for our Natural Gas and Pipeline segment we are increasing our 2012 full year outlook. Derrick will provide additional detail about our outlook during his comments.

In summary, total Company backlog remains strong, and we see continued opportunity to profitably grow our business. We are confident that 2012 will be a strong year for Quanta, and believe that the momentum and the strength of our business should continue into the foreseeable future. Before I turn the call over to Derrick Jensen, our new CFO, I would like to recognize James Haddox for his contributions to Quanta's overall success. As CFO since our inception, James has participated in 57 quarterly conference calls, which is a substantial tenure considering the growth of the Company from an annual IPO revenue of $152 million back in 1998 to where we are today. James, a big thank you to you for your service to this organization. Now, I would like to turn the call over to Derrick. Derrick?

Thanks, Jim, and thanks James. Good morning, everyone. Today we announced revenues of $1.52 billion for the second quarter of 2012, compared to $1.01 billion in the prior year second quarter, reflecting growth of about 50% quarter over quarter. Net income attributable to common stock for the quarter was $65.5 million, or $0.31 per diluted share, compared to net income of $31.8 million, or $0.15 per diluted share in the second quarter of last year. The growth in consolidated revenues in the second quarter of 2012 was driven by growth across all of Quanta's segments. Second quarter 2012 revenues were also favorably impacted by the incremental contribution of approximately $58 million in revenues from companies acquired since the second quarter of 2011. Our consolidated gross margin increased to 15.5% in the second quarter of 2012, or 15.2% in Q2 '11. This increase was due to strong performance in each of our segments as well as the impact of higher revenues which improved our ability to cover fixed costs.

Selling, general and administrative expenses were $115 million, reflecting an increase of $25 million as compared to last year's second quarter. This increase is primary attributable to $14.5 million in higher salary and incentive compensation costs associated with increased levels of activity and profitability, approximately $5.7 million in additional administrative expenses associated with companies acquired since the second quarter 2011 and $5.2 million in increased professional fees associated with ongoing legal matters. As a percentage of revenues, selling, general and administrative expenses decreased from 8.9% in the second quarter of 2011 to 7.6% in the second quarter of 2012, primarily due to the higher overall revenues as previously discussed. Our consolidated operating margin before amortization expense increased from 6.3% in 2Q '11 to 8% in 2Q '12. Amortization of intangible assets increased from $6.9 million in 2Q '11 to $9.5 million in the second quarter of 2Q '12 due to the acquisitions since June of last year.

Further discuss our segment results, the Electric Power segment's revenues were up about $347 million quarter over quarter, or approximately 52%. Revenues were positively impacted by higher revenues from Electric Power transmission services, resulting from an increase in the number and size of projects that were ongoing in 2Q '12 compared to 2Q '11. The increase in revenues is also attributable in part to the incremental contribution of $49 million in segment revenues from acquired companies. These increases were partially offset by $36 million in lower emergency restorations services versus 2Q '11. Operating margin in the Electric Power segment increased to 11% in the second quarter of 2012, compared to 10.4% in last year's second quarter, primarily due to higher overall revenues from services on higher margin transmission projects. Additionally, the overall increase in this segment's revenues contributed to this segment's improved ability to cover fixed and overhead costs. Partially offsetting the increase was a decrease in emergency restoration service revenues which typically carry higher margins.

Natural Gas and Pipeline revenues increase quarter over quarter by 62% to about $340 million in 2Q '12 primarily due to a increase in the number of shale gathering system projects currently under construction. Additionally, we saw increases in revenue from natural gas distribution services as the outsourced gas distribution work for Puget Sound Energy was just starting up in the second quarter of second quarter of 2011. Operating income for the Natural Gas and Pipeline segment as a percentage of revenues increased to 4.5% for 2Q '12 from a negative 0.6% for 2Q '11. This improvement was primarily due to the overall increase in the volume of this segments revenue due to the shift to more shale gathering system projects which improved the segments ability to cover fixed and overhead costs, as well as prior year being significantly impacted by productivity issues on certain transmission pipeline projects that were hampered by unusual weather, winter weather, and complicated by restrictive governmental regulations. Although significant rainfall did adversely impact the profitability of certain projects in the second quarter of 2012, the impact was not as extensive as what was experienced in 2Q '11.

Revenues from our Telecommunications segment increased $27.2 million, or 26%, to $133.6 million in 2Q '12, primarily due to an increase in the volume of the work associated with stimulus funded fiber optic network project and higher revenues from fiber to the cell site and wireless initiatives resulting from higher capital spending by our customers. Operating margin in Telecommunications segment was 10.3% in 2Q '12 compared to 8.5% in 2Q '11. 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 the segment's ability to cover fixed cost. Fiber Optic Licensing segment revenues were $28.7 million for the second quarter of 2012, reflecting an increase of 4% over 2Q '11. Operating margin was 53% in 2Q '12 compared to operating margin of 47.5% in 2Q '11.

When calculating operating margins by segment we do not allocate certain selling, general and administration expenses and amortization expense to our segments. Therefore the previous discussion about operating margins by segment excludes the effects of such expenses. Corporate and non-allocated cost increased $11.8 million in the second quarter of 2012 as compared to 2Q '11, primarily as a result of $5.7 million in higher salary and incentive compensation costs associated with current levels of operating activity, $2.8 million in increased professional fees associated with ongoing legal matters and $2.7 million in higher amortization expense associated with intangible assets. Adjusted diluted earnings per share as calculated in today's press release were $0.36 for the second quarter of 2012 compared to an adjusted diluted income per share of $0.19 for 2Q '11. Cash flow provided by operations was approximately $86.3 million for the second quarter of 2012. Capital expenditures, net of proceeds from sales were about $43.7 million, resulting in approximately $42.6 million in free cash flow for the quarter.

Our day sales outstanding, or DSOs, were 81 days at June 30, '12, 2012 versus 79 days at March 31, 2012, and 75 days at June 30, 2011. Although DSOs were comparable to the first quarter, our cost in excess of billing balances is higher during the period. A significant component of the balance is associated with the Sunrise Electric Transmission project which was substantially accelerated during the first half of this year. This acceleration created considerable workarounds impacting the sequence of production. This out of scope work which is directed by the customer in order to meet the accelerated completion date, created change order requests and delays in the final billing as reconciliation to final project activity had only just begun since the project was so recently completed. Although not fully approved yet by the customer, the change order has been billed subsequent to June 30, and in discussions with the customer we are not aware of any circumstances that would prevent these amounts from being collected in subsequent periods.

EBITA for the second quarter of 2012 was $116.1 million, or 7.7% of revenues, compared to $62.3 million, or 6.2% of revenues for the second quarter of 2011. Adjusted EBITDA was $155.9 million, or 10.3% of revenues for the second quarter of 2012, compared to $97.4 million, or 9.6% of revenues for the second quarter of 2011. The calculation of EBITA, EBITDA and adjusted EBITDA, all non-GAAP measures, and the definitions of these and DSOs can be found in the investors and media section of our website at quantaservices.com. At June 30, 2012, we had about $174 million in letters of credit outstanding, primarily to secure our insurance program, and we had borrowings of approximately $39 million in outstanding. In addition, at the end of the quarter, we had approximately $173 million in cash. Considering our cash on hand and availability under our credit facility, we had nearly $660 million in total liquidity as of June 30.

Concerning our outlook for 2012, we expect revenues for the third quarter of 2012 to range between $1.6 billion and $1.7 billion, and diluted earnings per share to be $0.34 to $0.37 on a GAAP basis. These estimates compare to revenues of $1.25 billion and diluted earnings per share in $0.25 in 3Q '11. Our forecast for 3Q '12 includes an estimate of $7.1 million for non-cash compensation expenses and $10.4 million for amortization expense. Including these expenses, our non-GAAP adjusted diluted earnings per share for the third quarter are expected to be $0.39 to $0.42,and compared to non-GAAP adjusted diluting earnings per share of $0.29 in 3Q '11. This non-GAAP measure is calculated on the same basis as the historical calculations of adjusted diluted earnings per share presented in the release.

Certainly expect revenues for the full year of 2012 to range between $5.9 billion and $6.1 billion and diluted earnings per share to be between $1.15 to $1.25 on a GAAP basis. These estimates compared to revenues of $4.6 billion and $0.62 in 2011. Our forecast for 2012 includes an estimate of $29 million for non-cash compensation expenses and $38 million of amortization expense. Including these expenses, our non-GAAP adjusted diluted earnings per share for 2012 are expected to be between $1.35 to $1.45. We are currently forecasting net income attributable to non controlling interests to be approximately $3.5 million in the third quarter of 2012 and between $15 million and $15.5 million for the year.

For additional guidance, we are currently projecting our GAAP tax rate to be between 36% and 37% for 2012. And we expect our diluted share count to be about 213 million shares. We expect CapEx for all of 2012 to be approximately $200 million to $220 million, which includes CapEx for our Fiber Optic Licensing segment of about $40 million to $50 million, this compares to CapEx for all of 2011 of $172 million. As Jim commented, we continue to execute within all of our segment and believe our Pipeline segment will continue to be profitable throughout the rest of year. We believe that we are operationally and financially well positioned for continued solid growth in 2012 and beyond. This concludes our formal presentation, we'll now open the line for Q&A. Operator?

Thank you, sir. We will now begin the question-and-answer session.

(Operator Instructions)

Alex Rygiel with FBR Capital Markets.

Jim, just a great quarter. James, thank you for all your help through the years. Couple questions. First, Jim, you finished two big transmission projects, you started three big transmission projects, how should we think about the positives or negatives that came through your P&L because of all that activity? Was it a net positive, was it a net negative because of the transition of the two and the three?

I think it's neutral, Alex, I mean, we have [mobe and devoc] cost that typically go into our POC accounting. So I mean, if it is a little bit negative, it would be immaterial, so it's neutral. I mean, I think the important thing is that we continue to have momentum, and we're able to fill any burn with backlog and large transmission projects going forward.

As I look at your book-to-bill and your new awards, I focus a lot more attention on 12-month backlog. And the new awards in your 12-month backlog, I think was the third highest in history, which is an amazing number here. Do you continue to believe that new awards can remain at a very high level like they are right now for the foreseeable future?

Yes, I mean, one thing you guys don't see are projects below $100 million, and we -- a lot of our smaller projects continue to accelerate. I would say our small transmission markets growing faster than the big projects and that's our every day work. Distribution is growing. Every aspect of our business has growth in it today. The big projects, we had a light quarter on awards, but that's -- I expect the third quarter we're going to see more activity there. So I feel very confident that the backlog it will be strong as we go into '13.

And it sounded like storm activity in the second quarter was maybe even somewhat of a negative. Would you expect that to reverse and be a little more of a positive in the third quarter?

It will be. We only had $13 million in storm revenue in the second quarter, and the storm work that we started on here in the third quarter, which was significantly more than $13 million, began in the first week in July. So I can tell you with confidence that storm revenues in the third quarter will be higher than in the second.

Dan Mannes with Avondale Partners.

Talking real quick about your guidance, is a really nice increase on the -- for the year, and really not because of the quarter. I mean it seems like a pretty significant move up. Can you talk a little bit about what increases your confidence or what changes your view for the balance of year given what you've experienced I guess over the last quarter?

Dan, it's really just better visibility. I mean, we're in an election year, we didn't -- we did hedge a little bit on timing on some of these project starts, but we're getting better visibility that these projects will start on time. And it's really just visibility between what we see today versus what we saw back in May.

Is there any impact from the tightness, i.e., the margins in your backlog, have they been improving relative to where they were three, six, nine months ago, or is that not as much as an indicator?

Margins and backlog are as strong or stronger than what we're experiencing today.

Got it. Thanks a lot.

Jamie Cook of Credit Suisse.

Hello, good morning and congratulations and I guess I owe Duke, specifically, a congratulations on the Gas margins in my opinion. So I guess can you just talk about your confidence level on the Gas side with the margins that you put up with the worst is behind us and how you see margins trending in the back half of the year, specifically what you think the implications could be for 2013? Thanks.

Yes, Jamie --

With and without big gas with regard to 2013, how we think about things if big gas or if it doesn't pick up, I guess.

Well, the good thing under Duke's leadership in trying to shift resources into these gathering fields, which we moved into that initiative about a year ago, now we're well established in these liquid rich fields that works almost like an MSA work. It's recurring revenues and it is profitable. And the second quarter is a good example that we don't have to have any big pipe work to gain profitability in that segment. So, we expect that work to continue, that shale gathering work. There will be some seasonality due to weather in the fourth and first quarter, but it should be more predictable going forward.

Any big pipe work would be incremental to that, because those all lump sum type projects, the margins on large pipe are 400 to 500 basis points higher than what we experience in the shale gathering work on an average basis. So we're very excited about where we're going with the segment. Everything that we expected and communicated to you guys is playing out as expected, and we do expect to be profitable for the year in that segment, and I look forward to good things next year.

Okay, thanks. And James, wish you well and thanks for your help. Congratulations, thanks.

Will Gabrielski with Lazard Capital Markets.

Two questions, one on Electric, we have heard from a few different power generating companies that the EPA rules are starting to -- around emissions, are starting to drive some incremental transmission spending, and you touched on that. I'm wondering if you could give a little more detail of whether or not you're doing that work now and what the visibility is like there? And then I'll have a follow up.

Not a whole lot right now, Will, we think that'll play out over the next, probably be more significant two, three years from now even into 2020. I mean, it's a longer play for us. I mean, the main thing is that the rule will drive pole switching to gas primarily, and while those rebuilds are occurring, whether it's a rebuild or a new gas plant that's being built, transmission will either be upgraded or will be built new. And so we think that'll play out over a longer period of time. But certainly it'll be incremental to our business.

Okay. And then on the Natural Gas Pipeline side, I guess you're getting your hands dirty in some of the different basins that are out there now and expanding beyond the Marcellus, I'm wondering what the competitive environment looks like union versus non-union and what type of progress you're making in the different fields?

We're seeing capacity just tighten overall in that market, both union and non-union labor. It is presenting opportunities for us to get the pricing that we aspire to have in that business even in non-union markets. So I did make comments in my script that, that capacity is tightening and we do see that continuing in the shale fields today. And we expect that will continue. And once big pipe construction moves forward in a meaningful way, we think we're going to be really tight, the industry's going to be really tight in capacity. So it's -- the momentum that we're seeing and our expectations are very positive for that segment.

Okay. Thank you.

Tahira Afzal with KeyBanc Capital Markets.

Morning Jim, Derrick and Kip, this is [Saagar] on for Tahira. First off, congrats on the solid quarter and the guidance raise. My first question relates again to the Pipeline business, and I know you've touched on a little bit of this, but the second quarter Pipeline profitability was -- is it really a reflection of what the base Pipeline margins on a [clean] level should be going forward? And along with that, how many of your spreads were utilized in the second quarter because as we saw overall Pipeline was down sequentially?

Yes I think we did have some weather impact in the second quarter, so I think margins should be just -- should be a little bit better than what we experienced on a go forward basis provided we have good weather. We should be closer to the mid to upper-mid single-digit operating income with just shale gathering work, and I think we did 4.5% for the segment. Other than that, I think going forward if we get big pipe work in the mix, we should be up in the 9% to 12% range. And I'm sorry I didn't catch the second part of the question?

I just said, how many of your spreads were utilized in the second quarter because as I saw the overall Pipeline revenue was down sequentially?

We look at spreads in two ways, one is equipment and one is people. And I would say that from a personnel standpoint, we're fairly utilized in the shale gathering work right now and in Canada. As far as spreads are concerned, we do have some under utilization on some of our specialized equipment for big pipe. But other than that, our equipment is being utilized fairly well on the equipment that can be used in both big pipe and in shale gathering work. So I would say overall our utilization is pretty high right now.

All right, great. Thank you very much.

Zach Larkin with Stephens.

First question, Jim, I wondered if you could talk a little more about the small transmission work, positive indications there, and I wonder if there's any geographic impact where you're seeing the most strength in the small transmission markets or is it something that's pretty broad based across the country?

It's broad based across the country right now. I mean it's NERC compliance standards that all of our customers have to meet. And those went into effect late last year and we're starting to see momentum there. So we expect that will continue if it's a multi-year trend. And it's a significant amount of work that needs to be done, so it's -- the day-to-day work, the $5 million, $10 million, $20 million, $30 million projects, but there's some specific requirements that NERC has put out that our customer need to meet and that's driving a lot of our construction activity today.

Great, thanks. And then, Derrick, I wondered if you could give a little bit more color on the legal expense, is that some something that you expect to continue through the end of the year or do you have any sense on when those expenses might curtail?

I think we'll have some form of expense through probably the rest of this year.

Okay. Thanks very much.

Scott Levine with JPMorgan.

So I was hoping you might be able to provide a little more color on priorities for cash or deployment. I know you've made some discussion about investing in individual projects on a select basis, maybe any thoughts there as well as your current M&A outlook and appetite for acquisitions either in the US or overseas.

Sure, I'd say that it remains somewhat constant. And as you saw from the second quarter, I mean our first demand is working capital to support our projects. And as we've talked about we have capital expenditure needs for this year. We are opportunistic still on the acquisition and investment side. We've talked about some smaller investments that are out there. At the same time from a acquisition standpoint, I'd say that we've closed 10 acquisitions in the last 12 months, and I believe we'll continue to see that, a similar type of optimistic opportunity over the next 12 months.

Got it. And Jim I'm not sure I caught this as well in your prepared comments, is there any update regarding your thoughts on the renewable business this year and particular the solar side?

Renewables will be strong this year, particularly solar as we take advantage of the -- our customers take advantage of the 1603 tax grant that expired at the end of last year. So, we do have significant activity. We will experience strong double-digit growth in solar this year and renewables overall. And I expect that trend will last into '13. Beyond that, I think a lot of it has to do with what state RPS does because Federal subsidies are expiring. But for the foreseeable future it's going to be an a very active business for us.

Understood, thanks. James, best of luck.

Jeff Beach with Stifel Nicolaus.

A couple of questions, one the Electric margin in this quarter at 11% on record revenues, below the margins of the last three quarters at least, and you had a couple of major project closeouts. Can you describe why the margins lower this quarter than the past two or three?

Jeff, this is Derrick. The primary reason is actually the amount of storm work. When you look at the amount of storm work we had in the fourth quarter of last year and the second quarter of last year, as well as even the first quarter of this year, we had substantially higher revenues from storm, in all of those periods and those things come in at higher margins. This quarter we only had $13 million in storm work compared to the numbers in the neighborhood of like $50 million from the previous period. So that's a pretty big driver.

And then sequentially I mean from a first quarter to second quarter, we had great weather in the first quarter allowing us to have such substantially higher productivity that contributed to both revenues and reduced costs. In the first quarter that -- when it comes to the second quarter those weren't quite the same. Relative to closeout, there wasn't anything unusual in the second quarter relative to any closeouts of the jobs, there wasn't anything negatively impacting the quarter.

All right, thanks. And as the follow up, can you tell us what the growth rate was in your Electric distribution revenues this quarter year-over-year?

Yes, I mean, I think last year we said we had about 10%, and again we don't measure this segment. There's some gray line between small transmission and large distribution, but it's not a bright line. But I would say that we're experiencing close to the 15% to 20% growth in distribution year to date compared to 10% year-over-year last year, over the prior year. So distribution does continue to accelerate and we're real pleased about that.

Does any of that have to do with the extreme hot weather?

Has to do with extreme hot weather? From NERC reliability standards, pent up demand because distribution has been at very low levels, distribution maintenance has been at low levels since '08, and it's really catch up. So it's also housing reports over the last quarter have started to turn and we do have some new housing starts. So it's a combination of different things, Jeff.

Congratulations on a great -- okay. Thank you.

Thank you.

Andrew Wittmann with Robert W. Baird.

I was just wondering a little bit about the guidance and Jim you mentioned some better visibilities giving you the confidence to raise the guidance. Is there any change in your overall approach where you're trying to be real conservative and really just put in there what you know you have or has the execution success here over the first two quarters of the year maybe encouraged you to have a little more confidence, just broadly speaking as you go into the second half?

I think the midpoint of our guidance is consistent with the approach that we've taken since the first of the year when it comes to the timing and start of large projects and our visibility into the Gas business. So I would say the midpoint of our guidance has very little uncommitted gas in there -- or none.

Okay.

No uncommitted gas for the year.

Okay. And then just as it relates to the Pipelines, typically the winter months have been the bidding season for the large diameter stuff. You mentioned in your press release here that you're expecting a couple large projects come forward. With winter months a few months off still, do you think that the seasonality of those Pipeline bookings could maybe change this year and come earlier than it normally has in the past?

Yes, I think you're going to see a change in the seasonality of awards probably over the next two to three years, because of the amount of large multi-year potentially projects that are going to be proposed to bring liquids from Canada and from these liquid shale plays to refinery centers. So the normal cyclicality of this business could provide more visibility on big diameter, large diameter, long haul pipe for probably at least two to three years. That's what we think will occur. We're pretty confident that, that's what we're going to see going forward.

All right. Great, that's it for me. Thank you very much.

Thank you.

Ahmar Zaman with Piper Jaffray.

Hello, this is [Sean] on for Ahmar. I noticed on the balance sheet you guys took on some long-term debt this quarter. Wondering if you could walk us through what prompted that and how you're using it?

I'm not sure I understood the second part of your question or heard the second part. But relative to the debt, back to the working capital demands in the quarter, we've had substantial growth. And then as we talked about, some of the aspects of the Sunrise, it takes some draws on our cash. But in addition we closed an acquisition in the quarter which was about $26 million of cash, and we also put the additional investment in Howard Energy which we talked about in the first quarter which was an additional $52 million of cash. So those things combined just took some short-term cash needs. [But I'd said] that by the end of the year we wouldn't expect to have any borrowings outstanding.

Great, that's helpful. And I wonder if I could just take a bigger picture question here. I mean, we talk a lot about the challenges in an election year, is the outlook that as we get past the election this year that we're going to see some acceleration in work in 2013, or just to get your thoughts on that?

Well, we haven't quantified or given any guidance for '13, but there's nothing that doesn't lead us to believe that '13 is going to be a very strong year from what we have in backlog today and what we expect will happen going forward in all of our segments really. I mean, we have momentum in all of our segments and we haven't seen any reason to believe that '13 won't be a very strong year. It doesn't matter who wins the election, infrastructure is still going to be one of the primary objectives of either administration. So we're feeling confident going forward.

Thank you very much.

William Bremer with Maxim Group.

Good morning, gentlemen. James it's been a pleasure. My first question is on pipeline integrity. Can you give us an update on that aspect of Pipeline? And my second question specifically deals with Canada, can you give us a little more color on Canada's operations both in the Electrical and the Pipe side for this last quarter?

Yes, I mean, I think the Hanna award is just -- reflects the opportunities in Canada that there's a similar build opportunities in Canada as there are in the US it's just occurring probably a year or two later than what the US experienced. I mean, that's reflected not only by Hanna but the Northwest Transmission Line. So that works out in about those two projects and look forward to executing and growing our business in the Canadian market.

The Pipeline integrity business, it's going to be a strong business. I think that's an area of our business that can grow more than any other part of our business, but it's growing off of a smaller base and I think that's going to materialize over time. That's a longer term growth opportunity for us that I think could be something material in three to four to five years from now. But [since] the regulations are going to drive significant amount of construction and rehabilitation efforts in the pipeline market.

Okay, gentlemen. Thank you.

Craig Irwin with Wedbush Securities.

Morning, gentlemen, congratulations on a solid quarter.

Thank you, Craig.

Jim, you mentioned that you have a pretty high level utilization. I was hoping that you might be able to shed some color on whether or not this makes you a little bit more selective in the jobs that you accept? And how you see you potentially expending the utilization and or at least the capacity to handle similar levels of utilization going forward, and then whether or not the current high levels of activity are impacting labor rates, and if you see that out there on the horizon?

Well the labor, let me address the labor rates first. We're under multi-year agreements with -- we're in the pipeline unions, the different unions that are associated with the pipeline industry, those are multi-year agreements. Labor rates aren't going crazy right now for us. I mean, they're multi-year agreements that we negotiate when they expire. Very similar to the Electric business.

We're not utilizing our big pipe equipment right now and we're very comfortable that when the big pipe work comes that we're going to be able to provide the necessary resources and execute on those projects. It was imperative for us to maximize utilization of our people and what equipment that we could share on shale pipe work to move back toward a profitable segment. So that was an imperative objective for us. But we're certainly well positioned strategically to not only keep that work ongoing in the shales but to capitalize on opportunities in the big pipe work.

Very similar to the Electric growth. Everybody was worried about us, how we were going to move from being on 2 transmission projects to 12. And we were able to deliver that from a resource standpoint and we're just as confident that we're going to be able to capitalize on the pipeline market as it expands as well.

Thank you. My follow-up question, I wanted to ask if you could give us an update on your initiative in combined cycle power plants, where you stand on that and what your potential outlook is for bookings in that market over the course of the year?

That's a niche market for us that we're trying to greenfield into. And some of that work has been pushed out a little bit further than what we thought it would from a standpoint of accelerating the market [accelerant], which is okay because we're using our renewable folks into that type of business. And our renewable folks are very active right now building solar plans into plants and the wind market has also picked up somewhat. So it's a niche market for us, it's not material today. Hopefully we'll be able to talk more about that as the growth area for us in '13 or even in '14. But it's more of a future opportunity for us not something that is really going to materialize anytime here soon.

Thank you.

Adam Thalhimer with BB&T Capital Markets.

On the -- with regards to your outlook for the long haul Pipeline segment, are you bidding on those jobs yet? And if not, when do you expect to see those bids come out?

We're having discussions with customers, okay, and nothing's really formally come out to bid right now. We're just having discussions with customers about capacity concerns into '13 and '14 because the industry's going to be tight. So we -- like I said in my prepared remarks, we think that this will become clearer to everyone as we get into the fourth quarter and certainly into the first quarter we'll have much more visibility in what's going on in, in the big pipe market. But we haven't bid anything to date yet, no.

Okay. And then, I wanted to ask secondly on Telecom, what are the atmospherics like in that business right now and are there any catalysts there, say, over the next 12 months?

Yes, I mean, I think right now we're at the height of stimulus construction and things are going really, really well and I don't anticipate that is going to lighten up anytime soon. I mean, stimulus is going to take us well into '13 and probably to the end of the '13. The Universal Services Fund is a big opportunity that, that's a program that's almost like a Federal stimulus that we think will provide subsidies to the Telecom market equal to what we're seeing in stimulus today as we get beyond '13.

So that's a huge potential opportunity that could keep our Telecom business strong beyond stimulus as well as many of our customers are starting to move forward with capital projects beyond stimulus. Stimulus really got them a head start on their strategic objectives, so we're feeling pretty good about Telecom right now going forward.

Great. Thanks very much.

Thank you.

(Operator Instructions)

Joe Ritchie with Goldman Sachs.

Good morning, everyone. Nice quarter.

Thank you, Joe.

First question is on the Gas business, just a follow up to a question earlier. Your revenues were down sequentially the last two quarters in that business, but the margins improved significantly. So I'm just trying to get an understanding, get my head around that. What were the big changes between this quarter and the last couple of quarters where you were able to increase the profitability of that business?

Yes this is Derrick. Actually it's similar to our discussion of the second quarter of this year versus second quarter of last year and that there were some weather impacts that impacted a few of the jobs in the fourth quarter and the first quarter. At the same time from a revenue perspective, we had the ramp up of at least one large diameter pipeline job in the first quarter and we didn't have any of that work in the second. So you had a decrease in revenue because of that.

So is the right way to think about it is weather impacts really have that ability to change your profitability on those projects, and it seems like this quarter was a much cleaner -- from a weather perspective than it had been in previous quarters, is that right?

Yes, weather actually is an impact, but we also established ourselves in the shales. And we weren't in the sales last year at this time as well. So, that's going to help us as well in the second quarter of this year certainly against the second quarter of last year.

Okay. And I guess just a follow-up question there, is you're still not at your target of 9% to 12% margins in that business. My understanding is that there's -- in order to get to 9% to 12%, you're likely going to need to book some of these large diameter pipe projects. And so maybe help me understand your confidence I guess in the timing of some of these projects Keystone being one of them, one that we haven't talked about yet today.

Well, again we're confident that Keystone and other projects will go forward in '13 and '14 because of the discussions we've been having with customers, and not only us, but other contractors in the industry will give you that same data point. You will see big pipe taking liquids from these liquid rich shale plays and the Canadian oil sands go to refinery centers primarily in the Gulf of Mexico. Look at the expansion plans and the capital that's going in to expanding these refineries you haven't seen that in decades. That's all associated or primarily associated with liquids coming from these shales. Right now they're railing and trucking product, that's a very inefficient means of transporting product.

Once they get enough gathering in place, gathering systems in place, you will start seeing big pipe build, and I think that from what we're hearing from our customers the big pipelines are going to start coming in '13 and '14. We do need to get some of the big pipe work in order to get to that 9% to 12% operating income target. And we're confident that we'll see that big pipe work come sometime in '13 and certainly into '14 and '15 time frame.

Okay. Thanks for taking my questions.

Okay, Joe.

Will Gabrielski with Lazard Capital Markets.

Jim, can you quantify what under utilization of the big pipeline equipment, what impact that had on the Natural Gas margin in Q2?

It's mid- to single-digit operating income to the 9% to 12% operating range. I mean the primary reason that we have that delta in margins is because we have higher margin work on the big pipe work as well as on the utilization of equipment. So, I don't think we can quantify it any better than that, really. I mean that directionally is what it does for you.

Okay, that's helpful. And then just quickly on working capital, where that's going to trend, maybe over the next few quarters based on what you have in hand today?

Yes. I think the biggest driver of our working capital is obviously our receivables and DSOs and I think that what we'll see is that by the time we get to the end of the year that, that'll start to trend downward. Historically working capital has run about 15% of revenues, but as we go forward it's -- a lot of revenues coming up right now and some of these things get tied up in some of these larger jobs. But I'd say that you could look at DSOs being able to be improved.

Okay. Thank you very much.

Tahira Afzal from KeyBanc Capital Markets.

Hello, guys this is Saagar again. I had a quick question I apologize if I missed this in Derrick's commentary earlier. But the rise that you -- the ramp that you guys had with the Sunrise Powerlink project is finishing that up in the second quarter, did that have, how much of a damper did that have on your Electric Power operating margins? And what impact could we seeing going forward from the change order? And is that built into your updated guidance?

Yes, there wasn't any impact relative to margins, I mean, that job was recorded to consistent margins throughout the period. And then as it relates to I think the second part of your question is what risk profile, and we believe it was -- we're in substantial conversations with customers such that the change order will come through and be collected at some point in time between now and the end of the year. It's tough to predict, I guess, the change order effect as far as when it will be settled, but we're pushing for settlement as soon as possible.

Okay, perfect. And then assuming it's built into your guidance then?

Well there's -- that job is complete at this point, so relative to an income impact, there would not be any income impact.

Okay, perfect. Thank you.

And ladies and gentlemen, this does conclude the question-and-answer session. I would like to turn the call back to Management for any closing remarks. Please go ahead.

I'd like to thank you all for participating in our second-quarter 2012 conference call. We appreciate your questions and your ongoing interest in Quanta Services. Thank you, this concludes our call.

If you'd like to listen to a replay of today's conference, please dial 1-800-406-7325 or 303-590-3030 and enter access code 455817.